UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 001-14790
Playboy Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-4249478
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
680 North Lake Shore Drive, Chicago, IL 60611
(Address of principal executive offices) (Zip Code)
(312) 751-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |X| No |_|
At April 30, 2003, there were 4,864,102 shares of Class A common stock, par
value $0.01 per share, and 21,430,009 shares of Class B common stock, par value
$0.01 per share, outstanding.
PLAYBOY ENTERPRISES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) for the Quarters Ended
March 31, 2003 and 2002 (Unaudited) 3
Condensed Consolidated Balance Sheets at March 31,
2003 (Unaudited) and December 31, 2002 4
Condensed Consolidated Statements of Cash Flows for the
Quarters Ended March 31, 2003 and 2002 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 20
2
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
for the Quarters Ended March 31 (Unaudited)
(In thousands, except per share amounts)
2003 2002
-------------------------------------------------------------------------------
Net revenues $ 74,281 $ 66,147
-------------------------------------------------------------------------------
Costs and expenses
Cost of sales (52,301) (49,890)
Selling and administrative expenses (12,530) (14,008)
-------------------------------------------------------------------------------
Total costs and expenses (64,831) (63,898)
-------------------------------------------------------------------------------
Operating income 9,450 2,249
-------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 56 39
Interest expense (3,562) (4,472)
Amortization of deferred financing fees (275) (240)
Minority interest (452) (421)
Debt extinguishment expenses (3,263) --
Other, net (72) (88)
-------------------------------------------------------------------------------
Total nonoperating expense (7,568) (5,182)
-------------------------------------------------------------------------------
Income (loss) before income taxes 1,882 (2,933)
Income tax expense (1,250) (6,454)
-------------------------------------------------------------------------------
Net income (loss) 632 (9,387)
-------------------------------------------------------------------------------
Other comprehensive income (loss) (net of tax)
Unrealized gain (loss) on marketable securities (155) 41
Unrealized gain on derivatives 609 448
Foreign currency translation adjustment 153 --
-------------------------------------------------------------------------------
Total other comprehensive income 607 489
-------------------------------------------------------------------------------
Comprehensive income (loss) $ 1,239 $ (8,898)
===============================================================================
Weighted average number of common shares outstanding
Basic 26,155 24,540
===============================================================================
Diluted 26,159 24,540
===============================================================================
Basic and diluted earnings per common share $ 0.02 $ (0.38)
===============================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
March 31, Dec. 31,
2003 2002
-----------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 27,226 $ 4,118
Marketable securities 2,530 2,677
Receivables, net of allowance for doubtful accounts of
$5,538 and $5,124, respectively 40,114 42,211
Receivables from related parties 1,590 1,542
Inventories, net 10,645 10,498
Deferred subscription acquisition costs 12,754 12,038
Other current assets 8,500 11,296
-----------------------------------------------------------------------------------------------
Total current assets 103,359 84,380
-----------------------------------------------------------------------------------------------
Property and equipment, net 11,305 11,716
Programming costs, net 53,878 52,347
Goodwill 111,893 111,893
Trademarks 55,570 55,219
Distribution agreements, net of accumulated amortization
of $7,945 and $6,598, respectively 32,937 34,284
Other noncurrent assets 25,483 19,882
-----------------------------------------------------------------------------------------------
Total assets $ 394,425 $ 369,721
===============================================================================================
Liabilities
Financing obligations $ -- $ 6,402
Financing obligations to related parties -- 17,235
Acquisition liabilities 11,870 13,427
Accounts payable 17,607 24,596
Accrued salaries, wages and employee benefits 4,024 10,419
Deferred revenues 53,091 52,633
Other liabilities and accrued expenses 17,408 17,648
-----------------------------------------------------------------------------------------------
Total current liabilities 104,000 142,360
-----------------------------------------------------------------------------------------------
Financing obligations 115,000 58,865
Financing obligations to related parties -- 10,000
Acquisition liabilities 27,738 39,685
Net deferred tax liabilities 12,744 12,375
Other noncurrent liabilities 9,827 8,904
-----------------------------------------------------------------------------------------------
Total liabilities 269,309 272,189
-----------------------------------------------------------------------------------------------
Minority interests 36,905 9,717
Shareholders' equity
Common stock, $0.01 par value
Class A voting - 7,500,000 shares authorized; 4,864,102 issued 49 49
Class B nonvoting - 30,000,000 shares authorized; 21,427,777
and 21,422,321 issued, respectively 214 214
Capital in excess of par value 142,535 146,091
Accumulated deficit (53,428) (54,060)
Unearned compensation - restricted stock -- (2,713)
Accumulated other comprehensive loss (1,159) (1,766)
-----------------------------------------------------------------------------------------------
Total shareholders' equity 88,211 87,815
-----------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 394,425 $ 369,721
===============================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Quarters Ended March 31 (Unaudited)
(In thousands)
2003 2002
----------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) $ 632 $ (9,387)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation of property and equipment 1,009 1,091
Amortization of intangible assets 2,185 1,812
Amortization of investments in entertainment programming 9,523 9,352
Amortization of deferred financing fees 275 240
Debt extinguishment expenses 3,263 --
Deferred income taxes (153) 6,128
Net change in operating assets and liabilities (9,754) 7,294
Investments in entertainment programming (12,399) (10,551)
Other, net 806 487
----------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities (4,613) 6,466
----------------------------------------------------------------------------------------------
Cash flows from investing activities
Proceeds from disposals 36 1,118
Additions to property and equipment (623) (451)
Other, net (3) (58)
----------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (590) 609
----------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from financing obligations 115,000 --
Repayment of financing obligations (65,767) (11,068)
Payment of debt extinguishment expenses (355) --
Payment of acquisition liabilities (14,219) --
Payment of deferred financing fees (6,370) (250)
Other, net 22 153
----------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 28,311 (11,165)
----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 23,108 (4,090)
Cash and cash equivalents at beginning of period 4,118 4,610
----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 27,226 $ 520
==============================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) BASIS OF PREPARATION
The financial information included in these financial statements is
unaudited but, in the opinion of management, reflects all normal recurring and
other adjustments necessary for a fair presentation of the results for the
interim periods. The interim results of operations and cash flows are not
necessarily indicative of those results and cash flows for the entire year.
These financial statements should be read in conjunction with the financial
statements and notes to the financial statements contained in our Form 10-K
Annual Report for the fiscal year ended December 31, 2002. Certain amounts
reported for prior periods have been reclassified to conform to the current
year's presentation.
