UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .................... to ....................
Commission file number 001-14790
Playboy Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-4249478
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
680 North Lake Shore Drive, Chicago, IL 60611
(Address of principal executive offices) (Zip Code)
(312) 751-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
As of April 30, 2002, there were 4,864,102 shares of Class A common stock,
par value $0.01 per share, and 21,168,025 shares of Class B common stock, par
value $0.01 per share, outstanding.
PLAYBOY ENTERPRISES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the Quarters Ended March 31,
2002 and 2001 (Unaudited) 3
Condensed Consolidated Balance Sheets at March 31,
2002 (Unaudited) and December 31, 2001 4
Condensed Consolidated Statements of Cash Flows for the
Quarters Ended March 31, 2002 and 2001 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
2
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
for the Quarters Ended March 31 (Unaudited)
(In thousands, except per share amounts)
2002 2001
-----------------------------------------------------------------------------------------
Net revenues $ 66,147 $ 65,410
-----------------------------------------------------------------------------------------
Costs and expenses
Cost of sales (49,890) (57,962)
Selling and administrative expenses (14,008) (12,338)
Loss on disposal -- (100)
-----------------------------------------------------------------------------------------
Total costs and expenses (63,898) (70,400)
-----------------------------------------------------------------------------------------
Operating income (loss) 2,249 (4,990)
-----------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 39 284
Interest expense (4,472) (2,633)
Minority interest (421) 4
Equity in operations of Playboy TV International, LLC and other 49 459
Other, net (377) (386)
-----------------------------------------------------------------------------------------
Total nonoperating expense (5,182) (2,272)
-----------------------------------------------------------------------------------------
Loss before income taxes and cumulative effect of change
in accounting principle (2,933) (7,262)
Income tax expense (6,454) (314)
-----------------------------------------------------------------------------------------
Loss before cumulative effect of change in accounting principle (9,387) (7,576)
Cumulative effect of change in accounting principle (net of tax) -- (4,218)
-----------------------------------------------------------------------------------------
Net loss (9,387) (11,794)
-----------------------------------------------------------------------------------------
Other comprehensive income (loss) (net of tax)
Unrealized gain (loss) on marketable securities 41 (292)
Derivative gain 448 128
Foreign currency translation gain -- 50
-----------------------------------------------------------------------------------------
Total other comprehensive income (loss) 489 (114)
-----------------------------------------------------------------------------------------
Comprehensive loss $ (8,898) $(11,908)
=========================================================================================
Basic and diluted weighted average number
of common shares outstanding 24,540 24,281
=========================================================================================
Basic and diluted earnings per common share
Loss before cumulative effect of change in accounting principle $ (0.38) $ (0.32)
Cumulative effect of change in accounting principle (net of tax) -- (0.17)
-----------------------------------------------------------------------------------------
Net loss $ (0.38) $ (0.49)
=========================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
March 31, Dec. 31,
2002 2001
------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 520 $ 4,610
Marketable securities 3,223 3,182
Receivables, net of allowance for doubtful accounts of
$6,323 and $6,406, respectively 33,987 41,846
Receivables from related parties 13,141 12,417
Inventories, net 11,775 13,962
Deferred subscription acquisition costs 12,618 12,111
Other current assets 6,170 7,857
------------------------------------------------------------------------------------------------
Total current assets 81,434 95,985
------------------------------------------------------------------------------------------------
Receivables from related parties 50,000 50,000
Property and equipment, net 10,090 10,749
Programming costs 57,360 56,213
Goodwill 112,143 112,338
Trademarks 52,293 52,185
Distribution agreements acquired, net of accumulated amortization
of $3,299 and $2,199, respectively 25,201 26,301
Other noncurrent assets 21,648 22,469
------------------------------------------------------------------------------------------------
Total assets $ 410,169 $ 426,240
