UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission file number 001-14790
Playboy Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-4249478
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
680 North Lake Shore Drive, Chicago, IL 60611
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 751-8000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
Class A Common Stock, par value $0.01 per share New York Stock Exchange
Pacific Exchange
Class B Common Stock, par value $0.01 per share New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
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 |_|
The aggregate market value of Class A Common Stock held by nonaffiliates
on June 30, 2002 (based upon the closing sale price on the New York Stock
Exchange) was $16,051,006. The aggregate market value of Class B Common Stock
held by nonaffiliates on June 30, 2002 (based upon the closing sale price on the
New York Stock Exchange) was $185,933,607.
At February 28, 2003, there were 4,864,102 shares of Class A Common Stock
and 21,424,706 shares of Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required for Part II. Item 5 and Part III. Items 10-13
of this report is incorporated herein by reference to the Notice of Annual
Meeting of Stockholders and Proxy Statement (to be filed) relating to the Annual
Meeting of Stockholders to be held in May 2003.
PLAYBOY ENTERPRISES, INC.
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 33
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 63
PART III
Item 10. Directors and Executive Officers of the Registrant 63
Item 11. Executive Compensation 63
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 63
Item 13. Certain Relationships and Related Transactions 63
Item 14. Controls and Procedures 63
PART IV
Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K 63
2
PART I
Item 1. Business
Playboy Enterprises, Inc., together with its subsidiaries and
predecessors, will be referred to in this Form 10-K Annual Report by terms such
as "we," "us," "our," "Playboy" and the "Company," unless the context otherwise
requires. We were organized in 1953 to publish Playboy magazine and are now a
worldwide leader in the development and distribution of multi-media
entertainment for adult audiences. The Playboy brand is one of the most widely
recognized and popular brands in the world and is embraced as a symbol of
freedom, style and good times. The strength of our brand drives our
Entertainment, Publishing, Playboy Online and Licensing Businesses Groups. Our
programming is carried by the six largest multiple system operators, or MSOs,
and the two largest satellite direct-to-home, or DTH, providers. Playboy
magazine, celebrating its 49th anniversary, is the best-selling monthly men's
magazine in the world and has a worldwide monthly circulation of 4.4 million
copies. Our online operations consist of a network of websites that have an
established and growing subscriber and revenue base. Our licensing businesses
utilize the Playboy name, the Rabbit Head Design and our other trademarks for
the worldwide manufacture, sale and distribution of a variety of consumer
products.
Our businesses are currently classified into the following four reportable
segments: Entertainment, Publishing, Playboy Online and Licensing Businesses.
Formerly, we operated a fifth segment, Catalog, which we divested in connection
with our sale of the Collectors' Choice Music catalog in 2001 and the Critics'
Choice Video catalog in 2000. Net revenues, loss before income taxes and
cumulative effect of change in accounting principle, depreciation and
amortization and identifiable assets of each reportable segment are set forth in
Note (U) Segment Information of Notes to Consolidated Financial Statements.
Our trademarks and copyrights are critical to the success and potential
growth of all of our businesses. Our trademarks, which are renewable
periodically and which can be renewed indefinitely, include Playboy, the Rabbit
Head Design, Playmate, Spice and Sarah Coventry. We also own numerous domain
names related to our online business.
ENTERTAINMENT GROUP
Our Entertainment Group operations include the production and marketing of
adult television programming for our domestic and international TV networks and
worldwide home video products. On December 24, 2002, we completed the
restructuring of the ownership of our international TV joint ventures with
Claxson Interactive Group Inc. and its affiliates, or Claxson. The restructuring
significantly expanded our ownership of Playboy TV and movie networks outside of
the United States and Canada. See International TV in this section and Note (C)
Restructuring of Ownership of International TV Joint Ventures of Notes to
Consolidated Financial Statements.
Programming
Our Entertainment Group develops, produces and distributes a wide range of
high-quality adult television programming for our domestic and international
television networks and worldwide home video products. Our proprietary
productions have included feature films, magazine format shows, reality-based
and dramatic series, documentaries, live events and celebrity and Playmate
features. We continue to increase the amount and variety of quality programming
by offering new genres. Our programming features stylized eroticism in a variety
of entertaining formats for men and women and does not contain scenes that link
sexuality with violence. Our programming is designed to be adapted easily into a
number of formats, enabling us to spread our relatively fixed programming costs
over multiple product lines. We have produced a number of shows which air on the
domestic Playboy TV network and are also distributed internationally.
Additionally, some episodes have been released as home video titles and/or have
been licensed to other networks, such as HBO and Showtime. Some of our series in
recent years have included Women: Stories of Passion, Passion Cove, Sexy Urban
Legends and 7 Lives Xposed, Playboy TV's first venture into reality-based
television. In 2002, we premiered The Weekend Flash, a provocative news show.
The majority of the programming that airs on our movie networks is licensed from
third parties.
3
We invest in high-quality adult-oriented programming to support our
expanding businesses. We invested $41.7 million, $37.3 million and $33.1 million
in entertainment programming in 2002, 2001 and 2000, respectively. These
amounts, which also include expenditures for licensed programming, resulted in
the production of 243, 232 and 192 hours of original programming, respectively.
At December 31, 2002, our library of primarily exclusive, Playboy branded
original programming totaled over 2,200 hours. Approximately two-thirds of our
$41.7 million in programming spending in 2002 was used to create proprietary
programming for Playboy TV. The remainder was used primarily to acquire
exclusive licenses to air high-quality adult movies in various edit standards on
our movie networks. In 2003, we expect to invest approximately $44 million in
Company-produced and licensed programming, which could vary based on, among
other things, the timing of completing productions.
Our programming is delivered to DTH and cable operators through
communications satellite transponders. We currently have two transponder service
agreements related to our domestic networks, the terms of which currently extend
through 2010 and 2015. We also have two international transponder service
agreements as a result of the December 2002 restructuring of the ownership of
Playboy TV International, LLC, or PTVI, both of which expire in 2004. These
service agreements contain protections typical in the industry against
transponder failure, including access to spare transponders, and conditions
under which our access may be denied. Major limitations on our access to DTH or
cable systems or satellite transponder capacity could materially adversely
affect our operating performance. There have been no instances in which we have
been denied access to transponder service.
In 2002, we moved to a new state-of-the-art studio facility in Los Angeles
where we now have a centralized digital, technical and programming facility for
both the Entertainment and Playboy Online Groups. The new space enables us to
produce more original programs in a more efficient and cost effective operating
environment.
Domestic TV Networks
We currently operate multiple domestic TV networks, which include Playboy
TV, Playboy TV en Espanol and seven Spice branded movie networks. Playboy TV,
which airs a variety of original and proprietary programming as well as adult
movies under exclusive license from leading adult studios, is offered through
the DTH market and on cable on a pay-per-view, or PPV, and monthly subscription
basis. Playboy TV en Espanol is offered on cable on a PPV basis and as part of
EchoStar's Dish Latino subscription package. Our Spice branded networks feature
adult movies under exclusive license from leading adult studios. The Spice and
Spice 2 movie networks are offered on cable on a PPV basis. In 2001, we acquired
The Hot Network and The Hot Zone networks, together with the related television
assets of Califa Entertainment Group, Inc., or Califa. In addition, we acquired
the Vivid TV network, now operated as Spice Platinum, and the related television
assets of V.O.D., Inc., or VODI, a separate entity owned by Califa's principals.
These transactions are referred to collectively as the "Califa acquisition." See
Note (B) Acquisition of Notes to Consolidated Financial Statements. The addition
of these three movie networks into our television networks portfolio enables us
to offer a wider range of adult programming. These three networks are all
offered through the DTH market and on cable on a PPV basis. Additionally, we
recently launched two new movie networks, Spice Hot and Spice Clips. We also
recognize royalty revenues from the license of our programming to other pay
networks.
The following table illustrates certain information regarding approximate
household units and current average retail rates for our networks (in millions,
except retail rates):
Household Units (1) Average Retail Rates
------------------- --------------------
Dec. 31, Dec. 31, Monthly
2002 2001 PPV Subscription
-------------------------------------------------------------------------------------
Playboy TV
DTH 19.2 18.1 $ 8.00 $ 15.10
Cable digital 14.0 10.3 8.40 11.05
Cable analog addressable 5.7 7.8 8.45 10.65
Playboy TV en Espanol (2)
DTH 7.0 -- -- --(3)
Cable digital 2.7 -- 8.60 --
Movie Networks
DTH 38.4 35.3 10.00-11.00 --
Cable digital 36.9 25.3 8.50-10.95 --
Cable analog addressable 10.8 17.0 $ 7.85-9.40 $ --
-------------------------------------------------------------------------------------
4
(1) Each household unit is defined as one household carrying one given network
per carriage platform. A single household can represent multiple household
units if two or more of our networks and/or multiple platforms (i.e.
digital and analog) are available to that household.
(2) We obtained 100% distribution rights of Playboy TV en Espanol in the U.S.
Hispanic market in December 2002 in connection with the restructuring of
the ownership of our international TV joint ventures. Prior to the
restructuring, this network was included in international TV's household
units.
(3) An average retail rate is not available as Playboy TV en Espanol is
offered with various other Spanish-speaking networks as part of EchoStar's
Dish Latino subscription package.
Most of our networks are provided through the DTH market in households
with small dishes receiving a Ku-band medium or high power digital signal, or
DBS, such as those currently offered by DirecTV and EchoStar. Playboy TV is the
only adult service to be available on all four DBS services in the United States
and Canada. It is currently available on DirecTV and EchoStar in the United
States and ExpressVu and Star Choice in Canada. As previously mentioned, Playboy
TV en Espanol is offered as part of EchoStar's Dish Latino subscription package.
The Hot Network, The Hot Zone and Spice Platinum networks are all available on
DirecTV and, in 2001, The Hot Zone network also was launched on EchoStar. Paul
Kagan Associates, Inc., or Kagan, an independent media research firm, projects
an average annual increase of approximately 7% in DBS households through
December 31, 2005. Our revenues reflect our contractual share of the amounts
received by the DTH operators, which are based on both the retail rates set by
the DTH operators and the number of buys and/or subscribers.
Our networks are also available to consumers through cable providers. Most
cable service in the United States is distributed through MSOs and their
affiliated cable systems, or cable affiliates. Once arrangements are made with
an MSO, we are able to negotiate channel space for our networks with the cable
affiliates. Individual cable affiliates determine the retail price of both PPV,
which can be dependent on the length of the block of programming, and monthly
subscription services, which can be dependent on the number of premium services
to which a household subscribes. Our revenues reflect our contractual share of
the amounts received by the cable affiliates, which are based on both the retail
rates set by the cable affiliates and the number of buys and/or subscribers.
PPV programming can be delivered through any number of delivery methods,
including (a) DTH, (b) digital and analog cable television, (c) wireless cable
systems and (d) technologies such as cable modem and the Internet. Growth in the
cable PPV market is expected to result principally from cable system upgrades,
utilizing digital compression and other bandwidth expansion methods that provide
cable operators additional channel capacity. In recent years, cable operators
have been shifting from analog to digital technology in order to upgrade their
cable systems and to counteract competition from DBS operators. Digital cable
television has several advantages over analog cable television, including more
channels, better audio and video quality, advanced set-top boxes that are
addressable, a secure fully scrambled signal, integrated program guides and
advanced ordering technology. Kagan projects average annual increases of
approximately 1% in total cable households and 23% in cable digital households
through December 31, 2005. During this same period, Kagan projects an average
annual decrease of approximately 2% in cable analog addressable households, as
customers move from older analog systems to the digital or DBS platforms.
Additionally, recent technology advances have begun to allow digital
consumers to not only order programs on a PPV basis, but also to choose
video-on-demand, or VOD, which differs from traditional PPV in that it allows
viewers to purchase a specific movie or program for a period of time with VCR
functionality. The basic premise is that consumers have a menu of options to
choose from and can buy a program "on demand" without having to adhere to the
schedule of a programmed network. We believe we are well positioned for this new
phase of technology because of the power of our brand names, our large library
of original programming and our agreements with leading major adult movie
producers for VOD rights. Growth of this technology will be dependent on a
number of factors including, but not limited to, operator investment,
server/bandwidth capacity, availability of a two-way communication path,
programmer rights issues and consumer acceptance. Kagan projects an average
annual increase of approximately 74% in VOD households through December 31,
2005.
5
Competition among television programming providers is intense for both
channel space and viewer spending. Our competition varies in both the type and
quality of programming offered, but consists primarily of other premium pay
services, such as general-interest premium channels like HBO and Showtime, and
other adult movie pay services. We compete with the other pay services as we (a)
attempt to obtain or renew carriage with DTH operators and individual cable
affiliates, (b) negotiate fee arrangements with these operators and (c) market
our programming to consumers. Over the past several years, we have been
adversely impacted by all of the competitive factors described above. While
there can be no assurance that we will be able to maintain our current DTH and
cable carriage or fee structures or maintain or grow our viewership in the face
of this competition, we believe that strong Playboy and Spice brand recognition,
the quality of our original programming and our ability to appeal to a broad
range of adult audiences are critical factors which differentiate our networks
from other providers of adult programming. Additionally, in response to
consumers' requests for a wider spectrum of adult-programming choices, through
the Califa acquisition in 2001, we added additional adult-oriented pay networks
to our portfolio and recently launched two additional movie networks. Also, to
optimize revenue potential, we are encouraging DTH and cable operators to market
the full range of PPV, VOD and monthly subscription options to consumers.