(B) RESTRUCTURING EXPENSES
In 2002, we announced a Company-wide restructuring initiative in order to
reduce our ongoing operating expenses. The restructuring resulted in a workforce
reduction of approximately 11%, or 70 positions. In connection with the
restructuring, we reported a $5.7 million charge in 2002, of which $2.9 million
related to the termination of 53 employees. The remaining positions were
eliminated through attrition. The initiative also involved consolidation of our
office space in Los Angeles and Chicago, resulting in a charge of $2.8 million.
Of the total $5.7 million of costs related to this restructuring plan,
approximately $1.3 million was paid by March 31, 2003, with most of the
remainder to be paid in 2003 with some payments continuing through 2007.
In 2001, we implemented a restructuring plan in anticipation of a
continuing weak economy. The plan included a reduction in workforce 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 $4.6 million were
recorded, including, in 2002, a $0.9 million unfavorable adjustment to the
previous estimate due primarily to a change in sublease assumptions. The
restructuring resulted in a workforce reduction of approximately 15%, or 104
positions, with more than half of these employees from the Online Group. Of the
$4.6 million charge, $2.6 million related to the termination of 88 employees.
The remaining positions were eliminated through attrition. The charge also
included $2.0 million related to the excess space in our Chicago and New York
offices. Of the total $4.6 million of costs related to this restructuring plan,
approximately $3.6 million was paid by March 31, 2003, with most of the
remainder to be paid in 2003 with some payments continuing through 2007.
(C) EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share, or EPS, (in thousands, except per share amounts):
(Unaudited)
Quarters Ended
March 31,
--------------------
2003 2002
-------------------------------------------------------------------------------
Numerator:
For basic and diluted EPS - net income (loss) $ 632 $ (9,387)
===============================================================================
Denominator:
For basic EPS - weighted-average shares 26,155 24,540
-------------------------------------------------------------------------------
Effect of dilutive potential common shares:
Stock options and other 4 --
-------------------------------------------------------------------------------
Dilutive potential common shares 4 --
-------------------------------------------------------------------------------
For diluted EPS - adjusted weighted-average shares 26,159 24,540
===============================================================================
Basic and diluted EPS $ 0.02 $ (0.38)
===============================================================================
6
The following table represents the approximate number of shares related to
options to purchase our Class B common stock, or Class B stock, and Class B
restricted stock awards that were outstanding which were not included in the
computation of diluted EPS as the inclusion of these shares would have been
antidilutive (in thousands):
(Unaudited)
Quarters Ended
March 31,
---------------------
2003 2002
--------------------------------------------------------------------------------
Stock options 3,165 2,495
Restricted stock awards -- 260
--------------------------------------------------------------------------------
Total 3,165 2,755
================================================================================
On May 1, 2003, $10.0 million of PEI Holdings, Inc., or Holdings, Series A
Preferred Stock held by Hugh M. Hefner, along with accumulated dividends of $0.1
million, were exchanged for 1,122,209 shares of Playboy Class B stock.
(D) INVENTORIES, NET
Inventories, net, which are stated at the lower of cost (specific cost and
average cost) or fair value, consisted of the following (in thousands):
(Unaudited)
March 31, Dec. 31,
2003 2002
--------------------------------------------------------------------------------
Paper $ 2,768 $ 2,470
Editorial and other prepublication costs 5,845 5,992
Merchandise finished goods 2,032 2,036
--------------------------------------------------------------------------------
Total inventories, net $10,645 $10,498
================================================================================
(E) MINORITY INTERESTS
Our Condensed Consolidated Balance Sheets reflected "Minority interests"
of $36.9 million and $9.7 million at March 31, 2003 and December 31, 2002,
respectively. The amount at March 31, 2003 included two series of Holdings
preferred stock, which were issued in March 2003 as discussed below, and a
series of preferred stock of Playboy.com, Inc., or Playboy.com. In connection
with the sale of the senior secured notes in March 2003, we restructured the
outstanding indebtedness of Playboy.com owed to Mr. Hefner. Three promissory
notes in the aggregate of $27.2 million were extinguished in exchange for $0.5
million in cash and two series of Holdings preferred stock. On May 1, 2003, we
exchanged the Holdings Series A Preferred Stock for 1,122,209 shares of Playboy
Class B stock and exchanged the Holdings Series B Preferred Stock for 1,674
shares of a new series of preferred stock of Playboy, which we refer to as
Playboy Preferred Stock.
(F) CONTINGENCIES
On February 17, 1998, Eduardo Gongora, or Gongora, filed suit in state
court in Hidalgo County, Texas against Editorial Caballero SA de CV, or EC,
Grupo Siete International, Inc., or GSI, collectively the Editorial Defendants,
and us. In the complaint, Gongora alleged that he was injured as a result of the
termination of a publishing license agreement, or the License Agreement, between
us and EC for the publication of a Mexican edition of Playboy magazine, or the
Mexican Edition. We terminated the License Agreement on or about January 29,
1998 due to EC's failure to pay royalties and other amounts due us under the
License Agreement. On February 18, 1998, the Editorial Defendants filed a
cross-claim against us. Gongora alleged that in December 1996 he entered into an
oral agreement with the Editorial Defendants to solicit advertising for the
Mexican Edition to be distributed in the United States. The basis of GSI's
cross-claim was that it was the assignee of EC's right to distribute the Mexican
Edition in the United States and other Spanish-speaking Latin American countries
outside of Mexico. On May 31, 2002, a jury returned a verdict against us in the
amount of $4.4 million. Under the verdict, Gongora was awarded no damages. GSI
and EC were awarded $4.1 million in out-of-pocket expenses and $0.3 million for
lost profits, respectively, even though the jury found that EC had failed to
comply with the terms of the License Agreement. On October 24, 2002, the trial
court signed a judgment against us for $4.4 million plus pre- and post-judgment
interest and costs. On November 22, 2002, we filed post-judgment motions
challenging the judgment in the trial court. The trial court overruled those
motions and we are vigorously pursuing an appeal with the State Appellate Court
sitting in Corpus Christi challenging the verdict. We have posted a bond in the
amount of approximately $7.7 million (which represents the amount of the
judgment, costs and estimated pre- and post-judgment interest) in connection
with the appeal. We, on advice of legal counsel, believe that it is not probable
that a material judgment against us will be sustained. In accordance with
Statement of Financial Accounting Standards, or Statement, 5, Accounting for
Contingencies, no liability has been accrued.