================================================================================================
Liabilities
Financing obligations $ 5,324 $ 8,561
Financing obligations to related parties 15,000 15,000
Acquisition liability 31,603 21,023
Accounts payable 18,822 19,293
Accounts payable to related parties 56 169
Accrued salaries, wages and employee benefits 4,019 8,717
Deferred revenues 50,318 47,913
Deferred revenues from related parties 8,513 8,382
Other liabilities and accrued expenses 17,585 18,453
------------------------------------------------------------------------------------------------
Total current liabilities 151,240 147,511
------------------------------------------------------------------------------------------------
Financing obligations 65,186 73,017
Financing obligations to related parties 5,000 5,000
Acquisition liability 31,777 41,079
Deferred revenues from related parties 43,925 44,350
Net deferred tax liabilities 11,441 5,313
Other noncurrent liabilities 28,631 28,445
------------------------------------------------------------------------------------------------
Total liabilities 337,200 344,715
------------------------------------------------------------------------------------------------
Shareholders' equity
Common stock, $0.01 par value
Class A voting - 7,500,000 shares authorized; 4,864,102 issued 49 49
Class B nonvoting - 30,000,000 shares authorized; 19,950,577
and 19,930,142 issued, respectively 200 199
Capital in excess of par value 123,378 123,090
Accumulated deficit (46,312) (36,925)
Unearned compensation restricted stock (2,966) (3,019)
Accumulated other comprehensive loss (1,380) (1,869)
------------------------------------------------------------------------------------------------
Total shareholders' equity 72,969 81,525
------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 410,169 $ 426,240
================================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Quarters Ended March 31 (Unaudited)
(In thousands)
2002 2001
-----------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (9,387) $(11,794)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation of property and equipment 1,091 974
Amortization of intangible assets 1,812 2,084
Equity in operations of Playboy TV International, LLC and other (49) (459)
Loss on disposal -- 100
Cumulative effect of change in accounting principle -- 4,218
Deferred income taxes 6,128 --
Amortization of investments in entertainment programming 9,352 9,389
Net change in operating assets and liabilities 7,343 (1,505)
Investments in entertainment programming (10,551) (10,277)
Other, net 727 (36)
-----------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 6,466 (7,306)
-----------------------------------------------------------------------------------------------
Cash flows from investing activities
Payments for acquisition (61) --
Proceeds from disposals 1,118 163
Additions to property and equipment (451) (914)
Other, net 3 3
-----------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 609 (748)
-----------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from financing obligations -- 5,000
Repayment of financing obligations (4,568) (800)
Net proceeds from (payments on) revolving credit facility (6,500) 2,750
Payment of financing fees (250) --
Proceeds from stock plans 153 245
Other, net -- (207)
-----------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (11,165) 6,988
-----------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (4,090) (1,066)
Cash and cash equivalents at beginning of period 4,610 2,534
-----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 520 $ 1,468
===============================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) BASIS OF PREPARATION
The financial information included in these financial statements is
unaudited but, in the opinion of management, reflects all normal recurring
adjustments necessary for a fair presentation of the results for the interim
periods. The interim results of operations and cash flows are not necessarily
indicative of those results and cash flows for the entire year. These financial
statements should be read in conjunction with the financial statements and notes
to the financial statements contained in our Annual Report on Form 10-K, as
amended, for the fiscal year ended December 31, 2001. Certain amounts reported
for prior periods have been reclassified to conform to the current year's
presentation.
(B) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
On July 1, 2001, we adopted certain provisions of Statement of Financial
Accounting Standards No. 141, Business Combinations, or Statement 141, and on
January 1, 2002, we adopted the full provisions of Statement 141 and Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
or Statement 142. Under the new rules, goodwill and intangible assets with
indefinite lives are no longer amortized but are subject to annual impairment
tests. Other intangible assets continue to be amortized over their useful lives.