From time to time, private advocacy groups have sought to exclude our
programming from pay television distribution because of the adult-oriented
content of the programming. Management does not believe that any such attempts
will materially affect our access to DTH and cable systems, but the nature and
impact of any such limitations in the future cannot be determined.
International TV
We own and operate or license 13 Playboy, Spice and locally branded movie
networks in Europe and the Pacific Far East. Through joint ventures, we have
equity interests in seven additional networks in Japan, Latin America and
Iberia. At December 31, 2002, our international TV networks were available in
approximately 30.9 million household units outside of the United States and
Canada, compared to approximately 29.5 million household units at December 31,
2001. These networks carry principally U.S.-originated content, which is
subtitled or dubbed and complemented by local content. We also derive revenues
by licensing programming rights from our extensive library of content to
broadcasters in Europe and Asia.
In Europe, we own and operate networks in the United Kingdom, which are
further distributed through DTH and cable television throughout greater Europe.
We license networks in Scandinavia, France, Turkey, Poland, Taiwan, Hong Kong,
South Korea and New Zealand that are programmed for the cultural sensitivities
of each country. Through a joint venture with Tohokushinsha Film Corp., we hold
a 19.9% ownership interest in Playboy Channel Japan and The Ruby Channel. These
international networks feature programming that is subtitled in the local
language and are generally available on both a PPV and monthly subscription
basis.
We hold a 19% interest in Playboy TV-Latin America, LLC, or PTVLA, a joint
venture with Claxson that operates Playboy TV and Spice networks in Latin
America and Iberia. In these markets, PTVLA operates five networks, distributes
The Hot Network and exploits the Playboy library by licensing content to
broadcasters in the territory.
We seek the most appropriate and profitable manner in which to build on
the powerful Playboy brand in each international television market. In addition,
we seek to generate synergies among our networks by combining operations where
practicable, through innovative programming and scheduling, through joint
programming acquisitions, and by coordinating and sharing marketing activities
and materials efficiently throughout the territories. We expect the benefits of
these synergies to improve operating margins in the future as new territories
are added to the growing list of our networks.
We believe we can grow our international television business through (a)
the continued rollout in digital addressable television households in our
existing international markets, (b) increasing buy rates driven by new
programming and scheduling tactics as well as more targeted marketing activity,
(c) expanding the distribution reach of existing networks and (d) expanding the
number of countries into which we launch and operate new networks.
6
The current scope of our international television business reflects the
significant expansion of our ownership of Playboy TV and movie networks outside
of the United States and Canada that occurred with the December 24, 2002
restructuring of the ownership of our international TV joint ventures with
Claxson. The Claxson joint ventures originated when PTVI and PTVLA were formed
in 1999 and 1996, respectively, as joint ventures between us and a member of the
Cisneros Group, or Cisneros, for the ownership and operation of Playboy TV
networks outside of the United States and Canada. In 2001, Claxson succeeded
Cisneros as our joint venture partner. Prior to the restructuring transaction,
parts of which were effective as of April 1, 2002, PTVI and PTVLA had exclusive
rights to create and launch new television networks under the Playboy and Spice
brands outside of the United States and Canada, and under specified
circumstances, to license programming to third parties. We owned a 19.9% equity
interest in PTVI and a 19% equity interest in PTVLA before the restructuring.
Under the terms of the restructuring transaction, we (a) increased from
19.9% to 100% our ownership in PTVI, (b) acquired the 19.9% equity in two
Japanese networks previously owned by PTVI, (c) retained our existing 19%
ownership in PTVLA, (d) acquired an option to increase our percentage ownership
of PTVLA, (e) obtained 100% distribution rights to Playboy TV en Espanol in the
U.S. Hispanic market, (f) restructured our Latin American Internet joint venture
with Claxson in favor of revenue share and promotional agreements for our
respective Internet businesses in Latin America and (g) received from Claxson
its preferred stock ownership in Playboy.com, Inc., or Playboy.com
(approximately 3% equity in Playboy.com as if converted).
Prior to the restructuring transaction, in return for the exclusive
international TV rights for the use of the Playboy tradename, film and video
library, and for the acquisition of the international rights to the Spice film
library, the U.K. and Japan Playboy TV networks and certain international
distribution contracts, PTVI was obligated to make total payments of $100.0
million to us, related to the above, over six years, of which $42.5 million had
been received prior to the restructuring transaction. The remaining $57.5
million was to be paid to us from 2002 to 2004. We accounted for these revenues
from the original sale of assets and the licensing payments on an "as received"
basis. In return for our increased ownership in PTVI and the other terms of the
restructuring transaction, among other things, (a) we forgave approximately
$12.3 million in current programming and other receivables due from PTVI, (b) we
will no longer receive the library or output agreement payments that we were
scheduled to receive under the original agreement and (c) Claxson is released
from its remaining funding obligations to PTVI. In the restructuring, we
acquired the 80.1% of the equity interest of PTVI that we did not already own.
As a result, PTVLA is our sole remaining joint venture with Claxson.
Under the terms of the new PTVLA operating agreement, Claxson maintains
management control of PTVLA. We now provide programming and use of our
trademarks directly to PTVLA in return for 17.5% of its net revenues with a
guaranteed annual minimum. The term of the program supply and trademark
agreement for PTVLA is ten years, unless earlier terminated in accordance with
the terms of the agreement. PTVLA provides the feed for Playboy TV en Espanol
and we pay them a 20% distribution fee for that feed based on the network's net
revenues in the U.S. Hispanic market. Neither we nor Claxson are obligated to
make any additional capital contributions to the PTVLA venture. If the
management committee of PTVLA determines that additional capital is necessary
for the conduct of PTVLA's business, we would have the option to contribute our
pro rata share of additional capital. We have an option to purchase up to 49.9%
of PTVLA at fair market value over the next ten years. In addition, we have the
option to purchase the remaining 50.1% of PTVLA at fair market value,
exercisable at any time during the period beginning December 23, 2007 and ending
December 23, 2008, so long as we have previously or concurrently exercised the
49.9% buy-up option. We have the option to pay the purchase price for the 49.9%
buy-up option in cash, shares of our Class B common stock, or Class B stock, or
a combination of cash and Class B stock. However, if we exercise both options
concurrently, then we must pay the entire purchase price for both options in
cash.
Worldwide Home Video
We also distribute our original programming domestically on DVD and VHS,
which are sold in video and music stores and other retail outlets, through
direct mail, including Playboy magazine, and online, including PlayboyStore.com.
In 2001, we expanded the home video business into three distinct product lines.
The lines include the flagship Playboy Home Video line, which celebrated its
20th anniversary in 2002, that features Playmate, celebrity and specials
product. The newer product lines include Playboy TV, which features TV shows
from our premium pay television network, and Playboy Exposed, a line of adult
reality-based programming.
We released 47 new home videos in 2002. Playboy Home Video released 14
titles in 2002, compared to 11 titles in 2001 and 21 titles in 2000. In 2002, we
released nine Playboy TV titles and 11 Playboy Exposed titles, compared to two
titles under each of these labels in 2001. In addition, in 2002, we released 13
of our non-Playboy branded movies. Additionally, we continue to release library
titles on DVD, which were previously only released on VHS.
7
Our contract with our previous domestic distributor expired in June 2001
and a contract with a new distributor became effective in October 2001. Our DVD
and VHS products are currently distributed in the United States and Canada by
Image Entertainment, Inc., or Image. We are responsible for manufacturing the
product for sale and for certain marketing and sales functions. We receive
advances from Image on all new release titles in the Playboy Home Video and
Playboy TV lines. Image receives a distribution fee on sales of all product and
remits a net amount to us.
In 2001, we entered into an agreement with Mandalay Direct, or Mandalay,
the creator of Girls Gone Wild, to market a continuity line of reality-based
videos. These programs are advertised on demographically targeted television
programs across a variety of networks and sold directly to consumers through
these offers. In general, we are equal participants with Mandalay in the profits
of the series.
Our proprietary Playboy programming is released in DVD and home video
formats in other countries worldwide. In 2002, we entered into an international
distribution agreement with Modern Entertainment, Ltd. to distribute our home
video products worldwide. We previously distributed these products through
separate distribution agreements. These products are based on the videos
produced for the U.S. market, with the licensee dubbing or subtitling into the
local language where necessary.
PUBLISHING GROUP
Our Publishing Group operations include the publication of Playboy
magazine, other domestic publishing businesses and the licensing of
international editions of Playboy magazine.
Playboy Magazine
Founded by Hugh M. Hefner in 1953, Playboy magazine continues to be the
best-selling monthly men's magazine in the world, based on the combined
circulation of the U.S. and international editions. Circulation of the U.S.
edition is approximately 3.2 million copies monthly. Combined average
circulation of the 19 licensed international editions is approximately 1.2
million copies monthly. According to Fall 2002 data published by Mediamark
Research, Inc., or MRI, an independent market research firm, the U.S. edition of
Playboy magazine is read by approximately one in every seven men in the United
States aged 18 to 34.
Playboy magazine plays a key role in driving the continued popularity and
recognition of the Playboy brand. Playboy magazine is a general-interest
magazine targeted to men, with a reputation for excellence founded on providing
high-quality photography, entertainment and informative articles on current
issues and trends. Playboy consistently includes in-depth, candid interviews
with high profile political, business, entertainment and sports figures;
pictorials of famous women; and content by leading authors, including, in recent
years, the following:
Interviews Pictorials Leading Authors
-------------- --------------- ------------------
Ben Affleck Pamela Anderson William F. Buckley
Halle Berry Drew Barrymore Joyce Carol Oates
George Clooney Cindy Crawford Michael Crichton
Bill Gates Carmen Electra David Halberstam
Tommy Hilfiger Farrah Fawcett William Kennedy
Michael Jordan Elle Macpherson Jay McInerney
Jimmy Kimmel Madonna Scott Turow
Rush Limbaugh Jenny McCarthy John Updike
Jesse Ventura Katarina Witt Kurt Vonnegut
Playboy magazine has long been known for its graphic excellence and
features and publishes the work of top artists and photographers. Playboy
magazine also features lifestyle articles on consumer products, fashion,
automobiles and consumer electronics and covers the worlds of sports and
entertainment.
The net circulation revenues of the U.S. edition of Playboy magazine for
2002, 2001 and 2000 were $62.3 million, $63.6 million and $69.6 million,
respectively. Net circulation revenues are gross revenues less commissions and
provisions for newsstand returns and display costs and unpaid subscriptions.
Circulation revenue comparisons may be materially impacted with respect to
newsstand sales in any period based on whether or not there are issues featuring
major celebrities.
8
According to the Audit Bureau of Circulations, an independent audit
agency, with a rate base (the total newsstand and subscription circulation
guaranteed to advertisers) of 3.15 million at December 31, 2002, Playboy
magazine was the 12th highest-ranking U.S. consumer publication. Playboy
magazine's rate base at December 31, 2002 was larger than each of Newsweek,
Cosmopolitan and Maxim and was larger than the combined rate bases of Rolling
Stone, Stuff and GQ.
Playboy magazine has historically generated approximately two-thirds of
its revenues from subscription and newsstand circulation, with the remainder
primarily from advertising. Subscription copies are approximately 85% of total
copies sold. We believe that managing Playboy's circulation to be primarily
subscription driven, like most major magazines, provides a stable and desirable
circulation base, which is also attractive to advertisers. According to the MRI
data previously mentioned, the median age of male Playboy readers is 33, with a
median annual household income of $54,000. We also derive revenues from the
rental of Playboy magazine's subscriber list, which consists of the subscriber's
name, address and other subscription-related information that we maintain.
We attract new subscribers to the magazine through our own direct mail
advertising campaigns, subscription agent campaigns and the Internet, including
the Playboy.com website. We recognize revenues from magazine subscriptions over
the terms of the subscriptions. Subscription copies of the magazine are
delivered through the U.S. Postal Service as periodical mail. We attempt to
contain these costs through presorting and other methods. The Publishing Group
was impacted by a general postal rate increase of approximately 10% in July
2002. No postal rate increases are expected in 2003.
Playboy magazine subscriptions are serviced by Communications Data
Services, Inc., or CDS. Pursuant to a subscription fulfillment agreement with
us, CDS performs a variety of services, including (a) receiving, verifying,
balancing and depositing payments from subscribers, (b) processing Internet
transactions, (c) printing forms and promotional materials, (d) maintaining
master files on all subscribers, (e) issuing bills and renewal notices to
subscribers, (f) issuing labels, (g) resolving customer service complaints as
directed by us and (h) furnishing various reports to monitor all aspects of the
subscription operations. The term of the previous agreement expired June 30,
2001, but has been extended to June 30, 2006. Either party may terminate the
agreement prior to expiration in the event of material nonperformance by, or
insolvency of, the other party. We pay CDS specified fees and charges based on
the types and amounts of service performed under the agreement. The fees and
charges are to be fixed at their July 1, 2001 levels until June 30, 2003, after
which they will increase annually at a rate based on the rate of increase in the
consumer price index, but no more than six percent in one year. CDS's liability
to us for a breach of its duties under the agreement is limited to actual
damages of up to $140,000 per event of breach, except in cases of willful breach
or gross negligence, in which case the limit is $280,000. The agreement provides
for indemnification by CDS of us and our shareholders against claims arising
from actions or omissions by CDS in compliance with the terms of the agreement
or in compliance with our instructions.
Playboy magazine is one of the highest priced magazines in the United
States. Effective with the April 2001 issue, the basic U.S. newsstand cover
price is $4.99 ($5.99 for the December holiday issue and $6.99 for the January
holiday issue) and the Canadian cover price is C$6.99 for all issues. In
addition, when there is a feature of special appeal, we generally increase the
newsstand cover price by $1.00. Prior to the April 2001 issue, the basic U.S.
cover price for Playboy magazine was $4.95 ($5.95 for the December holiday issue
and $6.95 for the January holiday issue) and the Canadian cover price was C$5.95
(C$6.95 for holiday issues). We price test from time to time, but no general
price increases are currently planned for 2003.
