UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 1999
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)
Registrant's telephone number, including area code: (312) 751-8000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ----------------------------------------------- -----------------------
Class A Common Stock, par value $0.01 per share . . . . .New York Stock Exchange
Pacific Exchange
Class B Common Stock, par value $0.01 per share . . . . .New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of Class A Common Stock, par value $0.01 per share,
held by nonaffiliates (based upon the closing sale price on the New York Stock
Exchange) on February 29, 2000 was $25,506,332. The aggregate market value of
Class B Common Stock, par value $0.01 per share, held by nonaffiliates (based
upon the closing sale price on the New York Stock Exchange) on February 29, 2000
was $287,581,047.
As of February 29, 2000, there were 4,859,102 shares of Class A Common Stock,
par value $0.01 per share, and 19,354,905 shares of Class B Common Stock, par
value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
- -------------------------------------------------- -----------------------------
Notice of Annual Meeting of Stockholders and Proxy Part III, Items 10-13, to the
Statement (to be filed) relating to the Annual extent described therein
Meeting of Stockholders to be held in May 2000
<PAGE>
PLAYBOY ENTERPRISES, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I
Item 1. Business........................................................... 3
Item 2. Properties.........................................................13
Item 3. Legal Proceedings..................................................14
Item 4. Submission of Matters to a Vote of Security Holders................14
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters........................................15
Item 6. Selected Financial Data............................................15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........27
Item 8. Financial Statements and Supplementary Data........................28
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure................................53
PART III
Item 10. Directors and Executive Officers of the Registrant.................53
Item 11. Executive Compensation.............................................53
Item 12. Security Ownership of Certain Beneficial Owners and Management.....53
Item 13. Certain Relationships and Related Transactions.....................53
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................................53
<PAGE>
PART I
Item 1. Business
The term "Company" means Playboy Enterprises, Inc., together with its
subsidiaries and predecessors, unless the context otherwise requires. The
Company was organized in 1953 to publish Playboy magazine. Shortly after its
inception, the Company expanded its operations by engaging in entertainment
businesses that are related to the content and style of Playboy magazine, and
licensing its trademarks for use on various consumer products and services.
Today it also operates a direct marketing business.
The Company's businesses are classified into the following reportable
segments: Publishing, Entertainment, Product Marketing, Catalog, Casino Gaming
and Playboy Online. Net revenues, income from continuing operations before
income taxes and cumulative effect of change in accounting principle, EBITDA,
depreciation and amortization and identifiable assets of each reportable segment
are set forth in Note (W) Segment Information of Notes to Consolidated Financial
Statements.
The Company's trademarks are vital to the success and future growth of
all of the Company's businesses. The trademarks, which are renewable
periodically and which can be renewed indefinitely, include Playboy, Playmate,
Rabbit Head Design, Spice, Sarah Coventry, Critics' Choice Video, Collectors'
Choice Music and numerous domain names related to its online business.
In November 1997, the Board of Directors of the Company (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. This change resulted in a
six-month transition period from July 1, 1997 through December 31, 1997 (the
"transition period"). The fiscal year ended December 31, 1998 represents the
first full calendar year subsequent to this change.
PUBLISHING GROUP
The Company's Publishing Group operations include the publication of
Playboy magazine, other domestic publishing businesses and the licensing of
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 4.7 million copies.
Approximately 3.2 million copies of the U.S. edition are sold monthly. According
to Fall 1999 data published by Mediamark Research, Inc. ("MRI"), the U.S.
edition of Playboy magazine is read by approximately one in every seven men in
the United States aged 18 to 34.
Playboy magazine is a general-interest magazine for men offering a
variety of features. It has gained a loyal customer base and a reputation for
excellence by providing quality entertainment and informative articles on
celebrities, 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 46-year history, exclusive interviews 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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The net circulation revenues of the U.S. edition of Playboy magazine for
fiscal years 1999 and 1998, the transition period and fiscal year 1997 were
$73.9 million, $75.4 million, $37.2 million and $74.9 million, respectively. Net
circulation revenues are gross revenues less provisions for newsstand returns
and unpaid subscriptions, and commissions. Circulation revenue comparisons may
be materially impacted with respect to any period which includes one or more
issues of unusually high public interest.
According to the Audit Bureau of Circulations ("ABC"), an independent
audit agency, with a circulation rate base (the total newsstand and subscription
circulation guaranteed to advertisers) of 3.15 million at December 31, 1999,
Playboy magazine was the 12th highest-ranking U.S consumer publication. Playboy
magazine's rate base at December 31, 1999 was larger than each of Newsweek and
Cosmopolitan, and also greater than the combined rate bases of Rolling Stone,
Esquire and GQ, which have substantial adult male audiences.
Playboy magazine has historically generated over two-thirds of its
revenues from subscription and newsstand circulation, with the remainder
primarily from advertising. Subscription copies are generally 80% of total
copies sold. The Company believes 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 MRI data previously mentioned, the median age of male Playboy readers is
32, with a median annual household income of approximately $43,000. The Company
also derives meaningful income from the rental of Playboy magazine's subscriber
list, which consists of the subscriber's name, address and other information
maintained by the Company.
The Company attracts new subscribers to the magazine through its own
direct mail advertising campaigns, subscription agent campaigns and the
Internet. The Company recognizes revenues from magazine subscriptions over the
terms of the subscriptions. Subscription copies of the magazine are delivered
through the U.S. Postal Service as second class mail. The Company attempts to
contain these costs through presorting and other methods. The Publishing Group
was impacted by a general postal rate increase of 4% in January 1999. No postal
rate increases are expected in fiscal year 2000.
Playboy magazine is one of the highest priced magazines in the United
States. The basic U.S. newsstand cover price is $4.95 ($5.95 for holiday
issues). The Canadian cover price is C$5.95 (C$6.95 for holiday issues). In
fiscal year 1999, the Company published two special issues that sold at a
premium price, the September 1999 issue featuring Rena Mero, the World Wrestling
Federation champion formerly known as Sable, and the January 2000 Collector's
edition. There were no newsstand price increases in fiscal year 1999 for copies
sold in the United States or Canada, and none are currently planned for fiscal
year 2000.
Distribution of the magazine to newsstands and other retail outlets is
accomplished through Warner Publisher Services ("Warner"), a national
distributor. Copies of the magazine are shipped in bulk to the wholesalers,
which are responsible for local retail distribution. The Company receives a
substantial cash advance from Warner at the time each issue goes on sale. The
Company recognizes revenues from newsstand sales based on estimated copy sales
at the time each issue goes on sale, and adjusts for actual sales upon
settlement with Warner. These revenue adjustments are not material on an annual
basis. Retailers return unsold copies to the wholesalers who count and then
shred the returned magazines and report the returns via affidavit. The Company
then settles with Warner based on the number of magazines actually sold. The
number of issues sold on newsstands varies from month to month, depending in
part on the cover, the pictorials and the editorial features.
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Playboy magazine targets a wide range of advertisers. Advertising by
category, as a percent of total ad pages, and the total number of ad pages were
as follows:
Fiscal Year Fiscal Year Six Months Fiscal Year
Ended Ended Ended Ended
12/31/99 12/31/98 12/31/97 6/30/97
-------- -------- -------- -------
Tobacco................. 26% 25% 23% 21%
Retail/Direct mail...... 22 23 21 23
Beer/Wine/Liquor........ 21 22 22 24
Toiletries/Cosmetics.... 6 6 4 7
Home electronics........ 5 6 9 4
All other............... 20 18 21 21
------ ----- ----- ------
Total................. 100% 100% 100% 100%
======= ====== ====== =======
Total ad pages.......... 640 601 273 558
====== ===== ===== ======
The Company continues to focus on securing new advertisers from
underdeveloped categories. The Company implemented 5% and 7% cost per thousand
increases in advertising rates effective with the January 2000 and 1999 issues,
respectively.
The Company publishes 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 net advertising revenues of the U.S. edition
of Playboy magazine for fiscal years 1999 and 1998, the transition period and
fiscal year 1997 were $33.9 million, $30.8 million, $13.7 million and $28.4
million, respectively. Net advertising revenues are gross revenues less
advertising agency commissions, frequency and cash discounts and rebates. Levels
of advertising revenues may be affected by, among other things, general economic
activity and governmental regulation of advertising content.
Many magazines receive a significant portion of their advertising
revenues from companies selling tobacco products. Because only approximately
25%-30% of Playboy magazine's revenues are from advertising, the percentage of
ad pages from tobacco of approximately 25% is a smaller overall percentage than
for others. 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 Company does not
believe that it will be impacted by the Food and Drug Administration (the "FDA")
regulation announced in August 1996 which prohibits the publication of tobacco
advertisements containing drawings, colors or pictures because the regulation
does not apply to a magazine which is demonstrated to be an "adult publication."
The Company believes that Playboy magazine qualifies as an "adult publication"
and that the regulation is not applicable. On April 25, 1997, the Federal
District Court for the Middle District of North Carolina ruled that the FDA has
no authority anyway under existing law to restrict the advertising and promotion
of tobacco products and ordered the FDA not to implement any of the advertising
and promotion restrictions contained in the regulation. The government appealed
this ruling. On August 14, 1998, a three-judge panel of the Fourth Circuit Court
of Appeals (the "Fourth Circuit Court") invalidated the FDA's authority to issue
regulations restricting tobacco advertising. The government appealed this
decision to the full Fourth Circuit Court, which in November 1998 denied the
government's motion for a rehearing. The government appealed to the United
States Supreme Court (the "Supreme Court"), which has heard and will decide the
appeal.
Playboy magazine and special editions are printed at Quad/Graphics, Inc.,
located in Wisconsin, which then ships the product to subscribers and Warner.
The actual print run varies each month and is determined with input from Warner.
Paper is the principal raw material used in the production of Playboy magazine.
The Company uses a variety of types of high-quality coated paper that is
purchased from a number of suppliers. The market for paper has historically been
cyclical, resulting in volatility in paper prices. Playboy magazine paper prices
decreased approximately 8% in fiscal year 1999. The Publishing Group expects an
approximate 7% increase in paper prices effective around the July 2000 issue.
From time to time, Playboy magazine, and certain of its distribution
outlets and advertisers, have been the target of certain groups who seek to
limit its availability because of its content. In its 46-year history, the
Company has never sold a product that has been judged to be obscene or illegal
in any U.S. jurisdiction.
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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 the magazine's reputation for quality and its libraries of art, photography
and editorial text. These products include special editions (which were formerly
known as newsstand specials) and calendars, which are primarily sold in
newsstand outlets and use both original photographs and photographs from the
Company's library. The group expects to publish 24 special editions in fiscal
year 2000. In fiscal years 1999 and 1998, the transition period and fiscal year
1997, the group published 24, 23, 11 and 22 special editions, respectively. The
newsstand cover price for special editions is $6.95.
The Publishing Group also generates revenues from related businesses,
including books. In conjunction with an unaffiliated third party, the Company
released Inside the Playboy Mansion late in fiscal year 1998, featuring a
private glimpse, in photographs and text, into the innersanctums of the
legendary Playboy Mansions in both Chicago and Los Angeles. In conjunction with
this same third party, the Company also published The Playmate Book: Five
Decades of Centerfolds in fiscal year 1997, which featured photographs and
capsule biographies of 514 Playmates.
International Publishing
The Company licenses the right to publish 15 international editions of
Playboy magazine in the following countries: Brazil, Croatia, the Czech
Republic, Germany, Greece, Hungary, Italy, Japan, the Netherlands, Poland,
Romania, Russia, Slovakia, Spain and Taiwan. The Company owns a majority
interest in the Polish edition of the magazine and as such, its results are
consolidated in the Company's financial statements. The Company recently
acquired a minority interest in the Romanian edition. Combined average
circulation of the international editions is approximately 1.5 million copies
monthly.
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. The Company monitors 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 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 1999, two editions, Brazil and Germany, accounted for
approximately 55% of the total licensing revenues from international editions.
ENTERTAINMENT GROUP
The Company's Entertainment Group operations include the production and
marketing of programming through domestic TV networks, international TV and
worldwide home video.
On March 15, 1999, the Company completed its acquisition of Spice
Entertainment Companies, Inc. ("Spice"), a leading provider of adult television
entertainment. This acquisition provides the Company with a strong foothold in
providing adult entertainment to cable operators.
During the quarter ended September 30, 1999, the Company entered into a
joint venture with a wholly-owned subsidiary of the Cisneros Group of Companies.
Playboy TV International, LLC ("PTVI") will own, operate and launch all Playboy
TV and Spice networks outside of the United States and Canada. The Company
currently owns a 19.9% interest in the venture and has entered into program
supply and trademark license agreements with PTVI.
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Programming
The Entertainment Group develops, produces and distributes programming
for worldwide television and home video markets. Its productions have included
feature films, magazine-format shows, dramatic series, documentaries, live
events, anthologies of sexy short stories and celebrity and Playmate features.
Its programming features stylized eroticism in a variety of entertaining formats
for men and women, with an emphasis on programming for couples. It 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. The Company's programming is designed to be adapted easily into a
number of formats, enabling the Company to spread its relatively fixed
programming costs over multiple product lines. The majority of the programming
that airs on the Spice networks is licensed by the Company from third parties.
The Company invests in Playboy-style, original quality programming to
support its expanding businesses. The Company invested $35.3 million, $25.9
million, $14.4 million and $30.7 million in entertainment programming in fiscal
years 1999 and 1998, the transition period and fiscal year 1997, respectively.
These amounts, which also include expenditures for licensed programming,
resulted in the production of 172, 136, 96 and 166 hours of original
programming, respectively. At December 31, 1999, the Company's library of
primarily exclusive, Playboy-branded original programming totaled approximately
1,500 hours. In fiscal year 2000, the Company expects to invest approximately
$38 million in Company-produced and licensed programming, which would result in
the production of approximately 210 hours of original programming. These amounts
could vary based on the timing of completion of productions.
The Company has released and continues to sell feature films, which are
generally co-produced, in the $1 - $2 million range under the Playboy Films
label. The Company is responsible for distributing the films and shares the
revenues, less associated costs, with the other party. Playboy Films also air on
the domestic Playboy TV network.
The Company created and markets The Eros Collection, a line of
small-budget, non-Playboy-branded movies. These movies are released worldwide
through television and home video. The Company currently distributes films under
the Eros label domestically through Universal Music & Video Distribution, Inc.
("Uni"), its regular distributor of domestic home video product.
The Company has produced or co-produced a variety of series which air on
the domestic and international Playboy TV networks and are also licensed to
distributors internationally. Additionally, some episodes have been released as
Playboy Home Video titles and/or have been licensed to other networks, such as
Showtime. Some of the series in recent years have included Women: Stories of
Passion, Red Shoe Diaries, which was co-produced with Zalman King Entertainment,
Inc., and Beverly Hills Bordello.
Domestic TV Networks
The Company currently operates Playboy and Spice branded domestic TV
networks. Playboy TV is offered on cable and through the satellite
direct-to-home ("DTH") market on a pay-per-view and monthly subscription basis.
The Spice networks are offered on cable on a pay-per-view basis. By June 1999,
the majority of households from AdulTVision, the Company's former flanker
network, had been merged into the Spice networks. The Company also recognizes
royalty revenues from the license of Playboy TV and Spice programming to other
pay networks.
Pay-per-view programming can be delivered through any number of delivery
methods, including: (a) cable television; (b) DTH to households with large
satellite dishes receiving a C-band low power analog or digital signal ("TVRO")
or with small dishes receiving a Ku-band medium or high power digital signal,
such as those currently offered by DirecTV, PrimeStar and EchoStar ("DBS"); (c)
wireless cable systems; and (d) new technologies such as cable modem and the
Internet.
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The following table illustrates certain information regarding cable
households in general, and Playboy TV and Spice (in thousands):
Dec. 31, Dec. 31,
1999 1998
Total households
Cable (a)............................................ 67,100 65,900
Cable analog addressable (a) (b)..................... 28,500 29,800
Cable digital (a).................................... 4,700 1,500
Playboy TV households
Cable analog addressable (b) (c)..................... 11,700 11,700
Cable digital (c).................................... 1,300 200
Spice households
Cable analog addressable (b) (c)..................... 13,600 -
Cable digital (c).................................... 2,800 -
(a) Source: Information reported by Paul Kagan Associates, Inc. ("Kagan").
Kagan projects approximately 1% and 69% average annual increases in cable
and cable digital households, respectively, and an average annual decrease
of approximately 9% in cable analog addressable households through December
31, 2002.
(b) Represents the approximate number of cable analog addressable households to
which pay-per-view was available as of the end of the period.
(c) 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.
Most cable service in the United States is distributed through large
multiple system operators ("MSOs") and their affiliated cable systems ("cable
affiliates"). Once arrangements are made with an MSO, the Company is able to
negotiate channel space for its networks with their cable affiliates. Individual
cable affiliates determine the retail price of the pay-per-view service and
prices currently approximate $6.50 and $7.30 for a block of analog and digital
Playboy TV programming, respectively, and approximate $6.60 and $7.10 for a
block of analog and digital Spice programming, respectively. Individual cable
affiliates also determine the retail price of the monthly subscription service,
where prices average approximately $8.65 for Playboy TV, largely dependent on
the number of premium services to which a household subscribes.
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. In December
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. Management believes that the effect of
Section 505 on the Company's financial performance is likely to continue until
the case is finally decided. See Part I. Item 3. "Legal Proceedings."
Additionally, from time to time, certain groups have sought to exclude
the Company's programming from local pay television distribution because of the
adult-oriented content of the programming. Management does not believe that any
such attempts will materially affect the Company's access to cable systems, but
the nature and impact of any such limitations in the future cannot be
determined.
Growth in the pay-per-view market is expected to result in part from
cable system upgrades, utilizing digital compression, fiber optics or other
bandwidth expansion methods that provide cable operators additional channel
capacity. In recent years, cable operators have begun the shift from analog to
digital technology in order 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. As digital technology, which is not impacted by Section 505, becomes
more available, the Company believes that ultimately its pay television networks
will be available to the majority of cable households on a 24-hour basis.
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In addition to cable, the Company provides Playboy TV via encrypted
signal, on both a pay-per-view and monthly subscription basis, to home satellite
dish viewers. In recent years, Playboy TV has added a significant number of
viewers through the DBS market, which is not impacted by Section 505. The growth
in the DBS market has provided the Company with an expanded customer base via a
digital transmission which has historically produced higher buy rates than
analog cable markets. DBS operators determine the retail price of the
pay-per-view service and U.S. prices average approximately $6.00 - $8.00 for a
block of Playboy TV programming.
Playboy TV was available to approximately 12.4 million and 9.8 million
DTH households at December 31, 1999 and 1998, respectively. Playboy TV is the
only adult service to be available on all five DBS services in the United States
and Canada. It is currently available on DirecTV, PrimeStar and EchoStar in the
United States and ExpressVu and Star Choice in Canada. In April 1999, PrimeStar
was acquired by Hughes Electronics Corporation, which owns DirecTV. As a result,
there has been a significant decline in the number of PrimeStar subscribers as
they continue to be transitioned primarily to DirecTV or other DBS and cable
services.
Competition among television programming providers is intense for both
channel space and viewer spending. The Company competes in the cable and DTH
markets primarily on the basis of its Playboy and Spice brand names and
Playboy's unique quality programming. Its competition varies in the type and
quality of programming offered, but consists primarily of other premium pay
services, such as general interest movie channels like HBO, and other adult pay
services, which typically provide more sexually explicit programming. The
Company competes with these other services as it (a) attempts to obtain or renew
carriage with individual cable affiliates and DTH operators, (b) negotiates fee
arrangements with these operators and (c) markets its programming to consumers.
Over the past several years, the Company has been adversely impacted by all of
these factors. While there can be no assurance that the Company will be able to
maintain its current cable and DTH carriage or fee structures in the face of
this competition, the Company believes that strong Playboy and Spice brand
recognition, the quality of its programming and its resulting ability to appeal
more effectively to a broader range of adult audiences are critical factors
which will continue to differentiate the Company's networks from its
competitors.
The programming of the Company's networks is delivered to cable and DTH
operators through communications satellite transponders. The Company's current
transponder leases contain protections typical in the industry against
transponder failure, including access to spare transponders, and conditions
under which the Company's access may be denied. The Company believes that the
transponder for Playboy TV 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 for Playboy TV expires October 30, 2001 and can be
renewed for an additional three years. The Company's current lease term for the
Spice networks' transponder extends through the remainder of the satellite's
life (currently estimated to be 2011). Major limitations on the Company's access
to cable or DTH 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 transponders it
leases.
International TV
During the quarter ended September 30, 1999, the Company entered into a
joint venture with a wholly-owned subsidiary of the Cisneros Group of Companies.
PTVI has the exclusive right to create and launch new television networks under
the Playboy and Spice brands in territories outside of the United States and
Canada and, under certain circumstances, to license programming to third
parties. PTVI will also own and operate all existing international Playboy TV
and Spice networks. In addition, the Company and PTVI have entered into program
supply and trademark license agreements. Currently, the Company has a 19.9%
interest in PTVI with an option to increase up to 50% for a certain period of
time.
Under the arrangements with PTVI, the Company will receive $100.0
million, $30.0 million of which was received during fiscal year 1999, with the
remainder to be received over the next five years. PTVI also has a long-term
commitment with the Company to license international television rights to each
year's production output, with payments representing a percentage of the
Company's annual production spending.
Prior to the formation of the PTVI joint venture, the Company sold its
television programming internationally either on a tier or program-by-program
basis to foreign broadcasters and pay television services or, in the United
Kingdom, Japan, Iberia and approximately 45 Latin America countries and
territories, through a local Playboy TV network in which the Company owned an
equity interest and from which it received fees for programming and the use of
the Playboy brand name.
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Worldwide Home Video
The Company also distributes its original programming domestically via
videocassettes, laserdiscs and DVDs which are sold in video and music stores and
other retail outlets and through the Internet and direct mail, including the
Company's own sites and catalogs. Playboy Home Video is one of the
largest-selling brands of nontheatrically released, special-interest videos in
the United States, and has consistently been named one of Billboard magazine's
"Top Video Sales Labels." The Playboy Home Video format is consistent with the
style, quality and focus of Playboy magazine. The Company also releases home
video titles under its Eros Collection label.
The Company plans to release 19 Playboy Home Video titles in fiscal year
2000. In fiscal year 1999, the Company released 16 new titles, 13 of which
entered the top 20 on Billboard magazine's weekly Top Video Sales Chart. The
Company released 16, 8 and 14 new titles in fiscal year 1998, the transition
period and fiscal year 1997, respectively.
The Company's home video products are distributed in the United States
and Canada by Uni. For new release titles, the Company is responsible for
manufacturing the video product and for certain marketing and sales functions.
Uni receives a distribution fee on sales of these new releases and remits a net
amount to the Company. The Company and Uni have a different distribution
agreement related to backlist titles (titles in release for longer than a year)
that shifts manufacturing and marketing responsibilities to Uni. The Company
receives annual guarantees for the backlist titles, and monies earned on these
titles are offset against the guarantee.
In addition to retail sales, the Company also sells its videos through
direct-marketing channels, including Playboy magazine, direct commerce and the
Company's and other e-commerce sites. The Company also distributes its video
programming via laserdiscs and the DVD format, through agreements with Image
Entertainment, Inc. The Company released over 50 DVD titles in fiscal year 1999.
The Company also distributes, through separate distribution agreements,
its U.S. home video products to countries in North and South America, Europe,
Australia, Asia and Africa. These products are based on the videos produced for
the U.S. market, with the licensee dubbing or subtitling into the local language
where necessary.
PRODUCT MARKETING GROUP
The Product Marketing Group licenses the Playboy name, Rabbit Head Design
and other trademarks and artwork owned by the Company for the worldwide
manufacture, sale and distribution of a variety of consumer products.
The Product Marketing Group works with licensees to develop, market and
distribute high-quality, Playboy branded merchandise. The Company's licensed
product lines include men's and women's clothing, accessories, cigars, watches,
jewelry, fragrances, small leather goods, stationery, eyewear and home fashions.
The group also licenses art-related products based on the Company's extensive
collection of artwork, many of which were commissioned as illustrations for
Playboy magazine and for use in the Company's other businesses. Additionally,
the Company owns all of the trademarks and service marks of Sarah Coventry,
Inc., which it licenses through mass market distribution leaders. Products are
marketed primarily through retail outlets, including department and specialty
stores.
The Company maintains control of the design and quality specifications of
its licensed products to ensure that products are consistent with the quality of
the Playboy 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. The Company continues to make investments
in brand marketing and product design to further promote a cohesive brand image.
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 1999, approximately 65% of the group's royalties earned from
licensing the Company's trademarks were derived from international licensees.
While the Company's branded products are unique, the marketing of
apparel, jewelry and cigars is an intensely competitive business that is
extremely sensitive to economic conditions, shifts in consumer buying habits or
fashion trends, as well as changes in the retail sales environment.
10
<PAGE>
CATALOG GROUP
The Company's Catalog Group operations have included the direct marketing
of products through the Critics' Choice Video catalog; the Collectors' Choice
Music catalog; the Playboy catalog; and the Spice catalog. Effective October 1,
1999, the Playboy and Spice catalogs have been integrated as direct commerce
businesses with the Company's branded e-commerce business within the Playboy
Online Group.
The Critics' Choice Video catalog, one of the largest-circulation
catalogs of classic, popular and hard-to-find movies from all of the major film
studios, is published quarterly.
The Collectors' Choice Music catalog contains 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.
The Playboy catalog included Playboy-branded fashions, cigars and gifts,
Playboy Home Video titles, Playboy collectibles, such as calendars, back issues
of Playboy magazine and special editions, and CD-ROM products. The Playboy
catalog had historically been published three times annually.
The Spice catalog offered videos in the late night category, sexy
lingerie and sensuous life products.
The catalog business is subject to competition from other catalogs,
e-commerce sites and retail outlets selling similar merchandise. The resulting
price competition was a major factor in the Company's decision to transition the
Playboy and Spice print catalogs into direct commerce promotion to support
e-commerce, while working to identify strategic purchasers for the Critics'
Choice Video and Collectors' Choice Music catalogs.
Paper is the principal raw material used in publishing the Company's
catalogs. The market for paper has historically been cyclical, resulting in
volatility in paper prices. The Catalog Group was impacted by a general postal
rate increase in January 1999. No postal rate increases are expected in fiscal
year 2000. In response to changes in paper and postage prices, the Company
continues to evaluate different grades of paper and review circulation plans to
operate the business most cost-effectively.
The Catalog Group operates out of a leased facility that features an
automated inventory management system and houses the majority of its operations.
CASINO GAMING GROUP
The Company decided to reenter the casino gaming business to further
leverage its brand image. The Company expects to complete deals that will obtain
licensing and/or management fees for gaming-anchored establishments, and will
consider making minority investments.
PLAYBOY ONLINE GROUP
The Playboy Online Group is dedicated to the lifestyle and entertainment
interests of young men around the world. It is uniquely positioned to
capitalize on the Playboy brand, which is one of the most recognized in the
world, to provide a compelling online entertainment experience. The group's
online destinations combine Playboy's distinct attitude with extensive and
original content, a large community of loyal users and a wealth of e-commerce
offerings. The group's sites provide the Company with multiple revenue streams,
including advertising and sponsorships, e-commerce and fees for subscription
services and pay-per-view events.
The Playboy.com site offers original content focusing on areas of
interest to its target audience, including digital culture, love & sex, pop
culture, campus life, travel and nightlife, gaming, sports, Playboy Playmates
and celebrities. The site also offers pay-per-view events such as lingerie
fashion shows, Mardi Gras and parties at the Playboy Mansion. The Company also
offers a members-only Playboy Cyber Club, which is a subscription-based site
offering services such as VIP access to over 45,000 photos, every interview
from Playboy magazine, individual home pages for Playboy Playmates, live
Playmate chats, video clips and free access to some pay-per-view specials. As
of December 31, 1999, the Playboy Cyber Club had approximately 40,000
subscribers.
11
<PAGE>
The group's e-commerce offerings include the Playboy Store, which is the
primary destination for purchasing over 2,700 different Playboy-branded
fashions, videos, jewelry and collectibles. The Playboy Marketplace allows top
notch companies to sell products such as movies, CDs, books, software, games,
cigars, wine, consumer electronics and travel packages to the very desirable
Playboy demographic. These companies include Amazon.com, CNET, Gourmet Market,
Sharper Image and College Club. CCMusic, an online version of the Collectors'
Choice Music catalog, offers approximately 250,000 selections in every musical
genre, including exclusive releases and titles not found on any other site.
CCVideo, an online version of the Critics' Choice Video catalog, offers a
database of approximately 46,000 videos, with approximately 23,000 in stock for
immediate shipment, including many not easily found in local retail outlets or
other Internet sites. In addition, in December 1999, Playboy Auctions was
launched in order to capitalize on the thriving market for Playboy
collectibles.
A separately branded online adult entertainment site is located at
Cyberspice.com. Capitalizing on the Company's acquisition of Spice, the site
offers over 3,100 items in the Spice Store, including adult videos, lingerie
and sensual products.
Effective October 1, 1999, the Playboy and Spice catalogs have been
integrated as direct commerce within the Playboy Online Group's e-commerce
business.
For the month of December 1999, the sites generated approximately 113
million page views and over 16 million visits, as audited by ABC Interactive.
The group's sites also generate significant international traffic. In December
1999, approximately 25% of the sites' traffic originated outside of the United
States.
In January 2000, Playboy.com, Inc., 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").
SEASONALITY
The Company's businesses are generally not seasonal in nature. Revenues
and operating results for the quarters ending December 31, however, are
typically impacted by higher newsstand cover prices of holiday issues. These
higher prices, coupled with typically higher sales of subscriptions of Playboy
magazine during those quarters, also results in an increase in accounts
receivable. E-commerce revenues and operating results are typically impacted by
the year-end holiday buying season and decreased traffic during the summer
months.