7
(G) STOCK-BASED COMPENSATION
The following pro forma information presents our net income (loss) and basic and
diluted EPS assuming stock-based compensation expense had been determined
consistent with Statement 123, Accounting for Stock-Based Compensation (in
thousands, except per share amounts):
(Unaudited)
Quarters Ended
March 31,
-------------------------
2003 2002
-------------------------------------------------------------------------------
Net income (loss)
As reported $ 632 $ (9,387)
Pro forma (425) (9,865)
Basic and diluted EPS
As reported 0.02 (0.38)
Pro forma $ (0.02) $ (0.40)
-------------------------------------------------------------------------------
(H) SEGMENT INFORMATION
The following table represents financial information by reportable segment (in
thousands):
(Unaudited)
Quarters Ended
March 31,
-------------------------
2003 2002
-------------------------------------------------------------------------------
Net revenues
Entertainment $ 33,203 $ 30,651
Publishing 26,634 26,658
Online 9,240 6,383
Licensing 5,204 2,455
-------------------------------------------------------------------------------
Total $ 74,281 $ 66,147
===============================================================================
Income (loss) before income taxes
Entertainment $ 7,952 $ 8,961
Publishing 507 (368)
Online 320 (3,588)
Licensing 3,571 827
Corporate Administration and Promotion (2,900) (3,583)
Investment income 56 39
Interest expense (3,562) (4,472)
Amortization of deferred financing fees (275) (240)
Minority interest (452) (421)
Debt extinguishment expenses (3,263) --
Other, net (72) (88)
-------------------------------------------------------------------------------
Total $ 1,882 $ (2,933)
===============================================================================
(Unaudited)
March 31, Dec. 31,
2003 2002
-------------------------------------------------------------------------------
Identifiable assets
Entertainment $ 263,677 $ 263,416
Publishing 39,568 43,861
Online 3,766 4,047
Licensing 5,207 4,726
Catalog -- 36
Corporate Administration and Promotion (1) 82,207 53,635
-------------------------------------------------------------------------------
Total (1) $ 394,425 $ 369,721
===============================================================================
(1) The increase in identifiable assets since December 31, 2002 was primarily
due to proceeds from the issuance of senior secured notes in March 2003.
8
(I) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
On March 11, 2003, Holdings issued $115.0 million of 11.00% senior secured
notes due 2010. The payment obligations under the senior secured notes are fully
and unconditionally guaranteed, jointly and severally, on a senior secured
basis, by us and by substantially all of our domestic subsidiaries, referred to
as the guarantors, excluding Playboy.com and its subsidiaries. All of our
remaining subsidiaries, referred to as the nonguarantors, are wholly-owned by
the guarantors except for Playboy.com, which is a majority-owned subsidiary. The
following supplemental Condensed Consolidating Statements of Operations for the
quarters ended March 31, 2003 and 2002 and the Condensed Consolidating Balance
Sheets at March 31, 2003 and December 31, 2002 and the Condensed Consolidating
Statements of Cash Flows for the quarters ended March 31, 2003 and 2002, present
financial information for (a) us (carrying our investment in Holdings under the
equity method), (b) Holdings (the issuer of the senior secured notes) (carrying
its investment in the guarantors under the equity method), (c) on a combined
basis the guarantors (carrying any investment in nonguarantors under the equity
method) and (d) on a combined basis the nonguarantors. Separate financial
statements of the guarantors are not presented because the guarantors are
jointly, severally, and unconditionally liable under the guarantees, and we
believe that separate financial statements and other disclosures regarding the
guarantors are not material to investors. In general, Holdings has entered into
third-party borrowings and financed its subsidiaries via intercompany accounts.
All intercompany activity has been included as "Net receipts from (payments to)
subsidiaries" in the Condensed Consolidating Statements of Cash Flows. In
certain cases, taxes have been calculated on the basis of a group position that
includes both guarantors and nonguarantors. In such cases, the taxes have been
allocated to individual legal entities based upon each legal entity's actual
contribution to the tax provision.
9
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
Quarter Ended March 31, 2003 (Unaudited)
---------------------------------------------------------------------------------------
Playboy PEI Non- Playboy
Enterprises, Holdings Guarantor Guarantor Enterprises,
Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Net revenues $ -- $ -- $ 60,520 $ 17,978 $ (4,217) $ 74,281
-----------------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales -- -- (42,321) (14,197) 4,217 (52,301)
Selling and administrative expenses -- -- (9,949) (2,581) -- (12,530)
-----------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses -- -- (52,270) (16,778) 4,217 (64,831)
-----------------------------------------------------------------------------------------------------------------------------------
Operating income -- -- 8,250 1,200 -- 9,450
-----------------------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income -- -- 67 22 (33) 56
Interest expense -- (1,772) (1,353) (470) 33 (3,562)
Amortization of deferred
financing fees -- (251) -- (24) -- (275)
Minority interest (119) -- (333) -- -- (452)
Debt extinguishment expenses -- (3,060) -- (203) -- (3,263)
Equity income (loss) from subsidiaries 751 5,841 (65) -- (6,527) --
Other, net -- (7) (27) (38) -- (72)
-----------------------------------------------------------------------------------------------------------------------------------
Total nonoperating income (expense) 632 751 (1,711) (713) (6,527) (7,568)
-----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 632 751 6,539 487 (6,527) 1,882
Income tax expense -- -- (698) (552) -- (1,250)
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 632 $ 751 $ 5,841 $ (65) $ (6,527) $ 632
===================================================================================================================================
Quarter Ended March 31, 2002 (Unaudited)
---------------------------------------------------------------------------------------
Playboy PEI Non- Playboy
Enterprises, Holdings Guarantor Guarantor Enterprises,
Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Net revenues $ -- $ -- $ 59,527 $ 6,676 $ (56) $ 66,147
-----------------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales -- -- (42,535) (7,411) 56 (49,890)
Selling and administrative expenses -- -- (11,178) (2,830) -- (14,008)
-----------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses -- -- (53,713) (10,241) 56 (63,898)
-----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) -- -- 5,814 (3,565) -- 2,249
-----------------------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income -- -- 25 14 -- 39
Interest expense -- (1,555) (2,376) (541) -- (4,472)
Amortization of deferred
financing fees -- (232) -- (8) -- (240)
Minority interest -- -- (421) -- -- (421)
Equity loss from subsidiaries (9,387) (7,600) (4,124) -- 21,111 --
Other, net -- -- (88) -- -- (88)
-----------------------------------------------------------------------------------------------------------------------------------
Total nonoperating expense (9,387) (9,387) (6,984) (535) 21,111 (5,182)
-----------------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (9,387) (9,387) (1,170) (4,100) 21,111 (2,933)
Income tax expense -- -- (6,430) (24) -- (6,454)
-----------------------------------------------------------------------------------------------------------------------------------
Net loss $(9,387) $(9,387) $ (7,600) $ (4,124) $ 21,111 $ (9,387)
===================================================================================================================================
10
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2003 (Unaudited)
(In thousands)
Playboy PEI Non- Playboy
Enterprises, Holdings Guarantor Guarantor Enterprises,
Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc.
