-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KBGVxsj5TQQ2IzY5TJokCxkw0/4rp/PIDFmg7O4NYDAK/zEv1rO//QRNRGqa/gjm +hYD37jU9FfR5V8S1ABrTQ== 0001005477-02-001298.txt : 20020415 0001005477-02-001298.hdr.sgml : 20020415 ACCESSION NUMBER: 0001005477-02-001298 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLAYBOY ENTERPRISES INC CENTRAL INDEX KEY: 0001072341 STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721] IRS NUMBER: 364249478 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14790 FILM NUMBER: 02581305 BUSINESS ADDRESS: STREET 1: 680 NORTH LAKE SHORE DRIVE CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3127518000 MAIL ADDRESS: STREET 1: 680 NORTH LAKE SHORE DR CITY: CHICAGO STATE: IL ZIP: 60611 FORMER COMPANY: FORMER CONFORMED NAME: NEW PLAYBOY INC DATE OF NAME CHANGE: 19981020 10-K 1 d02-35726.txt FORM 10-K 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, 2001 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) 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 on February 28, 2002 (based upon the closing sale price on the New York Stock Exchange) was $19,783,146. The aggregate market value of Class B Common Stock, par value $0.01 per share, held by nonaffiliates on February 28, 2002 (based upon the closing sale price on the New York Stock Exchange) was $214,618,476. As of February 28, 2002, there were 4,864,102 shares of Class A Common Stock, par value $0.01 per share, and 19,676,047 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 2002
PLAYBOY ENTERPRISES, INC. 2001 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............................................................14 Item 6. Selected Financial Data............................................15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............................................16 Item 7A. Quantitative and Qualitative Disclosures about Market Risk.........29 Item 8. Financial Statements and Supplementary Data........................29 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............................................58 PART III Item 10. Directors and Executive Officers of the Registrant.................58 Item 11. Executive Compensation.............................................58 Item 12. Security Ownership of Certain Beneficial Owners and Management.....58 Item 13. Certain Relationships and Related Transactions.....................58 PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K....58 2 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. The Company's businesses have been classified into the following reportable segments: Entertainment, Publishing, Playboy Online, Catalog and Licensing Businesses. The sale of the Collectors' Choice Music catalog in November 2001 ended the Company's presence in the nonbranded print Catalog Group business. Net revenues, loss from continuing operations before income taxes and cumulative effect of change in accounting principle, earnings before interest, taxes, depreciation and amortization ("EBITDA"), depreciation and amortization and identifiable assets of each reportable segment are set forth in Note (U) Segment Information of Notes to Consolidated Financial Statements. The Company's trademarks are critical to the success and potential 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 and numerous domain names related to its online business. ENTERTAINMENT GROUP The Entertainment Group operations include the production and marketing of programming through domestic TV networks, international TV and worldwide home video markets. On July 6, 2001, the Company acquired The Hot Network and The Hot Zone networks, together with the related television assets of Califa Entertainment Group, Inc. ("Califa"). In addition, under the asset purchase agreement related to the Califa networks, upon the resolution of certain contingencies, the Company will complete the acquisition of the Vivid TV network and the related television assets of V.O.D., Inc. ("VODI"), a separate entity owned by Califa's principals. Through provisions in the asset purchase agreement, the Company is currently operating Vivid TV and has generally assumed the risks and benefits associated with the ownership of the Vivid TV assets until the closing. These transactions are referred to collectively as the "Califa acquisition." The addition of these networks into the Company's television networks portfolio enables the Company to offer a wider range of adult programming. See Note (B) Acquisitions of Notes to Consolidated Financial Statements. Programming The Entertainment Group develops, produces and distributes programming for worldwide TV and home video markets. Its productions have included feature films, magazine-format shows, reality-based and dramatic series, documentaries, live events, anthologies of sexy short stories and celebrity and Playmate features. The Company continues to increase the amount and variety of quality programming by offering new genres, such as Director's Cut films. Its programming features stylized eroticism in a variety of entertaining formats for men and women and does not contain scenes that link sexuality with violence. 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 movie networks, comprised of Spice, Spice 2, The Hot Network, The Hot Zone and Vivid TV, is licensed by the Company from third parties. The Company invests in high-quality Playboy style programming to support its expanding businesses. The Company invested $37.3 million, $33.1 million and $35.3 million in entertainment programming in 2001, 2000 and 1999, respectively. These amounts, which also include expenditures for licensed programming, resulted in the production of 232, 192 and 172 hours of original programming, respectively. At December 31, 2001, the Company's library of primarily exclusive, Playboy branded original programming totaled approximately 2,000 hours. In 2002, the Company expects to invest approximately $45 million in Company-produced and licensed programming, which could vary based on, among other things, the timing of completing productions. 3 The Company also created and markets The Eros Collection, a line of small-budget, non-Playboy branded movies. These films air on Playboy TV, are distributed internationally and are available for rent or sale through home video retailers, such as Blockbuster Video stores. In addition, these movies frequently air on the HBO and Showtime networks. The Company has produced or co-produced a number of shows which air on the domestic Playboy TV network and are also distributed internationally. Additionally, some episodes have been released as Playboy Home Video titles and/or have been licensed to other networks, such as HBO and 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., Beverly Hills Bordello and Passion Cove. In 2001, the Company premiered its two newest series, Sexy Urban Legends and 7 Lives Xposed, Playboy TV's first venture into reality-based television. In 2002, the Company expects to move to a new 105,000 square-foot studio facility where the Company will have a centralized digital, technical and programming facility for both the Entertainment and Playboy Online Groups. The move will enable the Company to produce more original programs in a more efficient and cost effective operating environment. Domestic TV Networks The Company currently operates multiple domestic TV networks. Playboy TV is offered on cable and through the satellite direct-to-home ("DTH") market on a pay-per-view, video-on-demand ("VOD") and monthly subscription basis. In 1999, the Company acquired Spice Entertainment Companies, Inc. ("Spice"), a leading provider of adult television entertainment. The Spice and Spice 2 networks are offered on cable on a pay-per-view basis. As previously discussed, in July 2001, through the Califa acquisition the Company added the The Hot Network, The Hot Zone and Vivid TV networks to its portfolio, which are all offered on cable and through the DTH market on a pay-per-view basis. The Company intends to rebrand these new networks into its Spice branded portfolio. The Company also recognizes royalty revenues from the license of its programming to other pay networks. Pay-per-view programming can be delivered through any number of delivery methods, including: (a) digital and analog cable television, (b) DTH to households with small dishes receiving a Ku-band medium or high power digital signal ("DBS"), such as those currently offered by DirecTV and EchoStar, or with large satellite dishes receiving a C-band low power analog or digital signal ("TVRO"), (c) wireless cable systems, and (d) technologies such as cable modem and the Internet. The following table illustrates certain information regarding approximate household units and current average retail rates for the Company's networks (in millions, except retail rates):
Household Units (1) Average Retail Rates --------------------- ------------------------------- Dec. 31, Dec. 31, Monthly Pay- 2001 2000 Subscription Per-View - ------------------------------------------------------------------------------------------------------------------- Playboy TV DTH 18.1 15.4 $ 15.60 $ 8.00 Cable digital 10.3 3.2 12.25 7.90 Cable analog addressable 7.8 11.0 14.50 7.75 Movie Networks DTH 35.3 -- -- 9.35-11.00 Cable digital 25.3 8.4 -- 7.65-10.95 Cable analog addressable 17.0 16.2 $ -- $ 7.45-$11.95 - -------------------------------------------------------------------------------------------------------------------
(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 the Company's networks and/or multiple platforms (i.e. analog and digital) are available to that household. (2) Includes additional networks in connection with the Califa acquisition in July 2001. 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 the cable affiliates. Individual cable affiliates determine the retail price of both pay-per-view, which is dependent on the length of the block of programming, and monthly subscription services, which can be dependent on the number of premium services to which a household subscribes. 4 Growth in the cable pay-per-view market is expected to result principally from cable system upgrades, utilizing digital compression and other bandwidth expansion methods that provide cable operators additional channel capacity. In recent years, cable operators have been shifting from analog to digital technology in order to upgrade their cable systems and to counteract competition from DBS operators. Digital cable television has several advantages over analog cable television, including more channels, better audio and video quality, advanced set-top boxes that are addressable, a secure fully scrambled signal, integrated program guides and advanced ordering technology. Paul Kagan Associates, Inc. ("Kagan"), an independent media research firm, projects average annual increases of approximately 1% in total cable households and 35% in cable digital households through December 31, 2004. During this same period, Kagan projects an average annual decrease of approximately 39% in cable analog addressable households, as customers move from older analog systems to the digital or DBS platforms. Additionally, recent technology advances will allow consumers to not only order programs on a pay-per-view basis, but also to choose VOD, which differs from traditional pay-per-view in that it allows viewers to purchase a specific movie or program for a period of time with VCR functionality. The basic premise is that consumers have a menu of options to choose from and can buy a program "on demand" without having to adhere to the schedule of a programmed network. The Company believes it is well positioned for this new phase of technology because of the power of its brand names, its large library of original programming and its agreements with leading major adult movie producers for VOD rights. Growth of this technology will be dependent on a number of factors including, but not limited to, operator investment, server/bandwidth capacity, availability of a two-way communication path, programmer rights issues and consumer acceptance. In addition to cable, some of the Company's networks are provided via encrypted signal to home satellite dish viewers. Playboy TV is the only adult service to be available on all four DBS services in the United States and Canada. It is currently available on DirecTV and EchoStar in the United States and ExpressVu and Star Choice in Canada. Playboy TV was previously available on PrimeStar, which was acquired by DirecTV in 1999. The Hot Network, The Hot Zone and Vivid TV are all available on DirecTV and, in September 2001, The Hot Zone also was launched on EchoStar. In recent years, the Company has added a significant number of viewers through the DBS market, providing the Company with an expanded customer base via digital transmission which has historically produced higher buy rates than analog cable markets. Kagan projects an average annual increase of approximately 10% in DBS households through December 31, 2004. In October 2001, EchoStar announced plans to merge with DirecTV. The merger is expected to close in the second half of 2002, subject to certain conditions precedent. If this proposed merger becomes effective, the Company believes it will maintain its position as the leading provider of adult material through the merged entity, although the actual impact cannot be determined. Competition among television programming providers is intense for both channel space and viewer spending. The Company's competition varies in both the type and quality of programming offered, but consists primarily of other premium pay services, such as general-interest premium channels like HBO and Showtime, and other adult movie pay services. The Company competes with the other pay 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 the competitive factors described above. While there can be no assurance that the Company will be able to maintain its current cable and DTH carriage or fee structures or maintain or grow its viewership in the face of this competition, the Company believes that strong Playboy and Spice brand recognition, the quality of its original programming and its ability to appeal to a broad range of adult audiences are critical factors which differentiate the Company's networks from other providers of adult programming. Additionally, in response to consumers' requests for a wider spectrum of adult-programming choices, through the Califa acquisition in July 2001, the Company added additional adult-oriented pay networks to the Company's portfolio. Also, to optimize revenue potential, the Company is encouraging cable and DTH operators to market the full range of pay-per-view, VOD and monthly subscription options to consumers. From time to time, certain groups have sought to exclude the Company's programming from 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 and DTH systems, but the nature and impact of any such limitations in the future cannot be determined. 5 The programming of the Company's domestic TV networks is delivered to cable and DTH operators through a communications satellite transponder. The Company's satellite lease agreement for Playboy TV expired in October 2001 and the Company began service on a replacement transponder under an agreement which expires in 2010. The Company has an additional transponder service agreement related to its other networks, the term of which currently extends through 2015. The Company's current transponder service agreements 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. 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 transponder service. International TV During 1999, Playboy TV International, LLC ("PTVI") was formed as a joint venture between the Company and a member of the Cisneros Group ("Cisneros"). In 2001, Claxson Interactive Group, Inc. ("Claxson") succeeded Cisneros as the Company's joint venture partner. PTVI has the exclusive right to create and launch new television networks under the Playboy and Spice brands 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. These international networks are programmed principally with U.S.-originated content, which is subtitled or dubbed, and complemented by local content. As of December 31, 2001, the international networks reached approximately 31.0 million households, compared to approximately 26.2 million households at December 31, 2000. Currently, the Company has a 19.9% interest in PTVI with an option to increase its equity up to 50%. The option expires on the earlier to occur of September 15, 2009 and 30 days after the date on which PTVI reaches "cash breakeven" as specified in PTVI's operating agreement. The purchase price for the option through September 15, 2003 is the founders' price plus interest as specified in the operating agreement. Founders' price as of a specified date means, with respect to the price per one percentage interest of PTVI acquired by the Company, an amount equal to the sum of the capital contributions to PTVI by the venture partners through and including that date, divided by 100. After September 15, 2003, the purchase price is based on the market value of the acquired interests. The option purchase price can be paid in cash and/or the Company's Class B common stock ("Class B stock") at the Company's option. In return for the exclusive international TV rights for the use of the Playboy tradename, film and video library, and for the acquisition of the international rights to the Spice film library, the U.K. and Japan Playboy TV networks and certain international distribution contracts, PTVI is obligated to make total payments of $100.0 million to the Company over six years, of which $42.5 million has been received through the end of 2001. The remaining payments are owed over the next three years as follows: $7.5 million, $25.0 million and $25.0 million. PTVI also has a long-term commitment with the Company to license international TV rights to each year's output production, with payments representing a percentage of the Company's annual production spending. Until PTVI generates sufficient cash flow from operations, PTVI's ability to fund its operations, including making library license and programming output payments to the Company, is dependent on receiving capital contributions principally from Claxson and also from the Company. The maximum mandatory capital contributions by the partners is $100 million, of which $61.6 million has been contributed through December 31, 2001. In a recent filing with the Securities and Exchange Commission ("SEC"), 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. See Note (C) Playboy TV International, LLC Joint Venture of Notes to Consolidated Financial Statements. If PTVI fails to make these payments to the Company in a timely manner, either because of the failure of the partners to make capital contributions or otherwise, the Company's future financial condition and operating results could be materially adversely affected. 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 through local Playboy TV networks in which the Company owned an equity interest and from which it received fees for programming and the use of the Playboy brand name. 6 Worldwide Home Video The Company also distributes its original programming domestically on VHS and DVD which are sold in video and music stores and other retail outlets, through direct mail, including Playboy magazine, and online, including PlayboyStore.com. In 2001, the Company expanded the home video business into three distinct product lines. The lines include the flagship Playboy Home Video line, which features Playmate, celebrity and specials product. The new product lines include Playboy TV, which features TV shows from the Company's premium pay television network, and Playboy Exposed, a line of adult reality-based programming. All three product lines are available on both VHS and DVD. In addition, the Company also releases titles under its Eros Collection label. The Company released 11 new Playboy Home Video titles in 2001, compared to 21 new titles in 2000 and 16 new titles in 1999. In 2001, the Company also released two titles under each of the new Playboy TV and Playboy Exposed labels. Additionally, the Company continues to release library titles on DVD, which were previously only released on VHS. The Company's contract with its domestic distributor expired in June 2001 and a contract with a new distributor became effective in October 2001. The Company's VHS and DVD products are currently distributed in the United States and Canada by Image Entertainment, Inc. ("Image"). The Company is responsible for manufacturing the product for sale and for certain marketing and sales functions. The Company receives advances from Image on all new release titles in the Playboy Home Video and Playboy TV line. Image receives a distribution fee on sales of all product and remits a net amount to the Company. In 2001, the Company entered into an agreement with Mandalay Direct ("Mandalay"), the creator of Girls Gone Wild, to market a continuity line of reality-based videos. These programs are advertised on demographically targeted television programs across a variety of networks and sold directly to consumers via these offers. In general, the Company and Mandalay are equal participants in the profits of the series. The Company also distributes, generally through separate distribution agreements, its home video products to other countries worldwide. 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. PUBLISHING GROUP The 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 continues to be the best-selling monthly men's magazine in the world. Circulation of the U.S. edition is approximately 3.2 million copies monthly. Combined average circulation of the Company's international editions is approximately 1.3 million copies monthly. According to Fall 2001 data published by Mediamark Research, Inc. ("MRI"), an independent market research firm, 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 48-year history, exclusive interviews have included prominent public figures (such as Martin Luther King, Jr., Jimmy Carter, Fidel Castro, Mike Wallace, Rush Limbaugh and Jesse Ventura), 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 Bobby Knight). 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). 7 The net circulation revenues of the U.S. edition of Playboy magazine for 2001, 2000 and 1999 were $65.5 million, $72.1 million and $73.9 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 newsstand sales in any period based on whether or not there are issues featuring major celebrities. According to the Audit Bureau of Circulations, 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, 2001, Playboy magazine was the 12th highest-ranking U.S. consumer publication. Playboy magazine's rate base at December 31, 2001 was larger than each of Newsweek, Cosmopolitan and Maxim, as well as the combined rate bases of Rolling Stone, GQ and Esquire. Playboy magazine has historically generated approximately two-thirds of its revenues from subscription and newsstand circulation, with the remainder primarily from advertising. Subscription copies are approximately 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 33, with a median annual household income of $52,000. The Company also derives revenues from the rental of Playboy magazine's subscriber list, which consists of the subscriber's name, address and other subscription-related 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, including Playboy.com. 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 periodical mail. The Company attempts to contain these costs through presorting and other methods. The Publishing Group was impacted by general postal rate increases of approximately 10% and 3% in January and July of 2001, respectively. Postal rates are expected to increase again in October 2002 by approximately 10%. Playboy magazine subscriptions are serviced by Communications Data Services, Inc. ("CDS"). Pursuant to a subscription fulfillment agreement with the Company, CDS performs a variety of services, including (a) receiving, verifying, balancing and depositing payments from subscribers, (b) processing Internet transactions, (c) printing forms and promotional materials, (d) maintaining master files on all subscribers, (e) issuing bills and renewal notices to subscribers, (f) issuing labels, (g) resolving customer service complaints as directed by the Company and (h) furnishing various reports to monitor all aspects of the subscription operations. The term of the subscription fulfillment agreement expired June 30, 2001, but has been extended to June 30, 2006. Either party may terminate the agreement prior to expiration in the event of material nonperformance by, or insolvency of, the other party. The Company pays CDS specified fees and charges based on the types and amounts of service performed under the subscription fulfillment agreement. The fees and charges are to be fixed at their July 1, 2001 levels until June 30, 2003, after which they will increase yearly at a rate based on the rate of increase in the consumer price index, but no more than six percent in one year. CDS's liability to the Company for a breach of its duties under the subscription fulfillment agreement is limited to actual damages of up to $140,000 per event of breach, except in cases of willful breach or gross negligence, in which case the limit is $280,000. The subscription fulfillment agreement provides for indemnification by the Company of CDS and its shareholders against claims arising from actions or omissions by CDS in compliance with the terms of the agreement or in compliance with the Company's instructions. Playboy magazine is one of the highest priced magazines in the United States. Effective with the April 2001 issue, the basic U.S. newsstand cover price is $4.99 ($5.99 for the December holiday issue and $6.99 for the January holiday issue) and the Canadian cover price is C$6.99 for all issues. In addition, when there is a feature of special appeal, the Company generally increases the newsstand cover price by $1.00. Prior to the April 2001 issue, the basic U.S. cover price for Playboy magazine was $4.95 ($5.95 for the December holiday issue and $6.95 for the January holiday issue) and the Canadian cover price was C$5.95 (C$6.95 for holiday issues). No general price increases are currently planned for 2002. 8 Distribution of the magazine to newsstands and other retail outlets is accomplished through Warner Publisher Services, Inc. ("Warner"), a national distributor. Copies of the magazine are shipped in bulk to wholesalers, who 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 consumer interest in the cover, the pictorials and the editorial features. Playboy magazine and special editions are printed at Quad/Graphics, Inc., located in Wisconsin, which ships the product to subscribers and Warner. The print run varies each month based on expected sales and is determined with input from Warner. Paper is the principal raw material used in the production of these publications. 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, which can materially affect the Publishing Group's financial results. The Publishing Group expects paper prices in 2002 to be comparable with 2001. 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 Fiscal Year Ended Ended Ended Category 12/31/01 12/31/00 12/31/99 - ---------------------------------------------------------------------------- Beer/Wine/Liquor 28% 25% 21% Tobacco 23 23 26 Retail/Direct mail 19 19 22 Toiletries/Cosmetics 5 5 6 Apparel/Footwear/Accessories 5 5 4 All other 20 23 21 - ---------------------------------------------------------------------------- Total 100% 100% 100% ============================================================================ Total ad pages 618 674 640 ============================================================================ The Company continues to focus on securing new advertisers, including from underdeveloped categories. The net advertising revenues of the U.S. edition of Playboy magazine for 2001, 2000 and 1999 were $37.0 million, $38.4 million and $33.9 million, respectively. Net advertising revenues are gross revenues less advertising agency commissions, frequency and cash discounts and rebates. 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 Company implemented 8% cost per thousand increases in advertising rates effective with both the January 2002 and 2001 issues. Levels of advertising revenues may be affected by, among other things, increased competition for and decreased spending by advertisers, general economic activity and governmental regulation of advertising content, such as tobacco products. However, as only approximately one-third of Playboy magazine's revenues and less than 15% of the Company's revenues are from advertising, the Company is not overly dependent on this source of revenues. 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 48-year history, the Company has never sold a product that has been judged to be obscene or illegal in any U.S. jurisdiction. Magazine publishing companies face intense competition for readers, advertising and newsstand shelf space. Magazines and Internet sites 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. 9 Other Domestic Publishing The Publishing Group has also created media extensions, including special editions and calendars, which are primarily sold in newsstand outlets using mostly original photographs. In each of 2001, 2000 and 1999, the group published 24 special editions. Effective with issues on sale subsequent to March 1, 2001, the U.S. and Canadian special editions newsstand cover prices are $6.99 and C$7.99, respectively. Prior to this, the U.S. and Canadian newsstand cover prices were $6.95 and C$7.95, respectively. No general price increases are currently planned for 2002. International Publishing The Company licenses the right to publish 17 international editions of Playboy magazine in the following countries: Brazil, Croatia, the Czech Republic, France, Germany, Greece, Hungary, Italy, Japan, the Netherlands, Poland, Romania, Russia, Slovakia, Slovenia, Spain and Taiwan. Combined average circulation of the international editions is approximately 1.3 million copies monthly. In 2001, the Company sold a majority of its interest in VIPress Poland Sp. z o. o. ("VIPress"), publisher of the Polish edition of the magazine. As such, the results of VIPress are no longer consolidated in the Company's financial statements. Subsequent to the sale, the Company's remaining 20% interest is accounted for under the equity method and, as such, the Company's proportionate share of the results of VIPress is included in nonoperating results. The Company expects to sell its remaining interest in VIPress in 2002. Also in 2001, the Company sold its 19% joint venture interest in each of its Romanian and Hungarian editions. 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 to 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 2001, two editions, Brazil and Germany, accounted for approximately 45% of the total licensing revenues from international editions. PLAYBOY ONLINE GROUP The Playboy Online Group is dedicated to the lifestyle and entertainment interests of young men around the world. The Company believes that it is well positioned to provide compelling online entertainment experiences due to the strength of the Playboy brand. 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 e-commerce, fees for subscription services and pay-per-view events, advertising and sponsorships, online gaming and international ventures. The Playboy.com site offers original Playboy style content and was recently redesigned with a goal of converting a greater percentage of visitors to purchasers. It focuses on areas of interest to its target audience, including Love & Sex, Arts & Entertainment, Style, On Campus, Sports, World of Playboy, Playboy TV, Home Video and Playmates. The site also offers pay-per-view events such as lingerie fashion shows, Mardi Gras and parties at the Playboy Mansion (the "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 50,000 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, 2001 and 2000, Playboy Cyber Club had approximately 100,000 and 67,000 subscribers, respectively. Playboy Cyber Club is currently offered on a monthly basis for $9.95, a quarterly basis for $20.85 and an annual basis for $59.40. The group's Playboy branded e-commerce offerings include PlayboyStore.com, which is the primary destination for purchasing over 2,500 different Playboy branded fashions, videos, jewelry and collectibles. The PlayboyStore.com Partners Marketplace allows top-notch companies, including Amazon.com, to sell products such as movies, CDs, books, software, games and consumer electronics to the very desirable Playboy.com demographic. The Company also operates auction sites located at Auctions.Playboy.com and the eBay Playboy Marketplace in order to capitalize on the market for Playboy collectibles. CCMusic.com, an online version of the Collectors' Choice Music catalog, was sold in 2001 and CCVideo.com, an online version of the Critics' Choice Video catalog, was sold in 2000. The sales of these businesses are discussed in more detail in the Catalog Group section. 10 The group's online gaming business currently consists of three sites, PlayboySportsBook.com, PlayboyCasino.com and PlayboyRacingUSA.com. PlayboySportsBook.com and PlayboyCasino.com are partnerships with Ladbroke eGaming Limited, the world's largest bookmaker. PlayboySportsBook.com offers a full range of sports and event wagering, allowing international consumers to bet on U.S. and international sports. Safeguards have been implemented to prevent betting from within the United States and other places where online sports wagering is illegal. The site includes highlights of daily sports wagering, event coverage, sports commentary, scores and statistics. PlayboyCasino.com offers more than 50 casino games, including roulette, blackjack and slot games. The site uses realistic sound effects and graphics to give the look and feel of a real casino. The third gaming site, PlayboyRacingUSA.com, a partnership with Penn National Gaming, Inc., offers a wide variety of pari-mutuel wagering on horse races in North America. The site offers an array of interactive tools and resources, including real-time odds and scratches, past performance programs and special features like the virtual stable, which allows consumers to follow specific horses. The group is expanding its international presence by entering into joint ventures and/or licensing arrangements in foreign countries to provide compelling content specifically tailored to those individual foreign audiences. Its first international joint venture, Playboy.de with Focus Digital AG, was launched late in 2001. The German version of the web site has a local, dedicated editorial staff that develops original Playboy style content, makes use of content from the German edition of Playboy magazine and translates appropriate U.S.-originated Playboy.com content. The Company has also announced a relationship with Korea Telecom Hitel Co., Ltd. to develop a Playboy site aimed at the Korean marketplace. The Company is in negotiation in additional countries regarding other international web sites. A separately branded online adult entertainment site is located at SpiceTV.com. Capitalizing on the Company's acquisition of Spice, the site offers over 20,000 adult-oriented products in SpiceTVStore.com, including videos and DVDs, lingerie and sensual products. SpiceTV Club, a subscription site relaunched late in 2001, offers adult pictorials, video clips, interactive features that allow the users to view highly customized adult-video content, the Spice virtual studio highlighting SpiceTV Club original content, live chat rooms and Spice Girl of the Month. As of December 31, 2001, SpiceTV Club had approximately 1,000 subscribers. The SpiceTV Club is currently offered on a monthly basis for $24.95. The Internet industry is highly competitive. The Company competes for visitors and advertisers. The Company believes that the primary competitive factors include brand recognition, the quality of content and products, technology, pricing, ease of use, sales and marketing efforts and user demographics. The Company believes that it competes favorably with respect to each of these factors. Additionally, the Company has the advantage of leveraging the power of the Playboy and Spice brands, its libraries, marketing and promotions and loyal audiences. CATALOG GROUP The Catalog Group operations have historically included the direct marketing of products through the Critics' Choice Video and Collectors' Choice Music catalogs. In 2000, the Company completed the sale of its Critics' Choice Video catalog and related Internet business and fulfillment and customer service operations to Infinity Resources, Inc. ("Infinity"). In 2001, the Company also sold to Infinity its Collectors' Choice Music catalog and related Internet business, ending the Company's presence in the nonbranded print catalog business. Infinity is subleasing an approximately 105,000 square-foot warehouse facility and related equipment from the Company and is providing fulfillment and customer service for the Company's e-commerce business. LICENSING BUSINESSES GROUP The Licensing Businesses Group combines certain brand-related businesses, such as the licensing of consumer products carrying one or more of the Company's trademarks and artwork, as well as Playboy branded casino gaming opportunities. Also reported within the group are certain Company-wide marketing activities. This group was formerly named the Other Businesses Group. 11 The Company licenses the Playboy and Spice names, Rabbit Head Design and other images, trademarks and artwork owned by the Company for the worldwide manufacture, sale and distribution of a variety of consumer products. The group works with licensees to develop, market and distribute high-quality Playboy and Spice branded merchandise. The group's licensed product lines include men's and women's apparel, men's underwear and women's lingerie, accessories, collectibles, cigars, watches, jewelry, fragrances, small leather goods, stationery, eyewear, barware 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 other uses by the Company. Additionally, the Company owns all of the trademarks and service marks of Sarah Coventry, Inc., which it licenses. Products are marketed primarily through retail outlets, including department and specialty stores. 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. The Company is also interested in exploiting Playboy's brand equity in the location-based entertainment market by entering into partnerships with companies in which it would contribute its brand name and marketing expertise in return for licensing fees, and perhaps the option to earn or purchase equity in these ventures. Company-wide marketing activities consist of the Playboy Jazz Festival, Alta Loma Entertainment and Playmate promotions. The Company has produced the Playboy Jazz Festival on an annual basis in Los Angeles at the Hollywood Bowl since June 1979. In conjunction with the Playboy Jazz Festival, the Company continued its community events program by sponsoring free concerts. The Company has revived Alta Loma, which had been established in the 1980s to create television programming, so as to take advantage of the market for Playboy branded and Playboy style entertainment products targeted for film and television distribution beyond the Playboy networks. Alta Loma can draw upon material from Playboy magazine and Company franchises like the Mansion to develop original programming for non-Playboy outlets. Current television and film productions either under production or consideration, to be produced and funded by outside parties, include Who Wants to be a Playboy Playmate, A Night at the Playboy Mansion, Little Annie Fanny and Playboy After Dark. Playmate promotions encompass Playmates' involvement in ad campaigns, brochures, celebrity endorsements, commercials, conventions, motion pictures, trade shows, television and videos for the Company and outside clients. SEASONALITY The Company's businesses are generally not seasonal in nature. Revenues and operating results for the quarters ended 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 result in an increase in accounts receivable. E-commerce revenues and operating results are typically impacted by the holiday buying season and decreased Internet 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, purchased in 1971 the Mansion in Holmby Hills, California, 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, magazine photography, online events, business meetings, enhancing the Company's image, charitable functions and a wide variety of other promotional and marketing activities. The Mansion generates substantial publicity and recognition which increase public awareness of the Company and its products and services. As indicated in Part II. Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") and Part III. Item 13. "Certain Relationships and Related Transactions," Hugh M. 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 Consolidated Balance Sheet as of December 31, 2001 at a cost, including all improvements and after accumulated depreciation, of $2.0 million. The Company pays all operating expenses of the Mansion, including depreciation and taxes, which were $3.2 million, $3.2 million and $3.6 million for 2001, 2000 and 1999, respectively, net of rent received from Mr. Hefner. 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 The Company's trademarks are critical to the success and potential future growth of all of the Company's businesses. The Company actively defends its trademarks and copyrights throughout the world and monitors the marketplace for counterfeit products. Consequently, it initiates legal proceedings from time to time to prevent their unauthorized use. EMPLOYEES At February 28, 2002, the Company employed 605 full-time employees compared to 681 at February 28, 2001. No employees are represented by collective bargaining agreements. The Company believes it maintains a satisfactory relationship with its employees. Item 2. Properties Location Primary Use Office Space Leased: 680 North Lake Shore Drive This space serves as the Company's Chicago, Illinois 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 This space serves as the Company's New York, New York Publishing and Playboy Online Groups' headquarters, and a limited amount of this space is used by the Entertainment and Licensing Businesses Groups, as well as executive and administrative personnel. 9242 Beverly Boulevard This space serves as the Company's Beverly Hills, California 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 This space is primarily used by the Los Angeles, California Company's Entertainment Group for general business and film editing, and a limited amount of this space is used by the Playboy Online Group. Operations Facilities Leased: Itasca, Illinois The Company began subleasing this warehouse facility to Infinity in 2000. This facility, under separate agreements with Infinity, is used to provide direct- and e-commerce order fulfillment, customer service and related activities for the Company's Playboy Online Group and previously for the Catalog Group, and storage for the entire Company. The facility was formerly used by the Company in the same capacities. Santa Monica, California This space is used by the Company's Publishing Group as a photography studio. Los Angeles, California This space is used by the Company's Entertainment Group as a motion picture production facility. Property Owned: Holmby Hills, California The Mansion is used for various corporate activities, including serving as a valuable location for video production, magazine photography, online events, business meetings, enhancing the Company's image, charitable functions and a wide variety of other promotional and marketing activities. In 2002, the Company expects to move to the new 105,000 square-foot studio facility where the Company will have a centralized digital, technical and programming facility for both the Entertainment and Playboy Online Groups and also expects to relocate its Beverly Hills and Los Angeles office space. Additionally, in 2002 the Company subleased excess space in its New York office and expects to do the same for its Chicago office as a result of restructuring efforts in 2001. 13 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 (Q) Commitments and Contingencies of Notes to Consolidated Financial Statements. 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, 2001. PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters Stock price information, as reported in the New York Stock Exchange Composite Listing, is set forth in Note (W) Quarterly Results of Operations (Unaudited) of Notes to Consolidated Financial Statements. The Company's securities are traded on the exchanges listed on the cover page of this Form 10-K Annual Report under the ticker symbols PLA A (Class A voting) and PLA (Class B nonvoting). As of February 28, 2002, there were 7,387 and 8,590 holders of record of Class A and Class B common stock, respectively. There were no cash dividends declared during 2001 and 2000. The Company's credit agreement prohibits the payment of cash dividends. 14 Item 6. Selected Financial Data (1) (in thousands, except per share amounts, number of employees and ad pages)