PROMOTIONAL AND OTHER ACTIVITIES
The Company believes that its sales of products and services are enhanced
by the public recognition of Playboy as a lifestyle. In order to establish
public recognition, the Company, among other activities, acquired in 1971 a
mansion in Holmby Hills, California (the "Mansion"), where the Company's
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 the Company's image,
charitable functions and a wide variety of promotional and marketing purposes.
The Mansion generates substantial publicity and recognition which increase
public awareness of the Company and its products and services. As indicated in
Part III. Item 13. "Certain Relationships and Related Transactions," Mr. Hefner
pays rent to the Company for that portion of the Mansion used exclusively for
his and his personal guests' residence as well as the value of meals and other
benefits received by him and his personal guests. The Mansion is included in the
Company's financial statements as of December 31, 1999 at a cost, including all
improvements and after accumulated depreciation, of approximately $2,285,000.
The operating expenses of the Mansion, including depreciation, taxes and
security charges, net of rent received from Mr. Hefner, were approximately
$4,395,000, $4,285,000, $1,615,000 and $3,635,000 for fiscal years 1999 and
1998, the transition period and fiscal year 1997, respectively.
The Company has produced the Playboy Jazz Festival (the "Festival") on an
annual basis in Los Angeles at the Hollywood Bowl since June 1979. In
conjunction with the Festival, the Company continued its community events
program by sponsoring free concerts.
Through the Playboy Foundation, the Company supports 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.
12
<PAGE>
In order to protect the success and potential future growth of the
Company's businesses, the Company actively defends its trademarks throughout the
world and monitors the marketplace for counterfeit products. Consequently, it
initiates legal proceedings from time to time to prevent unauthorized use of the
trademarks.
EMPLOYEES
At February 29, 2000, the Company employed 792 full-time employees
compared to 773 at February 28, 1999. No employees are represented by collective
bargaining agreements. The Company believes it maintains a satisfactory
relationship with its employees.
Item 2. Properties
Location Approximate Size Primary Use
- -------------------------- -------------------- ----------------------------
Office Space Leased:
680 North Lake Shore Drive 130,000 sq. feet This space serves as the
Chicago, Illinois Company's corporate
This space serves as the
Company's corporate
headquarters, and is used by
all of the Company's
operating groups, primarily
Publishing and Playboy
Online, and for executive
and administrative
personnel.
730 Fifth Avenue 60,000 sq. feet This space serves as the
New York, New York Company's Publishing Group
headquarters, and a limited
amount of this space is used
by the Entertainment,
Product Marketing and
Playboy Online Groups, as
well as executive and
administrative
personnel.
9242 Beverly Boulevard 45,000 sq. feet This space serves as the
Los Angeles, California Company's Entertainment
Group headquarters, and a
limited amount of this space
is used by the Publishing
Group, as well as executive
and administrative
personnel.
5055 Wilshire Boulevard 20,000 sq. feet This space is primarily used
Los Angeles, California by the Company's
Entertainment Group for
general business and film
editing.
Operations Facilities Leased:
Itasca, Illinois 105,000 sq. feet This warehouse facility
space is used by the
Company's Catalog Group to
provide direct marketing and
e-commerce order fulfillment
and related activities. It
also houses a portion of the
Company's data processing
operations and serves as a
storage facility for the
entire Company.
Santa Monica, California 10,000 sq. feet This space is used by the
Company's Publishing Group
as a photography studio
Los Angeles, California 10,000 sq. feet This space is used by the
Company's Entertainment
Group as a motion picture
production facility.
Mansion Owned:
Holmby Hills, California 5 1/2acres The Mansion is used for
various activities,
including serving as a
valuable location for video
production and magazine
photography, business
meetings, enhancing the
Company's image, charitable
functions and a wide variety
of promotional and marketing
activities.
The Company considers its properties adequate for its present needs.
13
<PAGE>
Item 3. Legal Proceedings
The Company is from time to time a defendant in suits for defamation and
violation of rights of privacy, many of which allege substantial or unspecified
damages, which are vigorously defended by the Company. The Company is currently
engaged in other litigation, most of which is generally incidental to the normal
conduct of its business. Management believes that its reserves are adequate and
that no such action will have a material adverse impact on the Company's
financial condition. There can be no assurance, however, that the Company's
ultimate liability will not exceed its reserves. See Note (R) Contingencies of
Notes to Consolidated Financial Statements.
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. Management
believes that the effect of Section 505 on the Company's financial performance
is likely to continue until the case is finally decided.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
There were no matters submitted to a vote of security holders during the
quarter ended December 31, 1999.
14
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The stock price information, as reported in the New York Stock Exchange
Composite Listing, is set forth in Note (Y) Quarterly Results of Operations
(Unaudited) of Notes to Consolidated Financial Statements. The registrant's
securities are traded on the exchanges listed on the cover page of this Form
10-K Annual Report. As of February 29, 2000, there were 8,072 and 9,069 holders
of Class A common stock and Class B common stock, respectively. There were no
cash dividends declared during fiscal years 1999 and 1998. The Company's credit
agreement prohibits the payment of cash dividends.
Item 6. Selected Financial and Operating Data (1)
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Six Months Fiscal Year
Ended Ended Ended Ended
(in thousands) 12/31/99 12/31/98 12/31/97 6/30/97
- -------------------------------------------------------------------------------------------------------------------
Net Revenues
Publishing
Playboy magazine
<S> <C> <C> <C> <C>
Subscription $ 51,035 $ 53,012 $ 25,808 $ 52,892
Newsstand 22,863 22,424 11,345 21,972
Advertising 33,899 30,761 13,718 28,414
Other 58 604 19 40
- -------------------------------------------------------------------------------------------------------------------
Total Playboy magazine 107,855 106,801 50,890 103,318
Other domestic publishing 18,092 18,285 10,057 20,455
International publishing 11,115 10,981 5,305 9,951
- -------------------------------------------------------------------------------------------------------------------
Total Publishing 137,062 136,067 66,252 133,724
- -------------------------------------------------------------------------------------------------------------------
Entertainment
Domestic TV networks 74,014 63,035 27,243 51,769
International TV 37,966 12,828 4,253 9,108
Worldwide home video 10,534 12,922 3,722 11,625
Movies and other 3,269 2,264 2,138 2,214
- -------------------------------------------------------------------------------------------------------------------
Total Entertainment 125,783 91,049 37,356 74,716
- -------------------------------------------------------------------------------------------------------------------
Product Marketing 5,545 7,081 4,199 7,968
- -------------------------------------------------------------------------------------------------------------------
Catalog 60,335 74,393 39,340 75,391
- -------------------------------------------------------------------------------------------------------------------
Casino Gaming 900 - - -
- -------------------------------------------------------------------------------------------------------------------
Playboy Online 16,104 7,098 2,317 2,838
- -------------------------------------------------------------------------------------------------------------------
Corporate Marketing 2,088 1,930 77 1,986
- -------------------------------------------------------------------------------------------------------------------
Total net revenues $ 347,817 $ 317,618 $ 149,541 $ 296,623
===================================================================================================================
Operating Income
Publishing $ 5,977 $ 6,672 $ 4,022 $ 8,750
- -------------------------------------------------------------------------------------------------------------------
Entertainment
Before programming expense 78,716 52,575 19,144 39,609
Programming expense (34,341) (26,410) (11,153) (21,355)
- -------------------------------------------------------------------------------------------------------------------
Total Entertainment 44,375 26,165 7,991 18,254
- -------------------------------------------------------------------------------------------------------------------
Product Marketing 434 365 1,614 3,512
- -------------------------------------------------------------------------------------------------------------------
Catalog 256 4,100 1,835 4,630
- -------------------------------------------------------------------------------------------------------------------
Casino Gaming (521) (1,108) (541) -
- -------------------------------------------------------------------------------------------------------------------
Playboy Online (9,066) (6,528) (943) (113)
- ------------------------------------------------------------------------------------------------------------------
Corporate Administration and Promotion (27,476) (24,698) (9,519) (19,288)
- -------------------------------------------------------------------------------------------------------------------
Total segment profitability 13,979 4,968 4,459 15,745
Restructuring expenses (1,091) - - -
- -------------------------------------------------------------------------------------------------------------------
Operating income $ 12,888 $ 4,968 $ 4,459 $ 15,745
===================================================================================================================
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Selected Financial and Operating Data (1) (continued)
(in thousands, except per share amounts,
number of employees and ad pages)
Fiscal Fiscal Six Fiscal Fiscal Fiscal
Year Year Months Year Year Year
Ended Ended Ended Ended Ended Ended
12/31/99 12/31/98 12/31/97 6/30/97 6/30/96 6/30/95
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Data
Net revenues $ 347,817 $ 317,618 $ 149,541 $ 296,623 $ 276,587 $ 247,249
Interest expense, net (6,179) (1,424) (239) (354) (592) (569)
Income (loss) from continuing operations before
cumulative effect of change in accounting principle (5,568) 4,320 2,142 21,394 4,252 629
Net income (loss) (5,335) 4,320 1,065 21,394 4,252 629
Basic income (loss) per common share
Income (loss) from continuing operations before
cumulative effect of change in accounting principle (0.24) 0.21 0.10 1.05 0.21 0.03
Net income (loss) (0.23) 0.21 0.05 1.05 0.21 0.03
Diluted income (loss) per common share
Income (loss) from continuing operations before
cumulative effect of change in accounting principle (0.24) 0.21 0.10 1.03 0.21 0.03
Net income (loss) (0.23) 0.21 0.05 1.03 0.21 0.03
Cash dividends declared per common share - - - - - -
EBITDA (2) 58,722 38,889 17,584 41,651 35,470 27,624
Cash flows from operating activities 15,641 (11,524) (3,736) 1,539 4,716 3,456
Cash flows from investing activities (67,667) (9,706) (1,991) (2,450) (4,168) (315)
Cash flows from financing activities $ 75,213 $ 20,624 $ 5,371 $ (224) $ 419 (2,928)
- -----------------------------------------------------------------------------------------------------------------------------------
At Period End
Total assets $ 429,402 $ 212,107 $ 185,947 $ 175,542 $ 150,869 $ 137,835
Long-term financing obligations $ 75,000 $ - $ - $ - $ 347 $ 687
Shareholders' equity $ 161,281 $ 84,202 $ 78,683 $ 76,133 $ 52,283 $ 47,090
Long-term financing obligations as a
percentage of total capitalization 31.70% 0.00% 0.00% 0.00% 0.70% 1.40%
Number of common shares outstanding
Class A voting 4,859 4,749 4,749 4,749 4,749 4,714
Class B nonvoting 19,288 15,868 15,775 15,636 15,437 15,276
Number of full-time employees 780 758 684 666 621 600
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Operating Data
Playboy magazine ad pages 640 601 273 558 569 595
Cash investments in Company-produced and
licensed entertainment programming $ 35,262 $ 25,902 $ 14,359 $ 30,747 $ 25,549 $ 21,313
Amortization of investments in Company-produced
and licensed entertainment programming $ 34,341 $ 26,410 $ 11,153 $ 21,355 $ 21,263 $ 20,130
Domestic Playboy TV households (at period end)
Cable analog addressable (3) 11,700 11,700 11,600 11,200 11,300 10,600
Cable digital (3) 1,300 200 - - - -
Satellite direct-to-home 12,400 9,800 6,800 6,300 4,900 3,300
Domestic Spice households (at period end)
Cable analog addressable (3) (4) 13,600 - - - - -
Cable digital (3) (4) 2,800 - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
For a more detailed description of the Company's financial position, results of
operations and accounting policies, please refer to Part II. Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" ("MD&A") and Part II. Item 8. "Financial Statements and
Supplementary Data."
(1) Certain amounts reported for prior periods have been reclassified to
conform to the current year's presentation. Relevant financial data for the
pro forma calendar year ended December 31, 1997 is presented under Part II.
Item 7. "MD&A."
(2) EBITDA represents earnings from continuing operations before income taxes,
cumulative effect of change in accounting principle, interest expense,
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, expenses related
to the vesting of restricted stock awards and equity in operations of 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.
(3) 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. (4) The Company acquired Spice on March
15, 1999.
</FN>
</TABLE>
16
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
In November 1997, the Board approved a change in the Company's fiscal
year end from June 30 to December 31. In order to provide the reader with a
clearer understanding of the Company's results of operations, financial data for
the pro forma calendar year ended December 31, 1997 is included below for
comparative purposes. Certain amounts reported for prior periods have been
reclassified to conform to the current year's presentation.
<TABLE>
<CAPTION>
(Unaudited)
Pro Forma
Fiscal Year Fiscal Year Calendar Year
Ended Ended Ended
(in millions, except per share amounts) 12/31/99 12/31/98 12/31/97
- ------------------------------------------------------------------------------------------------------------
Net Revenues
Publishing
<S> <C> <C> <C>
Playboy magazine $ 107.9 $ 106.8 $ 102.4
Other domestic publishing 18.1 18.3 20.3
International publishing 11.1 11.0 10.0
- ------------------------------------------------------------------------------------------------------------
Total Publishing 137.1 136.1 132.7
- ------------------------------------------------------------------------------------------------------------
Entertainment
Domestic TV networks 74.0 63.0 54.3
International TV 38.0 12.9 10.0
Worldwide home video 10.5 12.9 10.5
Movies and other 3.3 2.2 3.4
- ------------------------------------------------------------------------------------------------------------
Total Entertainment 125.8 91.0 78.2
- ------------------------------------------------------------------------------------------------------------
Product Marketing 5.5 7.1 7.9
- ------------------------------------------------------------------------------------------------------------
Catalog 60.3 74.4 75.6
- ------------------------------------------------------------------------------------------------------------
Casino Gaming 0.9 - -
- ------------------------------------------------------------------------------------------------------------
Playboy Online 16.1 7.1 3.9
- ------------------------------------------------------------------------------------------------------------
Corporate Marketing 2.1 1.9 1.9
- ------------------------------------------------------------------------------------------------------------
Total net revenues $ 347.8 $ 317.6 $ 300.2
============================================================================================================
Net Income (Loss)
Publishing $ 6.0 $ 6.6 $ 9.1
- ------------------------------------------------------------------------------------------------------------
Entertainment
Before programming expense 78.7 52.6 41.5
Programming expense (34.3) (26.4) (22.9)
- ------------------------------------------------------------------------------------------------------------
Total Entertainment 44.4 26.2 18.6
- ------------------------------------------------------------------------------------------------------------
Product Marketing 0.4 0.4 2.9
- ------------------------------------------------------------------------------------------------------------
Catalog 0.3 4.1 3.6
- ------------------------------------------------------------------------------------------------------------
Casino Gaming (0.5) (1.1) (0.6)
- ------------------------------------------------------------------------------------------------------------
Playboy Online (9.1) (6.5) (1.2)
- ------------------------------------------------------------------------------------------------------------
Corporate Administration and Promotion (27.5) (24.7) (19.9)
- ------------------------------------------------------------------------------------------------------------
Segment profitability 14.0 5.0 12.5
Restructuring expenses (1.1) - -
- ------------------------------------------------------------------------------------------------------------
Operating income 12.9 5.0 12.5
- ------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 1.8 0.1 0.1
Interest expense (8.0) (1.6) (0.4)
Gain on sale of investments 1.7 4.3 -
Equity in operations of PTVI and other (13.9) (0.4) 0.4
Other, net (0.9) (0.4) (0.9)
- ------------------------------------------------------------------------------------------------------------
Total nonoperating income (expense) (19.3) 2.0 (0.8)
- ------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes and cumulative
effect of change in accounting principle (6.4) 7.0 11.7
Income tax benefit (expense) 0.9 (2.7) 8.0
- ------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before cumulative effect
of change in accounting principle (5.5) 4.3 19.7
Gain on disposal of discontinued
operations (net of tax) 0.2 - -
- ------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect
of change in accounting principle (5.3) 4.3 19.7
Cumulative effect of change in
accounting principle (net of tax) - - (1.1)
- -----------------------------------------------------------------------------------------------------------
Net income (loss) $ (5.3) $ 4.3 $ 18.6
============================================================================================================
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
Pro Forma
Fiscal Year Fiscal Year Calendar Year
Ended Ended Ended
12/31/99 12/31/98 12/31/97
- ------------------------------------------------------------------------------------------------------------
Basic Income (Loss) Per Common Share
Income (loss) before cumulative effect of
change in accounting principle
<S> <C> <C> <C>
From continuing operations $ (0.24) $ 0.21 $ 0.96
From discontinued operations (net of tax) 0.01 - -
- ------------------------------------------------------------------------------------------------------------
Total (0.23) 0.21 0.96
Cumulative effect of change in accounting
principle (net of tax) - - (0.05)
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.23) $ 0.21 $ 0.91
============================================================================================================
Diluted Income (Loss) Per Common Share
Income (loss) before cumulative effect of
change in accounting principle
From continuing operations $ (0.24) $ 0.21 $ 0.94
From discontinued operations (net of tax) 0.01 - -
- ------------------------------------------------------------------------------------------------------------
Total (0.23) 0.21 0.94
Cumulative effect of change in accounting
principle (net of tax) - - (0.05)
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.23) $ 0.21 $ 0.89
============================================================================================================
</TABLE>
Beginning with the quarter ended March 31, 1999, certain Company-wide
marketing activities, such as Playboy Jazz Festival and Playmate promotions,
that had previously been reported in the Publishing Group are now included in
Corporate Administration and Promotion results. The international home video
business, previously combined with international TV results, has been combined
with the domestic home video business and is now reported as worldwide home
video. Additionally, programming expense for all of the Entertainment Group's
businesses, including certain licensing expenses that were previously reported
as direct costs, are now reported collectively as programming expense.
Previously, results from AdulTVision and movies and other had been reported net
of programming expense. Beginning with the quarter ended June 30, 1999, all of
the Company's domestic TV networks are reported on a combined basis.
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. For
example, 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. In addition, international TV revenues vary due to the timing of
recognizing library license fees related to PTVI.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1998
The Company's revenues were $347.8 million for the fiscal year ended
December 31, 1999, a 10% increase over fiscal year 1998. This increase was
primarily due to higher revenues from the Entertainment Group, principally due
to the revenue generated from the sale of the international rights to our film
library to PTVI, a joint venture the Company entered into with the Cisneros
Television Group during the current year. Also contributing to the increase were
higher revenues from the Playboy Online Group, partially offset by lower Catalog
Group revenues. The Playboy Online and Catalog Group variances resulted in part
from the reconfiguration of the e-commerce business, resulting in Playboy and
Spice direct commerce results being reported in the Playboy Online Group
effective October 1, 1999.
18
<PAGE>
The Company reported segment profitability, or operating income before
restructuring expenses, of $14.0 million for fiscal year 1999 compared to
operating income of $5.0 million for fiscal year 1998. This increase was
primarily due to higher segment profitability from the Entertainment Group,
principally due to the PTVI-related revenues. Lower segment profitability from
the Catalog Group plus higher investments in Playboy Online and Corporate
Administration and Promotion, partially offset the above. The current year also
included $1.1 million of restructuring expenses related to severance costs as a
result of a reduction in the Company's work force, resulting in operating income
of $12.9 million.
Net loss for fiscal year 1999 was $5.3 million, or $0.23 per basic and
diluted common share, compared to net income of $4.3 million, or $0.21 per basic
and diluted common share, for the prior year. Net loss for the current year
included higher interest expense, primarily due to increased debt resulting from
the acquisition of Spice. The current year also included a $13.9 million charge
principally related to PTVI. Such charge included equity in operations of
nonconsolidated affiliates, including the 19.9% interest in PTVI, the accounting
effects of the formation of the PTVI venture, and the elimination of unrealized
profits of certain transactions between the Company and PTVI. There was also a
$1.7 million gain from the sale of the Company's interest in the Rhodes Casino
in fiscal year 1999, while the prior year included a $4.3 million gain on the
sale of the Company's interest in duPont Publishing, Inc. ("duPont").
PUBLISHING GROUP
Publishing Group revenues were $137.1 million for the fiscal year ended
December 31, 1999, a 1% increase over revenues of $136.1 million for the fiscal
year ended December 31, 1998.
Playboy magazine revenues increased $1.1 million, or 1%, for fiscal year
1999 compared to the prior year. Advertising revenues increased $3.1 million, or
10%, due to increases in both ad pages and the average net revenue per page.
Advertising sales for the fiscal year 2000 first quarter magazine issues are
closed and the Company expects to report 17% more ad pages and 28% higher ad
revenues compared to the quarter ended March 31, 1999. Partially offsetting the
increased advertising revenues was a $1.5 million, or 2%, decrease in
circulation revenues primarily due to a $2.0 million, or 4%, decrease in
subscription revenues, reflecting in part marketing issues facing direct
marketing stamp sheet agents, partially offset by a $0.5 million, or 2%,
increase in newsstand revenues.
Revenues from other domestic publishing businesses decreased $0.2
million, or 1%, for fiscal year 1999 compared to the prior year. This was
primarily due to fewer special editions copies sold, despite an additional issue
in the current year, as a result of increased competition, primarily from the
Internet. Partially offsetting the above were higher ancillary businesses
revenues.
International publishing revenues increased $0.1 million, or 1%, for
fiscal year 1999 compared to the prior year. The increase was primarily due to
higher revenues from the Polish edition of Playboy magazine, in which the
Company owns a majority interest, mostly offset by lower royalties from the
Brazilian edition, principally due to economic weakness in that country.
For fiscal year 1999, the Publishing Group's segment profitability
declined $0.6 million, or 10%. This decrease was primarily due to higher
overhead, due in part to higher performance-related variable compensation
expense, editorial, partially related to the higher newsstand revenues, and
ancillary businesses expenses combined with the lower special editions revenues
and international publishing royalties. Partially offsetting the above were the
higher Playboy magazine advertising revenues, lower paper prices and favorable
manufacturing volume variances due to a reduction in print runs.
ENTERTAINMENT GROUP
For the fiscal year ended December 31, 1999, Entertainment Group revenues
of $125.8 million increased $34.8 million, or 38%, compared to the prior year
primarily due to international TV revenues in the current year related to PTVI.
Also contributing to the increase were higher revenues from domestic TV
networks, principally attributable to the current year acquisition of Spice.
Segment profitability increased $18.2 million primarily due to the higher
revenues, which were partially offset by higher related expenses.
The following discussion focuses on the profit contribution of each
business before programming expense ("profit contribution").
19
<PAGE>
Domestic TV Networks
For fiscal year 1999, revenues of $74.0 million from domestic TV networks
increased $11.0 million, or 17%, and profit contribution increased $3.2 million.
These increases were primarily due to the Spice acquisition, partially offset by
lower off-network productions and Playboy TV DTH revenues, principally from
PrimeStar. In April 1999, PrimeStar was acquired by Hughes Electronics
Corporation, which owns DirecTV. As a result, there has been a significant
decline in the number of PrimeStar subscribers as they continue to be
transitioned primarily to DirecTV or other DTH and cable services. Higher
revenues from the growth in digital cable households also contributed to the
revenue increase.
The approximate number of households were as follows for the periods
indicated below (in millions):
Dec. 31, Dec. 31,
1999 1998
Cable (1):
Playboy TV Analog Addressable....... 11.7 11.7
Playboy TV Digital.................. 1.3 0.2
Spice Analog Addressable............ 13.6 -
Spice Digital....................... 2.8 -
DTH:
Playboy TV.......................... 12.4 9.8
(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.
By June 1999, the majority of AdulTVision households had been merged into
the Spice networks.
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. In
December 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. Management believes that the effect of
Section 505 on the Company's financial performance is likely to continue until
the case is finally decided. See Part I. Item 3. "Legal Proceedings."
International TV
Profit contribution from the international TV business in the current
year increased $26.4 million on a $25.1 million increase in revenues. These
increases were primarily due to the first year of revenues related to PTVI for
library license fees, trademark royalties and output license fees.
Worldwide Home Video
In the current year, revenues from the worldwide home video business
decreased $2.4 million, or 18%, while profit contribution decreased $2.1
million. These decreases were largely due to lower domestic sales of Playboy
Home Video titles combined with lower revenues from continuity series' programs.
The lower continuity series' revenues were due in part to the transition to a
new distributor.
Movies and Other
Profit contribution from movies and other businesses in the current year
increased $1.0 million on a $1.1 million increase in revenues. These increases
were primarily due to library license fees for movies in the current year from
PTVI.
The Entertainment Group's administrative expenses increased $2.4 million
in the current year primarily due to higher performance-related variable
compensation expense and staff needed to support the group's growth.
20
<PAGE>
Programming Expense
Programming amortization expense increased $7.9 million for fiscal year
1999 primarily as a result of the programming licensed to PTVI. Higher
amortization related to regular programming on the domestic Playboy TV network
and programming amortization in the current year related to the Spice networks
also contributed to the increase.
PRODUCT MARKETING GROUP
Product Marketing Group revenues of $5.5 million for the fiscal year
ended December 31, 1999 decreased $1.6 million, or 22%, compared to the prior
year. The current year reflects lower international product licensing royalties,
largely due to depressed economic conditions in Asia. Also unfavorably impacting
the comparison were lower revenues as a result of a barter agreement in the
prior year related to the sale of prints and posters from the Company's art
publishing inventory.
Segment profitability of $0.4 million was flat compared to the prior year
which included a $1.4 million unfavorable settlement of litigation.
CATALOG GROUP
For the fiscal year ended December 31, 1999, revenues of $60.3 million
decreased $14.1 million, or 19%, compared to the prior fiscal year. This
decrease reflected a decline in revenues for all of the Company's catalogs,
primarily due to lower circulation and response rates, except for the Spice
catalog which was launched during the summer of 1998. The decrease also
reflected the absence of fiscal year 1999 fourth quarter revenues related to the
Playboy and Spice catalogs, which have been integrated as direct commerce
businesses with the Company's branded e-commerce business and, effective October
1, 1999, have been included in Playboy Online Group results. These lower net
revenues, largely offset by lower related costs, resulted in segment
profitability of $0.3 million for fiscal year 1999, compared to operating income
of $4.1 million in the prior year.
In addition to refocusing sales of the former Playboy and Spice catalogs
to the Playboy Online Group by transitioning the print catalogs into direct
commerce promotion to support e-commerce as mentioned, the Catalog Group has
also taken steps to reduce its cost structure. Additionally, the Company is
working to identify strategic purchasers for the Critics' Choice Video and
Collectors' Choice Music catalogs.
CASINO GAMING GROUP
In the quarter ended March 31, 1999, the Company sold its 12% interest in
the Rhodes Casino, which resulted in a nonoperating gain of $1.7 million. In
connection with the sale, the Company negotiated a minimum guarantee against its
licensing agreement for the Rhodes Casino. The Casino Gaming Group reported
licensing revenues of $0.9 million in the fiscal year ended December 31, 1999 as
a result of the opening of the Rhodes Casino in April 1999. The Company recently
filed arbitration proceedings against Casino Rhodes, Resido Tourism Investment
and Avalon Casino Development seeking to sever its connection with the Rhodes
Casino as these companies have failed to meet their contractual obligations. For
fiscal year 1999, the Casino Gaming Group reported segment profitability of
negative $0.5 million compared to an operating loss of $1.1 million in the prior
year primarily due to the licensing revenues in the current year.
PLAYBOY ONLINE GROUP
For the fiscal year ended December 31, 1999, Playboy Online Group
revenues of $16.1 million increased $9.0 million, or 127%, compared to the prior
year. This increase was across the board including higher e-commerce,
advertising and subscription revenues. The significantly higher e-commerce
revenues were due in part to the previously mentioned integration of the Playboy
and Spice catalog businesses to e-commerce.
For fiscal year 1999, the Playboy Online Group reported segment
profitability of negative $9.1 million compared to an operating loss of $6.5
million in the prior year, reflecting higher planned investments related to the
group's continued growth and development. The Company does not recognize
revenues and offsetting cost of sales from barter transactions, which totaled
approximately $1.2 million in fiscal year 1999, in accordance with Abstract
99-17 of the Emerging Issues Task Force ("EITF 99-17") and subsequent Task Force
discussions.
In January 2000, Playboy.com, Inc., a component of the Playboy Online
Group, filed a registration statement for a planned sale of a minority of its
equity in an IPO.
21
<PAGE>
CORPORATE ADMINISTRATION AND PROMOTION
For the fiscal year ended December 31, 1999, Corporate Administration and
Promotion negative segment profitability was $27.5 million. This reflects a $2.8
million, or 11%, increase largely due to higher marketing expenses.
RESTRUCTURING EXPENSES
In fiscal year 1999, the Company began an assessment of its structure
directed towards reducing costs which led to a decision to reduce its work force
by 49 employees, or approximately 6%, through company-wide layoffs and
attrition. As of December 31, 1999, 18 employees had been terminated. In the
fourth quarter of fiscal year 1999, a $1.1 million restructuring charge was
recorded for severance. An additional charge of approximately $0.3 million is
expected to be recorded in the first quarter of fiscal year 2000 representing
the termination of an additional eight employees. Additionally, 23 positions
were eliminated through attrition. The Company expects all charges related to
this restructuring to be recorded by the end of the first quarter of fiscal year
2000. The Company anticipates savings of approximately $3.5 million in fiscal
year 2000 as a result of the restructuring.
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO PRO FORMA CALENDAR YEAR ENDED
DECEMBER 31, 1997
The Company's revenues were $317.6 million for the fiscal year 1998, a 6%
increase over revenues of $300.2 million for calendar year 1997 primarily due to
higher revenues from the Entertainment Group. Also contributing to the increase
were higher Playboy magazine and Playboy Online Group revenues.
The Company reported operating income of $5.0 million for fiscal year
1998 compared to $12.5 million for calendar year 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 net 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 an unfavorable
settlement of litigation in fiscal year 1998. The higher Corporate
Administration and Promotion net expenses were due in part to increased
investments in systems technology, including Year 2000 expenses.
Net income for fiscal year 1998 was $4.3 million, or $0.21 per basic and
diluted common share, compared to net income of $18.6 million, or $0.91 per
basic common share and $0.89 per diluted common share, for calendar year 1997.
