-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D+RsnECLqnK5fVFBNy1+iml/0JAteZ+HODrK1KqBAK2vIiwV+VN3x+1q1YEgEmLr gWp4gGBEj6K90jOkZxNDLg== 0001169232-03-006402.txt : 20031106 0001169232-03-006402.hdr.sgml : 20031106 20031106154418 ACCESSION NUMBER: 0001169232-03-006402 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLAYBOY ENTERPRISES INC CENTRAL INDEX KEY: 0001072341 STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721] IRS NUMBER: 364249478 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14790 FILM NUMBER: 03982327 BUSINESS ADDRESS: STREET 1: 680 NORTH LAKE SHORE DRIVE CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3127518000 MAIL ADDRESS: STREET 1: 680 NORTH LAKE SHORE DR CITY: CHICAGO STATE: IL ZIP: 60611 FORMER COMPANY: FORMER CONFORMED NAME: NEW PLAYBOY INC DATE OF NAME CHANGE: 19981020 10-Q 1 d57042_10-q.txt QUARTERLY REPORT 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, 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 October 31, 2003, there were 4,864,102 shares of Class A common stock, par value $0.01 per share, and 22,577,809 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, 2003 and 2002 (Unaudited) 3 Condensed Consolidated Statements of Operations and Comprehensive Loss for the Nine Months Ended September 30, 2003 and 2002 (Unaudited) 4 Condensed Consolidated Balance Sheets at September 30, 2003 (Unaudited) and December 31, 2002 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 (Unaudited) 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 Item 4. Controls and Procedures 21 PART II OTHER INFORMATION Item 1. Legal Proceedings 21 Item 6. Exhibits and Reports on Form 8-K 22 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) 2003 2002 - -------------------------------------------------------------------------------- Net revenues $ 74,448 $ 67,372 - -------------------------------------------------------------------------------- Costs and expenses Cost of sales (54,304) (48,305) Selling and administrative expenses (14,483) (14,879) - -------------------------------------------------------------------------------- Total costs and expenses (68,787) (63,184) - -------------------------------------------------------------------------------- Operating income 5,661 4,188 - -------------------------------------------------------------------------------- Nonoperating income (expense) Investment income 95 22 Interest expense (4,254) (3,500) Amortization of deferred financing fees (375) (250) Minority interest (345) (437) Other, net (242) (57) - -------------------------------------------------------------------------------- Total nonoperating expense (5,121) (4,222) - -------------------------------------------------------------------------------- Income (loss) before income taxes 540 (34) Income tax expense (1,150) (605) - -------------------------------------------------------------------------------- Net loss (610) (639) - -------------------------------------------------------------------------------- Other comprehensive income (loss) Unrealized gain (loss) on marketable securities 153 (499) Unrealized gain on derivatives 20 198 Foreign currency translation adjustments 82 -- - -------------------------------------------------------------------------------- Total other comprehensive income (loss) 255 (301) - -------------------------------------------------------------------------------- Comprehensive loss $ (355) $ (940) ================================================================================ Net loss $ (610) $ (639) Dividend requirements of preferred stock (334) -- - -------------------------------------------------------------------------------- Net loss applicable to common shareholders $ (944) $ (639) ================================================================================ Basic and diluted weighted average number of common shares outstanding 27,437 26,036 ================================================================================ Basic and diluted earnings per common share $ (0.03) $ (0.01) ================================================================================ 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) 2003 2002 - -------------------------------------------------------------------------------- Net revenues $ 224,700 $ 204,085 - -------------------------------------------------------------------------------- Costs and expenses Cost of sales (162,834) (152,612) Selling and administrative expenses (41,237) (42,868) - -------------------------------------------------------------------------------- Total costs and expenses (204,071) (195,480) - -------------------------------------------------------------------------------- Operating income 20,629 8,605 - -------------------------------------------------------------------------------- Nonoperating income (expense) Investment income 264 83 Interest expense (12,032) (11,547) Amortization of deferred financing fees (1,022) (729) Minority interest (1,309) (1,279) Debt extinguishment expenses (3,264) -- Other, net (664) (421) - -------------------------------------------------------------------------------- Total nonoperating expense (18,027) (13,893) - -------------------------------------------------------------------------------- Income (loss) before income taxes 2,602 (5,288) Income tax expense (3,485) (7,802) - -------------------------------------------------------------------------------- Net loss (883) (13,090) - -------------------------------------------------------------------------------- Other comprehensive income (loss) Unrealized gain (loss) on marketable securities 415 (696) Unrealized gain on derivatives 619 191 Foreign currency translation adjustments (156) -- - -------------------------------------------------------------------------------- Total other comprehensive income (loss) 878 (505) - -------------------------------------------------------------------------------- Comprehensive loss $ (5) $ (13,595) ================================================================================ Net loss $ (883) $ (13,090) Dividend requirements of preferred stock (557) -- - -------------------------------------------------------------------------------- Net loss applicable to common shareholders $ (1,440) $ (13,090) ================================================================================ Basic and diluted weighted average number of common shares outstanding 26,881 25,444 ================================================================================ Basic and diluted earnings per common share $ (0.05) $ (0.51) ================================================================================ 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, 2003 2002 - --------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 25,787 $ 4,118 Marketable securities 3,122 2,677 Receivables, net of allowance for doubtful accounts of $4,191 and $5,124, respectively 40,863 42,211 Receivables from related parties 1,420 1,542 Inventories, net 12,859 10,498 Deferred subscription acquisition costs 12,223 12,038 Other current assets 7,805 11,296 - --------------------------------------------------------------------------------------------------- Total current assets 104,079 84,380 - --------------------------------------------------------------------------------------------------- Property and equipment, net 12,636 11,716 Programming costs, net 57,244 52,347 Goodwill 111,893 111,893 Trademarks 57,495 55,219 Distribution agreements, net of accumulated amortization of $764 and $6,598, respectively 32,376 34,284 Other noncurrent assets 23,696 19,882 - --------------------------------------------------------------------------------------------------- Total assets $ 399,419 $ 369,721 =================================================================================================== Liabilities