Playboy magazine and special editions are printed at Quad/Graphics, Inc.,
located in Wisconsin, which ships the product to subscribers and wholesalers.
The print run varies each month based on expected sales and is determined with
input from Warner Publisher Services, Inc., or Warner, our national distributor.
Paper is the principal raw material used in the production of these
publications. We use a variety of types of high-quality coated and uncoated
paper that is purchased from a number of suppliers. The market for paper has
historically been cyclical resulting in volatility in paper prices, which can
materially affect the Publishing Group's financial results. Average paper prices
in 2002 were approximately 12% lower than in 2001 due to soft demand. We expect
paper prices in 2003 to be comparable with 2002.
Distribution of the magazine and special editions to newsstands and other
retail outlets is accomplished through Warner. The issues are shipped in bulk to
wholesalers, who are responsible for local retail distribution. We receive a
substantial cash advance from Warner at the time each issue goes on sale. We
recognize revenues from newsstand sales based on estimated copy sales at the
time each issue goes on sale and adjust for actual sales upon settlement with
Warner. These revenue adjustments are not material on an annual basis. Retailers
return unsold copies to the wholesalers, who count and then shred the returned
copies and report the returns by affidavit. We then settle with Warner based on
the number of issues actually sold. The number of issues sold on newsstands
varies from month to month, depending in part on consumer interest in the cover,
the pictorials and the editorial features.
9
Playboy magazine targets a wide range of advertisers. Advertising by
category, as a percent of total advertising pages, and the total number of ad
pages were as follows:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
Category 12/31/02 12/31/01 12/31/00
-------------------------------------------------------------------------------
Retail/Direct mail 26% 19% 19%
Beer/Wine/Liquor 25 28 25
Tobacco 19 23 23
Home electronics 8 4 6
Automotive 4 2 3
Toiletries/Cosmetics 4 5 5
Apparel/Footwear/Accessories 4 5 5
All other 10 14 14
-------------------------------------------------------------------------------
Total 100% 100% 100%
===============================================================================
Total ad pages 515 618 674
===============================================================================
We continue to focus on securing new advertisers, including from
underdeveloped categories. The net advertising revenues of the U.S. edition of
Playboy magazine for 2002, 2001 and 2000 were $32.4 million, $37.0 million and
$38.4 million, respectively. Net advertising revenues are gross revenues less
advertising agency commissions, frequency and cash discounts and rebates. We
publish the U.S. edition of Playboy magazine in 15 advertising editions: one
upper income zip-coded, eight regional, two state and four metro. All contain
the same editorial material but provide targeting opportunities for advertisers.
We implemented 8% cost per thousand increases in advertising rates effective
with both the January 2003 and 2002 issues.
Levels of advertising revenues may be affected by, among other things,
increased competition for and decreased spending by advertisers, general
economic activity and governmental regulation of advertising content, such as
tobacco products. However, as only approximately one-third of Playboy magazine's
revenues and less than 15% of the Company's total revenues are from advertising,
we are not overly dependent on this source of revenue.
From time to time, Playboy magazine and certain of its distribution
outlets and advertisers have been the target of private advocacy groups who seek
to limit its availability because of its adult-oriented content. In our 49-year
history, we have never sold a product that has been judged to be obscene or
illegal in any U.S. jurisdiction.
Magazine publishing companies face intense competition for readers,
advertising and newsstand shelf space. Magazines and Internet sites primarily
aimed at men are Playboy magazine's principal competitors. In addition, other
types of media that carry advertising, such as newspapers, radio, television and
Internet sites, compete for advertising revenues with Playboy magazine.
Other Domestic Publishing
Our Publishing Group has also created media extensions, including special
editions and calendars, which are primarily sold in newsstand outlets using
mostly original photographs. In each of 2002, 2001 and 2000, we published 24
special editions. Effective with the December and August 2002 issues, the U.S.
and Canadian special editions newsstand cover prices are $7.99 and C$8.99,
respectively. Prior to this, for issues on sale subsequent to March 1, 2001, the
U.S. and Canadian special editions newsstand cover prices were $6.99 and C$7.99,
respectively. Before that, the U.S. and Canadian newsstand cover prices were
$6.95 and C$7.95, respectively. No general price increases are currently planned
for 2003.
International Publishing
We license the right to publish 19 international editions of Playboy
magazine in the following countries: Brazil, Bulgaria, Croatia, the Czech
Republic, France, Germany, Greece, Hungary, Italy, Japan, Mexico, the
Netherlands, Poland, Romania, Russia, Slovakia, Slovenia, Spain and Taiwan.
Combined average circulation of the international editions is approximately 1.2
million copies monthly. In 2001, we sold a majority of our equity interest in
VIPress Poland Sp. z o. o., or VIPress, publisher of the Polish edition of the
magazine. Subsequently, the results of VIPress were no longer consolidated in
our financial statements, and our remaining 20% interest was accounted for under
the equity method and, as such, our proportionate share of the results of
VIPress were included in nonoperating results until October 2002 when we sold
our remaining interest in VIPress. Also in 2001, we sold our 19% joint venture
interest in each of our Romanian and Hungarian editions.
10
Local publishing licensees tailor their international editions by mixing
the work of their national writers and artists with editorial and pictorial
material from the U.S. edition. We monitor the content of the international
editions so that they retain the distinctive style, look and quality of the U.S.
edition, while meeting the needs of their respective markets. The terms of the
license agreements vary but, in general, are for terms of three to five years
and carry a guaranteed minimum royalty as well as a formula for computing earned
royalties in excess of the minimum. Royalty computations are generally based on
both circulation and advertising revenues. In 2002, three editions, Germany,
Brazil and the Netherlands, accounted for approximately 50% of the total
licensing revenues from international editions.
PLAYBOY ONLINE GROUP
Our Playboy Online Group, which provides a wide range of web-based
entertainment experiences under the Playboy and Spice brand names, is dedicated
to the lifestyle and entertainment interests of young men around the world. We
believe that we are well positioned to provide compelling online entertainment
experiences due to the strength of the Playboy brand. Our online destinations
combine Playboy's distinct attitude with extensive and original content, a large
community of loyal users and a wealth of e-commerce offerings. Our sites provide
us with multiple revenue streams, including fees for subscription services,
e-commerce, advertising and sponsorships, international ventures and online
gaming. The various international websites mirror the multiple revenue stream
model of our domestic online business.
The free Playboy.com site offers original adult-oriented content and is
designed with a goal of converting visitors to purchasers. It focuses on areas
of interest to its target audience, including Sex, Arts & Entertainment,
Features, Playboy magazine, Special Editions, On Campus, World of Playboy and
Playmates. In addition to directing visitors to our various revenue-generating
sites, Playboy.com generates advertising revenue.
We also offer multiple subscription-based websites and a VOD theater under
the Playboy name. The original Playboy Cyber Club, at the website
cyber.playboy.com, offers services such as VIP access to over 50,000 photos,
every interview from Playboy magazine, individual home pages for Playboy
Playmates, live Playmate chats and video clips. It is currently offered on a
monthly basis for $19.95 and an annual basis for $95.40. The PlayboyNet
subscription service, at the website Playboy.net, was launched in November 2002
and consists of pictorials and video clips organized by thematic interests
(college girls, lingerie, etc.). Access to the PlayboyNet is currently $29.94
per month. The PlayboyTV Jukebox, at the website PlayboyTVClub.com, is a
broadband-based offering that was launched in June 2002 and leverages our
television and video assets. Membership is currently $24.95 per month. In
December 2002, we launched a VOD service called the Director's Cut Theater which
offers a variety of viewing packages for our feature-length videos. Packages
range from $3.95 to $29.95 depending upon the length of time purchased. We plan
to offer additional subscription sites in the future.
Our Playboy branded e-commerce offerings include PlayboyStore.com, which
is the primary destination for purchasing over 1,500 different Playboy branded
fashions, videos, jewelry and collectibles. CCMusic.com, an online version of
the Collectors' Choice Music catalog, was sold in 2001 and CCVideo.com, an
online version of the Critics' Choice Video catalog, was sold in 2000. The sales
of these businesses are discussed in more detail in the Catalog Group section.
We are expanding our international presence by entering into joint
ventures and/or licensing arrangements in foreign countries to provide
compelling content specifically tailored to those individual foreign audiences.
Our first international joint venture was launched in Germany late in 2001.
During 2002, we entered into additional relationships with partners in Korea,
Taiwan and the Netherlands and launched Playboy sites in those marketplaces. All
international versions of the website have a local, dedicated editorial staff
that develops original adult-oriented content, makes use of content from the
local edition of Playboy magazine, when applicable, and translates appropriate
U.S.-originated Playboy.com content. Negotiations in additional countries
regarding other international websites and/or wireless services are ongoing.
11
Our online gaming business currently consists of three sites,
PlayboySportsBook.com, PlayboyCasino.com and PlayboyRacingUSA.com.
PlayboySportsBook.com and PlayboyCasino.com are partnerships with Ladbroke
eGaming Limited, the world's largest bookmaker. PlayboySportsBook.com offers a
full range of sports and event wagering, allowing international consumers to bet
on U.S. and international sports. Safeguards have been implemented to prevent
betting from within the United States and other places where online sports
wagering is illegal. The site includes highlights of daily sports wagering,
event coverage, sports commentary, scores and statistics. PlayboyCasino.com
offers more than 50 casino games, including roulette, blackjack and slot games
to audiences outside the United States where gaming is regulated and legal. The
third gaming site, PlayboyRacingUSA.com, a partnership with Penn National
Gaming, Inc., offers a wide variety of pari-mutuel wagering on horse races in
North America. The site offers an array of interactive tools and resources,
including real-time odds and scratches, past performance programs and special
features like the virtual stable, which allows consumers to follow specific
horses.
A separately branded online adult entertainment site is located at
SpiceTV.com and offers over 20,000 adult-oriented products in SpiceTVStore.com,
including DVDs and videos, lingerie and sensual products. SpiceTV Club, a
subscription site relaunched late in 2001, offers adult pictorials, video clips,
interactive features that allow the users to view highly customized adult-video
content, the Spice virtual studio highlighting SpiceTV Club original content,
live chat rooms and Spice Girl of the Month. The SpiceTV Club is currently
offered on a monthly basis for $24.95 and an annual basis for $129.96. The Spice
VOD theater, launched in November 2002, offers access to over 10,000 adult
movies. Viewing packages range from $3.95 to $29.95 depending upon the length of
time purchased.
The Internet industry is highly competitive. We compete for visitors,
buyers and advertisers. We believe that the primary competitive factors include
brand recognition, the quality of content and products, technology, pricing,
ease of use, sales and marketing efforts and user demographics. We believe that
we compete favorably with respect to each of these factors. Additionally, we
have the advantage of leveraging the power of the Playboy and Spice brands, our
libraries, marketing and promotions and loyal audiences.
LICENSING BUSINESSES GROUP
Our Licensing Businesses Group combines certain brand-related businesses,
such as the licensing of consumer products carrying one or more of our
trademarks and artwork, as well as Playboy branded casino gaming opportunities.
Also reported within the group are certain Company-wide marketing activities.
We license the Playboy and Spice names, the Rabbit Head Design and other
images, trademarks and artwork we own for the worldwide manufacture, sale and
distribution of a variety of consumer products. We work with licensees to
develop, market and distribute high-quality Playboy and Spice branded
merchandise. Our licensed product lines include men's and women's apparel, men's
underwear and women's lingerie, accessories, collectibles, slot machines,
interactive video games, cigars, watches, jewelry, fragrances, small leather
goods, stationery, music, eyewear, barware and home fashions. The group also
licenses art-related products based on our extensive collection of artwork, many
of which were commissioned as illustrations for Playboy magazine and for other
Company uses. In 2002, we sold a small portion of our art and memorabilia
collection through an auction held with Butterfields Auctioneers and eBay.
Additionally, we own and license all of the trademarks and service marks of
Sarah Coventry, Inc. Products are marketed primarily through retail outlets,
including department and specialty stores. Our first freestanding fashion retail
store, located in an upscale Tokyo shopping district and funded by one of our
licensees, opened in 2002. It offers a full collection of Playboy branded
fashion and accessories for men and women, as well as other Playboy branded
products. While our branded products are unique, the marketing of apparel,
jewelry and cigars is an intensely competitive business that is extremely
sensitive to economic conditions, shifts in consumer buying habits or fashion
trends, as well as changes in the retail sales environment. We are also
interested in exploiting Playboy's brand equity in the location-based
entertainment market by entering into partnerships with companies in which we
would contribute our brand name and marketing expertise in return for licensing
fees, and perhaps the option to earn or purchase equity in these ventures.