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Six Months Fiscal Year Ended Ended Ended Ended Ended Ended 12/31/01 12/31/00 12/31/99 12/31/98 12/31/97 6/30/97 - --------------------------------------------------------------------------------------------------------------------------------- Selected financial data Net revenues $ 291,226 $ 307,722 $ 347,817 $ 317,618 $ 149,541 $ 296,623 Interest expense, net (13,184) (7,629) (6,179) (1,424) (239) (354) Income (loss) from continuing operations before cumulative effect of change in accounting principle (29,323) (47,626) (5,568) 4,320 2,142 21,394 Net income (loss) (33,541) (47,626) (5,335) 4,320 1,065 21,394 Basic income (loss) per common share Income (loss) from continuing operations before cumulative effect of change in accounting principle (1.20) (1.96) (0.24) 0.21 0.10 1.05 Net income (loss) (1.37) (1.96) (0.23) 0.21 0.05 1.05 Diluted income (loss) per common share Income (loss) from continuing operations before cumulative effect of change in accounting principle (1.20) (1.96) (0.24) 0.21 0.10 1.03 Net income (loss) (1.37) (1.96) (0.23) 0.21 0.05 1.03 EBITDA (2) 39,198 23,875 58,722 39,267 17,255 41,519 Cash flows from operating activities (7,945) (31,150) 16,100 (11,110) (3,736) 1,539 Cash flows from investing activities (2,853) (3,889) (68,126) (10,120) (1,991) (2,450) Cash flows from financing activities $ 12,874 $ 14,045 $ 75,213 $ 20,624 $ 5,371 $ (224) - --------------------------------------------------------------------------------------------------------------------------------- At period end Total assets $ 426,240 $ 388,488 $ 429,402 $ 212,107 $ 185,947 $ 175,542 Long-term financing obligations $ 78,017 $ 94,328 $ 75,000 $ -- $ -- $ -- Shareholders' equity $ 81,525 $ 114,185 $ 161,281 $ 84,202 $ 78,683 $ 76,133 Long-term financing obligations as a percentage of total capitalization 49% 45% 32% --% --% --% Number of common shares outstanding Class A voting 4,864 4,859 4,859 4,749 4,749 4,749 Class B nonvoting 19,666 19,407 19,288 15,868 15,775 15,636 Number of full-time employees 610 686 780 758 684 666 - --------------------------------------------------------------------------------------------------------------------------------- Selected operating data Playboy magazine ad pages 618 674 640 601 273 558 Cash investments in Company-produced and licensed entertainment programming $ 37,254 $ 33,061 $ 35,262 $ 25,902 $ 14,359 $ 30,747 Amortization of investments in Company-produced and licensed entertainment programming $ 37,395 $ 33,253 $ 34,341 $ 26,410 $ 11,153 $ 21,355 Playboy TV networks household units (at period end) (3) DTH 18,100 15,400 12,400 9,800 6,800 6,300 Cable digital 10,300 3,200 1,300 200 -- -- Cable analog addressable 7,800 11,000 11,700 11,700 11,600 11,200 Movie networks household units (at period end) (3) (4) DTH 35,300 -- -- -- -- -- Cable digital 25,300 8,400 3,900 -- -- -- Cable analog addressable 17,000 16,200 18,300 -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------
For a more detailed description of the Company's financial position, results of operations and accounting policies, please refer to Part II. Item 7. "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. (2) EBITDA represents earnings from continuing operations 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 PTVI and other. EBITDA should not be considered an alternative to any measure of performance or liquidity under generally accepted accounting principles ("GAAP"). Similarly, it should not be inferred that EBITDA is more meaningful than any of those measures. (3) 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 the Company's networks and/or multiple platforms (i.e. analog and digital) are available to that household. (4) The Company acquired Spice in March 1999 and additional networks in connection with the Califa acquisition in July 2001. 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Several of the Company's businesses can experience variations in quarterly performance. As a result, the Company's 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. CRITICAL ACCOUNTING POLICIES The Company's financial statements are prepared in conformity with GAAP, which requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company believes that of its significant accounting policies, the following are some of the more complex and critical areas. PTVI REVENUE RECOGNITION The Company recognizes revenues from PTVI for the license of the exclusive international TV rights for the use of the Playboy tradename, film and video library, and for the acquisition of the international rights to the Spice film library, the U.K. and Japan Playboy TV networks and certain international distribution contracts. PTVI is obligated to make total payments of $100.0 million to the Company related to the above over six years, of which $42.5 million has been received through the end of 2001. The remaining payments are owed over the next three years as follows: $7.5 million, $25.0 million and $25.0 million. As the collectibility of these payments is not reasonably assured, the Company recognizes these revenues as the consideration is paid to the Company, less the Company's 19.9% intercompany interest in such transactions. This results in significant volatility in the Company's results of operations and cash flows from year to year. See Note (C) Playboy TV International, LLC Joint Venture of Notes to Consolidated Financial Statements. TRADEMARKS The Company's trademarks are critical to the success and potential future growth of all 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 their unauthorized use. As such, the Company incurs certain costs for acquisition, defense, registration and/or renewal of its trademarks. Trademark acquisition costs are capitalized and have been amortized using the straight-line method over 40 years. Trademark defense, registration and/or renewal costs are capitalized and have been amortized using the straight-line method over 15 years. Beginning in 2002, all trademark-related costs which have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with new accounting standards. As such, capitalized amounts related to the Company's trademarks are expected to increase going forward. 16 RESULTS OF OPERATIONS The following represents the results of operations of the Company for the periods indicated below (in millions, except per share amounts):
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/01 12/31/00 12/31/99 - ------------------------------------------------------------------------------------------------------------------- Net revenues Entertainment Domestic TV networks $ 86.6 $ 74.4 $ 74.0 International TV 17.0 17.0 38.0 Worldwide home video 9.6 8.6 10.5 Movies and other 0.6 0.9 3.3 - ------------------------------------------------------------------------------------------------------------------ Total Entertainment 113.8 100.9 125.8 - ------------------------------------------------------------------------------------------------------------------ Publishing Playboy magazine 102.7 110.5 107.9 Other domestic publishing 15.5 16.5 18.1 International publishing 9.9 12.9 11.1 - ------------------------------------------------------------------------------------------------------------------ Total Publishing 128.1 139.9 137.1 - ------------------------------------------------------------------------------------------------------------------ Playboy Online 27.5 25.3 16.1 - ------------------------------------------------------------------------------------------------------------------ Catalog 11.0 32.4 60.3 - ------------------------------------------------------------------------------------------------------------------ Licensing Businesses 10.8 9.2 8.5 - ------------------------------------------------------------------------------------------------------------------ Total net revenues $ 291.2 $ 307.7 $ 347.8 ================================================================================================================== Net loss Entertainment Before programming expense $ 67.3 $ 58.6 $ 78.7 Programming expense (37.4) (33.3) (34.3) - ------------------------------------------------------------------------------------------------------------------ Total Entertainment 29.9 25.3 44.4 - ------------------------------------------------------------------------------------------------------------------ Publishing 1.8 6.9 6.0 - ------------------------------------------------------------------------------------------------------------------ Playboy Online (21.7) (25.2) (9.1) - ------------------------------------------------------------------------------------------------------------------ Catalog (0.4) -- 0.3 - ------------------------------------------------------------------------------------------------------------------ Licensing Businesses 2.6 0.9 (0.5) - ------------------------------------------------------------------------------------------------------------------ Corporate Administration and Promotion (19.7) (20.9) (27.1) - ------------------------------------------------------------------------------------------------------------------ Total segment income (loss) (7.5) (13.0) 14.0 Restructuring expenses (3.8) (3.9) (1.1) Gain (loss) on disposals (0.9) (3.0) 1.7 - ------------------------------------------------------------------------------------------------------------------ Operating income (loss) (12.2) (19.9) 14.6 - ------------------------------------------------------------------------------------------------------------------ Nonoperating income (expense) Investment income 0.8 1.5 1.8 Interest expense (14.0) (9.1) (8.0) Minority interest (0.7) (0.1) (0.1) Equity in operations of PTVI and other (0.7) (0.4) (13.8) Playboy.com registration statement expenses -- (1.6) -- Legal settlement -- (0.6) -- Other, net (1.5) (1.2) (0.9) - ------------------------------------------------------------------------------------------------------------------ Total nonoperating expense (16.1) (11.5) (21.0) - ------------------------------------------------------------------------------------------------------------------ Loss from continuing operations before income taxes and cumulative effect of change in accounting principle (28.3) (31.4) (6.4) Income tax benefit (expense) (1.0) (16.2) 0.9 - ------------------------------------------------------------------------------------------------------------------ Loss from continuing operations before cumulative effect of change in accounting principle (29.3) (47.6) (5.5) Gain on disposal of discontinued operations (net of tax) -- -- 0.2 - ------------------------------------------------------------------------------------------------------------------ Loss before cumulative effect of change in accounting principle (29.3) (47.6) (5.3) Cumulative effect of change in accounting principle (net of tax) (4.2) -- -- - ------------------------------------------------------------------------------------------------------------------ Net loss $ (33.5) $ (47.6) $ (5.3) ================================================================================================================== Basic and diluted income (loss) per common share Income (loss) before cumulative effect of change in accounting principle From continuing operations $ (1.20) $ (1.96) $ (0.24) From discontinued operations (net of tax) -- -- 0.01 - ------------------------------------------------------------------------------------------------------------------ Total (1.20) (1.96) (0.23) Cumulative effect of change in accounting principle (net of tax) (0.17) -- -- - ------------------------------------------------------------------------------------------------------------------ Net loss $ (1.37) $ (1.96) $ (0.23) ==================================================================================================================
17 2001 COMPARED TO 2000 The Company's revenues for 2001 decreased $16.5 million, or 5%, compared to the prior year primarily due to the sale of its Critics' Choice Video businesses in October 2000. In November 2001, the Company also sold its Collectors' Choice Music businesses, ending the Company's presence in the nonbranded print catalog business. The comparison also reflected lower Playboy magazine revenues combined with higher domestic TV networks revenues, largely due to the Califa acquisition in July 2001. Operating performance improved $7.7 million compared to the prior year primarily due to the factors discussed above combined with better performance from the Playboy Online and Licensing Businesses Groups and lower Corporate Administration and Promotion expenses. The current year operating loss also included a lower loss related to the sale of Collectors' Choice Music compared to the loss related to the sale of Critics' Choice Video in the prior year. The lower net loss for 2001 reflected significantly lower income tax expense related to the Company's decision in the prior year to increase the valuation allowance for its deferred tax assets. The current year also 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 ("SOP 00-2"). Additionally, the current year reflected higher interest expense primarily due to imputed noncash interest related to the deferred payment of the purchase price for the Califa acquisition. ENTERTAINMENT GROUP On July 6, 2001, the Company acquired The Hot Network and The Hot Zone networks, together with the related television assets of Califa. In addition, under the asset purchase agreement related to the Califa networks, upon the resolution of certain contingencies, the Company will complete the acquisition of the Vivid TV network and the related television assets of VODI, a separate entity owned by Califa's principals. Through provisions in the asset purchase agreement, the Company is currently operating Vivid TV and has generally assumed the risks and benefits associated with the ownership of the Vivid TV assets until the closing. The addition of these networks into the Company's television networks portfolio enables the Company to offer a wider range of adult programming. The following discussion focuses on the profit contribution of each business before programming expense. Revenues from domestic TV networks for 2001 increased $12.2 million, or 16%, and profit contribution increased $9.8 million. These increases were primarily due to the Califa acquisition described above and an increase in Playboy TV revenues. The Company's networks were available to the following approximate household units (in millions): Dec. 31, Dec. 31, 2001 2000 - -------------------------------------------------------------------------------- Playboy TV (1) DTH 18.1 15.4 Cable digital 10.3 3.2 Cable analog addressable 7.8 11.0 Movie Networks (1) (2) DTH 35.3 -- Cable digital 25.3 8.4 Cable analog addressable 17.0 16.2 - -------------------------------------------------------------------------------- (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 the Company's networks and/or multiple platforms (i.e. analog and digital) are available to that household. (2) Includes additional networks in connection with the Califa acquisition in July 2001. 18 Revenues from the international TV business for 2001 were flat and profit contribution decreased $0.2 million. Lower revenues due to the timing of library license fees from PTVI were offset by higher PTVI programming output payments. Although the Company and Claxson have, to date, funded their respective obligations with respect to PTVI, PTVI's independent auditors have expressed substantial doubt as to PTVI's ability to continue as a going concern in their opinion 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 Claxson does not make its share of capital contributions or PTVI continues to incur losses, the Company's future financial condition and operating results could be materially adversely affected. Revenues from the worldwide home video business for 2001 increased $1.0 million, or 11%, and profit contribution increased $1.4 million primarily due to revenues recorded in the current year in accordance with SOP 00-2, Accounting by Producers or Distributors of Films, primarily related to the domestic business. These revenues were related to guarantees from a backlist distribution agreement that were recorded in prior years. Under the new rules of SOP 00-2, these previously recognized revenues were considered not yet earned and therefore were reversed and reported as part of a cumulative effect of change in accounting principle in the first quarter of 2001. The current year also reflected the impact of the absence of a domestic distributor in the third quarter. The Company's contract with its domestic distributor expired in June 2001 and a contract with a new distributor became effective in October 2001. Additionally, the current year reflected royalties related to a new continuity series deal. Both revenues and profit contribution from movies and other businesses for 2001 decreased $0.3 million, primarily due to lower sales of previously released movies combined with the timing of library license fees from PTVI. Programming expense increased $4.1 million in the current year primarily due to higher amortization for domestic TV networks and international TV, primarily related to the higher programming output payments from PTVI. The group's administrative expenses increased $1.7 million in the current year primarily due to higher performance-related variable compensation expense and increased staffing. PUBLISHING GROUP Playboy magazine revenues decreased $7.8 million, or 7%, for 2001 principally due to fewer U.S. and Canadian newsstand copies sold in the current year. Additionally, advertising revenues were lower due to fewer ad pages, partially offset by higher average net revenue per page. Advertising sales for the 2002 first quarter magazine issues are closed and the Company expects to report 5% lower ad revenues and 9% fewer ad pages compared to the 2001 quarter. These declines are largely the result of industry-wide softness. Philip Morris, a top advertiser to the Company, has announced that they will significantly reduce their overall spending on print advertising, including no pages in Playboy magazine for at least 2002. While this loss of revenues will have an adverse affect on the Company's financial performance, to mitigate this loss the Company continues to implement cost reduction measures and to focus on securing new advertisers, including from underdeveloped categories. Lower revenues from the rental of the magazine's subscriber list also contributed to the revenue decline, a trend the Company expects to continue. Revenues from other domestic publishing businesses decreased $1.0 million, or 6%, for 2001 compared to the prior year. This decline primarily reflected lower sales of special editions principally as a result of increased competition for shelf space and erotica on the Internet. International publishing revenues decreased $3.0 million, or 22%, primarily due to the Company's sale in July 2001 of a majority of VIPress, its Polish publishing joint venture, to its local management. As a result, the joint venture's results are no longer consolidated. Also contributing to the decline were lower royalties from the Brazilian edition as a result of weak economic conditions in that country. The Publishing Group's segment income for 2001 decreased $5.1 million, or 74%, compared to the prior year primarily due to the lower Playboy magazine newsstand and special editions revenues combined with lower subscription profitability. Partially offsetting the above were lower manufacturing costs, principally related to a smaller Playboy magazine book size due in part to the fewer advertising pages, and lower editorial costs. In 2002, the Company expects continued profitability of the Publishing Group. 19 PLAYBOY ONLINE GROUP Playboy Online Group revenues for 2001 increased $2.2 million, or 9%, to $27.5 million. Higher subscription and international revenues, the latter as a result of licensing fees generated by the Company's new German and Korean joint ventures, drove the increase. Additionally, e-commerce revenues increased in spite of the sales of CCVideo.com in October 2000 and CCMusic.com in November 2001. Weaker advertising and sponsorship revenues, an ongoing industry-wide trend, also affected the comparison. In spite of higher trademark and administrative fees to the parent company and write-offs for obsolete inventory, primarily related to the remerchandising of the sites, the segment loss decreased $3.5 million primarily due to cost-saving initiatives, including restructuring, in the current year. The Company is taking actions to achieve profitability for the group in 2002 by increasing efforts to convert visitors to purchasers and continuing to reduce expenses. The Company expects the restructuring and cost-saving initiatives to continue to favorably impact the financial performance of the Playboy Online Group. CATALOG GROUP Catalog Group revenues for 2001 decreased $21.4 million, or 66%, and segment performance decreased $0.4 million. These changes were the result of management's decision to divest this nonbranded noncore business. In October 2000, the Company sold its Critics' Choice Video businesses and related fulfillment and customer service operations to Infinity. In November 2001, the Company also sold to Infinity its Collectors' Choice Music businesses, ending the Company's presence in the nonbranded print catalog business. Infinity is subleasing an approximately 105,000 square-foot warehouse facility and related equipment from the Company and is providing fulfillment and customer service for the Company's e-commerce business. LICENSING BUSINESSES GROUP Segment income for 2001 from the Licensing Businesses Group, formerly the Other Businesses Group, increased $1.7 million on a revenue increase of $1.6 million, or 16%. Growth in the Company's domestic licensed branded products business combined with lower business development expenses related to casino gaming opportunities were responsible for the increased performance. The Company expects to continue to add new domestic and international licensees in 2002, leading to further growth in the group's profitability. The Company believes that the greatest interest in the marketplace for Playboy branded casino-based entertainment centers is from licensing and marketing opportunities, as opposed to equity and management deals. Therefore, as part of its restructuring, the Company has combined the operations of casino gaming into licensing. CORPORATE ADMINISTRATION AND PROMOTION Corporate Administration and Promotion expenses for 2001 decreased $1.2 million, or 6%, compared to the prior year. This improvement primarily reflects a reduction of expenses related to higher trademark fees from the Playboy Online Group and lower technology expenses, partially offset by higher performance-related variable compensation expense. RESTRUCTURING EXPENSES In 2001, the Company 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. As a result of these measures, the Company expects to save approximately $8 million to $10 million on an annualized basis. Total restructuring charges of $3.7 million related to this plan were recorded in 2001, of which $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 its Chicago and New York offices. In 2000, realignment of senior management, coupled with staff reductions, led to a restructuring charge of $3.7 million related to the termination of 19 employees. 20 GAIN (LOSS) ON DISPOSALS In 2001, the Company's sale of its Collectors' Choice Music businesses resulted in a loss of $1.3 million. Additionally, the Company sold a majority of its interest in VIPress, publisher of the Polish edition of Playboy magazine, resulting in a gain of $0.4 million. The prior year included a loss of $3.0 million related to the sale of the Critics' Choice Video businesses and fulfillment and customer service operations. 2000 COMPARED TO 1999 The Company's revenues for 2000 decreased 12% compared to the prior year primarily due to a $30.0 million up-front payment in 1999 from PTVI to the Entertainment Group toward the $100.0 million purchase principally related to library license fees, compared to $7.5 million in 2000. The comparison also reflected the expected decrease of Catalog Group revenues as the Critics' Choice Video businesses were sold in October 2000. The Company reported an operating loss of $19.9 million in 2000 compared to operating income of $14.6 million in 1999, primarily due to the timing and amount of PTVI payments discussed above combined with higher planned investments in the Playboy Online Group, partially offset by lower Corporate Administration and Promotion expenses. The operating loss for 2000 also included a loss related to the sale of the Critics' Choice Video businesses while the prior year included a gain from the sale of the Company's equity in The Playboy Casino at Hotel des Roses (the "Rhodes Casino") in Greece. Additionally, 2000 included a higher restructuring charge compared to the prior year. The higher net loss for 2000 reflected lower PTVI nonoperating expense, including the Company's 19.9% equity in PTVI, the elimination of unrealized profits of certain transactions between the Company and PTVI and gains related to the transfer of certain assets to PTVI. The prior year also included the accounting effects of the formation of the PTVI joint venture. The net loss for 2000 also included a charge incurred in connection with a Playboy.com registration statement that was subsequently withdrawn and significant noncash federal income tax expense related to the Company's decision to increase the valuation allowance for its deferred tax assets. ENTERTAINMENT GROUP The following discussion focuses on the profit contribution of each business before programming expense. For 2000, revenues from domestic TV networks increased $0.4 million, or 1%, and profit contribution increased $0.5 million, primarily due to the Spice acquisition. Also contributing were higher sales of programming to other networks and higher Playboy TV cable pay-per-view revenues, primarily due to higher retail rates. These increases were mostly offset by lower Playboy TV DTH revenues, principally due to a significant decline in PrimeStar subscribers as a result of DirecTV's acquisition of PrimeStar in 1999. PrimeStar service was discontinued in September 2000. The Company's networks were available to the following approximate household units (in millions): Dec. 31, Dec. 31, 2000 1999 - -------------------------------------------------------------------------------- Playboy TV (1) DTH 15.4 12.4 Cable digital 3.2 1.3 Cable analog addressable 11.0 11.7 Movie Networks (1) Cable digital 8.4 3.9 Cable analog addressable 16.2 18.3 - -------------------------------------------------------------------------------- (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 the Company's networks and/or multiple platforms (i.e. analog and digital) are available to that household. International TV business profit contribution for 2000 decreased $19.4 million on a $21.0 million, or 55%, decrease in revenues primarily due to the $30.0 million PTVI payment in 1999 primarily for library license fees. 21 Revenues from the worldwide home video business for 2000 decreased $1.9 million, or 19%, while profit contribution decreased $1.4 million largely due to softness in the domestic business. Profit contribution from movies and other businesses for 2000 decreased $2.1 million on a $2.4 million, or 72%, decrease in revenues primarily due to lower sales of previously released movies combined with the lower library license fees from PTVI. Programming expense decreased $1.0 million in 2000 primarily due to the lower library license fees from PTVI and the lower sales of movies. Higher amortization for domestic TV networks primarily offset the decrease. The group's administrative expenses decreased $2.1 million in 2000 primarily due to lower performance-related variable compensation expense. PUBLISHING GROUP Playboy magazine revenues increased $2.6 million, or 2%, for 2000 compared to the prior year due to higher advertising revenues, due to both higher average net revenue per page and more ad pages. Partially offsetting the above were lower circulation revenues, from both subscriptions and newsstand sales. Revenues from other domestic publishing businesses decreased $1.6 million, or 9%, for 2000 compared to the prior year. This decline largely reflected lower sales of special editions primarily as a result of the previously discussed increased competition. International publishing revenues increased $1.8 million, or 16%, for 2000 primarily due to higher revenues from VIPress, the Company's majority-owned Polish publishing joint venture. As previously discussed, the Company sold a majority of its interest in VIPress in 2001. The Publishing Group's segment income for 2000 increased $0.9 million, or 15%, compared to the prior year primarily due to the higher Playboy magazine advertising revenues, lower manufacturing costs related to a reduction in print runs and lower legal, performance-related variable compensation and ancillary businesses expenses. Partially offsetting the above was lower Playboy magazine subscription profitability combined with higher editorial costs and the lower special editions and Playboy magazine newsstand revenues. PLAYBOY ONLINE GROUP Playboy Online Group revenues for 2000 were $25.3 million, an increase of $9.2 million, or 57%, compared to the prior year due to higher e-commerce and subscription revenues. Contributing significantly to the higher e-commerce revenues was the integration of the Playboy and Spice direct commerce businesses with e-commerce effective October 1, 1999. Higher Playboy e-commerce revenues were offset by a decline in e-commerce revenues from Spice. The group reported a segment loss for 2000 of $25.2 million compared to $9.1 million in the prior year. This reflected planned higher expenses, principally related to sales and marketing, administration and content and product development. The higher administrative expenses were due in part to trademark, content and administrative fees to the parent company. CATALOG GROUP Catalog Group revenues for 2000 decreased $27.9 million, or 46%, and segment performance declined $0.3 million compared to the prior year largely as the result of management's decision to divest this business. In October 2000, the Company sold its Critics' Choice Video businesses and fulfillment and customer service operations. Additionally, the lower revenues reflected planned lower circulation for the Critics' Choice Video catalog, prior to its sale. The comparison also reflected the absence of 2000 revenues related to the Playboy and Spice catalogs. The Playboy and Spice catalogs were integrated as direct commerce businesses within the Company's Playboy Online branded e-commerce business effective in October 1999. LICENSING BUSINESSES GROUP Segment performance from the Licensing Businesses Group for 2000 increased $1.4 million on a $0.7 million, or 8%, increase in revenues primarily due to the strength of the Company's licensed branded products business, combined with lower expenses primarily due to a reorganization in 1999. 22 CORPORATE ADMINISTRATION AND PROMOTION Corporate Administration and Promotion expenses for 2000 were $6.2 million, or 23%, lower than the prior year primarily reflecting planned lower marketing spending and a reduction of expenses related to the trademark and administrative fees from the Playboy Online Group. RESTRUCTURING EXPENSES In 2000, realignment of senior management, coupled with staff reductions, led to a restructuring charge of $3.7 million related to the termination of 19 employees. In 1999, the Company began a cost reduction effort that led to a work force reduction through Company-wide layoffs and attrition. A total of 26 employees were terminated (including eight in the first quarter of 2000) resulting in total restructuring charges of $1.3 million, of which $0.2 million was recorded in the first quarter of 2000. Additionally, 23 positions were eliminated through attrition. GAIN (LOSS) ON DISPOSALS A loss of $3.0 million was recorded in 2000 related to the sale of the Critics' Choice Video businesses and fulfillment and customer service operations. The prior year included a gain of $1.7 million related to the sale of the Company's wholly-owned subsidiary, Playboy Gaming Greece Ltd., which owned a 12% interest in the Rhodes Casino. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2001, the Company had $4.6 million in cash and cash equivalents and $101.6 million in total financing obligations compared to $2.5 million in cash and cash equivalents and $103.3 million in total financing obligations at December 31, 2000. The financing obligations at December 31, 2001 and December 31, 2000 included $20.0 million and $10.0 million, respectively, in loans made directly from Hugh M. Hefner to Playboy.com. A total of $15.0 million of the loans from Mr. Hefner are scheduled to mature in 2002. The Company's current liquidity requirements, excluding those of Playboy.com, are being provided by a $106.1 million credit facility, comprised of $71.1 million of term loans and a $35.0 million revolving credit facility. At December 31, 2001, $10.5 million was outstanding under the revolving credit facility. The Company plans to finance its working capital requirements through cash generated from operations and its revolving credit facility. If additional funds become necessary, the Company will seek additional capital from the debt and/or equity markets. Outstanding balances under the credit facility bear interest at rates equal to specified index rates plus margins that fluctuate based on the Company's leverage ratio. The term loans consist of two tranches, Tranche A and Tranche B, which currently bear interest at 3.00% and 4.25% margins, respectively, over the London Interbank Offering Rate ("LIBOR"). The Company is assessed a 0.5% commitment fee on the unused portion of the revolving credit facility. The weighted average interest rates as of December 31, 2001 were 5.11% and 6.37% for the Tranche A and Tranche B term loans, respectively, and 6.05% for the revolving credit facility. The term loans began amortizing quarterly on March 31, 2001. The Tranche A term loan and the revolving credit facility both mature on March 15, 2004 and the Tranche B term loan matures on March 15, 2006. The Company's obligations under the credit facility are guaranteed by its subsidiaries (excluding Playboy.com) and are secured by substantially all of its assets (excluding Playboy.com and its assets). The credit agreement contains financial covenants requiring the Company to maintain certain leverage, interest coverage and fixed charge coverage ratios. Other covenants include limitations on other indebtedness, investments, capital expenditures and dividends. The credit agreement also requires mandatory prepayments with net cash proceeds resulting from excess cash flow, asset sales and the issuance of certain debt obligations or equity securities, with certain exceptions as described in the agreement. Based on 2001 results, the Company will make an excess cash flow payment of $3.6 million on March 31, 2002. Therefore, total 2002 debt repayments under the credit facility will now be $8.6 million. 23 The nominal consideration for the Califa acquisition was $70.0 million. The Company is obligated to pay up to an additional $12.0 million in consideration should the acquired assets achieve certain financial performance targets. The total consideration will be paid over ten years, with the Company having the option of paying up to $71 million of the scheduled payments in cash or Class B stock. If the Company elects to make a payment in Class B stock and the Company does not get the registration statement relating to the resale of its shares issued in connection with the specified payment effective within the periods set forth in the asset purchase agreement, the Company is also obligated to pay the Califa principals interest on the amount of the payment until the registration statement is declared effective. The interest payment can be paid in cash or shares of Class B stock at the Company's option. As of February 28, 2002, approximately $0.4 million in interest had accrued in connection with the payment of the first installment of consideration to be paid in Class B stock in accordance with the agreement. On March 12, 2002, the Company paid the Califa principals $0.3 million in cash as a partial payment of interest due under the agreement. The Company will pay the balance of the interest payment in shares of Class B stock. The credit agreement also contains a maximum funding limitation by the Company to Playboy.com of $17.5 million, which was met in September 2000. As a result of this limitation, Playboy.com is dependent on third-party financing to fund its operations, including its debt repayment obligations, until its business generates sufficient cash flow. In the event of an initial public offering ("IPO") of Playboy.com's common stock, all amounts above $10.0 million advanced to Playboy.com after January 1, 2000 shall be repaid from Playboy.com to the Company. In addition, 10% of the net proceeds of any Playboy.com equity financing shall be paid to the Company until all amounts above the $10.0 million have been repaid. Playboy.com has been in active discussions with strategic partners and other potential investors in connection with a private placement of its preferred stock. On each of March 7, 2001 and April 2, 2001, Playboy.com issued a convertible promissory note in the aggregate principal amount of $5.0 million to two strategic investors. On July 27, 2001, Playboy.com issued a third convertible promissory note in the aggregate principal amount of $5.0 million to Hugh M. Hefner. On August 13, 2001, each of the three aforementioned convertible promissory notes, together with accrued and unpaid interest thereon, was converted into shares of Playboy.com's Series A Preferred Stock. Playboy.com's Series A Preferred Stock is convertible into Playboy.com common stock (initially on a one-for-one basis) and is redeemable by Playboy.com after the fifth anniversary of the date of its issuance at the option of the holder. In addition, in the event that a holder elects to redeem Playboy.com's Series A Preferred Stock at any time after the fifth anniversary of the date of its issuance and before the 180th day thereafter, and Playboy.com is not able to, or does not, satisfy such obligation, in cash or stock, the Company has agreed that it shall redeem all or part of the shares in lieu of redemption by Playboy.com, either in cash, shares of the Company's Class B stock or any combination thereof at its option. In September and December 2000, Hugh M. Hefner made loans to Playboy.com each in the amount of $5.0 million. These loans bear interest at an annual rate of 10.50% and 12.00%, respectively, with principal and accumulated interest related to both loans due in September 2002. In September 2001, Hugh M. Hefner made an additional $5.0 million loan to Playboy.com which bears interest at an annual rate of 8.00%, with principal and accumulated interest due in July 2002. In December 2001, Hugh M. Hefner agreed to lend up to an additional $10.0 million to Playboy.com from time to time until December 31, 2002, of which $5.0 million had been borrowed by Playboy.com at December 31, 2001. Outstanding balances under this note bear interest at an annual rate of 9.00%, with interest payable monthly, and the note is due in August 2006. Under the terms of the note, Hugh M. Hefner may elect, at any time, to convert the note into shares of Playboy.com's common stock at a per share price of $7.1097 (as equitably adjusted for any stock dividends, combinations, splits or similar transactions). Additionally, in conjunction with the issuance of the note, the Company has agreed to give Hugh M. Hefner the right to surrender the note to the Company for shares of its Class B stock on or after certain specified surrender events. Under the agreement, "surrender event" means any of the following: (a) August 10, 2006, (b) the date on which the Company is no longer subject to the terms (except for such terms that expressly survive the payment in full of the obligations and termination of the commitments thereunder) of its credit agreement, (c) the occurrence and continuation of an event of default under the note, including the dissolution of Playboy.com or any vote in favor thereof by Playboy.com's board of directors or stockholders, certain insolvency or bankruptcy events relating to Playboy.com, Playboy.com's failure to pay principal and interest due and payable under the note and Playboy.com's non-performance of any material covenant or condition under the note which continues uncured for 15 days after written notice of the default is provided to Playboy.com, (d) the dissolution of Playboy.com or any vote in favor thereof by Playboy.com's board of directors or stockholders or (e) certain insolvency or bankruptcy events relating to Playboy.com. However, the note may not be surrendered if the surrender of the note or the issuance of the shares of Class B stock would be prohibited by the Company's credit agreement. In the event that Mr. Hefner elects to surrender the December 2001 note for shares of Class B stock in accordance with the foregoing, the Company will issue to Mr. Hefner the number of shares equal to the outstanding principal and interest on the note divided by $19.90 (125% of the volume weighted average closing price of Class B stock (as equitably adjusted for any stock dividends, combinations, splits or similar transactions) on the five trading days immediately prior to the date of the note). 