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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .................... to ....................
Commission file number 001-14790
Playboy Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-4249478
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
680 North Lake Shore Drive, Chicago, IL 60611
(Address of principal executive offices) (Zip Code)
(312) 751-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
As of October 31, 2002, there were 4,864,102 shares of Class A common
stock, par value $0.01 per share, and 21,178,174 shares of Class B common stock,
par value $0.01 per share, outstanding.
PLAYBOY ENTERPRISES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the Quarters Ended September 30,
2002 and 2001 (Unaudited) 3
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the Nine Months Ended September 30,
2002 and 2001 (Unaudited) 4
Condensed Consolidated Balance Sheets as of September 30,
2002 (Unaudited) and December 31, 2001 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2002 and 2001 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 4. Controls and Procedures 17
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 18
2
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
for the Quarters Ended September 30 (Unaudited)
(In thousands, except per share amounts)
2002 2001
- -----------------------------------------------------------------------------------------
Net revenues $ 67,372 $ 73,176
- -----------------------------------------------------------------------------------------
Costs and expenses
Cost of sales (48,305) (57,722)
Selling and administrative expenses (14,879) (13,042)
Restructuring expenses -- (256)
Gain on disposal -- 390
- -----------------------------------------------------------------------------------------
Total costs and expenses (63,184) (70,630)
- -----------------------------------------------------------------------------------------
Operating income 4,188 2,546
- -----------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 22 81
Interest expense (3,500) (3,972)
Minority interest (437) (244)
Equity in operations of Playboy TV International, LLC and other 62 (163)
Other, net (369) (336)
- -----------------------------------------------------------------------------------------
Total nonoperating expense (4,222) (4,634)
- -----------------------------------------------------------------------------------------
Loss before income taxes (34) (2,088)
Income tax expense (605) --
- -----------------------------------------------------------------------------------------
Net loss (639) (2,088)
- -----------------------------------------------------------------------------------------
Other comprehensive income (loss) (net of tax)
Unrealized loss on marketable securities (499) (481)
Derivative gain (loss) 198 (1,138)
Foreign currency translation loss -- (3)
- -----------------------------------------------------------------------------------------
Total other comprehensive loss (301) (1,622)
- -----------------------------------------------------------------------------------------
Comprehensive loss $ (940) $ (3,710)
=========================================================================================
Basic and diluted weighted average number
of common shares outstanding 26,036 24,502
=========================================================================================
Basic and diluted earnings per common share $ (0.01) $ (0.09)
=========================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
for the Nine Months Ended September 30 (Unaudited)
(In thousands, except per share amounts)
2002 2001
- -----------------------------------------------------------------------------------------------
Net revenues $ 204,085 $ 210,475
- -----------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales (152,612) (178,450)
Selling and administrative expenses (42,868) (39,239)
Restructuring expenses -- (256)
Gain on disposals -- 290
- -----------------------------------------------------------------------------------------------
Total costs and expenses (195,480) (217,655)
- -----------------------------------------------------------------------------------------------
Operating income (loss) 8,605 (7,180)
- -----------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 83 701
Interest expense (11,547) (9,342)
Minority interest (1,279) (292)
Equity in operations of Playboy TV International, LLC and other (32) 258
Other, net (1,118) (1,125)
- -----------------------------------------------------------------------------------------------
Total nonoperating expense (13,893) (9,800)
- -----------------------------------------------------------------------------------------------
Loss before income taxes and cumulative effect of change
in accounting principle (5,288) (16,980)
Income tax expense (7,802) (654)
- -----------------------------------------------------------------------------------------------
Loss before cumulative effect of change in accounting principle (13,090) (17,634)
Cumulative effect of change in accounting principle (net of tax) -- (4,218)
- -----------------------------------------------------------------------------------------------
Net loss (13,090) (21,852)
- -----------------------------------------------------------------------------------------------
Other comprehensive income (loss) (net of tax)
Unrealized loss on marketable securities (696) (624)
Derivative gain (loss) 191 (1,235)
Foreign currency translation gain -- 61
- -----------------------------------------------------------------------------------------------
Total other comprehensive loss (505) (1,798)
- -----------------------------------------------------------------------------------------------
Comprehensive loss $ (13,595) $ (23,650)
===============================================================================================
Basic and diluted weighted average number
of common shares outstanding 25,444 24,375
===============================================================================================
Basic and diluted earnings per common share
Loss before cumulative effect of change in accounting principle $ (0.51) $ (0.73)
Cumulative effect of change in accounting principle (net of tax) -- (0.17)
- -----------------------------------------------------------------------------------------------
Net loss $ (0.51) $ (0.90)
===============================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
Sept. 30, Dec. 31,
2002 2001
- ----------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ -- $ 4,610
Marketable securities 2,507 3,182
Receivables, net of allowance for doubtful accounts of
$4,910 and $6,406, respectively 36,381 41,846
Receivables from related parties 43,262 12,417
Inventories, net 12,555 13,962
Deferred subscription acquisition costs 12,932 12,111