Amortization expense related to these intangible assets over each of the next
five years, beginning in 2002, is expected to aggregate approximately $7.2
million, $3.8 million, $1.1 million, $0.6 million and $0.5 million,
respectively. During the quarter, we completed the first of the required
impairment tests for goodwill and indefinite-lived intangible assets which did
not result in an impairment charge. However, deferred tax liabilities related to
these assets now will be realized only if there is a disposition or an
impairment of the value of the intangible assets. We currently have net
operating loss carryforwards, or NOLs, available to offset deferred tax
liabilities realized within the NOL carryforward period. However, we cannot be
certain that NOLs will be available when the deferred tax liabilities related to
these intangible assets are realized. Therefore, in the current year quarter, we
recorded a noncash income tax provision of $6.1 million for these deferred tax
liabilities. Of this amount, $5.8 million was a cumulative effect charge,
although it is not allowed to be reported as a "Cumulative effect of change in
accounting principle."
The following table represents the pro forma effects as if we had adopted
Statement 142 as of January 1, 2001 (in thousands, except per share amounts):
(Unaudited)
Quarters Ended
March 31,
----------------------
2002 2001
-----------------------------------------------------------------------------------------------------------
Net loss
As reported $(9,387) $(11,794)
Amortization of goodwill and indefinite-lived intangible assets (net of tax) -- 1,467
Income tax provision 5,816 (6,128)
-----------------------------------------------------------------------------------------------------------
Pro forma $(3,571) $(16,455)
===========================================================================================================
Basic and diluted earnings per common share
As reported $ (0.38) $ (0.49)
Pro forma $ (0.15) $ (0.68)
===========================================================================================================
6
(C) RESTRUCTURING EXPENSES
In 2001, we implemented a restructuring plan in anticipation of a
continuing weak economy. The plan included a reduction in work force coupled
with vacating portions of certain office facilities by combining operations for
greater efficiency, refocusing sales and marketing, outsourcing some operations
and reducing overhead expenses. Total restructuring charges of $3.7 million
related to this plan were recorded in 2001. The restructuring resulted in a work
force reduction of approximately 15%, or 104 employees, through Company-wide
layoffs and attrition. Approximately half of these employees were in the Playboy
Online Group. Of the $3.7 million charge, $2.5 million related to the
termination of 88 employees. Additionally, 16 positions were eliminated through
attrition. Also included in the charge were $1.2 million of expenses related to
the excess space in our Chicago and New York offices. Of the total $3.7 million
of costs related to this plan, approximately $1.9 million was paid by March 31,
2002, with most of the remainder to be paid through 2002.
In 2000, realignment of senior management, coupled with staff reductions,
led to a restructuring charge related to the termination of approximately 3% of
the work force, or 19 employees. Total restructuring charges of $3.8 million
were recorded, including a $0.1 million unfavorable adjustment to the previous
estimate in 2001. A total of $3.7 million related to this restructuring was paid
by March 31, 2002, with the remaining $0.1 million to be paid through 2003.
(D) EARNINGS PER COMMON SHARE
For the quarters ended March 31, 2002 and 2001, options to purchase
approximately 2,495,000 and 2,360,000 shares, respectively, of our Class B
common stock and approximately 260,000 and 240,000 shares, respectively, of
Class B restricted stock awards were outstanding but were not included in the
computation of diluted earnings per common share as the inclusion of these
shares would have been antidilutive. As a result, the weighted average number of
basic and diluted common shares outstanding for the quarters ended March 31,
2002 and 2001 were equivalent.
On April 17, 2002, a registration statement for the resale of
approximately 1,475,000 shares of our Class B common stock became effective.
These shares were issued in payment of the largest installment plus an
additional installment of consideration, including an interest penalty, under
the terms of the asset purchase agreement relating to the acquisition of certain
television movie networks and related assets, which we refer to as the Califa
acquisition. We may be required to issue additional shares if the sale of these
shares does not yield the amount of the installments and the interest penalty.