24 As previously discussed, PTVI's ability to finance its operations, including making library license and programming output payments to the Company, will depend principally on the ability of Claxson, the Company's venture partner, and also the Company to make capital contributions, until PTVI generates sufficient funds from operations. The maximum mandatory capital contributions by the partners is $100 million, of which $61.6 million has been contributed through December 31, 2001. If these payments are not made, the Company's future financial condition and operating results could be materially adversely affected. See Note (C) Playboy TV International, LLC Joint Venture of Notes to Consolidated Financial Statements. CASH FLOWS FROM OPERATING ACTIVITIES Net cash used for operating activities was $7.9 million for 2001, due primarily to $37.3 million of investments in Company-produced and licensed entertainment programming, partially offset by positive results (after adjusting for noncash items), principally from the Entertainment Group. In 2002, the Company expects to invest approximately $45 million in Company-produced and licensed programming, which could vary based on, among other things, the timing of completing productions. CASH FLOWS FROM INVESTING ACTIVITIES Net cash used for investing activities was $2.9 million for 2001 primarily due to $3.2 million of additions to property and equipment. In 2001, the Company also entered into leases of furniture and equipment totaling $1.6 million. The Company invested $1.9 million related to funding its equity interests in international TV ventures. The Califa acquisition resulted in net cash paid of $0.9 million in the current year. Partially offsetting the above was $3.3 million of proceeds from disposals, primarily related to the sale of the Collectors' Choice Music businesses and VIPress. CASH FLOWS FROM FINANCING ACTIVITIES Net cash provided by financing activities was $12.9 million for 2001 primarily due to the $13.1 million of net proceeds from the sale of Playboy.com's Series A Preferred Stock. Playboy.com also received the $10.0 million in loans from Hugh M. Hefner. Partially offsetting the above was $7.8 million in payments on the Company's revolving credit facility. INCOME TAXES In 2000, 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. As a result of this review, the Company decided to adopt a more conservative approach by increasing the valuation allowance, which resulted in noncash federal income tax expense of $24.1 million. RELATED PARTY TRANSACTIONS HUGH M. HEFNER The Company owns a 29-room mansion located on 5 1/2 acres in Holmby Hills, California. The Mansion is used for various corporate activities, including serving as a valuable location for video production, magazine photography, online events, business meetings, enhancing the Company's image, charitable functions and a wide variety of other promotional and marketing activities. The Mansion generates substantial publicity and recognition which increase public awareness of the Company and its products and services. Its facilities include a tennis court, swimming pool, gymnasium and other recreational facilities as well as extensive film, video, sound and security systems. The Mansion also includes accommodations for guests and serves as an office and residence for Hugh M. Hefner, the Company's founder. It has a full-time staff which performs maintenance, serves in various capacities at the functions held at the Mansion and provides guests of the Company and Mr. Hefner with meals, beverages and other services. 25 Under a 1979 lease the Company entered into with Mr. Hefner, the annual rent Mr. Hefner pays to the Company for his use of the Mansion is determined by independent experts who appraise the value of Mr. Hefner's basic accommodations and access to the Mansion's facilities, utilities and attendant services based on comparable hotel accommodations. In addition, Mr. Hefner is required to pay the sum of the per-unit value of nonbusiness meals, beverages and other benefits he and his personal guests receive. These standard food and beverage per-unit values are determined by independent expert appraisals based on fair market values. Valuations for both basic accommodations and standard food and beverage units are reappraised every three years, and between appraisals are annually adjusted based on appropriate consumer price indexes. Mr. Hefner is also responsible for the cost of all improvements in any Hefner residence accommodations, including capital expenditures, that are in excess of normal maintenance for those areas. Mr. Hefner's usage of Mansion services and benefits is recorded through a system initially developed by the auditing and consulting firm of PricewaterhouseCoopers LLP and now administered by the Company, with appropriate modifications approved by the audit and compensation committees of the Board of Directors. The lease had an initial two-year term which expired on June 30, 1981, but on its terms continues for ensuing 12-month periods unless either the Company or Mr. Hefner terminates it. When the Company changed its fiscal year from a year ending June 30 to a year ending December 31, Mr. Hefner's lease continued for only a six-month period through December 31, 1998 to accommodate this change. On December 31, 1998, the lease renewed automatically and will continue to renew automatically for 12-month periods under the terms as previously described. The rent charged to Mr. Hefner during 2001 included the appraised rent and the appraised per-unit value of other benefits, as described above. Within 120 days after the end of the Company's fiscal year, the actual charge for all benefits for that year is finally determined. Mr. Hefner pays or receives credit for any difference between the amount finally determined and the amount he paid over the course of the year. The sum of the rent and other benefits payable for 2001 was estimated by the Company to be $1.3 million, and Mr. Hefner paid that amount during 2001. The actual rent and other benefits payable for 2000 and 1999 were $1.1 million and $0.9 million, respectively. The Company purchased the Mansion in 1971 for $1.1 million and in the intervening years has made substantial capital improvements at a cost of $13.4 million through 2001 (including $2.5 million to bring the Hefner residence accommodations to a standard similar to the Mansion's common areas). The Mansion is included in the Company's Consolidated Balance Sheet as of December 31, 2001 at a cost, including all improvements and after accumulated depreciation, of $2.0 million. The Company pays all operating expenses of the Mansion, including depreciation and taxes, which were $3.2 million, $3.2 million and $3.6 million for 2001, 2000 and 1999, respectively, net of rent received from Mr. Hefner. As of December 31, 2001, Playboy.com had borrowed a total of $20.0 million from Hugh M. Hefner. This indebtedness is evidenced by the four notes previously discussed. Also as discussed, Mr. Hefner was the holder of a $5.0 million convertible promissory note which converted into shares of Playboy.com's Series A Preferred Stock in 2001. From time to time, the Company enters into barter transactions in which the Company secures air transportation for Mr. Hefner in exchange for advertising pages in Playboy magazine. Mr. Hefner reimburses the Company for its direct costs of providing these advertising pages. The Company receives significant promotional benefit from these transactions. PTVI During 1999, PTVI was formed as a joint venture between the Company and Cisneros. In 2001, Claxson succeeded Cisneros as the Company's joint venture partner. PTVI has the exclusive right to create and launch new television networks under the Playboy and Spice brands 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 its equity up to 50%. 26 In return for the exclusive international TV rights for the use of the Playboy tradename, film and video library, and for the acquisition of the international rights to the Spice film library, the U.K. and Japan Playboy TV networks and certain international distribution contracts, PTVI is obligated to make total payments of $100.0 million to the Company over six years, of which $42.5 million has been received through the end of 2001. The remaining payments are owed over the next three years as follows: $7.5 million, $25.0 million and $25.0 million. PTVI also has a long-term commitment with the Company to license international TV rights to each year's output production, with payments representing a percentage of the Company's annual production spending. PTVI's ability to finance its operations, including making library license and programming output payments to the Company, will depend principally on the ability of Claxson and also the Company to make capital contributions, until PTVI generates sufficient funds from operations. If these payments are not made, the Company's future financial condition and operating results could be materially adversely affected. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (the "FASB") issued Statements of Financial Accounting Standards No. 141, Business Combinations and No. 142, Goodwill and Other Intangible Assets (collectively, "Statements 141 and 142"), effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets with indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with Statements 141 and 142. Other intangible assets will continue to be amortized over their useful lives. In compliance with these statements, goodwill recorded in connection with the Califa acquisition in July 2001 is not being amortized. The Company is evaluating the impact that application of the nonamortization provisions of Statements 141 and 142 will have on the Company's financial statements. In 2001, annual amortization expense for goodwill and intangible assets with indefinite lives was approximately $5.8 million. The Company will perform the first of the required impairment tests of goodwill and indefinite-lived intangible assets as of January 1, 2002. The Company does not expect to record a charge as a cumulative effect of change in accounting principle, however, it does expect to record an approximate $5.8 million income tax charge related to the adoption in the first quarter of 2002. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("Statement 144"), which is effective for fiscal years beginning after December 15, 2001. Statement 144 establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. Statement 144 supercedes Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("Statement 121"), and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions ("APB 30"), for the disposal of a segment of a business (as previously defined in that Opinion). Statement 144 also amends Accounting Research Bulletin No. 51, Consolidated Financial Statements ("ARB 51"), to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The Company believes that adoption of Statement 144 will not have a material impact on its financial statements. 27 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 known and unknown risks, uncertainties and other factors, which could cause 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 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) changes in or increased regulation of gaming businesses, which could limit the Company's ability to obtain licenses, and the impact of federal and state laws on gaming businesses generally, (c) limitations on the advertisement of tobacco, alcohol and other products which are important sources of advertising revenue, or (d) substantive changes in postal regulations or rates which could increase the Company's postage and distribution costs; (2) risks associated with foreign operations, including market acceptance and demand for the Company's products and the products of its licensees and the Company's ability to manage the risk associated with its 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 the Company's programming and products and impact its advertising revenues; (5) the Company's ability to protect its trademarks and other intellectual property; (6) risks as a distributor of media content, including 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 Company common stock in connection with acquisitions by the Company and 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 the Company's plans and assumptions regarding carriage of its networks; (12) risks associated with losing access to transponders, competition for transponders and channel space and any decline in the Company's 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 the Company's programming from pay television distribution; (14) risks associated with integrating the operations of the networks related to the Califa acquisition and the risks that the Company 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 the Company, will depend principally on the ability of Claxson, the Company's venture partner, and also the Company to make capital contributions, until PTVI generates sufficient funds from operations. If these payments are not made, the Company's 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) the Company's ability to obtain adequate third-party financing, including equity investments, to fund the Company's Internet business, and the timing and terms of such financing. 28 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 enters into various hedging transactions that have been authorized pursuant to the Company's policies and procedures. The Company does not use financial instruments for trading purposes. The Company prepared sensitivity analyses to determine the impact of a hypothetical one percentage point increase in interest rates. Based on its sensitivity analyses at December 31, 2001 and 2000, such a change in interest rates would affect the Company's annual consolidated operating results, financial position and cash flows by approximately $0.8 million and $0.9 million, respectively. As of December 31, 2001 and 2000, the Company had an interest rate swap agreement in place to effectively convert $45.0 million of its 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, 2001 and 2000, 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 for both years. The Company uses foreign currency forward contracts to manage the risk associated with its exposure to foreign currency exchange rate fluctuations. Item 8. Financial Statements and Supplementary Data The following consolidated financial statements of the Company and supplementary data are set forth in this Form 10-K Annual Report as follows: Page ---- Consolidated Statements of Operations - Fiscal Years Ended December 31, 2001, 2000 and 1999 30 Consolidated Balance Sheets - December 31, 2001 and 2000 31 Consolidated Statements of Shareholders' Equity - Fiscal Years Ended December 31, 2001, 2000 and 1999 32 Consolidated Statements of Cash Flows - Fiscal Years Ended December 31, 2001, 2000 and 1999 33 Notes to Consolidated Financial Statements 34 Report of Independent Auditors 55 Report of Independent Accountants 56 Report of Management 57 The supplementary data regarding quarterly results of operations are set forth in Note (W) Quarterly Results of Operations (Unaudited) of Notes to Consolidated Financial Statements. 29 PLAYBOY ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/01 12/31/00 12/31/99 - ------------------------------------------------------------------------------------------------------------ Net revenues $ 291,226 $ 307,722 $ 347,817 - ------------------------------------------------------------------------------------------------------------ Costs and expenses Cost of sales (240,691) (265,369) (277,448) Selling and administrative expenses (58,050) (55,385) (56,390) Restructuring expenses (3,776) (3,908) (1,091) Gain (loss) on disposals (955) (2,924) 1,728 - ------------------------------------------------------------------------------------------------------------ Total costs and expenses (303,472) (327,586) (333,201) - ------------------------------------------------------------------------------------------------------------ Operating income (loss) (12,246) (19,864) 14,616 - ------------------------------------------------------------------------------------------------------------ Nonoperating income (expense) Investment income 786 1,519 1,798 Interest expense (13,970) (9,148) (7,977) Minority interest (704) (125) (92) Equity in operations of PTVI and other (746) (375) (13,871) Playboy.com registration statement expenses -- (1,582) -- Legal settlement -- (622) -- Other, net (1,447) (1,202) (904) - ------------------------------------------------------------------------------------------------------------ Total nonoperating expense (16,081) (11,535) (21,046) - ------------------------------------------------------------------------------------------------------------ Loss from continuing operations before income taxes and cumulative effect of change in accounting principle (28,327) (31,399) (6,430) Income tax benefit (expense) (996) (16,227) 862 - ------------------------------------------------------------------------------------------------------------ Loss from continuing operations before cumulative effect of change in accounting principle (29,323) (47,626) (5,568) Gain on disposal of discontinued operations (net of tax) -- -- 233 - ------------------------------------------------------------------------------------------------------------ Loss before cumulative effect of change in accounting principle (29,323) (47,626) (5,335) Cumulative effect of change in accounting principle (net of tax) (4,218) -- -- - ------------------------------------------------------------------------------------------------------------ Net loss $ (33,541) $ (47,626) $ (5,335) ============================================================================================================ Basic and diluted weighted average number of common shares outstanding 24,411 24,240 22,872 ============================================================================================================ Basic and diluted income (loss) per common share Income (loss) before cumulative effect of change in accounting principle From continuing operations $ (1.20) $ (1.96) $ (0.24) From discontinued operations (net of tax) -- -- 0.01 - ------------------------------------------------------------------------------------------------------------ Total (1.20) (1.96) (0.23) Cumulative effect of change in accounting principle (net of tax) (0.17) -- -- - ------------------------------------------------------------------------------------------------------------ Net loss $ (1.37) $ (1.96) $ (0.23) ============================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 30 PLAYBOY ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
Dec. 31, Dec. 31, 2001 2000 - --------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 4,610 $ 2,534 Marketable securities 3,182 3,443 Receivables, net of allowance for doubtful accounts of $6,406 and $5,994, respectively 41,846 45,075 Receivables from related parties 12,417 7,575 Inventories, net 13,962 20,700 Deferred subscription acquisition costs 12,111 12,514 Other current assets 7,857 9,568 - --------------------------------------------------------------------------------------------------------- Total current assets 95,985 101,409 - --------------------------------------------------------------------------------------------------------- Receivables from related parties 50,000 57,500 Property and equipment, net 10,749 11,532 Programming costs 56,213 55,454 Goodwill, net of accumulated amortization of $7,349 and $4,761, respectively 112,338 87,260 Trademarks, net of accumulated amortization of $17,726 and $14,701, respectively 52,185 52,585 Distribution agreements acquired, net of accumulated amortization of $2,199 26,301 -- Other noncurrent assets 22,469 22,748 - --------------------------------------------------------------------------------------------------------- Total assets $ 426,240 $ 388,488 ========================================================================================================= Liabilities Financing obligations $ 8,561 $ 3,922 Financing obligations to related parties 15,000 5,000 Acquisition liability 21,023 -- Accounts payable 19,293 25,295 Accounts payable to related parties 169 718 Accrued salaries, wages and employee benefits 8,717 8,915 Deferred revenues 47,913 41,898 Deferred revenues from related parties 8,382 4,397 Other liabilities and accrued expenses 18,453 16,861 - --------------------------------------------------------------------------------------------------------- Total current liabilities 147,511 107,006 - --------------------------------------------------------------------------------------------------------- Financing obligations 73,017 89,328 Financing obligations to related parties 5,000 5,000 Acquisition liability 41,079 -- Deferred revenues from related parties 44,350 50,875 Net deferred tax liabilities 5,313 4,679 Other noncurrent liabilities 28,445 17,415 - --------------------------------------------------------------------------------------------------------- Total liabilities 344,715 274,303 - --------------------------------------------------------------------------------------------------------- Shareholders' equity Common stock, $0.01 par value Class A voting - 7,500,000 shares authorized; 4,864,102 and 4,859,102 issued, respectively 49 49 Class B nonvoting - 30,000,000 shares authorized; 19,930,142 and 19,647,048 issued, respectively 199 196 Capital in excess of par value 123,090 120,519 Accumulated deficit (36,925) (3,384) Unearned compensation restricted stock (3,019) (2,713) Accumulated other comprehensive loss (1,869) (482) - --------------------------------------------------------------------------------------------------------- Total shareholders' equity 81,525 114,185 - --------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 426,240 $ 388,488 =========================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 31 PLAYBOY ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
Retained Unearned Class A Class B Capital in Earnings Comp. Common Common Excess of (Accum. Restricted Stock Stock Par Value Deficit) Stock - --------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $ 50 $ 171 $ 44,860 $ 49,577 $ (3,716) Net loss -- -- -- (5,335) -- Shares issued, vested or forfeited under stock plans, net 2 6 5,454 -- 92 Shares issued related to the Spice acquisition -- 18 47,505 -- -- Shares issued in public equity offering -- 9 24,541 -- -- Cancellation of treasury stock (3) (8) (5,619) -- -- Income tax benefit related to stock plans -- -- 3,596 -- -- Other comprehensive income -- -- -- -- -- - --------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 49 196 120,337 44,242 (3,624) Net loss -- -- -- (47,626) -- Shares issued, vested or forfeited under stock plans, net -- -- 510 -- 911 Other comprehensive loss -- -- -- -- -- Other -- -- (328) -- -- - --------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 49 196 120,519 (3,384) (2,713) Net loss -- -- -- (33,541) -- Shares issued, vested or forfeited under stock plans, net -- 3 2,504 -- (306) Other comprehensive loss -- -- -- -- -- Disposal -- -- -- -- -- Other -- -- 67 -- -- - --------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 $ 49 $ 199 $ 123,090 $ (36,925) $ (3,019) ===================================================================================================================== Accumulated Other Comprehensive Treasury Income (Loss) Stock Total - ----------------------------------------------------------------------------------------- Balance at December 31, 1998 $ (169) $ (6,571) $ 84,202 Net loss -- -- (5,335) Shares issued, vested or forfeited under stock plans, net -- 35 5,589 Shares issued related to the Spice acquisition -- 906 48,429 Shares issued in public equity offering -- -- 24,550 Cancellation of treasury stock -- 5,630 -- Income tax benefit related to stock plans -- -- 3,596 Other comprehensive income 250 -- 250 - ----------------------------------------------------------------------------------------- Balance at December 31, 1999 81 -- 161,281 Net loss -- -- (47,626) Shares issued, vested or forfeited under stock plans, net -- -- 1,421 Other comprehensive loss (563) -- (563) Other -- -- (328) - ----------------------------------------------------------------------------------------- Balance at December 31, 2000 (482) -- 114,185 Net loss -- -- (33,541) Shares issued, vested or forfeited under stock plans, net -- -- 2,201 Other comprehensive loss (1,631) -- (1,631) Disposal 244 -- 244 Other -- -- 67 - ----------------------------------------------------------------------------------------- Balance at December 31, 2001 $ (1,869) $ -- $ 81,525 =========================================================================================
Comprehensive income (loss) was as follows:
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/01 12/31/00 12/31/99 - ----------------------------------------------------------------------------------- Net loss $ (33,541) $ (47,626) $ (5,335) Unrealized gain (loss) on marketable securities (350) (533) 388 Derivative loss (1,184) -- -- Foreign currency translation loss (97) (30) (138) - ----------------------------------------------------------------------------------- Total other comprehensive income (loss) (1,631) (563) 250 - ----------------------------------------------------------------------------------- Comprehensive loss $ (35,172) $ (48,189) $ (5,085) ===================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 32 PLAYBOY ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/01 12/31/00 12/31/99 - -------------------------------------------------------------------------------------------------------------- Cash flows from operating activities Net loss $ (33,541) $ (47,626) $ (5,335) Adjustments to reconcile net loss to net cash provided by (used for) operating activities Depreciation of property and equipment 3,897 3,561 2,055 Amortization of intangible assets 10,612 8,097 6,295 Equity in operations of PTVI and other 746 375 13,871 (Gain) loss on disposals 955 2,924 (1,728) Cumulative effect of change in accounting principle 4,218 -- -- Deferred income taxes 634 12,950 (6,663) Income tax benefit related to stock plans -- -- 3,596 Amortization of investments in entertainment programming 37,395 33,253 34,341 Changes in current assets and liabilities Receivables 5,822 (3,305) 5,604 Receivables from related parties (4,458) 4,832 (9,342) Inventories 3,468 (1,129) 1,854 Deferred subscription acquisition costs 403 1,065 (2,009) Other current assets 944 1,797 2,378 Accounts payable (6,587) (7,024) 128 Accounts payable to related parties (549) (1,972) 2,690 Accrued salaries, wages and employee benefits (486) 76 2,815 Deferred revenues 1,122 (456) 707 Deferred revenues from related parties 3,985 (2,128) 6,525 Acquisition liability interest 3,777 -- -- Other liabilities and accrued expenses 1,034 3,634 (598) ----------- ----------- ----------- Net change in current assets and liabilities 8,475 (4,610) 10,752 ----------- ----------- ----------- (Increase) decrease in receivables from related parties 6,525 4,350 (54,375) Investments in entertainment programming (37,254) (33,061) (35,262) Increase in trademarks (2,625) (7,080) (6,690) Increase in other noncurrent assets (173) (384) (1,722) Increase (decrease) in deferred revenues from related parties (6,525) (4,350) 55,225 Increase (decrease) in other noncurrent liabilities (737) (160) 1,188 Other, net (547) 611 552 - -------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) operating activities (7,945) (31,150) 16,100 - -------------------------------------------------------------------------------------------------------------- Cash flows from investing activities Payments for acquisitions (935) (1,152) (64,820) Proceeds from disposals 3,276 5,384 13,573 Additions to property and equipment (3,233) (5,265) (2,702) Funding of equity interests (1,875) (2,238) (12,069) Purchase of marketable securities (89) (866) (2,171) Other, net 3 248 63 - -------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (2,853) (3,889) (68,126) - -------------------------------------------------------------------------------------------------------------- Cash flows from financing activities Net proceeds from sale of Playboy.com Series A Preferred Stock 13,066 -- -- Proceeds from financing obligations 10,000 10,000 110,000 Repayment of financing obligations (3,922) (15,000) (20,000) Net proceeds from (payments on) revolving credit facility (7,750) 18,250 (29,750) Net proceeds from public equity offering -- -- 24,550 Payment of debt assumed in acquisition -- -- (10,471) Deferred financing fees (454) (590) (4,669) Proceeds from stock plans 2,141 1,385 5,553 Other, net (207) -- -- - -------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 12,874 14,045 75,213 - -------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 2,076 (20,994) 23,187 Cash and cash equivalents at beginning of year 2,534 23,528 341 - -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 4,610 $ 2,534 $ 23,528 ==============================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 33 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 have been eliminated in consolidation. Use of estimates: The preparation of financial statements in conformity with GAAP 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. New accounting pronouncements: In June 2001, the FASB issued Statements 141 and 142, Business Combinations and Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets with indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with Statements 141 and 142. Other intangible assets will continue to be amortized over their useful lives. In compliance with these statements, goodwill recorded in connection with the Califa acquisition in July 2001 is not being amortized. The Company is evaluating the impact that application of the nonamortization provisions of Statements 141 and 142 will have on the Company's financial statements. In 2001, annual amortization expense for goodwill and intangible assets with indefinite lives was approximately $5.8 million. The Company will perform the first of the required impairment tests of goodwill and indefinite-lived intangible assets as of January 1, 2002. The Company does not expect to record a charge as a cumulative effect of change in accounting principle, however, it does expect to record an approximate $5.8 million income tax charge related to the adoption in the first quarter of 2002. In August 2001, the FASB issued Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years beginning after December 15, 2001. Statement 144 establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. Statement 144 supercedes Statement 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that Opinion). Statement 144 also amends ARB 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The Company believes that adoption of Statement 144 will not have a material impact on its financial statements. Cumulative effect of change in accounting principle: During 2001, the Company adopted Statement of Financial Accounting Standards No. 139, Rescission of FASB Statement No. 53 and Amendments to FASB Statements No. 63, 89, and 121 ("Statement 139") and SOP 00-2, Accounting by Producers or Distributors of Films. Statement 139 rescinds FASB Statement No. 53, Financial Reporting by Producers and Distributors of Motion Picture Films. SOP 00-2 establishes new film accounting and reporting standards for producers or distributors of films, including changes in revenue recognition and accounting for marketing, development and overhead costs. SOP 00-2 also requires all programming costs to be classified on the balance sheet as noncurrent assets. As a result of the adoption of SOP 00-2, the Company recorded a noncash charge of $4.2 million, or $0.17 per basic and diluted common share, in 2001, representing a cumulative effect of change in accounting principle. There was no related income tax effect. The charge primarily relates to reversals of previously recognized revenues which under the new rules were considered not yet earned, combined with a write-off of marketing costs that were previously capitalized and are no longer capitalizable under the new rules. 34 Revenue recognition: 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 received from the PTVI joint venture, for the license of the exclusive international TV rights for the use of the Playboy tradename, film and video library, and for the acquisition of the international rights to the Spice film library, the U.K. and Japan Playboy TV networks and certain international distribution contracts, are recognized as the consideration is paid to the Company over a six-year period, less the Company's 19.9% intercompany interest in such transactions. License fees from PTVI for current output production are recognized as programming is available, less the Company's 19.9% intercompany interest in such transactions. See Note (C) Playboy TV International, LLC Joint Venture. Domestic home video revenues generally are recognized based on unit sales reported each month by the Company's distributor. Revenues from the sale of Playboy magazine and Internet subscriptions are recognized over the terms of the subscriptions. Revenues from 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. Revenues from direct- and e-commerce are recognized when the items are shipped. Cash equivalents: Cash equivalents are temporary cash investments with an original maturity of three months or less at date of purchase and are stated at cost, which approximates fair value. Marketable securities: Marketable securities are classified as available-for-sale securities and are stated at fair value. Net unrealized holding gains and losses are included in "Accumulated other comprehensive loss." Inventories: Inventories are stated at the lower of cost (specific cost and average cost) or fair value. Property and equipment: Property and equipment is stated at cost. Costs incurred for computer software developed or obtained for internal use are capitalized for application development activities and immediately expensed for preliminary project activities or post-implementation activities. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets. The useful life for buildings and improvements is ten years, furniture and equipment ranges from four to ten years and software ranges from one to five years. Leasehold improvements are depreciated using 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, and any related gains or losses are included in nonoperating results. 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 Playboy magazine subscriptions, principally the production of direct-mail solicitation materials and postage, and the distribution of direct- and e-commerce mailings for use in the Playboy Online Group and the Catalog Group, prior to the sales of the Company's catalogs. 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. See Note (L) Advertising Costs. 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 using the straight-line method over three years. The portion of 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 using 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. See Note (C) Playboy TV International, LLC Joint Venture and Note (N) Programming Costs. 35 Intangible assets: Goodwill, the excess of the purchase price of acquired businesses over the fair value of net assets acquired, has been amortized using the straight-line method generally over 40 years. In compliance with Statements 141 and 142, goodwill recorded in connection with the Califa acquisition in July 2001 is not being amortized. Trademark acquisition costs are capitalized and have been amortized using the straight-line method over 40 years. Trademark defense, registration and/or renewal costs are capitalized and have been amortized using the straight-line method over 15 years. Beginning in 2002, goodwill and all trademark-related costs which have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with Statements 141 and 142. The Company acquired certain distribution agreements as a result of the Califa acquisition that are reported as "Distribution agreements acquired." Certain of these distribution agreements were deemed to have indefinite lives and, as such, are not subject to amortization under Statements 141 and 142. Distribution agreements deemed to have definite lives are being amortized over the life of the agreements, or approximately two years. The consideration allocated to noncompete agreements related to the Spice and Califa acquisitions are amortized using the straight-line method over the life of the agreements, ranging from five to ten years, and are included in "Other noncurrent assets." Copyright defense, registration and/or renewal costs are capitalized and amortized using the straight-line method over 15 years, and are also included in "Other noncurrent assets." Derivative financial instruments: Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("Statement 133"), as amended by Statement of Financial Accounting Standards No. 138, which require all derivative instruments to be recognized as either assets or liabilities on the balance sheet at fair value regardless of the purpose or intent for holding the derivative instrument. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as either a fair value hedge, a cash flow hedge or a hedge of a net investment in a foreign operation. The adoption of Statement 133 did not have a material impact on the financial position or results of operations of the Company. The Company has derivative instruments that have been designated and qualify as cash flow hedges, which are entered into in order to hedge the variability of cash flows to be paid related to a recognized liability and cash flows to be received related to forecasted royalty revenues. In 2001, the Company entered into an interest rate swap agreement maturing in May 2003 that effectively converts $45.0 million of its floating rate debt to fixed rate debt, thus reducing the impact of interest rate changes on future interest expense. In addition, to protect against the reduction in value of foreign currency cash flows, the Company hedges portions of its forecasted royalty revenues denominated in foreign currencies, primarily Japanese yen and the Euro, with forward contracts. The Company hedges these royalties for periods not exceeding 12 months. As of December 31, 2001, the fair value and carrying value of the Company's interest rate swap was a liability of approximately $1.2 million recorded in "Other liabilities and accrued expenses." The fair value and carrying value of the Company's forward contracts was not material. Since these derivative instruments are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instruments is being deferred and reported as a component of "Accumulated other comprehensive loss" and is reclassified into earnings in the same line item where the related interest expense or royalty revenue is recognized into earnings. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various hedge transactions. The Company links all hedges that are designated as cash flow hedges to floating rate liabilities or forecasted transactions on the balance sheet. The Company also assesses, both at the inception of the hedge and on an on-going basis, whether the derivatives used in hedging transactions are effective in offsetting changes in cash flows of the hedged items. Should it be determined that a derivative is not effective as a hedge, the Company will discontinue hedge accounting prospectively. As of December 31, 2001, the Company had net unrealized losses totaling $1.2 million in "Accumulated other comprehensive loss," which represents the effective portion of changes in fair value of the cash flow hedges. During 2001, $0.2 million of net losses were reclassified from "Accumulated other comprehensive loss" to the Consolidated Statement of Operations, which were offset by net gains on the items being hedged. In 2001, there was no amount included in earnings related to hedging ineffectiveness. The Company expects the amount to be reclassified from "Accumulated other comprehensive loss" to earnings within the next 12 months to be losses of approximately $1.1 million. 36 The Company also used interest rate swap agreements and forward contracts for hedging purposes prior to 2001 and the adoption of Statement 133. For interest rate swaps, the differential to be paid or received was accrued monthly as an adjustment to interest expense. For forward contracts, gains and losses were recorded in operating results as part of, and concurrent with, the hedged transaction. The fair value of derivative instruments as of December 31, 2000 was $0.2 million, and these contracts were not recorded on the December 31, 2000 Consolidated Balance Sheet. Earnings per common share: The Company reports both basic and diluted earnings per share ("EPS") amounts. Basic EPS is computed by dividing net income (loss) applicable to common shares by the weighted average number of common shares outstanding during the period. Diluted EPS adjusts basic EPS for the dilutive effects of stock options and other potentially dilutive financial instruments. See Note (H) Earnings per Common Share. Equity in operations of PTVI and other: The equity method is used to account for the Company's 19.9% interest in the common stock of PTVI due to the Company's ability to exercise significant influence over PTVI's operating and financial policies. Equity in operations of PTVI includes the Company's 19.9% interest in the results of PTVI, the elimination of unrealized profits of certain transactions between the Company and PTVI and gains related to the transfer of certain assets to PTVI. Also included in 1999 were the accounting effects of the formation of the joint venture. Minority interest: In 2001, a subsidiary of the Company, Playboy.com, converted three promissory notes, together with accrued and unpaid interest thereon, into shares of Playboy.com's Series A Preferred Stock. As part of consolidation, included in "Minority interest" and "Other noncurrent liabilities" is the accretion of dividends payable and professional fees related to the preferred stock. Also included in "Other noncurrent liabilities" is minority interest associated with the preferred stock. Additionally, in 2001 the Company sold a majority of its interest in VIPress, publisher of the Polish edition of Playboy magazine. Prior to the sale, the financial statements of VIPress were included in the Company's financial statements, along with the related minority interest. Foreign currency translation: Assets and liabilities in foreign currencies related to VIPress, prior to the sale in 2001, were translated into U.S. dollars at the exchange rate existing at the balance sheet date. The net exchange differences resulting from these translations were included in "Accumulated other comprehensive loss." Revenues and expenses were translated at average rates for the period. In addition, the Company records its 19.9% interest in PTVI's foreign currency translation amounts. (B) ACQUISITIONS In July 2001, the Company acquired The Hot Network and The Hot Zone networks, together with the related television assets of Califa. In addition, under the asset purchase agreement related to the Califa networks, upon the resolution of certain contingencies, the Company will complete the acquisition of the Vivid TV network and the related television assets of VODI, a separate entity owned by Califa's principals. The asset purchase agreement provides that the Company will manage the Vivid TV assets in accordance with provisions contained in the asset purchase agreement until the closing of the purchase of the Vivid TV assets. These provisions generally allocate to the Company the risks and benefits associated with the ownership of the Vivid TV assets. The Vivid TV closing will take place promptly following the earliest to occur of (a) the Company obtaining the consent of DirecTV, Inc. to the transfer of the Vivid TV assets or (b) the earlier of the termination of the license agreement between DirecTV, Inc. and VODI or December 31, 2004. The addition of these networks into the Company's television networks portfolio enables the Company to offer a wider range of adult programming. The Company is accounting for the acquisition under the purchase method of accounting and, accordingly, the results of Califa and VODI since the acquisition date have been included in the Company's Consolidated Statement of Operations. In connection with the acquisition and purchase price allocations, the Entertainment Group recorded goodwill of $27.9 million which is deductible for income tax purposes over 15 years. The purchase price has been recorded at its net present value and is reported in the Consolidated Balance Sheet as current and noncurrent "Acquisition liability." Subject to the provisions of Statements 141 and 142, the Company has recorded $30.8 million of intangible assets separate from goodwill. The Company recorded $28.5 million for distribution agreements and $2.3 million for noncompete agreements. All of the noncompete agreements and $7.5 million of the distribution agreements are being amortized over approximately eight and two years, respectively, the weighted average lives of these agreements. Distribution agreements totaling $21.0 million were deemed to have indefinite lives and are not subject to amortization under Statements 141 and 142. 37 The nominal consideration for Califa's assets was $28.3 million. The Company also assumed the obligations of Califa related to a note payable and noncompete liability. The nominal consideration for VODI's assets was $41.7 million. The Company is obligated to pay up to an additional $12.0 million in consideration should the acquired assets achieve certain financial performance targets. The total consideration will be paid over ten years, with the Company having the option of paying up to $71 million of the scheduled payments in cash or Class B stock. The number of shares, if any, the Company will issue will be based on the trading prices of the Class B stock surrounding the applicable payment dates. Prior to each scheduled payment of consideration, the Company must provide the Califa principals with written notice specifying the portion of the purchase price payment that the Company intends to pay in cash and the portion in Class B stock. If the Company notifies the Califa principals that the Company intends to issue Class B stock, the Califa principals must elect the portion of the shares that the Califa principals want the Company to register under the Securities Act, referred to as the eligible shares. The Company is then obligated to issue eligible shares registered under the Securities Act. The Califa principals may sell the eligible shares received during the 90-day period following the date the eligible shares are issued. If the Company does not get the registration statement relating to the resale of its shares issued in connection with a specified payment effective within the periods set forth in the agreement, the Company is also obligated to pay the Califa principals interest on the amount of the payment until the registration statement is declared effective. The interest payment can be paid in cash or shares of Class B stock at the Company's option. For purposes of this discussion, references to eligible shares also includes any shares of Class B stock issued to pay any required interest payments, if applicable. The interest rate will vary depending on the length of time required after the applicable payment date to get the registration statement declared effective. The number of eligible shares that may be sold on any day during a selling period is limited under the asset purchase agreement. A selling period will be extended if the applicable volume limitations did not permit all of the eligible shares to be sold during that selling period, assuming that the maximum number of shares were sold on each day during the period. If the Califa principals elect to sell eligible shares during the applicable selling period and the proceeds from those sales are less than the aggregate value of the eligible shares sold when the shares were issued, the Company has agreed to make the Califa principals whole for the shortfall by, at the Company's option, (a) paying the shortfall in cash, (b) issuing additional shares of Class B stock in an amount equal to the shortfall, referred to as the make-whole shares, or (c) increasing the next scheduled payment of consideration to the Califa principals in an amount equal to the shortfall plus interest on the shortfall at a specified interest rate until the next scheduled payment of consideration. The foregoing make-whole mechanism will apply only to the extent the Califa principals have sold the maximum number of shares they are entitled to sell during the applicable selling period in accordance with the applicable volume limitations. The Company is obligated to issue make-whole shares that are registered under the Securities Act and the Califa principals are entitled to sell those shares during a 30-day selling period that follows their issuance. Sales of make-whole shares are also subject to volume limitations and the selling periods applicable to make-whole shares will also be extended if the applicable volume limitations did not permit all of the make-whole shares to be sold during the applicable selling period, assuming that the maximum number of shares were sold on each day during the period. If during the applicable selling period for eligible shares or make-whole shares, the sales proceeds exceed the amount of the purchase price payment or the amount of the make-whole payment, the Califa principals will immediately cease the offering and sale of the remaining eligible shares or make-whole shares, as applicable, and the remaining eligible shares or make-whole shares, as applicable, will be returned promptly to the Company along with any excess sales proceeds. 38 The Company is scheduled to make the base payments and any performance-based payments as follows (in thousands): Year Ended December 31 - -------------------------------------------------------------------------------- 2001 (1) $ 17,000 2002 (2) 7,750 2003 9,500 2004 8,000 2005 8,000 2006 8,000 2007 8,000 2008 1,000 2009 1,000 2010 1,000 2011 750 - -------------------------------------------------------------------------------- Total base payments 70,000 ================================================================================ 2003 5,000 2004 7,000 - -------------------------------------------------------------------------------- Total performance-based payments $ 12,000 ================================================================================ (1) As of December 31, 2001, $1.0 million of the scheduled payment had been paid. The remaining $16.0 million will be paid in shares of Class B stock upon the effectiveness of a Registration Statement on Form S-3 ("Form S-3"). Due to a delay in the effectiveness of the Form S-3, as of February 28, 2002, the Company had accrued an interest penalty of $0.4 million, of which $0.3 million was paid in cash on March 12, 2002. The remainder of the penalty will also be paid in shares of Class B stock upon the effectiveness of the Form S-3. (2) Of this payment, $6.5 million is expected to be paid in shares of Class B stock upon the effectiveness of the Form S-3. The following unaudited pro forma information presents a summary of the results of operations of the Company assuming the acquisition occurred on January 1, 2000 (in thousands, except per share amounts):