12
Company-wide marketing activities consist of the Playboy Jazz Festival,
Alta Loma Entertainment, or Alta Loma, and Playmate promotions. We have produced
the Playboy Jazz Festival on an annual basis in Los Angeles at the Hollywood
Bowl since June 1979. In conjunction with the Playboy Jazz Festival, we
continued our community events program by sponsoring free concerts. In 2001, we
reactivated Alta Loma, which had originally been established in the 1980s to
create television programming, so as to take advantage of the market for
adult-oriented Playboy branded entertainment products. Programming is targeted
for film and television distribution beyond our Playboy branded networks,
including mainstream networks. Alta Loma can draw upon material from Mr. Hefner,
the Playmates and our resources like the Playboy Mansion and Playboy magazine to
develop original programming for non-Playboy branded outlets, and possibly dual
programming with the Entertainment Group. Current television and film
productions either recently produced, in development or under consideration, to
be produced and funded by outside parties, include Girl Next Door: The Search
for a Playboy Centerfold, Murder at the Playboy Mansion, A Night at the Playboy
Mansion, Little Annie Fanny, Playboy After Dark and Playboy's 50th Anniversary
Special. Playmate promotions encompass Playmates' involvement in ad campaigns,
brochures, celebrity endorsements, commercials, conventions, motion pictures,
trade shows, television and videos for Playboy and outside clients.
CATALOG GROUP
Our Catalog Group operations have historically included the direct
marketing of products through our Critics' Choice Video and Collectors' Choice
Music catalogs. In 2000, we completed the sale of our Critics' Choice Video
catalog and related Internet business and fulfillment and customer service
operations to Infinity Resources, Inc., or Infinity. In 2001, we also sold to
Infinity our Collectors' Choice Music catalog and related Internet business,
ending our presence in the nonbranded print catalog business. Infinity is
subleasing an approximately 105,000 square-foot warehouse facility from us and
is providing fulfillment and customer service for our e-commerce business.
SEASONALITY
Our businesses are generally not seasonal in nature. Revenues and
operating results for the quarters ended December 31, however, are typically
impacted by higher newsstand cover prices of holiday issues. These higher
prices, coupled with typically higher sales of subscriptions of Playboy magazine
during those quarters, also result in an increase in accounts receivable.
E-commerce revenues and operating results are typically impacted by the holiday
buying season and decreased Internet traffic during the summer months when
people tend to be outside more often.
PROMOTIONAL AND OTHER ACTIVITIES
We believe that our sales of products and services are enhanced by the
public recognition of the Playboy name as symbolizing a lifestyle. In order to
establish public recognition, we, among other activities, purchased in 1971 the
Playboy Mansion in Holmby Hills, California, where our founder, Hugh M. Hefner,
lives. The Playboy Mansion is used for various corporate activities, including
serving as a valuable location for video production, magazine photography,
online events, business meetings, enhancing our image, charitable functions and
a wide variety of other promotional and marketing activities. The Playboy
Mansion generates substantial publicity and recognition which increase public
awareness of us and our products and services. As indicated in Part II. Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," or MD&A, and Part III. Item 13. "Certain Relationships and Related
Transactions," Mr. Hefner pays us rent for that portion of the Playboy Mansion
used exclusively for his and his personal guests' residence as well as the
per-unit value of nonbusiness meals, beverages and other benefits received by
him and his personal guests. The Playboy Mansion is included in our Consolidated
Balance Sheet at December 31, 2002 at a net book value, including all
improvements and after accumulated depreciation, of $1.9 million. We incur all
operating expenses of the Playboy Mansion, including depreciation and taxes,
which were $3.6 million, $3.2 million and $3.2 million for 2002, 2001 and 2000,
respectively, net of rent received from Mr. Hefner.
Through the Playboy Foundation, we support not-for-profit organizations
and projects concerned with issues historically of importance to Playboy
magazine and its readers, including anti-censorship efforts, civil rights, AIDS
education, prevention and research, and reproductive freedom. The Playboy
Foundation provides financial support to many organizations and also donates
public service advertising space in Playboy magazine and in-kind printing and
design services.
Our trademarks and copyrights are critical to the success and potential
growth of all of our businesses. We actively protect and defend our trademarks
and copyrights throughout the world and monitor the marketplace for counterfeit
products. Consequently, we initiate legal proceedings from time to time to
prevent their unauthorized use.
13
EMPLOYEES
At February 28, 2003, we employed 580 full-time employees compared to 605
at February 28, 2002. No employees are represented by collective bargaining
agreements. We believe we maintain a satisfactory relationship with our
employees.
AVAILABLE INFORMATION
We make available free of charge on our website,
www.playboyenterprises.com, our annual, quarterly and current reports, and, if
applicable, amendments to those reports, filed or furnished pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934, or the Exchange Act, as soon
as reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission, or SEC.
Item 2. Properties
Location Primary Use
-------- -----------
Office Space Leased:
Chicago, Illinois This space serves as our corporate
headquarters and is used by all of our
operating groups, primarily Publishing and
Playboy Online, and for executive and
administrative personnel.
Los Angeles, California This space serves as our Entertainment
Group's headquarters and for executive and
administrative personnel.
New York, New York This space serves as our Publishing and
Playboy Online Groups' headquarters and a
limited amount of this space is used by the
Licensing Businesses and Entertainment
Groups, as well as executive and
administrative personnel.
Operations Facilities Leased:
Los Angeles, California This space is used by our Entertainment and
Playboy Online Groups as a centralized
digital, technical and programming facility.
Santa Monica, California This space is used by our Publishing Group
as a photography studio.
Itasca, Illinois We began subleasing this warehouse facility
to Infinity in 2000. This facility, under
separate agreements with Infinity, is used
to provide e-commerce order fulfillment,
customer service and related activities for
our Playboy Online Group and previously for
the Catalog Group, and storage for the
entire Company. The facility was formerly
used by us in the same capacities.
Property Owned:
Holmby Hills, California The Playboy Mansion is used for various
corporate activities, including serving as a
valuable location for video production,
magazine photography, online events,
business meetings, enhancing our image,
charitable functions and a wide variety of
other promotional and marketing activities.
In 2002, we moved to a new state-of-the-art studio facility in Los Angeles
where we now have a centralized digital, technical and programming facility for
both the Entertainment and Playboy Online Groups. The new space enables us to
produce more original programs in a more efficient and cost effective operating
environment. Additionally, we consolidated and relocated certain California
office spaces. Due to restructuring efforts, we have subleased a portion of our
excess office space, and expect to sublease or terminate our remaining excess
office space. The term of our New York office lease expires in 2004, and we are
currently exploring our alternatives in the New York area.
14
Item 3. Legal Proceedings
We are from time to time a defendant in suits for defamation and violation
of rights of privacy, many of which allege substantial or unspecified damages,
which we vigorously defend. We are currently engaged in other litigation, most
of which is generally incidental to the normal conduct of our business. We
believe that our reserves are adequate and that no such action will have a
material adverse impact on our financial condition. There can be no assurance,
however, that our ultimate liability will not exceed our reserves.
On February 17, 1998, Eduardo Gongora, or Gongora, filed suit in state
court in Hidalgo County, Texas against Editorial Caballero SA de CV, or EC,
Grupo Siete International, Inc., or GSI, collectively the Editorial Defendants,
and us. In the complaint, Gongora alleged that he was injured as a result of the
termination of a publishing license agreement, or the License Agreement, between
us and EC for the publication of a Mexican edition of Playboy magazine, or the
Mexican Edition. We terminated the License Agreement on or about January 29,
1998 due to EC's failure to pay royalties and other amounts due us under the
License Agreement. On February 18, 1998, the Editorial Defendants filed a
cross-claim against us. Gongora alleged that in December 1996 he entered into an
oral agreement with the Editorial Defendants to solicit advertising for the
Mexican Edition to be distributed in the United States. The basis of GSI's
cross-claim was that it was the assignee of EC's right to distribute the Mexican
Edition in the United States and other Spanish-speaking Latin American countries
outside of Mexico. On May 31, 2002, a jury returned a verdict against us in the
amount of $4.4 million. Under the verdict, Gongora was awarded no damages. GSI
and EC were awarded $4.1 million in out-of-pocket expenses and $0.3 million for
lost profits, respectively, even though the jury found that EC had failed to
comply with the terms of the License Agreement. On October 24, 2002, the trial
court signed a judgment against us for $4.4 million plus pre- and post-judgment
interest and costs. On November 22, 2002, we filed post-judgment motions
challenging the judgment in the trial court. The trial court overruled those
motions and we are vigorously pursuing an appeal with the State Appellate Court
sitting in Corpus Christi challenging the verdict. We have posted a bond in the
amount of approximately $7.7 million (which represents the amount of the
judgment, costs and estimated pre- and post-judgment interest) in connection
with the appeal. We, on advice of legal counsel, believe that it is not probable
that a material judgment against us will be sustained. In accordance with
Statement of Financial Accounting Standards, or Statement, 5, Accounting for
Contingencies, no liability has been accrued.
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. On July 10, 2002, Playboy and Spice filed motions to dismiss in the
Bankruptcy Court. The case was subsequently remanded to state court on October
31, 2002. Discovery has only very recently resumed in the action. Playboy and
Spice filed motions to dismiss the first amended complaint on December 6, 2002.
A hearing on the motions took place on February 5, 2003, and we are awaiting a
decision. We intend to vigorously defend against these claims and we believe we
have good defenses to them. At this preliminary point in the action, however, it
is not possible to determine if there is any potential liability or whether any
liability may be material or is likely.
15
On September 26, 2002, Directrix filed suit in the U.S. Bankruptcy Court
in the Southern District of New York against Playboy Entertainment Group, Inc.
In the complaint, Directrix alleged that it was injured as a result of the
termination of a Master Services Agreement under which Directrix was to perform
services relating to the distribution, production and post production of our
cable networks and a sublease agreement under which Directrix would have
subleased office, technical and studio space at our Los Angeles, California
production facility. Directrix also alleged that we breached an agreement under
which Directrix had the right to transmit and broadcast certain versions of
films through C-band satellite, commonly known as the TVRO market, and Internet
distribution. On November 15, 2002, we filed an answer denying Directrix's
allegations and filed counterclaims against Directrix seeking damages in
connection with the Sublease Agreement and Directrix's breach of the Master
Services Agreement. On January 7, 2003, Directrix moved to dismiss one of our
counterclaims. Both sides have commenced discovery. We intend to vigorously
defend ourselves against Directrix's claims. We believe the claims are without
merit and that we have good defenses against them. We believe it is not probable
that a material judgment against us will result.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Stock price information, as reported in the New York Stock Exchange
Composite Listing, is set forth in Note (W) Quarterly Results of Operations
(Unaudited) of Notes to Consolidated Financial Statements. Our securities are
traded on the exchanges listed on the cover page of this Form 10-K Annual Report
under the ticker symbols PLA A (Class A voting) and PLA (Class B nonvoting). At
February 28, 2003, there were 7,353 and 8,737 holders of record of Class A and
Class B common stock, respectively. There were no cash dividends declared during
2002 and 2001. Our former credit agreement prohibited the payment of cash
dividends, and our new revolving credit facility and the indenture related to
the senior secured notes we issued in March 2003 have limitations related to the
payment of dividends.
Other information required under this Item is contained in our Notice of
Annual Meeting of Stockholders and Proxy Statement, or collectively, the Proxy
Statement, (to be filed) relating to the Annual Meeting of Stockholders to be
held in May 2003, which will be filed within 120 days after the close of our
fiscal year ended December 31, 2002, and is incorporated herein by reference.
16
Item 6. Selected Financial Data (1)
(in thousands, except per share amounts,
number of employees and ad pages)
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended
12/31/02 12/31/01 12/31/00 12/31/99 12/31/98
--------------------------------------------------------------------------------------------------------------------------------
Selected financial data
Net revenues $ 277,622 $ 287,583 $ 303,360 $ 344,044 $ 314,360
Interest expense, net (15,022) (13,184) (7,629) (6,179) (1,424)
Income (loss) from continuing operations before
cumulative effect of change in accounting principle (17,135) (29,323) (47,626) (5,568) 4,320
Net income (loss) (17,135) (33,541) (47,626) (5,335) 4,320
Basic and diluted earnings per common share
Income (loss) from continuing operations before
cumulative effect of change in accounting principle (0.67) (1.20) (1.96) (0.24) 0.21
Net income (loss) (0.67) (1.37) (1.96) (0.23) 0.21
EBITDA (2)
Earnings from continuing operations before income
taxes and cumulative effect of change in accounting
principle (8,591) (28,327) (31,399) (6,430) 7,025
Adjusted for:
Interest expense 15,147 13,970 9,148 7,977 1,551
Depreciation and amortization 51,619 51,904 44,911 42,691 30,313
Amortization of deferred financing fees 993 905 840 613 --
Amortization of restricted stock awards 2,748 -- -- -- --
Equity in operations of PTVI and other (279) 746 375 13,871 378
----------- ----------- ----------- ----------- -----------
EBITDA 61,637 39,198 23,875 58,722 39,267
Cash flows from operating activities 14,328 (7,945) (31,150) 16,100 (11,110)
Cash flows from investing activities (3,158) (2,853) (3,889) (68,126) (10,120)
Cash flows from financing activities $ (11,662) $ 12,874 $ 14,045 $ 75,213 $ 20,624
--------------------------------------------------------------------------------------------------------------------------------
At period end
Total assets $ 369,721 $ 426,240 $ 388,488 $ 429,402 $ 212,107
Long-term financing obligations $ 68,865 $ 78,017 $ 94,328 $ 75,000 $ --
Shareholders' equity $ 87,815 $ 81,525 $ 114,185 $ 161,281 $ 84,202
Long-term financing obligations as a
percentage of total capitalization 44% 49% 45% 32% --%
Number of common shares outstanding
Class A voting 4,864 4,864 4,859 4,859 4,749
Class B nonvoting 21,181 19,666 19,407 19,288 15,868
Number of full-time employees 581 610 686 780 758
--------------------------------------------------------------------------------------------------------------------------------
Selected operating data
Playboy magazine ad pages 515 618 674 640 601
Cash investments in Company-produced and
licensed entertainment programming $ 41,717 $ 37,254 $ 33,061 $ 35,262 $ 25,902
Amortization of investments in Company-produced
and licensed entertainment programming $ 40,626 $ 37,395 $ 33,253 $ 34,341 $ 26,410
Household units (at period end) (3)
Playboy TV networks
DTH 19,200 18,100 15,400 12,400 9,800
Cable digital 14,000 10,300 3,200 1,300 200
Cable analog addressable 5,700 7,800 11,000 11,700 11,700
Playboy TV en Espanol (4)
DTH 7,000 -- -- -- --
Cable digital 2,700 -- -- -- --
Movie networks (5)
DTH 38,400 35,300 -- -- --
Cable digital 36,900 25,300 8,400 3,900 --
Cable analog addressable 10,800 17,000 16,200 18,300 --
--------------------------------------------------------------------------------------------------------------------------------
For a more detailed description of our financial position, results of operations
and accounting policies, please refer to Part II. Item 7. "MD&A" and Part II.