Financing obligations $ -- $ 6,402 Financing obligations to related parties -- 17,235 Acquisition liabilities 12,857 13,427 Accounts payable 17,015 24,596 Accrued salaries, wages and employee benefits 7,204 10,419 Deferred revenues 52,617 52,633 Other liabilities and accrued expenses 16,357 17,648 - --------------------------------------------------------------------------------------------------- Total current liabilities 106,050 142,360 - --------------------------------------------------------------------------------------------------- Financing obligations 115,000 58,865 Financing obligations to related parties -- 10,000 Acquisition liabilities 28,114 39,685 Net deferred tax liabilities 13,482 12,375 Other noncurrent liabilities 11,945 8,904 - --------------------------------------------------------------------------------------------------- Total liabilities 274,591 272,189 - --------------------------------------------------------------------------------------------------- Minority interest 10,730 9,717 Shareholders' equity Preferred stock, $10,000 par value - 10,000,000 shares authorized; 1,674 issued 17,293 -- 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; 22,575,714 and 21,422,321 issued, respectively 226 214 Capital in excess of par value 152,918 146,091 Accumulated deficit (55,500) (54,060) Unearned compensation - restricted stock -- (2,713) Accumulated other comprehensive loss (888) (1,766) - --------------------------------------------------------------------------------------------------- Total shareholders' equity 114,098 87,815 - --------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 399,419 $ 369,721 ===================================================================================================
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)
2003 2002 - ---------------------------------------------------------------------------------------- Cash flows from operating activities Net loss $ (883) $(13,090) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation of property and equipment 2,962 3,107 Amortization of intangible assets 4,240 5,435 Amortization of investments in entertainment programming 29,216 29,095 Amortization of deferred financing fees 1,022 729 Debt extinguishment expenses 3,264 -- Deferred income taxes 222 6,736 Net change in operating assets and liabilities (6,143) (3,612) Investments in entertainment programming (34,461) (31,815) Other, net 1,074 272 - ---------------------------------------------------------------------------------------- Net cash provided by (used for) operating activities 513 (3,143) - ---------------------------------------------------------------------------------------- Cash flows from investing activities Proceeds from disposals 116 1,118 Additions to property and equipment (4,280) (1,625) Other, net 105 (328) - ---------------------------------------------------------------------------------------- Net cash used for investing activities (4,059) (835) - ---------------------------------------------------------------------------------------- Cash flows from financing activities Proceeds from financing obligations 115,000 17,235 Repayment of financing obligations (65,767) (17,731) Payment of debt extinguishment expenses (356) -- Payment of acquisition liabilities (14,892) -- Payment of deferred financing fees (9,023) (348) Other, net 253 212 - ---------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities 25,215 (632) - ---------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 21,669 (4,610) Cash and cash equivalents at beginning of period 4,118 4,610 - ---------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 25,787 $ -- ========================================================================================
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 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 Annual Report on Form 10-K 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. Approximately $3.1 million of the total $5.7 million of restructuring costs was paid by September 30, 2003, with most of the remainder to be paid in 2003 and 2004 and 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 employees from the Online Group accounting for more than half of the workforce reduction. 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 excess space in our Chicago and New York offices. Of the total $4.6 million of costs related to this restructuring plan, approximately $3.8 million was paid by September 30, 2003, with most of the remainder to be paid in 2003 and payments continuing through 2007. (C) EARNINGS PER COMMON SHARE The following table represents the approximate number of potential shares of our Class B common stock, or Class B stock, which were not included in the computation of diluted earnings per common share, or EPS, as the inclusion of these shares would have been antidilutive (in thousands): (Unaudited) (Unaudited) Quarters Ended Nine Months Ended September 30, September 30, ---------------- ----------------- 2003 2002 2003 2002 - -------------------------------------------------------------------------------- Stock options 2,875 2,745 3,155 2,660 Convertible preferred stock 1,535 -- 1,535 -- Restricted stock awards -- 250 -- 255 - -------------------------------------------------------------------------------- Total 4,410 2,995 4,690 2,915 ================================================================================ As a result, the weighted average number of basic and diluted common shares outstanding for the quarters and nine months ended September 30, 2003 and 2002 were equivalent. 7 (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) Sept. 30, Dec. 31, 2003 2002 - -------------------------------------------------------------------------------- Paper $ 3,173 $ 2,470 Editorial and other prepublication costs 7,231 5,992 Merchandise finished goods 2,455 2,036 - -------------------------------------------------------------------------------- Total inventories, net $12,859 $10,498 ================================================================================ (E) MINORITY INTEREST Our Condensed Consolidated Balance Sheets reflected "Minority interest" of $10.7 million and $9.7 million at September 30, 2003 and December 31, 2002, respectively. These amounts represented a series of preferred stock of Playboy.com, Inc., or Playboy.com. The amount at March 31, 2003 also included two series of PEI Holdings, Inc., or Holdings, preferred stock, which were issued in March 2003. In connection with a sale of 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 Series A preferred stock of Holdings, which we refer to as the Holdings Series A Preferred Stock, plus accumulated dividends for 1,122,209 shares of Playboy Class B stock and exchanged the Series B preferred stock of Holdings, which we refer to as 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. The Playboy Preferred Stock accrues dividends at a rate of 8.00% per annum which are paid semi-annually. (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 verdict, 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 No., or Statement, 5, Accounting for Contingencies, no liability has been accrued. 8 (G) STOCK-BASED COMPENSATION The following pro forma information presents our net 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) (Unaudited) Quarters Ended Nine Months Ended September 30, September 30, ------------------- -------------------- 2003 2002 2003 2002 - -------------------------------------------------------------------------------- Net loss As reported $ (610) $ (639) $ (883) $(13,090) Pro forma (1) (1,321) (1,613) (2,311) (15,465) Basic and diluted EPS As reported (0.03) (0.01) (0.05) (0.51) Pro forma (1) $ (0.06) $ (0.06) $ (0.11) $ (0.61) - -------------------------------------------------------------------------------- (1) Amounts for the current year nine-month period reflect the cancellation of a significant number of stock options. (H) SEGMENT INFORMATION The following table represents financial information by reportable segment (in thousands):