(E) INVENTORIES, NET
Inventories, net, which are stated at the lower of cost (specific cost and
average cost) or fair value, consisted of the following (in thousands):
(Unaudited)
March 31, Dec. 31,
2002 2001
--------------------------------------------------------------------------------
Paper $ 4,827 $ 5,189
Editorial and other prepublication costs 5,072 6,140
Merchandise finished goods 1,876 2,633
--------------------------------------------------------------------------------
Total inventories, net $11,775 $13,962
================================================================================
7
(F) SEGMENT INFORMATION
The following table represents financial information by reportable segment (in
thousands):
(Unaudited)
Quarters Ended
March 31,
--------------------
2002 2001
--------------------------------------------------------------------------------------
Net revenues
Entertainment $ 30,651 $ 24,692
Publishing 26,658 28,918
Playboy Online 6,383 6,792
Licensing Businesses 2,455 2,028
Catalog -- 2,980
--------------------------------------------------------------------------------------
Total $ 66,147 $ 65,410
======================================================================================
Loss before income taxes and cumulative effect of change
in accounting principle
Entertainment $ 8,961 $ 5,235
Publishing (368) (1,014)
Playboy Online (3,588) (5,435)
Licensing Businesses 827 512
Catalog -- (145)
Corporate Administration and Promotion (3,583) (4,043)
Loss on disposal -- (100)
Investment income 39 284
Interest expense (4,472) (2,633)
Minority interest (421) 4
Equity in operations of Playboy TV International, LLC and other 49 459
Other, net (377) (386)
--------------------------------------------------------------------------------------
Total $ (2,933) $ (7,262)
======================================================================================
EBITDA (1)
Entertainment $ 20,422 $ 16,295
Publishing (70) (817)
Playboy Online (3,624) (4,966)
Licensing Businesses 875 565
Catalog -- (138)
Corporate Administration and Promotion (2,898) (3,266)
Loss on disposal -- (100)
--------------------------------------------------------------------------------------
Total $ 14,705 $ 7,573
======================================================================================
(1) EBITDA represents earnings before interest expense, income taxes,
cumulative effect of change in accounting principle, depreciation of
property and equipment, amortization of intangible assets, amortization of
investments in entertainment programming, amortization of deferred
financing fees, expenses related to the vesting of restricted stock awards
and equity in operations of Playboy TV International, LLC, or PTVI, and
other. You should not consider EBITDA an alternative to any measure of
performance or liquidity under generally accepted accounting principles.
Similarly, you should not infer that EBITDA is more meaningful than any of
those measures.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following represents our results of operations for the periods indicated
below (in millions, except per share amounts):
Quarters Ended
March 31,
--------------------
2002 2001
---------------------------------------------------------------------------------------
Net revenues
Entertainment
Domestic TV networks $ 24.8 $ 19.0
International TV 3.2 2.8
Worldwide home video 2.6 2.9
Movies and other -- --
---------------------------------------------------------------------------------------
Total Entertainment 30.6 24.7
---------------------------------------------------------------------------------------
Publishing
Playboy magazine 22.7 22.8
Other domestic publishing 2.7 3.4
International publishing 1.3 2.7
---------------------------------------------------------------------------------------
Total Publishing 26.7 28.9
---------------------------------------------------------------------------------------
Playboy Online 6.4 6.8
---------------------------------------------------------------------------------------
Licensing Businesses 2.4 2.0
---------------------------------------------------------------------------------------
Catalog -- 3.0
---------------------------------------------------------------------------------------
Total net revenues $ 66.1 $ 65.4
=======================================================================================
Net loss
Entertainment
Before programming expense $ 18.4 $ 14.6
Programming expense (9.4) (9.4)
---------------------------------------------------------------------------------------
Total Entertainment 9.0 5.2
---------------------------------------------------------------------------------------
Publishing (0.4) (1.0)
---------------------------------------------------------------------------------------
Playboy Online (3.6) (5.4)
---------------------------------------------------------------------------------------
Licensing Businesses 0.8 0.5
---------------------------------------------------------------------------------------
Catalog -- (0.2)