------------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ -- $ -- $ 22,945 $ 4,281 $ -- $ 27,226
Marketable securities -- -- 2,530 -- -- 2,530
Receivables, net of allowance for
doubtful accounts -- -- 32,233 7,881 -- 40,114
Receivables from related parties -- -- (7,340) 8,930 -- 1,590
Inventories, net -- -- 9,600 1,045 -- 10,645
Deferred subscription acquisition
costs -- -- 12,754 -- -- 12,754
Other current assets -- -- 7,325 1,175 -- 8,500
------------------------------------------------------------------------------------------------------------------------------------
Total current assets -- -- 80,047 23,312 -- 103,359
------------------------------------------------------------------------------------------------------------------------------------
Receivables from affiliates -- 136,249 50,375 -- (186,624) --
Property and equipment, net -- -- 10,186 1,119 -- 11,305
Programming costs, net -- -- 53,089 789 -- 53,878
Goodwill -- -- 111,370 523 -- 111,893
Trademarks -- -- 55,570 -- -- 55,570
Distribution agreements, net of
accumulated amortization -- -- 32,937 -- -- 32,937
Investment in subsidiaries 115,065 88,211 (44,020) -- (159,256) --
Other noncurrent assets -- 8,497 16,957 29 -- 25,483
------------------------------------------------------------------------------------------------------------------------------------
Total assets $115,065 $232,957 $ 366,511 $ 25,772 $(345,880) $394,425
====================================================================================================================================
Liabilities
Acquisition liabilities $ -- $ -- $ 10,763 $ 1,107 $ -- $ 11,870
Accounts payable -- 2,189 11,278 4,140 -- 17,607
Accrued salaries, wages and
employee benefits -- -- 3,875 149 -- 4,024
Deferred revenues -- -- 47,795 5,296 -- 53,091
Other liabilities and accrued expenses -- 703 14,610 2,095 -- 17,408
------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities -- 2,892 88,321 12,787 -- 104,000
------------------------------------------------------------------------------------------------------------------------------------
Financing obligations -- 115,000 -- -- -- 115,000
Financing obligations to affiliates -- -- 136,249 50,375 (186,624) --
Acquisition liabilities -- -- 21,108 6,630 -- 27,738
Net deferred tax liabilities -- -- 12,744 -- -- 12,744
Other noncurrent liabilities -- -- 9,827 -- -- 9,827
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities -- 117,892 268,249 69,792 (186,624) 269,309
------------------------------------------------------------------------------------------------------------------------------------
Minority interests 26,854 -- 10,051 -- -- 36,905
Shareholders' equity
------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 88,211 115,065 88,211 (44,020) (159,256) 88,211
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $115,065 $232,957 $ 366,511 $ 25,772 $(345,880) $394,425
====================================================================================================================================
11
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2002 (Unaudited)
(In thousands)
Playboy PEI Non- Playboy
Enterprises, Holdings Guarantor Guarantor Enterprises,
Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc.
------------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ -- $ -- $ (1,908) $ 6,026 $ -- $ 4,118
Marketable securities -- -- 2,677 -- -- 2,677
Receivables, net of allowance for
doubtful accounts -- -- 33,286 8,925 -- 42,211
Receivables from related parties -- -- (6,926) 8,468 -- 1,542
Inventories, net -- -- 9,489 1,009 -- 10,498
Deferred subscription acquisition
costs -- -- 12,038 -- -- 12,038
Other current assets -- 905 9,387 1,004 -- 11,296
------------------------------------------------------------------------------------------------------------------------------------
Total current assets -- 905 58,043 25,432 -- 84,380
------------------------------------------------------------------------------------------------------------------------------------
Receivables from affiliates -- 63,603 27,598 -- (91,201) --
Property and equipment, net -- -- 10,432 1,284 -- 11,716
Programming costs, net -- -- 51,633 714 -- 52,347
Goodwill -- -- 111,370 523 -- 111,893
Trademarks -- -- 55,219 -- -- 55,219
Distribution agreements, net of
accumulated amortization -- -- 34,284 -- -- 34,284
Investment in subsidiaries 87,815 87,815 (47,864) -- (127,766) --
Other noncurrent assets -- 1,990 17,723 169 -- 19,882
------------------------------------------------------------------------------------------------------------------------------------
Total assets $87,815 $154,313 $ 318,438 $ 28,122 $(218,967) $369,721
====================================================================================================================================
Liabilities
Financing obligations $ -- $ 6,402 $ -- $ -- $ -- $ 6,402
Financing obligations to related parties -- -- -- 17,235 -- 17,235
Acquisition liabilities -- -- 12,525 902 -- 13,427
Accounts payable -- -- 18,281 6,315 -- 24,596
Accrued salaries, wages and
employee benefits -- -- 10,046 373 -- 10,419
Deferred revenues -- -- 48,377 4,256 -- 52,633
Other liabilities and accrued expenses -- 1,231 15,018 1,399 -- 17,648
------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities -- 7,633 104,247 30,480 -- 142,360
------------------------------------------------------------------------------------------------------------------------------------
Financing obligations -- 58,865 -- -- -- 58,865
Financing obligations to related parties -- -- -- 10,000 -- 10,000
Financing obligations to affiliates -- -- 63,603 27,598 (91,201) --
Acquisition liabilities -- -- 31,777 7,908 -- 39,685
Net deferred tax liabilities -- -- 12,375 -- -- 12,375
Other noncurrent liabilities -- -- 8,904 -- -- 8,904
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities -- 66,498 220,906 75,986 (91,201) 272,189
------------------------------------------------------------------------------------------------------------------------------------
Minority interests -- -- 9,717 -- -- 9,717
Shareholders' equity
------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 87,815 87,815 87,815 (47,864) (127,766) 87,815
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $87,815 $154,313 $ 318,438 $ 28,122 $(218,967) $369,721
====================================================================================================================================
12
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
Quarter Ended March 31, 2003 (Unaudited)
--------------------------------------------------------------------------------------------
Playboy PEI Non- Playboy
Enterprises, Holdings Guarantor Guarantor Enterprises,
Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net cash provided by (used for)
operating activities $ -- $ (1,698) $ (3,057) $ 142 $ -- $ (4,613)
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Proceeds from disposals -- -- 36 -- -- 36
Additions to property and equipment -- -- (508) (115) -- (623)
Other, net -- -- (6) 3 -- (3)
-----------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing
activities -- -- (478) (112) -- (590)
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from financing obligations -- 115,000 -- -- -- 115,000