(Unaudited) (Unaudited) Quarters Ended Nine Months Ended September 30, September 30, ----------------------- ------------------------- 2003 2002 2003 2002 - ---------------------------------------------------------------------------------------------------- Net revenues Entertainment $ 33,598 $ 28,415 $ 100,559 $ 89,793 Publishing 28,444 29,033 83,882 82,679 Online 8,981 7,223 26,532 21,330 Licensing 3,425 2,701 13,727 10,283 - ---------------------------------------------------------------------------------------------------- Total $ 74,448 $ 67,372 $ 224,700 $ 204,085 ==================================================================================================== Income (loss) before income taxes Entertainment $ 6,773 $ 7,336 $ 21,251 $ 24,432 Publishing 980 1,929 2,889 588 Online 474 (2,186) 898 (8,632) Licensing 1,775 1,171 6,689 3,476 Corporate Administration and Promotion (4,341) (4,062) (11,098) (11,259) Investment income 95 22 264 83 Interest expense (4,254) (3,500) (12,032) (11,547) Amortization of deferred financing fees (375) (250) (1,022) (729) Minority interest (345) (437) (1,309) (1,279) Debt extinguishment expenses -- -- (3,264) -- Other, net (242) (57) (664) (421) - ---------------------------------------------------------------------------------------------------- Total $ 540 $ (34) $ 2,602 $ (5,288) ====================================================================================================
(Unaudited) Sept. 30, Dec. 31, 2003 2002 - -------------------------------------------------------------------------------- Identifiable assets Entertainment $266,117 $263,416 Publishing 41,241 43,861 Online 4,770 4,047 Licensing 5,320 4,726 Catalog -- 36 Corporate Administration and Promotion (1) 81,971 53,635 - -------------------------------------------------------------------------------- Total (1) $399,419 $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. 9 (I) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS On March 11, 2003, Holdings issued in a private offering $115.0 million of 11.00% senior secured notes due in 2010, which we refer to as the Old Notes. On September 17, 2003, the Old Notes were exchanged for new 11.00% senior secured notes due in 2010, which we refer to as the New Notes. The form and terms of the New Notes are identical in all material respects (including principal amount, interest rate, maturity, ranking and covenant restrictions) to the form and terms of the Old Notes, except that the New Notes (a) have been registered under the Securities Act of 1933, as amended, or the Securities Act, (b) do not bear restrictive legends restricting their transfer under the Securities Act, (c) are not entitled to the registration rights that apply to the Old Notes and (d) do not contain provisions relating to liquidated damages in connection with the Old Notes under circumstances related to the timing of the exchange offer. The payment obligations under the New 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 and its subsidiaries, which are majority-owned subsidiaries. The following supplemental Condensed Consolidating Statements of Operations for the quarters and nine months ended September 30, 2003 and 2002, the Condensed Consolidating Balance Sheets at September 30, 2003 and December 31, 2002 and the Condensed Consolidating Statements of Cash Flows for the nine months ended September 30, 2003 and 2002, present financial information for (a) us (carrying our investment in Holdings under the equity method), (b) Holdings, the issuer of the New 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. 10 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (In thousands)
Quarter Ended September 30, 2003 (Unaudited) --------------------------------------------------------------------------------------- Playboy Non- Playboy Enterprises, Holdings Guarantor Guarantor Enterprises, Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc. - ----------------------------------------------------------------------------------------------------------------------------------- Net revenues $ -- $ -- $ 61,190 $ 17,589 $(4,331) $ 74,448 - ----------------------------------------------------------------------------------------------------------------------------------- Costs and expenses Cost of sales -- -- (45,211) (13,424) 4,331 (54,304) Selling and administrative expenses -- -- (11,721) (2,762) -- (14,483) - ----------------------------------------------------------------------------------------------------------------------------------- Total costs and expenses -- -- (56,932) (16,186) 4,331 (68,787) - ----------------------------------------------------------------------------------------------------------------------------------- Operating income -- -- 4,258 1,403 -- 5,661 - ----------------------------------------------------------------------------------------------------------------------------------- Nonoperating income (expense) Investment income -- -- 120 2 (27) 95 Interest expense -- (3,174) (1,080) (27) 27 (4,254) Amortization of deferred financing fees -- (375) -- -- -- (375) Minority interest -- -- (345) -- -- (345) Equity income (loss) from subsidiaries (610) 3,055 1,003 -- (3,448) -- Other, net -- (116) (86) (40) -- (242) - ----------------------------------------------------------------------------------------------------------------------------------- Total nonoperating expense (610) (610) (388) (65) (3,448) (5,121) - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (610) (610) 3,870 1,338 (3,448) 540 Income tax expense -- -- (815) (335) -- (1,150) - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $(610) $ (610) $ 3,055 $ 1,003 $(3,448) $ (610) =================================================================================================================================== Quarter Ended September 30, 2002 (Unaudited) --------------------------------------------------------------------------------------- Playboy Non- Playboy Enterprises, Holdings Guarantor Guarantor Enterprises, Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc. - ----------------------------------------------------------------------------------------------------------------------------------- Net revenues $ -- $ -- $ 60,010 $ 7,397 $ (35) $ 67,372 - ----------------------------------------------------------------------------------------------------------------------------------- Costs and expenses Cost of sales -- -- (41,704) (6,636) 35 (48,305) Selling and administrative expenses -- -- (11,926) (2,953) -- (14,879) - ----------------------------------------------------------------------------------------------------------------------------------- Total costs and expenses -- -- (53,630) (9,589) 35 (63,184) - ----------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) -- -- 6,380 (2,192) -- 4,188 - ----------------------------------------------------------------------------------------------------------------------------------- Nonoperating income (expense) Investment income -- -- 13 9 -- 22 Interest expense -- (1,507) (1,391) (602) -- (3,500) Amortization of deferred financing fees -- (235) -- (15) -- (250) Minority interest -- -- (437) -- -- (437) Equity income (loss) from subsidiaries (639) 1,134 (2,842) -- 2,347 -- Other, net -- (31) (26) -- -- (57) - ----------------------------------------------------------------------------------------------------------------------------------- Total nonoperating expense (639) (639) (4,683) (608) 2,347 (4,222) - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (639) (639) 1,697 (2,800) 2,347 (34) Income tax expense -- -- (563) (42) -- (605) - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $(639) $ (639) $ 1,134 $ (2,842) $ 2,347 $ (639) ===================================================================================================================================