Item 8. "Financial Statements and Supplementary Data."
17
(1) Certain amounts reported for prior periods have been reclassified to
conform to the current year's presentation.
(2) EBITDA represents earnings from continuing operations before interest
expense, income taxes, cumulative effect of change in accounting
principle, depreciation of property and equipment, amortization of
intangible assets, amortization of investments in entertainment
programming, amortization of deferred financing fees, expenses related to
the vesting of restricted stock awards and equity in operations of PTVI
and other. We evaluate our operating results based on several factors,
including EBITDA. We consider EBITDA an important indicator of the
operational strength and performance of our ongoing businesses, including
our ability to provide cash flows to pay interest, service debt and fund
capital expenditures. EBITDA eliminates the uneven effect across business
segments of noncash depreciation of property and equipment and
amortization of intangible assets. Because depreciation and amortization
are noncash charges, they do not affect our ability to service debt or
make capital expenditures. EBITDA also eliminates the impact of how we
fund our businesses and the effect of changes in interest rates, which we
believe relate to general trends in global capital markets but are not
necessarily indicative of our operating performance. Finally, EBITDA is
used to determine compliance with some of our credit facilities. EBITDA
should not be considered an alternative to any measure of performance or
liquidity under generally accepted accounting principles, or GAAP.
Similarly, EBITDA should not be inferred as more meaningful than any of
those measures.
(3) Each household unit is defined as one household carrying one given network
per carriage platform. A single household can represent multiple household
units if two or more of our networks and/or multiple platforms (i.e.
digital and analog) are available to that household.
(4) We obtained 100% distribution rights of Playboy TV en Espanol in the U.S.
Hispanic market in December 2002 in connection with the restructuring of
the ownership of our international TV joint ventures. Prior to the
restructuring, this network was included in international TV's household
units.
(5) We acquired two Spice networks in March 1999 and three networks in July
2001 in connection with the Califa acquisition.
18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
Since our inception in 1953 as the publisher of Playboy magazine, we have
expanded our operations to encompass entertainment businesses that are related
to the content and style of Playboy magazine. Today, an important aspect of our
businesses consists of the licensing of our trademarks for the worldwide
manufacture, sale and distribution of various consumer products and services.
Our trademarks, which are renewable periodically and which can be renewed
indefinitely, include Playboy, the Rabbit Head Design, Playmate, Spice and Sarah
Coventry. We also own numerous domain names related to our online business.
Our businesses are currently classified into four reportable segments:
Entertainment, Publishing, Playboy Online and Licensing Businesses. Formerly, we
operated a fifth segment, Catalog, which we divested in connection with our sale
of the Collectors' Choice Music catalog in November 2001 and the Critics' Choice
Video catalog in October 2000.
REVENUES
Most of our Entertainment Group revenues are derived from PPV and
subscription fees for our television network offerings, including Playboy TV and
Spice branded domestic and international networks, and sales of DVDs and home
videos. Entertainment revenues are affected by PPV and subscription retail
prices (both of which are set by the DTH and cable operators), revenue splits
with the DTH and cable operators and the demand for our programming.
The majority of our Publishing Group revenues is derived from subscription
and newsstand sales of the magazine and special editions, the sale of
advertising space and the licensing of 19 international editions. The
subscription-based revenues are fairly consistent, while newsstand sales
fluctuate and are typically higher for issues containing major celebrities or
other special content, such as interviews. Publishing Group revenues fluctuate
with the general condition of the local and national economy. Revenue
fluctuations are also due primarily to higher pricing of our holiday issues and
fluctuations in expenditure levels by national advertisers depending on economic
conditions, product introductions by advertising customers and changes in
advertising buying patterns generally.
The principal sources of Playboy Online Group revenues are subscription
revenues for our websites offering unique Playboy branded content, e-commerce
sales of Playboy branded and other consumer products, advertising and revenues
generated by international licensing transactions for websites outside of the
United States. E-commerce revenues are typically higher during the holiday
buying season and lower due to decreased Internet traffic during the summer
months when people tend to be outside more often.
Licensing Businesses Group revenues are principally generated through the
international and domestic distribution of Playboy branded consumer products and
Playboy sponsored marketing events such as the Playboy Jazz Festival, and
periodic auction sales of small portions of our art and memorabilia collection.
COSTS AND OPERATING EXPENSES
Entertainment Group expenses include programming amortization, network
distribution, sales and marketing and general and administrative expenses.
Amortization expenses relate primarily to the expenditures associated with the
creation of Playboy programming and licensing of third-party programming for our
movie networks.
Publishing Group expenses include manufacturing, subscription promotion,
editorial, shipping and general and administrative expenses. Manufacturing
expenses represent the largest operating expense of the Publishing Group and
fluctuate by issue due mainly to the cost of paper and the size of the magazine.
Playboy Online Group expenses consist of trademark license and
administrative fees to the parent company, content, product fulfillment, sales
and marketing, hosting and general and administrative expenses.
Licensing Businesses Group expenses include promotional expenses and
general and administrative expenses.
Corporate Administration and Promotion expenses include general corporate
costs such as finance, technology, legal, security and human resources as well
as Company-wide marketing and promotion and the expenses related to the Playboy
Mansion.
19
RESULTS OF OPERATIONS
The following table represents our results of operations (in millions, except
per share amounts):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/02 12/31/01 12/31/00
------------------------------------------------------------------------------------------------------------
Net revenues
Entertainment
Domestic TV networks $ 94.4 $ 86.6 $ 74.4
International TV 16.4 17.0 17.0
Worldwide home video 10.5 9.6 8.6
Movies and other 0.3 0.6 0.9
------------------------------------------------------------------------------------------------------------
Total Entertainment 121.6 113.8 100.9
------------------------------------------------------------------------------------------------------------
Publishing
Playboy magazine 94.7 100.8 108.0
Other domestic publishing 11.7 13.8 14.7
International publishing 5.4 9.9 12.9
------------------------------------------------------------------------------------------------------------
Total Publishing 111.8 124.5 135.6
------------------------------------------------------------------------------------------------------------
Playboy Online
E-commerce 14.4 17.6 16.7
Subscriptions 11.0 6.6 4.1
Other 5.6 3.3 4.5
------------------------------------------------------------------------------------------------------------
Total Playboy Online 31.0 27.5 25.3
------------------------------------------------------------------------------------------------------------
Licensing Businesses 13.2 10.8 9.2
------------------------------------------------------------------------------------------------------------
Catalog -- 11.0 32.4
------------------------------------------------------------------------------------------------------------
Total net revenues $ 277.6 $ 287.6 $ 303.4
============================================================================================================
Net loss
Entertainment
Before programming expense $ 72.9 $ 67.3 $ 58.6
Programming expense (40.6) (37.4) (33.3)
------------------------------------------------------------------------------------------------------------
Total Entertainment 32.3 29.9 25.3
------------------------------------------------------------------------------------------------------------
Publishing 2.7 1.8 6.9
------------------------------------------------------------------------------------------------------------
Playboy Online (8.9) (21.7) (25.2)
------------------------------------------------------------------------------------------------------------
Licensing Businesses 4.6 2.6 0.9
------------------------------------------------------------------------------------------------------------
Catalog -- (0.4) --
------------------------------------------------------------------------------------------------------------
Corporate Administration and Promotion (15.8) (19.7) (20.9)
------------------------------------------------------------------------------------------------------------
Total segment income (loss) 14.9 (7.5) (13.0)
Restructuring expenses (6.6) (3.8) (3.9)
Gain (loss) on disposals 0.4 (0.9) (3.0)
------------------------------------------------------------------------------------------------------------
Operating income (loss) 8.7 (12.2) (19.9)
------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 0.1 0.8 1.5
Interest expense (15.1) (14.0) (9.1)
Amortization of deferred financing fees (1.0) (0.9) (0.8)
Minority interest (1.7) (0.7) (0.1)
Equity in operations of PTVI and other 0.3 (0.7) (0.4)
Vendor settlement 0.7 -- --
Playboy.com registration statement expenses -- -- (1.6)
Legal settlement -- -- (0.6)
Other, net (0.6) (0.6) (0.4)
------------------------------------------------------------------------------------------------------------
Total nonoperating expense (17.3) (16.1) (11.5)
------------------------------------------------------------------------------------------------------------
Loss before income taxes and cumulative effect of change
in accounting principle (8.6) (28.3) (31.4)
Income tax expense (8.5) (1.0) (16.2)
------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of change in accounting principle (17.1) (29.3) (47.6)
Cumulative effect of change in accounting principle (net of tax) -- (4.2) --
------------------------------------------------------------------------------------------------------------
Net loss $ (17.1) $ (33.5) $ (47.6)
============================================================================================================
Basic and diluted earnings per common share
Loss before cumulative effect of change in accounting principle $ (0.67) $ (1.20) $ (1.96)
Cumulative effect of change in accounting principle (net of tax) -- (0.17) --
------------------------------------------------------------------------------------------------------------
Net loss $ (0.67) $ (1.37) $ (1.96)
============================================================================================================
20
2002 COMPARED TO 2001
Our revenues for 2002 decreased $10.0 million, or 3%, compared to the
prior year principally as a result of three transaction-related changes: (a) the
absence of Catalog Group revenues due to the sale of our Collectors' Choice
Music business in November 2001, (b) no library license fees received from PTVI
in the current year due to the restructuring of the ownership of our
international TV joint ventures as discussed in more detail below and (c) the
sale of a majority of our equity interest in the Polish edition of Playboy
magazine in July 2001. In addition, Playboy magazine revenues were also lower as
the mix of revenues continued to shift away from print to higher margin
businesses. Partially offsetting the above were higher domestic TV networks
revenues as a result of the Califa acquisition in July 2001, and higher Playboy
Online and Licensing Businesses Group revenues due in part to their global
expansion.
Operating performance improved $20.9 million compared to the prior year
due to better performance from all of our operating groups, primarily Playboy
Online, combined with lower Corporate Administration and Promotion expenses. The
current year included a $6.6 million restructuring charge compared to a $3.8
million charge in the prior year. The charge in both periods included severance
and consolidation of office space.
The lower net loss for 2002 included a $5.8 million noncash income tax
charge related to our adoption of Statement 142, Goodwill and Other Intangible
Assets. The prior year included a $4.2 million noncash charge representing a
"Cumulative effect of change in accounting principle" related to the adoption of
Statement of Position, or SOP, 00-2, Accounting by Producers or Distributors of
Films.
Entertainment Group
In December 2002, we completed the restructuring of the ownership of our
international TV joint ventures with Claxson. The restructuring significantly
expanded our ownership of Playboy TV and movie networks outside of the United
States and Canada. Under the terms of the restructuring transaction, we
increased our equity interest in networks in Europe and the Pacific Far East and
retained our existing 19.9% ownership interest in the Playboy TV and Spice
branded networks in Latin America and Iberia.
The following discussion focuses on the profit contribution of each of our
Entertainment Group businesses before programming expense.
Profit contribution from domestic TV networks for 2002 increased $7.2
million on a revenue increase of $7.8 million, or 9%, primarily due to the
addition of the movie networks from the Califa acquisition. In 2003, we expect
to see a flattening in domestic TV revenues while we continue to capitalize on
the rollout of digital technology by increasing the number of addressable homes
our networks are available to, as well as the number of networks on each system.
Additionally, our goal is to increase the number of systems that also offer
Playboy TV on a monthly subscription basis.
Our networks were available as follows:
Dec. 31, Dec. 31,
Household units (in millions) (1) 2002 2001
--------------------------------------------------------------------------------
Playboy TV
DTH 19.2 18.1
Cable digital 14.0 10.3
Cable analog addressable 5.7 7.8
Playboy TV en Espanol (2)
DTH 7.0 --
Cable digital 2.7 --
Movie Networks
DTH 38.4 35.3
Cable digital 36.9 25.3
Cable analog addressable 10.8 17.0
--------------------------------------------------------------------------------
(1) Each household unit is defined as one household carrying one given network
per carriage platform. A single household can represent multiple household
units if two or more of our networks and/or multiple platforms (i.e.
digital and analog) are available to that household.
(2) We obtained 100% distribution rights of Playboy TV en Espanol in the U.S.
Hispanic market in December 2002 in connection with the restructuring of
the ownership of our international TV joint ventures. Prior to the
restructuring, this network was included in international TV's household
units.