Other current assets 9,909 7,857
- ----------------------------------------------------------------------------------------------
Total current assets 117,546 95,985
- ----------------------------------------------------------------------------------------------
Receivables from related parties 25,000 50,000
Property and equipment, net 9,209 10,749
Programming costs 58,706 56,213
Goodwill 111,893 112,338
Trademarks 53,829 52,185
Distribution agreements acquired, net of accumulated amortization
of $5,498 and $2,199, respectively 23,002 26,301
Other noncurrent assets 19,671 22,469
- ----------------------------------------------------------------------------------------------
Total assets $ 418,856 $ 426,240
==============================================================================================
Liabilities
Financing obligations $ 6,042 $ 8,561
Financing obligations to related parties 17,235 15,000
Acquisition liability 11,349 21,023
Accounts payable 15,738 19,293
Accounts payable to related parties 59 169
Accrued salaries, wages and employee benefits 5,526 8,717
Deferred revenues 50,390 47,913
Deferred revenues from related parties 29,619 8,382
Other liabilities and accrued expenses 21,331 18,453
- ----------------------------------------------------------------------------------------------
Total current liabilities 157,289 147,511
- ----------------------------------------------------------------------------------------------
Financing obligations 67,805 73,017
Financing obligations to related parties 10,000 5,000
Acquisition liability 31,777 41,079
Deferred revenues from related parties 23,025 44,350
Net deferred tax liabilities 12,049 5,313
Other noncurrent liabilities 25,706 28,445
- ----------------------------------------------------------------------------------------------
Total liabilities 327,651 344,715
- ----------------------------------------------------------------------------------------------
Shareholders' equity
Common stock, $0.01 par value
Class A voting - 7,500,000 shares authorized; 4,864,102 issued 49 49
Class B nonvoting - 30,000,000 shares authorized; 21,427,252
and 19,930,142 issued, respectively 214 199
Capital in excess of par value 146,158 123,090
Accumulated deficit (50,015) (36,925)
Unearned compensation restricted stock (2,827) (3,019)
Accumulated other comprehensive loss (2,374) (1,869)
- ----------------------------------------------------------------------------------------------
Total shareholders' equity 91,205 81,525
- ----------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 418,856 $ 426,240
==============================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Nine Months Ended September 30 (Unaudited)
(In thousands)
2002 2001
- -----------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $(13,090) $(21,852)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation of property and equipment 3,107 2,940
Amortization of intangible assets 5,435 6,561
Equity in operations of Playboy TV International, LLC and other 32 (258)
Gain on disposals -- (290)
Cumulative effect of change in accounting principle -- 4,218
Deferred income taxes 6,736 (355)
Amortization of investments in entertainment programming 29,095 28,046
Net change in operating assets and liabilities (3,644) 236
Investments in entertainment programming (31,815) (27,760)
Other, net 1,001 (872)
- -----------------------------------------------------------------------------------------------
Net cash used for operating activities (3,143) (9,386)
- -----------------------------------------------------------------------------------------------
Cash flows from investing activities
Payments for acquisition (435) (501)
Proceeds from disposals 1,118 1,602
Additions to property and equipment (1,625) (2,120)
Funding of equity interests -- (1,747)
Other, net 107 (31)
- -----------------------------------------------------------------------------------------------
Net cash used for investing activities (835) (2,797)
- -----------------------------------------------------------------------------------------------
Cash flows from financing activities
Net proceeds from sale of Playboy.com, Inc. Series A Preferred Stock -- 13,305
Proceeds from financing obligations 17,235 5,000
Repayment of financing obligations (17,731) (4,631)
Payment of financing fees (348) (391)
Proceeds from stock plans 212 1,960
Other, net -- (207)
- -----------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (632) 15,036
- -----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (4,610) 2,853
Cash and cash equivalents at beginning of period 4,610 2,534
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ -- $ 5,387
===============================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
6
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) BASIS OF PREPARATION
The financial information included in these financial statements is
unaudited but, in the opinion of management, reflects all normal recurring
adjustments necessary for a fair presentation of the results for the interim
periods. The interim results of operations and cash flows are not necessarily
indicative of those results and cash flows for the entire year. These financial
statements should be read in conjunction with the financial statements and notes
to the financial statements contained in our Annual Report on Form 10-K, as
amended, for the fiscal year ended December 31, 2001. Certain amounts reported
for prior periods have been reclassified to conform to the current year's
presentation.
(B) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
On July 1, 2001, we adopted certain provisions of Statement of Financial
Accounting Standards No. 141, Business Combinations, or Statement 141, and on
January 1, 2002, we adopted the full provisions of Statement 141 and Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
or Statement 142. Under the new rules, goodwill and intangible assets with
indefinite lives are no longer amortized but are subject to annual impairment
tests. Other intangible assets continue to be amortized over their useful lives.
Amortization expense related to intangible assets with definite lives is
expected to total approximately $7.2 million, $3.8 million, $1.1 million, $0.6
million and $0.5 million for each of the next five years, respectively,
beginning with the current year. During the first quarter of 2002, we completed
the first of the required impairment tests for goodwill and indefinite-lived
intangible assets, which did not result in an impairment charge. Deferred tax
liabilities related to these assets with indefinite lives will now be realized
only if there is a disposition or an impairment of the value of these intangible
assets. We currently have net operating loss carryforwards, or NOLs, available
to offset deferred tax liabilities realized within the NOL carryforward period.