Repayment of financing obligations -- (65,267) -- (500) -- (65,767)
Payment of debt extinguishment
expenses -- (355) -- -- -- (355)
Payment of acquisition liabilities -- -- (13,145) (1,074) -- (14,219)
Payment of deferred financing fees -- (6,370) -- -- -- (6,370)
Other, net 22 -- -- -- -- 22
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for)
financing activities 22 43,008 (13,145) (1,574) -- 28,311
-----------------------------------------------------------------------------------------------------------------------------------
Net receipts from (payments to)
subsidiaries (22) (41,310) 41,533 (201) -- --
-----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents -- -- 24,853 (1,745) -- 23,108
Cash and cash equivalents
at beginning of period -- -- (1,908) 6,026 -- 4,118
-----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ -- $ -- $ 22,945 $ 4,281 $ -- $ 27,226
===================================================================================================================================
Quarter Ended March 31, 2002 (Unaudited)
--------------------------------------------------------------------------------------------
Playboy PEI Non- Playboy
Enterprises, Holdings Guarantor Guarantor Enterprises,
Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net cash provided by (used for)
operating activities $ -- $ (2,037) $ 11,411 $(2,908) $ -- $ 6,466
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Proceeds from disposals -- -- 1,085 33 -- 1,118
Additions to property and equipment -- -- (332) (119) -- (451)
Other, net -- -- (58) -- -- (58)
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for)
investing activities -- -- 695 (86) -- 609
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Repayment of financing obligations -- (11,068) -- -- -- (11,068)
Payment of deferred financing fees -- (100) -- (150) -- (250)
Other, net 153 -- -- -- -- 153
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for)
financing activities 153 (11,168) -- (150) -- (11,165)
-----------------------------------------------------------------------------------------------------------------------------------
Net receipts from (payments to)
subsidiaries (153) 13,205 (12,427) (625) -- --
-----------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash
equivalents -- -- (321) (3,769) -- (4,090)
Cash and cash equivalents
at beginning of period -- -- 456 4,154 -- 4,610
-----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ -- $ -- $ 135 $ 385 $ -- $ 520
===================================================================================================================================
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table represents our results of operations (in millions, except
per share amounts):
Quarters Ended
March 31,
------------------------
2003 2002
-------------------------------------------------------------------------------
Net revenues
Entertainment
Domestic TV networks $ 23.4 $ 24.8
International TV 8.5 3.2
Worldwide home video 1.1 2.6
Movies and other 0.2 --
-------------------------------------------------------------------------------
Total Entertainment 33.2 30.6
-------------------------------------------------------------------------------
Publishing
Playboy magazine 22.4 22.7
Other domestic publishing 2.9 2.7
International publishing 1.3 1.3
-------------------------------------------------------------------------------
Total Publishing 26.6 26.7
-------------------------------------------------------------------------------
Online
Subscriptions 4.1 2.0
E-commerce 3.9 3.0
Other 1.3 1.4
-------------------------------------------------------------------------------
Total Online 9.3 6.4
-------------------------------------------------------------------------------
Licensing 5.2 2.4
-------------------------------------------------------------------------------
Total net revenues $ 74.3 $ 66.1
===============================================================================
Net income (loss)
Entertainment
Before programming expense $ 17.5 $ 18.4
Programming expense (9.5) (9.4)
-------------------------------------------------------------------------------
Total Entertainment 8.0 9.0
-------------------------------------------------------------------------------
Publishing 0.5 (0.4)
-------------------------------------------------------------------------------
Online 0.3 (3.6)
-------------------------------------------------------------------------------
Licensing 3.6 0.8
-------------------------------------------------------------------------------
Corporate Administration and Promotion (2.9) (3.6)
-------------------------------------------------------------------------------
Operating income 9.5 2.2
-------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 0.1 0.1
Interest expense (3.6) (4.5)
Amortization of deferred financing fees (0.3) (0.2)
Minority interest (0.4) (0.4)
Debt extinguishment expenses (3.3) --
Other, net (0.1) (0.1)
-------------------------------------------------------------------------------
Total nonoperating expense (7.6) (5.1)
-------------------------------------------------------------------------------
Income (loss) before income taxes 1.9 (2.9)
Income tax expense (1.3) (6.5)
-------------------------------------------------------------------------------
Net income (loss) $ 0.6 $ (9.4)
===============================================================================
Basic and diluted EPS $ 0.02 $ (0.38)
===============================================================================
Our revenues increased primarily due to higher subscription revenues in
the Online Group and the sale of an original Salvador Dali painting in the
Licensing Group in the current year quarter. The comparison also reflected the
expected increase of Entertainment Group revenues as a result of consolidating
Playboy TV International, LLC, or PTVI, in the current year quarter in
connection with the December 2002 restructuring of the ownership of our
international TV joint ventures.
The significant improvement in operating income for the quarter was due to
better performance from the Online, Licensing and Publishing Groups. Lower
Corporate Administration and Promotion expenses also contributed.
14
We reported net income of $0.6 million for the current year quarter
compared to a net loss of $9.4 million in the prior year quarter. The current
year quarter included $3.3 million of debt extinguishment expenses in connection
with our former financing obligations. The prior year quarter included a $5.8
million noncash income tax charge related to our adoption of Statement 142,
Goodwill and Other Intangible Assets.
Several of our businesses can experience variations in quarterly
performance. As a result, our performance in any quarter is not necessarily
reflective of full-year or longer-term trends. Playboy magazine newsstand
revenues vary from issue to issue, with revenues generally higher for holiday
issues and any issues including editorial or pictorial features that generate
unusual public interest. Advertising revenues also vary from quarter to quarter
depending on economic conditions, product introductions by advertising
customers, holiday issues 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.