11 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (In thousands)
Nine Months Ended September 30, 2003 (Unaudited) --------------------------------------------------------------------------------------- Playboy Non- Playboy Enterprises, Holdings Guarantor Guarantor Enterprises, Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc. - ---------------------------------------------------------------------------------------------------------------------------------- Net revenues $ -- $ -- $ 184,424 $ 52,805 $(12,529) $ 224,700 - ---------------------------------------------------------------------------------------------------------------------------------- Costs and expenses Cost of sales -- -- (134,563) (40,800) 12,529 (162,834) Selling and administrative expenses -- -- (33,112) (8,125) -- (41,237) - ---------------------------------------------------------------------------------------------------------------------------------- Total costs and expenses -- -- (167,675) (48,925) 12,529 (204,071) - ---------------------------------------------------------------------------------------------------------------------------------- Operating income -- -- 16,749 3,880 -- 20,629 - ---------------------------------------------------------------------------------------------------------------------------------- Nonoperating income (expense) Investment income -- -- 318 36 (90) 264 Interest expense -- (8,119) (3,476) (527) 90 (12,032) Amortization of deferred financing fees -- (998) -- (24) -- (1,022) Minority interest (297) -- (1,012) -- -- (1,309) Debt extinguishment expenses -- (3,061) -- (203) -- (3,264) Equity income (loss) from subsidiaries (586) 11,843 1,783 -- (13,040) -- Other, net -- (251) (294) (119) -- (664) - ---------------------------------------------------------------------------------------------------------------------------------- Total nonoperating expense (883) (586) (2,681) (837) (13,040) (18,027) - ---------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (883) (586) 14,068 3,043 (13,040) 2,602 Income tax expense -- -- (2,225) (1,260) -- (3,485) - ---------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (883) $ (586) $ 11,843 $ 1,783 $(13,040) $ (883) ================================================================================================================================== Nine Months Ended September 30, 2002 (Unaudited) --------------------------------------------------------------------------------------- Playboy Non- Playboy Enterprises, Holdings Guarantor Guarantor Enterprises, Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc. - ---------------------------------------------------------------------------------------------------------------------------------- Net revenues $ -- $ -- $ 182,164 $ 22,051 $ (130) $ 204,085 - ---------------------------------------------------------------------------------------------------------------------------------- Costs and expenses Cost of sales -- -- (130,653) (22,089) 130 (152,612) Selling and administrative expenses -- -- (34,310) (8,558) -- (42,868) - ---------------------------------------------------------------------------------------------------------------------------------- Total costs and expenses -- -- (164,963) (30,647) 130 (195,480) - ---------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) -- -- 17,201 (8,596) -- 8,605 - ---------------------------------------------------------------------------------------------------------------------------------- Nonoperating income (expense) Investment income -- -- 55 28 -- 83 Interest expense -- (4,520) (5,305) (1,722) -- (11,547) Amortization of deferred financing fees -- (698) -- (31) -- (729) Minority interest -- -- (1,279) -- -- (1,279) Equity loss from subsidiaries (13,090) (7,841) (10,440) -- 31,371 -- Other, net -- (31) (390) -- -- (421) - ---------------------------------------------------------------------------------------------------------------------------------- Total nonoperating expense (13,090) (13,090) (17,359) (1,725) 31,371 (13,893) - ---------------------------------------------------------------------------------------------------------------------------------- Loss before income taxes (13,090) (13,090) (158) (10,321) 31,371 (5,288) Income tax expense -- -- (7,683) (119) -- (7,802) - ---------------------------------------------------------------------------------------------------------------------------------- Net loss $(13,090) $(13,090) $ (7,841) $(10,440) $ 31,371 $ (13,090) ==================================================================================================================================
12 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET September 30, 2003 (Unaudited) (In thousands)
Playboy Non- Playboy Enterprises, Holdings Guarantor Guarantor Enterprises, Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc. - ----------------------------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ -- $ -- $ 22,507 $ 3,280 $ -- $ 25,787 Marketable securities -- -- 3,122 -- -- 3,122 Receivables, net of allowance for doubtful accounts -- -- 33,492 7,371 -- 40,863 Receivables from related parties -- -- (7,277) 8,697 -- 1,420 Inventories, net -- -- 11,249 1,610 -- 12,859 Deferred subscription acquisition costs -- -- 12,223 -- -- 12,223 Other current assets -- -- 5,785 2,020 -- 7,805 - ----------------------------------------------------------------------------------------------------------------------------------- Total current assets -- -- 81,101 22,978 -- 104,079 - ----------------------------------------------------------------------------------------------------------------------------------- Receivables from affiliates -- 107,349 50,585 -- (157,934) -- Property and equipment, net -- -- 11,275 1,361 -- 12,636 Programming costs, net -- -- 56,327 917 -- 57,244 Goodwill -- -- 111,370 523 -- 111,893 Trademarks -- -- 57,495 -- -- 57,495 Distribution agreements, net of accumulated amortization -- -- 32,376 -- -- 32,376 Investment in subsidiaries 114,098 114,098 (45,994) -- (182,202) -- Other noncurrent assets -- 8,323 15,337 36 -- 23,696 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $114,098 $229,770 $ 369,872 $ 25,815 $(340,136) $399,419 =================================================================================================================================== Liabilities Acquisition liabilities $ -- $ -- $ 12,387 $ 470 $ -- $ 12,857 Accounts payable -- 110 12,064 4,841 -- 17,015 Accrued salaries, wages and employee benefits -- -- 7,056 148 -- 7,204 Deferred revenues -- -- 46,654 5,963 -- 52,617 Other liabilities and accrued expenses -- 562 14,322 1,473 -- 16,357 - ----------------------------------------------------------------------------------------------------------------------------------- Total current liabilities -- 672 92,483 12,895 -- 106,050 - ----------------------------------------------------------------------------------------------------------------------------------- Financing obligations -- 115,000 -- -- -- 115,000 Financing obligations to affiliates -- -- 107,349 50,585 (157,934) -- Acquisition liabilities -- -- 21,107 7,007 -- 28,114 Net deferred tax liabilities -- -- 13,482 -- -- 13,482 Other noncurrent liabilities -- -- 10,623 1,322 -- 11,945 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities -- 115,672 245,044 71,809 (157,934) 274,591 - ----------------------------------------------------------------------------------------------------------------------------------- Minority interest -- -- 10,730 -- -- 10,730 Shareholders' equity 114,098 114,098 114,098 (45,994) (182,202) 114,098 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $114,098 $229,770 $ 369,872 $ 25,815 $(340,136) $399,419 ===================================================================================================================================