Dec. 31, Dec. 31, 2001 2000 - ----------------------------------------------------------------------------------------------- Net revenues $ 298,242 $ 321,438 Loss before cumulative effect of change in accounting principle (32,835) (54,997) Net loss (37,053) (55,150) Basic and diluted EPS Loss before cumulative effect of change in accounting principle (1.35) (2.27) Net loss $ (1.52) $ (2.28) - -----------------------------------------------------------------------------------------------
These unaudited pro forma results have been prepared for comparative purposes only. They do not purport to be indicative of the results of operations which actually would have resulted had the acquisition occurred on January 1, 2000, or of future results of operations. The following reflects amounts assigned to assets, excluding goodwill, and liabilities of Califa and VODI at the acquisition date (in thousands): Califa VODI - ----------------------------------------------------------------------------- Current assets $ 4,143 $ 39 Noncurrent assets 29,696 1,150 Current liabilities $ 1,964 $ 99 - ----------------------------------------------------------------------------- In March 1999, the Company completed its acquisition of Spice, a leading provider of adult television entertainment. The final determination of the purchase price, including transaction costs and Spice debt, was approximately $127 million. The purchase was financed through the issuance of approximately $48 million, or approximately two million shares, of Class B stock, and the remainder through the payment and issuance of long-term debt. 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. Goodwill of approximately $90 million was recorded and has been amortized on a straight-line basis assuming a 40-year life. However, beginning in 2002, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with Statements 141 and 142. 39 (C) PLAYBOY TV INTERNATIONAL, LLC JOINT VENTURE During 1999, PTVI was formed as a joint venture between the Company and Cisneros. In 2001, Claxson succeeded Cisneros as the Company's joint venture partner. PTVI has the exclusive right to create and launch new television networks under the Playboy and Spice brands 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 its equity up to 50%. The option expires on the earlier to occur of September 15, 2009 and 30 days after the date on which PTVI reaches "cash breakeven" as specified in PTVI's operating agreement. The purchase price for the option through September 15, 2003 is the founders' price plus interest as specified in the operating agreement. Founders' price as of a specified date means, with respect to the price per one percentage interest of PTVI acquired by the Company, an amount equal to the sum of the capital contributions to PTVI by the venture partners through and including that date, divided by 100. After September 15, 2003, the purchase price is based on the market value of the acquired interests. The option purchase price can be paid in cash and/or Class B stock at the Company's option. In return for the exclusive international TV rights for the use of the Playboy tradename, film and video library, and for the acquisition of the international rights to the Spice film library, the U.K. and Japan Playboy TV networks and certain international distribution contracts, PTVI is obligated to make total payments of $100.0 million to the Company as follows (in thousands): Fiscal Year Ended December 31 -------------------------------------------------------------------------- 1999 $ 30,000 2000 7,500 2001 5,000 2002 7,500 2003 25,000 2004 25,000 -------------------------------------------------------------------------- Total payments from PTVI $ 100,000 ========================================================================== PTVI also has a long-term commitment with the Company to license international TV rights to each year's output production, with payments representing a percentage of the Company's annual production spending. Each year, an anticipated production budget is determined, detailing what will be produced. PTVI pays the Company a percentage of this production budget up to a maximum amount. Quarterly, the Company reviews the actual production dollars spent to date, and projects the remaining production budget for the year. Concurrently, the Company adjusts the effective percentage charged to PTVI for the change in the expected programming, retroactive for the year. Until PTVI generates sufficient cash flow from operations, PTVI's ability to fund its operations, including making library license and programming output payments to the Company, is dependent on receiving capital contributions principally from Claxson and also from the Company. The maximum mandatory capital contributions by the partners is $100 million, of which $61.6 million has been contributed through December 31, 2001. In a March 15, 2002 filing with the SEC, 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 fails to make these payments to the Company in a timely manner, either because of the failure of the partners to make capital contributions or otherwise, the Company's future financial condition and operating results could be materially adversely affected. 40 In 2001, 2000 and 1999, the Company recognized revenues from PTVI of $17.0 million, $17.0 million and $35.2 million, respectively, and pre-tax income, including the Company's equity in the results of PTVI's operations, of $8.7 million, $10.7 million and $13.8 million, respectively. Amounts related to PTVI are reflected in the Company's Consolidated Balance Sheets as follows (in thousands): Dec. 31, Dec. 31, 2001 2000 - ------------------------------------------------------------------------------- Current receivables from related parties $ 11,935 $ 7,397 Noncurrent receivables from related parties 50,000 57,500 Accounts payable to related parties 169 718 Current deferred revenues from related parties 6,525 4,350 Noncurrent deferred revenues from related parties $ 44,350 $ 50,875 - ------------------------------------------------------------------------------- Summarized financial information for PTVI for the periods indicated, which has been derived from PTVI audited financial statements, is presented below (in thousands): Dec. 31, Dec. 31, 2001 2000 - ------------------------------------------------------------------------------- Current assets $ 15,733 $ 28,713 Noncurrent assets 66,473 61,902 Current liabilities 19,352 12,909 Noncurrent liabilities $ 45,700 $ 45,039 - ------------------------------------------------------------------------------- Dec. 31, Dec. 31, Dec. 31, 2001 2000 1999(1) - ------------------------------------------------------------------------------- Revenues $ 33,669 $ 28,300 $ 9,368 Gross profit 7,648 9,766 4,418 Net loss $ (19,455) $ (9,935) $ (3,029) - ------------------------------------------------------------------------------- (1) For the period from August 31, 1999 (date of commencement) through December 31, 1999 In calculating the Company's equity in the results of PTVI's operations, the net loss as reported by PTVI is adjusted for the elimination of amortization on the assets acquired by PTVI from the Company. (D) RESTRUCTURING EXPENSES In 2001, the Company 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 104 employees, or approximately 15%, through Company-wide layoffs and attrition, approximately half of whom 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 its Chicago and New York offices. Of the total $3.7 million of costs related to this plan, approximately $1.1 million was paid by December 31, 2001, with most of the remainder to be paid in 2002. In 2000, realignment of senior management, coupled with staff reductions, led to a restructuring charge related to the termination of 19 employees, or approximately 3% of the work force. 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 December 31, 2001, with the remaining $0.1 million to be paid through 2003. In 1999, the Company began a cost reduction effort that led to a work force reduction of 49 employees, or approximately 6%, through Company-wide layoffs and attrition. A total of 26 employees were terminated (including eight in the first quarter of 2000) resulting in total restructuring charges of $1.3 million, of which $0.2 million was recorded in the first quarter of 2000. Additionally, 23 positions were eliminated through attrition. All charges related to this restructuring were recorded and paid by December 31, 2000. 41 (E) GAIN (LOSS) ON DISPOSALS In 2001, the Company sold its Collectors' Choice Music catalog and related Internet business. In connection with the sale, the Company recorded a loss of $1.3 million and a related deferred tax benefit of $0.5 million, which was offset by an increase in the valuation allowance. Also in 2001, the Company sold a majority of its interest in VIPress, publisher of the Polish edition of Playboy magazine. In connection with the sale, the Company recorded a gain of $0.4 million. There was no income tax effect attributable to the transaction due to the Company's net operating loss carryforward position. Prior to the sale, the financial statements of VIPress were included in the Company's financial statements, along with the related minority interest. Subsequent to the sale, the Company's remaining 20% interest in VIPress is accounted for under the equity method and, as such, the Company's proportionate share of the results of VIPress is included in nonoperating results. In 2000, the Company sold its Critics' Choice Video catalog and related Internet business and fulfillment and customer service operations. In connection with the sale, the Company recorded a loss of $3.0 million and a related deferred tax benefit of $0.4 million, which was offset by an increase in the valuation allowance. In 1999, the Company sold its wholly-owned subsidiary, Playboy Gaming Greece Ltd., which owned a 12% interest in 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. (F) INCOME TAXES The income tax provision (benefit) consisted of the following (in thousands):
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/01 12/31/00 12/31/99 - --------------------------------------------------------------------------------------- Current: Federal $ -- $ -- $ -- State 120 388 740 Foreign 242 2,889 1,591 - --------------------------------------------------------------------------------------- Total current 362 3,277 2,331 - --------------------------------------------------------------------------------------- Deferred: Federal 576 12,640 (8,690) State 58 310 (1,309) Foreign -- -- -- - --------------------------------------------------------------------------------------- Total deferred 634 12,950 (9,999) - --------------------------------------------------------------------------------------- Benefit of stock compensation recorded in capital in excess of par value -- -- 3,596 Benefit of pre-acquisition losses recorded in goodwill -- -- 3,336 - --------------------------------------------------------------------------------------- Total income tax provision (benefit) $ 996 $ 16,227 $ (736) ======================================================================================= Income tax provision (benefit) applicable to: Continuing operations $ 996 $ 16,227 $ (862) Discontinued operations -- -- 126 - --------------------------------------------------------------------------------------- Total income tax provision (benefit) $ 996 $ 16,227 $ (736) =======================================================================================
42 The U.S. statutory tax rate applicable to the Company for each of 2001, 2000 and 1999 was 35%. The income tax provision (benefit) from continuing operations differed from a benefit computed at the U.S. statutory tax rate as follows (in thousands):
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/01 12/31/00 12/31/99 - ------------------------------------------------------------------------------------------------------------------- Statutory rate tax benefit $ (9,914) $ (10,990) $ (2,251) Increase (decrease) in taxes resulting from: Foreign income and withholding tax on licensing income 242 2,889 1,591 State income taxes 178 698 (569) Nondeductible expenses 673 658 903 Increase in valuation allowance 9,902 24,142 -- Tax benefit of foreign taxes paid or accrued (85) (1,013) (516) Other -- (157) (20) - ------------------------------------------------------------------------------------------------------------------- Total income tax provision (benefit) from continuing operations $ 996 $ 16,227 $ (862) ===================================================================================================================
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. In 2000, the Company reevaluated its valuation allowance for deferred tax assets related to the 2000 net operating loss as well as the NOLs and tax credit carryforwards from prior years. As a result of this review, the Company increased the valuation allowance, which resulted in noncash federal income tax expense of $24.1 million. The significant components of the Company's deferred tax assets and deferred tax liabilities as of December 31, 2000 and 2001 are presented below (in thousands):
Dec. 31, Net Dec. 31, 2000 Change 2001 - --------------------------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards $ 16,629 $ 9,848 $ 26,477 Capital loss carryforwards 8,914 (890) 8,024 Tax credit carryforwards 12,256 (1,555) 10,701 Temporary difference related to PTVI 8,869 289 9,158 Other deductible temporary differences 16,225 1,867 18,092 - --------------------------------------------------------------------------------------- Total deferred tax assets 62,893 9,559 72,452 Valuation allowance (45,044) (9,544) (54,588) - --------------------------------------------------------------------------------------- Deferred tax assets 17,849 15 17,864 - --------------------------------------------------------------------------------------- Deferred tax liabilities: Deferred subscription acquisition costs (5,803) 233 (5,570) Intangible assets (12,982) 1,426 (11,556) Other taxable temporary differences (3,743) (2,308) (6,051) - --------------------------------------------------------------------------------------- Deferred tax liabilities (22,528) (649) (23,177) - --------------------------------------------------------------------------------------- Net deferred tax liabilities $ (4,679) $ (634) $ (5,313) =======================================================================================
At December 31, 2001, the Company had NOLs of $75.6 million expiring from 2004 through 2021. The Company had capital loss carryforwards of $22.9 million expiring in 2004. In addition, foreign tax credit carryforwards of $9.6 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 2002 through 2006. The minimum tax credit carryforwards have no expiration date. (G) DISCONTINUED OPERATIONS During 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 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. 43 In 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. In September 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 in November 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 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) EARNINGS PER COMMON SHARE For 2001, 2000 and 1999, options to purchase approximately 2,245,000, 2,040,000 and 2,520,000 shares, respectively, of the Company's Class A and Class B common stock combined and approximately 245,000, 270,000 and 325,000 shares, respectively, of Class B restricted stock awards were outstanding but were not included in the computation of diluted EPS. The inclusion of these shares would have been antidilutive. As a result, the weighted average number of basic and diluted common shares outstanding for 2001, 2000 and 1999 were equivalent. Upon the effectiveness of the Form S-3, the Company will pay two installments of consideration in shares of Class B stock under the Califa asset purchase agreement in the aggregate amount of $22.5 million. Based on a closing price of $16.37 per share on February 28, 2002, this would result in the issuance of approximately 1,375,000 shares. Due to a delay in the effectiveness of the Form S-3, as of February 28, 2002, the Company had accrued an interest penalty of $0.4 million, of which $0.3 million was paid in cash on March 12, 2002. The remainder of the penalty will also be paid in shares of Class B stock upon the effectiveness of the Form S-3, which would result in the issuance of an additional approximately 10,000 shares. See Note (B) Acquisitions and Note (R) Stock Plans. (I) FINANCIAL INSTRUMENTS Fair Value: 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, receivables, certain other current assets, current maturities of long-term debt and short-term debt, the amounts reported approximate fair value due to their short-term nature. For long-term debt related to the Company's credit agreement, the amount reported approximates fair value as the interest rate on the debt is generally reset every quarter to reflect current rates. For the interest rate swap agreement, based on the fair value, $1.2 million reflects the estimated amount that the Company would expect to pay if it terminated the agreement at December 31, 2001. For related party long-term debt, the amount reported approximates fair value due to no significant change in market conditions since December 17, 2001, when the note was issued. 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. Risk Management: The Company uses derivatives for hedging purposes only. In 2001, the Company entered into an interest rate swap agreement maturing in May 2003 that effectively converts $45.0 million of its floating rate debt to fixed rate debt, thus reducing the impact of interest rate changes on future interest expense. In addition, to protect against the reduction in value of foreign currency cash flows, the Company hedges portions of its forecasted royalty revenues denominated in foreign currencies with forward contracts. The Company hedges these royalties for periods not exceeding 12 months. When the dollar strengthens significantly against the foreign currencies, the decline in the value of future foreign currency revenue is offset by gains in the value of the forward contracts. Conversely, when the dollar weakens, the increase in the value of future foreign currency revenue is offset by losses in the value of the forward contracts. Since these derivative instruments are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instruments is being deferred and reported as a component of "Accumulated other comprehensive loss" and is reclassified into earnings in the same line item associated with the transaction when the hedged transaction occurs. During 2001, the Company reclassified $0.2 million of net losses from "Accumulated other comprehensive loss" to the Consolidated Statement of Operations, which were offset by net gains on the items being hedged. In 2001, there was no amount included in earnings related to hedging ineffectiveness. The Company expects the amount reclassified from "Accumulated other comprehensive loss" to earnings within the next 12 months to be losses of approximately $1.1 million. 44 Concentrations of Credit Risk: Concentration of credit risk with respect to accounts receivable is limited due to the wide variety of customers and segments from which the Company's product are sold. However, as of December 31, 2001, the Company's receivables from PTVI were $61.9 million, of which $50.0 million represents the noncurrent portion of the receivable. Of the $11.9 million current portion of the receivable, $2.6 million was collected in the first quarter of 2002, and $7.5 million is not contractually due until September 2002. The Company does not require collateral for accounts receivable, and therefore its future financial condition and operating results could be materially adversely affected if these payments from PTVI are not made. PTVI's ability to finance its operations, including making library license and programming output payments to the Company, will depend principally on the ability of Claxson, the Company's venture partner, and also the Company to make capital contributions, until PTVI generates sufficient funds from operations. (J) MARKETABLE SECURITIES Marketable securities, primarily purchased in connection with the Company's deferred compensation plans, consisted of the following (in thousands): Dec. 31, Dec. 31, 2001 2000 - ---------------------------------------------------------------------------- Cost of marketable securities $ 3,709 $ 3,620 Gross unrealized holding gains 10 17 Gross unrealized holding losses (537) (194) - ---------------------------------------------------------------------------- Fair value of marketable securities $ 3,182 $ 3,443 ============================================================================ There were no proceeds from the sale of marketable securities for 2001, 2000 and 1999 respectively, and therefore no gains or losses were realized. Included in "Total other comprehensive income (loss)" for 2001 and 2000 were net unrealized holding losses of $0.4 million and $0.5 million, respectively, and a net unrealized holding gain of $0.4 million in 1999. (K) INVENTORIES, NET Inventories, net, consisted of the following (in thousands): Dec. 31, Dec. 31, 2001 2000 - ---------------------------------------------------------------------------- Paper $ 5,189 $ 6,432 Editorial and other prepublication costs 6,140 6,987 Merchandise finished goods 2,633 7,281 - ---------------------------------------------------------------------------- Total inventories, net $ 13,962 $ 20,700 ============================================================================ (L) ADVERTISING COSTS At December 31, 2001 and 2000, advertising costs of $6.8 million and $7.4 million, respectively, were deferred and included in "Deferred subscription acquisition costs" and "Other current assets." For 2001, 2000 and 1999, the Company's advertising expense was $39.2 million, $47.0 million and $53.5 million, respectively. (M) PROPERTY AND EQUIPMENT, NET Property and equipment, net, consisted of the following (in thousands): Dec. 31, Dec. 31, 2001 2000 - ---------------------------------------------------------------------------- Land $ 292 $ 292 Buildings and improvements 8,623 8,512 Furniture and equipment 16,289 15,420 Leasehold improvements 9,927 9,950 Software 5,918 4,075 - ---------------------------------------------------------------------------- Total property and equipment 41,049 38,249 Accumulated depreciation (30,300) (26,717) - ---------------------------------------------------------------------------- Total property and equipment, net $ 10,749 $ 11,532 ============================================================================ 45 (N) PROGRAMMING COSTS In 2001, the Company adopted SOP 00-2, Accounting by Producers or Distributors of Films, which establishes new accounting and reporting standards. Programming costs consisted of the following (in thousands): Dec. 31, Dec. 31, 2001 2000 - ---------------------------------------------------------------------------- Released, less amortization $ 47,198 $ 44,529 Completed, not yet released 4,815 7,410 In-process 4,200 3,515 - ---------------------------------------------------------------------------- Total programming costs $ 56,213 $ 55,454 ============================================================================ Based on management's estimate of future total gross revenues as of December 31, 2001, approximately 47% of the completed original programming costs are expected to be amortized during 2002. Approximately 98% of the released original programming costs are expected to be amortized during the next three years. Additionally, at December 31, 2001, the Company had $13.2 million of film acquisition costs. Film acquisition costs assigned to domestic markets are amortized principally using 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. (O) FINANCING OBLIGATIONS Financing obligations consisted of the following (in thousands):
Dec. 31, Dec. 31, 2001 2000 - --------------------------------------------------------------------------------------------- Short-term financing obligations to related parties: Interest at 10.50% $ 5,000 $ -- Interest at 12.00% 5,000 5,000 Interest at 8.00% 5,000 -- - --------------------------------------------------------------------------------------------- Total short-term financing obligations to related parties $ 15,000 $ 5,000 ============================================================================================= Long-term financing obligations: Tranche A term loan, interest at 5.11% and 10.25% at December 31, 2001 and 2000, respectively $ 12,136 $ 15,333 Tranche B term loan, weighted average interest of 6.37% and 10.75% at December 31, 2001 and 2000, respectively 58,942 59,667 Revolving credit facility, weighted average interest of 6.05% and 11.03% at December 31, 2001 and 2000, respectively 10,500 18,250 - --------------------------------------------------------------------------------------------- Total long-term financing obligations 81,578 93,250 Less current maturities (8,561) (3,922) - --------------------------------------------------------------------------------------------- Long-term financing obligations $ 73,017 $ 89,328 ============================================================================================= Long-term financing obligations to related parties, interest at 9.00% and 10.50% at December 31, 2001 and 2000, respectively $ 5,000 $ 5,000 =============================================================================================
The aggregate minimum amount of all long-term debt payable, excluding the revolving credit facility, is approximately $8.6 million, $6.4 million, $22.2 million, $27.3 million and $11.6 million during 2002, 2003, 2004, 2005 and 2006, respectively. At December 31, 2001, the Company's credit facility totaled $106.1 million, comprised of $71.1 million of term loans and a $35.0 million revolving credit facility, with a $10.0 million letter of credit sublimit. At December 31, 2001, $10.5 million was outstanding under the revolving credit facility and an additional $0.2 million in letters of credit were outstanding. Outstanding balances under the credit facility bear interest at rates equal to specified index rates plus margins that fluctuate based on the Company's leverage ratio. The term loans consist of two tranches, Tranche A and Tranche B, which currently bear interest at 3.00% and 4.25% margins, respectively, over LIBOR. The Company is assessed a 0.5% commitment fee on the unused portion of the revolving credit facility. The term loans began amortizing quarterly on March 31, 2001. The Tranche A term loan and the revolving credit facility both mature on March 15, 2004 and the Tranche B term loan matures on March 15, 2006. 46 The Company's obligations under the credit facility are guaranteed by its subsidiaries (excluding Playboy.com) and are secured by substantially all of its assets (excluding Playboy.com and its assets). The credit agreement contains financial covenants requiring the Company to maintain certain leverage, interest coverage and fixed charge coverage ratios. Other covenants include limitations on other indebtedness, investments, capital expenditures and dividends. The credit agreement also requires mandatory prepayments with net cash proceeds resulting from excess cash flow, asset sales and the issuance of certain debt obligations or equity securities, with certain exceptions as described in the agreement. Based on 2001 results, the Company will make an excess cash flow payment of $3.6 million on March 31, 2002. Therefore, total 2002 debt repayments under the credit facility will now be $8.6 million. The credit agreement also contains a maximum funding limitation by the Company to Playboy.com of $17.5 million, which was met in September 2000. As a result of this limitation, Playboy.com is dependent on third-party financing to fund its operations, including its debt repayment obligations, until its business generates sufficient cash flow. In the event of an IPO of Playboy.com's common stock, all amounts above $10.0 million advanced to Playboy.com after January 1, 2000 shall be repaid from Playboy.com to the Company. In addition, 10% of the net proceeds of any Playboy.com equity financing shall be paid to the Company until all amounts above the $10.0 million have been repaid. Playboy.com has been in active discussions with strategic partners and other potential investors in connection with a private placement of its preferred stock. On each of March 7, 2001 and April 2, 2001, Playboy.com issued a convertible promissory note in the aggregate principal amount of $5.0 million to two strategic investors. On July 27, 2001, Playboy.com issued a third convertible promissory note in the aggregate principal amount of $5.0 million to Hugh M. Hefner. On August 13, 2001, each of the three aforementioned convertible promissory notes, together with accrued and unpaid interest thereon, was converted into shares of Playboy.com's Series A Preferred Stock. Playboy.com's Series A Preferred Stock is convertible into Playboy.com common stock (initially on a one-for-one basis) and is redeemable by Playboy.com after the fifth anniversary of the date of its issuance at the option of the holder. In addition, in the event that a holder elects to redeem Playboy.com's Series A Preferred Stock at any time after the fifth anniversary of the date of its issuance and before the 180th day thereafter, and Playboy.com is not able to, or does not, satisfy such obligation, in cash or stock, the Company has agreed that it shall redeem all or part of the shares in lieu of redemption by Playboy.com, either in cash, shares of the Company's Class B stock or any combination thereof at its option. In September and December 2000, Hugh M. Hefner made loans to Playboy.com each in the amount of $5.0 million. These loans bear interest at an annual rate of 10.50% and 12.00%, respectively, with principal and accumulated interest related to both loans due in September 2002. In September 2001, Hugh M. Hefner made an additional $5.0 million loan to Playboy.com which bears interest at an annual rate of 8.00%, with principal and accumulated interest due in July 2002. In December 2001, Hugh M. Hefner agreed to lend up to an additional $10.0 million to Playboy.com from time to time until December 31, 2002, of which $5.0 million had been borrowed by Playboy.com at December 31, 2001. Outstanding balances under this note bear interest at an annual rate of 9.00%, with interest payable monthly, and the note is due in August 2006. Under the terms of the note, Hugh M. Hefner may elect, at any time, to convert the note into shares of Playboy.com's common stock at a per share price of $7.1097 (as equitably adjusted for any stock dividends, combinations, splits or similar transactions). Additionally, in conjunction with the issuance of the note, the Company has agreed to give Hugh M. Hefner the right to surrender the note to the Company for shares of its Class B stock on or after certain specified surrender events. Under the agreement, "surrender event" means any of the following: (a) August 10, 2006, (b) the date on which the Company is no longer subject to the terms (except for such terms that expressly survive the payment in full of the obligations and termination of the commitments thereunder) of its credit agreement, (c) the occurrence and continuation of an event of default under the note, including the dissolution of Playboy.com or any vote in favor thereof by Playboy.com's board of directors or stockholders, certain insolvency or bankruptcy events relating to Playboy.com, Playboy.com's failure to pay principal and interest due and payable under the note and Playboy.com's non-performance of any material covenant or condition under the note which continues uncured for 15 days after written notice of the default is provided to Playboy.com, (d) the dissolution of Playboy.com or any vote in favor thereof by Playboy.com's board of directors or stockholders or (e) certain insolvency or bankruptcy events relating to Playboy.com. However, the note may not be surrendered if the surrender of the note or the issuance of the shares of Class B stock would be prohibited by the Company's credit agreement. In the event that Mr. Hefner elects to surrender the December 2001 note for shares of Class B stock in accordance with the foregoing, the Company will issue to Mr. Hefner the number of shares equal to the outstanding principal and interest on the note divided by $19.90 (125% of the volume weighted average closing price of Class B stock (as equitably adjusted for any stock dividends, combinations, splits or similar transactions) on the five trading days immediately prior to the date of the note). 47 (P) 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 2001, 2000 and 1999 were approximately $0.5 million, $0.7 million and $0.9 million, respectively. All employees are eligible to participate in the 401(k) plan upon the date of hire. The Company offers several mutual fund investment options. The purchase of Company stock is not an option. The Company makes matching contributions to the 401(k) plan based on each participating employee's contributions and eligible compensation. The Company's matching contributions for 2001, 2000 and 1999 related to this plan were approximately $1.2 million, $1.3 million and $1.2 million, respectively. The Company has two nonqualified deferred compensation plans, which permit certain employees and all nonemployee directors to annually elect to defer a portion of their compensation. A Company match is provided to employees who participate in the deferred compensation plan, at a certain specified minimum level, and whose annual eligible earnings exceed the salary limitation contained in the 401(k) plan. All amounts deferred and earnings credited under these plans are 100% immediately vested and are general unsecured obligations of the Company. Such obligations totaled approximately $3.9 million and $4.7 million at December 31, 2001 and 2000, respectively, and are included in "Other noncurrent liabilities." The Company has 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, 2001, a total of approximately 55,000 shares of Class B stock were available for future purchases under this plan. (Q) COMMITMENTS AND CONTINGENCIES The Company's principal lease commitments are for office space, operations facilities and furniture and equipment. Some of these leases contain renewal or end-of-lease purchase options. Rent expense was as follows (in thousands):
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/01 12/31/00 12/31/99 - --------------------------------------------------------------------------------------- Minimum rent expense $ 15,406 $ 15,165 $ 13,698 Sublease income (1,372) (395) -- - --------------------------------------------------------------------------------------- Net rent expense $ 14,034 $ 14,770 $ 13,698 - ---------------------------------------------------------------------------------------
There was no contingent rent expense in any of these periods. The minimum commitments at December 31, 2001, under operating leases with initial or remaining noncancelable terms in excess of one year, were as follows (in thousands): Operating Fiscal Year Ended December 31 Leases - ----------------------------------------------------------------------------- 2002 $ 7,996 2003 8,207 2004 6,716 2005 5,019 2006 5,002 Later years 30,596 Less minimum sublease income (27,343) - ----------------------------------------------------------------------------- Net minimum lease commitments $ 36,193 ============================================================================= 48 The programming of the Company's domestic TV networks is delivered to cable and DTH operators through a communications satellite transponder. The Company's satellite lease agreement for Playboy TV expired in October 2001 and the Company began service on a replacement transponder under an agreement which expires in 2010. The Company has an additional transponder service agreement related to its other networks, the term of which currently extends through 2015. At December 31, 2001, future commitments related to these two service agreements were $3.3 million, $3.5 million, $3.5 million, $3.5 million and $3.5 million for 2002, 2003, 2004, 2005 and 2006, respectively, and $20.2 million thereafter. The Company's current transponder service agreements 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. 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 transponder service. (R) 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 equals or exceeds the fair value at the grant date. In general, options become exercisable over a two- to four-year period from the grant date and expire ten years from the grant date. Restricted stock awards provide for the issuance of the 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 ten 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, 2001, a total of 1,005,015 shares of Class B stock were available for future grants under the various stock plans combined. Stock option transactions are summarized as follows:
Stock Options Outstanding - -------------------------------------------------------------------------------------- Weighted Average Shares Exercise Price - -------------------------------------------------------------------------------------- Class A Class B Class A Class B - -------------------------------------------------------------------------------------- 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 Granted -- 367,500 -- 21.42 Exercised -- (109,335) -- 10.44 Canceled -- (252,250) -- 20.33 - ----------------------------------------------------------- Outstanding at December 31, 2000 5,000 1,841,415 7.38 18.72 Granted -- 537,000 -- 12.28 Exercised (5,000) (235,779) 7.38 8.27 Canceled -- (77,500) -- 16.77 - ----------------------------------------------------------- Outstanding at December 31, 2001 -- 2,065,136 $ -- $ 18.31 ======================================================================================
The following table summarizes information regarding stock options at December 31, 2001:
Options Outstanding Options Exercisable ------------------------------------------- ---------------------------- Weighted Weighted Weighted Average Average Average Range of Number Remaining Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price - ------------------------------------------------------------------------------------------------------------------- Class B $8.25-$16.00 997,886 6.78 $12.25 466,844 $ 12.40 16.72-21.00 521,000 6.90 20.70 494,125 20.91 $24.13-$31.50 546,250 7.29 27.11 207,750 25.17 - ------------------------------------------------------------------------------------------------------------------- Total Class B 2,065,136 6.95 $18.31 1,168,719 $ 18.27 - -------------------------------------------------------------------------------------------------------------------