ENTERTAINMENT GROUP
The following discussion focuses on the profit contribution of each of our
Entertainment Group businesses before programming expense.
Revenues from our domestic TV networks business decreased $1.4 million, or
5%, in part due to digital churn related to customer resistance to pricing,
which results in reduced audience access. In addition, consistent with the
experience of other pay content providers, theft of service, particularly on DTH
platforms, is negatively impacting buy rates. The operators are clearly focusing
greater efforts on this issue. Profit contribution decreased $1.0 million
primarily due to the decrease in revenues combined with higher distribution
costs, partially offset by lower marketing costs.
Our networks were available as follows:
March 31, Dec. 31, March 31,
Household units (in millions) (1) 2003 2002 2002
--------------------------------------------------------------------------------------
Domestic TV
Playboy TV
DTH 19.9 19.2 18.7
Cable digital 15.1 14.0 11.4
Cable analog addressable 4.8 5.7 7.7
Playboy TV en Espanol (2)
DTH 7.4 7.0 --
Cable digital 2.8 2.7 --
Movie Networks
DTH 39.5 38.4 36.7
Cable digital 39.6 36.9 30.6
Cable analog addressable 9.4 10.8 17.7
International TV 33.3 30.9 30.4
--------------------------------------------------------------------------------------
(1) Each household unit is defined as one household carrying one given network
per carriage platform. A single household can represent multiple household
units if two or more of our networks and/or multiple platforms (i.e.
digital and analog) are available to that household.
(2) We obtained 100% distribution rights of Playboy TV en Espanol in the U.S.
Hispanic market in December 2002 in connection with the restructuring of
the ownership of our international TV joint ventures.
Profit contribution from our international TV business increased $1.0
million on a $5.3 million increase in revenues as the current year quarter was
the first quarter where we consolidated international TV operations as a result
of the December 2002 restructuring of the ownership of our international TV
joint ventures. The prior year quarter included $3.2 million in licensing fees
from the PTVI joint venture, at which time we owned a minority interest.
Profit contribution from our worldwide home video business decreased $0.9
million on a $1.5 million, or 56%, decrease in revenues primarily due to a large
sale of backlist titles in the prior year quarter combined with fewer titles
released in the current year quarter. Revenues from this business are expected
to continue to be lower compared to the prior year.
15
PUBLISHING GROUP
Playboy magazine revenues decreased $0.3 million, or 1%, due to slightly
lower advertising revenues as a result of fewer ad pages. Ad sales for the 2003
second quarter magazine issues are closed, and we expect to report 2% lower ad
revenues and 12% fewer ad pages compared to the 2002 second quarter. However, ad
sales are expected to be higher for the full year 2003 compared to 2002.
Circulation revenues were basically flat as lower subscription revenues were
mostly offset by higher newsstand revenues.
Revenues from our other domestic publishing businesses increased $0.2
million, or 9%, primarily due to up-pricing of special editions.
The group's segment performance increased $0.9 million as lower
manufacturing costs, driven by fewer pages and lower paper prices, combined with
lower editorial costs more than offset a decrease in advertising profitability.
ONLINE GROUP
The Online Group's revenues increased $2.9 million, or 45%, as
subscription revenues more than doubled to $4.1 million mainly due to the growth
of Playboy Cyber Club, in terms of both up-pricing and members, as well as the
launch of new clubs. Additionally, e-commerce revenues were $0.9 million, or
33%, higher as a result of the timing of Spice and Playboy mailings. The group
reported segment income of $0.3 million in the current year quarter compared to
a loss of $3.6 million in the prior year quarter. This improvement was
attributable to the higher revenues combined with a lower cost structure.
LICENSING GROUP
Segment income from our Licensing Group increased $2.8 million on a
revenue increase of the same primarily due to the sale of an original painting
by Salvador Dali for $1.9 million. Higher royalties from our international
licensed branded products business also contributed to the improvements.
CORPORATE ADMINISTRATION AND PROMOTION
Corporate Administration and Promotion expenses decreased $0.7 million, or
19%, in part reflecting our continued focus on cost control measures.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, we had $27.2 million in cash and cash equivalents and
$115.0 million in total financing obligations compared to $4.1 million in cash
and cash equivalents and $92.5 million in total financing obligations at
December 31, 2002. The financing obligations at December 31, 2002 included $27.2
million in obligations payable to Mr. Hefner. As discussed below, we and Mr.
Hefner agreed to exchange his $27.2 million of promissory notes issued by
Playboy.com for a cash payment of $0.5 million and $26.7 million in preferred
stock, issued by one of our subsidiaries, Holdings.
Our liquidity requirements are being provided by the cash and cash
equivalents generated from our private offering of $115.0 million in aggregate
principal amount of senior secured notes. In addition, we have a $20.0 million
revolving credit facility. At March 31, 2003, there were no borrowings and $11.6
million in letters of credit outstanding under this facility.
DEBT FINANCINGS
On March 11, 2003, we completed the private offering of $115.0 million in
aggregate principal amount of senior secured notes through one of our
subsidiaries, Holdings. The notes mature on March 15, 2010 and bear interest at
the rate of 11.00% per annum, with interest payable on March 15th and September
15th of each year, beginning September 15, 2003. On March 11, 2003, Holdings
also entered into a new revolving credit facility, through which we are
permitted to borrow up to $20.0 million in revolving borrowings, issue letters
of credit or a combination of both.
16
FINANCING FROM RELATED PARTY
At December 31, 2002, Playboy.com had an aggregate of $27.2 million of
outstanding indebtedness to Mr. Hefner in the form of three promissory notes.
Upon the closing of the senior secured notes offering on March 11, 2003,
Playboy.com's debt to Mr. Hefner was restructured. One promissory note, in the
amount of $10.0 million, was extinguished in exchange for shares of a new series
of Series A preferred stock of Holdings, which we refer to as the Holdings
Series A Preferred Stock, with an aggregate stated value of $10.0 million. We
were required to exchange the Holdings Series A Preferred Stock for shares of
Playboy Class B stock. The two other promissory notes, in a combined principal
amount of $17.2 million, were extinguished in exchange for $0.5 million in cash
and shares of a new series of Series B preferred stock of Holdings, which we
refer to as the Holdings Series B Preferred Stock, with an aggregate stated
value of $16.7 million. We were required to exchange the Holdings Series B
Preferred Stock for shares of Playboy Preferred Stock.