However, we cannot be certain that NOLs will be available when the deferred tax
liabilities related to these intangible assets are realized. Therefore, in the
current year third quarter and nine-month period, we recorded a noncash income
tax provision of $0.2 million and $6.7 million, respectively, for these deferred
tax liabilities. The cumulative effect of the accounting change included in the
current year first quarter income tax provision is $5.8 million of the $6.7
million.
The following table represents the pro forma effects as if we had adopted
Statement 142 as of January 1, 2001 (in thousands, except per share amounts):
(Unaudited) (Unaudited)
Quarters Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------
Net loss
As reported $ (639) $(2,088) $(13,090) $(21,852)
Amortization of goodwill and indefinite-lived
intangible assets (net of tax) -- 1,465 -- 4,400
Income tax provision -- (216) 5,816 (6,736)
- ------------------------------------------------------------------------------------------------------
Pro forma $ (639) $ (839) $ (7,274) $(24,188)
======================================================================================================
Basic and diluted earnings per common share
As reported $ (0.01) $ (0.09) $ (0.51) $ (0.90)
Pro forma $ (0.01) $ (0.03) $ (0.29) $ (0.99)
======================================================================================================
7
(C) RESTRUCTURING EXPENSES
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 $3.7 million
related to this plan were recorded in 2001. The restructuring resulted in a
workforce reduction of approximately 15%, or 104 employees, through Company-wide
layoffs and attrition. Approximately half of these employees were in the Playboy
Online Group. Of the $3.7 million charge, $2.5 million related to the
termination of 88 employees. An additional 16 positions were eliminated through
attrition. The charge also included $1.2 million related to the excess space in
our Chicago and New York offices. Of the total $3.7 million of costs related to
this restructuring plan, approximately $2.9 million was paid by September 30,
2002, with an additional $0.3 million expected to be paid by year-end 2002, with
the remainder expected to be paid through 2007.
(D) EARNINGS PER COMMON SHARE
The following table represents the approximate number of shares related to
options to purchase our Class B common stock and Class B restricted stock awards
that were outstanding which were not included in the computation of diluted
earnings per common share as the inclusion of these shares would have been
antidilutive (in thousands):
(Unaudited) (Unaudited)
Quarters Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
2002 2001 2002 2001
- --------------------------------------------------------------------------------
Stock options 2,745 2,150 2,660 2,280
Restricted stock awards 250 240 255 240
- --------------------------------------------------------------------------------
Total 2,995 2,390 2,915 2,520
================================================================================
As a result, the weighted average number of basic and diluted common
shares outstanding for the quarters and nine months ended September 30, 2002 and
2001 were equivalent.
(E) INVENTORIES, NET
Inventories, net, which are stated at the lower of cost (specific cost and
average cost) or fair value, consisted of the following (in thousands):
(Unaudited)
Sept. 30, Dec. 31,
2002 2001
- --------------------------------------------------------------------------------
Paper $ 5,030 $ 5,189
Editorial and other prepublication costs 5,554 6,140
Merchandise finished goods 1,971 2,633
- --------------------------------------------------------------------------------
Total inventories, net $12,555 $13,962
================================================================================
8
(F) SEGMENT INFORMATION
The following table represents financial information by reportable segment (in
thousands):
(Unaudited) (Unaudited)
Quarters Ended Nine Months Ended
September 30, September 30,
---------------------- ------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Net revenues
Entertainment $ 28,415 $ 29,947 $ 89,793 $ 80,660
Publishing 29,033 31,677 82,679 93,174
Playboy Online 7,223 6,754 21,330 19,821
Licensing Businesses 2,701 2,140 10,283 8,385
Catalog -- 2,658 -- 8,435
- ------------------------------------------------------------------------------------------------------------------------
Total $ 67,372 $ 73,176 $ 204,085 $ 210,475
========================================================================================================================
Loss before income taxes and cumulative effect of change
in accounting principle
Entertainment $ 7,336 $ 9,967 $ 24,432 $ 20,257
Publishing 1,929 877 588 346
Playboy Online (2,186) (5,097) (8,632) (16,564)
Licensing Businesses 1,171 618 3,476 1,721
Catalog -- 5 -- (161)
Corporate Administration and Promotion (4,062) (3,958) (11,259) (12,813)
Restructuring expenses -- (256) -- (256)
Gain on disposals -- 390 -- 290
Investment income 22 81 83 701
Interest expense (3,500) (3,972) (11,547) (9,342)
Minority interest (437) (244) (1,279) (292)
Equity in operations of Playboy TV International, LLC and other 62 (163) (32) 258
Other, net (369) (336) (1,118) (1,125)
- ------------------------------------------------------------------------------------------------------------------------
Total $ (34) $ (2,088) $ (5,288) $ (16,980)
========================================================================================================================
EBITDA (1)
Entertainment $ 18,772 $ 20,449 $ 59,721 $ 53,239
Publishing 2,234 1,054 1,487 862
Playboy Online (2,307) (4,859) (8,873) (15,361)
Licensing Businesses 1,220 670 3,620 1,880
Catalog -- 12 -- (141)
Corporate Administration and Promotion (3,254) (3,056) (9,091) (10,201)
Restructuring expenses -- (256) -- (256)
Gain on disposals -- 390 -- 290
- ------------------------------------------------------------------------------------------------------------------------
Total $ 16,665 $ 14,404 $ 46,864 $ 30,312
========================================================================================================================
(1) EBITDA represents earnings before interest expense, income taxes,
cumulative effect of change in accounting principle, depreciation of
property and equipment, amortization of intangible assets, amortization of
investments in entertainment programming, amortization of deferred
financing fees, expenses related to the vesting of restricted stock awards
and equity in operations of Playboy TV International, LLC, or PTVI, and
other. EBITDA should not be considered an alternative to any measure of
performance or liquidity under generally accepted accounting principles.