Net income for fiscal year 1998 included a $4.3 million gain on the sale of the
Company's interest in duPont. 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 the Company's
early adoption of Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities ("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
$0.30 per basic and diluted common share.
PUBLISHING GROUP
Publishing Group revenues were $136.1 million for the fiscal year ended
December 31, 1998, a 3% increase over revenues of $132.7 million for the
calendar year ended December 31, 1997, primarily due to higher revenues from
Playboy magazine.
Playboy magazine revenues increased $4.4 million, or 4%, for fiscal year
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. Additionally, subscription revenues increased $0.5
million, or 1%. Advertising revenues increased $1.8 million, or 6%, primarily
due to 6% more ad pages.
Revenues from other domestic publishing businesses decreased $2.0
million, or 10%, for fiscal year 1998 compared to the prior year primarily due
to fewer special editions copies sold.
International publishing revenues increased $1.0 million, or 10%, for
fiscal year 1998 compared to the prior year. The increase primarily reflected
higher revenues from the Polish edition of Playboy magazine.
22
<PAGE>
For fiscal year 1998, Publishing Group operating income declined $2.5
million, or 27%, primarily due to lower subscription profitability, the lower
revenues from special editions, higher average paper prices and expenses in
fiscal year 1998 related to the search for the Playmate 2000. Partially
offsetting were the higher Playboy magazine advertising and newsstand revenues
combined with lower overhead.
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 domestic TV networks.
The following discussion focuses on the profit contribution of each
business before programming expense ("profit contribution").
Domestic TV Networks
For fiscal year 1998, revenues of $63.0 million from domestic TV networks
were $8.7 million, or 16%, higher, and profit contribution increased $7.9
million.
These increases were principally due to higher Playboy TV DTH revenues,
primarily due to significant increases in addressable universes for DirecTV and
PrimeStar, combined with revenues in fiscal year 1998 as a result of fiscal year
1998 launches on EchoStar and two Canadian DTH services, ExpressVu and Star
Choice. Revenues from TVRO, or the big-dish market, continued to decline, as
expected, due to the maturity of this platform.
The approximate number of households were as follows for the periods
indicated below (in millions):
Dec. 31, Dec. 31,
1998 1997
-------- --------
Cable (1):
Playboy TV Analog Addressable...................... 11.7 11.6
Playboy TV Digital................................. 0.2 -
AdulTVision Analog Addressable..................... 6.2 3.8
AdulTVision Digital................................ 0.1 -
DTH:
Playboy TV......................................... 9.8 6.8
AdulTVision........................................ 3.6 2.1
(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.
International TV
For fiscal year 1998, revenues and profit contribution from the
international TV business increased $2.9 million and $2.6 million, respectively,
primarily due to higher international network sales and contractual revenues.
Variances in quarterly performance were 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.
Worldwide Home Video
Worldwide home video revenues and profit contribution increased $2.4
million and $2.7 million, respectively, for fiscal year 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, partially offset by lower
international home video sales in fiscal year 1998.
23
<PAGE>
Movies and Other
Revenues and profit contribution from movies and other businesses
decreased $1.2 million and $1.0 million, respectively, for fiscal year 1998,
primarily due to a favorable settlement from a distributor of feature films in
the prior year. The Entertainment Group's administrative expenses increased $1.1
million for fiscal year 1998 compared to the prior year largely due to staff
needed to support the group's growth.
Programming Expense
For fiscal year 1998, programming amortization expense increased $3.5
million compared to the prior year. The increase was largely due to domestic TV
networks due in part to higher amortization related to regular programming on
the domestic Playboy TV network.
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. Fiscal year 1998 reflects lower international product licensing
royalties, principally from Asia, largely attributable to unfavorable economic
conditions. Higher revenues as a result of a barter agreement related to the
sale of prints and posters from the Company's art publishing inventory partially
offset the decline.
The Product Marketing Group reported operating income of $0.4 million for
fiscal year 1998, a decrease of $2.5 million, or 87%, compared to the prior
calendar year due in part to a $1.4 million unfavorable settlement of
litigation. The lower Asian royalties also unfavorably impacted fiscal year
1998.
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. Sales volume for the Playboy
catalog was also lower primarily as a result of a lower response rate to the
fall catalog. Partially offsetting these decreases were revenues in fiscal year
1998 from the Spice catalog.
Operating income of $4.1 million for fiscal year 1998 increased $0.5
million, or 14%, compared to the prior calendar year as a result of 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.
CASINO GAMING GROUP
For the fiscal year ended December 31, 1998, the Casino Gaming Group
incurred an operating loss of $1.1 million compared to $0.6 million for calendar
year 1997. Fiscal year 1998 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" in accordance with SOP 98-5.
PLAYBOY ONLINE GROUP
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,
subscription and advertising revenues.
For fiscal year 1998, the Playboy Online Group reported an operating loss
of $6.5 million compared to $1.2 million in the prior calendar year. Fiscal year
1998 included higher planned investments related to the group's continued growth
and development.
CORPORATE ADMINISTRATION AND PROMOTION
Corporate Administration and Promotion net expenses of $24.7 million for
the fiscal year ended December 31, 1998 increased $4.8 million, or 24%, compared
to calendar year 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 fiscal year 1998.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had $23.5 million in cash and cash
equivalents, no short-term borrowings and $90.0 million in current and long-term
financing obligations, compared to $0.3 million in cash and cash equivalents,
$29.8 million in short-term borrowings and no current or long-term financing
obligations at December 31, 1998. The increase in cash and cash equivalents was
primarily due to the Company's public equity offering in May 1999. The increase
in financing obligations was primarily due to debt financing related to the
March 1999 acquisition of Spice. In February 2000, the Company made a $15.0
million repayment of financing obligations. The Company expects to meet its
short- and long-term cash requirements through its remaining cash and cash
equivalents and its current unused $35.0 million revolving credit facility.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $15.6 million for the
fiscal year ended December 31, 1999, primarily related to the PTVI joint
venture.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used for investing activities was $67.7 million for fiscal year
1999, primarily due to the Company's acquisition of Spice, resulting in cash
paid of $64.7 million in the current year.
The Company received $9.7 million in the current year related to the sale
of its interests in the Rhodes Casino and duPont. See Note (E) Sale of
Investments. The Company invested $8.2 million in the current year related to
its equity interests in international ventures, including the funding of its
19.9% interest in PTVI. Capital expenditures for fiscal year 1999 were $2.4
million. The Company also entered into leases of furniture and equipment
totaling $4.4 million, largely attributable to upgrades and new information
technology-related equipment. The Company expects an increase in capital
expenditures and leasing costs in fiscal year 2000 to support the growing
Playboy Online infrastructure.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by financing activities was $75.2 million in the
current year. This increase was principally due to the $110.0 million increase
in current and long-term financing obligations combined with $24.6 million of
net proceeds from the Company's public equity offering. Partially offsetting the
above was the repayment of $29.8 million of short-term borrowings and $20.0
million of long-term financing obligations combined with the payment of $10.5
million of Spice's debt.
In connection with the Company's current credit agreement, tranche A and
B term loans are subject to a quarterly amortization schedule beginning in 2001
and mature in 2004 and 2006, respectively. The revolving credit facility matures
in 2004. All financial covenants for the quarters ended September 30, 1999 and
December 31, 1999 were waived. Additionally, the financial covenants were
amended beginning with the quarter ended March 31, 2000. See Note (Q) Financing
Obligations.
In May 1999, the Company completed a public equity offering of shares of
nonvoting Class B common stock. Net proceeds to the Company of $24.6 million are
being used for general corporate purposes and repayment of financing
obligations. See Note (T) Public Equity Offerings.
Income Taxes
At June 30, 1997, the Company evaluated its net operating loss
carryforwards ("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 due to reevaluating the realizability of the deferred tax assets
in future years.
Associated with the Spice acquisition, $15.7 million of deferred tax
liabilities were recorded under the purchase method of accounting for certain
identifiable intangible assets, comprising trademarks, noncompete agreements and
a film library. After consideration of this additional $15.7 million of deferred
tax liabilities, the Company's net deferred tax asset at December 31, 1999
declined to $8.3 million consisting of $2.9 million of current net deferred tax
assets and $5.4 million of noncurrent net deferred tax assets.
25
<PAGE>
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. 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, Playboy Online and Casino Gaming Groups
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.
Year 2000 Compliance
The Company did not experience any malfunctions or errors in its
computerized business systems related to the Year 2000 problem. Based on
operations since January 1, 2000, the Company does not expect any significant
impact to its ongoing business as a result of the Year 2000 problem. However,
it is possible that there may be an impact at a later date. For example, it is
possible that Year 2000 or similar issues may occur with billing, payroll, or
financial closings at month, quarter or year end. The Company believes that any
such problems are likely to be minor and correctable. In addition, the Company
could still be negatively affected if its customers or vendors and other
service providers are adversely affected by the Year 2000 or similar issues,
but is not aware of any such problems at this time.
The Company has expensed approximately $1.2 million on Year 2000
readiness efforts to date through December 31, 1999, and expects to
additionally incur approximately $0.1 million of expenses in fiscal year 2000.
These efforts include replacing some outdated, noncompliant hardware and
software as well as identifying and remediating Year 2000 problems.
Other
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. Management is
evaluating the effect that adoption of Statement 133 will have on the Company's
financial statements.
26
<PAGE>
FORWARD-LOOKING STATEMENTS
This Form 10-K Annual Report contains "forward-looking statements,"
including statements in "MD&A," 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; (10)
potential problems associated with the integration of the Company's business
with Spice's business; and (11) potential adverse effects of unresolved Year
2000 problems, including those that may be experienced by key suppliers.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to certain market risks, including changes in
interest rates and foreign currency exchange rates. In order to manage the risk
associated with its exposure to such fluctuations, the Company uses derivative
financial instruments. The Company does not enter into derivatives for trading
purposes.
The Company prepared sensitivity analyses to determine the impact of a
hypothetical one percentage point increase in interest rates on the Company's
consolidated operating results, financial position and cash flows. Based on its
sensitivity analyses at December 31, 1999, such a change in interest rates would
affect the Company's annual consolidated operating results, financial position
and cash flows by approximately $0.9 million. As of December 31, 1999, the
Company had an interest rate swap agreement in place to effectively convert
$45.0 million of its $90.0 million floating rate debt to fixed rate debt,
thereby significantly reducing its risk related to interest rate fluctuations.
The Company also prepared sensitivity analyses to determine the impact of
a hypothetical 10% devaluation of the U.S. dollar relative to the foreign
currencies of the countries to which it has exposure, primarily Japan and
Germany. Based on its sensitivity analyses at December 31, 1999, such a change
in foreign currency exchange rates would affect the Company's annual
consolidated operating results, financial position and cash flows by
approximately $0.2 million. The Company uses foreign currency forward contracts
to manage the risk associated with its exposure to foreign currency exchange
rate fluctuations.
27
<PAGE>
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of the registrant and
report of independent accountants are set forth in this Form 10-K Annual Report
as follows:
Page
----------
Consolidated Statements of Operations and Comprehensive
Income - Fiscal Years Ended December 31, 1999 and 1998,
Six-Month Transition Period Ended December 31, 1997 and
Fiscal Year Ended June 30, 1997 29
Consolidated Balance Sheets - December 31, 1999 and 1998 30
Consolidated Statements of Shareholders' Equity - Fiscal
Years Ended December 31, 1999 and 1998, Six-Month
Transition Period Ended December 31, 1997 and Fiscal
Year Ended June 30, 1997 31
Consolidated Statements of Cash Flows - Fiscal Years
Ended December 31, 1999 and 1998, Six-Month Transition
Period Ended December 31, 1997 and Fiscal Year Ended
June 30, 1997 32
Notes to Consolidated Financial Statements 33-50
Report of Independent Accountants
The supplementary data regarding quarterly results of operations are set
forth in Note (Y) Quarterly Results of Operations (Unaudited) of Notes to
Consolidated Financial Statements.
28
<PAGE>
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Six Months Fiscal Year
Ended Ended Ended Ended
(in thousands, except per share amounts) 12/31/99 12/31/98 12/31/97 6/30/97
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 347,817 $ 317,618 $ 149,541 $ 296,623
- -------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales (277,448) (269,478) (126,658) (245,023)
Selling and administrative expenses (56,390) (43,172) (18,424) (35,855)
Restructuring expenses (1,091) - - -
- -------------------------------------------------------------------------------------------------------------------
Total costs and expenses (334,929) (312,650) (145,082) (280,878)
- -------------------------------------------------------------------------------------------------------------------
Operating income 12,888 4,968 4,459 15,745
- -------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 1,798 127 50 73
Interest expense (7,977) (1,551) (289) (427)
Gain on sale of investments 1,728 4,272 - -
Equity in operations of PTVI and other (13,871) (378) 329 132
Other, net (996) (413) (259) (772)
- -------------------------------------------------------------------------------------------------------------------
Total nonoperating income (expense) (19,318) 2,057 (169) (994)
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes
and cumulative effect of change in accounting principle (6,430) 7,025 4,290 14,751
Income tax benefit (expense) 862 (2,705) (2,148) 6,643
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before cumulative
effect of change in accounting principle (5,568) 4,320 2,142 21,394
Gain on disposal of discontinued operations (net of tax) 233 - - -
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change in
accounting principle (5,335) 4,320 2,142 21,394
Cumulative effect of change in accounting
principle (net of tax) - - (1,077) -
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) (5,335) 4,320 1,065 21,394
- -------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (net of tax)
Foreign currency translation adjustment (90) (4) (37) (37)
Unrealized gain (loss) on marketable securities 252 (21) - -
- -------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) 162 (25) (37) (37)
- -------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ (5,173) $ 4,295 $ 1,028 $ 21,357
===================================================================================================================
Weighted average number of
common shares outstanding
Basic 22,872 20,548 20,487 20,318
===================================================================================================================
Diluted 22,872 21,036 20,818 20,694
===================================================================================================================
Basic EPS
Income (loss) before cumulative effect of change
in accounting principle
From continuing operations $ (0.24) $ 0.21 $ 0.10 $ 1.05
From discontinued operations (net of tax) 0.01 - - -
- -------------------------------------------------------------------------------------------------------------------
Total (0.23) 0.21 0.10 1.05
Cumulative effect of change in accounting
principle (net of tax) - - (0.05) -
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.23) $ 0.21 $ 0.05 $ 1.05
===================================================================================================================
Diluted EPS
Income (loss) before cumulative effect of change
in accounting principle
From continuing operations $ (0.24) $ 0.21 $ 0.10 $ 1.03
From discontinued operations (net of tax) 0.01 - - -
- -------------------------------------------------------------------------------------------------------------------
Total (0.23) 0.21 0.10 1.03
Cumulative effect of change in accounting
principle (net of tax) - - (0.05) -
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.23) $ 0.21 $ 0.05 $ 1.03
===================================================================================================================
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</FN>
</TABLE>
29
<PAGE>
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Dec. 31, Dec. 31,
(in thousands, except share data) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and cash equivalents $ 23,528 $ 341
Marketable securities 3,064 505
Receivables, net of allowance for doubtful accounts of
$5,738 and $4,448, respectively 40,670 46,099
Receivables from related parties, net of allowance for doubtful
accounts of $2,232 and $1,901, respectively 14,225 3,780
Inventories 23,831 25,685
Programming costs 52,546 43,342
Deferred subscription acquisition costs 13,579 11,570
Other current assets 17,367 21,097
- -------------------------------------------------------------------------------------------------------------------
Total current assets 188,810 152,419
- -------------------------------------------------------------------------------------------------------------------
Property and equipment, net 9,415 9,157
Receivables from related parties 62,500 1,193
Programming costs 3,100 5,983
Goodwill, net of amortization of $2,490 and $432, respectively 89,539 2,053
Trademarks, net of amortization of $11,819 and $9,522, respectively 48,387 17,294
Net deferred tax assets 5,390 6,525
Other noncurrent assets 22,261 17,483
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 429,402 $ 212,107
===================================================================================================================
Liabilities
Short-term borrowings $ - $ 29,750
Financing obligations 15,000 -
Accounts payable 31,868 30,834
Accounts payable to related parties 2,690 -
Accrued salaries, wages and employee benefits 8,839 6,024
Deferred revenues 42,354 41,647
Deferred revenues from related parties 6,525 -
Other liabilities and accrued expenses 12,395 10,738
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 119,671 118,993
- -------------------------------------------------------------------------------------------------------------------
Financing obligations 75,000 -
Deferred revenues from related parties 55,225 -
Other noncurrent liabilities 18,225 8,912
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 268,121 127,905
- -------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' Equity
Common stock, $0.01 par value
Class A voting--7,500,000 shares authorized; 4,859,102
and 5,042,381 issued, respectively 49 50
Class B nonvoting--30,000,000 shares authorized; 19,595,358
and 17,149,691 issued, respectively 196 171
Capital in excess of par value 120,337 44,860
Retained earnings 44,242 49,577
Foreign currency translation adjustment (275) (137)
Unearned compensation restricted stock (3,624) (3,716)
Unrealized gain (loss) on marketable securities 356 (32)
Less cost of 0 and 293,427 Class A common shares and 0
and 951,041 Class B common shares in treasury - (6,571)
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 161,281 84,202
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 429,402 $ 212,107
====================================================================================================================
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</FN>
</TABLE>
30
<PAGE>
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unearned
Class A Class B Capital in Comp.
Common Common Excess of Retained Treasury Restricted
(in thousands of dollars) Stock Stock Par Value Earnings Stock Stock Other Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $ 50 $ 170 $ 40,867 $ 22,798 $(7,036) $(4,549) $ (17) $ 52,283
Net income - - - 21,394 - - - 21,394
Shares issued, vested or forfeited
under stock plans, net - - 1,043 - 275 460 - 1,778
Income tax benefit related to stock plans - - 735 - - - - 735
Other - - - - - - (57) (57)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 50 170 42,645 44,192 (6,761) (4,089) (74) 76,133
Net income - - - 1,065 - - - 1,065
Shares issued, vested or forfeited
under stock plans, net - 1 684 - 69 578 - 1,332
Income tax benefit related to stock plans - - 210 - - - - 210
Other - - - - - - (57) (57)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 50 171 43,539 45,257 (6,692) (3,511) (131) 78,683
Net income - - - 4,320 - - - 4,320
Shares issued, vested or forfeited
under stock plans, net - - 1,163 - 121 (205) - 1,079
Income tax benefit related to stock plans - - 158 - - - - 158
Other - - - - - - (38) (38)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 50 171 44,860 49,577 (6,571) (3,716) (169) 84,202
Net loss - - - (5,335) - - - (5,335)
Shares issued, vested or forfeited
under stock plans, net 2 6 5,454 - 35 92 - 5,589
Shares issued related to the Spice acquisition - 18 47,505 - 906 - - 48,429
Shares issued in public equity offering - 9 24,541 - - - - 24,550
Cancellation of treasury stock (3) (8) (5,619) - 5,360 - - -
Income tax benefit related to stock plans - - 3,596 - - - - 3,596
Other - - - - - - 250 250
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 49 $ 196 $ 120,337 $ 44,242 $ - $ (3,624) $ 81 $ 161,281
===================================================================================================================================
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</FN>
</TABLE>
31
<PAGE>
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Six Months Fiscal Year
Ended Ended Ended Ended Ended
(in thousands) 12/31/99 12/31/98 12/31/97 6/30/97
- -------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
<S> <C> <C> <C> <C>
Net income (loss) $ (5,335) $ 4,320 $ 1,065 $ 21,394
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities
Depreciation of property and equipment 2,055 2,010 1,007 2,210
Amortization of intangible assets 6,295 1,893 845 1,893
Equity in operations of PTVI and other 13,871 - - -
Gain on sale of investments (1,728) (4,272) - -
Income tax benefit related to stock plans 3,596 158 210 735
Amortization of investments in
entertainment programming 34,341 26,410 11,153 21,355
Investments in entertainment programming (35,262) (25,902) (14,359) (30,747)
Changes in current assets and liabilities
Receivables 5,604 (8,357) (398) (3,110)
Receivables from related parties (9,342) (2,317) (600) (176)
Inventories 1,854 (309) (2,072) 195
Deferred subscription acquisition costs (2,009) 573 (3,066) 492
Other current assets 634 (2,294) 367 (2,146)
Accounts payable 128 (1,434) 5,344 4,169
Accounts payable to related parties 2,690 - - -
Accrued salaries, wages and employee benefits 2,815 1,525 (1,628) 1,428
Deferred revenues 707 (1,569) 943 (2,105)
Deferred revenues from related parties 6,525 - - -
Other liabilities and accrued expenses (598) 2,353 (831) (719)
- -------------------------------------------------------------------------------------------------------------------
Net change in current assets and liabilities 9,008 (11,829) (1,941) (1,972)
- -------------------------------------------------------------------------------------------------------------------
Increase in receivables from related parties (54,375) - - -
Increase in trademarks (6,690) (3,645) (1,767) (2,898)
(Increase) decrease in net deferred tax assets (6,663) 35 457 (9,954)
(Increase) decrease in other noncurrent assets (437) (843) (405) (632)
Increase in deferred revenues from related
parties 55,225 - - -
Increase (decrease) in other noncurrent
liabilities 1,188 548 (3) 106
Net cash provided by (used for) discontinued
operations 34 (542) (18) (79)
Other, net 518 135 20 128
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for)
operating activities 15,641 (11,524) (3,736) 1,539
- -------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Acquisition of Spice (64,720) (3,345) (117) -
Sale of investments 9,693 500 - -
Additions to property and equipment (2,363) (1,144) (765) (671)
Funding of equity interests in
international ventures (8,169) (5,212) (1,109) (1,905)
Purchase of marketable securities (2,171) (537) - -
Other, net 63 32 - 126
- -------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (67,667) (9,706) (1,991) (2,450)
- --------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from (payments on) short-term borrowings (29,750) 19,750 5,500 (500)
Proceeds from financing obligations 110,000 - - -
Repayment of financing obligations (20,000) - (350) (350)
Net proceeds from public equity offering 24,550 - - -
Payment of debt assumed in acquisition of Spice (10,471) - - -
Deferred financing fees (4,669) (175) - -
Proceeds from employee stock benefit plans 5,553 1,049 221 626
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for)
financing activities 75,213 20,624 5,371 (224)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 23,187 (606) (356) (1,135)
Cash and cash equivalents at beginning of period 341 947 1,303 2,438
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 23,528 $ 341 $ 947 $ 1,303
===================================================================================================================
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</FN>
</TABLE>
32
<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.
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.
Reclassifications: Certain amounts reported for prior periods have been
reclassified to conform to the current year's presentation.
Change in Fiscal Year: In November 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 Playboy magazine and Internet
subscriptions are recognized over the terms of the subscriptions. Newsstand
sales of Playboy magazine and special editions (net of estimated returns), and
revenues from the sale of Playboy magazine advertisements, are recorded when
each issue goes on sale. Domestic TV networks cable and DTH revenues are
recognized based on pay-per-view buys and monthly subscriber counts reported
each month by the system operators. International TV revenues are recognized
based on existing library and current programming licensed to PTVI. Domestic
home video revenues generally are recognized based on unit sales reported for
new releases each month by the Company's distributor and a distribution
agreement for backlist titles. Revenues from the direct marketing of catalog and
e-commerce 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.
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 fair value.
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
Playboy 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 (O)
Advertising Costs.
33
<PAGE>
Programming Costs and Amortization: Programming costs include original
programming and film acquisition costs, which are generally capitalized and
amortized. The portion of original programming costs assigned to the domestic TV
networks market is principally amortized on the straight-line method over three
years. The portion of current original programming costs assigned to the
international TV market is fully amortized upon availability to PTVI. Existing
library original programming costs allocated to the international TV market are
amortized proportionately with license fees recognized related to the PTVI
agreement. The portion of original programming costs assigned to the worldwide
home video market is amortized using the individual-film-forecast-computation
method. Film acquisition costs assigned to domestic markets are amortized
principally on the straight-line method over the license term, generally three
years or less, while those assigned to the international TV market are fully
amortized upon availability to PTVI. 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, 1999, substantially
all unamortized programming costs applicable to released programs are expected
to be amortized during the next three years. See Note (N) Programming Costs.
Intangible Assets: Goodwill, the excess of the purchase price of acquired
businesses over the fair value of net assets acquired, is amortized on the
straight-line method generally over 40 years. 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. A noncompete agreement
related to the Spice acquisition is amortized on the straight-line method over
five years, and is included in "Other noncurrent assets."
Financial Instruments: Financial instruments are primarily utilized by the
Company to manage risks associated with interest rate and foreign exchange
volatility. The Company does not hold or issue financial instruments for trading
purposes. In May 1999, the Company entered into a two-year interest rate swap
agreement which effectively allows the Company to exchange its floating interest
rate on $45.0 million of its financing obligations for a fixed rate. The
differential to be paid or received is accrued monthly as an adjustment to
interest expense. The Company also utilizes forward contracts to minimize the
impact of currency movements on royalties received and certain payments
denominated in foreign currencies primarily in Japan and Germany. 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, 1999 and 1998, the Company had
approximately $1,700,000 and $2,155,000, respectively, in outstanding foreign
exchange forward contracts.
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 earnings per share ("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 (J) Income (Loss) per
Common Share.
Equity in Operations of PTVI and Other: Equity in operations of PTVI includes
the Company's 19.9% interest in the results of PTVI, the accounting effects of
the formation of the venture and the elimination of unrealized profits of
certain transactions between the Company and PTVI.
Other in fiscal year 1999 included the equity in results of the United Kingdom
television networks prior to the PTVI transaction, and in years prior to fiscal
year 1999 included the equity results in duPont.
Minority Interest: The Company owns a majority interest in VIPress Poland Sp. z
o.o. ("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 of VIPress is
included in nonoperating income or expense and the minority interest in the
equity of VIPress is included in "Other noncurrent liabilities."
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.
34
<PAGE>
New Accounting Pronouncements: 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.
Management is evaluating the effect that adoption of Statement 133 will have on
the Company's financial statements.
(B) ACQUISITION
On March 15, 1999, the Company completed its acquisition of Spice, a leading
provider of adult television entertainment. The current determination of the
purchase price, including transaction costs and Spice debt, is approximately
$127 million. The purchase price and its allocation are subject to change upon
final determination. The purchase was financed through the issuance of
approximately $48 million, or approximately two million shares, of the Company's
Class B common stock, and the remainder through the payment and issuance of
long-term debt. See Note (Q) Financing Obligations. The acquisition was
accounted for under the purchase method of accounting and, accordingly, the
results of Spice since the acquisition date have been included in the Company's
Consolidated Statements of Operations and Comprehensive Income. Goodwill of
approximately $90 million has been recorded and is being amortized over 40
years. Immediately preceding the acquisition, Spice sold certain of its assets.
Receivables of $10.0 million related to this sale and related gains have been
deferred by the Company in accordance with Staff Accounting Bulletin 81 due to
the capitalization and leverage levels of the purchaser.
The following unaudited pro forma information presents a summary of the
results of operations of the Company assuming the acquisition occurred on
January 1, 1998 (in thousands, except per share amounts):
Dec. 31, Dec. 31,
1999 1998
- ----------------------------------------------------------------------------
Net revenues $354,875 $ 342,659
Net loss (6,905) (754)
Basic and diluted EPS $ (0.30) $ (0.03)
- ------------------------------------------------------------------------------
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as additional amortization expense
primarily related to goodwill and increased interest expense related to the debt
financing. They do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred on January 1,
1998, or of future results of operations.
(C) PLAYBOY TV INTERNATIONAL, LLC JOINT VENTURE
During the quarter ended September 30, 1999, the Company entered into a joint
venture with a wholly-owned subsidiary of the Cisneros Group of Companies. PTVI
has the exclusive right to create and launch new television networks under the
Playboy and Spice brands in territories outside of the United States and Canada
and, under certain circumstances, to license programming to third parties. PTVI
will also own and operate all existing international Playboy TV and Spice
networks. In addition, the Company and PTVI have entered into program supply and
trademark license agreements. Currently, the Company has a 19.9% interest in
PTVI with an option to increase up to 50% for a certain period of time.
Under the agreements with PTVI, the Company will receive $100.0 million,
$30.0 million of which was received during fiscal year 1999, with the remainder
to be received over the next five years. PTVI also has a long-term commitment
with the Company to license international television rights to each year's
production output, with payments representing a percentage of the Company's
annual production spending. In fiscal year 1999, the Company recognized revenues
related to PTVI of $35.2 million.
Summarized financial information for PTVI for the fiscal period ended
December 31, 1999, which has been derived from the PTVI audited financial
statements, is presented below (in thousands):
Revenues $ 9,403
Gross profit 7,263
Net loss (3,029)
Current assets 21,609
Noncurrent assets 67,461
Current liabilities 14,986
Noncurrent liabilities $ 45,717
---------------------------------------------------------------------------
35
<PAGE>
(D) RESTRUCTURING EXPENSES
In fiscal year 1999, the Company began an assessment of its structure directed
towards reducing costs which led to a decision to reduce its work force by 49
employees, or approximately 6%, through company-wide layoffs and attrition. As
of December 31, 1999, 18 employees had been terminated. In the fourth quarter of
fiscal year 1999, a $1,091,000 restructuring charge was recorded for severance,
of which $43,000 was paid by December 31, 1999. An additional charge of
approximately $255,000 is expected to be recorded in the first quarter of fiscal
year 2000 representing the termination of an additional eight employees.
Additionally, 23 positions were eliminated through attrition. The Company
expects all charges related to this restructuring to be recorded by the end of
the first quarter of fiscal year 2000.
(E) SALE OF INVESTMENTS
In the quarter ended March 31, 1999, the Company sold its wholly-owned
subsidiary, Playboy Gaming Greece Ltd., which owned a 12% interest in the Rhodes
Casino. Total proceeds of $5.2 million were received. These proceeds included a
repayment of a loan of $1.2 million owed to the Company by the Rhodes Casino.