In order to issue the Playboy Preferred Stock, we were required to amend
our certificate of incorporation to authorize the issuance, which we refer to as
the certificate amendment. In accordance with applicable law, Mr. Hefner, the
holder of more than a majority of our outstanding Class A voting common stock,
approved the certificate amendment by written consent. Under federal securities
laws, the certificate amendment could not become effective prior to the 20th
calendar day following the mailing to our stockholders of an information
statement that complied with applicable Securities and Exchange Commission
rules. This information statement was mailed on April 10, 2003. As a result, on
May 1, 2003, we filed an amendment to our certificate of incorporation and
exchanged the Holdings Series A Preferred Stock for 1,122,209 shares of Playboy
Class B stock and exchanged the Holdings Series B Preferred Stock for 1,674
shares of Playboy Preferred Stock, in each case in accordance with the terms of
the Holdings Series A and B Preferred Stock, respectively.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used for operating activities was $4.6 million for the quarter
primarily due to a reduction in accounts payable.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used for investing activities was $0.6 million for the quarter
primarily due to additions to property and equipment.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by financing activities was $28.3 million for the
quarter principally due to proceeds of $115.0 million related to the private
offering of senior secured notes, partially offset by payment of $6.4 million of
related financing fees, repayment of former financing obligations of $65.8
million and payment of $14.2 million of acquisition liabilities.
FORWARD-LOOKING STATEMENTS
This Form 10-Q Quarterly Report contains "forward-looking statements,"
including statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as to expectations, beliefs, plans,
objectives and future financial performance, and assumptions underlying or
concerning the foregoing. We use words such as "may," "will," "would," "could,"
"should," "believes," "estimates," "projects," "potential," "expects," "plans,"
"anticipates," "intends," "continues" and other similar terminology. These
forward-looking statements involve known and unknown risks, uncertainties and
other factors, which could cause our actual results, performance or outcomes to
differ materially from those expressed or implied in the forward-looking
statements. The following are some of the important factors that could cause our
actual results, performance or outcomes to differ materially from those
discussed in the forward-looking statements:
(1) foreign, national, state and local government regulation, actions or
initiatives, including:
(a) attempts to limit or otherwise regulate the sale, distribution or
transmission of adult-oriented materials, including print, video and
online materials,
(b) limitations on the advertisement of tobacco, alcohol and other
products which are important sources of advertising revenue for us,
or
(c) substantive changes in postal regulations or rates which could
increase our postage and distribution costs;
17
(2) risks associated with our foreign operations, including market acceptance
and demand for our products and the products of our licensees and our
ability to manage the risk associated with our exposure to foreign
currency exchange rate fluctuations;
(3) changes in general economic conditions, consumer spending habits, viewing
patterns, fashion trends or the retail sales environment which, in each
case, could reduce demand for our programming and products and impact our
advertising revenues;
(4) our ability to protect our trademarks, copyrights and other intellectual
property;
(5) risks as a distributor of media content, including our becoming subject to
claims for defamation, invasion of privacy, negligence, copyright, patent
or trademark infringement, and other claims based on the nature and
content of the materials distributed;
(6) the dilution from any potential issuance of additional common stock in
connection with financings or acquisitions;
(7) 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;
(8) competition in the television, men's magazine and Internet markets;
(9) attempts by consumers or private advocacy groups to exclude our
programming or other products from distribution;
(10) the television and Internet businesses' reliance on third parties for
technology and distribution, and any changes in that technology and/or
unforeseen delays in its implementation which might affect our plans and
assumptions;
(11) risks associated with losing access to transponders and competition for
transponders and channel space;
(12) the impact of industry consolidation, any decline in our access to, and
acceptance by, DTH and/or cable systems and the possible resulting
deterioration in the terms, cancellation of fee arrangements or pressure
on margin splits with operators of these systems;
(13) risks that we may not realize the expected operating efficiencies,
synergies, increased sales and profits and other benefits from
acquisitions and the restructuring of our international TV joint ventures;
(14) risks associated with the impact that the financial condition of Claxson
Interactive Group Inc., our venture partner, may have on our Playboy
TV-Latin America, LLC joint venture;
(15) increases in paper or printing costs;
(16) effects of the national consolidation of the single-copy magazine
distribution system; and
(17) uncertainty of the viability of the Internet subscription, e-commerce,
advertising and gaming businesses.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Effective with the refinancing of our financing obligations, which
occurred on March 11, 2003, we no longer have any floating interest rate
exposure. All of our current debt is represented by the senior secured notes,
which are fixed rate obligations. Therefore, the fair value of the $115.0
million senior secured notes will be influenced by changes in market rates and
our credit quality. As of March 31, 2003, the fair value of the notes
approximated their carrying value.
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended, or the Exchange Act) as of a date within 90 days prior to the filing
date of this quarterly report, or the Evaluation Date. Based on such evaluation,
such officers have concluded that, as of the Evaluation Date, our disclosure
controls and procedures are effective in alerting them on a timely basis to
material information relating to us, including our consolidated subsidiaries,
that is required to be included in our reports filed or submitted under the
Exchange Act.
(b) Changes in Internal Controls
Since the Evaluation Date, there have not been any significant changes in
our internal controls or in other factors that could significantly affect such
controls.
18
LEGAL PROCEEDINGS
On February 17, 1998, Gongora filed suit in state court in Hidalgo County,
Texas against the Editorial Defendants and us. In the complaint, Gongora alleged
that he was injured as a result of the termination of the License Agreement
between us and EC for the publication of the Mexican Edition. We terminated the
License Agreement on or about January 29, 1998 due to EC's failure to pay
royalties and other amounts due us under the License Agreement. On February 18,
1998, the Editorial Defendants filed a cross-claim against us. Gongora alleged
that in December 1996 he entered into an oral agreement with the Editorial
Defendants to solicit advertising for the Mexican Edition to be distributed in
the United States. The basis of GSI's cross-claim was that it was the assignee
of EC's right to distribute the Mexican Edition in the United States and other
Spanish-speaking Latin American countries outside of Mexico. On May 31, 2002, a
jury returned a verdict against us in the amount of $4.4 million. Under the
verdict, Gongora was awarded no damages. GSI and EC were awarded $4.1 million in
out-of-pocket expenses and $0.3 million for lost profits, respectively, even
though the jury found that EC had failed to comply with the terms of the License
Agreement. On October 24, 2002, the trial court signed a judgment against us for
$4.4 million plus pre- and post-judgment interest and costs. On November 22,
2002, we filed post-judgment motions challenging the judgment in the trial
court. The trial court overruled those motions and we are vigorously pursuing an
appeal with the State Appellate Court sitting in Corpus Christi challenging the
verdict. We have posted a bond in the amount of approximately $7.7 million
(which represents the amount of the judgment, costs and estimated pre- and
post-judgment interest) in connection with the appeal. We, on advice of legal
counsel, believe that it is not probable that a material judgment against us
will be sustained. In accordance with Statement 5, Accounting for Contingencies,
no liability has been accrued.