Similarly, EBITDA should not be inferred as more meaningful than any of
those measures.
(G) SALE OF SECURITIES
In connection with the Califa acquisition, we have the option of paying up
to $71 million of the purchase price in cash or Class B common stock through
2007. On April 17, 2002, a registration statement for the resale of
approximately 1,475,000 shares became effective. These shares were issued in
payment of two installments of consideration which totaled $22.5 million plus
$0.3 million of accrued interest. The Califa principals elected to sell the
shares and realized net proceeds from the sale of $19.2 million. As a result, we
are required to provide them with a make-whole payment in either cash or stock
of approximately $3.6 million, plus interest through the date of the next
payment. The make-whole amount plus interest will be added to the payment
scheduled to be made on March 3, 2003.
9
(H) 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. We plan to file post-judgment motions challenging the
judgment in the trial court, and, if those motions are denied, then we will
vigorously pursue an appeal with the State Appellate Court sitting in Corpus
Christi challenging the verdict. We will be posting a bond in the amount of
approximately $7 million (which represents the amount of the judgment plus
estimated pre- and post-judgment interest) in connection with the appeal.
Management, on advice of legal counsel, believes that it is not probable that a
material judgment against us will be sustained. In accordance with Statement of
Financial Accounting Standards No. 5, Accounting for Contingencies, or Statement
5, no liability has been accrued.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table represents our results of operations for the periods
indicated below (in millions, except per share amounts):
Quarters Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Net revenues
Entertainment
Domestic TV networks $ 23.0 $ 23.1 $ 71.2 $ 60.2
International TV 2.9 6.2 9.8 12.9
Worldwide home video 2.4 0.5 8.6 7.3
Movies and other 0.1 0.2 0.2 0.3
- -----------------------------------------------------------------------------------------------------------------------
Total Entertainment 28.4 30.0 89.8 80.7
- -----------------------------------------------------------------------------------------------------------------------
Publishing
Playboy magazine 23.8 25.1 70.0 73.9
Other domestic publishing 3.8 4.2 8.8 10.8
International publishing 1.5 2.4 3.9 8.5
- -----------------------------------------------------------------------------------------------------------------------
Total Publishing 29.1 31.7 82.7 93.2
- -----------------------------------------------------------------------------------------------------------------------
Playboy Online 7.2 6.7 21.3 19.8
- -----------------------------------------------------------------------------------------------------------------------
Licensing Businesses 2.7 2.2 10.3 8.4
- -----------------------------------------------------------------------------------------------------------------------
Catalog -- 2.6 -- 8.4
- -----------------------------------------------------------------------------------------------------------------------
Total net revenues $ 67.4 $ 73.2 $ 204.1 $ 210.5
=======================================================================================================================
Net loss
Entertainment
Before programming expense $ 16.7 $ 18.7 $ 53.5 $ 48.3
Programming expense (9.4) (8.7) (29.1) (28.0)
- -----------------------------------------------------------------------------------------------------------------------
Total Entertainment 7.3 10.0 24.4 20.3
- -----------------------------------------------------------------------------------------------------------------------
Publishing 1.9 0.9 0.6 0.4
- -----------------------------------------------------------------------------------------------------------------------
Playboy Online (2.1) (5.1) (8.6) (16.6)
- -----------------------------------------------------------------------------------------------------------------------
Licensing Businesses 1.2 0.6 3.5 1.7
- -----------------------------------------------------------------------------------------------------------------------
Catalog -- -- -- (0.2)
- -----------------------------------------------------------------------------------------------------------------------
Corporate Administration and Promotion (4.1) (4.0) (11.3) (12.8)
- -----------------------------------------------------------------------------------------------------------------------
Total segment income (loss) 4.2 2.4 8.6 (7.2)
Restructuring expenses -- (0.3) -- (0.3)
Gain on disposals -- 0.4 -- 0.3
- -----------------------------------------------------------------------------------------------------------------------
Operating income (loss) 4.2 2.5 8.6 (7.2)
- -----------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income -- 0.1 0.1 0.7
Interest expense (3.5) (3.9) (11.6) (9.3)
Minority interest (0.5) (0.3) (1.3) (0.3)
Equity in operations of PTVI and other 0.1 (0.2) -- 0.2
Other, net (0.3) (0.3) (1.1) (1.1)
- -----------------------------------------------------------------------------------------------------------------------
Total nonoperating expense (4.2) (4.6) (13.9) (9.8)
- -----------------------------------------------------------------------------------------------------------------------
Loss before income taxes and cumulative effect of change
in accounting principle -- (2.1) (5.3) (17.0)
Income tax expense (0.6) -- (7.8) (0.7)
- -----------------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of change in accounting principle (0.6) (2.1) (13.1) (17.7)
Cumulative effect of change in accounting principle (net of tax) -- -- -- (4.2)
- -----------------------------------------------------------------------------------------------------------------------
Net loss $ (0.6) $ (2.1) $ (13.1) $ (21.9)
=======================================================================================================================
Basic and diluted earnings per common share
Loss before cumulative effect of change in accounting principle $ (0.01) $ (0.09) $ (0.51) $ (0.73)
Cumulative effect of change in accounting principle (net of tax) -- -- -- (0.17)
- -----------------------------------------------------------------------------------------------------------------------
Net loss $ (0.01) $ (0.09) $ (0.51) $ (0.90)
=======================================================================================================================
11
Our revenues were lower than last year's third quarter and nine-month
period principally as a result of three deal-related changes: 1) no library
license fees in the Entertainment Group from PTVI received in the current year
as discussed in more detail later; 2) the absence of Catalog Group revenues due
to the sale of our Collectors' Choice Music business in November 2001; and 3)
the sale of a majority of our equity interest in the Polish edition of Playboy
magazine in July 2001. Additionally, domestic Playboy magazine and other
publishing revenues were down for both periods. Higher revenues from the
Licensing Businesses and Playboy Online Groups partially offset the above for
both periods. Also, domestic TV networks revenues were higher for the nine-month
period as a result of the Califa acquisition in July 2001.