The Company realized a gain before income taxes of $1.7 million on the sale. The
taxable gain on the sale was immaterial and was offset by the application of a
capital loss carryforward.
On December 31, 1998, the Company sold back to duPont the 20% interest in
duPont's common stock owned by the Company. Sale proceeds were $5.0 million,
which consisted of $0.5 million of cash and a $4.5 million 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 $4.3 million on the
sale. There was no income tax effect related to this gain due to the application
of a capital loss carryforward.
(F) 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
12/31/99 12/31/98 12/31/97 6/30/97
- -------------------------------------------------------------------------------------------------------------------
Current:
<S> <C> <C> <C> <C>
Federal $ - $ 208 $ - $ 354
State 740 557 180 501
Foreign 1,591 1,747 747 1,721
- -------------------------------------------------------------------------------------------------------------------
Total current 2,331 2,512 927 2,576
- -------------------------------------------------------------------------------------------------------------------
Deferred:
Federal (8,690) 35 457 (9,954)
State (1,309) - - -
Foreign - - - -
- -------------------------------------------------------------------------------------------------------------------
Total deferred (9,999) 35 457 (9,954)
- -------------------------------------------------------------------------------------------------------------------
Benefit of stock compensation recorded
in capital in excess of par value 3,596 158 210 735
Benefit of pre-acquisition losses recorded
in goodwill 3,336 - - -
Benefit recorded as part of cumulative
effect of change in accounting principle - - 554 -
- -------------------------------------------------------------------------------------------------------------------
Total income tax provision (benefit) $ (736) $ 2,705 $ 2,148 $ (6,643)
===================================================================================================================
Income tax provision (benefit) applicable to:
Continuing operations $ (862) $ 2,705 $ 2,148 $ (6,643)
Discontinued operations 126 - - -
- -------------------------------------------------------------------------------------------------------------------
Total income tax provision (benefit) $ (736) $ 2,705 $ 2,148 $ (6,643)
===================================================================================================================
</TABLE>
36
<PAGE>
The income tax provision (benefit) from continuing operations differed from a
provision (benefit) 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
12/31/99 12/31/98 12/31/97 6/30/97
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory rate tax provision (benefit) $ (2,251) $ 2,459 $ 1,459 $ 5,163
Increase (decrease) in taxes resulting from:
Foreign withholding tax on licensing income 1,591 1,368 747 1,452
Foreign income tax in excess of statutory rates - 127 - -
State income taxes (569) 557 180 501
Nondeductible expenses 903 399 180 342
Reduction in valuation allowance - (1,543) - (13,486)
Tax benefit of foreign taxes paid or accrued (516) (465) (328) (538)
Effect of rate increase - (225) - -
Other (20) 28 (90) (77)
- -------------------------------------------------------------------------------------------------------------------
Total income tax provision (benefit)
from continuing operations $ (862) $ 2,705 $ 2,148 $ (6,643)
===================================================================================================================
</TABLE>
The U.S. statutory tax rate applicable to the Company for fiscal years 1999 and
1998, the transition period and fiscal year 1997 was 35%, 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 due to 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, 1998 and 1999 are presented below
(in thousands):
<TABLE>
<CAPTION>
Dec. 31, Net Dec. 31,
1998 Change 1999
- -------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C> <C>
Net operating loss carryforwards $ 4,972 $ 226 $ 5,198
Capital loss carryforwards 8,914 - 8,914
Tax credit carryforwards 10,349 957 11,306
Temporary difference related to PTVI - 4,449 4,449
Other deductible temporary differences 13,023 6,179 19,202
- -------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 37,258 11,811 49,069
Valuation allowance (15,438) (439) (15,877)
- ------------------------------------------------------------------------------------------------------------------
Deferred tax assets 21,820 11,372 33,192
- -------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred subscription acquisition costs (4,270) (1,857) (6,127)
Intangible assets - (14,409) (14,409)
Other taxable temporary differences (3,616) (772) (4,388)
- ------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities (7,886) (17,038) (24,924)
- ------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 13,934 $ (5,666) $ 8,268
===================================================================================================================
</TABLE>
At December 31, 1998, $7.4 million of the $13.9 million net deferred tax asset
was included in "Other current assets" and $6.5 million was segregated as "Net
deferred tax assets." Associated with the Spice acquisition, $15.7 million of
deferred tax liabilities were recorded under the purchase method of accounting
for certain identifiable intangible assets, comprising trademarks, noncompete
agreements and a film library. At December 31, 1999, after consideration of this
additional $15.7 million of deferred tax liabilities, $2.9 million of the $8.3
million net deferred tax asset was included in "Other current assets" and $5.4
million was segregated as "Net deferred tax assets."
37
<PAGE>
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 $8.3 million at
December 31, 1999, the Company will need to generate future taxable income of
approximately $24.0 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.
At December 31, 1999, the Company had NOLs of $14.9 million with $11.7
million expiring in 2009, $2.5 million expiring in 2012 and $0.7 million
expiring in 2019. The Company had capital loss carryforwards of $25.5 million
expiring in 2004. In addition, foreign tax credit carryforwards of $9.3
million, investment tax credit carryforwards of $0.9 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 2000
through 2004 and the investment tax credit carryforwards expire in 2000 through
2001. The minimum tax credit carryforwards have no expiration.
(G) DISCONTINUED OPERATIONS
During the fiscal year ended June 30, 1986, the Company discontinued operations
at its company-owned and operated clubs. A reserve was established for estimated
costs to fulfill the court-approved settlement of the Playboy Club keyholder
lawsuits. During the fourth quarter of fiscal year 1999, the Company reversed
its estimate of the remaining liabilities related to the lawsuits, resulting in
a gain on disposal of discontinued operations of $168,000, net of $90,000 of
income tax expense.
In January 1993, the Company received a General Notice from the United
States Environmental Protection Agency (the "EPA") as a "potentially responsible
party" ("PRP") in connection with a site identified as the Southern Lakes Trap &
Skeet Club, located at the Resort-Hotel in Lake Geneva, Wisconsin (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 United
States District Court for the Eastern District of Wisconsin on November 25,
1998. The Company had established adequate reserves to cover its approximately
$525,000 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. During the fourth
quarter of fiscal year 1999, the Company reversed its estimate of the remaining
liabilities related to this matter, resulting in a gain on disposal of
discontinued operations of $65,000, net of $36,000 of income tax expense.
(H) 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.
38
<PAGE>
Pro forma amounts, assuming SOP 98-5 was applied beginning in fiscal year
1997, follow with comparisons to actual results (in thousands, except per share
amounts):
Six Months Fiscal Year
Ended Ended
12/31/97 6/30/97
- -------------------------------------------------------------------------------
Income before cumulative effect of
change in accounting principle
As reported $ 2,142 $ 21,394
Pro forma 2,142 20,857
Net income
As reported 1,065 21,394
Pro forma 2,142 20,857
Income per common share before
cumulative effect of change in
accounting principle
Basic, as reported 0.10 1.05
Basic, pro forma 0.10 1.03
Diluted, as reported 0.10 1.03
Diluted, pro forma 0.10 1.01
Net income per common share
Basic, as reported 0.05 1.05
Basic, pro forma 0.10 1.03
Diluted, as reported 0.05 1.03
Diluted, pro forma $ 0.10 $ 1.01
- -------------------------------------------------------------------------------
(I) 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 (loss). Comprehensive income is a
more inclusive financial reporting methodology that encompasses net income
(loss) and all other nonshareholder changes in equity (other comprehensive
income or loss).
The following sets forth the components of other comprehensive income
(loss), and the related income tax expense or benefit allocated to each item
(in thousands):
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Six Months Fiscal Year
Ended Ended Ended Ended
12/31/99 12/31/98 12/31/97 6/30/97
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign currency translation adjustment (1) $ (90) $ (4) $ (37) $ (37)
Unrealized gain (loss) on marketable securities (2) $ 252 $ (21) $ - $ -
- -------------------------------------------------------------------------------------------------------------------
<FN>
(1) Net of a related tax benefit of $48, $2, $20 and $20 for fiscal years 1999
and 1998, the transition period and fiscal year 1997, respectively.
(2) Net of related tax expense of $136 and a tax benefit of $11 for fiscal
years 1999 and 1998, respectively.
</FN>
</TABLE>
39
<PAGE>
(J) 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 Year Fiscal Year Six Months Fiscal Year
Ended Ended Ended Ended
12/31/99 12/31/98 12/31/97 6/30/97
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
For basic and diluted EPS--
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle $ (5,568) $ 4,320 $ 2,142 $ 21,394
Gain on disposal of discontinued
operations (net of tax) 233 - - -
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change
in accounting principle (5,335) 4,320 2,142 21,394
Cumulative effect of change
in accounting principle (net of tax) - - (1,077) -
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (5,335) $ 4,320 $ 1,065 $ 21,394
===================================================================================================================
Denominator:
Denominator for basic EPS--
weighted-average shares 22,872 20,548 20,487 20,318
- -------------------------------------------------------------------------------------------------------------------
Effect of dilutive potential common shares:
Stock options - 488 331 315
Nonvested restricted stock awards - - - 61
- -------------------------------------------------------------------------------------------------------------------
Dilutive potential common shares - 488 331 376
- -------------------------------------------------------------------------------------------------------------------
Denominator for diluted EPS--
adjusted weighted-average shares 22,872 21,036 20,818 20,694
===================================================================================================================
Basic EPS
Income (loss) before cumulative effect of change
in accounting principle
From continuing operations $ (0.24) $ 0.21 $ 0.10 $ 1.05
From discontinued operations (net of tax) 0.01 - - -
- -------------------------------------------------------------------------------------------------------------------
Total (0.23) 0.21 0.10 1.05
Cumulative effect of change in accounting
principle (net of tax) - - (0.05) -
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.23) $ 0.21 $ 0.05 $ 1.05
===================================================================================================================
Diluted EPS
Income (loss) before cumulative effect of change
in accounting principle
From continuing operations $ (0.24) $ 0.21 $ 0.10 $ 1.03
From discontinued operations (net of tax) 0.01 - - -
- -------------------------------------------------------------------------------------------------------------------
Total (0.23) 0.21 0.10 1.03
Cumulative effect of change in accounting
principle (net of tax) - - (0.05) -
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.23) $ 0.21 $ 0.05 $ 1.03
===================================================================================================================
</TABLE>
During the fiscal year ended December 31, 1999, approximately 325,000
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. Options
to purchase approximately 300,000 weighted-average shares of Class B common
stock were outstanding during fiscal year 1999 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. Additionally, approximately 715,000 potential common shares
related to stock options were not included in the fiscal year 1999 computation
as their effect was antidilutive. See Note (S) Stock Plans.
40
<PAGE>
(K) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. For cash and cash equivalents, trade
receivables, certain other current assets, short-term borrowings, and current
maturities of long-term debt, the amounts reported approximate fair value due to
their short-term nature. For long-term debt, the amount reported approximates
fair value as the interest rate on the debt is reset generally every quarter to
reflect current rates. For interest rate swap agreements, the fair value of $0.6
million reflects the estimated amount that the Company would expect to receive
if it terminated the agreement at December 31, 1999. For foreign currency
forward contracts, the fair value is estimated using quoted market prices
established by financial institutions for comparable instruments, which
approximates the contracts' values.
(L) MARKETABLE SECURITIES
Marketable securities, purchased in connection with the Company's deferred
compensation plans, consisted of the following (in thousands):
Dec. 31, Dec. 31,
1999 1998
- -------------------------------------------------------------------------------
Cost of marketable securities $ 2,708 $ 537
Gross unrealized holding gains 432 -
Gross unrealized holding losses (76) (32)
- -------------------------------------------------------------------------------
Fair value of marketable securities $ 3,064 $ 505
===============================================================================
There were no proceeds from the sale of marketable securities for fiscal years
1999 and 1998, respectively, and therefore no gains or losses were realized. The
net unrealized holding gain included in shareholders' equity during fiscal year
1999 was $0.4 million.
(M) INVENTORIES
Inventories consisted of the following (in thousands):
Dec. 31, Dec. 31,
1999 1998
- -------------------------------------------------------------------------------
Paper $ 6,226 $ 8,277
Editorial and other prepublication costs 6,432 6,052
Merchandise finished goods 11,173 11,356
- -------------------------------------------------------------------------------
Total inventories $ 23,831 $ 25,685
===============================================================================
(N) PROGRAMMING COSTS
Current programming costs consisted of the following (in thousands):
Dec. 31, Dec. 31,
1999 1998
- -------------------------------------------------------------------------------
Released, less amortization $ 39,332 $ 34,573
Completed, not yet released 13,214 8,769
- -------------------------------------------------------------------------------
Total current programming costs $ 52,546 $ 43,342
===============================================================================
Noncurrent programming costs of $3.1 million and $6.0 million at December 31,
1999 and 1998, respectively, consisted of programs in the process of production.
41
<PAGE>
(O) 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
and direct commerce mailings for use in the Catalog and Playboy Online Groups.
The capitalized direct-response advertising costs are amortized over the period
during which the future benefits are expected to be received, generally six to
12 months.
At December 31, 1999 and 1998, advertising costs of $10.0 million and
$9.9 million, respectively, were deferred and included in "Deferred subscription
acquisition costs" and "Other current assets." For fiscal years 1999 and 1998,
the transition period and fiscal year 1997, the Company's advertising expense
was $53.5 million, $49.5 million, $23.9 million and $46.2 million, respectively.
(P) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following (in thousands):
Dec. 31, Dec. 31,
1999 1998
- -------------------------------------------------------------------------------
Land $ 292 $ 292
Buildings and improvements 8,467 8,412
Furniture and equipment 15,778 22,068
Leasehold improvements 8,681 8,270
- -------------------------------------------------------------------------------
Total property and equipment 33,218 39,042
Accumulated depreciation (23,803) (29,885)
- -------------------------------------------------------------------------------
Total property and equipment, net $ 9,415 $ 9,157
===============================================================================
The Company retired approximately $8.1 million of fully depreciated assets in
fiscal year 1999.
(Q) FINANCING OBLIGATIONS
Financing obligations consisted of the following (in thousands):
<TABLE>
<CAPTION>
Dec. 31, Dec. 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-term borrowings, weighted average interest of 7.16% at December 31, 1998 $ - $ 29,750
===================================================================================================================
Long-term financing obligations:
Tranche A term loan, interest at 2.75% over LIBOR, due in installments through 2004 18,400 -
Tranche B term loan, interest at 3.25% over LIBOR, due in installments through 2006 71,600 -
Less current maturities (15,000) -
- -------------------------------------------------------------------------------------------------------------------
Total long-term financing obligations $75,000 $ -
===================================================================================================================
</TABLE>
The aggregate minimum amount of long-term debt payable is approximately $15.0
million, $3.9 million, $5.2 million, $6.7 million and $23.3 million during
fiscal years 2000, 2001, 2002, 2003 and 2004, respectively, and $35.9 million
thereafter.
In connection with financing the Company's acquisition of Spice, the
Company entered into a $150.0 million credit agreement dated as of February 26,
1999. The agreement provided financing to (a) purchase all of the outstanding
shares of Spice and pay related acquisition costs; (b) repay the existing debt
of the Company and Spice; and (c) fund future general working capital and
investment needs. This agreement replaced an existing $40.0 million revolving
credit agreement in place at December 31, 1998 which covered short-term
borrowings and the issuance of letters of credit, of which $0.2 million was
outstanding at December 31, 1998.
42
<PAGE>
The $150.0 million agreement originally consisted of three components: a
$40.0 million revolving credit facility with a $10.0 million letter of credit
sublimit, of which $0.2 million was outstanding at December 31, 1999; a $35.0
million tranche A term loan; and a $75.0 million tranche B term loan. On
September 16, 1999, the Company used $20.0 million of the cash proceeds from
PTVI to repay the term debt which reduced the credit facility to $130.0 million.
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 (earnings
before income taxes, interest expense and depreciation and amortization, less
cash investments in programming). The Company is assessed a 0.5% commitment fee
on the unused portion of its revolving credit facility. The Company's
obligations under the agreement are unconditionally guaranteed by each of the
Company's existing and subsequently acquired domestic restricted subsidiaries
(all domestic subsidiaries except Playboy.com, Inc.). The agreement and related
guarantees are collateralized by substantially all of Playboy Enterprises,
Inc.'s and its domestic restricted subsidiaries' assets.
The agreement contained financial covenants requiring the Company to
maintain certain leverage, cash flow, interest coverage and fixed charge
coverage ratios. Other covenants included limitations on other indebtedness,
investments, capital expenditures and dividends. The agreement also required
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.
Effective February 3, 2000, the agreement was amended and the Company
made a $15.0 million repayment on the term loans, which reduced the term debt
from $90.0 million to $75.0 million and the revolving credit facility, which had
not been drawn upon since its establishment, was reduced by $5.0 million to
$35.0 million. The interest rate margin on all future borrowings was increased
by 0.25% from the terms of the original agreement. The amendment primarily
changed the agreement in the areas of the financial covenant ratios, mandatory
prepayment obligations and funding of the Company's unrestricted subsidiary,
Playboy.com, Inc.
The amendment waived the financial covenants for the quarters ended
September 30, 1999 and December 31, 1999. Beginning with the quarter ended March
31, 2000, the minimum cash flow covenant was eliminated and the required ratios
for the leverage, interest coverage and fixed charge coverage covenants were
adjusted to reflect the Company's revised financial projections. The amendment
also eliminated the mandatory prepayment provision associated with the proceeds
from the anticipated Playboy.com, Inc. IPO, as well as from certain asset sales
under the condition that the sale proceeds are reinvested within 36 months from
the sale date.
In connection with the anticipated Playboy.com, Inc. IPO, the Company
agreed to reduce the revolving credit facility by an additional $5.0 million to
$30.0 million, effective with the funding date of the IPO. The cash proceeds of
the IPO are expected to provide the required liquidity for Playboy.com, Inc.
Until then, the maximum allowable funding from the Company to Playboy.com, Inc.
is limited to $10.0 million, effective January 1, 2000.
(R) CONTINGENCIES
The programming of the Company's networks is delivered to cable and DTH
operators through communications satellite transponders. The Company's current
transponder leases contain protections typical in the industry against
transponder failure, including access to spare transponders, and conditions
under which the Company's access may be denied. The Company believes that the
transponder for Playboy TV 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 for Playboy TV expires October 30, 2001 and can be
renewed for an additional three years. The Company's current lease term for the
Spice networks' transponder extends through the remainder of the satellite's
life (currently estimated to be 2011). Major limitations on the Company's access
to cable or DTH 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 transponders it
leases.
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. In
December 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. Management believes that the effect of
Section 505 on the Company's financial performance is likely to continue until
the case is finally decided.
43
<PAGE>
(S) STOCK PLANS
The Company has various stock plans for key employees and nonemployee directors
which provide for the grant of nonqualified and incentive stock options, and
shares of restricted stock, deferred stock and other performance-based equity
awards. The exercise price of options granted must equal or exceed the fair
value at the grant date. In general, options become exercisable over a two- or
four-year period from the grant date and expire 10 years from the grant date.
Restricted stock awards provide for the issuance of Class B common stock ("Class
B stock") subject to restrictions that lapse if the Company meets specified
operating income objectives pertaining to a fiscal year. Vesting requirements
for certain restricted stock awards will lapse automatically, regardless of
whether or not the Company has achieved those objectives, generally 10 years
from the award date. In addition, one of the plans pertaining to nonemployee
directors also allows for the issuance of Class B stock as awards and payment
for annual retainers and meeting fees.
At December 31, 1999, a total of 1,546,462 shares of Class B stock were
available for future grants under the various stock plans combined. Stock option
transactions are summarized as follows:
<TABLE>
<CAPTION>
Stock Options Outstanding
Weighted Average
Shares Exercise Price
- ---------------------------------------------------------------------------------------------------------------
Class A Class B Class A Class B
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Granted - 1,008,000 - 23.67
Exercised (110,000) (578,500) 6.69 7.90
Canceled - (115,500) - 17.89
- ------------------------------------------------------------------------------------
Outstanding at December 31, 1999 5,000 1,835,500 $7.38 $17.91
===================================================================================================================
</TABLE>
The weighted average exercise prices for Class A and Class B exercisable options
at June 30, 1997 were $6.72 and $7.59, respectively, and at December 31, 1997
were $6.72 and $8.00, respectively. The weighted average exercise prices for
Class A and Class B exercisable options at December 31, 1998 were $6.72 and
$8.54, respectively. The following table summarizes information regarding stock
options at December 31, 1999:
<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
$7.38 5,000 1.66 $ 7.38 5,000 $ 7.38
Class B
$5.38-$13.63 615,500 4.35 $ 9.65 547,375 $ 9.24
14.75-22.63 872,500 8.50 19.37 287,500 18.64
$25.56-$31.50 347,500 9.07 28.87 - -
- -------------------------------------------------------------------------------------------------------------------
Total Class B 1,835,500 7.22 $ 17.91 834,875 $ 12.47
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
The following table summarizes transactions related to restricted stock awards:
Restricted Stock Awards Outstanding
Class B
- -----------------------------------------------------------------------------
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
Awarded 26,250
Vested -
Canceled (49,374)
- ----------------------------------------------------------------------------
Outstanding at December 31, 1999 307,498
=============================================================================
Effective July 1, 1996, the Company established an Employee Stock 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.
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. At December 31,
1999, a total of approximately 87,000 shares of Class B stock were available for
future purchases under this plan.
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):
Fiscal Year Fiscal Year Six Months Fiscal Year
Ended Ended Ended Ended
12/31/99 12/31/98 12/31/97 6/30/97
- ------------------------------------------------------------------------------
Net income (loss)
As reported $(5,335) $ 4,320 $ 1,065 $ 21,394
Pro forma (10,121) 3,194 658 21,008
Basic EPS
As reported (0.23) 0.21 0.05 1.05
Pro forma (0.44) 0.16 0.03 1.03
Diluted EPS
As reported (0.23) 0.21 0.05 1.03
Pro forma $ (0.44) $ 0.15 $ 0.03 $ 1.02
- ------------------------------------------------------------------------------
The fair value of each option grant was estimated on the grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
Fiscal Year Fiscal Year Six Months Fiscal Year
Ended Ended Ended Ended
12/31/99 12/31/98 12/31/97 6/30/97
- -------------------------------------------------------------------------------
Risk-free interest rate 4.86% 5.63% 6.14% 6.56%
Expected stock price
volatility 44.11% 41.47% 40.07% 40.00%
Expected dividend yield - - - -
- -------------------------------------------------------------------------------
45
<PAGE>
For fiscal year 1997, the transition period and fiscal years 1998 and 1999, 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 $6.87,
$7.35, $7.91 and $9.72, 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 year
1997, the transition period and fiscal years 1998 and 1999, the weighted average
fair value of restricted stock awarded was $13.67, $14.05, $16.14 and $22.13,
respectively.
The pro forma effect on net income (loss) for fiscal year 1997, the
transition period and fiscal years 1998 and 1999 may not be representative of
the pro forma effect on net income (loss) 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.
(T) PUBLIC EQUITY OFFERINGS
In May 1999, the Company completed a public equity offering of 2,875,000 shares
of nonvoting Class B common stock at a price of $30.00 per share. Two million
shares were sold by a trust established by, and for the benefit of, Hugh M.
Hefner, the Company's founder and principal stockholder, and 875,000 shares were
sold by the Company. Of the Company's shares, 375,000 were sold upon exercise by
the underwriters of their over-allotment option. The Company did not receive any
of the proceeds from the sale of Class B common stock by Mr. Hefner. Mr. Hefner
paid for expenses related to this transaction proportionate to the number of
shares he sold to the total number of shares sold in the offering. Net proceeds
to the Company of $24.6 million are being used for general corporate purposes
and repayment of financing obligations.
In January 2000, Playboy.com, Inc., a component of the Playboy Online
Group, filed a registration statement for a planned sale of a minority of its
equity in an IPO.
(U) CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest and income taxes was as follows (in thousands):
Fiscal Year Fiscal Year Six Months Fiscal Year
Ended Ended Ended Ended
12/31/99 12/31/98 12/31/97 6/30/97
- --------------------------------------------------------------------------------
Interest $ 7,706 $ 1,505 $ 268 $ 480
Income taxes $ 2,756 $ 2,367 $1,545 $ 2,293
- --------------------------------------------------------------------------------
During fiscal years 1999 and 1998, the Company had noncash investing activities
related to the sale of investments. See Note (E) Sale of Investments.
The following summarizes noncash investing and financing activities related to
the Spice acquisition (in thousands):
Fiscal Year
Ended
12/31/99
- -----------------------------------------------------------------------------
Fair value of net assets acquired, including goodwill $ 127,409
Acquisition liabilities (3,462)
Payment of debt assumed (10,471)
Common stock issued (48,429)
- ----------------------------------------------------------------------------
Cash paid 65,047
Less: cash acquired (327)
- ----------------------------------------------------------------------------
Net cash paid for the Spice acquisition $ 64,720
=============================================================================
See Note (B) Acquisition.
(V) LEASE COMMITMENTS
The Company's principal lease commitments are for office space, satellite
transponders 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.
46
<PAGE>
The Company's corporate headquarters located in Chicago is under terms of
an 18-year lease, which commenced September 1, 1989 and has 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 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 which transmits
Playboy TV programming commenced January 1, 1993. This operating lease is for a
term of approximately nine years. Subsequent to the Spice acquisition, the
Company leases satellite transponder space for the transmission of Spice
programming. This operating lease extends through the remainder of the
satellite's life (currently estimated to be 2011).
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 1999 and 1998, the transition period and
fiscal year 1997 was $14,282,000, $11,250,000, $5,232,000 and $9,611,000,
respectively. There was no contingent rent expense or sublease income in any of
these periods.
The minimum commitments at December 31, 1999, under operating leases with
noncancelable terms in excess of one year, were as follows (in thousands):
Operating
Fiscal year ending December 31 Leases
- -----------------------------------------------------------------------------
2000 $ 13,832
2001 12,264
2002 6,780
2003 5,614
2004 4,655
Later years 12,683
- -----------------------------------------------------------------------------
Total minimum lease payments $ 55,828
=============================================================================
(W) 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 the results of
operations or financial position of the Company, but did affect the disclosure
of segment information.
The Company's 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 special editions, 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 and Spice networks, other domestic pay
television, international TV and worldwide home video businesses as well as the
production or co-production and distribution of feature films. 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 the Company's print catalogs. Casino Gaming Group operations
include the development of casino gaming opportunities. The Playboy Online Group
operates Playboy.com, the Company's network of sites on the Internet, a pay site
called Playboy Cyber Club and e-commerce sites.
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
measures are segment operating results and EBITDA. The accounting policies of
the reportable segments are the same as those described in Note (A) Summary of
Significant Accounting Policies. The following table represents financial
information by reportable segment:
47
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Six Months Fiscal Year
Ended Ended Ended Ended
(in thousands) 12/31/99 12/31/98 12/31/97 6/30/97
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Revenues (1)
Publishing $ 137,062 $ 136,067 $ 66,252 $ 133,724
Entertainment 125,783 91,049 37,356 74,716
Product Marketing 5,545 7,081 4,199 7,968
Catalog 60,335 74,393 39,340 75,391
Casino Gaming 900 - - -
Playboy Online 16,104 7,098 2,317 2,838
Corporate Marketing 2,088 1,930 77 1,986
- -------------------------------------------------------------------------------------------------------------------
Total $ 347,817 $317,618 $149,541 $ 296,623
===================================================================================================================
Income (Loss) from Continuing Operations before
Income Taxes and Cumulative Effect
of Change in Accounting Principle
Publishing $ 5,977 $ 6,672 $ 4,022 $ 8,750
Entertainment 44,375 26,165 7,991 18,254
Product Marketing 434 365 1,614 3,512
Catalog 256 4,100 1,835 4,630
Casino Gaming (521) (1,108) (541) -
Playboy Online (9,066) (6,528) (943) (113)
Corporate Administration and Promotion (27,476) (24,698) (9,519) (19,288)
Restructuring expenses (1,091) - - -
Investment income 1,798 127 50 73
Interest expense (7,977) (1,551) (289) (427)
Gain on sale of investments 1,728 4,272 - -
Equity in operations of PTVI and other (13,871) (378) 329 132
Other, net (996) (413) (259) (772)
- ------------------------------------------------------------------------------------------------------------------
Total $ (6,430) $ 7,025 $ 4,290 $ 14,751
===================================================================================================================
EBITDA
Publishing $ 6,570 $ 7,313 $ 4,347 $ 9,796
Entertainment 83,557 52,997 19,347 40,281
Product Marketing 599 520 1,692 3,688
Catalog 500 4,564 2,072 5,281
Casino Gaming (521) (1,108) (541) -
Playboy Online (9,037) (6,500) (943) (113)
Corporate Administration and Promotion (21,855) (18,897) (8,390) (17,282)
Restructuring expenses (1,091) - - -
- -------------------------------------------------------------------------------------------------------------------
Total $ 58,722 $ 38,889 $ 17,584 $ 41,651
===================================================================================================================
Depreciation and Amortization (2) (3)
Publishing $ 593 $ 641 $ 325 $ 1,046
Entertainment 39,182 26,832 11,356 22,027
Product Marketing 165 155 78 176
Catalog 244 464 237 651
Casino Gaming - - - -
Playboy Online 29 28 - -
Corporate Administration and Promotion 2,478 2,193 1,009 2,573
- -------------------------------------------------------------------------------------------------------------------
Total $ 42,691 $ 30,313 $ 13,005$ 26,473
===============================================================================================================
Identifiable Assets (2) (4)
Publishing $ 51,273 $ 50,171 $ 46,511 $ 37,372
Entertainment 281,167 85,783 71,353 72,251
Product Marketing 4,938 5,764 6,589 6,404
Catalog 13,599 17,871 18,931 15,338
Casino Gaming 2,043 4,416 1,863 2,936
Playboy Online 4,924 1,282 636 704
Corporate Administration and Promotion 71,458 46,820 40,064 40,537
- -------------------------------------------------------------------------------------------------------------------
Total $ 429,402 $212,107 $185,947 $ 175,542
===================================================================================================================
<FN>
(1) Net revenues include revenues attributable to foreign countries of $70,596,
$45,231, $21,292 and $42,956 in fiscal years 1999 and 1998, the transition
period and fiscal year 1997, respectively. Revenues from individual foreign
countries were not material. Revenues are generally attributed to countries
based on the location of customers, except Product Marketing royalties
where revenues are attributed based upon the location of licensees. In
fiscal year 1999, revenues from PTVI exceeded 10% of the Company's total
net revenues. See Note (C) Playboy TV International, LLC Joint Venture.