---------------------------------------------------------------------------------------
Corporate Administration and Promotion (3.6) (4.0)
---------------------------------------------------------------------------------------
Total segment income (loss) 2.2 (4.9)
Loss on disposal -- (0.1)
---------------------------------------------------------------------------------------
Operating income (loss) 2.2 (5.0)
---------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 0.1 0.3
Interest expense (4.5) (2.6)
Minority interest (0.4) --
Equity in operations of PTVI and other 0.1 0.4
Other, net (0.4) (0.4)
---------------------------------------------------------------------------------------
Total nonoperating expense (5.1) (2.3)
---------------------------------------------------------------------------------------
Loss before income taxes and cumulative effect of change
in accounting principle (2.9) (7.3)
Income tax expense (6.5) (0.3)
---------------------------------------------------------------------------------------
Loss before cumulative effect of change in accounting principle (9.4) (7.6)
Cumulative effect of change in accounting principle (net of tax) -- (4.2)
---------------------------------------------------------------------------------------
Net loss $ (9.4) $ (11.8)
=======================================================================================
Basic and diluted earnings per common share
Loss before cumulative effect of change in accounting principle $ (0.38) $ (0.32)
Cumulative effect of change in accounting principle (net of tax) -- (0.17)
---------------------------------------------------------------------------------------
Net loss $ (0.38) $ (0.49)
=======================================================================================
Overall our revenues increased slightly primarily due to higher domestic
TV networks revenues, primarily as a result of the Califa acquisition in July
2001. Mostly offsetting was the sale in November 2001 of our Collectors' Choice
Music business and the sale in July 2001 of a majority of our interest in
VIPress Poland Sp. z o. o., or VIPress, our Polish publishing joint venture, and
as a result we no longer consolidate their results.
9
The $7.2 million improvement in our operating performance was due to
better performance from all of our operating groups, lead by Entertainment,
which benefited significantly from the Califa acquisition. Corporate
Administration and Promotion expenses were also lower.
The net loss for the current year quarter included a $5.8 million noncash
income tax charge related to our adoption of Statement 142, Goodwill and Other
Intangible Assets. Additionally, the quarter reflected higher interest expense
primarily due to imputed interest related to the deferred payment of the
purchase price for the Califa acquisition. The prior year quarter included a
noncash charge representing a "Cumulative effect of change in accounting
principle" related to the adoption of Statement of Position 00-2, Accounting by
Producers or Distributors of Films.
Several of our businesses can experience variations in quarterly
performance. As a result, our performance in any quarter is not necessarily
reflective of full-year or longer-term trends. Playboy magazine newsstand
revenues vary from issue to issue, with revenues generally higher for holiday
issues and any issues including editorial or pictorial features that generate
unusual public interest. Advertising revenues also vary from quarter to quarter,
depending on economic conditions, product introductions by advertising customers
and changes in advertising buying patterns. E-commerce revenues are typically
impacted by the holiday buying season and decreased Internet traffic during the
summer months. Additionally, international TV revenues vary due to the timing of
recognizing library license fees from PTVI.
ENTERTAINMENT GROUP
The following discussion focuses on the profit contribution of each of our
Entertainment businesses before programming expense.
Revenues from our domestic TV networks business increased $5.8 million, or
31%, and profit contribution increased $4.3 million. These increases were
primarily due to the Califa acquisition and a $1.9 million increase in Playboy
TV cable pay-per-view revenues.
Our networks were available to the following approximate household units (in
millions):
March 31, Dec. 31, March 31,
2002 2001 2001
--------------------------------------------------------------------------------
Playboy TV (1)
DTH 18.7 18.1 16.2
Cable digital 11.4 10.3 4.3
Cable analog addressable 7.7 7.8 10.0
Movie Networks (1) (2)
DTH 36.7 35.3 --
Cable digital 30.6 25.3 10.5
Cable analog addressable 17.7 17.0 14.3
--------------------------------------------------------------------------------
(1) Each household unit is defined as one household carrying one given network
per carriage platform. A single household can represent multiple household
units if two or more of our networks and/or multiple platforms (i.e.
analog and digital) are available to that household.