In spite of the revenue decline, operating income improved for the quarter
mainly due to better performance from the Playboy Online, Publishing and
Licensing Businesses Groups, partially offset by lower income from the
Entertainment Group, also related to PTVI. The improvement in our operating
performance for the nine-month period was due to better performance from all of
our operating groups combined with lower Corporate Administration and Promotion
expenses.
The net loss for the current year nine-month period included a $5.8
million noncash income tax charge related to our adoption of Statement 142,
Goodwill and Other Intangible Assets. The prior year nine-month period included
a $4.2 million 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, or SOP 00-2. Additionally, the
current year nine-month period reflected higher interest expense due to mostly
noncash imputed interest related to the deferred payment of the purchase price
for the Califa acquisition.
Several of our businesses can experience variations in quarterly
performance. As a result, our performance in any quarter is not necessarily
reflective of full-year or longer-term trends. Playboy magazine newsstand
revenues vary from issue to issue, with revenues generally higher for holiday
issues and any issues including editorial or pictorial features that generate
unusual public interest. Advertising revenues also vary from quarter to quarter,
depending on economic conditions, product introductions by advertising customers
and changes in advertising buying patterns. E-commerce revenues are typically
impacted by the holiday buying season and decreased Internet traffic during the
summer months. Additionally, international TV revenues have varied due to the
timing of recognizing library license fees from PTVI.
ENTERTAINMENT GROUP
The following discussion focuses on the profit contribution of each of our
Entertainment Group businesses before programming expense.
Revenues from our domestic TV networks business were essentially flat for
the quarter as a decrease in Playboy TV revenues was mostly offset by an
increase in revenues from the movie networks. Profit contribution increased $0.8
million for the quarter due in part to cost controls. Profit contribution for
the nine-month period increased $9.1 million on an $11.0 million, or 18%,
increase in revenues, primarily due to the Califa acquisition.
Our networks were available as follows:
Sept. 30, Dec. 31, Sept. 30,
Household units (in millions) (1) 2002 2001 2001
- --------------------------------------------------------------------------------
Playboy TV
DTH 19.8 18.1 17.1
Cable digital 12.8 10.3 7.6
Cable analog addressable 6.5 7.8 8.8
Movie Networks
DTH 38.7 35.3 33.2
Cable digital 35.1 25.3 18.5
Cable analog addressable 12.5 17.0 18.4
- --------------------------------------------------------------------------------
(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.
12
For the quarter and nine-month period, profit contribution from our
international TV business decreased $3.2 million and $3.4 million, respectively,
on revenue decreases of $3.3 million, or 52%, and $3.1 million, or 23%,
respectively, primarily due to not receiving library license fees from PTVI as
we had in the prior year periods. In September 2002, we were scheduled to
receive a $7.5 million library license payment from PTVI which, as expected, was
not paid when due. However, we expect that if ongoing negotiations concerning
the restructuring of the PTVI joint venture with Claxson Interactive Group,
Inc., or Claxson, our venture partner, are successfully completed, we will
receive assets of equivalent or greater value than this amount and other amounts
owed from PTVI. If we are unable to successfully complete negotiations with
Claxson and PTVI is unable to make required payments to us in a timely manner,
either because of Claxson's failure to fund its capital contribution obligations
or otherwise, we will be required to address this failure by, among other
matters, exercising our remedies under the PTVI joint venture agreements,
reducing operating expenses, seeking amendments to our credit facility or
seeking additional capital. If these efforts are not successful, our future
financial condition and operating results could be materially adversely
affected.
For the quarter and nine-month period, profit contribution from our
worldwide home video business increased $1.3 million and $0.8 million,
respectively, on revenue increases of $1.9 million and $1.3 million,
respectively, mainly due to the absence of a domestic distributor in the prior
year quarter. The contract with our previous distributor expired in June 2001
and the contract with our current distributor became effective in October 2001.