21
Revenues and profit contribution from the international TV business
decreased $0.6 million and $1.1 million, respectively, due to our not receiving
the September 2002 library license fee payment of $7.5 million from PTVI under
the old joint venture agreement. Partially offsetting the above were higher
sales of output programming to PTVI. As previously discussed, in December 2002,
we restructured the ownership of our international TV joint ventures with
Claxson. We accounted for this transaction as an unwinding of the PTVI joint
venture and final payment under the original sale of assets and licensing
agreement, which resulted in the recognition of $0.5 million in additional
revenues. In return for our increased ownership in PTVI and the other terms of
the restructuring transaction, among other things, (a) we forgave approximately
$12.3 million in current programming and other receivables due from PTVI, (b) we
will no longer receive the library or output agreement payments that we were
scheduled to receive under the original agreement and (c) Claxson is released
from its remaining funding obligations to PTVI. With the recent expansion of our
ownership in Playboy TV and movie networks outside of the United States and
Canada and by offering such a diverse range of networks, we will seek to
increase penetration in our existing international markets as more television
homes have access to digital technology and expand our reach into other
international markets. However, in the near term we expect lower operating
margins from this business as a result of consolidating PTVI under our new
ownership rather than recording licensing fees as in the past. This, coupled
with the flattening of domestic TV revenues, is expected to lead to a decline in
Entertainment Group profitability in 2003.
Profit contribution from our worldwide home video business increased $0.7
million on a revenue increase of $0.9 million, or 10%, mainly due to the absence
of a domestic distributor in the prior year third quarter. The contract with our
previous distributor expired in June 2001, and the contract with our current
distributor became effective in October 2001. Partially offsetting the above
were higher revenues in the prior year of $1.6 million related to a change in
accounting in accordance with SOP 00-2, Accounting by Producers or Distributors
of Films, which primarily impacted the domestic business.
Programming amortization expense increased $3.2 million compared to the
prior year as a result of a higher number of original programs premiering on
domestic Playboy TV and the addition of licensed programming for the movie
networks from the Califa acquisition.
The group incurred expenses in the current year of $1.0 million related to
relocating its California office space and moving to its new studio production
facility during the current year.
Publishing Group
Playboy magazine revenues decreased $6.1 million, or 6%, for 2002 due
mostly to lower advertising and newsstand revenues. In spite of this, the
Publishing Group reported improved performance for 2002 of $0.9 million.
Advertising revenues decreased $4.6 million, or 12%, due to fewer ad pages,
partially offset by higher average net revenue per page. Advertising sales for
the 2003 first quarter magazine issues are closed, and we expect to report 4%
fewer ad pages and 3% lower ad revenues compared to the 2002 first quarter.
Newsstand revenues were $2.8 million lower principally due to 13% fewer U.S. and
Canadian newsstand copies sold in the current year. Subscription revenues were
3% higher.
Other domestic publishing revenues decreased $2.1 million, or 15%, for
2002 compared to the prior year primarily due to lower newsstand sales of
special editions.
International publishing revenues decreased $4.5 million, or 45%, due to
the sale in July 2001 of the majority of our equity interest in VIPress, our
Polish publishing joint venture. As a result we no longer consolidate its
results. We sold our remaining equity interest in the joint venture in October
2002.
The group's segment performance for 2002 increased due in part to
cost-reduction measures implemented in the fourth quarter of the prior year.
Additionally, manufacturing costs decreased $4.5 million, driven by lower paper
prices combined with fewer printed pages in Playboy magazine largely as a result
of the fewer ad pages. Significantly lower editorial costs of $3.8 million also
favorably impacted the comparison. The lower Playboy magazine and special
editions newsstand revenues and the lower advertising revenues partially offset
the lower costs and expenses. In 2003, we expect the continuing benefit of cost
reductions plus growth in ad revenues to more than offset the transitional costs
of moving editorial staff from Chicago to New York under the direction of the
magazine's new editor. Additionally, the group expects to benefit from the sales
of Playboy's 50th anniversary issue in December.
22
Playboy Online Group
Playboy Online Group revenues for 2002 increased $3.5 million, or 13%, to
$31.0 million. Subscription revenues increased $4.4 million, or 66%, due to
growth in members, the up pricing of Playboy Cyber Club and the launch of new
clubs. Other revenues increased $2.3 million, or 69%, primarily as a result of
licensing fees generated by international website deals, including in Germany,
Korea, the Netherlands and Taiwan. E-commerce revenues were down $3.2 million,
or 18%, mostly due to the sale of our Collectors' Choice Music business in
November 2001 combined with the continuation of the strategy to increase profit
margins with more targeted circulation. The group's segment loss decreased $12.8
million mainly due to a combination of the higher revenues plus cost-saving
initiatives implemented in the fourth quarter of 2001. In accordance with an
agreement, the group paid trademark fees to the parent company of $6.6 million
in the current year compared to $4.6 million in 2001. We expect to achieve
profitability for the group in 2003 principally through the continued growth of
our subscription business.
Licensing Businesses Group
Segment income for 2002 from the Licensing Businesses Group increased $2.0
million, or 75%, on a revenue increase of $2.4 million, or 23%. Higher royalties
from our international licensed branded products business of $1.3 million,
revenues of $0.9 million related to an auction held with Butterfields
Auctioneers and eBay in June 2002 of a small portion of our art and memorabilia
collection and the favorable impact of cost-reduction measures implemented in
the fourth quarter of 2001 were responsible for the improved performance. We
expect to continue to increase the group's profitability in 2003 by expanding
our product lines and outlets.
Catalog Group
In November 2001, we sold our Collectors' Choice Music business, ending
our presence in the nonbranded print catalog business.
Corporate Administration and Promotion
Corporate Administration and Promotion expenses for 2002 decreased $3.9
million, or 20%, compared to the prior year. This improvement was primarily a
result of no longer amortizing trademarks in the current year due to the
adoption of Statement 142, Goodwill and Other Intangible Assets, lower marketing
expenses and a greater reduction of expenses related to the higher trademark
fees from the Playboy Online Group. Partially offsetting the above were expenses
related to the addition of a President and Chief Operating Officer position in
the current year. We expect Corporate Administration and Promotion expenses to
be slightly lower in 2003 than in 2002.
Restructuring Expenses
In 2002, we announced a Company-wide restructuring initiative in order to
reduce our ongoing operating expenses. 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 and $2.8 million related to the consolidation of our
office space in Los Angeles and Chicago. Also in 2002, a $0.9 million
unfavorable adjustment was made to the 2001 restructuring discussed below
primarily due to a change in sublease assumptions.
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. Restructuring charges of $3.7 million related to
this plan were recorded in 2001, of which $2.5 million related to the
termination of 88 employees. The charge also included $1.2 million related to
the excess space in our Chicago and New York offices.
Gain (Loss) on Disposals
The prior year included a loss of $1.3 million related to the sale of our
Collectors' Choice Music business. Also in 2001, we sold a majority of our
equity interest in VIPress, publisher of the Polish edition of Playboy magazine,
resulting in a gain of $0.4 million. In 2002, we sold our remaining 20% interest
in VIPress resulting in a gain of $0.4 million.
23
2001 COMPARED TO 2000
Our revenues for 2001 decreased $15.8 million, or 5%, compared to the
prior year primarily due to the sale of our Critics' Choice Video business in
October 2000. In November 2001, we also sold our Collectors' Choice Music
business, ending our presence in the nonbranded print catalog business. The
comparison also reflected lower Playboy magazine revenues combined with higher
domestic TV networks revenues, largely due to the Califa acquisition in July
2001.
Operating performance improved $7.7 million in 2001 compared to the prior
year primarily due to the factors discussed above combined with better
performance from the Playboy Online and Licensing Businesses Groups and lower
Corporate Administration and Promotion expenses. The operating loss for 2001
also included a lower loss related to the sale of Collectors' Choice Music
compared to the loss related to the sale of Critics' Choice Video in 2000.
The lower net loss for 2001 reflected significantly lower income tax
expense related to our decision in 2000 to increase the valuation allowance for
our deferred tax assets. Also included in the 2001 net loss was a $4.2 million
noncash charge representing a "Cumulative effect of change in accounting
principle" related to the adoption of SOP 00-2, Accounting by Producers or
Distributors of Film. Additionally, 2001 reflected higher interest expense
primarily due to mostly noncash imputed interest related to the deferred payment
of the purchase price for the Califa acquisition.
Entertainment Group
In July 2001, we acquired two networks, The Hot Network and The Hot Zone,
together with the related television assets of Califa. In addition, we acquired
the Vivid TV network, now operated as Spice Platinum, together with the related
television assets of VODI, a separate entity owned by Califa's principals.
The following discussion focuses on the profit contribution of each of our
Entertainment Group businesses before programming expense.
Revenues from domestic TV networks for 2001 increased $12.2 million, or
16%, and profit contribution increased $9.8 million. These increases were
primarily due to the Califa acquisition and a $4.9 million increase in Playboy
TV revenues.
Our networks were available as follows:
Dec. 31, Dec. 31,
Household units (in millions) (1) 2001 2000
--------------------------------------------------------------------------------
Playboy TV
DTH 18.1 15.4
Cable digital 10.3 3.2
Cable analog addressable 7.8 11.0
Movie Networks (2)
DTH 35.3 --
Cable digital 25.3 8.4
Cable analog addressable 17.0 16.2
--------------------------------------------------------------------------------
(1) Each household unit is defined as one household carrying one given network
per carriage platform. A single household can represent multiple household
units if two or more of our networks and/or multiple platforms (i.e.
digital and analog) are available to that household.
(2) Includes The Hot Network, The Hot Zone and the Spice Platinum networks
acquired in connection with the Califa acquisition in July 2001.
Revenues from our international TV business for 2001 were flat and profit
contribution decreased $0.2 million. Lower revenues of $2.1 million due to the
timing of library license fees from PTVI were offset by $2.1 million higher PTVI
programming output revenues.
Revenues from our worldwide home video business for 2001 increased $1.0
million, or 11%, and profit contribution increased $1.4 million primarily due to
$2.9 million of revenues recorded in 2001 related to a change in accounting in
accordance with SOP 00-2, primarily related to the domestic business. Also
reflected in 2001 results was the absence of a domestic distributor in the third
quarter. The contract with our previous distributor expired in June 2001, and
the contract with our current distributor became effective in October 2001.
Additionally, results for 2001 reflected royalties from a new continuity series.
24
Both revenues and profit contribution from movies and other businesses for
2001 decreased $0.3 million, primarily due to lower sales of previously released
movies combined with the timing of library license fees from PTVI.
Programming amortization expense increased $4.1 million in 2001 primarily
due to higher amortization for domestic TV networks of $2.9 million and
international TV of $1.5 million, primarily related to the higher programming
output revenues from PTVI.
The group's administrative expenses increased $1.7 million in 2001
primarily due to higher performance-related variable compensation expense and
increased staffing.
Publishing Group
Playboy magazine revenues decreased $7.2 million, or 7%, for 2001
principally due to 25% fewer U.S. and Canadian newsstand copies sold in 2001.
Additionally, advertising revenues were $1.4 million lower in 2001 due to fewer
ad pages, partially offset by higher average net revenue per page. Lower
revenues from the rental of the magazine's subscriber list also contributed to
the revenue decline.
Revenues from other domestic publishing businesses decreased $0.9 million,
or 6%, for 2001 compared to the prior year primarily reflecting lower newsstand
sales of special editions.
International publishing revenues decreased $3.0 million, or 22%, in 2001
primarily due to the sale in July 2001 of a majority of our equity interest in
VIPress, our Polish publishing joint venture, and as a result we no longer
consolidate its results. Also contributing to the decline were lower royalties
of $0.8 million from the Brazilian edition as a result of weak economic
conditions in that country.
The group's segment income for 2001 decreased $5.1 million, or 74%,
compared to 2000 primarily due to the lower Playboy magazine newsstand and
special editions revenues combined with lower subscription profitability of $1.8
million. Partially offsetting the above were lower manufacturing costs of $1.5
million, principally related to fewer printed pages in Playboy magazine due in
part to the fewer ad pages, and lower editorial costs of $1.3 million.
Playboy Online Group
Playboy Online Group revenues for 2001 increased $2.2 million, or 9%, to
$27.5 million. Higher subscription revenues of $2.5 million drove the increase.
Additionally, e-commerce revenues increased $0.9 million in spite of the sales
of CCVideo.com in October 2000 and CCMusic.com in November 2001. Other revenues
decreased $1.2 million as licensing fees generated by our new German and Korean
joint ventures were more than offset by weaker advertising and sponsorship
revenues. In spite of higher trademark fees to the parent company and write-offs
for obsolete inventory, primarily related to the remerchandising of the online
websites, the group's segment loss decreased $3.5 million primarily due to
cost-saving initiatives, including restructuring, in 2001.
Licensing Businesses Group
Segment income for 2001 from the Licensing Businesses Group increased $1.7
million on a revenue increase of $1.6 million, or 16%. Growth in our domestic
licensed branded products business of $1.0 million combined with lower business
development expenses of $0.8 million related to casino gaming opportunities were
responsible for the increased performance.
Catalog Group
Catalog Group revenues for 2001 decreased $21.4 million, or 66%, and
segment performance decreased $0.4 million. These changes were the result of
management's decision to divest this nonbranded noncore business.
Corporate Administration and Promotion
Corporate Administration and Promotion expenses for 2001 decreased $1.2
million, or 6%, compared to 2000. This improvement primarily reflected a greater
reduction of expenses related to the higher trademark fees of $1.5 million from
the Playboy Online Group.
25
Restructuring Expenses
As previously discussed, in 2001, we implemented a restructuring plan in
anticipation of a continuing weak economy, which resulted in a restructuring
charge of $3.7 million recorded in 2001. In 2000, realignment of senior
management, coupled with staff reductions, led to a restructuring charge of $3.7
million related to the termination of 19 employees.