(2) Includes The Hot Network, The Hot Zone and Vivid TV networks from the
Califa acquisition in July 2001.
Profit contribution from our international TV business increased $0.1
million on a $0.4 million, or 16%, increase in revenues as a result of higher
sales of output programming to PTVI, partially offset by consulting fees.
Profit contribution from our worldwide home video business decreased $0.5
million on a $0.3 million, or 11%, decrease in revenues. These decreases were
primarily due to international sales of The Eros Collection titles through a
one-time multi-territory sale in the prior year quarter.
10
PUBLISHING GROUP
Playboy magazine revenues were relatively flat, as lower advertising
revenues were mostly offset by higher circulation revenues. Circulation revenues
increased $0.3 million, or 2%. Subscription revenues were higher but were
partially offset by lower newsstand revenues due primarily to an unfavorable
variance related to sales adjustments for prior years' issues. Advertising
revenues decreased $0.4 million, or 5%, primarily due to fewer ad pages,
partially offset by higher average net revenue per page. Advertising sales for
the second quarter magazine issues are closed and we expect to report 14% lower
ad revenues and 17% fewer ad pages compared to the 2001 quarter. These
advertising declines are largely the result of continued industry-wide softness.
Revenues from our other domestic publishing businesses decreased $0.7
million, or 22%, primarily due to a $0.5 million unfavorable variance related to
newsstand sales adjustments for prior years' issues in our special editions
business combined with $0.3 million in lower current year quarter issues sales.
International publishing revenues decreased $1.4 million, or 53%, due to
our previously discussed sale in 2001 of a majority of our equity in VIPress.
The group's segment performance increased $0.6 million primarily due to
lower operating expenses of $1.2 million, due in part to cost reduction measures
implemented in the prior year, combined with a $0.5 million impact from lower
paper prices, partially offset by the lower special editions revenues.
PLAYBOY ONLINE GROUP
Playboy Online Group revenues decreased $0.4 million, or 6%, due to
planned lower e-commerce revenues of $1.6 million as a result of a more targeted
circulation plan, the timing of Playboy and Spice spring mailings and the
absence of Collectors' Choice Music e-commerce revenues due to its sale in
November 2001. Higher subscription revenues of $0.6 million and international
revenues of $0.4 million mostly offset this decline, the latter as a result of
licensing fees generated by our German and Korean international ventures. In
spite of $0.4 million higher trademark and administrative fees to our parent
company, the segment loss decreased $1.8 million primarily due to cost-saving
initiatives implemented in the prior year combined with lower costs as a result
of the timing of the spring mailings.
LICENSING BUSINESSES GROUP
Segment income from our Licensing Businesses Group increased $0.3 million
on a revenue increase of $0.4 million, or 21%. Sales increases in our domestic
and entertainment licensed branded products businesses combined with lower
business development expenses were responsible for the increased performance.
CATALOG GROUP
In the prior year quarter, our Catalog Group reported revenues of $3.0
million and a segment loss of $0.2 million. In November 2001, we sold our
Collectors' Choice Music business, ending our presence in the nonbranded print
catalog business.
CORPORATE ADMINISTRATION AND PROMOTION
Corporate Administration and Promotion expenses decreased $0.4 million, or
11%, largely due to no longer amortizing trademarks in the current year quarter
due to the adoption of Statement 142, Goodwill and Other Intangible Assets.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, we had $0.5 million in cash and cash equivalents and
$90.5 million in total financing obligations compared to $4.6 million in cash
and cash equivalents and $101.6 million in total financing obligations at
December 31, 2001. The financing obligations at March 31, 2002 and December 31,
2001 each included $20.0 million in loans made directly from Hugh M. Hefner to
Playboy.com, Inc., or Playboy.com. A total of $15.0 million of the loans from
Mr. Hefner are scheduled to mature in 2002, with $5.0 million maturing in July
and $10.0 million in September.