Additionally, both of the current year periods included revenues from a new
continuity series. Partially offsetting the above for the nine-month comparison
were higher revenues in the prior year of $1.2 million related to a change in
accounting in accordance with SOP 00-2, Accounting by Producers or Distributors
of Films, and $0.8 million in international sales of The Eros Collection titles
through a one-time multi-territory sale.
Programming amortization expense increased $0.7 million for the quarter
and $1.1 million for the nine-month period driven by higher programming
amortization related to the domestic TV networks. The nine-month period also
reflected higher worldwide home video amortization.
The group incurred expenses of $0.4 million for the quarter and $0.6
million for the nine-month period related to relocating its California office
space and moving to a new production facility during the current year.
PUBLISHING GROUP
Playboy magazine revenues decreased 5% for both the quarter and nine-month
period due to lower newsstand and advertising revenues. In spite of this, the
Publishing Group reported improved performance for the quarter and nine-month
period of $1.0 million and $0.2 million, respectively. Advertising revenues
decreased $0.7 million, or 8%, for the quarter and $2.4 million, or 9%, for the
nine-month period due to fewer ad pages, partially offset by higher average net
revenue per page. Advertising sales for the fourth quarter magazine issues are
closed, and we expect to report 23% fewer ad pages and 22% lower ad revenues
compared to the 2001 fourth quarter, resulting in expected 17% and 13% decreases
in ad pages and revenues, respectively, for 2002 compared to 2001. For both the
quarter and nine-month period, higher subscription revenues were more than
offset by lower newsstand sales of $1.5 million and $2.2 million, respectively.
A $0.5 million favorable variance related to newsstand sales adjustments for
prior issues also contributed to the quarter comparison.
Other domestic publishing revenues decreased $0.4 million, or 10%, for the
quarter and $2.0 million, or 18%, for the nine-month period primarily due to
lower newsstand sales of special editions. A $0.6 million unfavorable variance
related to special editions newsstand sales adjustments for prior years' issues
also contributed to the nine-month comparison.
International publishing revenues decreased $0.9 million for the quarter
and $4.6 million for the nine-month period due to the sale in July 2001 of the
majority of our equity interest in our Polish publishing joint venture, and as a
result we no longer consolidate its results. We sold our remaining equity
interest in the joint venture in October 2002.
The group's segment performance for both periods improved due to lower
direct costs and operating expenses, the latter mostly due to cost reduction
measures implemented in the fourth quarter of the prior year. Manufacturing
costs decreased $1.0 million for the quarter and $3.0 million for the nine-month
period driven by lower paper prices combined with fewer printed pages in Playboy
magazine in part as a result of the fewer ad pages. Significantly lower
editorial costs also favorably impacted both periods. Additionally, the higher
Playboy magazine subscription revenues favorably contributed to the nine-month
comparison. The lower Playboy magazine and special editions newsstand sales and
the lower advertising revenues partially offset the above.
13
PLAYBOY ONLINE GROUP
Playboy Online Group revenues increased $0.5 million, or 7%, for the
quarter and $1.5 million, or 8%, for the nine-month period. Subscription
revenues increased approximately 60% for both periods due to growth in Playboy
Cyber Club and Spice Club members and the successful launch of the PlayboyTV
Club. Both periods also reflected higher international revenues. In addition to
web site deals in Germany and Korea, we have announced new deals to launch web
sites in the Netherlands and Taiwan. E-commerce revenues were down year over
year for both periods mostly due to the continuation of the strategy to manage
direct-commerce circulation more profitably. Also, the timing of Playboy and
Spice mailings combined with the sale of our Collectors' Choice Music business
in November 2001 resulted in an unfavorable nine-month revenue comparison. The
group's segment loss decreased $3.0 million and $8.0 million for the quarter and
nine-month period, respectively, due to the higher revenues and cost-saving
initiatives implemented in the prior year. The group paid trademark fees to the
parent company of $1.7 million and $5.0 million for the current year quarter and
nine-month period, respectively, compared to $1.2 million and $3.5 million for
the same periods last year.
LICENSING BUSINESSES GROUP
For the quarter and nine-month period, segment income from the Licensing
Businesses Group increased $0.6 million and $1.8 million, respectively, on
revenue increases of 26%, or $0.5 million, and 23%, or $1.9 million,
respectively. For both periods, higher royalties from our international licensed
branded products business combined with lower expenses were responsible for the
improved performances. Also contributing to the nine-month comparison were
revenues of $0.9 million related to an auction held with Butterfields
Auctioneers and eBay in June 2002 of a small portion of our art and memorabilia
collection.
CATALOG GROUP
In November 2001, we sold our Collectors' Choice Music business, ending
our presence in the nonbranded print catalog business.