13 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET December 31, 2002 (Unaudited) (In thousands)
Playboy 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 interest -- -- 9,717 -- -- 9,717 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 ===================================================================================================================================
14 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (In thousands)
Nine Months Ended September 30, 2003 (Unaudited) ------------------------------------------------------------------------------------------- Playboy 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 $ (186) $ (8,398) $ 5,352 $ 3,745 $ -- $ 513 - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities Proceeds from disposals -- -- 116 -- -- 116 Additions to property and equipment -- -- (3,537) (743) -- (4,280) Other, net -- -- 102 3 -- 105 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities -- -- (3,319) (740) -- (4,059) - ----------------------------------------------------------------------------------------------------------------------------------- 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 -- (356) -- -- -- (356) Payment of acquisition liabilities -- -- (13,145) (1,747) -- (14,892) Payment of deferred financing fees -- (9,023) -- -- -- (9,023) Other, net 253 -- -- -- -- 253 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities 253 40,354 (13,145) (2,247) -- 25,215 - ----------------------------------------------------------------------------------------------------------------------------------- Net receipts from (payments to) subsidiaries (67) (31,956) 35,527 (3,504) -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents -- -- 24,415 (2,746) -- 21,669 Cash and cash equivalents at beginning of period -- -- (1,908) 6,026 -- 4,118 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ -- $ -- $ 22,507 $ 3,280 $ -- $ 25,787 =================================================================================================================================== Nine Months Ended September 30, 2002 (Unaudited) ------------------------------------------------------------------------------------------- Playboy 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 $ -- $ (4,667) $ 11,478 $ (9,954) $ -- $ (3,143) - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities Proceeds from disposals -- -- 1,085 33 -- 1,118 Additions to property and equipment -- -- (1,362) (263) -- (1,625) Other, net -- -- (328) -- -- (328) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities -- -- (605) (230) -- (835) - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities Proceeds from financing obligations -- -- -- 17,235 -- 17,235 Repayment of financing obligations -- (7,731) -- (10,000) -- (17,731) Payment of deferred financing fees -- (136) -- (212) -- (348) Other, net 212 -- -- -- -- 212 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities 212 (7,867) -- 7,023 -- (632) - ----------------------------------------------------------------------------------------------------------------------------------- Net receipts from (payments to) subsidiaries (212) 12,534 (13,387) 1,065 -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents -- -- (2,514) (2,096) -- (4,610) Cash and cash equivalents at beginning of period -- -- 456 4,154 -- 4,610 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ -- $ -- $ (2,058) $ 2,058 $ -- $ -- ===================================================================================================================================
15 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 Nine Months Ended September 30, September 30, ---------------------- ---------------------- 2003 2002 2003 2002 - ------------------------------------------------------------------------------------------------- Net revenues Entertainment Domestic TV networks $ 23.9 $ 23.0 $ 71.2 $ 71.2 International TV 8.2 2.9 25.1 9.8 Worldwide DVD/home video 1.4 2.4 3.9 8.6 Other 0.1 0.1 0.4 0.2 - ------------------------------------------------------------------------------------------------- Total Entertainment 33.6 28.4 100.6 89.8 - ------------------------------------------------------------------------------------------------- Publishing Playboy magazine 23.0 23.8 70.1 70.0 Other domestic publishing 4.0 3.8 9.7 8.8 International publishing 1.5 1.5 4.1 3.9 - ------------------------------------------------------------------------------------------------- Total Publishing 28.5 29.1 83.9 82.7 - ------------------------------------------------------------------------------------------------- Online Subscriptions 4.7 3.0 13.0 7.7 E-commerce 3.5 2.8 10.7 9.5 Other 0.7 1.4 2.8 4.1 - ------------------------------------------------------------------------------------------------- Total Online 8.9 7.2 26.5 21.3 - ------------------------------------------------------------------------------------------------- Licensing 3.4 2.7 13.7 10.3 - ------------------------------------------------------------------------------------------------- Total net revenues $ 74.4 $ 67.4 $ 224.7 $ 204.1 ================================================================================================= Net loss Entertainment Before programming expense $ 16.4 $ 16.7 $ 50.4 $ 53.5 Programming expense (9.7) (9.4) (29.2) (29.1) - ------------------------------------------------------------------------------------------------- Total Entertainment 6.7 7.3 21.2 24.4 - ------------------------------------------------------------------------------------------------- Publishing 1.0 1.9 2.9 0.6 - ------------------------------------------------------------------------------------------------- Online 0.5 (2.1) 0.9 (8.6) - ------------------------------------------------------------------------------------------------- Licensing 1.8 1.2 6.7 3.5 - ------------------------------------------------------------------------------------------------- Corporate Administration and Promotion (4.4) (4.1) (11.1) (11.3) - ------------------------------------------------------------------------------------------------- Operating income 5.6 4.2 20.6 8.6 - ------------------------------------------------------------------------------------------------- Nonoperating income (expense) Investment income 0.1 -- 0.3 0.1 Interest expense (4.2) (3.5) (12.0) (11.6) Amortization of deferred financing fees (0.3) (0.2) (1.0) (0.7) Minority interest (0.3) (0.5) (1.3) (1.3) Debt extinguishment expenses -- -- (3.3) -- Other, net (0.3) -- (0.7) (0.4) - ------------------------------------------------------------------------------------------------- Total nonoperating expense (5.0) (4.2) (18.0) (13.9) - ------------------------------------------------------------------------------------------------- Income (loss) before income taxes 0.6 -- 2.6 (5.3) Income tax expense (1.2) (0.6) (3.5) (7.8) - ------------------------------------------------------------------------------------------------- Net loss $ (0.6) $ (0.6) $ (0.9) $ (13.1) ================================================================================================= Basic and diluted EPS $ (0.03) $ (0.01) $ (0.05) $ (0.51) =================================================================================================