Gain (Loss) on Disposals
In 2001, the sale of our Collectors' Choice Music business resulted in a
loss of $1.3 million. Also in 2001, we sold a majority of our equity interest in
VIPress, resulting in a gain of $0.4 million. The prior year included a loss of
$3.0 million related to the sale of our Critics' Choice Video business and
fulfillment and customer service operations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, we had $4.1 million in cash and cash equivalents and
$92.5 million in total financing obligations compared to $4.6 million in cash
and cash equivalents and $101.6 million in total financing obligations at
December 31, 2001. The financing obligations at December 31, 2002 and 2001
included $27.2 million and $20.0 million, respectively, in loans made directly
from Mr. Hefner to Playboy.com.
At December 31, 2002, our liquidity requirements, excluding those of
Playboy.com, were being provided by a $97.5 million credit facility, comprised
of $62.5 million of term loans and a $35.0 million revolving credit facility. At
December 31, 2002, $2.8 million of borrowings and $3.9 million in letters of
credit were outstanding under the revolving credit facility. In January 2003, an
additional $6.0 million letter of credit was issued under the facility as
collateral for a supersedeas bond, which was issued in connection with our
appeal of the verdict in the Gongora lawsuit. See Part I. Item 3. "Legal
Proceedings." A second letter of credit in the amount of $1.7 million was also
issued in January 2003 as collateral for the supersedeas bond, but was not
provided under the credit facility. As a result, we cash collateralized the $1.7
million letter of credit with the issuing bank.
DEBT FINANCINGS
The credit facility provided that outstanding borrowings carry interest at
rates equal to specified index rates plus margins that fluctuated based on our
leverage ratio. The term loans consisted of two tranches, Tranche A and Tranche
B, which carried margins of 3.00% and 4.25%, respectively, over the London
Interbank Offering Rate, or LIBOR. We were assessed a 0.5% commitment fee on the
unused portion of the revolving credit facility. The weighted average interest
rates at December 31, 2002 were 4.42% and 5.67% for the Tranche A and Tranche B
term loans, respectively, and 6.25% for the revolving credit facility. In May
2001, we entered into a two-year interest rate swap, which effectively converted
$45.0 million of floating rate debt to a fixed rate of 9.03% at December 31,
2002. This agreement was terminated in March 2003 in connection with the new
debt financings discussed below. The term loans began amortizing quarterly on
March 31, 2001. The Tranche A term loan and the revolving credit facility were
scheduled to mature on March 15, 2004 and the Tranche B term loan was scheduled
to mature on March 15, 2006, prior to the new debt financings discussed below.
On March 11, 2003, we completed the private offering of $115.0 million in
aggregate principal amount of senior secured notes through one of our
wholly-owned subsidiaries, PEI Holdings, Inc., or Holdings. The notes mature on
March 15, 2010 and bear interest at the rate of 11.00% per annum, with interest
payable on March 15th and September 15th of each year, beginning September 15,
2003.
The notes are guaranteed 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. The notes and the guarantees rank
equally in right of payment with our and the guarantors' other existing and
future senior debt. The notes and the guarantees are secured by a first-priority
lien on our and each guarantor's trademarks, referred to as the primary
collateral, and by a second-priority lien, junior to a lien for the benefit of
the lenders under the new credit facility, as described below, on (a) 100% of
the stock of substantially all of our domestic subsidiaries, excluding the
subsidiaries of Playboy.com, (b) 65% of the capital stock of substantially all
of our indirect first-tier foreign subsidiaries, (c) substantially all of our
and each guarantor's domestic personal property, excluding the primary
collateral and (d) the Playboy Mansion, or collectively, the secondary
collateral.
26
On March 11, 2003, we used $73.3 million of the notes proceeds to repay
$73.0 million in outstanding principal and $0.3 million in accrued interest and
fees on our credit facility. Effective with this repayment, the credit facility
was terminated. In connection with the termination of the credit facility, we
also terminated our existing interest rate swap agreement for $0.4 million,
which was scheduled to mature in May 2003. On March 14, 2003, we paid $17.3
million to the Califa principals in satisfaction of substantially all of our
2003 payment obligations, which are discussed below. The remaining $24.0 million
of notes proceeds will provide liquidity for general corporate purposes and be
used to pay fees and expenses associated with the notes offering.
On March 11, 2003, Holdings also entered into a new revolving credit
facility, pursuant to which we are permitted to borrow up to $20.0 million in
revolving borrowings, letters of credit or a combination thereof. For purposes
of calculating interest, revolving loans made under the new credit facility will
be designated at either the offshore dollar inter bank rate, or IBOR, plus a
borrowing margin based on our adjusted EBITDA or, in certain circumstances, at a
base rate plus a borrowing margin based on our adjusted EBITDA. Letters of
credit issued under the new credit facility bear fees at IBOR plus a borrowing
margin based on our adjusted EBITDA. All amounts outstanding under the new
credit facility will mature on March 11, 2006. At March 27, 2003, there were no
borrowings outstanding under the new credit facility, but the $9.9 million of
letters of credit that had been outstanding under the former credit facility,
plus the $1.7 million letter of credit outstanding outside the former credit
facility, were canceled and reissued under the new credit facility, for a total
of $11.6 million in letters of credit outstanding. Our obligations under the new
credit facility are guaranteed by us and each of the guarantors of the notes.
The obligations of us and each of the guarantors under the new credit facility
are secured by a first-priority lien on the secondary collateral and a
second-priority lien on the primary collateral.
FINANCING FROM RELATED PARTY
The former credit facility contained a maximum funding limitation which
restricted the amount of funding we could provide to Playboy.com. As a result,
Playboy.com issued Series A Preferred Stock and promissory notes to Mr. Hefner,
as discussed in more detail below, which have provided Playboy.com most of its
required liquidity since 2000. Under the terms of the senior secured notes and
the new credit facility, our ability to invest in Playboy.com is no longer
limited.
In 2001, in connection with a private placement of its preferred stock,
Playboy.com converted three $5.0 million convertible promissory notes, together
with accrued and unpaid interest thereon, into shares of Playboy.com's Series A
Preferred Stock. Mr. Hefner was the holder of one of these notes. Playboy.com's
Series A Preferred Stock is convertible into Playboy.com common stock (initially
on a one-for-one basis) and is redeemable by Playboy.com after the fifth
anniversary of the date of its issuance at the option of the holder. In
addition, in the event that a holder elects to cause Playboy.com to redeem
Playboy.com's Series A Preferred Stock at any time after the fifth anniversary
of the date of its issuance and before the 180th day thereafter, and Playboy.com
is not able to, or does not, satisfy such obligation, in cash or stock, we have
agreed that we will redeem all or part of the shares in lieu of redemption by
Playboy.com, either in cash, shares of our Class B stock or any combination
thereof at our option. As part of the ownership restructuring of PTVI, Claxson
agreed to return its shares of Playboy.com Series A Preferred Stock, which
leaves only Mr. Hefner and one unaffiliated investor as minority shareholders of
Playboy.com.
In connection with the sale of the senior secured notes, we restructured
the outstanding indebtedness of Playboy.com owed to Mr. Hefner. In its review of
the Hefner debt restructuring, our Board of Directors appointed a special
committee of independent directors to evaluate, negotiate and determine the
terms on behalf of us. The special committee approved the Hefner debt
restructuring on the terms described below and recommended to the full Board of
Directors that it approve the restructuring on those terms, which it did. In
connection with their respective approvals, the special committee and our Board
of Directors received an opinion from an independent financial advisor of
national standing retained by the special committee to the effect that the
Hefner debt restructuring was fair to us from a financial point of view.
27
At December 31, 2002 and at the time of the Hefner debt restructuring,
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 in the following manner. A $10.0 million promissory note payable by
Playboy.com to Mr. Hefner was extinguished in exchange for shares of a new
series of Series A preferred stock of Holdings, which we refer to as the
Holdings Series A Preferred Stock, with an aggregate stated value of $10.0
million. We are required to exchange the Holdings Series A Preferred Stock for
shares of our Class B stock. The two other promissory notes payable by
Playboy.com to Mr. Hefner, in a combined principal amount of $17.2 million plus
interest, were extinguished in exchange for $0.5 million in cash and shares of a
new series of Series B preferred stock of Holdings, which we refer to as the
Holdings Series B Preferred Stock, with an aggregate stated value of $17.2
million. We are required to exchange the Holdings Series B Preferred Stock for
shares of a new series of preferred stock of Playboy, which we refer to as
Playboy Preferred Stock.
In order to issue the Playboy Preferred Stock, our certificate of
incorporation must be amended 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,
has approved the certificate amendment by written consent. Under federal
securities laws, the certificate amendment cannot become effective prior to the
20th calendar day following the mailing to our stockholders of an information
statement that complies with applicable SEC rules. The Holdings Series A
Preferred Stock will be mandatorily exchanged for our Class B stock and the
Holdings Series B Preferred Stock will be mandatorily exchanged for Playboy
Preferred Stock as soon as practicable following the effectiveness of the
certificate amendment.
Holdings will be required to redeem the Holdings Series A Preferred Stock
in September 2010, unless exchanged earlier for our Class B stock, and the
Holdings Series A Preferred Stock will pay an annual dividend of 8.00%, payable
semi-annually. The dividend will be payable in cash, provided that if the
exchange of the Holdings Series A Preferred Stock for shares of our Class B
stock has not occurred prior to the 90th day following the original issuance of
the Holdings Series A Preferred Stock, dividends accruing after that date will
be paid through the issuance of additional shares of Holdings Series A Preferred
Stock. The number of shares of Class B stock issued in the exchange would be
determined by dividing (a) the sum of the aggregate stated value of the then
outstanding shares of Holdings Series A Preferred Stock and the amount of
accrued and unpaid dividends by (b) the weighted average closing price of our
Class B stock during the 90-day period prior to the date of the certificate
amendment.
Holdings will be required to redeem the Holdings Series B Preferred Stock
in September 2010, unless exchanged earlier for Playboy Preferred Stock, and the
Holdings Series B Preferred stock will pay an annual cash dividend of 8.00%,
payable semi-annually. Each share of Holdings Series B Preferred Stock will be
exchanged for one share of Playboy Preferred Stock plus an amount equal to any
accrued but unpaid dividends. The Playboy Preferred Stock to be issued in
exchange for the Holdings Series B Preferred Stock will have the same terms as
the Holdings Series B Preferred Stock, except that it will be convertible at the
option of the holder into shares of our Class B stock at a conversion price
equal to 125% of the weighted average closing price of our Class B stock over
the 90-day period prior to the exchange of Holdings Series B Preferred Stock for
Playboy Preferred Stock. After the date that is three years after the date the
Playboy Preferred Stock is issued, if at any time the weighted average closing
price of our Class B stock for 15 consecutive trading days equals or exceeds
150% of the conversion price, we will have the option, by delivering a written
notice to holders of shares of Playboy Preferred Stock, to convert any or all
shares of Playboy Preferred Stock into the number of shares of Class B stock
determined by dividing (a) the sum of the aggregate stated value of such Playboy
Preferred Stock and the amount of accrued and unpaid dividends by (b) the
conversion price.
On September 15, 2010, we will be required to redeem all shares of Playboy
Preferred Stock that are then outstanding at a redemption price equal to $10,000
per share plus the amount of accrued and unpaid dividends. The final redemption
price may be paid, at our option, in either cash or shares of our Class B stock
or any combination of cash and shares of Class B stock. If we elect to pay the
final redemption price in shares of our Class B stock, the number of such shares
to which a holder of shares of Playboy Preferred Stock will be entitled will be
determined by dividing (a) the sum of the aggregate stated value of such Playboy
Preferred Stock and the amount of accrued and unpaid dividends by (b) the
weighted average closing price of our Class B stock over the 90-day period prior
to September 15, 2010.
28
CALIFA ACQUISITION
The Califa acquisition agreement gave us the option of paying up to $71
million of the purchase price in cash or Class B stock through 2007. On April
17, 2002, a registration statement for the resale of approximately 1,475,000
shares became effective. These shares were issued in payment of two installments
of consideration, which totaled $22.5 million plus $0.3 million of accrued
interest. The Califa principals, or the sellers, elected to sell the shares and
realized net proceeds from the sale of $19.2 million. As a result, we were
required to provide them with a make-whole payment in either cash or Class B
stock of approximately $3.6 million, plus interest until the date payment was
made. On March 14, 2003, we paid the sellers $17.3 million in cash, in
satisfaction of $8.5 million of base consideration due in 2003, a $5.0 million
performance-based payment due in 2003 and the $3.6 million make-whole payment,
plus accrued interest of $0.2 million thereon.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $14.3 million for 2002,
which included $5.2 million of cash received as part of the net assets of PTVI
acquired as the final payment under the original sale of assets and licensing
agreement. In return for our increased ownership in PTVI and the other terms of
the restructuring transaction, among other things, (a) we forgave approximately
$12.3 million in current programming and other receivables due from PTVI, (b) we
will no longer receive the library or output agreement payments that we were
scheduled to receive under the original agreement and (c) Claxson is released
from its remaining funding obligations to PTVI. See Note (C) Restructuring of
Ownership of International TV Joint Ventures of Notes to Consolidated Financial
Statements. The current year was also positively impacted by the addition of the
three networks from the Califa acquisition. In 2002, we spent $41.7 million in
Company-produced and licensed programming and expect to invest approximately $44
million in 2003, which could vary based on, among other things, the timing of
completing productions.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used for investing activities was $3.2 million for 2002 primarily
due to $4.3 million of additions to property and equipment. In 2002, we also
entered into leases of furniture and equipment totaling $2.1 million. Partially
offsetting the above was $1.5 million of proceeds from disposals, primarily
related to the sale of our Collectors' Choice Music business.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used for financing activities was $11.7 million for 2002
primarily due to $8.5 million in repayments of term loans and $7.8 million in
payments on our former revolving credit facility, partially offset by $5.0
million of proceeds related to a December 2001 note issued by Playboy.com to Mr.