11
Our current liquidity requirements, excluding those of Playboy.com, are
being provided by a $101.5 million credit facility, comprised of $66.5 million
of term loans and a $35.0 million revolving credit facility. At March 31, 2002,
$4.0 million was outstanding under the revolving credit facility. The weighted
average interest rates as of March 31, 2002 were 5.95% for the term loans and
6.75% for the revolving credit facility. We plan to finance our working capital
requirements through cash generated from operations and our revolving credit
facility. If additional funds become necessary, we will seek additional capital
from the debt and/or equity markets. Playboy.com's funding requirements are
currently being obtained from loans made available by Hugh M. Hefner.
In connection with the Califa acquisition, we have the option of paying up
to $71 million of the scheduled payments in cash or Class B common stock through
2007. On April 17, 2002, a registration statement for the resale of
approximately 1,475,000 shares became effective. These shares were issued in
payment of the largest installment plus an additional installment of
consideration which totaled $22.5 million and an additional $0.3 million
interest penalty under the terms of the Califa asset purchase agreement. We may
be required to issue additional shares if the sale of these shares does not
yield the amount of the installments and the interest penalty.
In the international TV arena, PTVI's ability to finance its operations,
including making library license and programming output payments to us, will
depend principally on the ability of Claxson Interactive Group, Inc., or
Claxson, our venture partner, and also us to make capital contributions, until
PTVI generates sufficient funds from operations. In a March 15, 2002 filing with
the Securities and Exchange Commission, Claxson indicated that it is evaluating
a number of alternatives and taking certain steps which, if not completed
successfully and in a timely manner, would result in its auditors expressing a
"going concern opinion" in connection with the filing of Claxson's annual report
in June 2002. Although Claxson has, to date, funded its obligations with respect
to PTVI, PTVI's independent auditors have expressed a "going concern opinion" in
their report relating to PTVI's financial statements for the fiscal year ended
December 31, 2001. The reasons cited as the basis for raising substantial doubt
as to PTVI's ability to continue as a going concern are the potential inability
of Claxson to make required capital contributions combined with PTVI's losses
from operations. If PTVI is unable to make required payments to us in a timely
manner, either because of Claxson's failure to fund its capital contribution
obligations or otherwise, we may be required to take steps to address this by,
among other things, restructuring the PTVI agreements, reducing operating
expenses, seeking amendments to our credit facility or seeking additional
capital. If these efforts are not successful, our future financial condition and
operating results could be materially adversely affected.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $6.5 million for the quarter
primarily due to positive results (after adjusting for noncash items),
principally from the Entertainment Group, combined with $7.3 million of cash
provided from operating assets and liabilities, primarily due to collections of
receivables during the quarter from Playboy magazine and DTH operators.
Additionally, the quarter reflected $10.6 million of investments in produced and
licensed entertainment programming.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash provided by investing activities was $0.6 million for the quarter
primarily due to $1.1 million of proceeds from disposals, primarily related to
the sale of our Collectors' Choice Music businesses, partially offset by $0.5
million of additions to property and equipment.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used for financing activities was $11.2 million for the quarter
principally due to $4.6 million in repayments of financing obligations and $6.5
million in payments on our revolving credit facility.