(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) Amounts include depreciation of property and equipment, amortization of
intangible assets, amortization of investments in entertaining programming
and expenses related to the vesting of restricted stock awards.
(4) Long-lived assets of the Company located in foreign countries were not
material.
</FN>
</TABLE>
48
<PAGE>
(X) 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 1999 and 1998, the transition period
and fiscal year 1997 were approximately $890,000, $420,000, $275,000 and
$1,035,000, 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. Effective January 1, 2000, all employees may
participate in the plan upon the date of hire. The Company makes matching
contributions to the 401(k) plan based on each participating employee's
contributions and eligible compensation. In fiscal years 1999 and 1998, the
transition period and fiscal year 1997, the maximum matching contributions were
3 1/2% of each employee's eligible compensation, subject to Internal Revenue
Service limitations. For fiscal year 2000, the maximum matching contribution
will continue to be 3 1/2% of such compensation. The Company's matching
contributions for fiscal years 1999 and 1998, the transition period and fiscal
year 1997 related to this plan were approximately $1,160,000, $1,015,000,
$455,000 and $920,000, respectively.
The Company has two nonqualified 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 85 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. 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. Directors are
entitled to receive annual retainers, payable in cash and/or Class B stock, and
meeting fees, payable in Class B stock, for their services. Directors may elect
to defer between 25% and 100% (in 25% increments) of their annual retainers, and
all or none of their meeting fees. 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. All amounts deferred and earnings credited under these
plans are 100% immediately vested and are general unsecured obligations of the
Company. Such obligations totaled approximately $4,215,000 and $2,580,000 at
December 31, 1999 and 1998, respectively, and are included in "Other noncurrent
liabilities."
(Y) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
fiscal years 1999 and 1998 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Fiscal Year
Quarters Ended Ended
----------------------------------------------
Fiscal Year Ended December 31, 1999 Mar. 31 June 30 Sept. 30 Dec. 31 12/31/99
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 73,384 $ 77,759 $ 104,240 $ 92,434 $ 347,817
Gross profit 10,076 12,338 32,690 15,265 70,369
Operating income (loss) (1,991) (980) 15,420 439 12,888
Net loss (1,042) (2,972) (1,078) (243) (5,335)
Basic and diluted EPS (0.05) (0.13) (0.05) 0.00 $ (0.23)
Common stock price
Class A high 25 1/8 32 24 11/16 22 3/8
Class A low 16 1/8 20 3/8 16 11/16 16 5/8
Class B high 28 11/16 36 1/8 28 9/16 26 1/2
Class B low $17 15/16 $ 23 5/16 $18 11/16 $19 11/16
- ------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year
Quarters Ended Ended
--------------------------------------------
Fiscal Year Ended December 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>
Revenues and offsetting cost of sales for the first three quarters of fiscal
year 1999 have been adjusted by $0.2 million, $0.3 million and $0.2 million,
respectively, to eliminate barter transactions related to the Playboy Online
Group in accordance with EITF 99-17 and subsequent Task Force discussions.
Additionally, net income (loss) and basic and diluted EPS for the quarter ended
September 30, 1999 have been adjusted by $7.4 million, or $0.33 per basic and
diluted common share, to reflect revised results attributable to the Company's
19.9% interest in PTVI, the accounting effects of the formation of the PTVI
venture and the elimination of unrealized profits of certain transactions
between the Company and PTVI
The net loss for the quarter ended March 31, 1999 includes a gain on sale
of investment of $1.7 million. See Note (E) Sale of Investments.
The financial results for the quarter ended September 30, 1999 include
annual library license fees related to PTVI. See Note (C) Playboy TV
International, LLC Joint Venture.
The net loss for the quarter ended December 31, 1999 includes
restructuring expenses of $1.1 million. See Note (D) Restructuring Expenses.
Additionally, the net loss for the quarter also includes a gain on disposal of
discontinued operations of $0.2 million, net of tax. See Note (G) Discontinued
Operations.
Net income for the quarter ended December 31, 1998 includes a gain on
sale of investment of $4.3 million. See Note (E) Sale of Investments.
(Z) SUBSEQUENT EVENT
In February 2000, one of the Company's subsidiaries, Playboy.com, Inc.,
purchased substantially all of the assets and assumed certain liabilities of
Rouze Media, Inc. ("Rouze"), which operated an Internet site located at
www.rouze.com. A majority of the employees of Rouze, including its two founders,
also joined the Company as part of the transaction. The aggregate purchase price
consisted of $1.2 million in cash, certain assumed liabilities plus direct costs
of the transaction.
50
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Playboy Enterprises, Inc.
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations and comprehensive income, of shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Playboy Enterprises, Inc. and its subsidiaries at December 31, 1999 and 1998,
and the results of their operations and comprehensive income and their cash
flows for the fiscal years ended December 31, 1999 and 1998, the six-month
transition period ended December 31, 1997 and the fiscal year ended June 30,
1997, in conformity with accounting principles generally accepted in the United
States. 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 did not audit the financial statements of
Playboy TV International, LLC ("PTVI"), an unconsolidated affiliate accounted
for using the equity method. Such investment aggregated $723,264 at December 31,
1999, and equity in operations of PTVI was $(12,744,717) in 1999. The financial
statements of PTVI (Note C) were audited by other auditors whose report thereon
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for PTVI is based solely on the report of such other auditors. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, 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 and the report of other auditors provide a reasonable
basis for the opinion expressed above.
As discussed in Note (H) Cumulative Effect of Change in Accounting
Principle 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
March 30, 2000
51
<PAGE>
REPORT OF MANAGEMENT
The consolidated financial statements and all related financial
information in this Form 10-K Annual Report are the responsibility of the
Company. The financial statements, which include amounts based on judgments,
have been prepared in accordance with accounting principles generally accepted
in the United States. Other financial information in this Form 10-K Annual
Report is consistent with that in the financial statements.
The Company maintains a system of internal controls that it believes
provides reasonable assurance that transactions are executed in accordance with
management's authorization and are properly recorded, that assets are
safeguarded and that accountability for assets is maintained. The system of
internal controls is characterized by a control-oriented environment within the
Company, which includes written policies and procedures, careful selection and
training of personnel, and internal audits.
PricewaterhouseCoopers LLP, independent accountants, have audited and
reported on the Company's consolidated financial statements. Their audits were
performed in accordance with auditing standards generally accepted in the United
States.
The Audit Committee of the Board of Directors, composed of three
nonmanagement directors, meets periodically with PricewaterhouseCoopers LLP,
management representatives and the Company's internal auditor to review internal
accounting control and auditing and financial reporting matters. Both
PricewaterhouseCoopers LLP and the internal auditor have unrestricted access to
the Audit Committee and may meet with it without management representatives
being present.
Christie Hefner
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Linda G. Havard
Executive Vice President, Finance and Operations,
and Chief Financial Officer
(Principal Financial and Accounting Officer)
52
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
None
PART III
Information required by Items 10, 11, 12 and 13 is contained in the
registrant's Notice of Annual Meeting of Stockholders and Proxy Statement (to be
filed) relating to the Annual Meeting of Stockholders to be held in May 2000,
which will be filed within 120 days after the close of the registrant's fiscal
year ended December 31, 1999, and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) Certain Documents Filed as Part of the Form 10-K
Financial Statements of the registrant and report of independent accountants
following are as set forth under Item 8 of this Form 10-K Annual Report:
Page
----------
Consolidated Statements of Operations and Comprehensive
Income - Fiscal Years Ended December 31, 1999 and 1998,
Six-Month Transition Period Ended December 31, 1997 and
Fiscal Year Ended June 30, 1997 29
Consolidated Balance Sheets - December 31, 1999 and 1998 30
Consolidated Statements of Shareholders' Equity - Fiscal
Years Ended December 31, 1999 and 1998, Six-Month
Transition Period Ended December 31, 1997 and Fiscal
Year Ended June 30, 1997 31
Consolidated Statements of Cash Flows - Fiscal Years
Ended December 31, 1999 and 1998, Six-Month Transition
Period Ended December 31, 1997 and Fiscal Year Ended
June 30, 1997 32
Notes to Consolidated Financial Statements 33-50
Report of Independent Accountants 51
Report of Independent Accountants on Financial Statement Schedule 66
Schedule II - Valuation and Qualifying Accounts 67
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
(c) Exhibits
2.1 Agreement and Plan of Merger, dated as of May 29, 1998, by and
among Playboy Enterprises, Inc., New Playboy, Inc., Playboy
Acquisition Corp., Spice Acquisition Corp. and Spice
Entertainment Companies, Inc. (incorporated by reference to
Exhibit 2.1 from the Company's Registration Statement No.
333-68139 on Form S-4 dated December 1, 1998 (the "December 1,
1998 Form S-4"))
2.2 Amendment, dated as of November 16, 1998, to the Agreement and
Plan of Merger by and among Playboy Enterprises, Inc., New
Playboy, Inc., Playboy Acquisition Corp., Spice Acquisition
Corp. and Spice Entertainment Companies, Inc. (incorporated by
reference to Exhibit 2.2 from the December 1, 1998 Form S-4)
2.3 Amendment, dated as of February 26, 1999, to the Agreement and
Plan of Merger by and among Playboy Enterprises, Inc., New
Playboy, Inc., Playboy Acquisition Corp., Spice Acquisition
Corp. and Spice Entertainment Companies, Inc. (incorporated by
reference to Exhibit 2.1 from the Current Report on Form 8-K
dated March 9, 1999 (the "March 9, 1999 Form 8-K"))
53
<PAGE>
3.1 Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 from the
Current Report on Form 8-K dated March 15, 1999 (the "March
15, 1999 Form 8-K"))
3.2 Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of the Company, dated March 15,
1999 (incorporated by reference to Exhibit 3.2 from the March
15, 1999 Form 8-K)
3.3 Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of the Company, dated March 15,
1999 (incorporated by reference to Exhibit 3.3 from the March
15, 1999 Form 8-K)
3.4 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.4 from the March 15, 1999 Form 8-K)
#10.1 Playboy Magazine Printing and Binding Agreement dated as of
October 22, 1997 between Playboy Enterprises, Inc. and
Quad/Graphics, Inc. (incorporated by reference to Exhibit 10.4
from the Company's transition period report on Form 10-K for
the six months ended December 31, 1997 (the "Transition Period
Form 10-K"))
10.2 Playboy Magazine Distribution Agreement dated as of July 2,
1999 between Playboy Enterprises, Inc. and Warner Publisher
Services, Inc. (incorporated by reference to Exhibit 10.4 from
the Company's quarterly report on Form 10-Q for the quarter
ended September 30, 1999 (the "September 30, 1999 Form 10-Q"))
10.3 Playboy Magazine Subscription Fulfillment Agreement
a July 1, 1987 agreement between Communication Data
Services, Inc. and Playboy Enterprises, Inc.
(incorporated by reference to Exhibit 10.12(a) from
the Company's annual report on Form 10-K for the year
ended June 30, 1992 (the "1992 Form 10-K"))
b Amendment dated as of June 1, 1988 to said
Fulfillment Agreement (incorporated by reference to
Exhibit 10.12(b) from the Company's annual report on
Form 10-K for the year ended June 30, 1993 (the "1993
Form 10-K"))
c Amendment dated as of July 1, 1990 to said
Fulfillment Agreement (incorporated by reference to
Exhibit 10.12(c) from the Company's annual report on
Form 10-K for the year ended June 30, 1991 (the "1991
Form 10-K"))
d Amendment dated as of July 1, 1996 to said
Fulfillment Agreement (incorporated by reference to
Exhibit 10.5(d) from the Company's annual report on
Form 10-K for the year ended June 30, 1996 (the "1996
Form 10-K"))
#e Amendment dated July 7, 1997 to said Fulfillment
Agreement (incorporated by reference to Exhibit
10.6(e) from the Transition Period Form 10-K)
10.4 Transponder Lease Agreement dated as of December 31, 1992
between Playboy Entertainment Group, Inc. and General Electric
Capital Corporation (incorporated by reference to Exhibit 10.3
from the Company's quarterly report on Form 10-Q for the
quarter ended December 31, 1992 (the "December 31, 1992 Form
10-Q"))
10.5 Agreement for Compressed Transponder Services effective as of
March 15, 1999 between Califa Entertainment Group, Inc. and
Playboy Entertainment Group, Inc.
10.6 Distribution License to Exploit Home Video Rights effective
October 1, 1991 between Playboy Video Enterprises, Inc. and
Uni Distribution Corp. (incorporated by reference to Exhibit
10.16 from the 1991 Form 10-K)
10.7 Distribution Agreement between Playboy Entertainment Group,
Inc. and Universal Music & Video Distribution (formerly Uni
Distribution Corp.) regarding licensing and sale of domestic
home video product
a Agreement dated as of March 24, 1995 (incorporated by
reference to Exhibit 10.8 from the Company's annual
report on Form 10-K for the year ended June 30, 1995
(the "1995 Form 10-K"))
b Amendment to March 24, 1995 agreement dated February
28, 1997 (incorporated by reference to Exhibit 10.6
from the Company's quarterly report on Form 10-Q for
the quarter ended March 31, 1997 (the "March 31, 1997
Form 10-Q"))
#c Agreement dated June 5, 1998 (incorporated by
reference to Exhibit 10.1 from the Company's
quarterly report on Form 10-Q for the quarter ended
June 30, 1998 (the "June 30, 1998 Form 10-Q"))
#10.8 Program Supply Agreement between SEI Inc ApS and SEI 1 ApS
dated June 30, 1999 (incorporated by reference to Exhibit 10.2
from the Company's quarterly report on Form 10-Q for the
quarter ended June 30, 1999 (the "June 30, 1999 Form 10-Q"))
10.9 Agreements between Playboy Entertainment Group, Inc. and
Bloomfield Mercantile Inc. related to establishing
international networks in Latin America, Spain and Portugal
#a Agreement outline as of March 29, 1996
#b Letter agreement dated January 13, 1997
(items (a) and (b) incorporated by reference to Exhibits
10.4(a) and (b), respectively, from the March 31, 1997 Form
10-Q)
54
<PAGE>
#10.10 Operating Agreement for Playboy TV International, LLC dated as
of August 31, 1999 between Playboy Entertainment Group, Inc.
and Victoria Springs Investments Ltd. (incorporated by
reference to Exhibit 10.1 from the September 30, 1999 Form
10-Q)
#10.11 Program Supply Agreement dated as of August 31, 1999 between
Playboy Entertainment Group, Inc., Playboy TV International
LLC and PTV U.S., LLC (incorporated by reference to Exhibit
10.2 from the September 30, 1999 Form 10-Q)
#10.12 Trademark License Agreement dated as of August 31, 1999
between Playboy Enterprises International, Inc. and Playboy TV
International, LLC (incorporated by reference to Exhibit 10.3
from the September 30, 1999 Form 10-Q)
10.13 Distribution Agreements between Playboy Entertainment Group,
Inc., Orion Home Video and Metro-Goldwyn-Mayer Studios Inc.
regarding the distribution of certain home video programs and
product
a Agreement dated June 27, 1996 (incorporated by
reference to Exhibit 10.12 from the 1996 Form 10-K)
b First Amendment to June 27, 1996 agreement dated July
29, 1996 (incorporated by reference to Exhibit 10.7
from the March 31, 1997 Form 10-Q)
#c Second Amendment to June 27, 1996 agreement dated
December 31, 1997 (incorporated by reference to
Exhibit 10.18(c) from the Transition Period Form
10-K)
10.14 Letter Agreement dated as of January 5, 1998 between Playboy
Entertainment Group, Inc. and Metro-Goldwyn-Mayer Studios Inc.
in reference to Metro-Goldwyn-Mayer Studios Inc. assuming full
right, power and authority over certain distribution and
production agreements on behalf of other parties (incorporated
by reference to Exhibit 10.19 from the Transition Period Form
10-K)
10.15 Affiliation Agreement between Playboy Entertainment Group,
Inc. and DirecTV, Inc. regarding the satellite distribution of
Playboy TV
a Agreement dated November 15, 1993
b First Amendment to November 15, 1993 agreement dated
as of April 19, 1994
c Second Amendment to November 15, 1993 agreement dated
as of July 26, 1995
(items (a), (b) and (c) incorporated by reference to Exhibits
10.13(a), (b) and (c), respectively, from the 1996 Form 10-K)
#d Third Amendment to November 15, 1993 agreement dated
August 26, 1997 (incorporated by reference to Exhibit
10.3 from the Company's quarterly report on Form 10-Q
for the quarter ended September 30, 1997 (the
"September 30, 1997 Form 10-Q"))
#e Fourth Amendment to November 15, 1993 agreement dated
March 15, 1999 (incorporated by reference to Exhibit
10.1 from the June 30, 1999 Form 10-Q)
#10.16 DBS License Agreement dated April 1, 1997 between Playboy
Entertainment Group, Inc. and PrimeStar Partners, L.P.
regarding the satellite distribution of Playboy TV or any
other service mark that retains a Playboy Mark (incorporated
by reference to Exhibit 10.1 from the Company's quarterly
report on Form 10-Q for the quarter ended March 31, 1998 (the
"March 31, 1998 Form 10-Q"))
10.17 Product License Agreements between Playboy Enterprises, Inc.
and Chaifa Investment, Limited
a Agreement dated September 26, 1989 related to the
Hong Kong territory
b Agreement dated March 4, 1991 related to the People's
Republic of China territory
c Amendment dated July 21, 1992 related to the March 4,
1991 agreement
d Amendment dated August 17, 1993 related to the
agreements dated September 26, 1989 and March 4, 1991
e Amendment dated January 23, 1996 related to the
agreements dated September 26, 1989 and March 4, 1991
(items (a) through (e) incorporated by reference to Exhibits
10.16(a) through (e), respectively, from the 1996 Form 10-K)
f Amendment dated May 12, 1997 related to the
agreements dated September 26, 1989 and March 4, 1991
(incorporated by reference to Exhibit 10.18(f) from
the Company's annual report on Form 10-K for the year
ended June 30, 1997 (the "1997 Form 10-K"))
10.18 Credit Agreement
a Credit Agreement, dated as of February 26, 1999,
among New Playboy, Inc., PEI Holdings, Inc., the
Lenders named in this Credit Agreement, ING (U.S.)
Capital LLC, as Syndication Agent, and Credit Suisse
First Boston, as Administrative Agent, as Collateral
Agent and as Issuing Bank
b Subsidiary Guarantee Agreement, dated as of March 15,
1999, among certain subsidiaries of Playboy
Enterprises, Inc. and Credit Suisse First Boston, as
Collateral Agent
c Indemnity, Subrogation and Contribution Agreement,
dated as of March 15, 1999, among Playboy
Enterprises, Inc., PEI Holdings, Inc., certain other
subsidiaries of Playboy Enterprises, Inc., and Credit
Suisse First Boston, as Collateral Agent
55
<PAGE>
d Pledge Agreement, dated as of March 15, 1999, among
Playboy Enterprises, Inc., PEI Holdings, Inc.,
certain other subsidiaries of Playboy Enterprises,
Inc., and Credit Suisse First Boston, as Collateral
Agent
e Security Agreement, dated as of March 15, 1999, among
Playboy Enterprises, Inc., PEI Holdings, Inc.,
certain other subsidiaries of Playboy Enterprises,
Inc., and Credit Suisse First Boston, as Collateral
Agent
(items (a) through (e) incorporated by reference to Exhibits
10.21(a) through (e), respectively, from the Company's annual
report on Form 10-K for the year ended December 31, 1998 (the
"1998 Form 10-K"))
f First Amendment to February 26, 1999 Credit Agreement
dated as of June 14, 1999
g Second Amendment to February 26, 1999 Credit
Agreement dated as of January 31, 2000
10.19 Playboy Mansion West Lease Agreement, as amended, between
Playboy Enterprises, Inc. and Hugh M. Hefner
a Letter of Interpretation of Lease
b Agreement of lease
(items (a) and (b) incorporated by reference to Exhibits
10.3(a) and (b), respectively, from the 1991 Form 10-K)
c Amendment to lease agreement dated as of January 12,
1998 (incorporated by reference to Exhibit 10.2 from
the March 31, 1998 Form 10-Q)
10.20 Los Angeles Offices Lease Documents
a Office lease dated as of July 25, 1991 between
Playboy Enterprises, Inc. and Beverly Mercedes Place,
Ltd. (incorporated by reference to Exhibit 10.6(c)
from the 1991 Form 10-K)
b Amendment to July 25, 1991 lease dated June 26, 1996
c Amendment to July 25, 1991 lease dated September 12,
1996
(items (b) and (c) incorporated by reference to Exhibits
10.19(b) and (c), respectively, from the 1996 Form 10-K)
d Office lease dated January 6, 1999 between 5055
Wilshire Limited Partnership and Playboy Enterprises,
Inc. (incorporated by reference to Exhibit 10.24(d)
from the 1998 Form 10-K)
10.21 Chicago Office Lease Documents
a Office Lease dated April 7, 1988 by and between
Playboy Enterprises, Inc. and LaSalle National Bank
as Trustee under Trust No. 112912 (incorporated by
reference to Exhibit 10.7(a) from the 1993 Form 10-K)
b First Amendment to April 7, 1988 lease dated October
26, 1989 (incorporated by reference to Exhibit
10.15(b) from the 1995 Form 10-K)
c Second Amendment to April 7, 1988 lease dated June 1,
1992 (incorporated by reference to Exhibit 10.1 from
the December 31, 1992 Form 10-Q
d Third Amendment to April 7, 1988 lease dated August
30, 1993 (incorporated by reference to Exhibit
10.15(d) from the 1995 Form 10-K)
e Fourth Amendment to April 7, 1988 lease dated August
6, 1996 (incorporated by reference to Exhibit
10.20(e) from the 1996 Form 10-K)
f Fifth Amendment to April 7, 1988 lease dated March
19, 1998 (incorporated by reference to Exhibit 10.3
from the March 31, 1998 Form 10-Q)
10.22 New York Office Lease Agreement dated August 11, 1992 between
Playboy Enterprises, Inc. and Lexington Building Co.
(incorporated by reference to Exhibit 10.9(b) from the 1992
Form 10-K)
10.23 Itasca Warehouse Lease Documents
a Agreement dated as of September 6, 1996 between
Centerpoint Properties Corporation and Playboy
Enterprises, Inc. (incorporated by reference to
Exhibit 10.23 from the 1996 Form 10-K)
b Amendment to September 6, 1996 lease dated June 1,
1997 (incorporated by reference to Exhibit 10.25(b)
from the 1997 Form 10-K)
*10.24 Selected Company Remunerative Plans
a Executive Protection Program dated March 1, 1990
(incorporated by reference to Exhibit 10.18(c) from
the 1995 Form 10-K)
b Amended and Restated Deferred Compensation Plan for
Employees effective January 1, 1998
c Amended and Restated Deferred Compensation Plan for
Board of Directors' effective January 1, 1998
(items (b) and (c) incorporated by reference to Exhibits
10.2(a) and (b), respectively, from the June 30, 1998 Form
10-Q)
*10.25 1989 Option Plan
a Playboy Enterprises, Inc. 1989 Stock Option Plan, as
amended, For Key Employees (incorporated by reference
to Exhibit 10.4(mm) from the 1991 Form 10-K)
56
<PAGE>
b Playboy Enterprises, Inc. 1989 Stock Option Agreement
c Letter dated July 18, 1990 pursuant to the June 7,
1990 recapitalization regarding adjustment of options
(items (b) and (c) incorporated by reference to Exhibits
10.19(c) and (d), respectively, from the 1995 Form 10-K) d
Consent and Amendment regarding the 1989 Option Plan
(incorporated by reference to Exhibit 10.4(aa) from the 1991
Form 10-K)
*10.26 1991 Directors' Plan
a Playboy Enterprises, Inc. 1991 Non-Qualified Stock
Option Plan for Non-Employee Directors, as amended
b Playboy Enterprises, Inc. 1991 Non-Qualified Stock
Option Agreement for Non-Employee Directors
(items (a) and (b) incorporated by reference to
Exhibits 10.4(rr) and (nn), respectively, from the
1991 Form 10-K)
*10.27 1995 Stock Incentive Plan
a Amended and Restated Playboy Enterprises, Inc. 1995
Stock Incentive Plan (incorporated by reference to
Exhibit 10.3 from the June 30, 1999 Form 10-Q)
b Form of Non-Qualified Stock Option Agreement for
Non-Qualified Stock Options which may be granted
under the Plan
c Form of Incentive Stock Option Agreement for
Incentive Stock Options which may be granted under
the Plan
d Form of Restricted Stock Agreement for Restricted
Stock issued under the Plan
(items (b), (c) and (d) incorporated by reference to Exhibits
4.3, 4.4 and 4.5, respectively, from the Company's
Registration Statement No. 33-58145 on Form S-8 dated March
20, 1995 (the "March 20, 1995 Form S-8"))
e Form of Section 162(m) Restricted Stock Agreement for
Section 162(m) Restricted Stock issued under the Plan
(incorporated by reference to Exhibit 10.1(e) from
the 1997 Form 10-K)
*10.28 1997 Directors' Plan
a 1997 Equity Plan for Non-Employee Directors of
Playboy Enterprises, Inc., as amended (incorporated
by reference to Exhibit 10.3(a) from the Transition
Period Form 10-K)
b Form of Restricted Stock Agreement for Restricted
Stock issued under the Plan (incorporated by
reference to Exhibit 10.1(b) from the September 30,
1997 Form 10-Q)
*10.29 Form of Nonqualified Option Agreement between Playboy
Enterprises, Inc. and each of Dennis S. Bookshester and Sol
Rosenthal (incorporated by reference to Exhibit 4.4 from the
Company's Registration Statement No. 333-30185 on Form S-8
dated November 13, 1996 (the "November 13, 1996 Form S-8"))
*10.30 Employee Stock Purchase Plan
a Playboy Enterprises, Inc. Employee Stock Purchase
Plan, as amended and restated (incorporated by
reference to Exhibit 10.2 from the March 31, 1997
Form 10-Q)
b Amendment to Playboy Enterprises, Inc. Employee Stock
Purchase Plan, as amended and restated (incorporated
by reference to Exhibit 10.4 from the June 30, 1999
Form 10-Q)
*10.31 Selected Employment, Termination and Other Agreements
a Playboy Enterprises, Inc. Severance Agreement
(incorporated by reference to Exhibit 10.4(vv) from
the 1991 Form 10-K)
b Employment Agreement dated May 21, 1992 between
Playboy Enterprises, Inc. and Anthony J. Lynn
(incorporated by reference to Exhibit 10.4(bbb) from
the 1992 Form 10-K)
c Amendment dated August 15, 1996 regarding the
Employment Agreement dated May 21, 1992 between
Playboy Enterprises, Inc. and Anthony J. Lynn
(incorporated by reference to Exhibit 10.25(i) from
the 1996 Form 10-K)
d Agreement dated October 16, 1996 amending the
Employment Agreement dated May 21, 1992 between
Playboy Enterprises, Inc. and Anthony J. Lynn
e Playboy Enterprises, Inc. Incentive Compensation Plan
for Anthony J. Lynn
f Letter Agreement dated April 18, 1997 regarding
employment of Linda Havard
(items (d) through (f) incorporated by reference to Exhibits
10.3(a), (b) and (f), respectively, from the March 31, 1997
Form 10-Q)
g Letter Agreement dated September 25, 1997 regarding
employment of Helen Isaacson
h Letter Agreement dated September 26, 1997 regarding
employment of Garry Saunders
(items (g) and (h) incorporated by reference to Exhibits
10.5(a) and (b), respectively, from the September 30, 1997
Form 10-Q)
57
<PAGE>
i Letter Agreement dated January 25, 1999 regarding
employment of Alex Mironovich (incorporated by
reference to Exhibit 10.1 from the Company's
quarterly report on Form 10-Q for the quarter ended
March 31, 1999 (the "March 31, 1999 Form 10-Q"))
j 1999-2000 Special Incentive/Bonus Plans for Garry
Saunders
21 Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
99 Playboy TV International, LLC Joint Venture financial
statements for the period ended December 31, 1999
- --------------
* Indicates management compensation plan
# Certain information omitted pursuant to a request for confidential
treatment filed separately with and granted by the Securities and
Exchange Commission (the "SEC")
(d) Financial Statement Schedules
See Item 14(a) above
58
<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.
March 30, 2000 By s/Linda Havard
--------------------------------------
Linda G. Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Authorized Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
s/Christie Hefner March 30, 2000
- ----------------------------------------------
Christie Hefner
Chairman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer)
s/Richard S. Rosenzweig March 30, 2000
- ----------------------------------------------
Richard S. Rosenzweig
Executive Vice President and Director
s/Dennis S. Bookshester March 30, 2000
- ----------------------------------------------
Dennis S. Bookshester
Director
s/David I. Chemerow March 30, 2000
- ----------------------------------------------
David I. Chemerow
Director
s/Donald G. Drapkin March 30, 2000
- ----------------------------------------------
Donald G. Drapkin
Director
s/Sol Rosenthal March 30, 2000
- ----------------------------------------------
Sol Rosenthal
Director
s/Sir Brian Wolfson March 30, 2000
- ----------------------------------------------
Sir Brian Wolfson
Director
s/Linda Havard March 30, 2000
- ----------------------------------------------
Linda G. Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
59
<PAGE>
EXHIBIT INDEX
All agreements listed below may have additional exhibits which are not attached.