The weighted average exercise prices for Class A and Class B exercisable options at December 31, 1999 were $7.38 and $12.47, respectively, and at December 31, 2000 were $7.38 and $14.68, respectively. 49 The following table summarizes transactions related to restricted stock awards: Restricted Stock Awards Outstanding Class B - ------------------------------------------------------------------------------ Outstanding at December 31, 1998 330,622 Awarded 26,250 Vested -- Canceled (49,374) - ------------------------------------------------------------------------------ Outstanding at December 31, 1999 307,498 Awarded 25,750 Vested -- Canceled (93,124) - ------------------------------------------------------------------------------ Outstanding at December 31, 2000 240,124 Awarded 45,000 Vested -- Canceled (21,250) - ------------------------------------------------------------------------------ Outstanding at December 31, 2001 263,874 ============================================================================== 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. The following pro forma information presents the Company's net loss and basic and diluted EPS assuming compensation expense for these options had been determined consistent with Statement 123 (in thousands, except per share amounts):
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/01 12/31/00 12/31/99 - --------------------------------------------------------------------------------------- Net loss As reported $ (33,541) $ (47,626) $ (5,335) Pro forma (37,716) (51,963) (10,121) Basic and Diluted EPS As reported (1.37) (1.96) (0.23) Pro forma $ (1.55) $ (2.14) $ (0.44) - ---------------------------------------------------------------------------------------
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 Fiscal Year Ended Ended Ended 12/31/01 12/31/00 12/31/99 - --------------------------------------------------------------------------------------- Risk-free interest rate 4.98% 6.27% 4.86% Expected stock price volatility 49.70% 46.10% 44.11% Expected dividend yield -- -- -- - ---------------------------------------------------------------------------------------
For 2001, 2000 and 1999, an expected life of six years was used for all of the stock options, and the weighted average fair value of options granted was $6.59, $14.43 and $9.72, respectively. For 2001, 2000 and 1999, the weighted average fair value of restricted stock awarded was $14.37, $14.20 and $22.13, respectively. The pro forma effect on net loss for 1999 may not be representative of the pro forma effect on results 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. 50 (S) PUBLIC EQUITY OFFERINGS In 2000, Playboy.com, a component of the Playboy Online Group, filed a registration statement for a sale of a minority of its equity in an IPO. Due to market conditions, the registration statement was subsequently withdrawn. Deferred costs of $1.6 million were written off in 2000 as nonoperating expense. In 1999, the Company completed a public equity offering of 2,875,000 shares of Class B 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 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 were used for general corporate purposes and repayment of term loan financing obligations. (T) CONSOLIDATED STATEMENTS OF CASH FLOWS Cash paid for interest and income taxes was as follows (in thousands): Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/01 12/31/00 12/31/99 - ------------------------------------------------------------------------------ Interest $ 8,730 $ 8,281 $ 7,706 Income taxes $ 782 $ 1,728 $ 2,756 - ------------------------------------------------------------------------------ The Company had noncash activities related to both the Spice and Califa acquisitions. See Note (B) Acquisitions. (U) SEGMENT INFORMATION The Company's businesses have been classified into the following reportable segments: Entertainment, Publishing, Playboy Online, Catalog and Licensing Businesses. Entertainment Group operations include the production and marketing of programming through the Company's domestic TV networks, other domestic pay television, international TV and worldwide home video businesses as well as the distribution of feature films. 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. Playboy Online Group operations include the Company's network of free, pay and e-commerce sites on the Internet. The sales of the Critics' Choice Video business in 2000 and the Collectors' Choice Music business in 2001 ended the Company's presence in the nonbranded print Catalog Group business. Licensing Businesses Group operations combine certain brand-related businesses, such as the licensing of consumer products carrying one or more of the Company's trademarks and artwork as well as Playboy branded casino gaming opportunities and certain Company-wide marketing activities. 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. 51 The following table represents financial information by reportable segment (in thousands):
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/01 12/31/00 12/31/99 - --------------------------------------------------------------------------------------------------- Net revenues (1) Entertainment $ 113,833 $ 100,955 $ 125,783 Publishing 128,139 139,870 137,062 Playboy Online 27,499 25,291 16,104 Catalog 10,986 32,360 60,335 Licensing Businesses 10,769 9,246 8,533 - --------------------------------------------------------------------------------------------------- Total $ 291,226 $ 307,722 $ 347,817 =================================================================================================== Loss from continuing operations before income taxes and cumulative effect of change in accounting principle Entertainment $ 29,921 $ 25,287 $ 44,375 Publishing 1,776 6,881 5,977 Playboy Online (21,673) (25,199) (9,066) Catalog (453) 54 256 Licensing Businesses 2,614 887 (436) Corporate Administration and Promotion (19,700) (20,942) (27,127) Restructuring expenses (3,776) (3,908) (1,091) Gain (loss) on disposals (955) (2,924) 1,728 Investment income 786 1,519 1,798 Interest expense (13,970) (9,148) (7,977) Minority interest (704) (125) (92) Equity in operations of PTVI and other (746) (375) (13,871) Playboy.com registration statement expenses -- (1,582) -- Legal settlement -- (622) -- Other, net (1,447) (1,202) (904) - --------------------------------------------------------------------------------------------------- Total $ (28,327) $ (31,399) $ (6,430) =================================================================================================== EBITDA Entertainment $ 75,506 $ 64,307 $ 83,557 Publishing 2,336 7,498 6,570 Playboy Online (19,693) (23,497) (9,037) Catalog (427) 180 500 Licensing Businesses 2,823 1,084 (271) Corporate Administration and Promotion (16,616) (18,865) (23,234) Restructuring expenses (3,776) (3,908) (1,091) Gain (loss) on disposals (955) (2,924) 1,728 - --------------------------------------------------------------------------------------------------- Total $ 39,198 $ 23,875 $ 58,722 =================================================================================================== Depreciation and amortization (2) (3) Entertainment $ 45,585 $ 39,020 $ 39,182 Publishing 560 617 593 Playboy Online 1,980 1,702 29 Catalog 26 126 244 Licensing Businesses 209 197 165 Corporate Administration and Promotion 3,544 3,249 2,478 - --------------------------------------------------------------------------------------------------- Total $ 51,904 $ 44,911 $ 42,691 =================================================================================================== Identifiable assets (2) (4) Entertainment $ 317,848 $ 267,142 $ 281,167 Publishing 49,219 56,191 51,273 Playboy Online 4,463 7,675 4,739 Catalog 1,244 3,797 13,784 Licensing Businesses 4,732 5,003 7,082 Corporate Administration and Promotion 48,734 48,680 71,357 - --------------------------------------------------------------------------------------------------- Total $ 426,240 $ 388,488 $ 429,402 ===================================================================================================
(1) Net revenues include revenues attributable to foreign countries of approximately $48,522, $50,165 and $71,495 in 2001, 2000 and 1999, respectively. Revenues from individual foreign countries were not material. Revenues are generally attributed to countries based on the location of customers, except product licensing royalties where revenues are attributed based upon the location of licensees. In 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 reportable segments. (3) Amounts include depreciation of property and equipment, amortization of intangible assets and amortization of investments in entertainment programming. (4) Long-lived assets of the Company located in foreign countries were not material. 52 (V) RELATED PARTY TRANSACTIONS In 1971, the Company purchased the Mansion in Holmby Hills, California, 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, magazine photography, online events, business meetings, enhancing the Company's image, charitable functions and a wide variety of other promotional and marketing activities. The Mansion generates substantial publicity and recognition which increase public awareness of the Company and its products and services. 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, beverages and other benefits received by him and his personal guests. The Mansion is included in the Company's Consolidated Balance Sheets as of December 31, 2001 and December 31, 2000 at a cost, including all improvements and after accumulated depreciation, of $2.0 million and $2.1 million, respectively. The operating expenses of the Mansion, including depreciation and taxes, were $3.2 million, $3.2 million and $3.6 million for 2001, 2000 and 1999, respectively, net of rent received from Mr. Hefner. The sum of the rent and other benefits payable for 2001 was estimated by the Company to be $1.3 million, and Mr. Hefner paid that amount during 2001. The actual rent and other benefits payable for 2000 and 1999 were $1.1 million and $0.9 million, respectively. As of December 31, 2001, Playboy.com had borrowed a total of $20.0 million from Hugh M. Hefner. This indebtedness is evidenced by the four notes previously discussed. Also as discussed, Mr. Hefner was the holder of a $5.0 million convertible promissory note which converted into shares of Playboy.com's Series A Preferred Stock in 2001. See Note (O) Financing Obligations. From time to time, the Company enters into barter transactions in which the Company secures air transportation for Mr. Hefner in exchange for advertising pages in Playboy magazine. Mr. Hefner reimburses the Company for its direct costs of providing these advertising pages. The Company receives significant promotional benefit from these transactions. The Company also has material related party transactions with PTVI. See Note (C) Playboy TV International, LLC Joint Venture. (W) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for 2001 and 2000 (in thousands, except per share amounts):
Quarters Ended ---------------------------------------------------- 2001 Mar. 31 June 30 Sept. 30 Dec. 31 Year - -------------------------------------------------------------------------------------------- Net revenues $ 66,319 $ 72,819 $ 74,115 $ 77,973 $ 291,226 Operating income (loss) (4,990) (4,736) 2,546 (5,066) (12,246) Net loss (11,794) (7,970) (2,088) (11,689) (33,541) Basic and diluted EPS (0.49) (0.32) (0.09) (0.47) $ (1.37) Common stock price Class A high 12.07 14.35 16.51 14.84 Class A low 8.38 8.70 9.82 10.00 Class B high 13.49 16.89 19.75 17.23 Class B low $ 9.75 $ 9.63 $ 11.11 $ 11.72 - --------------------------------------------------------------------------------------------
Quarters Ended ---------------------------------------------------- 2000 Mar. 31 June 30 Sept. 30 Dec. 31 Year - ------------------------------------------------------------------------------------------ Net revenues $ 73,103 $ 77,182 $ 77,890 $ 79,547 $ 307,722 Operating loss (6,314) (5,808) (4,746) (2,996) (19,864) Net loss (6,235) (5,883) (6,506) (29,002) (47,626) Basic and diluted EPS (0.26) (0.24) (0.27) (1.19) $ (1.96) Common stock price Class A high 24.94 16.81 15.00 13.31 Class A low 15.81 10.25 10.88 8.25 Class B high 29.50 20.13 16.00 14.88 Class B low $ 18.38 $ 11.38 $ 11.88 $ 9.44 - ------------------------------------------------------------------------------------------
53 The net loss for the quarter ended March 31, 2001 included a $4.2 million noncash charge representing a cumulative effect of change in accounting principle related to the adoption of SOP 00-2, Accounting by Producers or Distributors of Films. See Note (A) Summary of Significant Accounting Policies. The net losses for the quarters ended September 30, and December 31, 2001 reflected higher interest expense largely due to imputed noncash interest of $1.5 million and $2.5 million, respectively, related to the deferred payment of the purchase price for the Califa acquisition. See Note (B) Acquisitions. The operating loss for the quarter ended December 31, 2001 included restructuring expenses of $3.5 million. See Note (D) Restructuring Expenses. The operating loss for the quarter also included a loss on the sale of its Collectors' Choice Music businesses of $1.3 million. See Note (E) Gain (Loss) on Disposals. The operating loss for the quarter ended September 30, 2000 included an estimated loss on the sale of its Critics' Choice Video businesses of $2.7 million. See Note (E) Gain (Loss) on Disposals. The net loss for the quarter included nonoperating expense of $1.5 million related to the withdrawal of the Playboy.com registration statement. See Note (S) Public Equity Offerings. Additionally, the net loss for the quarter included $0.6 million of nonoperating expense related to a legal settlement. The operating loss for the quarter ended December 31, 2000 included restructuring expenses of $3.7 million. See Note (D) Restructuring Expenses. The net loss for the quarter included noncash federal income tax expense of $24.1 million related to the Company's decision to increase the valuation allowance for its deferred tax assets. See Note (F) Income Taxes. 54 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Directors of Playboy Enterprises, Inc. We have audited the accompanying consolidated balance sheets of Playboy Enterprises, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the two years in the period ended December 31, 2001. Our audits also included the financial statement schedule for the years ended December 31, 2001 and 2000 listed in the Index at Item 14(a). These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 was $1,750,586 and $2,398,065 at December 31, 2001 and 2000, respectively. Equity in operations of PTVI was a loss of $826,206 and $283,095 for the years ended December 31, 2001 and 2000, respectively. Those statements were audited by other auditors whose report has been furnished to us, and contains an explanatory paragraph expressing uncertainty about PTVI's ability to continue as a going concern. Our opinion, insofar as it relates to data included for PTVI, is based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Playboy Enterprises, Inc. at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. In 2001, as discussed in Note A, Playboy Enterprises Inc. changed its methods of accounting for production and distribution of films and for derivative financial instruments, in accordance with new professional standards. Ernst & Young LLP Chicago, Illinois February 22, 2002 Except for Note C, as to which the date is March 15, 2002 55 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 statement of operations, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Playboy Enterprises, Inc. and its subsidiaries at December 31, 1999, and the results of their operations and their cash flows for the fiscal year ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Our audit also included the financial statement schedule for the fiscal year ended December 31, 1999 listed on the Index at Item 14(a). In our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. These financial statements and schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the financial statements of Playboy TV International, LLC ("PTVI"), an unconsolidated affiliate accounted for using the equity method. 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 audit 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 audit and the report of other auditors provide a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements and financial statement schedule of Playboy Enterprises, Inc. for any period subsequent to December 31, 1999. PricewaterhouseCoopers LLP Chicago, Illinois March 30, 2000 56 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. Ernst & Young LLP, independent auditors, have audited and reported on the Company's consolidated financial statements for the fiscal years ended December 31, 2001 and 2000. 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 Ernst & Young LLP, management representatives and the Company's internal auditor to review internal accounting control and auditing and financial reporting matters. Both Ernst & Young 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) 57 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On November 14, 2000, the Company appointed Ernst & Young LLP as the Company's independent auditors and dismissed PricewaterhouseCoopers LLP. The report of PricewaterhouseCoopers LLC on the financial statements of the Company for the fiscal year ended December 31, 1999 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principle. During the fiscal year ended December 31, 1999, and through November 14, 2000, there were no disagreements or reportable events. The decision to change firms was approved by the Audit Committee of the Company's Board of Directors. PART III Information required by Items 10, 11, 12 and 13 is contained in the Company'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 2002, which will be filed within 120 days after the close of the Company's fiscal year ended December 31, 2001, 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 Company and supplementary data following are as set forth under Part II. Item 8. of this Form 10-K Annual Report: Page ---- Consolidated Statements of Operations - Fiscal Years Ended December 31, 2001, 2000 and 1999 30 Consolidated Balance Sheets - December 31, 2001 and 2000 31 Consolidated Statements of Shareholders' Equity - Fiscal Years Ended December 31, 2001, 2000 and 1999 32 Consolidated Statements of Cash Flows - Fiscal Years Ended December 31, 2001, 2000 and 1999 33 Notes to Consolidated Financial Statements 34 Report of Independent Auditors 55 Report of Independent Accountants 56 Report of Management 57 Schedule II - Valuation and Qualifying Accounts 67
(b) Reports on Form 8-K On December 27, 2001, the Company filed a Current Report on Form 8-K under Item 5., announcing that (a) Playboy.com, Inc., a subsidiary of the Company, borrowed $5.0 million from Hugh M. Hefner pursuant to a promissory note (the "Note"), dated as of December 17, 2001, issued by Playboy.com, Inc. to Mr. Hefner and (b) in conjunction with the issuance of the Note, the Company entered into an agreement, dated as of December 17, 2001, with Mr. Hefner pursuant to which the Company has given Mr. Hefner the right to surrender the Note to the Company for shares of the Company's Class B common stock upon the occurrence of specified surrender events. (c) Exhibits See Exhibit Index. 58 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 20, 2002 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 19, 2002 - -------------------------------------------- Christie Hefner Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) /s/ Richard S. Rosenzweig March 20, 2002 - -------------------------------------------- Richard S. Rosenzweig Executive Vice President and Director /s/ Dennis S. Bookshester March 20, 2002 - -------------------------------------------- Dennis S. Bookshester Director /s/ David I. Chemerow March 20, 2002 - -------------------------------------------- David I. Chemerow Director /s/ Donald G. Drapkin March 20, 2002 - -------------------------------------------- Donald G. Drapkin Director /s/ Sol Rosenthal March 20, 2002 - -------------------------------------------- Sol Rosenthal Director /s/ Sir Brian Wolfson March 20, 2002 - -------------------------------------------- Sir Brian Wolfson Director /s/ Linda Havard March 20, 2002 - -------------------------------------------- Linda G. Havard Executive Vice President, Finance and Operations, and Chief Financial Officer (Principal Financial and Accounting Officer) 59 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.
Exhibit Sequentially Number Description Numbered 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) &2.4 Asset Purchase Agreement, dated as of June 29, 2001, by and among Playboy Enterprises, Inc., Califa Entertainment Group, Inc., V.O.D., Inc., Steven Hirsch, Dewi James and William Asher (incorporated by reference to Exhibit 2.1 from the Current Report on Form 8-K dated July 6, 2001) 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 #a October 22, 1997 Agreement 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")) #b Amendment to October 22, 1997 Agreement dated as of March 3, 2000 (incorporated by reference to Exhibit 10.1 from the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2000) 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"))
60 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 as of July 7, 1997 to said Fulfillment Agreement (incorporated by reference to Exhibit 10.6(e) from the Transition Period Form 10-K) &f Amendment dated as of July 1, 2001 to said Fulfillment Agreement (incorporated by reference to Exhibit 10.1 from the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2001 (the "September 30, 2001 Form 10-Q")) 10.4 Transponder Service Agreements a SKYNET Transponder Service Agreement dated March 1, 2001 between Playboy Entertainment Group, Inc. and LORAL SKYNET (incorporated by reference to Exhibit 10.1 from the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2001 (the "March 31, 2001 Form 10-Q")) @b SKYNET Transponder Service Agreement dated February 8, 1999 by and between Califa Entertainment Group, Inc. and LORAL SKYNET 68-85 @c Transfer of Service Agreement dated February 22, 2002 between Califa Entertainment Group, LORAL SKYNET and Spice Hot Entertainment, Inc. 86 @d Amendment One to the Transponder Service Agreement between Spice Hot Entertainment, Inc. and LORAL SKYNET dated February 28, 2002 87 10.5 Playboy TV International, LLC Agreements #a 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) b First Amendment to Operating Agreement dated September 24, 1999 c Second Amendment to Operating Agreement dated December 28, 2000 (items (b) and (c) incorporated by reference to Exhibits 10.2 and 10.3, respectively, from the March 31, 2001 Form 10-Q) #d Program Supply Agreement dated as of August 31, 1999 between Playboy Entertainment Group, Inc., Playboy TV International, LLC and PTV U.S., LLC #e Trademark License Agreement dated as of August 31, 1999 between Playboy Enterprises International, Inc. and Playboy TV International, LLC (items (d) and (e) incorporated by reference to Exhibit 10.2 and 10.3, respectively, from the September 30, 1999 Form 10-Q) &f Binding Letter of Intent dated March 7, 2001 amending the Operating Agreement, Program Supply Agreement and Trademark License Agreement (incorporated by reference to Exhibit 10.4 from the March 31, 2001 Form 10-Q)
61 10.6 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 Company's quarterly report on Form 10-Q for the quarter ended June 30, 1999 (the "June 30, 1999 Form 10-Q")) 10.7 Fulfillment and Customer Service Services Agreement dated October 2, 2000 between Infinity Resources, Inc. and Playboy.com, Inc. (incorporated by reference to Exhibit 10.13 from the Company's annual report on Form 10-K for the year ended December 31, 2000 (the "2000 Form 10-K")) 10.8 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 dated as of June 14, 1999 g Second Amendment to February 26, 1999 Credit Agreement dated as of January 31, 2000 (items (f) and (g) incorporated by reference to Exhibits 10.18(f) and (g), respectively, from the Company's annual report on Form 10-K for the year ended December 31, 1999) h Third Amendment to February 26, 1999 Credit Agreement dated as of June 9, 2000 (incorporated by reference to Exhibit 10.1 from the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000) i Fourth Amendment to February 26, 1999 Credit Agreement dated as of June 1, 2001 (incorporated by reference to Exhibit 10.1 from the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2001 (the "June 30, 2001 Form 10-Q"))
62 10.9 Promissory Notes issued by Playboy.com, Inc. to Hugh M. Hefner a Promissory Note dated September 27, 2000 (incorporated by reference to Exhibit 10.2 from the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2000 (the "September 30, 2000 Form 10-Q")) b Promissory Note dated December 29, 2000 (incorporated by reference to Exhibit 10.15(b) from the 2000 Form 10-K) c First Amendment to December 29, 2000 Promissory Note dated February 15, 2001 &d Second Amendment to December 29, 2000 Promissory Note and Acknowledgement of Subordination Agreement dated March 7, 2001 (items (c) and (d) incorporated by reference to Exhibits 10.5 and 10.6, respectively, from the March 31, 2001 Form 10-Q) e Third Amendment to December 29, 2000 Promissory Note dated May 7, 2001 (incorporated by reference to Exhibit 10.2 from the June 30, 2001 Form 10-Q) f Promissory Note dated September 26, 2001 (incorporated by reference to Exhibit 10.2 from the September 30, 2001 Form 10-Q) g Promissory Note dated December 17, 2001 h Agreement, dated December 17, 2001, by and between Playboy Enterprises, Inc. and Hugh M. Hefner relating to that certain Promissory Note, dated as of December 17, 2001 (items (g) and (h) incorporated by reference to Exhibits 10.1 and 10.2, respectively, from the Current Report on Form 8-K dated December 27, 2001) 10.10 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 Company's quarterly report on Form 10-Q for the quarter ended March 31, 1998 (the "March 31, 1998 Form 10-Q")) 10.11 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 October 10, 1991 88-90 c Amendment to July 25, 1991 Lease dated September 12, 1996 (incorporated by reference to Exhibit 10.19(c) from the 1996 Form 10-K) d Amendment to July 25, 1991 Lease between Playboy Enterprises, Inc. and Star Property Fund, L.P. dated March 16, 2001 (incorporated by reference to Exhibit 10.3 from the June 30, 2001 Form 10-Q) e 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) @f First Amendment to January 6, 1999 Lease dated November 2, 2001 91-92
63 10.12 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 Company's annual report on Form 10-K for the year ended June 30, 1995 (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 Company's quarterly report on Form 10-Q for the quarter ended December 31, 1992) 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) 10.13 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) 10.14 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 Company's annual report on Form 10-K for the year ended June 30, 1997 (the "1997 Form 10-K")) c Real Estate Sublease Agreement dated October 2, 2000 between Playboy Enterprises, Inc. and Infinity Resources, Inc. (incorporated by reference to Exhibit 10.20(c) from the 2000 Form 10-K) 10.15 Los Angeles Studio Facility Lease Documents a Agreement of Lease dated September 20, 2001 between Kingston Andrita LLC and Playboy Entertainment Group, Inc. b Sublease dated September 20, 2001 between Playboy Entertainment Group, Inc. and Directrix, Inc. c Guaranty dated September 20, 2001 by Playboy Entertainment Group, Inc. in favor of Kingston Andrita LLC (items (a), (b) and (c) incorporated by reference to Exhibits 10.3(a), (b) and (c), respectively, from the September 30, 2001 Form 10-Q) *10.16 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 Company's quarterly report on Form 10-Q for the quarter ended June 30, 1998)
64 *10.17 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) 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) *10.18 1991 Directors' Plan a Playboy Enterprises, Inc. 1991 NonQualified Stock Option Plan for NonEmployee Directors, as amended b Playboy Enterprises, Inc. 1991 NonQualified Stock Option Agreement for NonEmployee Directors (items (a) and (b) incorporated by reference to Exhibits 10.4(rr) and (nn), respectively, from the 1991 Form 10-K) *10.19 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 NonQualified Stock Option Agreement for NonQualified 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) 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) *10.20 1997 Directors' Plan a 1997 Equity Plan for NonEmployee Directors of Playboy Enterprises, Inc., as amended (incorporated by reference to Exhibit 10.25(a) from the 2000 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) *10.21 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) *10.22 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 Company's quarterly report on Form 10-Q for the quarter ended March 31, 1997) 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)
65 *10.23 Selected Employment, Termination and Other Agreements @a Form of Severance Agreement by and between Playboy Enterprises, Inc. and each of Michael Carr, James English, Linda Havard, Christie Hefner, Martha Lindeman, Richard Rosenzweig, Howard Shapiro and Alex Vaickus 93-113 b Letter Agreement dated November 30, 2000 regarding employment of Michael Carr c Letter Agreement dated December 30, 2000 regarding employment of James English (items (b) and (c) incorporated by reference to Exhibits 10.28(f) and (g), respectively, from the 2000 Form 10-K) @21 Subsidiaries 114-115 @23.1 Consent of Ernst & Young LLP 116 @23.2 Consent of PricewaterhouseCoopers LLP 117 @23.3 Consent of Deloitte & Touche LLP 118 @99 Playboy TV International, LLC Joint Venture financial statements for the year ended December 31, 2001 119-131
- ---------- * Indicates management compensation plan # Certain information omitted pursuant to a request for confidential treatment filed separately with and granted by the SEC & Certain information omitted pursuant to a request for confidential treatment filed separately with the SEC @ Filed herewith 66 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 Costs and Other End Description of Period Expenses Accounts Deductions of Period - ---------------------------------------- ------------ ------------ ------------ ------------ ------------ Allowance deducted in the balance sheet from the asset to which it applies: Fiscal Year Ended December 31, 2001: Allowance for doubtful accounts $ 15,994 $ 584 $ 1,690(a) $ 11,862(b) $ 6,406 ============ ============ ============ ============ ============ Allowance for returns $ 28,815 $ -- $ 52,698(c) $ 50,999(d) $ 30,514 ============ ============ ============ ============ ============ Deferred tax asset valuation allowance $ 45,044 $ 9,544(e) $ -- $ -- $ 54,588 ============ ============ ============ ============ ============ Fiscal Year Ended December 31, 2000: Allowance for doubtful accounts $ 17,970 $ 723 $ 1,108(a) $ 3,807(b) $ 15,994 ============ ============ ============ ============ ============ Allowance for returns $ 21,295 $ -- $ 51,205(c) $ 43,685(d) $ 28,815 ============ ============ ============ ============ ============ Deferred tax asset valuation allowance $ 19,783 $ 24,142(e) $ 1,119(f) $ -- $ 45,044 ============ ============ ============ ============ ============ 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 $ -- $ 4,345(f) $ -- $ 19,783 ============ ============ ============ ============ ============
Notes: (a) Includes a $10,000 provision in 1999 related to the Spice acquisition which was charged to goodwill and applied against a noncurrent note receivable. Also primarily represents provisions for unpaid subscriptions charged to net revenues. (b) Includes a reversal in 2001 of the $10,000 provision discussed above related to assuming the obligation in the Califa acquisition. Also primarily 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 noncash federal income tax expense related to increasing the valuation allowance. (f) Represents the unrealizable portion of the change in the gross deferred tax asset. 67 EX-10.4B 4 ex10-4b.txt AGREEMENT Exhibit 10-4b CALIFA 02/08/99 Final AGREEMENT BETWEEN CALIFA ENTERTAINMENT GROUP, INC. AND LORAL SKYNET(R) CONCERNING SKYNET TRANSPONDER SERVICE This agreement (the "Agreement") is made this 8th day of February, 1999 by and between Califa Entertainment Group, Inc., a corporation organized and existing under the laws of the State of California and having its primary place of business at 15127 Califa St., Van Nuys, CA 91411 (hereinafter referred to as "CUSTOMER" which expression shall include its successors and permitted assigns) and Loral SpaceCom Corporation, a corporation organized and existing under the laws of the State of Delaware, doing business as LORAL SKYNET, and having a place of business at 500 Hills Drive, Bedminster, New Jersey 07921 (hereinafter referred to as "SKYNET" which expression shall include its successors and permitted assigns). WITNESSETH: WHEREAS, SKYNET has launched its Telstar 5 satellite for the purpose of providing service to commercial services on such satellite; WHEREAS, pursuant to an Asset Purchase Agreement dated May 29, 1998 between Spice Entertainment Companies, Inc. ("Spice"), and CUSTOMER, CUSTOMER has agreed to acquire the assets of a certain programming network currently operated by Spice, which Asset Purchase Agreement is not effective until the closing of that certain merger between Spice and Playboy Enterprises, Inc. (the "Closing"). WHEREAS, CUSTOMER desires to obtain service on C-band Telstar 5 Satellite ("Telstar 5") transponders to be used for commercial satellite transmission service and; WHEREAS, it is a condition precedent to the effectiveness of this Agreement that the Closing occur, but if it does occur, this Agreement shall be effective as of the Closing, and; WHEREAS, this agreement shall be in effect and the satellite services provided hereunder shall be provided by SKYNET to CUSTOMER on a non-common carrier basis such that the terms and conditions of the use of these services are governed solely by this Agreement and not by a tariff filed with the Federal Communications Commission ("Commission"). - ----------------------------- SKYNET(R) is a registered trademark of Loral SpaceCom Corporation LORAL SKYNET PROPRIETARY 2 CALIFA 11/9/98 Final NOW, THEREFORE, CUSTOMER and SKYNET, in consideration of the mutual covenants expressed herein, agree as follows: 1. SKYNET SERVICES 1.1 SKYNET offers and CUSTOMER hereby orders SKYNET Transponder Service consisting of service on one (1) 36 MHz, C-Band, 20 Watt fully protected transponder (hereinafter referred to as the "Fully Protected" transponder) on Telstar 5 beginning effective ________ [concurrent with the termination of the existing Spice/SKYNET contract and the closing of that certain merger between Spice and Playboy Enterprises, Inc.] and terminating on the end of life of the satellite. 1.2 The service as described in Section 1.1 above shall hereinafter be referred to as the "Service". 1.3 The Service is furnished to CUSTOMER subject to the Agreement including terms and conditions set forth in Codicil 1 ("TERMS AND CONDITIONS") attached hereto and incorporated by reference. 2. RATES CUSTOMER shall pay a monthly rate for the Service as set forth in the following table: Monthly Rate Quantity Service Satellite Term Per Transponder - -------------------------------------------------------------------------------- 1 36 MHz 20W C-band Telstar 5 Start of Service $ 145,000.00 Fully Protected (see Section 1.1) thru T5 End of Life 3. OPTIONS 3.1 TO ADD ADDITIONAL CAPACITY CUSTOMER shall have the option to acquire an additional 36 MHz Fully Protected transponder on either Telstar 6, or Telstar 7, depending on availability and subject to Section 3.2 below, by providing thirty (30) day written notice to SKYNET for a start of service no later than August 31, 1999. The rate for the additional transponder shall be $145,000/mo. The additional transponder will co-terminate with the existing Service provided under this Agreement. LORAL SKYNET PROPRIETARY 3 CALIFA 11/9/98 Final 3.2 RIGHT OF FIRST REFUSAL For the period ending August 1, 1999, SKYNET shall provide CUSTOMER with a Right-of First Refusal at the time a bona fide offer is received by SKYNET for the last Fully Protected "C"-Band transponder available on Telstar 6 and Telstar 7. In order to implement such Right-of First Refusal, SKYNET shall provide CUSTOMER with written notice of such bona fide offer. If CUSTOMER chooses to lease the transponder in question, CUSTOMER must respond, in writing, to SKYNET within seven (7) calendar days and Service must begin no later than August 31, 1999 at a rate of $145,000/mo.. Failure to respond to SKYNET's notification will be deemed a refusal of SKYNET's offer. 4. TRANSPONDER LOADING The monthly rate as set forth in Section 2 ("RATES") for the Service includes intrasatellite and intersatellite transponder management for the uplink of up to a maximum of six (6) carriers per transponder, subject to intrasatellite and intersatellite coordination, for its initial loading plan ("Initial Loading Plan"). In the event CUSTOMER implements a Different Loading Plan, pursuant to Paragraph 8 ("USE OF THE TRANSPONDER") of Codicil 1, or if CUSTOMER notifies SKYNET that it desires to implement a Different Loading Plan, SKYNET shall extend reasonable efforts to effect such intrasatellite and intersatellite coordination. Any changes to such Initial Loading Plan shall be subject to the provisions of Codicil 1 Paragraphs 8 ("USE OF THE TRANSPONDER") and 9 ("MULTIPLE CARRIER CHARGE"). The number of channels within a carrier shall not be unreasonably restricted by SKYNET. 5. NOTICES All notices, demands, requests, or other communications which may be or are required to be given, served, or sent by one party to the other party pursuant to this Agreement (except as otherwise specifically provided in this Agreement) shall be in writing and shall be delivered by hand, confirmed facsimile, or mailed by first-class, registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (i) If to CUSTOMER: Califa Entertainment Group, Inc. Mr. Steven Hirsch 15127 Califa St. Van Nuys, CA 91411 Phone: 818-908-0404 Fax: 818-908-0588 LORAL SKYNET PROPRIETARY 4 CALIFA 11/9/98 Final Copy to: Lipsitz, Green, Gahringer, Roll, Salisbury & Attention: Paul Cambria, Jr., Esq. 42 Delaware Avenue Suite 300 Buffalo, New York, 14202 Phone: 716-849-1333 Ext. 346 Fax: 716-855-1580 (ii) If to SKYNET LORAL SKYNET 500 Hills Drive Bedminster, NJ 07921 ATTN: Ted Corus Director - North America Sales Room 3B26 Phone: (908) 470-2320 Fax: (908) 470-2320 Copy to: LORAL SKYNET 500 Hills Drive Bedminster, NJ 07921 ATTN: Daniel J. Zaffarese Contract Manager- Room 3A20 Phone: (908) 470-2352 Fax: (908) 470-2453 Either party may designate by notice in writing a new address or addressee, to which any notice, demand, request, or communication may thereafter be so given, served or sent. Each notice, demand, request, or communication which shall be delivered, shall be deemed sufficiently given, served, sent or received for all purposes at such time as it is delivered to the addressee named above as to each party, with the signed messenger receipt, return receipt, or the delivery receipt being deemed conclusive evidence of such delivery. 6. ENTIRE AGREEMENT This Agreement along with matters incorporated herein by reference, constitutes the entire agreement between CUSTOMER and SKYNET relative to the Service, and this Agreement can be altered, amended or revoked only by an instrument in writing signed by both CUSTOMER and SKYNET. CUSTOMER and SKYNET agree hereby that any prior or contemporaneous oral and written agreements between and among themselves and their agents and representatives relative to the subject of this Agreement are superseded and replaced by this Agreement. Any provision of this Agreement found to be unenforceable or invalid by a court of competent jurisdiction shall LORAL SKYNET PROPRIETARY 5 CALIFA 11/9/98 Final in no way affect the validity or enforceability of any other provision except that if such invalid or unenforceable provision provided a material benefit to a party hereto, such party shall have the right to terminate the Agreement without liability to the other. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the day and year first above written, and agree to the terms and conditions set forth herein. CALIFA ENTERTAINMENT GROUP, INC. LORAL SKYNET By: /s/ Steven Hirsch By: /s/Ted Corus ---------------------------- ----------------------------------- Title: President Title: Vice President, Sales ------------------------ ------------------------------- Date: 2/9/99 Date: 3/5/99 -------------------------- -------------------------------- LORAL SKYNET PROPRIETARY Califa / Playboy Codicil 1 Final 2/8/99 Page 1 of 11 CODICIL 1 TERMS AND CONDITIONS OF THE AGREEMENT BETWEEN CALIFA / PLAYBOY AND LORAL SKYNET CONCERNING SKYNET(R) TRANSPONDER CAPACITY 1. WARRANTY EXCLUSIONS SKYNET WARRANTS TO CUSTOMER THAT SKYNET WILL PERFORM THE SERVICES DEFINED HEREIN IN ACCORDANCE WITH GENERALLY ACCEPTED INDUSTRY STANDARDS. SUBJECT TO THE ABOVE, SKYNET, ITS PARENT, THEIR SUBSIDIARIES AND THEIR AFFILIATES, SUBCONTRACTORS AND SUPPLIERS MAKE NO WARRANTY, EXPRESS OR IMPLIED, REGARDING THE PERFORMANCE OF THE SERVICE, AND SPECIFICALLY DISCLAIM ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 2. PAYMENT OF CHARGES A monthly charge applies each month or fraction thereof that Service is furnished. Monthly charges start on the first day the Service begins pursuant to Section 1. ("SKYNET SERVICES") of the Agreement. Charges accrue through and include the day that the Service is discontinued. When the billing date and the date that the Service is started, changed, or discontinued do not coincide, the charges will be adjusted to reflect the fractional part of the month involved. Monthly charges will be billed in advance, except where prohibited by law. For billing purposes each month is considered to have thirty (30) days. Payment is due on or before the first day of each month for Services to be provided that month. Service may be discontinued for nonpayment of a bill, in accordance with Paragraph 20. 2.1 SECURITY PAYMENT To safeguard its interests, SKYNET may require Customers to remit a security deposit, which will be held as a guarantee for the payment of charges. This security deposit does not relieve the Customer of the responsibility for the prompt payment of bills upon presentation. The security deposit will not exceed an amount equal to three times the monthly charge. The security deposit will be held by SKYNET and applied to the Customer's final bill(s). All of the security deposit amount in excess of the last billed amounts will be refunded to the Customer. The Security Deposit may be required, at SKYNET's discretion, if CUSTOMER fails to make timely payments. Simple interest at the rate of six percent annually will be paid to the Customer for the period that a cash deposit is held by the Company. However, if the appropriate legal authority in the state where the Customer's office responsible for bill payment is located establishes a different rate of interest, then that rate will apply. 3. INTEREST ON LATE PAYMENTS Any late payments by CUSTOMER of amounts due and payable hereunder (including but not limited to, specified payments, damages, and indemnification) to SKYNET shall be with interest at the rate of eighteen percent (18%) per annum, or the highest legally permissible rate of interest, whichever is lower, and all interest or discounting shall be compounded on a monthly basis. Such late payments, including interest, shall be payable with the amount due and calculated from the date payment was due until the date it is received by SKYNET. 