Our revenues increased approximately 10% for both the quarter and nine-month period primarily due to higher online subscription revenues and international licensing royalties. In addition, as previously disclosed, our increased ownership in Playboy TV International, LLC, or PTVI, at the end of 2002, resulted in favorable revenue comparisons. Operating income improved significantly for both the quarter and nine-month period, mostly due to the better online subscription revenues and licensing royalties described above, both of which are high-margin businesses. The positive performance in the Online and Licensing Groups was partially offset by expected lower revenues and operating income from our worldwide DVD/home video business. Operating income from the Publishing Group was lower in the current year quarter, but improved for the nine-month period. 16 The net loss for the current year nine-month period included $3.3 million of debt extinguishment expenses in connection with financing obligations which were repaid upon completion of our debt offering in the first quarter. The prior 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. 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, along with online subscription revenues, 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 increased $0.9 million, or 4%, for the quarter resulting in flat revenues for the nine-month comparison. We believe revenues continue to be impacted by theft of service which we also believe is an area of focus for the operators. We believe that revenues have also been impacted by customer resistance to pricing for basic and premium services and the resulting dissatisfaction with the overall value of digital service. In general, our networks are digital services and we are therefore negatively affected by customer churn in digital cable. The quarter and nine-month period both reflected higher revenues related to Playboy TV en Espanol. Profit contribution for the quarter and nine-month period increased slightly. Both periods were impacted by lower amortization of intangibles acquired in the Califa acquisition as their contractual lives are expiring and higher distribution costs and overhead related to our new production facility. For both the quarter and nine-month period, profit contribution from our international TV business increased on revenue increases of $5.3 million and $15.3 million, respectively. In the current year we began consolidating our international TV operations as a result of the December 2002 restructuring of the ownership of our international TV joint ventures. The prior year quarter and nine-month period included $2.9 million and $9.8 million, respectively, in licensing fees from the PTVI joint venture, at which time we owned a minority interest. For both the quarter and nine-month period, profit contribution from our worldwide DVD/home video business decreased on revenue decreases of $1.0 million, or 41%, and $4.7 million, or 54%, respectively. Both the quarter and nine-month period reflected lower domestic sales of $1.0 million and $3.3 million, respectively, due to fewer titles released in the current year periods, reduced distribution outlets and the absence of last year's continuity series. In addition, the nine-month comparison was impacted by a large domestic sale of backlist titles in the prior year period and lower international revenues of $1.4 million primarily as a result of revenues from a large Korean contract being recorded in the prior year period. The group's administrative expenses increased for both the quarter and nine-month period mainly due to higher legal expenses in the current year periods. As projected at the start of the year, Entertainment Group profitability for the full year 2003 is expected to be below 2002 due to the continuing lower worldwide DVD/home video revenues, flat domestic TV revenues, higher legal costs and overhead related to our new production facility. 17 PUBLISHING GROUP Playboy magazine revenues decreased $0.8 million, or 3%, for the quarter as higher newsstand revenues were more than offset by $1.2 million lower advertising revenues as a result of the previously announced fewer ad pages. For the nine-month period, Playboy magazine revenues increased $0.1 million as $2.3 million higher newsstand revenues, mainly due to several strong-selling issues which also carried higher cover prices, were mostly offset by $1.8 million lower ad revenues. The ad revenues were lower as a result of fewer ad pages, partially offset by higher average net revenue per page. Ad sales for the 2003 fourth quarter magazine issues are closed, and we expect to report 64% higher ad revenues and 60% more ad pages compared to the 2002 fourth quarter. We expect that all three fourth quarter issues will be up in pages year-over-year, ending with Playboy's 50th anniversary issue. This is expected to result in 11% and 8% increases in ad revenues and pages, respectively, for 2003 compared to 2002. Revenues from our other domestic publishing businesses increased $0.2 million, or 6%, for the quarter and $0.9 million, or 10%, for the nine-month period primarily due to a price increase for special editions, partially offset by fewer copies sold. The group's segment performance decreased $0.9 million for the quarter and increased $2.3 million for the nine-month period. The quarter and nine-month period reflected lower manufacturing costs of $0.8 million and $2.5 million, respectively, driven by lower print runs, the fewer ad pages and lower paper prices, combined with the higher Playboy magazine newsstand revenues. The impact of these factors was more than offset for the quarter and partially offset for the nine-month period by the lower Playboy magazine ad revenues combined with higher editorial costs of $1.6 million and $1.4 million, respectively. The higher editorial costs were due in part to celebrity expenses, which drove newsstand sales, and transitional costs associated with moving editorial staff from Chicago to New York. We expect to incur additional transitional costs in the fourth quarter. ONLINE GROUP The Online Group's revenues increased $1.7 million, or 24%, for the quarter and $5.2 million, or 24%, for the nine-month period primarily due to significant increases in subscription revenues of $1.7 million and $5.3 million, respectively, due to the launch of several higher-priced subscription services that were not available in the prior year combined with the increased price and number of members of Playboy Cyber Club. Increased circulation helped improve e-commerce revenues by $0.7 million for the quarter and $1.2 million for the nine-month period. These revenue increases were offset in part by lower other revenues of $0.7 million and $1.3 million for the quarter and nine-month period, respectively, in large part due to lower advertising revenues. The group reported segment income of $0.5 million and $0.9 million in the current year quarter and nine-month period, respectively, compared to losses of $2.1 million and $8.6 million in the comparable prior year periods. These improvements were attributable to the higher revenues combined with a lower cost structure. The current and prior year quarters and nine-month periods included $1.9 million and $5.6 million, respectively, of trademark and administrative fees paid to the parent company. LICENSING GROUP For the quarter and nine-month period, segment income from our Licensing Group increased $0.6 million and $3.2 million, respectively, on revenue increases of $0.7 million, or 27%, and $3.4 million, or 33%, respectively. Higher brand licensing royalties from our international products business were mainly responsible for the improved performances in both periods. The sale in the current year of an original painting by Salvador Dali for $1.9 million, partially offset by $0.7 million of income in the prior year from an auction of a small portion of our art and memorabilia collection, also contributed to the nine-month comparison. CORPORATE ADMINISTRATION AND PROMOTION Corporate Administration and Promotion expenses increased $0.3 million, or 7%, for the quarter while expenses for the nine-month period decreased $0.2 million, or 1%. The quarter and nine-month period both reflected our continued focus on cost control measures more than offset by, and partially offset by, respectively, benefit-related expenses. 