All such exhibits are available upon request, provided the requesting party
shall pay a fee for copies of such exhibits, which fee shall be limited to the
Company's reasonable expenses incurred in furnishing these documents.
Sequentially
Exhibit Numbered
Number Description Page
- ------ -------------------------------------------------------------- -----
2.1 Agreement and Plan of Merger, dated as of May 29, 1998, by and
among Playboy Enterprises, Inc., New Playboy, Inc., Playboy
Acquisition Corp., Spice Acquisition Corp. and Spice
Entertainment Companies, Inc. (incorporated by reference to
Exhibit 2.1 from the Company's Registration Statement No.
333-68139 on Form S-4 dated December 1, 1998 (the "December 1,
1998 Form S-4"))
2.2 Amendment, dated as of November 16, 1998, to the Agreement and
Plan of Merger by and among Playboy Enterprises, Inc., New
Playboy, Inc., Playboy Acquisition Corp., Spice Acquisition
Corp. and Spice Entertainment Companies, Inc. (incorporated by
reference to Exhibit 2.2 from the December 1, 1998 Form S-4)
2.3 Amendment, dated as of February 26, 1999, to the Agreement and
Plan of Merger by and among Playboy Enterprises, Inc., New
Playboy, Inc., Playboy Acquisition Corp., Spice Acquisition
Corp. and Spice Entertainment Companies, Inc. (incorporated by
reference to Exhibit 2.1 from the Current Report on Form 8-K
dated March 9, 1999 (the "March 9, 1999 Form 8-K"))
3.1 Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 from the
Current Report on Form 8-K dated March 15, 1999 (the "March
15, 1999 Form 8-K"))
3.2 Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of the Company, dated March 15,
1999 (incorporated by reference to Exhibit 3.2 from the March
15, 1999 Form 8-K)
3.3 Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of the Company, dated March 15,
1999 (incorporated by reference to Exhibit 3.3 from the March
15, 1999 Form 8-K)
3.4 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.4 from the March 15, 1999 Form 8-K)
#10.1 Playboy Magazine Printing and Binding Agreement dated as of
October 22, 1997 between Playboy Enterprises, Inc. and
Quad/Graphics, Inc. (incorporated by reference to Exhibit 10.4
from the Company's transition period report on Form 10-K for
the six months ended December 31, 1997 (the "Transition Period
Form 10-K"))
10.2 Playboy Magazine Distribution Agreement dated as of July 2,
1999 between Playboy Enterprises, Inc. and Warner Publisher
Services, Inc. (incorporated by reference to Exhibit 10.4 from
the Company's quarterly report on Form 10-Q for the quarter
ended September 30, 1999 (the "September 30, 1999 Form 10-Q"))
10.3 Playboy Magazine Subscription Fulfillment Agreement
a July 1, 1987 agreement between Communication Data
Services, Inc. and Playboy Enterprises, Inc.
(incorporated by reference to Exhibit 10.12(a) from
the Company's annual report on Form 10-K for the year
ended June 30, 1992 (the "1992 Form 10-K"))
b Amendment dated as of June 1, 1988 to said
Fulfillment Agreement (incorporated by reference to
Exhibit 10.12(b) from the Company's annual report on
Form 10-K for the year ended June 30, 1993 (the "1993
Form 10-K"))
c Amendment dated as of July 1, 1990 to said
Fulfillment Agreement (incorporated by reference to
Exhibit 10.12(c) from the Company's annual report on
Form 10-K for the year ended June 30, 1991 (the "1991
Form 10-K"))
d Amendment dated as of July 1, 1996 to said
Fulfillment Agreement (incorporated by reference to
Exhibit 10.5(d) from the Company's annual report on
Form 10-K for the year ended June 30, 1996 (the "1996
Form 10-K"))
#e Amendment dated July 7, 1997 to said Fulfillment
Agreement (incorporated by reference to Exhibit
10.6(e) from the Transition Period Form 10-K)
10.4 Transponder Lease Agreement dated as of December 31, 1992
between Playboy Entertainment Group, Inc. and General Electric
Capital Corporation (incorporated by reference to Exhibit 10.3
60
<PAGE>
from the Company's quarterly report on Form 10-Q for the
quarter ended December 31, 1992 (the "December 31, 1992 Form
10-Q"))
@10.5 Agreement for Compressed Transponder Services effective as of 68-72
March 15, 1999 between Califa Entertainment Group, Inc. and
Playboy Entertainment Group, Inc.
10.6 Distribution License to Exploit Home Video Rights effective
October 1, 1991 between Playboy Video Enterprises, Inc. and
Uni Distribution Corp. (incorporated by reference to Exhibit
10.16 from the 1991 Form 10-K)
10.7 Distribution Agreement between Playboy Entertainment Group,
Inc. and Universal Music & Video Distribution (formerly Uni
Distribution Corp.) regarding licensing and sale of domestic
home video product
a Agreement dated as of March 24, 1995 (incorporated by
reference to Exhibit 10.8 from the Company's annual
report on Form 10-K for the year ended June 30, 1995
(the "1995 Form 10-K"))
b Amendment to March 24, 1995 agreement dated February
28, 1997 (incorporated by reference to Exhibit 10.6
from the Company's quarterly report on Form 10-Q for
the quarter ended March 31, 1997 (the "March 31, 1997
Form 10-Q"))
#c Agreement dated June 5, 1998 (incorporated by
reference to Exhibit 10.1 from the Company's
quarterly report on Form 10-Q for the quarter ended
June 30, 1998 (the "June 30, 1998 Form 10-Q"))
#10.8 Program Supply Agreement between SEI Inc ApS and SEI 1 ApS
dated June 30, 1999 (incorporated by reference to Exhibit 10.2
from the Company's quarterly report on Form 10-Q for the
quarter ended June 30, 1999 (the "June 30, 1999 Form 10-Q"))
10.9 Agreements between Playboy Entertainment Group, Inc. and
Bloomfield Mercantile Inc. related to establishing
international networks in Latin America, Spain and Portugal
#a Agreement outline as of March 29, 1996
#b Letter agreement dated January 13, 1997
(items (a) and (b) incorporated by reference to Exhibits
10.4(a) and (b), respectively, from the March 31, 1997 Form
10-Q)
#10.10 Operating Agreement for Playboy TV International, LLC dated as
of August 31, 1999 between Playboy Entertainment Group, Inc.
and Victoria Springs Investments Ltd. (incorporated by
reference to Exhibit 10.1 from the September 30, 1999 Form
10-Q)
#10.11 Program Supply Agreement dated as of August 31, 1999 between
Playboy Entertainment Group, Inc., Playboy TV International
LLC and PTV U.S., LLC (incorporated by reference to Exhibit
10.2 from the September 30, 1999 Form 10-Q)
#10.12 Trademark License Agreement dated as of August 31, 1999
between Playboy Enterprises International, Inc. and Playboy TV
International, LLC (incorporated by reference to Exhibit 10.3
from the September 30, 1999 Form 10-Q)
10.13 Distribution Agreements between Playboy Entertainment Group,
Inc., Orion Home Video and Metro-Goldwyn-Mayer Studios Inc.
regarding the distribution of certain home video programs and
product
a Agreement dated June 27, 1996 (incorporated by
reference to Exhibit 10.12 from the 1996 Form 10-K)
b First Amendment to June 27, 1996 agreement dated July
29, 1996 (incorporated by reference to Exhibit 10.7
from the March 31, 1997 Form 10-Q)
#c Second Amendment to June 27, 1996 agreement dated
December 31, 1997 (incorporated by reference to
Exhibit 10.18(c) from the Transition Period Form
10-K)
10.14 Letter Agreement dated as of January 5, 1998 between Playboy
Entertainment Group, Inc. and Metro-Goldwyn-Mayer Studios Inc.
in reference to Metro-Goldwyn-Mayer Studios Inc. assuming full
right, power and authority over certain distribution and
production agreements on behalf of other parties (incorporated
by reference to Exhibit 10.19 from the Transition Period Form
10-K)
61
<PAGE>
10.15 Affiliation Agreement between Playboy Entertainment Group,
Inc. and DirecTV, Inc. regarding the satellite distribution of
Playboy TV
a Agreement dated November 15, 1993
b First Amendment to November 15, 1993 agreement dated
as of April 19, 1994
c Second Amendment to November 15, 1993 agreement dated
as of July 26, 1995
(items (a), (b) and (c) incorporated by reference to Exhibits
10.13(a), (b) and (c), respectively, from the 1996 Form 10-K)
#d Third Amendment to November 15, 1993 agreement dated
August 26, 1997 (incorporated by reference to Exhibit
10.3 from the Company's quarterly report on Form 10-Q
for the quarter ended September 30, 1997 (the
"September 30, 1997 Form 10-Q"))
#e Fourth Amendment to November 15, 1993 agreement dated
March 15, 1999 (incorporated by reference to Exhibit
10.1 from the June 30, 1999 Form 10-Q)
#10.16 DBS License Agreement dated April 1, 1997 between Playboy
Entertainment Group, Inc. and PrimeStar Partners, L.P.
regarding the satellite distribution of Playboy TV or any
other service mark that retains a Playboy Mark (incorporated
by reference to Exhibit 10.1 from the Company's quarterly
report on Form 10-Q for the quarter ended March 31, 1998 (the
"March 31, 1998 Form 10-Q"))
10.17 Product License Agreements between Playboy Enterprises, Inc.
and Chaifa Investment, Limited
a Agreement dated September 26, 1989 related to the
Hong Kong territory
b Agreement dated March 4, 1991 related to the People's
Republic of China territory
c Amendment dated July 21, 1992 related to the March 4,
1991 agreement
d Amendment dated August 17, 1993 related to the
agreements dated September 26, 1989 and March 4, 1991
e Amendment dated January 23, 1996 related to the
agreements dated September 26, 1989 and March 4, 1991
(items (a) through (e) incorporated by reference to Exhibits
10.16(a) through (e), respectively, from the 1996 Form 10-K)
f Amendment dated May 12, 1997 related to the
agreements dated September 26, 1989 and March 4, 1991
(incorporated by reference to Exhibit 10.18(f) from
the Company's annual report on Form 10-K for the year
ended June 30, 1997 (the "1997 Form 10-K"))
10.18 Credit Agreement
a Credit Agreement, dated as of February 26, 1999,
among New Playboy, Inc., PEI Holdings, Inc., the
Lenders named in this Credit Agreement, ING (U.S.)
Capital LLC, as Syndication Agent, and Credit Suisse
First Boston, as Administrative Agent, as Collateral
Agent and as Issuing Bank
b Subsidiary Guarantee Agreement, dated as of March 15,
1999, among certain subsidiaries of Playboy
Enterprises, Inc. and Credit Suisse First Boston, as
Collateral Agent
c Indemnity, Subrogation and Contribution Agreement,
dated as of March 15, 1999, among Playboy
Enterprises, Inc., PEI Holdings, Inc., certain other
subsidiaries of Playboy Enterprises, Inc., and Credit
Suisse First Boston, as Collateral Agent
d Pledge Agreement, dated as of March 15, 1999, among
Playboy Enterprises, Inc., PEI Holdings, Inc.,
certain other subsidiaries of Playboy Enterprises,
Inc., and Credit Suisse First Boston, as Collateral
Agent
e Security Agreement, dated as of March 15, 1999, among
Playboy Enterprises, Inc., PEI Holdings, Inc.,
certain other subsidiaries of Playboy Enterprises,
Inc., and Credit Suisse First Boston, as Collateral
Agent
(items (a) through (e) incorporated by reference to Exhibits
10.21(a) through (e), respectively, from the Company's annual
report on Form 10-K for the year ended December 31, 1998 (the
"1998 Form 10-K"))
@f First Amendment to February 26, 1999 Credit Agreement 73-76
dated as of June 14, 1999
@g Second Amendment to February 26, 1999 Credit 77-89
Agreement dated as of January 31, 2000
62
<PAGE>
10.19 Playboy Mansion West Lease Agreement, as amended, between
Playboy Enterprises, Inc. and Hugh M. Hefner
a Letter of Interpretation of Lease
b Agreement of lease
(items (a) and (b) incorporated by reference to Exhibits
10.3(a) and (b), respectively, from the 1991 Form 10-K)
c Amendment to lease agreement dated as of January 12,
1998 (incorporated by reference to Exhibit 10.2 from
the March 31, 1998 Form 10-Q)
10.20 Los Angeles Offices Lease Documents
a Office lease dated as of July 25, 1991 between
Playboy Enterprises, Inc. and Beverly Mercedes Place,
Ltd. (incorporated by reference to Exhibit 10.6(c)
from the 1991 Form 10-K)
b Amendment to July 25, 1991 lease dated June 26, 1996
c Amendment to July 25, 1991 lease dated September 12,
1996
(items (b) and (c) incorporated by reference to Exhibits
10.19(b) and (c), respectively, from the 1996 Form 10-K)
d Office lease dated January 6, 1999 between 5055
Wilshire Limited Partnership and Playboy Enterprises,
Inc. (incorporated by reference to Exhibit 10.24(d)
from the 1998 Form 10-K)
10.21 Chicago Office Lease Documents
a Office Lease dated April 7, 1988 by and between
Playboy Enterprises, Inc. and LaSalle National Bank
as Trustee under Trust No. 112912 (incorporated by
reference to Exhibit 10.7(a) from the 1993 Form 10-K)
b First Amendment to April 7, 1988 lease dated October
26, 1989 (incorporated by reference to Exhibit
10.15(b) from the 1995 Form 10-K)
c Second Amendment to April 7, 1988 lease dated June 1,
1992 (incorporated by reference to Exhibit 10.1 from
the December 31, 1992 Form 10-Q
d Third Amendment to April 7, 1988 lease dated August
30, 1993 (incorporated by reference to Exhibit
10.15(d) from the 1995 Form 10-K)
e Fourth Amendment to April 7, 1988 lease dated August
6, 1996 (incorporated by reference to Exhibit
10.20(e) from the 1996 Form 10-K)
f Fifth Amendment to April 7, 1988 lease dated March
19, 1998 (incorporated by reference to Exhibit 10.3
from the March 31, 1998 Form 10-Q)
10.22 New York Office Lease Agreement dated August 11, 1992 between
Playboy Enterprises, Inc. and Lexington Building Co.
(incorporated by reference to Exhibit 10.9(b) from the 1992
Form 10-K)
10.23 Itasca Warehouse Lease Documents
a Agreement dated as of September 6, 1996 between
Centerpoint Properties Corporation and Playboy
Enterprises, Inc. (incorporated by reference to
Exhibit 10.23 from the 1996 Form 10-K)
b Amendment to September 6, 1996 lease dated June 1,
1997 (incorporated by reference to Exhibit 10.25(b)
from the 1997 Form 10-K)
*10.24 Selected Company Remunerative Plans
a Executive Protection Program dated March 1, 1990
(incorporated by reference to Exhibit 10.18(c) from
the 1995 Form 10-K)
b Amended and Restated Deferred Compensation Plan for
Employees effective January 1, 1998
c Amended and Restated Deferred Compensation Plan for
Board of Directors' effective January 1, 1998
(items (b) and (c) incorporated by reference to Exhibits
10.2(a) and (b), respectively, from the June 30, 1998 Form
10-Q)
*10.25 1989 Option Plan
a Playboy Enterprises, Inc. 1989 Stock Option Plan, as
amended, For Key Employees (incorporated by reference
to Exhibit 10.4(mm) from the 1991 Form 10-K)
63
<PAGE>
b Playboy Enterprises, Inc. 1989 Stock Option Agreement
c Letter dated July 18, 1990 pursuant to the June 7,
1990 recapitalization regarding adjustment of options
(items (b) and (c) incorporated by reference to Exhibits
10.19(c) and (d), respectively, from the 1995 Form 10-K) d
Consent and Amendment regarding the 1989 Option Plan
(incorporated by reference to Exhibit 10.4(aa) from the 1991
Form 10-K)
*10.26 1991 Directors' Plan
a Playboy Enterprises, Inc. 1991 Non-Qualified Stock
Option Plan for Non-Employee Directors, as amended
b Playboy Enterprises, Inc. 1991 Non-Qualified Stock
Option Agreement for Non-Employee Directors
(items (a) and (b) incorporated by reference to
Exhibits 10.4(rr) and (nn), respectively, from the
1991 Form 10-K)
*10.27 1995 Stock Incentive Plan
a Amended and Restated Playboy Enterprises, Inc. 1995
Stock Incentive Plan (incorporated by reference to
Exhibit 10.3 from the June 30, 1999 Form 10-Q)
b Form of Non-Qualified Stock Option Agreement for
Non-Qualified Stock Options which may be granted
under the Plan
c Form of Incentive Stock Option Agreement for
Incentive Stock Options which may be granted under
the Plan
d Form of Restricted Stock Agreement for Restricted
Stock issued under the Plan
(items (b), (c) and (d) incorporated by reference to Exhibits
4.3, 4.4 and 4.5, respectively, from the Company's
Registration Statement No. 33-58145 on Form S-8 dated March
20, 1995 (the "March 20, 1995 Form S-8"))
e Form of Section 162(m) Restricted Stock Agreement for
Section 162(m) Restricted Stock issued under the Plan
(incorporated by reference to Exhibit 10.1(e) from
the 1997 Form 10-K)
*10.28 1997 Directors' Plan
a 1997 Equity Plan for Non-Employee Directors of
Playboy Enterprises, Inc., as amended (incorporated
by reference to Exhibit 10.3(a) from the Transition
Period Form 10-K)
b Form of Restricted Stock Agreement for Restricted
Stock issued under the Plan (incorporated by
reference to Exhibit 10.1(b) from the September 30,
1997 Form 10-Q)
*10.29 Form of Nonqualified Option Agreement between Playboy
Enterprises, Inc. and each of Dennis S. Bookshester and Sol
Rosenthal (incorporated by reference to Exhibit 4.4 from the
Company's Registration Statement No. 333-30185 on Form S-8
dated November 13, 1996 (the "November 13, 1996 Form S-8"))
*10.30 Employee Stock Purchase Plan
a Playboy Enterprises, Inc. Employee Stock Purchase
Plan, as amended and restated (incorporated by
reference to Exhibit 10.2 from the March 31, 1997
Form 10-Q)
b Amendment to Playboy Enterprises, Inc. Employee Stock
Purchase Plan, as amended and restated (incorporated
by reference to Exhibit 10.4 from the June 30, 1999
Form 10-Q)
*10.31 Selected Employment, Termination and Other Agreements
a Playboy Enterprises, Inc. Severance Agreement
(incorporated by reference to Exhibit 10.4(vv) from
the 1991 Form 10-K)
b Employment Agreement dated May 21, 1992 between
Playboy Enterprises, Inc. and Anthony J. Lynn
(incorporated by reference to Exhibit 10.4(bbb) from
the 1992 Form 10-K)
c Amendment dated August 15, 1996 regarding the
Employment Agreement dated May 21, 1992 between
Playboy Enterprises, Inc. and Anthony J. Lynn
(incorporated by reference to Exhibit 10.25(i) from
the 1996 Form 10-K)
64
<PAGE>
d Agreement dated October 16, 1996 amending the
Employment Agreement dated May 21, 1992 between
Playboy Enterprises, Inc. and Anthony J. Lynn
e Playboy Enterprises, Inc. Incentive Compensation Plan
for Anthony J. Lynn
f Letter Agreement dated April 18, 1997 regarding
employment of Linda Havard
(items (d) through (f) incorporated by reference to Exhibits
10.3(a), (b) and (f), respectively, from the March 31, 1997
Form 10-Q)
g Letter Agreement dated September 25, 1997 regarding
employment of Helen Isaacson
h Letter Agreement dated September 26, 1997 regarding
employment of Garry Saunders
(items (g) and (h) incorporated by reference to Exhibits
10.5(a) and (b), respectively, from the September 30, 1997
Form 10-Q)
i Letter Agreement dated January 25, 1999 regarding
employment of Alex Mironovich (incorporated by
reference to Exhibit 10.1 from the Company's
quarterly report on Form 10-Q for the quarter ended
March 31, 1999 (the "March 31, 1999 Form 10-Q"))
@j 1999-2000 Special Incentive/Bonus Plans for Garry 90-91
Saunders
@21 Subsidiaries 92
@23.1 Consent of PricewaterhouseCoopers LLP 93
@23.2 Consent of Deloitte & Touche LLP 94
@27 Financial Data Schedule 95
@99 Playboy TV International, LLC Joint
Venture financial statements for the period
ended December 31, 1999 96-108
- --------------
* Indicates management compensation plan
# Certain information omitted pursuant to a request for confidential
treatment filed separately with and granted by the Securities and
Exchange Commission (the "SEC")
@ Filed herewith
65
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Board of Directors
Playboy Enterprises, Inc.
Our report on the consolidated financial statements of Playboy
Enterprises, Inc. and its Subsidiaries is included on page 51 of this Form 10-K
Annual Report. In connection with our audits of such financial statements, we
have also audited the related financial statement schedule listed in the index
on page 53 of this Form 10-K Annual Report.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 30, 2000
66
<PAGE>
<TABLE>
<CAPTION>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------------------------------------------------------------------------------------------------
Additions
----------------------------
Balance at Charged to Charged to Balance at
Beginning Cost and Other End
Description of Period Expenses Accounts Deductions of Period
- ---------------------------------------- ----------- ----------- ----------- ---------- -----------
Allowance deducted in the balance sheet
from the asset to which it applies:
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended December 31, 1999:
Allowance for doubtful accounts $ 6,349 $ 1,920 $ 11,670(a) $ 1,969(b) $ 17,970
=========== =========== =========== ========== ===========
Allowance for returns $ 21,644 $ - $ 56,024(c) $ 56,373(d) $ 21,295
=========== =========== ========== ========== ===========
Deferred tax asset valuation allowance $ 15,438 $ - $ 439(e) $ - $ 15,877
=========== =========== ========== ========== ===========
Fiscal Year Ended December 31, 1998:
Allowance for doubtful accounts $ 4,467 $ 2,371 $ 1,810(a) $ 2,299(b) $ 6,349
=========== =========== ========== ========== ===========
Allowance for returns $ 27,187 $ - $ 58,880(c) $ 64,423(d) $ 21,644
=========== =========== ========== ========== ===========
Deferred tax asset valuation allowance $ 16,504 $ - $ - $ 1,066(e) $ 15,438
=========== =========== ========== ========== ===========
Six-Month Transition Period
Ended December 31, 1997:
Allowance for doubtful accounts $ 3,882 $ 1,053 $ 702(a) $ 1,170(b) $ 4,467
=========== =========== ========== ========== ===========
Allowance for returns $ 22,747 $ - $ 32,774(c) $ 28,334(d) $ 27,187
=========== =========== ========== ========== ===========
Deferred tax asset valuation allowance $ 15,870 $ - $ 634(e) $ - $ 16,504
=========== =========== ========== ========== ===========
Fiscal Year Ended June 30, 1997:
Allowance for doubtful accounts $ 3,009 $ 1,241 $ 1,522(a) $ 1,890(b) $ 3,882
=========== =========== ========== ========== ===========
Allowance for returns $ 21,939 $ - $ 64,197(c) $ 63,389(d) $ 22,747
=========== =========== ========== ========== ===========
Deferred tax asset valuation allowance $ 27,971 $ - $ 1,385(e) $ 13,486(f) $ 15,870
=========== =========== ========== ========== ===========
<FN>
Notes:
(a) Represents primarily a $10,300 net provision charged to goodwill
related to the Spice acquisition in fiscal year 1999, and provisions
for unpaid subscriptions charged to net revenues.
(b) Represents uncollectible accounts less recoveries.
(c) Represents provisions charged to net revenues for estimated returns of
Playboy magazine, other domestic publishing products and domestic home
videos.
(d) Represents settlements on provisions previously recorded.
(e) Represents the unrealizable portion of the change in the gross deferred
tax asset.
(f) Represents a federal income tax benefit resulting from a change in the
realizability of the gross deferred tax asset.
</FN>
</TABLE>
67
AGREEMENT FOR
COMPRESSED TRANSPONDER SERVICES
THIS SERVICES AGREEMENT (the "Agreement") is made and entered into
effective as of March 15, 1999 and between Califa Entertainment Group, Inc.,
("Califa"), and Playboy Entertainment Group, Inc. ("Playboy"). (Califa and
Playboy are together referred to as the "Parties".)
RECITALS
WHEREAS, pursuant to a Transponder Service Agreement between Califa and
Loral Skynet ("Loral") dated February 8, 1998 (the "Loral Agreement") Califa
obtained transponder services on fully-protected transponder 5 (the
"Transponder") of the C-Band Telstar 5 satellite.
WHEREAS, the Service agreement shall not become effective until the
closing of that certain merger between Playboy Enterprises, Inc. and Spice
Entertainment Companies, Inc. ("Spice") (the "Closing").
WHEREAS, pursuant to Satellite Services Agreements, one between Califa and
Directrix, Inc. ("Directrix"), and the other between Playboy and Directrix,
Directrix shall, among other things, digitally compress the analog transponder
signal into multiple digital streams (the "Mandatory Services Agreements")
WHEREAS, the Mandatory Services Agreements shall not become effective
until the Closing.
WHEREAS, The Transponder signal shall be compressed into four (4) digital
steams, of which Playboy shall utilize three (3) streams and Califa shall
utilize one (1) stream, and Playboy and Califa shall share one (1) spare stream.
The parties intend to add additional capacity commencing at or about June 1,1999
that will increase the total channel capacity to eight (8) channels. Playboy
shall utilize four (4) of such eight (8) channels, and Califa shall utilize two
(2) of such eight (8) channels, and Playboy and Califa shall each have one (1)
spare stream exclusively. Playboy shall be solely entitled to any additional
capacity added thereafter.
WHEREAS, it shall be a condition precedent to the effectiveness of this
Agreement that the Closing occur.
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, the Parties hereby agree as
follows:
1. Provision of Services. Califa hereby agrees to provide 24 hour a day
transponder services to Playboy for digitally compressed television channels on
the Transponder (such services are referred to as the "Compressed Transponder
Services").
2. Term. The Compressed Transponder Services shall be effective simultaneously
with the Loral Agreement and shall continue up to and including the termination
date of the Loral Agreement with Loral (the "Term"), unless terminated earlier
as provided herein.
3. Service Fees; Option for Additional Services.
3.1 Playboy shall pay service fees ("Fee") to Califa during the Term for
the Compressed Transponder Services of Seventy-Two Thousand, Five Hundred
Dollars ($72,500) payable monthly to Califa, prorated for any period of less
than a month. Fees shall be payable five days in advance of each month during
the Term. Playboy may, at its sole discretion, opt to increase the
<PAGE>
channel capacity on the Transponder, in which case Playboy agrees to solely bear
such cost, as well as the cost of any additional capacity thereafter, provided
that Playboy shall be entitled to all such additional capacity other than the
one (1) additional stream (bringing Califa's total channel capacity to two
channels) and the one (1) spare stream to be utilized exclusively by Califa, as
mentioned hereinabove. In the event that Playboy opts to not increase channel
capacity, then Califa shall have the right to a second digital stream on the
Transponder commencing no later than June 1, 1999.
3.2 Califa agrees that it shall not exercise the option to acquire
capacity on an additional transponder pursuant to paragraph 3.1 of the Loral
Agreement without prior written consent from Playboy, and that any additional
capacity acquired on another transponder shall be deemed automatically assigned
to Playboy hereunder. Califa shall, upon Playboy's request, however, exercise
such option. Playboy shall remit to Califa the fees set forth in the Loral
Agreement for any additional capacity.
4. Representations and Warranties.
4.1 Califa and Playboy each represents and warrants to the other that (i)
each is organized and validly existing under the laws of the State of their
formation, (ii) each has all necessary power and authority to enter into this
Agreement and has taken all requisite corporate action, as appropriate, to
approve the execution, delivery, and performance of this Agreement, and (iii)
this Agreement constitutes a legal, valid, and binding obligation of the Parties
in" accordance with its terms.
4.2 Califa hereby represents and warrants that the Service Agreement shall
be in full force and effect as of the date of the Closing and Califa has not
received any notices from any third party to the contrary.
5. Limitation of Liability.
5.1 Neither Party to this Agreement shall be held liable or responsible
for the degradation or failure or any Compressed Transponder Services or
signals, contracts, obligations, or facilities if caused by an act of God,
weather, fire, flood, epidemic, earthquake, casualty, lockout, boycott, strike
or other labor dispute, riot, civil commotion, failure or technical
difficulties, acts of public enemy, enactment, order, rule, or action of any
international, federal, state or local government agency, or instrumentality,
failure of electrical or telephone power transmission lines or facilities, or
any other cause beyond the reasonable control of either Party. Upon the
happening of any of the above-described events, the Parties shall promptly
notify each other of said event and shall thereafter use their best efforts to
perform their obligations pursuant to this Agreement.
5.2 Except as otherwise provided for in 6.3, both Parties expressly
acknowledge and agree that in no event shall a Party be liable to any third
party whatsoever in contract, tort, or any other theory at law, or in equity,
for any damages of any nature arising out of any breach or alleged breach by
such Party of its obligations under this Agreement, including but not limited
to, the use by Playboy of the Compressed Transponder Service, as provided
herein.
5.3 Neither party shall, under the foregoing or any other circumstances,
be liable for incidental, consequential or special damages, including, without
limitation, loss of profits or revenues, damage to or loss of personal property
or claim of the other party.
6. Indemnification.
2
<PAGE>
6.1 Playboy and Califa shall each indemnify, defend and forever hold the
other, its affiliated corporations and other entities, partners, officers,
directors, employees and agents (collectively the "Indemnitees") harmless from
all liabilities, claims, costs, damages and expenses (including without
limitation, reasonable counsel fees of counsel of the applicable party's choice)
(collectively "Claims") of third parties arising from the performance of each
party hereunder, provided that in each case where such indemnification is
sought:
a) the Indemnitee promptly notifies the other of the Claim to which the
indemnification relates;
b) the party giving indemnification rights to the other shall control
fully any litigation, compromise, settlement or other resolution or
disposition of such Claim; and
c) the Indemnitee fully cooperates with the reasonable requests of the
other party in its defense of such claim.