4. TAXES 4.1 Other than for taxes on SKYNET'S net income, CUSTOMER agrees to pay all applicable sales, gross receipts, Universal Service Fund assessments, use and transfer taxes, similar taxes, or impositions, or levies by whatever name ("Taxes") that are directly levied on account of the Service on or after the consummation of the Agreement, excluding license or permit fees imposed generally upon SKYNET's operation of any SKYNET satellite or earth station. Taxes will be separately stated on CUSTOMER's invoice or statement of account. CUSTOMER may in good faith and by appropriate legal proceedings contest the validity, applicability or amount of any Taxes assessed or levied under the foregoing provisions, and SKYNET agrees to cooperate with CUSTOMER in any such contest and will permit CUSTOMER to contest the same at CUSTOMER's LORAL SKYNET PROPRIETARY Califa / Playboy Codicil 1 Final 2/8/99 Page 2 of 11 cost and expense. If any Taxes increase the CUSTOMER's annual cost of the Service provided hereunder by more than twenty-five percent (25%), the CUSTOMER may terminate the Service upon not less than thirty (30) days written notice to SKYNET. Any notice of termination must be delivered no more than thirty (30) days after CUSTOMER has been notified of the imposition of such Taxes that will result in increasing the CUSTOMER's annual cost of Service. 4.2 Notwithstanding anything to the contrary contained in the Agreement, the nonpayment of any such contested Taxes by CUSTOMER in connection with such contest shall not be deemed a default hereunder until final determination (including appeals) in such contest and expiration of any date established for filing an appeal therein. CUSTOMER agrees to indemnify SKYNET for any interest or penalty assessed on Taxes finally adjudged to be due and owing by the appropriate local, state, or federal tax authority. 5. TYPES OF SERVICE FULLY PROTECTED SERVICE (If Applicable) "Fully Protected" transponders, in the event of failure, shall be restored using spare equipment that may be available on the satellite at the time of failure, or on a comparable transponder on the same satellite, or on another SKYNET satellite then in orbit, pursuant to Paragraph 7 ("RESTORATION OF A FULLY PROTECTED FAILED TRANSPONDER") hereof, except where the failure is caused by the actions or inaction's of Customer not pursuant to directions of SKYNET. Fully Protected transponders are not preemptible. NON-PREEMPTIBLE SERVICE (If Applicable) "Non-Preemptible" transponders are not protected in the event of failure, and are not subject to preemption (non-preemptible) to restore any other customers protected service. PREEMPTIBLE SERVICE (If Applicable) "Preemptible" transponders are not protected in the event of failure. Preemptible transponders may be preempted on a permanent or temporary basis to restore protected service. If CUSTOMER continues to use any Preemptible transponder longer than five minutes following notification or attempted notification by SKYNET of its preemption to restore a protected service, a Preemption Notification Charge shall apply at the rate of $1,100.00 per minute, or each fraction thereof, for each minute after such five minute period. For purposes of notification concerning preemption of any Preemptible transponder, CUSTOMER shall specify, in writing to SKYNET prior to the start of Service provided under the Agreement, a telephone number or numbers where designated CUSTOMER personnel may be reached by SKYNET. Such contact telephone number(s) and Customer personnel shall remain in effect until further written notice is given, if ever, by CUSTOMER, changing the designated contact telephone number(s) and/or personnel. The five minute notification period specified above shall begin to run from the time the telephone call is completed with the CUSTOMER representative, or from the time of attempted notification of CUSTOMER if there is no answer at the Customer designated telephone number. Nothing in the Agreement shall prevent SKYNET from taking any action that it is required by law to take in accordance with the provisions of Section 706 of the Communications Act of 1934, as amended, 47 U.S.C. ss. 606. If Preemptible Service is temporarily preempted, CUSTOMER will be credited for the period of interrupted service as follows: The effective rate of each Preemptible transponder for the purposes of calculating credit due to preemption shall be the monthly rate divided by the number of transponders being furnished at that time. The actual amount credited shall be pro-rated based on the actual time CUSTOMER is without the transponder service. Notwithstanding anything in this Agreement, to the extent CUSTOMER does not comply with any permitted preemption, SKYNET shall have the right to prevent CUSTOMER's use of the preempted service, including SKYNET's right to deny, temporarily suspend, or terminate the service permanently without further notice. BUSINESS PREEMPTIBLE SERVICE (If Applicable) "Business Preemptible" transponders are not protected in the event of failure. Business Preemptible transponders may be preempted on a permanent or temporary basis as follows: (1) with five (5) minutes notice to restore protected service, or (2) with not less than thirty (30) days notice for any reason at the sole discretion of SKYNET (hereinafter referred to as "Discretionary Preemption"). If CUSTOMER continues to use any Business Preemptible transponder longer than five minutes following notification or attempted notification by SKYNET of its preemption to restore a protected service, or if CUSTOMER continues to use any Business Preemptible transponder five (5) minutes beyond 12:00:01 AM Eastern Time on the effective date of preemption in the case of a Discretionary Preemption, a Preemption Notification Charge shall apply at the rate of $1,100.00 per minute, or each fraction thereof, for each minute after such five minute period, in either case such charge is in addition to any remedy SKYNET may have hereunder. For purposes of notification concerning preemption of any Business Preemptible transponder to restore a protected service, CUSTOMER shall specify, in writing to SKYNET prior to the start of Service provided under the Agreement, a telephone number or LORAL SKYNET PROPRIETARY Califa / Playboy Codicil 1 Final 2/8/99 Page 3 of 11 numbers where designated CUSTOMER personnel may be reached by SKYNET. Such contact telephone number(s) and Customer personnel shall remain in effect until further written notice is given, if ever, by CUSTOMER, changing the designated contact telephone number(s) and/or personnel. In the event of a Discretionary Preemption of any Business Preemptible transponder, SKYNET shall notify CUSTOMER in writing pursuant to Section 4 ("NOTICES") of the Agreement. In the event any Business Preemptible transponder is preempted to restore any protected service, the five minute notification period specified above shall begin to run from the time the telephone call is completed with the CUSTOMER representative, or from the time of attempted notification of CUSTOMER if there is no answer at the Customer designated telephone number. Nothing in the Agreement shall prevent SKYNET from taking any action that it is required by law to take in accordance with the provisions of Section 706 of the Communications Act of 1934, as amended, 47 U.S.C. ss. 606. If Business Preemptible Service is temporarily preempted, CUSTOMER will be credited for the period of interrupted service as follows: The effective rate of each Business Preemptible transponder for the purposes of calculating credit due to preemption shall be the monthly rate divided by the number of transponders being furnished at that time. The actual amount credited shall be pro-rated based on the actual time CUSTOMER is without the transponder service. Notwithstanding anything in this Agreement, to the extent CUSTOMER does not comply with any permitted preemption, SKYNET shall have the right to prevent CUSTOMER's use of the preempted service. 6. TRANSPONDER INTERRUPTION OR FAILURE For the purpose of the Agreement; (i) an interruption ("Interruption") shall be defined as any period during which a transponder fails to meet the performance parameters set forth in Exhibit A ("PERFORMANCE PARAMETERS") attached hereto and incorporated by reference, as measured by SKYNET at its earth station in Hawley, Pennsylvania, such that the transponder is precluded from being used for its intended commercial purpose, and (ii) a failure ("Failure") shall be defined as any of the following: a) the inability, for any period of sixty (60) consecutive minutes, to pass signals through a transponder when it is illuminated with any authorized transmitted carrier, or b) an Interruption for any period of twenty four (24) consecutive hours, or c) ten (10) or more Interruptions of at least one (1) minute or longer per occurrence within any period of thirty (30) consecutive days. For purposes of this Paragraph 6 ("TRANSPONDER INTERRUPTION OR FAILURE"), measurement of periods of Interruption or Failure shall commence only upon CUSTOMER's written or verbal notification to SKYNET's Hawley earth station and CUSTOMER having vacated its signal from the affected transponder to permit SKYNET's verification of the existence of the Interruption or Failure. 7. RESTORATION OF A FAILED TRANSPONDER FULLY PROTECTED TRANSPONDER (If Applicable In the event any Fully Protected transponder provided hereunder fails, pursuant to Paragraph 6 ("TRANSPONDER INTERRUPTION OR FAILURE") hereof, and if SKYNET is unable to restore service on the affected transponder by switching in spare equipment that may be available on the satellite at the time of such failure, then SKYNET shall restore such service either (1) on a transponder of the same frequency band, having the same or greater bandwidth and the same power as the failed transponder, on the same satellite or (2) on a transponder of the same frequency band, having the same or greater bandwidth, the same or different power, the same or greater EIRP, and substantially equivalent domestic footprint, but no less than the same number of States included in the failed transponder footprint, on another SKYNET satellite then in orbit. Such transponder will then become the Fully Protected Transponder. NON-PROTECTED TRANSPONDER (If Applicable) In the event any non-protected transponder provided hereunder fails, pursuant to Paragraph 6 ("TRANSPONDER INTERRUPTION OR FAILURE") hereof, SKYNET may, in its sole discretion, attempt to restore service on the affected transponder using spare equipment on the satellite. If SKYNET is unable to restore service on the affected transponder by switching in spare equipment that may be available on the satellite at the time of such failure, then SKYNET may, in its sole discretion, offer to restore the Service on an available transponder of the same frequency band, having the same bandwidth and the same or different power as the failed transponder, on the same satellite or on another SKYNET satellite then in orbit. Such transponder will then become the non-protected transponder; provided, however, if SKYNET offers to restore the affected Transponder Service on a satellite other than the satellite on which the failed transponder was provided, then CUSTOMER may reject Service on such transponder with notice to SKYNET within twenty four (24) hours of SKYNET having offered such transponder to CUSTOMER. If SKYNET does not restore or attempt to restore Service, or CUSTOMER rejects, such service on the affected transponder(s) will terminate as of the moment of the failure pursuant to Paragraph 20.3 ("TERMINATION") hereof. 8. USE OF THE TRANSPONDER(S) LORAL SKYNET PROPRIETARY Califa / Playboy Codicil 1 Final 2/8/99 Page 4 of 11 The monthly rate as set forth in Section 2 ("RATES") of the Agreement includes intrasatellite and intersatellite transponder management for the uplink of carriers as set forth in Section 3 ("TRANSPONDER LOADING") of the Agreement, to each of the transponders provided hereunder for each of their initial loading plan ("Initial Loading Plan"). For purposes of the Agreement the carriers will be classified and defined as follows: (1) Digital Carriers: A "Digital Carrier" is a radio signal whose carrier phase and or amplitude takes on discrete values during a modulation symbol in response to balanced amplitude modulation by a raised cosine filtered impulse train representing digital information for any purpose including but not limited to video, voice, or data. Digital Carrier types include Binary Phase Shift Keying, Quadrature Phase Shift Keying, 8 state Phase Shift Keying, and 16 state Quadrature Amplitude Modulation. (2) FM Television Carriers: An "FM Television Carrier" is a radio signal whose carrier is modulated continuously in frequency or phase by a baseband video signal whose format, before any encryption or information compression technique, conforms to any video standard including, but not limited to, NTSC, PAL or SECAM. (3) Other Types Of Carriers: For purposes of the Agreement "Other Types Of Carriers" are cases not covered under either "Digital Carriers" or "FM Television Carriers". If CUSTOMER desires to transmit to any transponder provided under the Agreement in any manner different ("Different Loading Plan") than such transponders Initial Loading Plan, then the following shall apply: (i) If the Different Loading Plan involves Digital Carriers, then CUSTOMER may implement such Different Loading Plan at any time, provided that CUSTOMER shall provide the Different Loading Plan to SKYNET, no later than fourteen (14) days after the start date of such Different Loading Plan, identifying its characteristics. In the event that SKYNET is required to perform any maintenance or troubleshooting activity involving the affected transponder, CUSTOMER must furnish the Different Loading Plan on demand, and (ii) If the Different Loading Plan involves the addition of or changes to an FM Television Carrier or any Other Type Of Carrier, then CUSTOMER shall provide a written request to SKYNET, no less than sixty (60) days prior to the desired start date of such Different Loading Plan, identifying the characteristics, and the desired start date of such Different Loading Plan. SKYNET shall coordinate such proposed Different Loading Plan to determine if its use could reasonably be expected to result in either intrasatellite or intersatellite interference, and, based on the results of such coordination, SKYNET shall either authorize or reject, the use of such proposed Different Loading Plan, in a timely fashion, in writing to CUSTOMER. Such authorization shall not be unreasonably withheld. (iii) Notwithstanding anything in the Agreement to the contrary, CUSTOMER may obtain SKYNET's authorization for more than one Different Loading Plan for any transponder provided hereunder, for any period of time, during the term of the Agreement. 9. MULTIPLE CARRIER CHARGE 9.1 To the extent that SKYNET authorizes any transponder for use of Multiple Carriers where the number of carriers is a greater number than its Initial Loading Plan, whether analog or digital, then beginning with the scheduled start date of such Multiple Carriers, SKYNET shall bill, and CUSTOMER shall pay, a Multiple Carrier Charge for the maximum number of carriers authorized by SKYNET for the affected transponder, whether or not CUSTOMER actually uplinks to the affected transponder in a manner that utilizes such maximum number of carriers. The per carrier rate for such Multiple Carrier Charge shall be seven hundred ($700.00) dollars per month for each carrier added to the affected transponders Initial Loading Plan. For purposes of clarification, a carrier may contain any number of channels. 9.2 In the event that CUSTOMER uplinks to any transponder in any manner different from that authorized by SKYNET ("Unauthorized Loading Plan") pursuant to either its Initial Loading Plan or any other authorized Different Loading Plan for the affected transponder, whether analog or digital, then CUSTOMER shall be charged twice the monthly Multiple Carrier Charge, per month, for each unauthorized carrier for as long as said carrier(s) is (are) in operation and unauthorized. Furthermore, SKYNET may, in its sole discretion, require CUSTOMER to discontinue the use of such LORAL SKYNET PROPRIETARY Califa / Playboy Codicil 1 Final 2/8/99 Page 5 of 11 Unauthorized Loading Plan until such time as SKYNET authorizes the use of such uplink such that it becomes a Different Loading Plan pursuant to the provisions of the Agreement, including by way of illustration and not of limitation, Paragraph 8 ("USE OF THE TRANSPONDER(S)") and this Paragraph 9 ("MULTIPLE CARRIER CHARGE"). 10. LIMITATION OF LIABILITY 10.1 SKYNET'S LIABILITY, IF ANY, FOR ITS WILLFUL MISCONDUCT IS NOT LIMITED BY THE AGREEMENT. WITH RESPECT TO ANY OTHER CLAIM OR SUIT, BY CUSTOMER OR BY ANY OTHERS, FOR DAMAGES ASSOCIATED WITH THE INSTALLATION, PROVISION, TERMINATION, MAINTENANCE, REPAIR OR RESTORATION OF SERVICE, AND SUBJECT TO PARAGRAPHS 10.2. AND 10.5 FOLLOWING, SKYNET'S LIABILITY, IF ANY, SHALL NOT EXCEED AN AMOUNT EQUAL TO THE PROPORTIONATE CHARGE PROVIDED FOR UNDER THE AGREEMENT FOR THE SERVICE FOR THE PERIOD DURING WHICH THE SERVICE WAS AFFECTED, BUT IN NO CASE SHALL EXCEED $100,000.00. THIS LIABILITY FOR DAMAGES SHALL BE IN ADDITION TO ANY AMOUNTS THAT MAY OTHERWISE BE DUE CUSTOMER UNDER THE AGREEMENT AS A CREDIT ALLOWANCE FOR INTERRUPTIONS DESCRIBED HEREIN. 10.2 SKYNET IS NOT LIABLE FOR DAMAGES ASSOCIATED WITH SERVICE, CHANNELS, OR EQUIPMENT, WHICH IT DOES NOT FURNISH. 10.3 SKYNET, ITS PARENT, THEIR SUBSIDIARIES AND AFFILIATES, AND THE DIRECTORS, EMPLOYEES, AGENTS AND SUBCONTRACTORS OF ALL OF THEM, SHALL BE INDEMNIFIED, DEFENDED, AND HELD HARMLESS BY CUSTOMER AGAINST ALL CLAIMS, LOSSES, OR DAMAGES RESULTING FROM THE USE OF SERVICES FURNISHED PURSUANT TO THE AGREEMENT, INVOLVING: 10.3.1. CLAIMS FOR LIBEL, SLANDER, INVASION OF PRIVACY, INFRINGEMENT OF COPYRIGHT, OR ANY CLAIM BASED ON THE CONTENT OF ANY TRANSMISSION ARISING FROM ANY COMMUNICATION; 10.3.2. CLAIMS FOR PATENT INFRINGEMENT ARISING FROM COMBINING OR USING THE SERVICE FURNISHED BY SKYNET IN CONNECTION WITH FACILITIES OR EQUIPMENT FURNISHED BY OTHERS; OR 10.3.3. ALL OTHER CLAIMS ARISING OUT OF ANY ACT OR OMISSION OF OTHERS RELATING TO SERVICES PROVIDED PURSUANT TO THE AGREEMENT. SKYNET will use reasonable efforts to give CUSTOMER prompt notice of any claim that might cause SKYNET to rely on the provisions of this Paragraph 10.3. 10.4 NO LICENSE UNDER PATENTS (OTHER THAN THE LIMITED LICENSE TO USE) IS GRANTED BY SKYNET OR SHALL BE IMPLIED OR ARISE BY ESTOPPEL, WITH RESPECT TO ANY SERVICE OFFERED UNDER THE AGREEMENT. SKYNET WILL DEFEND CUSTOMER AGAINST CLAIMS OF PATENT INFRINGEMENT ARISING SOLELY FROM THE USE BY CUSTOMER OF SERVICES OFFERED UNDER THE AGREEMENT AND WILL INDEMNIFY CUSTOMER FOR ANY DAMAGES AWARDED BASED SOLELY ON SUCH CLAIMS. 10.5 SKYNET'S FAILURE TO PROVIDE OR MAINTAIN SERVICES UNDER THE AGREEMENT SHALL BE EXCUSED BY LABOR DIFFICULTIES, GOVERNMENTAL ORDERS, CIVIL COMMOTIONS, ACTS OF GOD AND OTHER CIRCUMSTANCES BEYOND SKYNET'S REASONABLE CONTROL, SUBJECT TO THE CREDIT ALLOWANCE FOR INTERRUPTIONS PROVISIONS OF THE AGREEMENT. 10.6 NOTWITHSTANDING ANYTHING TO THE CONTRARY, SKYNET SHALL NOT BE LIABLE FOR INCIDENTAL, INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES, OR FOR LOST PROFITS, SAVINGS OR REVENUES OF ANY KIND, WHETHER OR NOT SKYNET HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 11. LAUNCH SERVICES To the extent required by the launch services provider for launch services provided in connection with the launch of any satellite(s) contemplated by the Agreement, CUSTOMER shall have no right of action against the launch services contractor, other third party customers of the launch services contractor or their respective associates, for any loss or damage including, but not limited to, damage for bodily harm (including death) and damage to property suffered by CUSTOMER resulting from the LORAL SKYNET PROPRIETARY Califa / Playboy Codicil 1 Final 2/8/99 Page 6 of 11 performance of the launch services agreement by such parties. CUSTOMER further irrevocably agrees to a no-fault, no subrogation waiver of liability, and waives the right to make any claim or to instigate any judicial proceeding in connection with such claim, against the launch services contractor or their associates, in each case for any such damage suffered by CUSTOMER resulting from the performance of the launch services agreement by such parties. In the event that one or more associates of CUSTOMER (in their capacities as such) shall proceed against the launch services contractor, the third party customers or their associates as a result of any such damage suffered by CUSTOMER and caused by the launch services contractor, the third party customers or their associates resulting from the performance of the launch services agreement by such parties, CUSTOMER shall indemnify, hold harmless, dispose of any such claim and defend, when not contrary to the governing rules of procedures where the action takes place, the launch services contractor, such third party customers and their associates from any loss, damage, liability or expense, including reasonable attorney's fees, on account of such damage, injury or death, and shall pay all expenses and satisfy all judgments which may be incurred by or rendered against said indemnities in connection with such proceeding. As used herein, (i) the term "associates" means, with respect to any person, individuals or legal entities which act, directly or indirectly, on behalf of or at the direction of such person to fulfill the obligations of such person, including such person's employees, suppliers and subcontractors (when so acting) and (ii) the term "third party customers" means other customers of the launch services contractor that use the launch services contractor's launch services for the same launch. 12. CREDIT ALLOWANCES Credit allowances, may be given to CUSTOMER for Interruptions and/or Failures as defined in Paragraph 6 ("TRANSPONDER INTERRUPTION OR FAILURE") above. These credit allowances will be applied against future payments, or in the event of such interruption or failure during the final month of Service will result in a refund equal to the amount of the credit allowance. An Interruption or Failure period begins when CUSTOMER reports the service to a transponder to be interrupted or failed and releases the affected transponder for testing and repair. An Interruption or Failure period ends when the affected transponder is operative. If CUSTOMER reports a transponder to be interrupted or failed but declines to release it for testing and repair, it is considered to be impaired, but not interrupted or failed. For calculation of such credit allowance each month is considered to have thirty (30) days. Such credit allowance will be given for any Interruption or Failure of thirty (30) minutes or more, in one minute increments for each occurrence for the period of time when the transponder is Interrupted or Failed, except when Interrupted or Failed for any of the following reasons: (1) Interruptions or Failures caused by the action or failure to act of CUSTOMER or others authorized by CUSTOMER to use the affected transponder, not pursuant to the directions of SKYNET. (2) Interruptions or Failures during periods when CUSTOMER elects not to release the affected transponder for testing. (3) Interruptions or Failures due to the effects of sun transit on receiving earth stations. 13. CONTENT OF TRANSMISSIONS CUSTOMER is solely responsible for the content of transmissions using the transponder and related service. 14. SCRAMBLING Prior to commencing use of the Service provided under the Agreement, CUSTOMER, at its expense, shall provide SKYNET with any unscrambling devices that may be required for signal monitoring. CUSTOMER shall not use, or allow the use of, the Service provided hereunder for distribution of program material of a sexual or pornographic nature, to television viewers unless the programming is scrambled such that television viewers can receive the programming only through the use of an unscrambler authorized by CUSTOMER or CUSTOMER's authorized agent. 15. REFUSAL OF SERVICE SKYNET may terminate, prevent or restrict any communications using the Service provided hereunder as a means of transmission if such actions (1) are undertaken at the direction of a governmental agency with colorable jurisdiction (including the Commission) or (2) are taken subsequent to the institution against SKYNET or any of its permitted assignees, any legal entity affiliated with any of them, or any of the directors, officers, agents or employees of them, of criminal or administrative proceedings or investigations based upon the content of such communications, other than civil proceedings or (3) are taken as a result of a judgement on the merits against CUSTOMER or any permitted assignee of CUSTOMER, of criminal liability based upon the content of such communications. SKYNET will not terminate, prevent or restrict CUSTOMER's transmissions pursuant to such clause if, promptly upon notification by SKYNET of the institution of such proceedings or investigations, CUSTOMER is able to satisfy SKYNET, subject to SKYNET's sole and reasonable discretion, that within forty-eight (48) hours the aforementioned proceedings are resolved to SKYNET's satisfaction or the relevant transmissions will LORAL SKYNET PROPRIETARY Califa / Playboy Codicil 1 Final 2/8/99 Page 7 of 11 terminate in the relevant jurisdiction and that they will not re-occur in the relevant jurisdiction. Nothing in this Paragraph shall affect any other term or condition hereof including without limitation any obligation under Paragraph 10 (LIMITATION OF LIABILITY) or any obligation to pay the rates in Section 2 (RATES) of the Agreement throughout its period. 16. ASSIGNMENT / RESALE 16.1 ASSIGNMENT CUSTOMER acknowledges and agrees that notwithstanding anything to the contrary contained in the Agreement, CUSTOMER shall not transfer or assign any of its rights or obligations under the Agreement to any third parties without SKYNET's consent, which shall not be unreasonably withheld. SKYNET expressly shall have the right to assign the Agreement including its rights, duties and obligations hereunder, to its parent corporation or any present or future affiliate or subsidiary of SKYNET, or in connection with the merger or acquisition of its satellite business. 16.2 RESALE For as long as the Agreement is not assigned, the following applies: To the extent not otherwise prohibited by rule, regulation or law, in the event CUSTOMER desires to resell all or any part of the Service to a third party, CUSTOMER is approved to do so. CUSTOMER shall be solely responsible for any permitted resale and shall indemnify and hold SKYNET harmless for any claim or liability for damages made by any third party in connection with such resale. If this Agreement is assigned, the following applies: To the extent not otherwise prohibited by rule, regulation or law, in the event CUSTOMER desires to resell all or any part of the Service to a third party, CUSTOMER shall notify SKYNET in writing no less than thirty (30) days prior to the scheduled date of such resale, that it has an agreement to permit a third party to use all or any part of the Service. SKYNET shall notify CUSTOMER in writing within fifteen 15 days of receipt of the aforementioned notification, advising CUSTOMER of SKYNET's decision to either allow the resale to such third party, or not to allow the resale. CUSTOMER shall be solely responsible for any permitted resale and shall indemnify and hold SKYNET harmless for any claim or liability for damages made by any third party in connection with such resale. 17. NON-INTERFERENCE CUSTOMER's radio transmissions (and those of its uplinking agents) to the satellite shall comply, in all material respects, with all FCC and all other governmental (whether international, federal, state, municipal, or otherwise) statutes, laws, rules, regulations, ordinances, codes, directives and orders, of any such governmental agency, body, or court (collectively "Laws") applicable to it regarding the operation of the satellite, transponder, and any backup transponders to which CUSTOMER is given access pursuant to the Agreement and shall not interfere with the use of any other transponder or cause physical harm to the Transponder, any backup transponder to which CUSTOMER is given access pursuant to the Agreement, any other transponders, or to the satellite on which the Transponder is located. Further, CUSTOMER will coordinate with (and will require its uplinking agents to coordinate with) SKYNET, in accordance with procedures reasonably established by SKYNET and uniformly applied to all users of transponders on the satellite, its transmissions to the satellite, so as to minimize adjacent channel and adjacent satellite interference. For purposes of this Paragraph 17, interference shall also mean acts or omissions, which cause a transponder to fail to meet its transponder performance parameters. Without limiting the generality of the foregoing, CUSTOMER (and its uplinking agents) shall comply with all FCC rules and regulations regarding use of automatic transmitter identification systems (ATIS). 18. IMPROPER ILLUMINATION In the event improper illumination of any transponder provided under the Agreement is detected by SKYNET, CUSTOMER shall be notified and CUSTOMER shall take immediate corrective action to stop the improper illumination within five (5) minutes of notification from SKYNET. A charge of eleven hundred ($1,100.00) dollars per minute will apply for improper illumination that continues beyond the five minute period after notification, or attempted notification if there is no answer at the telephone number provided by CUSTOMER. Furthermore, if immediate corrective action is not taken by CUSTOMER, SKYNET shall have the right to take immediate action to protect its services or its interests, including but not limited to suspending or terminating CUSTOMER's service on the affected transponder. 19. GENERAL OBLIGATIONS In the event CUSTOMER breaches any of its obligations in connection with the usage procedures and restrictions described in the Agreement, including, without limitation, transponder usage, non-interference, government regulations, preemptive rights, and no-transfer, then SKYNET may, in its sole discretion and in addition to the exercise of its other rights against CUSTOMER, require CUSTOMER to cease LORAL SKYNET PROPRIETARY Califa / Playboy Codicil 1 Final 2/8/99 Page 8 of 11 transmissions to (any or all of / the affected) transponder(s) provided hereunder and take any actions necessary to enforce SKYNET's rights. CUSTOMER will pay to SKYNET all expenses (including reasonable attorney's fees) incurred in connection with SKYNET's enforcement against CUSTOMER arising out of CUSTOMER's use of the affected transponder(s). Notwithstanding the foregoing in this paragraph 19 ("GENERAL OBLIGATIONS"), in the event SKYNET requires CUSTOMER to cease transmissions pursuant to this Section 19, and if such action is subsequently brought to arbitration pursuant to Section 34 ("ARBITRATION") herein, if the arbitrator rules that CUSTOMER should not have been required to cease transmissions, or if SKYNET independently determines that CUSTOMER should not have been required to cease transmissions, then CUSTOMER will have no obligation to pay such SKYNET expenses. 20. TERMINATION The Agreement may be terminated prior to the end of its term as follows: 20.1 In the event of the breach of any of the material terms and conditions, representations and warranties contained herein, the non-breaching party may terminate upon written notice to the other with fifteen (15) days prior written notice citing the cause of such termination, which period may be used to cure. 20.2 In the event that the satellite that the Service is intended to be provided on fails to reach and maintain a satisfactory orbit in the appropriate orbital position, or a failure by said satellite to go into satisfactory operation after achieving satisfactory orbit in the appropriate orbital position (any or all of the foregoing in this Paragraph 20.2 being referred to herein as a "Launch Failure"), either party may terminate the Agreement with written notice to the other party and neither party will have any further liability to the other party except for SKYNET's liability to refund to CUSTOMER any monies paid to SKYNET for Service not received. 20.3 In the event of a failure, as defined in Paragraph 6 (TRANSPONDER INTERRUPTION OR FAILURE), of a non-protected transponder for which SKYNET does not provide an acceptable restoration, as defined in Paragraph 7 ("TRANSPONDER INTERRUPTION OR FAILURE"), within 10 days, the customer or SKYNET may terminate this Agreement without liability except for such services as have already been received. The termination date will be considered to be the date of the failure. 21. EARLY TERMINATION Subject to Paragraph 20 ("TERMINATION") hereof, no early termination date is provided under the Agreement. Therefore, in the event CUSTOMER orders the discontinuance of Service, effective on any date prior to the termination date set forth in Section 1 ("SKYNET SERVICES") of the Agreement, or if the Agreement is terminated by SKYNET due to CUSTOMER's breach with respect to the Service provided under the Agreement prior to the termination date set forth in Section 1 ("SKYNET SERVICES") of the Agreement, an early termination charge ("Early Termination Charge") shall apply as follows: The Early Termination Charge shall be an amount equal to the lesser of (i) the aggregate monthly rate then in effect for twelve (12) months of Service on the affected transponder(s) or (ii) the aggregate rate for Service through the term of Service for the affected transponder(s). Early Termination Charges shall be due and payable upon receipt by CUSTOMER of an invoice for such charges. Early termination charges apply regardless of whether or not Service has begun and are in addition to any other rights SKYNET may have hereunder. 22. CHANGES IN OPERATIONS OR PROCEDURES SKYNET is not responsible to CUSTOMER if a change in operations, procedures, or transmission parameters as set forth in Exhibit B ("TRANSMISSION PARAMETERS") attached hereto and incorporated by reference (i) affects any facilities, CUSTOMER equipment or CUSTOMER communications system in any way, or (ii) requires their modification in order to be used with any transponder provided pursuant to the Agreement. However, if such changes can be reasonably expected to materially affect the operating or transmission characteristics of the Service, or render with the Service any CUSTOMER equipment or CUSTOMER communications system incompatible with the Service, SKYNET shall use reasonable efforts to provide adequate notice, in writing, to allow CUSTOMER an opportunity to maintain uninterrupted service. SKYNET shall have no obligation to change or modify any of its components, operations or procedures to be compatible with CUSTOMER. 23. TRANSPONDER ALLOCATION Assignment of the specific transponders and/or satellites to be used for the Service remains the sole prerogative of SKYNET. During the term of the Agreement SKYNET shall LORAL SKYNET PROPRIETARY Califa / Playboy Codicil 1 Final 2/8/99 Page 9 of 11 have the right to change any of the transponder and / or satellite assignments, but shall do so only if there is an operational concern, interference caused by CUSTOMER, or, in order to protect the health of the satellite on which Service is being provided. If required, such assignment change shall be made with not less than thirty (30) days prior written notice to CUSTOMER. 24. FCC COMPLIANCE 24.1 If, at any time after the aforementioned applications become effective, SKYNET can no longer comply fully with the provisions of the Agreement because of other Commission rules and regulations which are inconsistent with the Agreement, CUSTOMER may either (1) terminate immediately the Agreement without any liability whatever by giving notice in writing within ninety (90) days of such action or (2) negotiate with SKYNET so to modify the Agreement as to conform with the new commission rules and regulations. If CUSTOMER elects to terminate in such event, SKYNET shall refund promptly any sums previously paid to SKYNET for Service not rendered. 24.2 SKYNET represents and warrants to CUSTOMER that to the best of its knowledge there are no existing Commission rules and regulations and no provisions in Loral SpaceCom Corporation Tariff F.C.C. No. 1 that would prevent SKYNET from complying with all of the terms and conditions in the Agreement. If any such Commission rules and regulations or tariff provisions are found to exist, SKYNET agrees that it will immediately file petitions proposing to remove such regulations or provisions so as to permit it to comply with all of the terms and conditions in the Agreement. If such regulations or tariff provisions affect SKYNET's ability to comply with material terms and conditions of the Agreement and are not removed within six (6) months of the time petitions are filed, CUSTOMER may either (1) terminate immediately the Agreement without any liability whatsoever by giving notice in writing within fifteen (15) days or (2) negotiate with SKYNET so to modify the Agreement as to conform with the aforementioned regulations. If CUSTOMER elects to terminate in such event, SKYNET shall refund promptly any sums previously paid to SKYNET for Service not rendered. 24.3 SKYNET agrees that for so long as the Agreement is in effect, it will neither voluntarily file, nor cause a third party to file voluntarily, any proposed tariff with the Commission, and will not voluntarily make commission filings with the Commission that are in any way inconsistent with the terms and conditions of the Agreement. 25. NO POSSESSORY INTEREST, BANKRUPTCY CUSTOMER has, and will have, no possessory or other interest in the transponder(s) provided pursuant to the Agreement. CUSTOMER acknowledges that: (1) it has been advised of and fully understands the conditions and the consideration pursuant to which SKYNET provides and CUSTOMER accepts the Service and (2) the rates for the Service, as well as the termination charges as provided for in Paragraph 21 ("EARLY TERMINATION CHARGE") hereof, are fair and reasonable at the market on the date of commitment to the Service and the date of the Agreement. CUSTOMER recognizes that transponder space for the provision of the service contemplated under the Agreement is a commodity in limited supply and that those using full time transponder service, similar to the Service provided under the Agreement, usually enter into long-term commitments with service providers. Therefore, CUSTOMER understands that its acceptance of the Service precludes SKYNET from accepting any other customer for service on the transponder(s) being used to provide Service to Customer. Because of this, CUSTOMER concedes that a failure to fulfill CUSTOMER's obligations under the Agreement would irreparably harm SKYNET. Therefore, in the event of any bankruptcy or similar proceeding on the part of CUSTOMER, CUSTOMER agrees that it will petition any relevant court for prompt action to accept or reject the Agreement, and to authorize the scheduled payments in full, prior to resolution of matters affecting the Agreement. 26. INDEPENDENT CONTRACTOR Nothing herein contained shall create any association, partnership, joint venture, the relation of principal and agent, or the relation of employer and employee between the parties hereto, it being understood that SKYNET shall perform all services hereunder as an independent contractor. 27. PUBLICITY AND ADVERTISING 27.1 CUSTOMER shall not in any way or in any form publicize or advertise in any manner the fact that it is obtaining services from SKYNET pursuant to the Agreement, without the express written approval (which shall not be unreasonably withheld) of SKYNET, obtained in advance, for each item of such advertising or publicity. The foregoing prohibition shall include but not be limited to news releases, letters, correspondence, literature, promotional LORAL SKYNET PROPRIETARY Califa / Playboy Codicil 1 Final 2/8/99 Page 10 of 11 materials or displays of any nature or form. Each request for approval hereunder shall be submitted in writing to the representative designated in writing by SKYNET; and approval, in each instance, shall be effective only if in writing and signed by said representative. Notwithstanding the foregoing, CUSTOMER may refer to the fact that it is securing services from SKYNET without SKYNET's prior approval so long as such statements are limited to a statement of such fact and are not an endorsement of any product or service by SKYNET. 27.2 SKYNET shall not in any way or in any form publicize or advertise in any manner the fact that it is providing services to CUSTOMER pursuant to the Agreement, without the express written approval (which shall not be unreasonably withheld) of CUSTOMER, obtained in advance, for each item of advertising or publicity. The foregoing prohibition shall include but not be limited to news releases, letters, correspondence, literature, promotional materials or displays of any nature or form. Each request for approval hereunder shall be submitted in writing to the representative designated in writing by CUSTOMER; and approval, in each instance, shall be effective only if in writing and signed by said representative. Nothing herein shall prevent SKYNET from providing the FCC or any other governmental agency, information concerning the Agreement as required by Law or in response to a request for information by such Governmental Agency. Notwithstanding the foregoing, SKYNET may refer to the fact that it is providing the service to CUSTOMER without CUSTOMER's prior approval so long as such statements are limited to a statement of such fact and are not an endorsement of any product or service by CUSTOMER. 28. GOVERNING LAW This Agreement shall be governed by and construed under the laws of the State of New York, without giving effect to its conflict of law principles. 29. HEADINGS The headings used throughout the Agreement are for convenience only and are not a part of the Agreement and shall have no effect upon the construction and interpretation of the Agreement. 30. WAIVERS A waiver by either party of any of the terms and conditions of the Agreement in any instance shall not be deemed or construed to be a waiver of such term or condition for the future, or of any subsequent breach thereof. 31. CONFIDENTIALITY The Agreement shall be kept strictly confidential, except for disclosure (1) to the extent required by the law or legal process, in which case the parties shall seek confidential treatment of the document and the information contained herein, (2) as a part of normal accounting and auditing procedures, (3) to each party's parent company, or (4) to a bona fide potential purchaser of the applicable business, investment bankers and bona fide potential or actual lenders, provided any such party shall have agreed to keep the Agreement confidential pursuant to an agreement containing terms substantially similar to those in Paragraph 33 ("NONDISCLOSURE OF INFORMATION") hereof. 32. SUCCESSION The Agreement shall inure to the benefit of and be binding upon the respective successors and permitted assigns of the parties hereto. 33. NONDISCLOSURE OF INFORMATION 33.1 Each Party to the Agreement may find it beneficial to disclose to the other Party documentation or other information which the disclosing Party considers proprietary ("Information"). Such Information may include but is not limited to, engineering, hardware, software or other technical information concerning the project or the SKYNET network, and financial, accounting or marketing reports, analysis, forecasts, predictions or projections relating to this project or the business of SKYNET or CUSTOMER generally. 33.2 It is specifically understood and agreed that Information disclosed pursuant to the Agreement shall be considered proprietary either because 1) it has been developed internally by the disclosing Party, or because 2) it has been received by the disclosing Party subject to a continuing obligation to maintain the confidentiality of the Information. 