18 INCOME TAX EXPENSE Our income tax provision consists primarily of foreign income tax related to our international networks and withholding tax on licensing income for which we do not receive a current U.S. income tax benefit. The tax provision also includes noncash deferred federal and state income tax related to the amortization of goodwill and other indefinite-lived intangibles as a result of the adoption of Statement 142, Goodwill and Other Intangible Assets. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2003, we had $25.8 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 by Playboy.com. As discussed below, we and Mr. Hefner agreed to exchange his $27.2 million of promissory notes issued by Playboy.com for cash and our equity securities. Our liquidity requirements are being provided by the cash 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 September 30, 2003, there were no borrowings and $11.1 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 the Old Notes of our subsidiary, Holdings. On September 17, 2003, the Old Notes were exchanged for the New Notes. The form and terms of the New Notes are identical in all material respects (including principal amount, interest rate, maturity, ranking and covenant restrictions) to the form and terms of the Old Notes. The New 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. 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 Holdings Series A Preferred Stock with an aggregate stated value of $10.0 million. 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 Holdings Series B Preferred Stock with an aggregate stated value of $16.7 million. Pursuant to the terms of an exchange agreement between us, Holdings, Playboy.com and Mr. Hefner and certificates of designation governing the Holdings Series A and Series B Preferred Stock, we were required to exchange the Holdings Series A Preferred Stock for shares of Playboy Class B stock and 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. As a result, on May 1, 2003, we filed an amendment to our certificate of incorporation and exchanged the Holdings Series A Preferred Stock plus accumulated dividends 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. The Playboy Preferred Stock accrues dividends at a rate of 8.00% per annum which are paid semi-annually. CASH FLOWS FROM FINANCING ACTIVITIES Net cash provided by financing activities was $25.2 million for the nine-month period principally due to proceeds of $115.0 million related to the private offering of senior secured notes, partially offset by payment of $9.0 million of related financing fees, repayment of former financing obligations of $65.8 million and payment of $14.9 million of acquisition liabilities. 19 FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q 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; (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 we distribute; (6) 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 increased sales and profits and other benefits from acquisitions and the restructuring of our international TV joint ventures; (14) risks associated with the financial condition of Claxson Interactive Group Inc., our Playboy TV-Latin America, LLC joint venture partner; (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 our primarily subscription- and e-commerce-based Internet model. 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. At September 30, 2003, the notes were trading above par for an implied fair value of $126.5 million. 20 CONTROLS AND PROCEDURES (a) Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this quarterly report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act. (b) Internal Control Over Financial Reporting There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 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 verdict, 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. Playboy and Spice filed motions to dismiss the first amended complaint and on April 4, 2003, the California Superior Court granted Playboy's motion to dismiss without leave to amend. The court signed a final judgment dismissing Playboy on May 9, 2003. Logix then moved for a new trial and that motion was denied on July 21, 2003. The plaintiffs have filed a notice of appeal of Playboy's dismissal. When the court dismissed Playboy on April 4, 2003, the court's decision was silent as to Spice's motion to dismiss. Spice then moved for clarification of that order 21 on the grounds that the same statute of limitations theory on which the court dismissed fraud claims against Playboy applied with equal force to certain claims against Spice. On May 19, 2003, the court heard the motion for clarification and on July 21, 2003 issued a final ruling dismissing all claims against Spice except for breach of contract claims. A trial date for the remaining breach of contract claims against Spice has been set for December 10, 2003. Spice and the plaintiffs filed cross-motions for summary judgment or, in the alternative, for summary adjudication, on September 5, 2003. Those motions are set for hearing on November 19, 2003. On September 22, 2003, the plaintiffs filed a petition for writ of mandate, prohibition or other relief which seeks to vacate the trial court's order that dismissed all but the contract claims against Spice. On September 29, 2003, Spice filed a letter brief with the Court of Appeals which preliminarily opposes the writ petition. The writ petition is pending. We intend to vigorously defend against these claims and we believe we have good defenses to them. At this 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, along with counterclaims against Directrix relating to the Sublease Agreement and the Master Services Agreement and seeking damages. On May 15, 2003, we filed an amended answer and counterclaims. On July 30, 2003, Directrix moved to dismiss one of the amended counterclaims, and on October 20, 2003, the Court denied Directrix's motion. Both sides have commenced discovery. We intend to vigorously defend ourselves against Directrix's claims. We believe its 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. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Description -------------- ----------- 10.1 Seventh Amendment to September 20, 2001 Lease dated July 23, 2003 between Kingston Andrita LLC and Playboy Entertainment Group, Inc. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 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 July 25, 2003, we filed a Current Report on Form 8-K, dated July 25, 2003, under Item 7., attaching as exhibits thereto (a) consolidated financial statements of Playboy TV International, LLC and the related independent auditors' report and (b) an independent auditors' consent. On August 6, 2003, we furnished a Current Report on Form 8-K, dated August 6, 2003, under Item 12., attaching our press release announcing our financial results for the second quarter of 2003. On August 13, 2003, we filed a Current Report on Form 8-K, dated August 13, 2003, under Item 7., attaching as an exhibit thereto financial information that was included in our earnings release on August 6, 2003. 