CORPORATE ADMINISTRATION AND PROMOTION
Corporate Administration and Promotion expenses were relatively flat for
the quarter and decreased $1.5 million, or 12%, for the nine-month period. Both
periods were impacted by no longer amortizing trademarks in the current year due
to the adoption of Statement 142, Goodwill and Other Intangible Assets, lower
marketing expenses and a greater reduction of expenses related to the higher
trademark fees from the Playboy Online Group. Also reflected in both periods
were expenses related to the expected vesting of restricted stock awards and the
addition of a Chief Operating Officer position in the current year.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, we had no cash and cash equivalents and $101.1
million in total financing obligations compared to $4.6 million in cash and cash
equivalents and $101.6 million in total financing obligations at December 31,
2001. Our financing obligations as of September 30, 2002 and December 31, 2001
included $27.2 million and $20.0 million, respectively, in loans made directly
from Hugh M. Hefner to Playboy.com, Inc., or Playboy.com. In July 2002, Mr.
Hefner and Playboy.com amended an expiring $5.0 million note by extending the
maturity date to July 2003. In September 2002, Mr. Hefner agreed to accept a new
$12.2 million note from Playboy.com in satisfaction of two $5.0 million notes,
plus accrued interest, which matured in September 2002. The new note bears
interest at an annual rate of 8.00% (compared to 10.50% and 12.00% for the two
original notes), with $0.5 million due in March 2003 and $11.7 million due in
September 2003.
Our current liquidity requirements, excluding those of Playboy.com, are
being provided by a $98.8 million credit facility, comprised of $63.8 million of
term loans and a $35.0 million revolving credit facility. As of September 30,
2002, $10.0 million of borrowings and $3.9 million in letters of credit were
outstanding under the revolving credit facility. The weighted average interest
rates as of September 30, 2002 were 5.86% for the term loans and 5.20% for the
revolving credit facility. We plan to finance our working capital requirements
through cash generated from operations and our revolving credit facility. If
additional funds become necessary, we will seek additional capital from the debt
and/or equity markets. Playboy.com's funding requirements have been obtained
from loans made available by Mr. Hefner.
14
In connection with the Califa acquisition, we have the option of paying up
to $71 million of the purchase price in cash or Class B common stock through
2007. On April 17, 2002, a registration statement for the resale of
approximately 1,475,000 shares became effective. These shares were issued in
payment of two installments of consideration which totaled $22.5 million plus
$0.3 million of accrued interest. The Califa principals elected to sell the
shares and realized net proceeds from the sale of $19.2 million. As a result, we
are required to provide them with a make-whole payment in either cash or stock
of approximately $3.6 million, plus interest through the date of the next
payment. The make-whole amount plus interest will be added to the payment
scheduled to be made on March 3, 2003.
We are in late stage negotiations with Claxson, our venture partner, to
restructure the ownership and terms of our international TV joint ventures. We
expect that the restructuring will result in, among other things, our trading
our right to the September 2002 and future library license and programming
output payments from PTVI for additional ownership interests in PTVI. We are
working to execute definitive agreements and close the restructuring in the
fourth quarter of 2002. In the event that we are unable to complete the
restructuring of our joint venture relationships, PTVI's ability to finance its
operations, including making library license and programming output payments to
us, will depend principally on the ability of Claxson and also us to make
capital contributions, until PTVI generates sufficient funds from operations. In
a June 27, 2002 filing with the Securities and Exchange Commission, Claxson
indicated that its auditors have expressed a "going concern opinion." The
reasons cited were Claxson's losses from operations, working capital deficiency
and its default on debt. PTVI's independent auditors have also 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. As of September 30, 2002, we had a
$7.9 million net receivable from PTVI related to programming output, including
$3.0 million of revenues recorded in the third quarter and $9.0 million for the
nine-month period. In September 2002, we were scheduled to receive a $7.5
million library license payment from PTVI which, as expected, was not paid when
due. We do not expect to receive these amounts in cash. However, we expect that
if ongoing negotiations concerning the restructuring of the PTVI joint venture
with Claxson are successfully completed, we will receive assets of equivalent or
greater value than these amounts. If we are unable to successfully complete
negotiations with Claxson and PTVI is unable to make these and other required
payments to us in a timely manner, either because of Claxson's failure to fund
its capital contribution obligations or otherwise, we will be required to
address this failure by, among other matters, exercising our remedies under the
PTVI joint venture agreements, reducing operating expenses, seeking amendments
to our credit facility or seeking additional capital. If these efforts are not
successful, our future financial condition and operating results could be
materially adversely affected.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used for operating activities was $3.1 million for the nine
months reflecting investments in entertainment programming.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used for investing activities was $0.8 million for the nine
months mainly due to $1.6 million of additions to property and equipment,
partially offset by $1.1 million of proceeds from disposals, primarily related
to the sale of our Collectors' Choice Music business.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used for financing activities was $0.6 million for the nine
months principally due to $7.2 million in repayments of term loans, partially
offset by $5.0 million of proceeds related to a December 2001 note issued by
Playboy.com to Mr. Hefner. As previously discussed, Mr. Hefner agreed to accept
a new $12.2 million note in satisfaction of two maturing $5.0 million notes,
plus accrued interest.