On May 17, 2001, Logix Development Corporation, or Logix, D. Keith
Howington and Anne Howington filed suit in state court in Los Angeles County
Superior Court in California against Spice Entertainment Companies, Inc., or
Spice, Emerald Media, Inc., or EMI, Directrix, Inc., or Directrix, Colorado
Satellite Broadcasting, Inc., New Frontier Media, Inc., J. Roger Faherty, Donald
McDonald, Jr. and Judy Savar. On February 8, 2002, plaintiffs amended the
complaint and added as a defendant Playboy, which acquired Spice in 1999. The
complaint alleged 11 contract and tort causes of action arising principally out
of a January 18, 1997 agreement between EMI and Logix in which EMI agreed to
purchase certain explicit television channels broadcast over C-band satellite.
The complaint further seeks damages from Spice based on Spice's alleged failure
to provide transponder and uplink services to Logix. Playboy and Spice filed a
motion to dismiss plaintiffs' complaint. The court sustained Playboy's motion as
to plaintiffs' fraud and conspiracy claims, but not as to plaintiffs' claims of
tortious interference with contract and imposition of constructive trust and
granted plaintiffs leave to amend. On June 10, 2002, plaintiffs filed their
first amended complaint. In the first amended complaint, plaintiffs allege that
the various defendants, including Playboy and Spice, were alter egos of each
other. The complaint purports to seek unspecified damages in excess of $10
million. On May 31, 2002, Directrix filed for bankruptcy and on July 8, 2002,
Directrix removed the action to the Central District of California Bankruptcy
Court. The case was subsequently remanded to state court on October 31, 2002.
Discovery has only very recently resumed in the action. Playboy and Spice filed
motions to dismiss the first amended complaint and a hearing on the motions took
place on February 5, 2003. On April 4, 2003, the California Superior Court
granted Playboy's motion to dismiss without leave to amend and a final judgment
dismissing Playboy has been submitted to the court. Spice's motion to dismiss
was denied, but we are moving for reconsideration of that ruling. We intend to
vigorously defend against these claims and we believe we have good defenses to
them. At this preliminary point in the action, however, it is not possible to
determine if there is any potential liability or whether any liability may be
material or is likely.
On September 26, 2002, Directrix filed suit in the U.S. Bankruptcy Court
in the Southern District of New York against Playboy Entertainment Group, Inc.
In the complaint, Directrix alleged that it was injured as a result of the
termination of a Master Services Agreement under which Directrix was to perform
services relating to the distribution, production and post production of our
cable networks and a sublease agreement under which Directrix would have
subleased office, technical and studio space at our Los Angeles, California
production facility. Directrix also alleged that we breached an agreement under
which Directrix had the right to transmit and broadcast certain versions of
films through C-band satellite, commonly known as the TVRO market, and Internet
distribution. On November 15, 2002, we filed an answer denying Directrix's
allegations and filed counterclaims against Directrix seeking damages in
connection with the Sublease Agreement and Directrix's breach of the Master
Services Agreement. On January 7, 2003, Directrix moved to dismiss one of our
counterclaims. Both sides have commenced discovery. We intend to vigorously
defend ourselves against Directrix's claims. We believe the claims are without
merit and that we have good defenses against them. We believe it is not probable
that a material judgment against us will result.
19
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------
3 Certificate of Incorporation of Playboy Enterprises, Inc.
4 Certificate of Designations, Powers, Preferences and Rights of
Series A Convertible Preferred Stock of Playboy Enterprises,
Inc. (included in Exhibit 3)
99 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On January 7, 2003, we filed a Current Report on Form 8-K under Item 2.,
announcing the completion of the restructuring of the ownership of our
international TV joint venture relationships with Claxson Interactive Group
Inc., or the Claxson Restructuring Transaction, and filing as an exhibit thereto
the related Transfer Agreement.
On February 12, 2003, we filed a Current Report on Form 8-K under Item 5.,
filing as exhibits thereto the Second Amended and Restated Operating Agreement
and the Program Supply and Trademark License Agreement entered into in
connection with the Claxson Restructuring Transaction.
On February 25, 2003, we filed an Amendment No. 1 on Form 8-K/A which
updated the Form 8-K filed on January 7, 2003 to include the financial
statements and pro forma financial information required by Item 7. of Form 8-K.
On March 6, 2003, we filed a Current Report on Form 8-K under Item 5.,
announcing that we were pursuing a private offering of senior secured notes to
be issued by Holdings, a subsidiary of ours.
On March 6, 2003, we filed a Current Report on Form 8-K under Item 5.,
announcing the pricing of the private offering of $115.0 million in aggregate
principal amount of senior secured notes by Holdings.
On March 12, 2003, we filed a Current Report on Form 8-K under Item 5.,
announcing the completion of the private offering of $115.0 million in aggregate
principal amount of senior secured notes by Holdings.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PLAYBOY ENTERPRISES, INC.
(Registrant)
Date: May 13, 2003 By /s/ Linda Havard
------------ ------------------------------
Linda G. Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)
21
CERTIFICATIONS
I, Christie Hefner, Chairman of the Board, Chief Executive Officer and Director
of Playboy Enterprises, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Playboy Enterprises,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 13, 2003 /s/ Christie Hefner
------------ ------------------------------------
Name: Christie Hefner
Title: Chairman of the Board,
Chief Executive Officer and Director
22
I, Linda G. Havard, Executive Vice President, Finance and Operations, and Chief
Financial Officer of Playboy Enterprises, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Playboy Enterprises,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 13, 2003 /s/ Linda Havard
------------ ---------------------------
Name: Linda G. Havard
Title: Executive Vice President,
Finance and Operations,
and Chief Financial Officer
23