22 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 6, 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) 23 EX-10.1 4 d57042_ex10-1.txt AMENDMENT TO LEASE Exhibit 10.1 SEVENTH AMENDMENT TO LEASE This SEVENTH AMENDMENT TO LEASE ("Seventh Amendment") is made and entered into as of the 23rd day of July, 2003, by and between KINGSTON ANDRITA LLC, a Delaware limited liability company ("Landlord"), and PLAYBOY ENTERTAINMENT GROUP, INC., a Delaware corporation ("Tenant"). Recitals A. Tenant and Landlord are parties to that certain Lease, dated September 20, 2001, as amended by that certain First Amendment to Lease (the "First Amendment"), dated May 15, 2002, as further amended by that certain Second Amendment to Lease (the "Second Amendment"), dated July 23, 2002, as further amended by that certain Third Amendment to Lease (the "Third Amendment"), dated October 31, 2002, as further amended by that certain Fourth Amendment to Lease (the "Fourth Amendment"), as further amended by that certain Fifth Amendment to Lease (the "Fifth Amendment"), dated December 31, 2002, and as further amended by that certain Sixth Amendment to Lease (the "Sixth Amendment"), dated January 31, 2003 (as amended, the "Lease"), pursuant to which Landlord lease to Tenant certain premises located at 3030 Andrita Street, Los Angeles, California as more particularly described in the Lease (the "Premises"). B. Tenant has completed the "Audit" provided for in Section 18 of the Second Amendment. C. Landlord has acquired fee title to the Adjacent Property as contemplated by Section 13(a) of the Second Amendment and Section 9 of the Sixth Amendment. D. Landlord and Tenant desire to amend the Lease upon the terms and conditions set forth below. E. All capitalized terms used herein but not specifically defined in this Seventh Amendment shall have the meanings ascribed to such terms in the Lease. NOW, THEREFORE, in consideration of the mutual promises set forth below and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows: 1. Base Rent Increase. As a result of the completion of the Audit, Section 2.2(e)(ii) of the Lease is hereby amended in its entirety to read as follows: "The Base Rent for each Lease Year shall be increased by an amount equal to $83,007.11." The following provisions of the Lease relating to changes in the Base Rent are hereby deleted in their entirety as of the date of this Seventh Amendment: Page 1 (a) The second and third sentences of Section 12 of the Second Amendment; (b) Section 13(b) of the Second Amendment; (c) The clause "except only for any credits for or revised allocations of Landlord's Work as may be revealed by the Audit." At the end of the fourth sentence of Section 6 of the Sixth Amendment; and (d) Section 8 of the Sixth Amendment. 2. Purchased Improvements. Landlord has delivered to Tenant the Bill of Sale for the Purchased Improvements as required by Section 4 of the Sixth Amendment. The Purchased Improvements shall be deemed to be Alterations for all purposes of the Lease and are deemed to be improvements of Tenant completed as of the date of this Seventh Amendment for purposes of the first sentence of Section 12.6 of the Lease. 3. Sound Reduction For Chiller. Section 10 of the Sixth Amendment is hereby deleted in its entirety. Landlord shall have no obligation to Tenant with respect to the Sound Reduction Solution described in Section 10 of the Sixth Amendment and Tenant hereby waives any claim against Landlord with respect thereto. 4. Revised Exhibit A. Exhibit "A" of the Lease is hereby amended by adding the parcel of land described on Schedule 1 to this Seventh Amendment to Exhibit "A" of the Lease. The Adjacent Property described on Section 1 to this Seventh Amendment, as of the date of this Seventh Amendment, is part of the Premises for all purposes of the Lease. 5. Lease in Full Force. Except for the amendment to the Lease provided for in this Seventh Amendment, all other terms, covenants and conditions of the Lease shall remain in full force and effect. 6. Successors and Assigns. This Seventh Amendment shall be binding upon and shall inure to the benefit of Landlord and Tenant and their respective successors and assigns. 7. Guarantor Consent. Guarantor, by executing the consent to this Seventh Amendment set forth below, hereby agrees that the guaranteed obligations covered by the Guaranty include all of the additional payment and other obligations of Tenant set forth in this Seventh Amendment. 8. Counterparts. This Seventh Amendment may be executed in one or more counterparts, each of which shall be deemed an original and all of which, when taken together, shall constitute a single instrument. Page 2 IN WITNESS WHEREOF, this Seventh Amendment is executed on and as of the date first written above. KINGSTON ANDRITA LLC By: /s/ E. Peter Krulewitch ------------------------------ Name: E. Peter Krulewitch Title: President PLAYBOY ENTERTAINMENT GROUP, INC. By: /s/ James L. English ------------------------------ Name: Jim English Title: President THIS SEVENTH AMENDMENT IS CONSENTED TO: PLAYBOY ENTERPRISES, INC., Guarantor By: /s/ Howard Shapiro ------------------------------ Name: Howard Shapiro Title: Executive Vice President Page 3 SCHEDULE 1 LEGAL DESCRIPTION OF ADJACENT PROPERTY THE SOUTHERLY 131.50 FEET OF PARCEL 2, WHICH PARCEL 2 IS DESCRIBED AS FOLLOWS: THAT PORTION OF THE 2296.11 ACRE TRACT, IN THE RANCHO SAN RAFAEL, IN THE CITY OF LOS ANGELES, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY, ALLOTTED TO ANDREW GLASSELL AND ALFRED B. CHAPMAN, BY DECREE OF PARTITION OF CASE NO. 1621. DISTRICT COURT OF SAID COUNTY, DESCRIBED AS FOLLOWS: BEGINNING AT THE INTERSECTION OF THE CENTERLINE OF DREW STREET, 60.00 FEET WIDE, AS SHOWN ON MAP OF TRACT 3122, AS RECORDED IN BOOK 42 PAGE 22 OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY, WITH THE SOUTHWESTERLY LINE OF SAID TRACT; THENCE ALONG THE SOUTHWESTERLY PROLONGATION OF SAID CENTERLINE, SOUTH 50 DEGREES 26' 15" WEST 30.00 FEET TO A POINT IN A LINE THAT IS PARALLEL TO AND 30.00 FEET SOUTHWESTERLY OF THE SOUTHWESTERLY LINE OF SAID TRACT; THENCE ALONG SAID PARALLEL LINE NORTH 39 DEGREES 32' 40" WEST 426.32 FEET TO A POINT OF INTERSECTION WITH THE SOUTHWESTERLY PROLONGATION OF THE CENTERLINE OF CHAPMAN STREET, AS SHOWN ON SAID MAP; THENCE ALONG SAID PROLONGED CENTER LINE, NORTH 47 DEGREES 37' 45" EAST 30.04 FEET TO THE AFORESAID SOUTHWESTERLY LINE OF SAID TRACT; THENCE ALONG SAID SOUTHWESTERLY LINE SOUTH 39 DEGREES 32' 40" EAST 427.78 FEET TO THE POINT OF BEGINNING. Page S-1 EX-31.1 5 d57042_ex31-1.txt CEO CERTIFICATION EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 6, 2003 /s/ Christie Hefner --------------------- Name: Christie Hefner Title: Chairman of the Board, Chief Executive Officer and Director EX-31.2 6 d57042_ex31-2.txt CFO CERTIFICATION EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 6, 2003 /s/ Linda Havard ------------------- Name: Linda G. Havard Title: Executive Vice President, Finance and Operations, and Chief Financial Officer EX-32.1 7 d57042_ex32-1.txt CERTIFICATIONS Exhibit 32.1 CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Playboy Enterprises, Inc. (the "Company") for the quarterly period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Christie Hefner, as Chief Executive Officer of the Company, and Linda G. Havard, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to the best of her knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Christie Hefner - ---------------------- Name: Christie Hefner Title: Chief Executive Officer Date: November 6, 2003 /s/ Linda G. Havard - ---------------------- Name: Linda G. Havard Title: Chief Financial Officer Date: November 6, 2003 This certification accompanies the Report pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss.18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to Playboy Enterprises, Inc. and will be retained by Playboy Enterprises, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----