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FORWARD-LOOKING STATEMENTS
This Form 10-Q Quarterly Report contains "forward-looking statements,"
including statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," as to expectations, beliefs, plans,
objectives and future financial performance, and assumptions underlying or
concerning the foregoing. These forward-looking statements involve known and
unknown risks, uncertainties and other factors, which could cause our actual
results, performance or outcomes to differ materially from those expressed or
implied in the forward-looking statements. The following are some of the
important factors that could cause our actual results, performance or outcomes
to differ materially from those discussed in the forward-looking statements:
(1) foreign, national, state and local government regulation, actions or
initiatives, including:
(a) attempts to limit or otherwise regulate the sale, distribution or
transmission of adult-oriented materials, including print, video and
online materials,
(b) limitations on the advertisement of tobacco, alcohol and other
products which are important sources of advertising revenue for us,
(c) substantive changes in postal regulations or rates which could
increase our postage and distribution costs, or
(d) changes in or increased regulation of gaming businesses, which could
limit our ability to obtain licenses, and the impact of federal and
state laws on gaming businesses generally;
(2) risks associated with our foreign operations, including market acceptance
and demand for our products and the products of our licensees and our
ability to manage the risk associated with our exposure to foreign
currency exchange rate fluctuations;
(3) increases in interest rates;
(4) changes in general economic conditions, consumer spending habits, viewing
patterns, fashion trends or the retail sales environment which, in each
case, could reduce demand for our programming and products and impact our
advertising revenues;
(5) our ability to protect our trademarks and other intellectual property;
(6) risks as a distributor of media content, including our becoming subject to
claims for defamation, invasion of privacy, negligence, copyright, patent
or trademark infringement, and other claims based on the nature and
content of the materials distributed;
(7) the dilution from any potential issuance of additional common stock in
connection with acquisitions we make or investments in Playboy.com;
(8) competition for advertisers from other publications, media or online
providers or any decrease in spending by advertisers, either generally or
with respect to the adult male market;
(9) competition in the cable, DTH, men's magazine and Internet markets;
(10) reliance on third parties for technology and distribution for the
television video-on-demand and Internet businesses;
(11) changes in distribution technology and/or unforeseen delays in the
implementation of that technology by the cable and DTH industries, which
might affect our plans and assumptions regarding carriage of our networks;
(12) risks associated with losing access to transponders, competition for
transponders and channel space and any decline in our access to, and
acceptance by, cable and DTH systems or any deterioration in the terms or
cancellation of fee arrangements with operators of these systems;
(13) attempts by consumers or citizens groups to exclude our programming from
pay television distribution;
(14) risks associated with integrating the operations of the networks related
to the Califa acquisition and the risks that we may not realize the
expected operating efficiencies, synergies, increased sales and profits
and other benefits from the acquisition;
(15) PTVI's ability to finance its operations, including making library license
and programming output payments to us, will depend principally on the
ability of Claxson, our venture partner, and also us to make capital
contributions, until PTVI generates sufficient funds from operations. If
PTVI is unable to make required payments to us in a timely manner, either
because of Claxson's failure to fund its capital contribution obligations
or otherwise, we may be required to take steps to address this by, among
other things, restructuring the PTVI agreements, reducing operating
expenses, seeking amendments to our credit facility or seeking additional
capital. If these efforts are not successful, our future financial
condition and operating results could be materially adversely affected;
(16) increases in paper or printing costs;
(17) effects of the national consolidation of the single-copy magazine
distribution system;
(18) uncertainty of the viability of the Internet gaming, e-commerce,
advertising and subscription businesses; and
(19) our ability to obtain adequate third-party financing, including equity
investments, to fund our Internet business, and the timing and terms of
such financing.
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EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
10.1 Fifth Amendment to February 26, 1999 Credit Agreement dated as of
April 12, 2002
10.2 Amendment to July 25, 1991 Lease between Playboy Enterprises, Inc.
and Star Property Fund, L.P. dated March 26, 2002
10.3 Agreement of Sublease between Playboy Enterprises International,
Inc. and Concentra Managed Care Services, Inc. dated February 13,
2002
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 2002.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PLAYBOY ENTERPRISES, INC.
(Registrant)
Date May 8, 2002 By s/ Linda Havard
-------------------------------------
Linda G. Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)
15