15
FORWARD-LOOKING STATEMENTS
This Form 10-Q Quarterly Report contains "forward-looking statements,"
including statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," as to expectations, beliefs, plans,
objectives and future financial performance, and assumptions underlying or
concerning the foregoing. These forward-looking statements involve known and
unknown risks, uncertainties and other factors, which could cause our actual
results, performance or outcomes to differ materially from those expressed or
implied in the forward-looking statements. The following are some of the
important factors that could cause our actual results, performance or outcomes
to differ materially from those discussed in the forward-looking statements:
(1) foreign, national, state and local government regulation, actions or
initiatives, including:
(a) attempts to limit or otherwise regulate the sale, distribution or
transmission of adult-oriented materials, including print, video and
online materials,
(b) limitations on the advertisement of tobacco, alcohol and other
products which are important sources of advertising revenue for us,
(c) substantive changes in postal regulations or rates which could
increase our postage and distribution costs, or
(d) changes in or increased regulation of gaming businesses, which could
limit our ability to obtain licenses, and the impact of any new
legislation on gaming businesses generally;
(2) risks associated with our foreign operations, including market acceptance
and demand for our products and the products of our licensees and our
ability to manage the risk associated with our exposure to foreign
currency exchange rate fluctuations;
(3) increases in interest rates;
(4) changes in general economic conditions, consumer spending habits, viewing
patterns, fashion trends or the retail sales environment which, in each
case, could reduce demand for our programming and products and impact our
advertising revenues;
(5) our ability to protect our trademarks and other intellectual property;
(6) risks as a distributor of media content, including our becoming subject to
claims for defamation, invasion of privacy, negligence, copyright, patent
or trademark infringement, and other claims based on the nature and
content of the materials distributed;
(7) the dilution from any potential issuance of additional common stock in
connection with acquisitions we make or investments in Playboy.com;
(8) competition for advertisers from other publications, media or online
providers or any decrease in spending by advertisers, either generally or
with respect to the adult male market;
(9) competition in the television, men's magazine and Internet markets;
(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, competition for
transponders and channel space and any decline in our access to, and
acceptance by, cable and DTH systems or any deterioration in the terms or
cancellation of fee arrangements with operators of these systems;
(12) attempts by consumers or citizens groups to exclude our programming from
pay television distribution;
(13) risks associated with integrating the operations of the networks related
to the Califa acquisition and the risks that we may not realize the
expected operating efficiencies, synergies, increased sales and profits
and other benefits from the acquisition;
(14) PTVI's ability to finance its operations, including making library license
and programming output payments to us, will depend principally on the
ability of Claxson, our venture partner, and also us to make capital
contributions, until PTVI generates sufficient funds from operations. If
we are unable to successfully complete negotiations concerning the
restructuring of the PTVI joint venture with Claxson and PTVI is unable to
make required payments to us in a timely manner, either because of
Claxson's failure to fund its capital contribution obligations or
otherwise, we will be required to address this failure by, among other
matters, exercising our remedies under the PTVI joint venture agreements,
reducing operating expenses, seeking amendments to our credit facility or
seeking additional capital. If these efforts are not successful, our
future financial condition and operating results could be materially
adversely affected;
(15) increases in paper or printing costs;
(16) effects of the national consolidation of the single-copy magazine
distribution system;
(17) uncertainty of the viability of the Internet gaming, e-commerce,
advertising and subscription businesses; and
(18) our ability to obtain adequate third-party financing to fund our Internet
business, and the timing and terms of such financing.
16
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.
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. We plan to file
post-judgment motions challenging the judgment in the trial court, and, if those
motions are denied, then we will vigorously pursue an appeal with the State
Appellate Court sitting in Corpus Christi challenging the verdict. We will be
posting a bond in the amount of approximately $7 million (which represents the
amount of the judgment plus estimated pre- and post-judgment interest) in
connection with the appeal. Management, on advice of legal counsel, believes
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 September 26, 2002, Directrix, Inc., or 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. We intend to vigorously defend ourselves
against these 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.
17
EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit Number Description
- -------------- -----------
10.1 Sixth Amendment to February 26, 1999 Credit Agreement dated as
of October 15, 2002
10.2 Promissory Note dated September 27, 2002 between Playboy.com,
Inc. and Hugh M. Hefner
10.3 First Amendment to September 26, 2001 Promissory Note dated
July 1, 2002 between Playboy.com, Inc. and Hugh M. Hefner
10.4 First Amendment to April 23, 2002 Lease dated June 28, 2002
between Los Angeles Media Tech Center, LLC and Playboy
Enterprises, Inc.
10.5 Second Amendment to January 6, 1999 Lease dated July 3, 2002
between 5055 Wilshire Limited Partnership and Playboy
Enterprises, Inc.
10.6 Second Amendment to September 20, 2001 Lease dated July 23,
2002 between Kingston Andrita LLC and Playboy Entertainment
Group, Inc.
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
No reports on Form 8-K were filed during the quarter ended September 30, 2002.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PLAYBOY ENTERPRISES, INC.
-------------------------
(Registrant)
Date November 8, 2002 By s/ Linda Havard
---------------- -----------------------------
Linda G. Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)
19
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 we
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, or 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: November 8, 2002 s/Christie Hefner
---------------------------
Name: Christie Hefner
Title: Chairman of the Board,
Chief Executive Officer and
Director
20
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 we
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, or 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: November 8, 2002 s/Linda Havard
---------------------------
Name: Linda G. Havard
Title: Executive Vice President,
Finance and Operations,
and Chief Financial Officer
21