6.2. Notwithstanding the above, Playboy's indemnification of Califa will
be valid in the event of a prosecution or claim involving an allegation of
violation of the laws insofar as the content of the any channel for which
Playboy is utilizing the Compressed Transponder services is concerned, only in
the event each of the following conditions is met:
a) Immediate telephone contact be made with both the General Counsel's
office of Playboy in Chicago at (312) 751-8000 and Playboy's President in
Beverly Hills at (310) 246-4000, or other numbers hereafter specified by
Playboy. Such telephone notification should be immediately followed with a
letter containing copies of all papers that have been served and giving
complete information then available regarding the incident.
b) Playboy shall have the right to approve Califa's choice of counsel and
to determine in advance the terms of retention.
c) Playboy will assist in defended actions only and will not be
responsible in cases where there is any admission of guilt by anyone
charged with violation of the law as to the content of Service
programming. Settlement or dismissal of any case will not be allowed,
except with Playboy's prior written consent.
d) Actual or prospective parties involved in such prosecution shall make
no voluntary disclosure regarding support or lack thereof by Playboy under
this policy.
7. Termination. This agreement shall terminate prior to the expiration of the
Term only in the event that the Loral Agreement is terminated. Califa shall not
have the right to terminate the Loral Agreement for any reason, including for
reasons of Loral's breach, without prior written approval of Playboy. In the
event that any circumstances arise pursuant to the Loral Agreement that allow
Califa to terminate the Agreement, including for Loral's failure to meet the
performance standards set forth therein, Califa shall be obligated to terminate
the Loral Agreement if so requested by Playboy and seek transponder services
from another provider approved by Playboy.
8. General Provisions.
10.1 Counterparts. This agreement may be executed in one or more
counterpart copies. Each counterpart copy shall constitute an agreement and all
of the counterpart copies shall constitute one fully executed agreement. This
Agreement may be executed on facsimile counterparts. The signature of any party
to any counterpart shall be deemed a signature to, and may be appended to, any
other counterpart.
3
<PAGE>
10.2 Assignment. Califa may not assign this Agreement without Playboy's
prior written consent. Furthermore, Califa agrees that Playboy shall have the
option, exercisable at any time upon the payment of Five Thousand Dollars
($5,000) consideration, to compel Califa to assign Califa's rights and
obligations under the Loral Agreement (provided Loral consents to such
assignment as provided in the Loral agreement) to a third party designated by
Playboy. In the event Califa's rights and obligations under the Loral agreement
are assigned to another party, this Agreement shall be deemed automatically
assigned by Califa to such other party. Playboy may assign this Agreement
provided prompt notice of such assignment is provided to Califa of such
assignment.
10.3 Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto, and may not be modified or changed except in a
writing executed by all parties hereto. This Agreement supersedes any prior
written or oral understanding between the parties. Each party acknowledges that
it is entering into this Agreement in reliance only upon the provisions herein
set forth, and not upon any covenants, representations, warranties or other
considerations not set forth herein.
10.4 Governing Law. This Agreement shall be governed by and interpreted
under the laws of the State of California.
10.5 Notices. All notices or other formal communications under this
Agreement must be in writing. They may be sent by personal delivery, facsimile,
prepaid recognized overnight air express delivery or prepaid certified mail,
return receipt requested. The notices and other formal communications should be
sent to the attention of the following persons:
(a) Playboy: 9242 Beverly Blvd., 3rd Floor, Beverly Hills, CA
90210
Attn. Jim English
With a copy to: Bill Tillson, 2467 Nalin Drive, Los Angeles,
CA 90077
(b) Califa: 15500 Erwin Street, Suite 247, Van Nuys, CA 91411;
Attn: Steve Hirsch
With a copy to: Lipsitz, Green, Gahringer, Roll, Salisbury and
Cambria,
42 Delaware Avenue, Suite 300, Buffalo, NY 14202
Attn: Paul Cambria, Esq.
10.6 Headings, etc. Paragraph headings are for convenience only. If any
provision of this Agreement is prohibited or unenforceable in any jurisdiction,
the provision shall, as to that jurisdiction only, be ineffective to the extent
of the prohibition or unenforcability without invalidating the remaining
provisions.
10.7 No Waiver. No waiver of any provision of this Agreement by either
party shall be deemed to be a waiver of any other provision hereof, or of any
subsequent similar breach or default by the other. All remedies hereunder shall
be cumulative and not exclusive.
10.8 Relationship of Parties. It is expressly understood and agreed that
the execution and performance of this Agreement shall not be construed to create
a relationship between the Parties as partners, joint ventures, or as principal
and agent. Neither Party shall have any authority to bind the other in any
fashion.
10.9. Severability. In the event any provision or portion of this
Agreement shall be deemed invalid, canceled, or unenforceable, the remaining
rights and obligations of the Parties
4
<PAGE>
under this Agreement shall remain in full force and effect and shall be
construed and enforced accordingly.
10.10 Confidentiality. Neither Playboy nor Califa shall disclose to any
third party (other than its respective employees, in their capacity as such),
without the other party's written approval, any information with respect to the
terms and provisions of this Agreement except: (i) to the extent necessary to
comply with law or the valid order of a court of competent jurisdiction, in
which event the party making such disclosure shall so notify the other and shall
seek confidential treatment of such information, (ii) as part of its normal
reporting or review procedure to its parent company, its auditors and its
attorneys, provided, however, that such parent company, auditors and attorneys
agree to be bound by the provisions of this paragraph and (iii) in order to
enforce its rights pursuant to this Agreement.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed by their respective duly authorized officers.
CALIFA ENTERTAINMENT GROUP, INC.
By: /s/ Steven Hirsch
----------------------------------
Name: Steven Hirsch
--------------------------------
Title: President
-------------------------------
Date: 3/11/99
--------------------------------
AGREED TO AND ACCEPTED BY:
PLAYBOY ENTERTAINMENT GROUP, INC.
By: /s/ Anthony J. Lynn
----------------------------------
Name: Anthony J. Lynn
--------------------------------
Title: President
-------------------------------
Date: 3/10/99
--------------------------------
FIRST AMENDMENT dated as of June 14,1999 (this
"Amendment") to the Credit Agreement dated as of February 26,
1999, among PLAYBOY ENTERPRISES, INC. (formerly known as New
Playboy, Inc.), a Delaware corporation (the "Company"), PET
HOLDINGS, INC., a Delaware corporation and wholly owned
subsidiary of the Company ("PHI"), the Lenders (as defined in
Article I thereof), and CREDIT SUISSE FIRST BOSTON, a bank
organized under the laws of Switzerland, acting through its
New York Branch ("CSFB"), as administrative agent (in such
capacity, the "Administrative Agent"), as collateral agent
(in such capacity, the "Collateral Agent"), and as issuing
bank (in such capacity, the "Issuing Bank").
A. The Company and PHI have requested that the Lenders enter into
this Amendment to amend certain provisions of the Credit Agreement. The Lenders
are willing to enter into this Amendment, subject to the terms and conditions of
this Amendment.
B. Capitalized terms used and not otherwise defined herein shall
have the meanings assigned to them in the Credit Agreement.
Accordingly, in consideration of the agreements, provisions and
consents herein contained, the parties hereto hereby agree as follows:
SECTION 1. Amendment to Section 1.01 of the Credit Agreement.
Section 1.01 of the Credit Agreement is hereby amended by adding the following
new definitions in their proper alphabetical order:
"'First Amendment Effective Date' shall mean the date on which each
condition to effectiveness set forth in Section 9 of the First Amendment dated
as of June 14, 1999 to this Agreement has been satisfied."
"'Option' shall mean a call option the value of which is a function
of the value of the Philadelphia Semiconductor index and the relevant exercise
price."
"'Options Transactions' shall mean the simultaneous purchase of
approximately 15,000 Options and sale of an equal number of Options, in each
case (a) with the same expiry date, (b) with an exercise price not in excess of
$35 for the initial transaction and not in excess of $40 in any subsequent
transactions, (c) with an exercise price not in excess of $5 less or greater
than that of the offsetting Options for the initial transaction and not in
excess of $10 less or greater than that of the offsetting Options in any
subsequent transactions and (d) in the case of the initial transaction,
purchased or sold at a time when the Philadelphia Semiconductor Index is valued
at not less than $350."
"'Unhedged Exposure' shall mean that at any time prior to the expiry
of any Options, the Company fails to hold a like number of offsetting Options
meeting all the requirements set forth in the definition of 'Options
Transactions.'"
<PAGE>
2
SECTION 2. Amendment to Section 5.10 of the Credit Agreement.
Section 5.10 of the Credit Agreement is hereby amended by deleting "90th"
therefrom and replacing it with "135th".
SECTION 3. Amendment to Article V of the Credit Agreement. Article V
of the Credit Agreement is hereby amended by inserting at the end thereof the
following:
"SECTION 5.12. Payment of Fees and Expenses. Within 30 days after
the First Amendment Effective Date pay to the Administrative Agent all fees and
other amounts due and payable in connection with the First Amendment dated as of
June 14, 1999 to this Agreement, including, to the extent invoiced,
reimbursement or payment of all out-of-pocket expenses."
SECTION 4. Amendment to Section 6.01 of the Credit Agreement.
Section 6.01 of the Credit Agreement is hereby amended by inserting immediately
following the phrase "under Section 5.10" in clause (f) thereof the following:
", incurred as part of the Options Transactions (to the extent such
transactions constitute Hedging Agreements)".
SECTION 5. Amendment to Section 6.02 of the Credit Agreement.
Section 6.02 of the Credit Agreement is hereby amended by deleting the word
"and" from clause (s) thereof, and by deleting the period at the end of clause
(t) thereof and replacing it with the following:
"; and (u) the Lien on the Options granted to Bear, Stearns & Co.
Inc. (or one of its Affiliates) pursuant to the OTC Agreement as part of the
Options Transactions."
SECTION 6. Amendment to Section 6.04 of the Credit Agreement.
Section 6.04 of the Credit Agreement is hereby amended by deleting the word
"and" from clause (p) thereof, and by deleting the period at the end of clause
(q) thereof and replacing it with the following:
"and (r) during the period of 90 days immediately following the
First Amendment Effective Date, investments by the Company made as part of the
Options Transactions in an aggregate amount not to exceed $20,000,000."
SECTION 7. Amendment to Article VI of the Credit Agreement. Article
VI of the Credit Agreement is hereby amended by inserting at the end thereof the
following:
"SECTION 6.18. Unhedged Exposure. Permit at any time Unhedged
Exposure in connection with the Options Transactions."
SECTION 8. Representations and Warranties. Each of the Company and
PHI hereby represents and warrants to each Lender, on and as of the First
Amendment Effective Date, that:
<PAGE>
3
(a) This Amendment has been duly authorized, executed and delivered
by each of the Company and PHI, and each of this Amendment and the Credit
Agreement as amended by this Amendment constitutes a legal, valid and binding
obligation of each of the Company and PHI, enforceable in accordance with its
terms.
(b) After giving effect to this Amendment, no Event of Default or
Default will have occurred and be continuing.
SECTION 9. Conditions to Effectiveness. This Amendment shall become
effective when the following conditions are satisfied:
(a) The Administrative Agent shall have received counterparts hereof
executed by the Company, PHI and the Required Lenders.
(b) The Administrative Agent shall have received a certificate,
dated the First Amendment Effective Date and signed by a Financial Officer of
the Company, confirming that after giving effect to this Amendment (i) the
representations and warranties set forth in Article III of the Credit Agreement
are true and correct in all material respects, with the same effect as though
made on and as of the First Amendment Effective Date, except to the extent that
such representations and warranties expressly relate to an earlier date, and
(ii) no Default or Event of Default has occurred and is continuing.
SECTION 10. Applicable Law. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 11. Counterparts. This Amendment may be executed in two or
more counterparts, each of which shall constitute an original but all of which
when taken together shall constitute but one contract.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their respective authorized officers as of the day and year
first written above.
PLAYBOY ENTERPRISES, INC.
(formerly known as New Playboy, Inc.),
by
/s/ Robert D. Campbell
-----------------------------------------
Name: Robert D. Campbell
Title: V.P., Treasurer
<PAGE>
4
PEI HOLDINGS, INC.,
by
/s/ Robert D. Campbell
-----------------------------------------
Name: Robert D. Campbell
Title: Treasurer
CREDIT SUISSE FIRST BOSTON,
individually and as Administrative Agent,
Collateral Agent and Issuing Bank,
by
-----------------------------------------
Name:
Title:
by
-----------------------------------------
Name:
Title:
ING (U.S.) CAPITAL LLC, individually and
as Syndication Agent,
by
-----------------------------------------
Name:
Title:
LASALLE NATIONAL BANK,
by
-----------------------------------------
Name:
Title:
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION,
by
-----------------------------------------
Name:
Title:
SECOND AMENDMENT dated as of January 31, 2000 (this
"Amendment"), to the Credit Agreement dated as of February 26,
1999 (the "Credit Agreement"), among PLAYBOY ENTERPRISES,
INC., a Delaware corporation (the "Company"), PEI HOLDINGS,
INC., a Delaware corporation and wholly owned subsidiary of
the Company ("PHI"), the financial institutions from time to
time party thereto (the "Lenders") and CREDIT SUISSE FIRST
BOSTON, a bank organized under the laws of Switzerland, acting
through its New York branch, as administrative agent (in such
capacity, the "Administrative Agent"), as collateral agent and
as issuing bank.
A. The parties hereto have entered into the Credit Agreement,
pursuant to which the Lenders have agreed to extend credit to the Borrower (as
defined in the Credit Agreement) on the terms and subject to the conditions set
forth therein.
B. The Company and PHI have requested that the Lenders agree to
amend certain provisions of the Credit Agreement, and the Lenders are willing,
on the terms and subject to the conditions set forth below, to amend the Credit
Agreement as provided herein.
C. Capitalized terms used and not otherwise defined herein shall
have the meanings assigned to them in the Credit Agreement.
Accordingly, in consideration of the mutual agreements herein
contained and other good and valuable consideration, the sufficiency and receipt
of which are hereby acknowledged, the parties hereto hereby agree as follows:
SECTION 1. Amendment of Credit Agreement. The Credit Agreement is
hereby amended as follows:
(a) The Table of Contents of the Credit Agreement is hereby amended
(i) by replacing the words "Annual EBITDA" following "SECTION 6.13" with
"[deleted]" and (ii) by inserting at the end of the list of Exhibits to the
Credit Agreement the following:
"EXHIBIT J Form of Subordination Agreement".
(b) The table in the definition of "Applicable Percentage" in
Section 1.01 of the Credit Agreement is hereby deleted and replaced with the
following table:
Eurodollar ABR
Consolidated Leverage Ratio Spread Spread
- --------------------------- ------ ------
Category 1
- ----------
Greater than or equal to 5.00 to 1.00 3.50% 2.50%
Category 2
- ----------
Less than 5.00 to 1.00 but greater than or equal to 4.00 to 3.25% 2.25%
<PAGE>
Eurodollar ABR
Consolidated Leverage Ratio Spread Spread
- --------------------------- ------ ------
1.00
Category 3
- ----------
Less than 4.00 to 1.00 but greater than or equal to 3.00 to 3.00% 2.00%
1.00
Category 4
- ----------
Less than 3.00 to 1.00 2.75% 1.75%
(c) The definition of "Asset Sale" in Section 1.01 of the Credit
Agreement is amended by (i) inserting in clause (vi)(y), after the words "in the
business of the Borrower or the Restricted Subsidiaries within nine months", the
words "(or 36 months, in the case of a Catalog Operations Sale)" and (ii)
inserting in the final sentence thereof, after the words "the aggregate amount
of Net Cash Proceeds", the words "(other than Net Cash Proceeds resulting from a
Catalog Operations Sale)".
(d) The definition of "Consolidated EBITDA" in Section 1.01 of the
Credit Agreement is amended by (i) deleting therefrom the phrase "(x) the
Playboy International Rights Acquisition Fee for such period," and (ii)
replacing clause (ii) of the last sentence thereof with the following:
"(ii) following a Catalog Operations Sale, for any four-fiscal
quarter period that includes a fiscal quarter ending on or prior to
December 31, 2000, Consolidated EBITDA for such period shall be
increased by the product of (x) $1,800,000 and (y) a fraction, the
numerator of which is the number of days in fiscal year 2000
included in such four-fiscal quarter period which occurred after the
consummation of the Catalog Operations Sale and the denominator of
which is three hundred sixty six and (iii) Consolidated EBITDA for
any period shall be increased by the amount of restructuring costs
incurred on or after December 1, 1999 in connection with workforce
reductions to the extent such costs have actually been paid by the
Company and the Restricted Subsidiaries in such period; provided,
that any such increase, together with all other increases made in
the same period or any other period pursuant to this clause (iii),
shall not exceed $3,000,000 in the aggregate.
(e) The definition of "Consolidated Fixed Charge Coverage Ratio" in
Section 1.01 of the Credit Agreement is hereby amended by (i) deleting the word
"Adjusted" in clause (i) thereof, (ii) replacing "and" with a comma at the end
of clause (vi) thereof, (iii) inserting, at the end of clause (vii) thereof
before the final parenthetical phrase in such definition, "and (viii) cash
investments in programming during such period", and (iv) changing "(vii)" to
"(viii)" in the final parenthetical phrase thereof.
(f) The definition of "Playboy Online" is amended by deleting
"Playboy Online, Inc." and replacing such phrase with "Playboy.com, Inc."
(g) The following definitions are added to Section 1.01 of the
Credit Agreement in their appropriate alphabetical positions:
"Catalog Operations Sale" shall mean any sale, transfer or other
disposition of all or substantially all of the catalog sales operations
conducted by Critics' Choice Video, Inc. and the
<PAGE>
3
assets and property used to conduct such operations (it being understood that
such assets and property include, but are not limited to, leasehold interests of
Playboy Enterprises International, Inc. and the Company used by Critics' Choice
Video, Inc.).
"SAG Liens" shall mean Liens granted to the Screen Actors Guild by the
Borrower or any Subsidiary in specific items of Product to secure amounts
payable by the Borrower or such Subsidiary to members of the Screen Actors Guild
in respect of the production of such items of Product.
"Second Amendment Effective Date" shall mean the date on which the
amendments provided for in Section 1 of the Second Amendment dated as of January
31, 2000, to this Agreement become effective.
"Subordination Agreement" shall mean a subordination agreement
substantially in the form of Exhibit J hereto, together with such other changes
as the Collateral Agent may deem appropriate.
(h) The following new paragraph (j) is inserted at the end of
Section 2.09 of the Credit Agreement:
(j) The aggregate Revolving Credit Commitments shall be decreased
(i) by $5,000,000 on the Second Amendment Effective Date and (ii) by an
additional $5,000,000 upon the closing of any sale of Equity Interests of
Playboy Online to a person other than the Company or a Subsidiary
consisting of an underwritten primary initial public offering (other than
a public offering pursuant to a registration statement on Form S-8) of the
common stock of Playboy Online pursuant to an effective registration
statement filed with the Securities and Exchange Commission in accordance
with the Securities Act of 1933, as amended (whether alone or in
connection with a secondary public offering).
(i) Section 2.13(c) of the Credit Agreement is amended by (A)
deleting from clause (i) thereof the phrase "in an aggregate amount not greater
than $25,000,000", (B) deleting from clause (ii) thereof the phrase "minus the
aggregate Net Cash proceeds of Equity Issuances referred to in the preceding
clause (i)" and (C) inserting in clause (ii) thereof after the words "the
Company and Restricted Subsidiaries that" the phrase ", after subtracting any
such Net Cash Proceeds used to prepay Term Loans on the Second Amendment
Effective Date,".
(j) Section 2.13(d) of the Credit Agreement is amended by deleting
the date "December 31, 1999" and inserting in its place "December 31, 2000".
(k) Section 6.02(m) of the Credit Agreement is amended by inserting
the phrase "(including SAG Liens)" after the word "Liens" therein.
(l) Section 6.04(e) of the Credit Agreement is amended to read as
follows:
<PAGE>
4
"(e) investments in and loans and advances to Playboy Online that
are (A) made during the fiscal year ended December 31, 1999 and that do
not exceed $6,500,000 in the aggregate or (B) made after December 31, 1999
but prior to the initial public offering of Equity Interests of Playboy
Online and that do not exceed $10,000,000 in the aggregate".
(m) Section 6.04(j) of the Credit Agreement is amended to read as
follows:
"(j) investments in and loans and advances to Restricted
Subsidiaries to procure assets, properties or contract rights to be used
in gaming operations, but only to the extent such investments, loans and
advances are made with and do not in the aggregate exceed the cash
proceeds received by the Borrower from a Catalog Operations Sale to
persons other than the Company and the Subsidiaries after the Second
Amendment Effective Date".
(n) Clause (c) of Section 6.05 of the Credit Agreement is amended by
the insertion at the end thereof of the following proviso:
"; provided, that a Catalog Operations Sale may be made for consideration
consisting of cash or publicly-traded Equity Interests in other persons
and shall not be subject to or included in the computation of such
$10,000,000 limit".
(o) The text of Section 6.13 of the Credit Agreement is hereby
replaced with "[deleted]".
(p) The table appearing in Section 6.14 of the Credit Agreement is
hereby replaced with the following table and text:
Date Ratio
----- -----
March 31, 2000 5.95 to 1.00
June 30, 2000 5.95 to 1.00
September 30, 2000 5.95 to 1.00
December 31, 2000 5.95 to 1.00
March 31, 2001 5.95 to 1.00
June 30, 2001 5.75 to 1.00
September 30, 2001 5.50 to 1.00
December 31, 2001 4.50 to 1.00
March 31, 2002 4.00 to 1.00
June 30, 2002 3.50 to 1.00
September 30, 2002 and thereafter 3.00 to 1.00
Notwithstanding the definition of "Consolidated Adjusted EBITDA", in
determining the Consolidated Leverage Ratio, (i) Consolidated Adjusted EBITDA
for the period of three fiscal quarters ended December 31, 1999 shall be deemed
to total $21,000,000 for the purpose of calculating Consolidated Adjusted EBITDA
for the period of four fiscal quarters ended March 31, 2000, (ii) Consolidated
Adjusted EBITDA for the period of two fiscal quarters
<PAGE>
5
ended December 31, 1999 shall be deemed to total $23,000,000 for the purpose of
calculating Consolidated Adjusted EBITDA for the period of four fiscal quarters
ended June 30, 2000, and (iii) Consolidated Adjusted EBITDA for the fiscal
quarter ended December 31, 1999 shall be deemed to be $15,000,000 for the
purpose of calculating Consolidated Adjusted EBITDA for the period of four
fiscal quarters ended September 30, 2000."
(q) The table appearing in Section 6.15 of the Credit Agreement is
hereby replaced with the following table:
Date Ratio
----- -----
March 31, 2000 1.75 to 1.00
June 30, 2000 1.75 to 1.00
September 30, 2000 1.75 to 1.00
December 31, 2000 1.60 to 1.00
March 31, 2001 1.65 to 1.00
June 30, 2001 1.75 to 1.00
September 30, 2001 2.00 to 1.00
December 31, 2001 2.25 to 1.00
March 31, 2002 2.50 to 1.00
June 30, 2002 2.75 to 1.00
September 30, 2002 and thereafter 3.00 to 1.00
Notwithstanding the definition of "Consolidated Adjusted EBITDA", in
determining the Consolidated Interest Expense Coverage Ratio under this Section
6.15, (i) Consolidated Adjusted EBITDA for the period of three fiscal quarters
ended December 31, 1999 shall be deemed to total $21,000,000 for the purpose of
calculating Consolidated Adjusted EBITDA for the period of four fiscal quarters
ended March 31, 2000, (ii) Consolidated Adjusted EBITDA for the period of two
fiscal quarters ended December 31, 1999 shall be deemed to total $23,000,000 for
the purpose of calculating Consolidated Adjusted EBITDA for the period of four
fiscal quarters ended June 30, 2000, and (iii) Consolidated Adjusted EBITDA for
the fiscal quarter ended December 31, 1999 shall be deemed to be $15,000,000 for
the purpose of calculating Consolidated Adjusted EBITDA for the period of four
fiscal quarters ended September 30, 2000. In determining the Consolidated
Interest Expense Coverage Ratio under this Section 6.15 for the periods of four
fiscal quarters ended March 31, 2000, June 30, 2000 and September 30, 2000,
respectively, Consolidated Interest Expense for such periods shall be deemed to
be (i) the actual Consolidated Interest Expense for the fiscal quarter ended
March 31, 2000, multiplied by four, (ii) the actual Consolidated Interest
Expense for the period of two fiscal quarters ended June 30, 2000, multiplied by
two, and (iii) the actual Consolidated Interest Expense for the period of three
fiscal quarters ended September 30, 2000, multiplied by four thirds,
respectively."
(r) The table appearing in Section 6.16 of the Credit Agreement is
hereby replaced with the following table:
<PAGE>
6
Date Ratio
----- -----
Prior to March 31, 2001 Unlimited
March 31, 2001 0.90 to 1.00
June 30, 2001 0.90 to 1.00
September 30, 2001 0.90 to 1.00
December 31, 2001 1.00 to 1.00
March 31, 2002 1.00 to 1.00
June 30, 2002 1.10 to 1.00
September 30, 2002 1.20 to 1.00
December 31, 2002 and thereafter 1.25 to 1.00
(s) Article VIII of the Credit Agreement is amended by the insertion
at the end of the first paragraph thereof of the following sentence: "The Agents
are further expressly authorized, at their discretion, to execute Subordination
Agreements or other instruments or agreements recognizing the subordination of
the Liens created by the Security Documents to Liens permitted under paragraphs
(m), (p) and (r) of section 6.02 ."
(t) A new Exhibit J, in the form of Exhibit J to this Amendment, is
hereby added to the Credit Agreement.
SECTION 2. Representations and Warranties. Each of the Company and
PHI represents and warrants to each Lender that, on and as of the date hereof,
and after giving effect to the amendments provided for in Section 1 of this
Amendment:
(a) The representations and warranties set forth in Article III of
the Credit Agreement are true and correct in all material respects with
the same effect as if made on and as of the date hereof, except to the
extent such representations and warranties expressly relate to an earlier
date.
(b) No Event of Default or Default has occurred and is continuing.
SECTION 3. Effectiveness. This Amendment shall become effective upon
the execution of counterparts of the signature pages hereto by the Company, PHI,
the Administrative Agent and Lenders constituting the Required Lenders;
provided, that the amendments set forth in Section 1 shall not become effective
until each of the following conditions precedent shall have been satisfied, and
if any of such conditions shall not have been satisfied by February 3, 2000,
then the provisions of Section 1 shall terminate and cease to be of any force or
effect:
(a) The Administrative Agent shall have received from the Borrower
immediately available funds in the amount of $15,000,000 as a prepayment,
without premium or penalty, of the Term Loans. It is agreed that such
prepayment shall be applied ratably to the outstanding Tranche A Term
Borrowings and Tranche B Term Borrowings, and that the amounts allocated
to each of the Tranche A Term Borrowings and the Tranche B Term Borrowings
shall be applied (i) first, to satisfy the installments of principal due
in respect of the Term Borrowings of such class during calendar year
<PAGE>
7
2000 and then (ii) pro rata against the remaining scheduled installments
of principal due in respect of the Term Borrowings of such class;
provided, that any amounts that but for this proviso would be used to
prepay Tranche B Term Loans of Lenders listed on Schedule I hereto in
accordance with clause (ii) above, shall be applied to prepay Tranche A
Term Loans in accordance with this sentence.
(b) The Borrower shall have prepaid Revolving Loans to the extent
required under Section 2.13(i) of the Credit Agreement as a result of the
reduction in the Revolving Credit Commitments on the Second Amendment
Effective Date pursuant to Section 2.09(j) of the Credit Agreement as
amended hereby.
(c) The Borrower shall have paid to the Administrative Agent, for
the account of each Lender that shall have executed this Amendment at or
prior to noon New York City time on January 31, 2000, in immediately
available funds, an amendment fee equal to .25% of the aggregate
outstanding Term Loans, Revolving Credit Exposure and unused Revolving
Credit Commitment of such Lender on the date hereof (determined after
giving effect to the prepayments and Commitment reductions that will occur
on the Second Amendment Effective Date, as provided for herein).
(d) The Administrative Agent shall have received (i) such evidence
as the Administrative Agent or Cravath, Swaine & Moore, counsel to the
Administrative Agent, shall reasonably have requested as to the corporate
power and authority of the Company and PHI to enter into and perform their
obligations under this Amendment and (ii) an opinion from each of Paul,
Weiss, Rifkind, Wharton & Garrison, special counsel for the Company and
PHI, and Howard Shapiro, Esq., General Counsel of the Company, in each
case reasonably satisfactory in form and substance to the Administrative
Agent and to Cravath, Swaine & Moore.
The Administrative Agent shall notify the Lenders of the satisfaction of the
foregoing conditions, and such notice shall, in the absence of manifest error,
conclusively evidence the satisfaction of such conditions.
SECTION 4. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK.
SECTION 5. Expenses. The Borrower shall pay all reasonable
out-of-pocket fees and expenses incurred by the Administrative Agent in
connection with the preparation, negotiation, execution and delivery of this
Amendment, including, but not limited to, the reasonable fees, disbursements and
other charges of Cravath, Swaine & Moore, counsel to the Administrative Agent.
SECTION 6. Counterparts. This Amendment may be executed in any
number of counterparts, each of which shall be an original but all of which,
when taken together, shall constitute but one instrument. Delivery of an
executed counterpart of a signature page of this
<PAGE>
8
Amendment by facsimile transmission shall be as effective as delivery of a
manually executed counterpart of this Amendment.
SECTION 7. Headings. Section headings used herein are for
convenience of reference only, are not part of this Amendment and are not to
affect the construction of, or to be taken into consideration in interpreting,
this Amendment.