33.3 Information that is provided in a tangible form shall be marked in a manner to indicate that it is considered proprietary or otherwise subject to limited distributions provided herein. If the Information is provided orally, LORAL SKYNET PROPRIETARY Califa / Playboy Codicil 1 Final 2/8/99 Page 11 of 11 the disclosing party shall clearly identify it as being proprietary at the time of disclosure, and within five (5) working days of such disclosure, confirm the disclosure in writing to the other party. With respect to Information, the Party to whom the Information is disclosed and its employees shall: a. hold the Information in confidence and protect it in accordance with the security regulations by which it protects its own proprietary or confidential information, which it does not wish to disclose; b. restrict disclosure of the Information solely to those employees with a need to know and not disclose it to any other persons; c. advise those employees of their obligations with respect to the Information; and d. use the Information only in connection with implementing the Agreement and in continuing discussions and negotiations between the parties concerning the Service, except as may otherwise be agreed upon in writing. 33.4 The party to whom Information is disclosed shall have no obligations to preserve the proprietary nature of any Information that: a. was previously known to it free of any obligations to keep it confidential; b. is disclosed to third parties by the disclosing party without restriction; c. is or becomes publicly available by other than unauthorized disclosure; or d. is independently developed by the receiving party. 33.5 The receiving party may disclose the Information pursuant to a court order or other governmental or regulatory compulsion provided that the disclosing party shall be given prompt notice of the receipt of such order or other compulsion 33.6 The Receiving Party Agrees That All Of Its Obligations Undertaken Under This Non-Disclosure Agreement Shall Survive And Continue After Any Termination Of This Agreement. The Information shall be deemed the property of the disclosing party and, upon request the other party will return all Information that is in tangible form to the disclosing party or destroy all such information. 34. ARBITRATION The parties agree and acknowledge that any and all disputes, disagreements, or controversies arising from or in connection with the Agreement shall be submitted to arbitration. If a dispute arises out of or relates to this Agreement, or its breach, and the parties have not been successful in resolving such dispute through negotiation, then within thirty (30) days of such negotiation, the parties agree to submit the dispute to final and binding arbitration under the Rules of Conciliation and Arbitration of the American Arbitration Association ("AAA"). Where the amount in controversy is one million United States dollars ($1,000,000.00) or less, the arbitration will be conducted by a sole arbitrator agreed upon by the parties. Where the amount in controversy exceeds one million United States dollars ($1,000,000.00), the arbitration will be conducted by a three (3) arbitrator panel, with each party selecting one (1) arbitrator and the third being chosen by the AAA. The arbitration shall be conducted under the procedural rules of the AAA in effect on the date of the Agreement.. The arbitrator(s) shall apply the substantive (not the conflicts) law of the State specified in Paragraph 28 ("GOVERNING LAW") above. The arbitrator(s) may not limit, expand or otherwise modify the terms of the Agreement or award exemplary or punitive damages or attorney's fees. The arbitration, including arguments and briefs, shall be in the English language and the arbitration shall take place in New York, New York. The award shall be in United States dollars. Judgment upon the award rendered in the arbitration may be entered in any court having jurisdiction thereof. Each party shall bear its own expenses (including attorney's fees) and an equal share of the costs of the arbitration. The parties, their representatives, other participants and the arbitrator(s) shall hold the existence, content and result of the arbitration in confidence. Nothing in this Paragraph 34 ("ARBITRATION") shall be construed to preclude any party from seeking injunctive relief in order to protect its rights pending arbitration. A request by a party to a court for such injunctive relief shall not be deemed a waiver of the obligation to arbitrate. LORAL SKYNET PROPRIETARY CALIFA/PLAYBOY 2/8/99 EXHIBIT A C-BAND PERFORMANCE PARAMETERS TELSTAR 5 Minimum Performance At End-Of-Life With 50 State Plus U.S. Caribbean Coverage C-BAND EIRP REGION 20 Watt HPA G/T - ------ ----------- --- **95% of CONUS 36.9 dBW -7 Major Alaskan Cities 33.3 dBW -8.9 Hawaii 32.2 dBW -6.3 Puerto Rico and 32.7 dBW -4.6 Virgin Islands Should the EIRP performance of the Telstar 5 transponder vary by minus 2dBW from the values in the above table, or if the G/T performance of the Telstar 5 transponder varies by minus 2 db/k from the values in the above table, as measured by SKYNET at its earth station in Hawley, Pennsylvania, the transponder will be considered to have a failure. The above table summarizes minimum (worse case transponder during winter solstice) CW (Continuous Wave) Saturation EIRP values at End-of-Life for the Telstar 5 C-band transponders at the Edge of Coverage (EOC) and minimum G/T values at End-of-Life for the Telstar 5 C-band transponders at EOC. LORAL SKYNET PROPRIETARY CALIFA/PLAYBOY 2/8/99 EXHIBIT B TRANSMISSION PARAMETERS C-BAND TRANSMISSION PARAMETERS FOR C-BAND TRANSPONDERS A. Transmitted Carrier(s) - The transmitted carrier(s) shall be within accepted industry standards and shall be confined to a 36 MHz bandwidth centered on the frequency assigned by SKYNET. B. Transmit Power - The SKYNET shall authorize a particular transmit power by a transmitting earth station. For transponders operating in the saturated mode, this authorized transmit power shall normally be that power necessary to saturate the transponder and shall not be exceeded by more than 2 dB. For transponders operating in a mode where the power is backed-off below saturation, this authorized transmit power shall not be exceeded. C. C-Band Carrier Dispersal - For determining the amount of carrier dispersal required to control the energy (power flux density) at the earth's surface, a C-Band transponders equivalent isotropically radiated power of +39 dBW for TELSTAR 4 twelve watt transponders, +42 dBW for TELSTAR 4 twenty-four watt transponders and +41 dBW for Telstar 5 transponders shall be assumed for beam center-Contiguous Mainland. SKYNET transponder users are required to provide enough modulation at all times such that the energy at the surface of the earth from a SKYNET satellite shall not exceed the limits set by the FCC. D. Polarization Isolation (Transmitting Earth Station) - isolation between orthogonal cross-polarized signals shall be at least 35 dB throughout the frequency bands of 5925 MHz to 6425 MHz within the cone angle of 0.25 Theta where Theta is the half-power beamwidth of the main beam. The polarization adjustment of the earth station antenna relative to the satellite shall be maintained to an accuracy of +/- 1.0 degree at minimum Faraday rotation when polarization tracking is not employed. LORAL SKYNET PROPRIETARY EX-10.4C 5 ex10-4c.txt TRANSFER OF SERVICE AGREEMENT Exhibit 10-4c Califa /Spice Assignment 02/21/02 Page 1 of 1 TRANSFER OF SERVICE AGREEMENT Califa Entertainment Group, Inc. ("Former Customer") having its principal place of business at 15127 Califa St., Van Nuys, California, requests that Loral SpaceCom Corporation, doing business as Loral Skynet(R) ("SKYNET"), transfer the following service to Spice Hot Entertainment, Inc. ("New Customer"), having its principal place of business at 9242 Beverly Blvd., Beverly Hills, CA 90210. Service to be transferred: SKYNET Transponder Service consisting of one 36MHz 20W C-band Fully Protected transponder (the "Service") on the Telstar 5 satellite (subsequently moved to Telstar 7), which Service began March 15, 1999 and shall continue through the End of Life ("EOL") of Telstar 5 at a monthly rate of $145,000.00, such Service being ordered pursuant to the Agreement between Former Customer and SKYNET entered into effective February 8, 1999. The transfer will be effective as of July 6, 2001. This Transfer of Service Agreement acknowledges that (i) Former Customer has paid for Service provided through June 30, 2001 and (ii) New Customer, through its Playboy Enterprises parent, has been paying for the Service since July 1, 2001. The Service is not to be interrupted or relocated at the time the transfer is made. New Customer agrees to assume all obligations of Former Customer at the time of transfer. These obligations may include and are not limited to: (1) all outstanding indebtedness for the Service, (2) the unexpired portion of the original term of Service and revenue commitment(s), and (3) any unexpired termination liability(ies). FORMER CUSTOMER NEW CUSTOMER By: /s/ W. Asher By: /s/ James English ---------------------------------- ---------------------------------- (Signature of Authorized (Signature of Authorized Representative) Representative) Print: W. Asher Print: J. English -------------------------------- ------------------------------- Title: President Title: President ------------------------------- ------------------------------- Date: 2/22/02 Date: 2/22/02 ------------------------------- ------------------------------- Agreed to by SKYNET: By: R.J. DeMartini ----------------------------------------------------- (Signature of Authorized Representative) Print: R.J. DeMartini -------------------------------------------------- Title: Director, Supplier Relations & Customer Contracts -------------------------------------------------- Date: 2/22/02 -------------------------------------------------- - -------------------------------------------------------------------------------- SKYNET and its logo are registered trademarks of Loral SpaceCom Corporation LORAL SKYNET PROPRIETARY EX-10.4D 6 ex10-4d.txt AMENDMENT ONE TO THE TRANSPONDER SERVICE AGMT Exhibit 10-4d Daniel J. Zaffarese 500 Hills Drive Senior Contract Manager Bedminster, N.J. 07921 Tel: (908) 470-2352 Fax: (908) 470-2453 February 28, 2002 Spice Hot Entertainment, Inc. Mr. James L. English, President 9242 Beverly Boulevard Beverly Hills, CA 90210 Subject: Amendment One to the Transponder Service Agreement between Spice Hot Entertainment, Inc. and Loral SpaceCom Corporation, doing business as Loral Skynet(R)("SKYNET"). Dear Mr. English, Reference is made to the agreement between Spice Hot Entertainment, Inc. and Loral Skynet concerning Skynet Transponder Service (the "Agreement"). The Agreement, was originally executed between SKYNET and Califa Entertainment Group, Inc. effective February 8, 1999 and was subsequently assigned from Califa Entertainment Group, Inc. to Spice Hot Entertainment, Inc. effective July 6, 2001 in accordance with a Transfer of Service Arrangement signed by Spice Hot Entertainment, Inc., Califa Entertainment Group, Inc. and SKYNET. The Agreement provided for Service on the Telstar 5 satellite from March 15, 1999 through the End of Life ("EOL") of Telstar 5 (currently estimated to be on or about June 30, 2015). This Amendment memorializes the fact that Service was moved from Telstar 5 to Telstar 7 on or about November 2, 1999 in accordance with Paragraph 20 of the Terms and Conditions of the Agreement. In addition, this Amendment also memorializes a change in the termination of Service date from the Telstar 5 EOL to the Telstar 7 satellite EOL (currently estimated to be on or about October 31, 2014). If you have any questions, please call me on 908-470-2352. Thank You, Agreed to: Spice Hot Entertainment, Inc. Name: James L. English /s/ Daniel J. Zaffarese -------------------------- Daniel J. Zaffarese Signature: /s/ James L. English Senior Contract Manager ---------------------- Date: March 1, 2002 --------------------------- Cc: Ms. Alexandra Shepard, Senior VP, Business and Legal Affairs - Playboy Entertainment Group, Inc. Mr. Ted Corus, Executive Vice President, Skynet Satellite Services - Loral Skynet - --------------------- SKYNET(R)is a registered trademark of Loral SpaceCom Corporation EX-10.11B 7 ex10-11b.txt FIRST AMENDMENT TO LEASE Exhibit 10-11b FIRST AMENDMENT TO LEASE THIS FIRST AMENDMENT TO LEASE ("First Amendment") is made as of this 10th day of October, 1991 by and between Beverly Mercedes Place, Ltd., a California Limited Partnership ("Landlord") and Playboy Enterprises, Inc., a Delaware corporation ("Tenant"). R E C I T A L S: A. Landlord entered into a lease dated as of July 25, 1991 with Tenant (the "Lease") whereunder Tenant leased space on the 2nd and 3rd floors of the building located at 9242 Beverly Boulevard, Beverly Hills, California 90210 (the "Building"). B. Landlord and Tenant desire to modify certain of the terms and conditions of the Lease. C. Unless otherwise defined herein, capitalized terms as used herein shall have the same meanings as defined in the Lease. AMENDMENT NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby amend the Lease as follows: 1. Paragraphs 69 and 70. Paragraphs 69 and 70 of the Lease are hereby deleted in its entirety and the following paragraphs are hereby inserted in their place: "69. Subordination and Title Insurance Policy. The requirement of Paragraph 28 of the Lease that Tenant subordinate its leasehold interest in the Premises to the interest of (and to attorn to) the holder of each ground lease, mortgage and trust deed conveying an interest in or encumbering the Building, executed after the date this Lease is executed and delivered, shall be conditioned upon the receipt by Tenant from each such ground lessor, mortgagee or trustee, as the case may be, of a commercially reasonable nondisturbance agreement which is in recordable form. It shall be a condition to Tenant's obligations under this Lease that Tenant obtains, on or before October 25, 1991, an ALTA 1970 Form B leasehold policy of title insurance with such title endorsements as may be requested by Tenant issued by Title Insurer (as defined below) showing the leasehold interest created under this Lease vested in Tenant subject only to the following matters: (a) real property taxes not then delinquent; (b) matters of title respecting the Site described in the preliminary title report dated as of June 12, 1991 issued by Pacific Title Guaranty ("Title Insurer") and supplements thereto dated as of July 3 and July 9, 1991, a copy of which is attached hereto as Exhibit "L" and incorporated herein by reference, but deleting therefrom exceptions 9, 27, 28 and Notes numbers 1 through 7; and (c) matters affecting the condition of title to the Site created by or with the written consent of Tenant (collectively, the "Title Policy"). The Title Policy shall be issued with liability in the amount of Seven Hundred Fifty Thousand Dollars ($750,000.00), and the cost of the Title Policy shall be paid for by Tenant. Landlord agrees to furnish such affidavits and indemnities to the Title Insurer as the Title Insurer shall require in order to issue the Title Policy. Without limiting the generality of the foregoing, Landlord shall execute such indemnity agreements as the Title Insurer shall require in order to provide Tenant with title insurance coverage against any loss by reason of the establishment of priority over the leasehold interest of any mechanics' liens or mechanics' liens rights. In the event that Tenant fails to obtain the Title Policy on or before October 25, 1991, Tenant may elect to terminate this Lease by delivering to Landlord written notice within five (5) business days after October 25, 1991. In the event that Tenant fails to timely deliver such notice, Tenant shall be deemed to have approved this condition and Tenant shall not be able to terminate this Lease because of the failure to obtain the Title Policy. In the event that Tenant elects to terminate this Lease as provided in this paragraph, Landlord shall reimburse Tenant for Tenant's actual out-of-pocket expenses paid or incurred to Sam Cardella for the period between the date of the execution of this Lease and such termination date. 70. Non-Disturbance Agreement. Landlord hereby agrees to obtain, on or before October 25, 1991, a commercially reasonable non-disturbance agreement from the current lender for the Building in a form similar to the form attached hereto as Exhibit "J". In the event that Landlord fails to obtain such Non-Disturbance Agreement on or before October 25, 1991, Tenant may elect to terminate this Lease by delivering to Landlord written notice within five (5) days after Tenant's receipt of Landlord's notice informing Tenant that Landlord was unable to obtain the Non-Disturbance Agreement. In the event that Tenant fails to timely deliver such notice, Tenant shall be deemed to have approved this condition and Tenant shall not be able to terminate this Lease because of Landlord's failure to obtain a Non-Disturbance Agreement. In the event that Tenant elects to terminate this Lease as provided in this Paragraph 70, -2- Landlord shall reimburse Tenant for Tenant's actual out-of-pocket expenses paid or incurred to Sam Cardella for the period between the date of the execution of this Lease and such termination date." 2. Paragraph 14 - Alterations. The language "or non-structural Change where the cost of such Change, individually or when aggregated with all Changes not previously approved by Landlord in writing, is $500,000.00 or more" is hereby added after the word "Change" in the first line of the first sentence of Paragraph 14(b). 3. Paragraph 22 - Damage or Destruction. The following paragraph is hereby added to the Lease: "(e) The provisions of California Civil Code ss.1932, Subsection 2, and ss.1933, Subsection 4, are hereby waived by Tenant." 4. Counterparts. This First Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but both of which, taken together, shall constitute one and the same First Amendment. 5. No Other Changes. In all other respects, the terms and conditions of the Lease are hereby affirmed by the parties, and any provisions of the Lease not inconsistent with the modifications set forth herein shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this First Amendment as of the day and year first above written. LANDLORD: BEVERLY MERCEDES PLACE, a California Limited Partnership By: Silver Star, Inc. a California corporation, general partner By:/s/ Ross S. Gilbert --------------------------- Ross S. Gilbert, President TENANT: PLAYBOY ENTERPRISES, INC. a Delaware corporation By: /s/ Dale Gordon --------------------------------- Its: Vice-President -3- EX-10.11F 8 ex10-11f.txt FIRST AMENDMENT TO COMMERCIAL OFFICE LEASE Exhibit 10-11f FIRST AMENDMENT TO COMMERCIAL OFFICE LEASE THIS FIRST AMENDMENT TO COMMERCIAL OFFICE LEASE ("First Amendment") is made the 2 day of November, 2001, by and between 5055 WILSHIRE LIMITED PARTNERSHIP, a Texas limited partnership ("Landlord") and PLAYBOY ENTERPRISES, INC., a Delaware corporation ("Tenant"). WHEREAS, under that certain Commercial Office Lease dated January 6, 1999 (the "Lease"), by and between Landlord and Tenant, Tenant leases approximately 21,270 rentable square feet of office space (the "Premises") designated as Suite 800 at 5055 Wilshire located at 5055 Wilshire Boulevard, Los Angeles, California 90036, all as more particularly described in the Lease; and WHEREAS, Landlord and Tenant desire to extend the Term of the Lease for an additional four (4) months. NOW THEREFORE, in consideration of the rentals to be paid and the covenants and agreements to be kept and performed by both parties hereto, Landlord and Tenant hereby agree to amend the Lease as follows: 1. Section 1.9 Expiration Date is deleted in its entirety and replaced with the following: "1.9 Expiration Date. June 30, 2002." 2. 1.10 Term is deleted in its entirety and replaced with the following: " 1.10 Term. Forty-two (42) months, beginning on the Commencement Date and expiring on the Expiration Date." 3. The following language is added at the end of Section 1.11 Basic Rent: "Month(s) Monthly Basic Rent Annual Basic Rent -------- ------------------ ----------------- 39 - 42 $51,048.00 N/A" 4. Article XXVI Right of First Offer and Article XXVII Option to Renew are deleted in their entirety. 5. Condition of the Premises. Landlord and Tenant agree that Landlord has no obligation to construct any improvements to the Premises and that TENANT ACCEPTS THE PREMISES "AS IS", "WHERE IS" AND WITH ANY AND ALL FAULTS AS OF THE DATE OF THIS FIRST AMENDMENT. LANDLORD NEITHER MAKES NOR HAS MADE ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE QUALITY, SUITABILITY OR FITNESS THEREOF OF THE PREMISES, OR THE CONDITION OR REPAIR THEREOF. TENANT'S OCCUPYING THE PREMISES SHALL BE CONCLUSIVE EVIDENCE FOR ALL PURPOSES OF TENANT'S ACCEPTANCE OF THE PREMISES IN GOOD ORDER AND SATISFACTORY CONDITION, AND IN A STATE AND CONDITION SATISFACTORY, ACCEPTABLE AND SUITABLE FOR THE TENANT'S USE PURSUANT TO THE LEASE. 6. Brokers. Tenant and Landlord each represent that it has not had dealings with a real estate broker, finder or other person with respect to this First Amendment in any manner. Each party shall hold harmless the other party from all damages resulting from any claims that may be asserted against the other party by any broker, finder, or other person, with whom the indemnifying party purportedly has dealt. 7. Counterclaims. As of the date of this First Amendment, there exist no offsets, counterclaims or defenses of Tenant under the Lease against Landlord, and there exist no events which would constitute a basis for such offsets, counterclaims or defenses against Landlord upon the lapse of time or the giving of notice or both. 8. Continued Effect. Except as otherwise provided in this First Amendment, all other provisions of the Lease shall remain unmodified and in full force and effect. All terms not defined herein shall be as defined pursuant to the terms of the Lease. EXECUTED on the dates indicated below to be effective on the date first above written. LANDLORD: 5055 WILSHIRE LIMITED PARTNERSHIP, a Texas limited partnership By: L. A. WILSHIRE ONE, INC., a Delaware corporation, its General Partner By: /s/ Steven L. Ames ------------------------ Name: Steven L. Ames ---------------------- Title: AVP --------------------- Date: 11/26/01 ---------------------- TENANT: PLAYBOY ENTERPRISES, INC., a Delaware corporation By: /s/ Howard Shapiro --------------------- Name: Howard Shapiro ------------------- Title: Ex VP ------------------ Date: 11/2/01 ------------------- 2 EX-10.23A 9 ex10-23a.txt SEVERANCE AGREEMENT Exhibit 10-23a SEVERANCE AGREEMENT THIS SEVERANCE AGREEMENT (this "Agreement"), dated as of ___________, by and between Playboy Enterprises, Inc., a Delaware corporation (the "Company"), and ____________, (the "Executive"). WITNESSETH: WHEREAS, the Executive is a senior executive or key employee of the Company and has made and is expected to continue to make major contributions to the short- and long-term profitability, growth and financial strength of the Company; WHEREAS, the Company recognizes that, as is the case for most publicly-held companies, the possibility of a Change in Control exists; WHEREAS, the Company desires to assure itself of both present and future continuity of management and desires to establish certain minimum severance benefits for certain of its senior executive officers and other key employees, including the Executive, applicable in the event of a Change in Control; WHEREAS, the Company wishes to ensure that its senior executives and other key employees are not practically disabled from discharging their duties in respect of a proposed or actual transaction involving a Change in Control; and WHEREAS, the Company desires to provide additional inducement for the Executive to continue to remain in the ongoing employ of the Company; NOW, THEREFORE, the Company and the Executive agree as follows: 1. Certain Defined Terms: In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Base Pay" means the Executive's annual base salary at a rate not less than the Executive's annual fixed or base compensation as in effect for Executive immediately prior to the occurrence of a Change in December 3, 2001 Control or such higher rate as may be determined from time to time by the Board of Directors of the Company (the "Board") or a Committee thereof. (b) "Change in Control" means any of the following occurrences during the Term: (i) Hugh M. Hefner directly or as beneficial owner and Christie Hefner cease collectively to hold over 50% of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors of the Company ("Voting Stock"); (ii) except pursuant to a transaction described in the proviso to Section 1(b)(iv) or (v), a sale, exchange or other disposition of PLAYBOY Magazine; (iii) except pursuant to a transaction described in the proviso to Section 1(b)(iv) or (v), the liquidation or dissolution of the Company; (iv) the Company is merged, consolidated or reorganized into or with another corporation or other legal person; provided, however, that no such merger, consolidation or reorganization will constitute a Change in Control if the merger, consolidation or reorganization is initiated by the Company and as a result of such merger, consolidation or reorganization not less than a majority of the combined voting power of the then-outstanding securities of the surviving, resulting or ultimate parent corporation, as the case may be, immediately after such transaction is held in the aggregate by persons who held not less than a majority of the combined voting power of the outstanding Voting Stock of the Company immediately prior to such transaction; (v) the Company sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person; provided, however, that no such sale or transfer will constitute a Change in Control if the sale or transfer is initiated by the Company and as a result of such sale or transfer not less than a majority of the 2 December 3, 2001 combined voting power of the then-outstanding securities of such corporation or other legal person, as the case may be, immediately after such sale or transfer is held in the aggregate by persons who held not less than a majority of the combined voting power of the outstanding Voting Stock of the Company immediately prior to such sale or transfer; (vi) an equity or other investment in the Company, the result of which is that Christie Hefner ceases to serve as the Company's Chief Executive Officer or relinquishes upon request or is divested of any of the following responsibilities: (i) functioning as the person primarily responsible for establishing policy and direction for the Company or (ii) being the person to whom the senior executives of the Company report; or (vii) the adoption by the Board of a resolution that, for purposes of this Agreement, a Change in Control has occurred. For purposes of Section 1(b)(i), any Voting Stock beneficially owned (as such term is defined under Rule 13d-3 or any successor rule or regulation under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) by the Hugh M. Hefner Foundation shall be deemed to be held by Christie Hefner if and so long as she has sole voting power with respect to such Voting Stock. (c) "Cause" means that, prior to any termination pursuant to Section 3(b) hereof, the Executive shall have: (i) been convicted of a criminal violation involving dishonesty, fraud or breach of trust; or (ii) willfully engaged in misconduct in the performance of Executive's duties that materially injures the Company or any entity in which the Company directly or indirectly beneficially owns 50% or more of the voting securities (a "Subsidiary"). (d) "Employee Benefits" means the perquisites, benefits and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which Executive is entitled to participate, including without limita- 3 December 3, 2001 tion any stock option, stock purchase, stock appreciation, savings, pension, supplemental executive retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital or other insurance (whether funded by actual insurance or self-insured by the Company), disability, salary continuation, executive protection, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may now exist or any equivalent successor policies, plans, programs or arrangements that may be adopted hereafter by the Company, providing perquisites, benefits and service credit for benefits at least as great in the aggregate as are provided thereunder immediately prior to a Change in Control. (e) "Incentive Pay" means bonus, incentive or other payments of cash compensation, in addition to Base Pay, made or to be made in regard to services rendered pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar agreement, policy, plan, program or arrangement (whether or not funded) of the Company, or any successor thereto providing benefits at least as great as the benefits provided thereunder immediately prior to a Change In Control. (f) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following subsections shall have occurred: (i) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (ii) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; or (iii) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (g) "Potential Change in Control Period" shall commence upon the occurrence of a Potential Change in Control and shall lapse upon the occurrence of a Change in Control or, if earlier (i) with respect to a Potential 4 December 3, 2001 Change in Control occurring pursuant to Section 1(f)(i), immediately upon the abandonment or termination of the applicable agreement, (ii) with respect to a Potential Change in Control occurring pursuant to Section 1(f)(ii), immediately upon a public announcement by the applicable party that such party has abandoned its intention to take or consider taking actions which if consummated would result in a Change in Control or (iii) with respect to a Potential Change in Control occurring pursuant to Section 1(f)(iii), upon the one year anniversary of the occurrence of a Potential Change in Control (or such earlier date as may be determined by the Board). (h) "Severance Period" means the period of time commencing on the date of each occurrence of a Change in Control and continuing until the earliest of (i) eighteen months following the occurrence of the Change in Control, (ii) the Executive's death, or (iii) the Executive's attainment of age 65; provided, however, that commencing on each anniversary of the Change in Control, the Severance Period will automatically be extended for an additional eighteen months unless, not later than 120 calendar days prior to such date, either the Company or the Executive shall have given written notice to the other that the Severance Period is not to be so extended. (i) "Term" means the period commencing as of the date hereof and expiring as of the later of (i) the close of business on December 31, 20__, or (ii) the expiration of the Severance Period; provided, however, that (A) commencing on January 1, ____ and each January 1 thereafter, the term of this Agreement will automatically be extended for an additional year unless, not later than September 30 of the immediately preceding year, the Company or the Executive shall have given notice that it or the Executive, as the case may be, does not wish to have the Term extended, and (B) if, prior to a Change in Control, the Executive ceases for any reason to be an employee of the Company or any Subsidiary, thereupon without further action the Term shall be deemed to have expired and this Agreement will immediately terminate and be of no further effect. For purposes of this Section 1(i), the Executive shall not be deemed to have ceased to be an employee of the Company or any Subsidiary by reason of the transfer of Executive's employment between the Company and any Subsidiary, or among any Subsidiaries. (j) "Targeted Bonus" shall mean the targeted bonus for Executive's position as set forth in the Company's Executive Incentive Compensation Plan ("EICP") established for the then applicable fiscal year, 5 December 3, 2001 which shall be equal to fifty percent (50%) times the maximum amount which Executive could earn under the EICP with respect to established quantifiable and objective financial goals. 2. Operation of Agreement: This Agreement will be effective and binding immediately upon its execution, but, anything in this Agreement to, the contrary notwithstanding, this Agreement will not be operative unless and until a Change in Control occurs, whereupon without further action this Agreement shall become immediately operative. 3. Termination Following a Change in Control: (a) In the event of the occurrence of a Change in Control, the Executive's employment may be terminated by the Company during the Severance Period and the Executive shall not be entitled to the benefits provided by Section 4 only upon the occurrence of one or more of the following events: (i) The Executive's death; (ii) If the Executive becomes disabled (as defined below) and begins actually to receive disability benefits pursuant to the long-term disability plan in effect for, or applicable to, Executive immediately prior to the Change in Control; or (iii) Cause. If, during the Severance Period, the Executive's employment is terminated by the Company other than pursuant to Section 3(a)(i), 3(a)(ii) or 3(a)(iii), the Executive will be entitled to the benefits provided by Section 4 hereof. For purposes of this Agreement, Executive shall be deemed "disabled" if, by reason of physical or mental disability, Executive becomes unable to perform the services required of Executive for more than 120 days in the aggregate (excluding infrequent and temporary absences due to ordinary transitory illness) during any twelve-month period. (b) In the event of the occurrence of a Change in Control, the Executive may terminate employment with the Company and any Subsidiary during the Severance Period with the right to severance compensation as 6 December 3, 2001 provided in Section 4 upon the occurrence of one or more of the following events (regardless of whether any other reason, other than Cause as hereinabove provided, for such termination exists or has occurred, including without limitation other employment): (i) Failure to elect or reelect or otherwise to maintain the Executive in the office or the position, or a substantially equivalent office or position, of or with the Company and/or a Subsidiary, as the case may be, which the Executive held immediately prior to a Change in Control, or the removal of the Executive as a Director of the Company (or any successor thereto) if the Executive shall have been a Director of the Company immediately prior to the Change in Control; (ii) (I) Executive is assigned duties materially inconsistent with the authorities, powers, functions, status, responsibilities or duties attached to the position with the Company and any Subsidiary which the Executive held immediately prior to the Change in Control; (II) a reduction in the aggregate of the Executive's Base Pay and Incentive Pay payable to the Executive by the Company and any Subsidiary; or (III) the termination or denial of the Executive's rights to Employee Benefits or a reduction in the scope or value thereof; (iii) A determination by the Executive (which determination will be conclusive and binding upon the parties hereto provided such determination is reasonable and has been made in good faith and in all events will be presumed to be a reasonable determination made in good faith unless otherwise shown by the Company by clear and convincing evidence) that a change in circumstances has occurred following a Change in Control, including without limitation a change in the scope of the business or other activities for which the Executive was responsible immediately prior to the Change in Control, which has rendered the Executive substantially unable to carry out, has substantially hindered Executive's performance of, or has caused Executive to suffer a substantial reduction in, any of the authorities, powers, functions, responsibilities or duties attached to the position held by the Executive immediately prior to the Change in Control, which situation is not remedied within 10 calendar days after 7 December 3, 2001 written notice to the Company from the Executive of such determination; (iv) The liquidation, dissolution, merger, consolidation or reorganization of the Company or transfer of all or substantially all of its business and/or assets, unless the successor or successors (by liquidation, merger, consolidation, reorganization, transfer or otherwise) to which all or substantially all of its business and/or assets have been transferred (directly or by operation of law) shall have assumed all duties and obligations of the Company under this Agreement pursuant to Section 10(a); (v) The Company or any of its Subsidiaries requires the Executive regularly to perform Executive's duties of employment beyond a 50-mile radius from the location of Executive's employment immediately prior to the Change in Control or requires the Executive to travel away from Executive's office in the course of discharging Executive's responsibilities or duties hereunder at least 50% more (in terms of aggregate days in any calendar year or in any calendar quarter when annualized for purposes of comparison to any prior year) than was required of Executive in any of the three full years immediately prior to the Change of Control without, in either case, Executive's prior written consent. (c) A termination by the Company pursuant to Section 3(a) or 3(d) or by the Executive pursuant to Section 3(b) or 3(d) will not affect any rights or benefits which the Executive may have pursuant to any agreement, policy, plan, program or arrangement of the Company providing Employee Benefits, which rights and benefits shall be governed by the terms thereof, including, without limitation, rights to payments under the Company's bonus and incentive plans for prior fiscal years which have been earned but not yet paid to Executive, except for any rights to severance compensation to which Executive may be entitled upon termination of employment under any employment agreement Executive may have with the Company, which rights shall, during the Severance Period, be superceded by this Agreement. (d) For purposes of this Agreement, a termination of Executive's employment during a Potential Change in Control Period (A) by the Company other than pursuant to the events described in Section 3(a)(i), 8 December 3, 2001 3(a)(ii) or 3(a)(iii) or (B) by Executive following the occurrence of one of the events described in Section 3(b)(i) through (v) shall be deemed to be a termination of Executive's employment during the Severance Period entitling Executive to benefits provided by Section 4. 9 December 3, 2001 4. Severance Compensation: (a) If, following the occurrence of a Change in Control, the Company terminates the Executive's employment during the Severance Period other than pursuant to Section 3(a), or if the Executive terminates Executive's employment pursuant to Section 3(b), the Company will pay to the Executive the following amounts within ten business days after the date (the "Termination Date") that the Executive's employment is terminated (the effective date of which shall be the date of termination, or such other date that may be specified by the Executive if the termination is pursuant to Section 3(b)) and continue to provide to the Executive the following benefits: (i) a lump sum cash payment (the "Severance Payment") in an amount equal to three times the sum of (A) Base Pay, plus (B) the greater of (x) the average actual bonus earned by the Executive pursuant to any annual bonus or incentive plan maintained by the Company in respect of the three fiscal years ending immediately prior to the fiscal year in which occurs such Change in Control (or, such lesser number of years during which the Executive was employed by the Company and annualized in the case of any such bonus paid in respect of a portion of a fiscal year) and (y) the Targeted Bonus (determined in accordance with Section 1(j) (the greater of (x) and (y) being hereinafter referred to as the "Highest Bonus"); (ii) for 36 months following the Termination Date (the "Continuation Period"), the Company will arrange to provide the Executive with Employee Benefits that are welfare benefits (but not stock option, stock purchase, stock appreciation or similar compensatory benefits) no less favorable than those which the Executive was receiving or entitled to receive immediately prior to the Termination Date, including benefits provided under the Company's Executive Protection Plan. If and to the extent that any benefit described in this Section 4(a)(ii) is not or cannot be paid or provided under any policy, plan, program or arrangement of the Company or any Subsidiary, as the case may be, then the Company will itself pay or provide for the payment to the Executive, or Executive's dependents and beneficiaries, of such Employee Benefits. Without otherwise limiting the purpose or effect of Section 5, Employee Benefits otherwise receiv- 10 December 3, 2001 able by the Executive pursuant to this Section 4(a)(ii) will be reduced to the extent comparable welfare benefits are actually received by the Executive from another employer during the Continuation Period. (iii) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (x) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Termination Date under any such plan and which, as of the Termination Date, is contingent only upon the continued employment of the Executive to a subsequent date, and (y) the product of the Highest Bonus and a fraction, the numerator of which is the number of days in the fiscal year in which the Termination Date occurs prior to the Termination Date and the denominator of which is 365. (iv) Notwithstanding the terms or conditions of any awards relating to a grant of restricted shares, all restricted shares which are not vested as of the Termination Date shall become fully vested. (v) The Company shall provide the Executive with outplacement services suitable to the Executive's position for a period of three years or, if earlier, until the first acceptance by the Executive of an offer of employment. (b) There will be no right of set-off or counterclaim in respect of any claim, debt or obligation against any payment to or benefit for the Executive provided for in this Agreement, except as expressly provided in the last sentence of Section 4(a)(ii). (c) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided hereunder on a timely basis, the Company will pay interest on the amount or value thereof at the prime rate in effect at the First National Bank of Chicago. Such interest will be payable as it accrues on demand. Any change in such prime rate will be effective on and as of the date of such change. 11 December 3, 2001 (d) Notwithstanding any other provision hereof, the parties' respective rights and obligations under this Section 4 and under Sections 6 and 7 will survive any termination or expiration of this Agreement following a Change in Control or the termination of the Executive's employment following a Change in Control for any reason whatsoever. 5. No Mitigation Obligation: The Company hereby acknowledges that it will be difficult and may be impossible (a) for the Executive to find reasonably comparable employment following the Termination Date, and (b) to measure the amount of damages which Executive may suffer as a result of termination of employment hereunder. Accordingly, the payment of the severance compensation by the Company to the Executive in accordance with the terms of this Agreement is hereby acknowledged by the Company to be reasonable and will be liquidated damages, and the Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive hereunder or otherwise reduce any payments or benefits to be provided to Executive hereunder, except as expressly provided in the last sentence of Section 4(a)(ii). 6. Certain Additional Payments by the Company: (a) In the event that this Agreement becomes operative and it is determined (as hereafter provided) that any payment or distribution by the Company or any of its affiliates to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (or any successor provision thereto), or to any similar tax imposed by state or local law, or any interest or penalties with respect to such excise tax (such tax or taxes, together with any such interest and penalties, are hereafter collectively referred to as the "Excise Tax"), then Executive will be entitled to receive an additional payment or payments (a "Gross-Up Payment") in an amount such that, after 12 December 3, 2001 payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 6(f) below, all determinations required to be made under this Section 6, including whether an Excise Tax is payable by Executive and the amount of such Excise Tax and whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, will be made by a nationally recognized firm of certified public accountants (the "Accounting Firm") selected by Executive in Executive's sole discretion. Executive will direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and Executive within 15 calendar days after the date of the Change in Control or the date of Executive's termination of employment, if applicable, and any other such time or times as may be requested by the Company or Executive. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Termination Date (or if there is no Termination Date, then the date on which the Gross-Up Payment is calculated for purposes of this Section 6(b)), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. If the Accounting Firm determines that any Excise Tax is payable by Executive, the Company will pay the required Gross-Up Payment to Executive within five business days after receipt of such determination and calculations. If the Accounting Firm determines that no Excise Tax is payable by Executive, it will, at the same time as it makes such determination, furnish Executive with an opinion that Executive has substantial authority not to report any Excise Tax on Executive's federal, state, local income or other tax return. Any determination by the Accounting Firm as to the amount of the Gross-Up Payment will be binding upon the Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code (or any successor provision thereto) and the possibility of similar uncertainty regarding applicable state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with 13 December 3, 2001 the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 6(f) below and Executive thereafter is required to make a payment of any Excise Tax, Executive will direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and Executive as promptly as possible. Any such Underpayment will be promptly paid by the Company to, or for the benefit of, Executive within five business days after receipt of such determination and calculations. (c) The Company and Executive will each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determination contemplated by Section 6(b) above. (d) The federal, state and local income or other tax returns filed by Executive will be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by Executive. Executive will make proper payment of the amount of any Excise Tax. If prior to the filing of Executive's federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, Executive will within five business days pay to the Company the amount of such reduction. (e) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by Section 6(b) and (d) above will be borne by the Company. If such fees and expenses are initially advanced by Executive, the Company will reimburse Executive the full amount of such fees and expenses within five business days after receipt from Executive of a statement therefor and reasonable evidence of Executive's payment thereof. (f) Executive will notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification will be given as promptly as practicable, but no later than 10 business days after 14 December 3, 2001 Executive actually receives notice of such claim, and Executive will further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by Executive). Executive will not pay such claim prior to the earlier of (i) the expiration of the 30-calendar-day period following the date on which Executive gives such notice to the Company and (ii) the date that any payment of amount with respect to such claim is due. If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive will: (i) provide the Company with any written records or documents in Executive's possession relating to such claim reasonably requested by the Company; (ii) take such action in connection with contesting such claim as the Company will reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; (iii) cooperate with the Company in good faith in order effectively to contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company will bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and will indemnify and hold harmless Executive, on an after-tax basis, for and against any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 6(f), the Company will control all proceedings taken in connection with the contest of any claim contemplated by this Section 6(f) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (provided that Executive may participate therein at Executive's own cost and expense) and may, at its 15 December 3, 2001 option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company will determine; provided, however, that if the Company directs Executive to pay the tax claimed and sue for a refund, the Company will advance the amount of such payment to Executive on an interest-free basis and will indemnify and hold Executive harmless, on an after-tax basis, from any excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance; and provided further, however, that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim will be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive will be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (g) If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 6(f) above, Executive receives any refund with respect to such claim, Executive will (subject to the Company's complying with the requirements of Section 6(f) above) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 6(f) above, a determination is made that Executive will not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest such denial or refund prior to the expiration of 30-calendar-days after such determination, then such advance will be forgiven and will not be required to be repaid and the amount of such advance will offset, to the extent thereof, the amount of Gross-Up Payment required to be paid pursuant to this Section 6. 7. Legal Fees and Expenses: If it should appear to the Executive that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void, invalid or unenforceable, or institutes 16 December 3, 2001 any litigation or other action or proceeding designed to deny, or to recover from, the Executive the benefits provided or intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of Executive's choice, at the expense of the Company as hereafter provided, to advise and represent the Executive in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any Director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to the Executive's entering into an attorney-client relationship with such counsel, and in that connection the Company and the Executive agree that a confidential relationship shall exist between the Executive and such counsel. The Company will pay and be solely financially responsible for Executive's out-of-pocket expenses, including reasonable attorneys' fees and expenses, incurred by the Executive in connection with any of the foregoing; provided, however, in the case of any such litigation or other action or proceeding in which the Company or any of its affiliates and Executive are adverse parties, the Company shall not pay or be responsible for any such expenses if the Company or any of its affiliates prevails against the Executive. 8. Employment Rights; Termination Prior to Change in Control: Nothing expressed or implied in this Agreement will create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company or any Subsidiary prior to or following any Change in Control. 9. Withholding of Taxes: The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as the Company is required to withhold pursuant to any law or government regulation or ruling. 10. Successors and Binding Agreement: (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession 17 December 3, 2001 had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 10(a) and 10(b) hereof. Without limiting the generality or effect of the foregoing, the Executive's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, garnishment, creation of a security interest, claims for alimony, or otherwise, other than by a transfer by Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 10(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 11. Notices: For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five business days after having been mailed by United States registered mail, return receipt requested, postage prepaid, or three business days after having been sent by a nationally recognized overnight courier service such as Federal Express, UPS, or Purolator, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to the Executive at Executive's principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 18 December 3, 2001 12. Dispute Resolutions: Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Chicago, Illinois in accordance with the rules of the American Arbitration Association then in effect; provided, however, that the evidentiary standards set forth in this Agreement shall apply. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 19 December 3, 2001 13. Governing Law: The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Delaware, without giving effect to the principles of conflict of laws of such State. 14. Validity: If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal. 15. Miscellaneous: No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. Effective as of the date hereof, this Agreement supercedes and replaces the prior Severance Agreement entered into between the Executive and the Company. 16. Counterparts: This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same agreement. 20 December 3, 2001 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. PLAYBOY ENTERPRISES, INC, By:_________________________________ Title:______________________________ ACCEPTED and AGREED to: - ------------------------------ 21 December 3, 2001 EX-21 10 ex-21.txt SUBSIDIARIES 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, 2001. 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:
Percent Jurisdiction in Ownership which Incorporated By Immediate Name of Company or Organized Parent --------------- ------------ ------ 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% Planet Spice, Inc. Delaware 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% Alta Loma Entertainment, Inc. Delaware 100% Itasca Holdings, Inc. Illinois 100% EuroEast Publishing Ventures, B.V. Inc. The Netherlands 100% Lake Shore Press, Inc. Delaware 100% Lifestyle Brands, Ltd. Delaware 100% Planet Playboy, Inc. Delaware 100% Playboy Canada, Inc. Canada 100% Playboy Australia Pty. Ltd. Australia 100% Playboy Clubs International, Inc. Delaware 100% Playboy Preferred, Inc. Illinois 100% Playboy.com, Inc. Delaware 100% Playboy Casino Australia Pty. Ltd. Australia 100% Playboy.com Germany, Inc. Delaware 100% Playboy.com Internet Gaming, Inc. Delaware 100% Playboy.com Racing, Inc. Delaware 100% Playboy.com Internet Gaming (Gibraltar) Limited Gibraltar 100% Playboy.com KGLP, Inc. Delaware 100% SpiceTV.com, Inc. Delaware 100% Playboy Entertainment Group, Inc. Delaware 100% AdulTVision Communications, Inc. Delaware 100% After Dark Video, Inc. Delaware 100% Alta Loma Distribution, Inc. Delaware 100% AL 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 Gaming International, Ltd. Delaware 100% Playboy Cruise Gaming, Inc. Delaware 100% Playboy Gaming UK, Ltd. Delaware 100% Playboy Gaming Nevada, Inc. Nevada 100%
Subsidiary Listing Cont. 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% Spice Hot Entertainment, Inc. Delaware 100% Spice Platinum Entertainment, Inc. Delaware 100% Telecom International, Inc. Florida 100%
EX-23.1 11 ex23-1.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-30185 and Form S-8 POS (as amended) No. 333-74451) of Playboy Enterprises, Inc. and in the related prospectuses of our report dated February 22, 2002 (except Note C, as to which the date is March 15, 2002) with respect to the consolidated financial statements and financial statement schedule of Playboy Enterprises, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2001. ERNST & YOUNG LLP Chicago, Illinois March 20, 2002 EX-23.2 12 ex23-2.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT 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) and Amendment No. 1 on Form S-3 (File No. 333-69820)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 and for the fiscal year ended December 31, 1999, which report is included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Chicago, Illinois March 19, 2002 EX-23.3 13 ex23-3.txt CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.3 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 February 22, 2002 on the consolidated financial statements of Playboy TV International, LLC. and subsidiaries as of and for the year ended December 31, 2001 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the entity's ability to continue as a going concern), appearing in this Annual Report on Form 10-K of Playboy Enterprises, Inc. for the year ended December 31, 2001. Deloitte & Touche LLP Miami, Florida March 20, 2002 EX-99 14 ex-99.txt INDEPENDENT AUDITORS' REPORT INDEPENDENT AUDITORS' REPORT To the Board of Directors and Owners of Playboy TV International, LLC.: We have audited the accompanying consolidated balance sheets of Playboy TV International, LLC and subsidiaries (collectively, "Playboy TV International") as of December 31, 2000 and 2001 and the related consolidated statements of operations and comprehensive loss, of owners' equity and of cash flows for the years then ended. These financial statements are the responsibility of Playboy TV International's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Playboy TV International at December 31, 2000 and 2001 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that Playboy TV International will continue as a going concern. As described in Note 1 to the consolidated financial statements, Playboy TV International's recurring losses from operations, working capital deficiency and its dependency on capital contributions from the majority owner raises substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Deloitte & Touche LLP Certified Public Accountants Miami, Florida February 22, 2002 1 PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of December 31, 2000 and 2001 (In thousands of U.S. dollars)
2000 2001 ------- ------- ASSETS CURRENT ASSETS: Cash and cash equivalents .................................... $ 5,549 $ 4,035 Accounts receivable, net ..................................... 4,860 4,387 Due from related parties ..................................... 3,791 4,579 Capital contribution receivable (collected in February 2002) . -- 919 Programming rights, net ...................................... 13,334 -- Other current assets ......................................... 1,179 1,813 ------- ------- Total current assets ....................................... 28,713 15,733 PROPERTY AND EQUIPMENT, NET ..................................... 1,399 1,504 PROGRAMMING RIGHTS, NET ......................................... 37,724 44,014 INVESTMENT IN UNCONSOLIDATED AFFILIATE .......................... 3,306 3,306 TRADEMARKS, net ................................................. 10,396 9,196 GOODWILL, net ................................................... 8,939 8,443 OTHER ........................................................... 138 10 ------- ------- TOTAL ASSETS .................................................... $90,615 $82,206 ======= ======= LIABILITIES AND OWNERS' EQUITY CURRENT LIABILITIES: Accounts payable ............................................. $ 1,258 $ 2,048 Accrued expenses and other current liabilities ............... 2,940 2,817 Accrued compensation ......................................... 334 1,843 Due to related parties ....................................... 2,789 4,398 . Current portion of rights acquisition fee payable ............ 5,000 7,500 Unearned revenues ............................................ 588 746 ------- ------- Total current liabilities .................................. 12,909 19,352 ------- ------- LONG-TERM LIABILITIES: Rights acquisition fee payable, net of current portion ..... 45,039 41,668 Accrued compensation ....................................... -- 4,032 ------- ------- Total long-term liabilities .............................. 45,039 45,700 ------- ------- COMMITMENTS AND CONTINGENCIES (Note 8) OWNERS' EQUITY .................................................. 32,667 17,154 ------- ------- TOTAL LIABILITIES AND OWNERS' EQUITY ............................ $90,615 $82,206 ======= =======
See notes to consolidated financial statements. 2 PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS Years Ended December 31, 2000 and 2001 (In thousands of U.S. dollars) 2000 2001 -------- -------- REVENUES: Subscriber-based fees .............................. $ 24,584 $ 29,842 Advertising ........................................ 459 510 Programming rights ................................. 2,516 2,246 Other .............................................. 741 1,071 -------- -------- Total revenues .................................... 28,300 33,669 -------- -------- OPERATING EXPENSES: Product, content and technology .................... 18,534 26,021 Marketing and sales ................................ 3,323 4,181 Corporate and administration ....................... 9,813 16,464 Depreciation and amortization ...................... 2,148 2,141 -------- -------- Total operating expenses .......................... 33,818 48,807 -------- -------- OPERATING LOSS ....................................... (5,518) (15,138) -------- -------- OTHER INCOME (EXPENSE): Interest expense ................................... (4,322) (4,129) Interest income .................................... 213 139 Other .............................................. (308) (327) -------- -------- Other income (expense), net ....................... (4,417) (4,317) -------- -------- NET LOSS ............................................. (9,935) (19,455) OTHER COMPREHENSIVE INCOME (LOSS) - Foreign currency translation ....................................... 32 (1,016) -------- -------- COMPREHENSIVE LOSS ................................... $ (9,903) $(20,471) ======== ======== See notes to consolidated financial statements. 3 PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OWNERS' EQUITY Years Ended December 31, 2000 and 2001 (In thousands of U.S. dollars)
Accumulated Claxson Playboy Other Interactive Entertainment Comprehensive Group, Inc. Group, Inc. Income (Loss) Total ----------- ------------- ------------- -------- BALANCE, JANUARY 1, 2000 .......... $ 31,570 $ (3,392) $ 189 $ 28,367 Capital contributions .......... 11,377 2,826 -- 14,203 Foreign currency translation ... -- -- 32 32 Net loss ....................... (7,958) (1,977) -- (9,935) -------- -------- -------- -------- BALANCE, DECEMBER 31 2000 ......... 34,989 (2,543) 221 32,667 Capital contributions .......... 3,971 987 -- 4,958 Foreign currency translation ... -- -- (1,016) (1,016) Net loss ....................... (15,583) (3,872) -- (19,455) -------- -------- -------- -------- BALANCE, DECEMBER 31 2001 ......... $ 23,377 $ (5,428) $ (795) $ 17,154 ======== ======== ======== ========
See notes to consolidated financial statements. 4 PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2000 and 2001 (In thousands of U.S. dollars)
2000 2001 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss .................................................. $ (9,935) $(19,455) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Amortization of programming rights ..................... 14,293 17,011 Reduction in the carrying value of programming rights .. -- 5,486 Depreciation and amortization .......................... 2,148 2,141 Accretion of interest expense .......................... 4,322 4,129 Changes in operating assets and liabilities: Accounts receivable, net ............................... 471 473 Due from related parties ............................... (1,433) (788) Acquisition of programming rights ..................... (12,648) (15,453) Other assets ........................................... (907) (506) Accounts payable ....................................... (142) 790 Accrued expenses and other current liabilities ......... (140) (123) Accrued compensation ................................... 318 5,541 Due to related parties ................................. (63) 1,609 Unearned revenue ....................................... 450 158 -------- -------- Net cash (used in) provided by operating activities ....... (3,266) 1,013 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment .................. (634) (674) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Capital contributions .................................. 14,203 4,039 Payment of rights acquisition fee payable .............. (7,500) (5,000) -------- -------- Net cash provided by (used in) financing activities ....... 6,703 (961) -------- -------- EFFECT OF FOREIGN CURRENCY TRANSLATION .................... 310 (892) -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...... 3,113 (1,514) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............ 2,436 5,549 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD .................. $ 5,549 $ 4,035 ======== ======== SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES - Capital contribution receivable, collected in February 2002 .......................................... $ -- $ 919 ======== ========
See notes to consolidated financial statements. 5 PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2000 and 2001 (In thousands of U.S. dollars) 1. GENERAL AND ORGANIZATION General -- Playboy TV International, LLC and subsidiaries (collectively, "Playboy TV International"), a Delaware limited liability company, were created to own and operate on an exclusive basis adult-oriented television services worldwide outside of North America and Latin America under the Playboy TV and Spice brand names. Playboy TV International presently owns and operates an adult-oriented television service in the United Kingdom. Playboy TV International also owns a minority interest (19.9%) in an adult-oriented television service in Japan. Playboy TV International generates a significant portion of its revenues from subscriber-based fees charged to cable system and direct-to-home operators that distribute Playboy TV International's branded television channels. Playboy TV International also derives revenues from the licensing of programming rights. Playboy TV International'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 Playboy TV International is established annually in connection with the approval of the business plan and annual budget. There can be no assurance, however, that Playboy TV International's business plan and cash flow projections will be met. Going Concern - Playboy TV International has incurred net losses of $9,935 and $19,455 for the years ended December 31, 2000 and 2001, respectively, and has a working capital deficiency of $3,619 as of December 31, 2001. Playboy TV International is primarily dependent on capital contributions from the majority owner to fund shortfalls. The potential inability of the majority owner to fund the expected shortfalls for 2002 raises substantial doubt as to the ability of Playboy TV International to continue as a going concern. Until Playboy TV International generates sufficient cash flow from operations, it does not have the ability to fully meet its obligations (including the rights acquisition fee payable and payments pursuant to the program supply agreement, described in Notes 4 and 5, respectively) without the capital contributions from the majority owner. The failure or inability of the majority owner to make the necessary amount of capital contributions could ultimately have a material adverse effect on the financial position of Playboy TV International and its ability to meet its obligations when due. Management has not explored any alternative means of financing, if available, to meet the obligations of Playboy TV International should the majority owner not make the necessary capital contributions. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Organization -- Playboy TV International was established in June 1999. Claxson Interactive Group, Inc. ("Claxson") holds an 80.1% interest in Playboy TV International and Playboy Entertainment Group, Inc. ("PEGI") holds a 19.9% interest. The net income or loss of Playboy TV International is allocated to the owners in accordance with their respective ownership interests. PEGI has substantive participating rights, including the approval of the annual budget, and has the option to increase its equity interest in Playboy TV International up to 50% by purchasing a portion of Claxson's interest in Playboy TV International at a price governed by the terms of the operating agreement. This option may be exercised until the earlier of September 15, 2009 and 30 days after the end of the second consecutive quarter during which Playboy TV International has had positive cash EBITDA. Until September 15, 2003, the exercise price for this "buy-up" right increases over time and is based on the Founders Price of the initial investment in Playboy TV International plus interest. Founders price as of a specified date means, with respect to the price per one percentage interest of PTVI, an amount equal to the sum of the capital contributions to Playboy TV International by the owners through and including that date, divided by 100. From September 15, 2003 through September 15, 2009, the exercise price is based on the fair market value of Playboy TV International at the time of exercise. The exercise price may be paid in cash or Class B common shares of PEGI's parent company, at PEGI's option. 6 PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2000 and 2001 (In thousands of U.S. dollars) On August 31, 1999, Playboy TV International entered into several agreements in which, among other things, Playboy TV International 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 and a 100% ownership interest in a subsidiary in the United Kingdom ("U.K. Subsidiary"). The 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 remaining net assets were recorded at their estimated fair value. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation -- The consolidated financial statements of Playboy TV International include the accounts of Playboy TV International, LLC and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Significant assumptions and estimates were used in determining the carrying values of programming rights and accounts receivable and to determine compensation expense pursuant to the phantom stock plan. Actual results could differ from those estimates. Fair Value of Financial Instruments -- The fair value of financial instruments held by Playboy TV International is based on a number of factors and assumptions and may not necessarily be representative of the actual gains or losses that may be realized upon settlement. The carrying amount of cash equivalents, accounts receivable and payable, accrued expenses, due to related parties and other current liabilities approximates their fair value due to their short-term nature. The carrying amount of the rights acquisition fee payable approximates fair value as determined based on rates estimated by Playboy TV International to be currently available from other lenders. Foreign Currency Translation-- The accounts of the U.K. Subsidiary are translated into U.S. 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 U.K. Subsidiary. Certain assets and liabilities of the U.K. 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. Risk Management -- Playboy TV International has international operations. As a result, Playboy TV International's revenues may be adversely affected by changes in international market conditions. Playboy TV International does not have significant foreign currency risk because the majority of its assets are non-monetary in nature and the majority of its liabilities are denominated in U.S. dollars. In addition, Playboy TV International does not have interest rate risk exposure. Accordingly, Playboy TV International does not enter into derivative transactions to hedge against these potential risks. 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 -- Playboy TV International carries accounts receivable at the amount it deems to be collectible. Accordingly, Playboy TV International 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 receivable that become uncollectible could differ from the estimated amount. The activity for the allowance for doubtful accounts receivable is as follows: 7 PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2000 and 2001 (In thousands of U.S. dollars) Year Ended Year Ended December 31, 2000 December 31, 2001 ----------------- ----------------- Beginning balance ................. $ 144 $ 186 Provision ......................... 205 778 Write-offs, net of recoveries ..... (163) (676) -------- -------- Ending balance .................... $ 186 $ 288 ======== ======== Programming Rights -- Programming rights consist of the right to broadcast and distribute acquired or licensed television content and related rights. Programming rights and the related obligations are recorded at gross contract prices. The costs are amortized on varying bases related to the license periods, anticipated usage and residual value of the programs and the expected revenues to be derived from the licensing of rights to third parties. Expected amortization for the year ending December 31, 2002 is estimated to amount to $13,354. Individual titles older than seven years are carried at a residual value of 5% of original cost. As of December 31, 2001, the residual value included in programming rights amounted to $3,964. In the event that an acquired program is replaced and no longer used or the unamortized cost exceeds fair value, Playboy TV International reduces the carrying value of the related programming rights accordingly. In the year ended December 31, 2001, Playboy TV International reduced the carrying value of programming rights by $5,486 for programming no longer used. Playboy TV International believes that these policies conform to Statement of Position No. 00-2, Accounting by Producers or Distributors of Films. Property and Equipment -- Property and equipment is stated at cost less accumulated depreciation and amortization. Property and equipment, other than leasehold improvements, is depreciated using the straight-line method over the estimated useful lives of the respective assets, which range from 3 to 5 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 Affiliate -- Investment in unconsolidated affiliate consists of a 19.9% minority interest in an adult-oriented television service in Japan. Playboy TV International accounts for this investment under the cost method of accounting. Trademarks and Goodwill -- Trademarks are amortized on a straight-line basis over their contractual life of 10 years. As of December 31, 2000 and 2001, accumulated amortization of trademarks amounted to $1,599 and $2,799, respectively. Goodwill was amortized on a straight-line basis over an estimated life of 20 years. As of December 31, 2000 and 2001, accumulated amortization of goodwill amounted to $622 and $1,066, respectively. The carrying value of intangible assets is periodically reviewed by management and impairments, if any, are recognized when the expected future undiscounted cash flows related to such intangible assets are less than their carrying value. Measurement of any impairment loss is based on discounted operating cash flows, which represents management's estimate of fair value. Revenue Recognition -- Playboy TV International enters into network license agreements with cable and direct-to-home distributors pursuant to which it receives subscriber-based fees. Revenues from subscriber-based fees are recorded as Playboy TV International provides the television signal to the distributor or when the license period begins and a contractual obligation exists. Advertising revenue is recognized at the time the advertisement is aired. Revenues from programming rights are recognized when the license period begins and a contractual obligation exists. Playboy TV International believes that its revenue recognition policies conform with Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. Revenues attributable to any one customer that exceeded 10% amounted to $6,580 or 23% (representing one customer) $11,725 or 35% (representing two customers with 21% and 14%) for the years ended December 31, 2000 and 2001, respectively. 8 PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2000 and 2001 (In thousands of U.S. dollars) Advertising Expenses -- Playboy TV International records advertising expenses as incurred. Advertising expenses amounted to $3,156 and $2,507, for the years ended December 31, 2000 and 2001, respectively. Income Taxes -- Playboy TV International's subsidiaries that are subject to income taxes account for income taxes 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 financial statement 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 arises (subject to a valuation allowance with respect to any tax benefits not expected to be realized). As of December 31, 2000 and 2001, Playboy TV International did not have any significant deferred tax assets or liabilities. New Accounting Pronouncements -- In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No. 141 eliminates the pooling of interest method and requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also establishes specific criteria regarding the allocation of the purchase price between intangible assets and goodwill. The provisions of this Statement apply to all business combinations initiated after June 30, 2001. This Statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. The adoption of SFAS No. 141 did not have a material effect on Playboy TV International's results of operations or financial position. In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually on a basis set forth in SFAS No. 142. Intangible assets with finite useful lives will continue to be amortized over their respective useful lives and reviewed for impairment under existing accounting literature. The provisions of this Statement are required to be applied by Playboy TV International on January 1, 2002. The Statement requires an initial impairment test for goodwill and intangible assets with indefinite useful lives on the date of adoption. Playboy TV International has not yet determined if any impairment charge will result from the adoption of this Statement. Amortization of goodwill was $456 and $444 for the years ended December 31, 2000 and 2001, respectively. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the recognition of legal obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the asset, and the associated asset retirement costs in the period in which it is incurred if a reasonable estimate of fair value can be made. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 is not expected to have a material effect on Playboy TV International's financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of a Disposal of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. This Statement also amends ARB No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The statement provides additional guidance on accounting for discontinued operations and resolves other implementation issues related to SFAS No. 142. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. The provisions of this statement generally are to be applied prospectively. Playboy TV International is currently evaluating whether 9 PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2000 and 2001 (In thousands of U.S. dollars) adoption of SFAS No. 144 will have a material effect on Playboy TV International's financial position or results of operations. In December 2001, the Accounting Standards Executive Committee issued Statement of Position ("SOP") 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others. The provisions of this SOP are effective for financial statements issued for fiscal years beginning after December 15, 2001 and should be applied prospectively. Playboy TV International is currently evaluating whether the adoption of SOP 01-6 will have a material effect on Playboy TV International's financial position or results of operations. 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
December 31, December 31, 2000 2001 ------------ ------------ Furniture and equipment.............................. $ 1,188 $ 1,744 Leasehold improvements............................... 784 804 -------- -------- Total.............................................. 1,972 2,548 Less accumulated depreciation and amortization....... (573) (1,044) -------- --------- Property and equipment, net.......................... $ 1,399 $ 1,504 ======== ========
Depreciation expense for the years ended December 31, 2000 and 2001 amounted to $493 and $471, respectively. 4. 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%. For the years ended December 31, 2000 and 2001, imputed interest expense amounted to $4,322 and $4,129, respectively. The rights acquisition fee matures as follows: 2002 ..................................................... $ 7,500 2003 ..................................................... 25,000 2004 ..................................................... 25,000 -------- Total gross payments ..................................... 57,500 Less amounts representing interest ....................... (8,332) -------- Present value of rights acquisition fee payments ......... 49,168 Less current portion of rights acquisition fee ........... (7,500) -------- Rights acquisition fee, net of current portion ........... $ 41,668 ======== 5. RELATED PARTY TRANSACTIONS Program Supply Agreement -- On August 31, 1999, Playboy TV International and PEGI entered into a program supply agreement pursuant to which Playboy TV International was granted a license to all new programs produced by PEGI as well as other programs for which PEGI acquires international rights. In exchange for these rights, Playboy TV International agreed to pay to PEGI a license fee that is generally 10 PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2000 and 2001 (In thousands of U.S. dollars) determined as a percentage of PEGI's annual programming costs. For the years ended December 31, 2000 and 2001, Playboy TV International acquired $10,514 and $12,601, respectively, of programming pursuant to this agreement. Trademark License Agreement -- Playboy TV International entered into a trademark license agreement with PEGI's parent company ("Licensor") under which Playboy TV International received the exclusive right to use the Playboy marks outside the United States, Canada and Latin America in connection with the operation, distribution and promotion of the Playboy TV channels and for the licensing of Playboy programming to third parties. The license fee for the trademark license granted for years one through ten was included in the purchase price as discussed in Note 1. Beginning on the eleventh anniversary of the agreement and for each fiscal year through the end of the 50-year term of the agreement, Playboy TV International agreed to pay Licensor a license fee based on a percentage of Playboy TV International's total revenues for that year. Management and Other Services -- A subsidiary of Claxson performs certain "back office" management and other services for Playboy TV International. The fees for these services are determined based on the estimated value of the services provided and are typically agreed upon by the owners annually in connection with the approval of the business plan and annual budget. For the years ended December 31, 2000 and 2001, Playboy TV International incurred fees amounting to $295 and $429, respectively, for management and other services provided by Claxson. Revenues -- For the years ended December 31, 2000 and 2001, Playboy TV International recognized subscriber-based fees totaling $8,187 and $9,302, from two and four affiliates, respectively. Included in due from related parties as of December 31, 2000 and 2001 is $3,791 and $4,579 due from these affiliates, respectively. 6. SUPPLEMENTAL REVENUE INFORMATION The following presents, on a supplemental basis, Playboy TV International's revenues based on revenue sources by country/region: Year ended December 31, 2000: Subscriber- Programming Advertising - Based Fees Rights and Other Total ------------- ------------- ------------- ----------- United Kingdom ... $ 11,292 $ 1,069 $ 459 $ 12,820 Latin America .... 5,913 -- -- 5,913 Iberia ........... 1,675 -- -- 1,675 Japan ............ 1,607 -- -- 1,607 Turkey ........... 1,163 -- -- 1,163 Scandinavia ...... 1,516 100 -- 1,616 Taiwan ........... 750 -- -- 750 Poland ........... -- 426 -- 426 Israel ........... 410 -- -- 410 Netherlands ...... 93 355 -- 448 Other ............ 165 566 741 1,472 ------------- ------------- ------------- ----------- Total ........ $ 24,584 $ 2,516 $ 1,200 $ 28,300 ============= ============= ============= =========== 11 PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2000 and 2001 (In thousands of U.S. dollars) Year ended December 31, 2001: Subscriber- Programming Advertising Based Fees Rights and Other Total ----------- ----------- ---------- ---------- United Kingdom .. $ 14,764 $ 143 $ 510 $ 15,417 Latin America ... 5,519 696 -- 6,215 Iberia .......... 1,662 -- -- 1,662 Japan ........... 1,433 -- -- 1,433 Scandinavia ..... 1,341 194 -- 1,535 Taiwan .......... 1,536 -- -- 1,536 New Zealand ..... 781 -- -- 781 Poland .......... 24 388 -- 412 Israel .......... 702 -- -- 702 France .......... 353 65 -- 418 Other ........... 1,727 760 1,071 3,558 ---------- ---------- ---------- ---------- Total ....... $ 29,842 $ 2,246 $ 1,581 $ 33,669 ========== ========== ========== ========== 7. PHANTOM STOCK OPTION PLAN Effective November 8, 2001, Playboy TV International adopted a phantom equity plan (the "Plan"). The Plan is designed to attract, retain and motivate officers, employees, directors and consultants. The Plan enables Playboy TV International to award individual units representing a hypothetical share of stock (the "Phantom Share"). Each Phantom Share is assigned a strike value on the date of grant. The difference between the fair market value and the strike value assigned to each Phantom Share represents the cash award each grantee is entitled to receive on the exercise date. For the year ended December 31, 2001, Playboy TV International incurred compensation expense amounting to $5,198 in connection with the Plan. As of December 31, 2001, Playboy TV International had a liability amounting to $3,698 also in connection with the Plan. 8. COMMITMENTS AND CONTINGENCIES Leases -- Playboy TV International's headquarters offices are leased through a subsidiary of Claxson. In addition, Playboy TV International leases transponders and office space in the United Kingdom. Future minimum lease payments under these noncancellable operating lease agreements are as follows: Year Ended December 31, ------------------------------ 2002..................................... $ 512 2003..................................... 458 2004..................................... 305 --------- Total................................. $ 1,275 ========= For the years ended December 31, 2000 and 2001, lease expense under these noncancellable operating lease agreements amounted to $428 and $434, respectively. 12 PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2000 and 2001 (In thousands of U.S. dollars) Contingent Acquisition Payment -- As part of the acquisition of the U.K. Subsidiary, Playboy TV International assumed a contingent liability in the amount of approximately $10,000 payable to the previous shareholders (prior to PEGI) of the U.K. Subsidiary. This amount is payable from future profits of the U.K. Subsidiary and is therefore contingent upon the ability of the U.K. Subsidiary to make profits as defined in the applicable agreement. As of December 31, 2001, Playboy TV International recorded a liability amounting to $369 in connection with this contingent acquisition payment. The remaining balance will be recorded as the contingency is resolved. 13 -----END PRIVACY-ENHANCED MESSAGE-----