SECTION 8. Effect of Amendment. Except as specifically stated
herein, the Credit Agreement shall continue in full force and effect in
accordance with the provisions thereof. As used therein, the terms "Agreement",
"herein", "hereunder", "hereinafter", "hereto", "hereof" and words of similar
import shall, unless the context otherwise requires, refer to the Credit
Agreement as modified hereby. Upon effectiveness of this Amendment in accordance
with Section 3, the Required Lenders hereby waive any failure by the Borrower to
comply prior to the Second Amendment Effective Date with the covenants in
Sections 6.13, 6.14, 6.15 and 6.16.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their respective authorized officers as of the date first
above written.
PLAYBOY ENTERPRISES, INC,
by /s/ Robert D. Campbell
-------------------------------------
Name: Robert D. Campbell
Title: Sr. Vice President, Treasurer
PEI HOLDINGS, INC.,
by /s/ Robert D. Campbell
-------------------------------------
Name: Robert D. Campbell
Title: Treasurer
CREDIT SUISSE FIRST BOSTON, individually
and as Administrative Agent, Collateral
Agent and Issuing Bank,
by /s/ Bill O'Daly
-------------------------------------
Name: Bill O'Daly
Title: Vice President
by /s/ Kristen Lepri
-------------------------------------
Name: Kristen Lepri
Title: Associate
<PAGE>
BANK OF AMERICA, N.A.,
by /s/ Peter J. Gates Jr.
-------------------------------------
Name: Peter J. Gates Jr.
Title: Vice President
EATON VANCE SENIOR INCOME TRUST,
By EATON VANCE MANAGEMENT as Investment
Advisor,
by /s/ Payson F. Swaffield
-------------------------------------
Name: Payson F. Swaffield
Title: Vice President
FIRST DOMINION FUNDING II,
by /s/ Andrew Marshak
-------------------------------------
Name: Andrew Marshak
Title: Authorized Signator
FRANKLIN FLOATING RATE TRUST,
by /s/ Chauncey Lufkin
-------------------------------------
Name: Chauncey Lufkin
Title: Vice President
MOUNTAIN CAPITAL CLO I LTD.,
by /s/ Darren P. Riley
-------------------------------------
Name: Darren P. Riley
Title: Director
GALAXY CLO 1999-1, LTD.,
by /s/ Sabur Moini
-------------------------------------
Name: Sabur Moini
Title: Authorized Signatory
<PAGE>
HARRIS TRUST & SAVINGS BANK,
by /s/ Scott F. Geik
-------------------------------------
Name: Scott F. Geik
Title: Managing Director
ING BANK,
by /s/ William James
-------------------------------------
Name: William James
Title: Vice President
KZH ING-2 LLC,
by /s/ Peter Chin
-------------------------------------
Name: Peter Chin
Title: Authorized Agent
KZH ING-3 LLC,
by /s/ Peter Chin
-------------------------------------
Name: Peter Chin
Title: Authorized Agent
KZH SOLEIL-2 LLC,
by /s/ Peter Chin
-------------------------------------
Name: Peter Chin
Title: Authorized Agent
LASALLE BANK N.A.,
by /s/ Kyle Freimuth
-------------------------------------
Name: Kyle Freimuth
Title: Assistant Vice President
PPM AMERICA, INC., as Attorney-in-fact, on
behalf of Jackson National Life Insurance
Company,
by /s/ John Walding
-------------------------------------
Name: John Walding
<PAGE>
Title: Managing Director
PPM SPYGLASS FUNDING TRUST,
by /s/ Kelly C. Walker
-------------------------------------
Name: Kelly C. Walker
Title: Authorized Agent
<PAGE>
SENIOR DEBT PORTFOLIO
by BOSTON MANAGEMENT AND RESEARCH as
Investment Advisor,
by /s/ Payson F. Swaffield
-------------------------------------
Name: Payson F. Swaffield
Title: Vice President
SRF TRADING, INC.,
by /s/ Kelly C. Walker
-------------------------------------
Name: Kelly C. Walker
Title: Vice President
STEIN ROE FLOATING RATE LIMITED LIABILITY
COMPANY,
by /s/ James R. Fellows
-------------------------------------
Name: James R. Fellows
Title: Vice President, Stein Roe &
Farnham Incorporated, as
Advisor to the Stein Roe
Floating Rate Limited
Liability Company
EATON VANCE INSTITUTIONAL SENIOR LOAN FUND,
by: Eaton Vance Management as Investment
Advisor
by /s/ Payson F. Swaffield
-------------------------------------
Name: Payson F. Swaffield
Title: Vice President
<PAGE>
13
Schedule I
Declining Lenders
None.
- --------------------------------------------------------------------------------
1999 - 2000 SPECIAL INCENTIVE/BONUS PLANS
Garry Saunders
- --------------------------------------------------------------------------------
The two-part incentive/bonus plan approved by the Board of Directors is
effective for 1999.
ANNUAL INCENTIVE PLAN
The annual incentive portion of the plan is based 50% on PEI financial
performance as defined for the Management Incentive Plan and 50% on Casino
Gaming Operating Income with a maximum opportunity of $100,000. This
portion of the plan is reviewed and subject to change each year consistent
with the incentive plan for all senior managers. Payouts under this plan
will be calculated and paid as soon after the plan year-end as the
financial objectives can be measured and the outside audit is completed.
SPECIAL BONUS PLAN
The Special Bonus Plan is effective for calendar years 1999 and 2000.
Payouts will be made annually at the same time as the annual incentive
plan and will be based on the achievement of the performance measures
defined on the matrix for that calendar year.
The award for the opening of the property is payable if the property opens
during the term of the contract period, i.e., on or before 12/31/2000.
The profit participation award is a one-time payment based on operating
and non-operating income for each project. The award is payable if the
project reaches its expected profit level within the first twelve months
of operation and is based on a percentage of Playboy's portion of the
total profits. The project must be completed during the term of the
contract period.
ELIGIBILITY
The participant must be an active employee (i.e., not on a Leave of
Absence, either medical or personal, not on Special Compensation or Salary
Continuation) on the last day of the calendar year to be eligible for the
bonus earned for that year.
If the participant is terminated for cause, performance or resigns, that
participant will not be eligible for any bonus earned in the calendar year
the termination or resignation took place.
Playboy reserves the right to change, modify or terminate this plan, with or
without notice, in whole or in part, at any time.
<PAGE>
PLAYBOY ENTERPRISES, INC.
SPECIAL BONUS PLAN
CALENDAR YEARS 1999 AND 2000
GARRY SAUNDERS
<TABLE>
<CAPTION>
===================================================================================
PROJECTED PLAYBOY PROFIT
-----------------------------------------------------------------------------------
$1M<$2M $2M<$3M $3M<$5M $5M<$10M
-----------------------------------------------------------------------------------
(Assume $2M Profit) (Assume $3M Profit) (Assume $4M Profit) (Assume $8M Profit)
=========================================================================================================================
<S> <C> <C> <C> <C>
Bonus $60,000 $80,000 $100,000 $200,000
Signed Contract
- -------------------------------------------------------------------------------------------------------------------------
Bonus $20,000 $40,000 $60,000 $120,000
Opening of Property (prior to
12/31/2000)
- -------------------------------------------------------------------------------------------------------------------------
Total Bonus $80,000 $120,000 $160,000 $320,000
=========================================================================================================================
Profit Participation=1% of profit if $20,000 $30,000 $40,000 $80,000
expected profit achieved within first
12 months of operation.
- -------------------------------------------------------------------------------------------------------------------------
Total Payout: $100,000 $150,000 $200,000 $400,000
-------- -------- -------- --------
=========================================================================================================================
========================
PROJECTED PLAYBOY PROFIT
------------------------
$10M and over
------------------------
(Assume $12M Profit)
===============================================================
<S> <C>
Bonus $300,000
Signed Contract
- ---------------------------------------------------------------
Bonus $170,000
Opening of Property (prior to
12/31/2000)
- ---------------------------------------------------------------
Total Bonus $470,000
===============================================================
Profit Participation=1% of profit if $130,000
expected profit achieved within first
12 months of operation.
- ---------------------------------------------------------------
Total Payout: $600,000
--------
===============================================================
</TABLE>
All bonuses based on Playboy's portion of the profit levels (projected and
achieved). Profit participation based on operating and non-operating income.
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
EXHIBIT 21
SUBSIDIARIES
The accounts of all of the subsidiaries are included in the Company's
Consolidated Financial Statements. Set forth below are the names of certain
active corporate subsidiaries of the Company as of December 31, 1999. Certain
subsidiaries are omitted because, when considered individually or in the
aggregate, they would not constitute a significant subsidiary.
Indented names are subsidiaries of the company under which they are indented:
<TABLE>
<CAPTION>
Percent
Jurisdiction in Ownership
which Incorporated By Immediate
Name of Company or Organized Parent
- --------------- ------------ ------
<S> <C> <C>
Playboy Enterprises, Inc. (parent) Delaware
PEI Holdings, Inc. Delaware 100%
Spice Entertainment, Inc. Delaware 100%
CPV Productions, Inc. Delaware 100%
Cyberspice, Inc. Delaware 100%
MH Pictures, Inc. California 100%
SEI 4 ApS Denmark 100%
Spice Direct, Inc. Delaware 100%
Spice International, Inc. Delaware 100%
Spice Networks, Inc. New York 100%
Spice Productions, Inc. Nevada 100%
Playboy Enterprises International, Inc. Delaware 100%
Critics' Choice Video, Inc. Illinois 100%
EuroEast Publishing Ventures, B.V. Inc. The Netherlands 100%
Lake Shore Press, Inc. Delaware 100%
Lifestyle Brands, Ltd. Delaware 100%
Playboy International, Inc. Delaware 100%
Playboy Australia Pty. Ltd. Australia 100%
Playboy Clubs International, Inc. Delaware 100%
Playboy Preferred, Inc. Illinois 100%
Playboy Entertainment Group, Inc. Delaware 100%
AdulTVision Communications, Inc. Delaware 100%
After Dark Video, Inc. Delaware 100%
Alta Loma Distribution, Inc. Delaware 100%
Alta Loma Entertainment, Inc. California 100%
Impulse Productions, Inc. Delaware 100%
Indigo Entertainment, Inc. Illinois 100%
Mystique Films, Inc. California 100%
Precious Films, Inc. California 100%
Women Productions, Inc. California 100%
Playboy.com, Inc. Delaware 100%
Playboy Gaming International, Ltd. Delaware 100%
Playboy Cruise Gaming, Inc. Florida 100%
Playboy Gaming Nevada, Inc. Nevada 100%
Playboy Japan, Inc. Delaware 100%
Playboy Models, Inc. Illinois 100%
Playboy Products and Services International, B.V. The Netherlands 100%
Playboy Properties, Inc. Delaware 100%
SEI, Inc. ApS Denmark 100%
Playboy Shows, Inc. Delaware 100%
Special Editions, Ltd. Delaware 100%
Telecom International, Inc. Florida 100%
VIPress Poland Sp. z o.o. Poland 82%
</TABLE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements on Form S-8 (File No. 333-30185) and Form S-8 POS (File No.
333-74451, as amended) of our report dated March 30, 2000, on our audit of the
consolidated financial statements and financial statement schedule of Playboy
Enterprises, Inc. as of December 31, 1999 and 1998, and for the fiscal years
ended December 31, 1999 and 1998, the six-month transition period ended December
31, 1997, and the fiscal year ended June 30, 1997, which report is included in
this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 30, 2000
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-30185 on Form S-8 and No. 333-74451, as amended, on Form S-8 POS of Playboy
Enterprises, Inc of our report dated March 24, 2000 on the consolidated
financial statements of Playboy TV International, LLC. as of December 31, 1999
and for the period from August 31, 1999 (date of commencement) to December 31,
1999, appearing in this Annual Report on Form 10-K of Playboy Enterprises, Inc.
for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 23,528
<SECURITIES> 3,064
<RECEIVABLES> 46,408
<ALLOWANCES> 5,738
<INVENTORY> 23,831
<CURRENT-ASSETS> 188,810
<PP&E> 33,218
<DEPRECIATION> 23,803
<TOTAL-ASSETS> 429,402
<CURRENT-LIABILITIES> 119,671
<BONDS> 75,000
0
0
<COMMON> 245
<OTHER-SE> 161,036
<TOTAL-LIABILITY-AND-EQUITY> 429,402
<SALES> 347,817
<TOTAL-REVENUES> 347,817
<CGS> 277,448
<TOTAL-COSTS> 334,929
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,977
<INCOME-PRETAX> (6,430)
<INCOME-TAX> (862)
<INCOME-CONTINUING> (5,568)
<DISCONTINUED> 233
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,335)
<EPS-BASIC> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
Exhibit 99
---------------------------------------------------------------
PLAYBOY TV INTERNATIONAL, LLC
AND SUBSIDIARIES
Consolidated Financial Statements as of December 31, 1999 and
for the Period from August 31, 1999 (Date of Commencement)
through December 31, 1999 and Independent Auditors' Report
---------------------------------------------------------------
<PAGE>
PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(in thousands)
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,436
Accounts receivable, net 7,689
Programming rights 11,232
Other current assets 252
-------
Total current assets 21,609
PROPERTY AND EQUIPMENT, net 1,258
PROGRAMMING RIGHTS, net 41,471
INVESTMENT IN UNCONSOLIDATED SUBSIDIARY, at cost 3,306
INTANGIBLE AND OTHER ASSETS, net 21,426
-------
TOTAL $89,070
=======
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, accrued expenses and other
current liabilities $ 4,634
Due to related parties 2,852
Current portion of rights acquisition fee payable 7,500
-------
Total current liabilities 14,986
RIGHTS ACQUISITION FEE PAYABLE, net of current portion 45,717
COMMITMENTS AND CONTINGENCIES (Note 8)
OWNERS' EQUITY 28,367
-------
TOTAL $89,070
=======
See notes to consolidated financial statements.
1
<PAGE>
PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE PERIOD FROM AUGUST 31, 1999 (DATE OF COMMENCEMENT) THROUGH DECEMBER
31, 1999
(in thousands)
- --------------------------------------------------------------------------------
REVENUES:
Program licensing $ 5,893
Direct-to-home-subscriber fees 2,205
Cable subscriber fees 971
Advertising 113
Other 221
--------
Total revenues 9,403
--------
COSTS AND EXPENSES:
Programming, production and related 1,494
Selling, general and administrative 5,551
Amortization of programming rights 3,456
Other amortization and depreciation 646
Interest expense 1,285
--------
Total costs and expenses 12,432
--------
NET LOSS (3,029)
COMPREHENSIVE INCOME - Foreign currency translation 189
--------
COMPREHENSIVE LOSS $ (2,840)
========
See notes to consolidated financial statements.
2
<PAGE>
PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OWNERS' EQUITY
FOR THE PERIOD FROM AUGUST 31, 1999 (DATE OF COMMENCEMENT) THROUGH DECEMBER
31, 1999
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Victoria Playboy Other
Springs Entertainment Comprehensive
Investments, Ltd. Group, Inc. Income Total
<S> <C> <C> <C> <C>
INITIAL CASH CAPITAL CONTRIBUTIONS $ 33,996 $ 8,446 $ -- $ 42,442
Adjustment for historical carryover basis (See Note 1) -- (11,235) -- (11,235)
Foreign currency transalation -- -- 189 189
Net loss (2,426) (603) -- (3,029)
-------- -------- -------- --------
BALANCE, DECEMBER 31, 1999 $ 31,570 $ (3,392) $ 189 $ 28,367
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM AUGUST 31, 1999 (DATE OF COMMENCEMENT) THROUGH DECEMBER
31, 1999
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITES:
Net loss $ (3,029)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 4,102
Accretion of interest expense 1,285
Changes in operating assets and liabilities:
Accounts receivable (4,443)
Other assets (342)
Programming rights (8,644)
Accounts payable, accrued expenses and other current liabilities 1,748
Due to related parties (1,018)
--------
Net cash used in operating activities (10,341)
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (1,164)
Net cash acquired in acquisition 1,310
--------
Net cash provided by investing activities 146
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Initial cash capital contributions 42,442
Payment of rights acquisition fee payable (30,000)
--------
Net cash provided by financing activities 12,442
--------
EFFECT OF FOREIGN CURRENCY TRANSLATION 189
--------
CASH AND CASH EQUIVALENTS, DECEMBER 31, 1999 $ 2,436
========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES - Acquisition of certain net assets
as described in Note 1
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM AUGUST 31, 1999 (DATE OF COMMENCEMENT) THROUGH DECEMBER 31,
1999
- --------------------------------------------------------------------------------
1. GENERAL AND ORGANIZATION
General - Playboy TV International, LLC ("PTVI") and subsidiaries
(collectively the "Company") was created to own and operate on an
exclusive basis adult-oriented television services worldwide outside of
North America under the Playboy TV and Spice brand names. The Company
presently owns and operates an adult-oriented television service in the
United Kingdom. The Company also owns a minority interest (19.9%) in an
adult-oriented television service in Japan. The Company derives a majority
of its revenues from the licensing of programming rights. The Company also
generates a significant portion of its revenues from fees charged to cable
system and direct-to-home ("DTH") operators who distribute the Company's
branded television channels.
The Company's business plan provides for operating losses in the initial
years, requires further capital contributions, and is ultimately expected
to result in positive cash flow. The funding of the capital requirements
of the Company are established annually in connection with the approval of
the business plan and annual budget, which under the operating agreement
has proportional voting and veto rights. There can be no assurance,
however, that the Company's business plan and cash flow projections will
be met.
Organization - PTVI was formed in June 1999 by Victoria Springs
Investments, Inc. ("VSI") and Playboy Entertainment Group, Inc. ("PEGI")
with initial cash capital contributions of $33.9 million and $8.4 million,
respectively. VSI acquired an 80.1% interest in the Company and PEGI
acquired a 19.9% interest. PEGI has the right to increase its interest in
the Company to 50% by buying such additional interest from VSI for cash.
The net income or loss of the Company is allocated to the owners in
accordance with their respective ownership interests.
On August 31, 1999 (Date of Commencement) the Company entered into several
agreements in which, among other things, PTVI acquired certain assets,
subject to certain liabilities, from PEGI and PEGI's parent company,
including the right to use certain trademarks for a specified number of
years (see Note 6) and a 100% ownership interest in a subsidiary in the
United Kingdom ("UK Subsidiary"). The following is a summary of the assets
acquired, liabilities assumed and consideration given (in thousands):
Cash $ 1,310
Accounts receivable 3,246
Programming rights 47,515
Property and equipment 174
Investment in unconsolidated subsidiary 3,306
Intangible assets 12,063
-------
Total assets acquired 67,614
-------
5
<PAGE>
Accounts payable, accrued expenses
and other current liabilities - assumed 2,886
Due to related parties - assumed 3,870
Rights acquisition fee payable 81,932
--------
Total consideration 88,688
--------
Excess of consideration
Adjustment for historical carryover basis 21,074
(11,235)
--------
Excess cost over net assets acquired (goodwill) $ 9,839
========
The above transaction was recorded in the accompanying consolidated
financial statements by carrying over PEGI's historical basis in the net
assets sold to the extent that PEGI continues to have an interest in those
assets (i.e. 19.9%). The net assets attributable to VSI were recorded at
their estimated fair market value.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements of the
Company include the accounts of PTVI and its wholly-owned subsidiaries.
All significant intercompany balances and transactions have been
eliminated in consolidation.
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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Foreign Currency Translation - The accounts of the UK Subsidiary were
translated into United States dollars in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 52, Foreign
Currency Translation. Management has determined that the pound is the
functional currency of the UK Subsidiary. Certain assets and liabilities
of the UK Subsidiary are denominated in currencies other than the
functional currency; transaction gains and losses on these assets and
liabilities are included in the results of operations for the relevant
period.
6
<PAGE>
Cash and Cash Equivalents - Cash and cash equivalents include cash and
interest-bearing deposits held in banks with an original maturity date of
three months or less when acquired.
Allowance for Doubtful Accounts Receivable - The Company carries accounts
receivable at the amount it deems to be collectible. Accordingly, the
Company provides allowances for accounts receivable deemed to be
uncollectible based on management's best estimates. Recoveries are
recognized in the period they are received. The ultimate amount of
accounts receivables that become uncollectible could differ from those
estimated. As of December 31, 1999 the allowance for doubtful accounts
receivable amounted to $0.1 million.
Programming Rights - Programming rights consists of the rights to
broadcast and distribute acquired programming. The programming rights are
amortized on varying bases related to the license periods, anticipated
usage and the expected revenues to be derived from the licensing of rights
to third parties. In the event that an acquired program is replaced and no
longer used or determined to have no future licensing value, the Company
will reduce the carrying value of programming rights accordingly. The
programming rights are segregated on the balance sheet between current and
non-current based on management's estimate of usage. As of December 31,
1999 accumulated amortization of programming rights amounted to $3.5
million.
Property and Equipment - Property and equipment is stated at cost and is
depreciated using the straight-line method over the estimated useful lives
of the respective assets, which range from three to five years. Leasehold
improvements are amortized over the lesser of the term of the lease or the
useful life of the respective improvement (from 4 to 5 years).
Investment in Unconsolidated Subsidiary - Investment in unconsolidated
subsidiary consists of a 19.9% minority interest in an adult-oriented
television service in Japan. The Company accounts for this investment
under the cost method of accounting.
Intangible Assets - Intangible assets primarily consist of trademarks and
goodwill resulting from the net assets acquired as described in Note 1.
The trademarks are amortized on a straight-line basis over their
contractual life of ten years. Goodwill is amortized on a straight-line
basis over an estimated life of twenty years. The carrying value of
intangible assets is periodically reviewed by the Company and impairments,
if any, are recognized when the expected future undiscounted cash flows
derived from such intangible assets are less than their carrying value.
Measurement of any impairment loss would be based on discounted operating
cash flows.
Revenue Recognition - Revenues from program licensing are recognized when
the license period begins and a contractual obligation exists. The Company
enters into distribution agreements with cable and DTH distributors
pursuant to which it receives a monthly license fee, typically based on
the number of subscribers. Revenues from this monthly license fee are
recorded as the Company provides the television signal to the distributor.
Advertising revenue is recognized at the time the advertisement is aired.
For the period from August 31, 1999 (Date of Commencement) through
December 31, 1999 revenues from any one customer exceeding ten percent of
total revenues amounted to $2.1 million (22%); $1.5 million (16%); and
$1.4 million (15%).
7
<PAGE>
Income Taxes - PTVI is not subject to income taxes. The income or loss of
PTVI is passed directly to the owners for inclusion in their tax returns.
PTVI's subsidiaries that are subject to income taxes account for them in
accordance with the provisions of SFAS No. 109, Accounting for Income
Taxes. SFAS No. 109 requires an asset and liability approach for
differences in financial accounting and income tax purposes. Under this
method, a deferred tax asset or liability is recognized with respect to
all temporary differences between the carrying amounts and the tax bases
of assets and liabilities, and the benefit from utilizing tax loss
carryforwards and asset tax credits is recognized in the year in which the
loss or credit arise (subject to a valuation allowance with respect to any
tax benefits not expected to be realized). As of December 31, 1999 there
were no significant deferred tax assets or liabilities.
Advertising Costs - Advertising costs are expensed as incurred. For the
period from August 31, 1999 (Date of Commencement) through December 31,
1999, advertising expense amounted to $0.9 million.
Comprehensive Income (Loss) - The Company complies with the provisions of
SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes
standards for reporting comprehensive income (loss) and its components in
the financial statements. Comprehensive income (loss) as defined, includes
all changes in equity during a period from non-owner sources.
New Accounting Pronouncement - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133"). Among other provisions, SFAS No.
133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It also requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. In June
1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement
No. 137 ("SFAS No. 137"). SFAS No. 137 deferred the effective date of
adoption of SFAS No. 133 to fiscal years beginning after June 15, 2000.
Management has not determined what impact, if any, the adoption of SFAS
No. 133 will have on the Company's financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31, 1999
(in thousands):
Furniture and equipment $ 536
Leasehold improvements 802
----------
Total 1,338
Less accumulated depreciation and amortization (80)
----------
Property and equipment, net $ 1,258
==========
8
<PAGE>
4. INTANGIBLE AND OTHER ASSETS
Intangible assets consists of the following as of December 31, 1999 (in
thousands):
Trademarks $ 11,995
Goodwill 9,839
Other 158
----------
Total 21,992
Less accumulated amortization (566)
----------
Intangible assets, net $ 21,426
==========
5. RIGHTS ACQUISITION FEE PAYABLE
The rights acquisition fee payable arose in connection with the net assets
acquired as described in Note 1. The rights acquisition fee is
non-interest bearing and has been recorded at its present value using an
imputed interest rate of 8.25%. The rights acquisition fee matures as
follows (in thousands):
2000 $ 7,500
2001 5,000
2002 7,500
2003 25,000
2004 25,000
--------
Total gross payments 70,000
Less amounts representing interest (16,783)
--------
Present value of net future rights
acquisition fee payments 53,217
Less current portion of rights acquisition fee (7,500)
--------
Rights acquisition fee, net of current portion $ 45,717
========
6. RELATED PARTY TRANSACTIONS
Program Supply Agreement - On August 31, 1999 the Company and PEGI entered
into a program supply agreement in which PEGI agreed to license to the
Company all of the programs to be produced by PEGI, or for which PEGI
obtains the rights, as specified by the agreement ("Annual Output"). In
exchange for the rights to the Annual Output, the Company will pay to PEGI
a license fee to be generally determined as a percentage of the cost of
the Annual Output. For the period from August 31, 1999 (Date of
Commencement) through December 31, 1999 the Company purchased $8.6 million
of Annual Output pursuant to this agreement.
9
<PAGE>
Trademark Agreement - The Company has entered into a trademark license
agreement with PEGI's parent company ("Licensor") in which the Company has
been granted the right to use certain trademarks. The license fee for the
trademark license granted for years one through ten were included in the
purchase price as discussed in Note 1. Beginning in year eleven and for
each fiscal year through the end of the agreement (year fifty) the Company
agrees to pay to the Licensor a license fee to be determined as a
percentage of the Company's total revenues as specified in the agreement.
Management Services - Cisneros Television Services, Inc. ("CTSI"), an
affiliated entity, performs certain "back office" management services for
the Company. Included in selling, general and administrative expense for
the period from August 31, 1999 (Date of Commencement) through December
31, 1999 is $30,000 for management services provided by CTSI. As of
December 31, 1999 this amount had not been paid and was included in the
balance of due to related parties.
Due to Related Parties - As of December 31, 1999, the Company had
liabilities to related parties amounting to approximately $2.9 million.
These liabilities are primarily due to PEGI and relate to amounts due for
the purchase of Annual Output, as described above, and a liability to PEGI
assumed as part of the acquisition of net assets described in Note 1.
These amounts do not bear interest and are expected to be paid within a
year.
Revenues - For the period from August 31, 1999 (Date of Commencement)
through December 31, 1999 the Company recognized program license revenues
in the amount of $2.6 million from two affiliates. Included in accounts
receivable as of December 31, 1999 is $2.3 million due from these
affiliates.
7. GEOGRAPHICAL INFORMATION
Revenues - The Company's sales were made to customers located in, or for
distribution in, the following countries for the period from August 31,
1999 (Date of Commencement) through December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Direct-to
Home Cable
Program Subscriber Subscriber Advertising
Licensing Fees Fees and Other Total
--------- ---------- ------ ------------ ------
<S> <C> <C> <C> <C> <C>
United Kingdom $ 95 $1,454 $ 768 $ 213 $2,530
Germany 1,455 -- -- -- 1,455
Latin America 1,573 -- -- -- 1,573
Spain and Portugal 530 -- -- -- 530
Turkey 425 -- -- -- 425
Japan 520 -- -- -- 520
Israel 340 -- -- -- 340
Scandinavia 367 -- -- -- 367
Poland 210 -- -- -- 210
Other 378 751 203 121 1,453
------ ------ ------ ------ ------
Total revenues $5,893 $2,205 $ 971 $ 334 $9,403
====== ====== ====== ====== ======
</TABLE>
10
<PAGE>
Foreign Assets - Identifiable assets are those assets which are identified
with operations of a particular geographic area. Corporate assets include
cash and cash equivalents and goodwill generated as a result of the
acquisition of net assets described in Note 1. As of December 31, 1999
identifiable assets and corporate assets of the UK Subsidiary amounted to
$3.4 million and $8.2 million, respectively.
8. COMMITMENTS AND CONTINGENCIES
Leases - The Company's headquarter offices are leased through an
affiliate. In addition, the Company leases transponders and office space
in the United Kingdom. Future minimum lease payments under these
noncancellable operating lease agreements are as follows for each of the
years (in thousands):
2000 $ 2,530
2001 1,159
2002 740
2003 743
2004 363
Thereafter --
-------
Total $ 5,535
=======
For the period from August 31, 1999 (Date of Commencement) through
December 31, 1999 total lease expense for transponder and office space
amounted to $0.9 million.
Contingent Acquisition Payment - As part of the acquisition of the UK
subsidiary, the Company assumed a contingent liability in the amount of
approximately $10 million payable to the predecessor stockholders (prior
to PEGI) of the UK subsidiary. This amount is payable from the profits of
the UK subsidiary and is therefore contingent upon the ability of the UK
subsidiary to make profits as defined in the applicable agreement. As of
December 31, 1999 the Company has not recorded any liability in connection
with this contingency as it has not concluded that it is probable that any
payments will ultimately need to be made.
* * * * * * *
11
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Owners of Playboy TV International, LLC.:
We have audited the accompanying consolidated balance sheet of Playboy TV
International, LLC. and subsidiaries (the "Company") as of December 31, 1999,
and the related consolidated statements of operations and comprehensive loss, of
owners' equity and of cash flows for the period from August 31, 1999 (date of
commencement) through December 31, 1999. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1999
and the results of its operations and its cash flows for the period from August
31, 1999 (date of commencement) through December 31, 1999, in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
March 24, 2000