Hefner.
INCOME TAXES
In 2000, we evaluated our net operating loss carryforwards, or NOLs, and
other deferred tax assets and liabilities in relation to our recent earnings
history. As a result of this review, we decided to adopt a more conservative
approach by increasing the valuation allowance for deferred tax assets, which
resulted in noncash federal income tax expense of $24.1 million. The 2001
increase in the valuation allowance was due primarily to the deferred tax asset
related to the 2001 net operating loss. Of the 2002 increase in the valuation
allowance, $7.1 million was due to the deferred tax treatment of certain
acquired intangibles as a result of the adoption of Statement 142, Goodwill and
Other Intangible Assets, and the remainder was primarily due to the deferred tax
asset related to the 2002 net operating loss.
CRITICAL ACCOUNTING POLICIES
Our financial statements are prepared in conformity with GAAP, which
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. We believe that of
our significant accounting policies, the following is one of the more complex
and critical areas. For additional information about our accounting policies,
see Note (A) Summary of Significant Accounting Policies of Notes to Consolidated
Financial Statements.
29
TRADEMARKS
Our trademarks are critical to the success and potential growth of all of
our businesses. We actively protect and defend our trademarks throughout the
world and monitor the marketplace for counterfeit products. Consequently, we
initiate legal proceedings from time to time to prevent their unauthorized use,
and we incur costs associated with acquisition, defense, registration and/or
renewal of our trademarks. Prior to the implementation of Statement 142,
Goodwill and Other Intangible Assets, in 2002, trademark acquisition costs were
capitalized and amortized using the straight-line method over 40 years, and
trademark defense, registration and/or renewal costs were capitalized and
amortized using the straight-line method over 15 years. Beginning in 2002,
trademark-related costs are no longer being amortized, since our trademarks have
indefinite lives, but are subject to annual impairment tests in accordance with
the new accounting standard. For periods after 2001, capitalized amounts related
to our trademarks are generally higher than they would have been had the old
accounting standards continued to apply.
RELATED PARTY TRANSACTIONS
HUGH M. HEFNER
We own a 29-room mansion located on 5 1/2 acres in Holmby Hills,
California. The Playboy Mansion is used for various corporate activities,
including serving as a valuable location for video production, magazine
photography, online events, business meetings, enhancing our image, charitable
functions and a wide variety of other promotional and marketing activities. The
Playboy Mansion generates substantial publicity and recognition which increase
public awareness of us and our products and services. Its facilities include a
tennis court, swimming pool, gymnasium and other recreational facilities as well
as extensive film, video, sound and security systems. The Playboy Mansion also
includes accommodations for guests and serves as an office and residence for
Hugh M. Hefner, our founder. It has a full-time staff which performs
maintenance, serves in various capacities at the functions held at the Playboy
Mansion and provides guests of ours and Mr. Hefner's with meals, beverages and
other services.
Under a 1979 lease we entered into with Mr. Hefner, the annual rent Mr.
Hefner pays to us for his use of the Playboy Mansion is determined by
independent experts who appraise the value of Mr. Hefner's basic accommodations
and access to the Playboy Mansion's facilities, utilities and attendant services
based on comparable hotel accommodations. In addition, Mr. Hefner is required to
pay the sum of the per-unit value of nonbusiness meals, beverages and other
benefits he and his personal guests receive. These standard food and beverage
per-unit values are determined by independent expert appraisals based on fair
market values. Valuations for both basic accommodations and standard food and
beverage units are reappraised every three years, and between appraisals are
annually adjusted based on appropriate consumer price indexes. Mr. Hefner is
also responsible for the cost of all improvements in any Hefner residence
accommodations, including capital expenditures, that are in excess of normal
maintenance for those areas.
Mr. Hefner's usage of Playboy Mansion services and benefits is recorded
through a system initially developed by the auditing and consulting firm of
PricewaterhouseCoopers LLP and now administered by us, with appropriate
modifications approved by the audit and compensation committees of the Board of
Directors. The lease had an initial two-year term which expired on June 30,
1981, but on its terms continues for ensuing 12-month periods unless either we
or Mr. Hefner terminates it. When we changed our fiscal year from a year ending
June 30 to a year ending December 31, Mr. Hefner's lease continued for only a
six-month period through December 31, 1998 to accommodate this change. On
December 31, 1998, the lease renewed automatically and will continue to renew
automatically for 12-month periods under the terms as previously described. The
rent charged to Mr. Hefner during 2002 included the appraised rent and the
appraised per-unit value of other benefits, as described above. Within 120 days
after the end of our fiscal year, the actual charge for all benefits for that
year is finally determined. Mr. Hefner pays or receives credit for any
difference between the amount finally determined and the amount he paid over the
course of the year. The sum of the rent and other benefits payable for 2002 was
estimated by us to be $1.1 million, and Mr. Hefner paid that amount during 2002.
The actual rent and other benefits payable for 2001 and 2000 were $1.3 million
and $1.1 million, respectively.
We purchased the Playboy Mansion in 1971 for $1.1 million and in the
intervening years have made substantial capital improvements at a cost of $13.6
million through 2002 (including $2.5 million to bring the Hefner residence
accommodations to a standard similar to the Playboy Mansion's common areas). The
Playboy Mansion is included in our Consolidated Balance Sheet at December 31,
2002 at a net book value, including all improvements and after accumulated
depreciation, of $1.9 million. We incur all operating expenses of the Playboy
Mansion, including depreciation and taxes, which were $3.6 million, $3.2 million
and $3.2 million for 2002, 2001 and 2000, respectively, net of rent received
from Mr. Hefner.
30
From time to time, we enter into barter transactions in which we secure
air transportation for Mr. Hefner in exchange for advertising pages in Playboy
magazine. Mr. Hefner reimburses us for our direct costs of providing these ad
pages. We receive significant promotional benefit from these transactions.
At December 31, 2002 and at the time of the Hefner debt restructuring,
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 as previously discussed in Liquidity and Capital Resources.
PTVI
In December 2002, we completed the restructuring of the ownership of our
international TV joint ventures with Claxson. The restructuring significantly
expanded our ownership of Playboy TV and movie networks outside of the United
States and Canada. The Claxson joint ventures originated when PTVI and PTVLA
were formed in 1999 and 1996, respectively, as joint ventures between us and
Cisneros for the ownership and operation of Playboy TV networks outside of the
United States and Canada. In 2001, Claxson succeeded Cisneros as our joint
venture partner. Prior to the restructuring transaction, parts of which were
effective as of April 1, 2002, PTVI and PTVLA had exclusive rights to create and
launch new television networks under the Playboy and Spice brands outside of the
United States and Canada, and under specified circumstances, to license
programming to third parties. We owned a 19.9% equity interest in PTVI and a 19%
equity interest in PTVLA before the restructuring. PTVLA is now our sole
remaining joint venture with Claxson.
Prior to the restructuring transaction, in return for the exclusive
international TV rights for the use of the Playboy tradename, film and video
library, and for the acquisition of the international rights to the Spice film
library, the U.K. and Japan Playboy TV networks and certain international
distribution contracts, PTVI was obligated to make total payments of $100.0
million to us, related to the above, over six years, of which $42.5 million had
been received prior to the restructuring transaction. The remaining $57.5
million was to be paid to us from 2002 to 2004. In addition, prior to the
restructuring transaction, we received $36.7 million in quarterly payments as
part of the original PTVI long-term output agreement for the international
television rights to programming. In return for our increased ownership in PTVI
and the other terms of the restructuring transaction, among other things, (a) we
forgave approximately $12.3 million in current programming and other receivables
due from PTVI, (b) we will no longer receive the library or output agreement
payments that we were scheduled to receive under the original agreement and (c)
Claxson is released from its remaining funding obligations to PTVI.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board, or the FASB,
issued Statement 148, Accounting for Stock-Based Compensation - Transition and
Disclosure - an Amendment of FASB Statement No. 123. Statement 148 amends
Statement 123, Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to Statement 123's fair value
method of accounting for stock-based compensation. Statement 148 also requires
disclosure in the summary of significant accounting policies footnote of the
method of accounting for stock options used in each period presented and a
tabular presentation of the actual or pro forma effect of using the fair value
method of accounting for stock-based compensation. Additionally, Statement 148
requires disclosure of the same pro forma information in interim financial
statements. The transition provisions and annual disclosure requirements of
Statement 148 are effective for fiscal years ending after December 15, 2002. The
interim disclosure requirements are effective for periods beginning after
December 15, 2002. As we have elected to continue to apply the intrinsic
value-based method of accounting for stock-based compensation, the adoption of
Statement 148 did not have a material impact on our financial statements.
31
FORWARD-LOOKING STATEMENTS
This Form 10-K Annual Report contains "forward-looking statements,"
including statements in MD&A, as to expectations, beliefs, plans, objectives and
future financial performance, and assumptions underlying or concerning the
foregoing. These forward-looking statements involve known and unknown risks,
uncertainties and other factors, which could cause 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 distributed;
(6) the dilution from any potential issuance of additional common stock in
connection with acquisitions we make or investments in Playboy.com;
(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) any decline in our access to, and acceptance by, DTH and cable systems or
any deterioration in the terms or cancellation of fee arrangements with
operators of these systems;
(13) risks that we may not realize the expected operating efficiencies,
synergies, increased sales and profits and other benefits from
acquisitions;
(14) risks associated with the impact that the financial condition of Claxson,
our venture partner, may have on our existing PTVLA partnership
relationship or the recently concluded restructuring of the joint venture
relationships between us, on the one hand, and Claxson, on the other hand,
and the risks that we may not realize the expected operating efficiencies,
synergies, revenues and profits and other benefits from the restructuring
of our joint venture relationships;
(15) increases in paper or printing costs;
(16) effects of the national consolidation of the single-copy magazine
distribution system; and
(17) uncertainty of the viability of the Internet subscription, e-commerce,
advertising and gaming businesses.
32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks, including changes in interest
rates and foreign currency exchange rates. In order to manage the risk
associated with our exposure to such fluctuations, we enter into various hedging
transactions that have been authorized pursuant to our policies and procedures.
We have derivative instruments that have been designated and qualify as cash
flow hedges, which are entered into in order to hedge the variability of cash
flows to be paid related to a recognized liability and cash flows to be received
related to forecasted royalty revenues. In 2001, we entered into an interest
rate swap agreement that was scheduled to mature in May 2003 that effectively
converted $45.0 million of our floating rate debt to fixed rate debt, thus
reducing the impact of interest rate changes on future interest expense. In
March 2003, in connection with the termination of our former credit facility, we
also terminated this swap agreement for $0.4 million. In addition, to protect
against the reduction in value of foreign currency cash flows, we hedge portions
of our forecasted royalty revenues denominated in foreign currencies, primarily
Japanese yen and the Euro, with forward contracts. We hedge these royalties for
periods not exceeding 12 months. We formally document all relationships between
hedging instruments and hedged items, as well as our risk management objectives
and strategies for undertaking various hedge transactions. We link all hedges
that are designated as cash flow hedges to floating rate liabilities or
forecasted transactions on the balance sheet. We also assess, both at the
inception of the hedge and on an on-going basis, whether the derivatives used in
hedging transactions are effective in offsetting changes in cash flows of the
hedged items. Should it be determined that a derivative is not effective as a
hedge, we will discontinue hedge accounting prospectively. We do not use
financial instruments for trading purposes.
We prepared sensitivity analyses to determine the impact of a hypothetical
one percentage point increase in interest rates. Based on our sensitivity
analyses at December 31, 2002 and 2001, such a change in interest rates would
affect our annual consolidated operating results, financial position and cash
flows by approximately $0.7 million and $0.8 million, respectively. At December
31, 2002 and 2001, we had an interest rate swap agreement in place to
effectively convert $45.0 million of our floating rate debt to a fixed rate of
9.03% and 8.78%, respectively, thereby significantly reducing our risk related
to interest rate fluctuations.
We also prepared sensitivity analyses to determine the impact of a
hypothetical 10% devaluation of the U.S. dollar relative to the foreign
currencies of the countries to which we have exposure, primarily Japan and
Germany. Based on our sensitivity analyses at December 31, 2002 and 2001, such a
change in foreign currency exchange rates would affect our annual consolidated
operating results, financial position and cash flows by approximately $0.3
million and $0.2 million, respectively. We use foreign currency forward
contracts to manage the risk associated with our exposure to foreign currency
exchange rate fluctuations.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements and supplementary data are set
forth in this Form 10-K Annual Report as follows:
Page
----
Consolidated Statements of Operations - Fiscal Years Ended December
31, 2002, 2001 and 2000 34
Consolidated Balance Sheets - December 31, 2002 and 2001 35
Consolidated Statements of Shareholders' Equity - Fiscal Years Ended
December 31, 2002, 2001 and 2000 36
Consolidated Statements of Cash Flows - Fiscal Years Ended December
31, 2002, 2001 and 2000 37
Notes to Consolidated Financial Statements 38
Report of Independent Auditors 61
Report of Management 62
The supplementary data regarding quarterly results of operations are set
forth in Note (W) Quarterly Results of Operations (Unaudited) of Notes to
Consolidated Financial Statements.
33
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/02 12/31/01 12/31/00
------------------------------------------------------------------------------------------------------------
Net revenues $ 277,622 $ 287,583 $ 303,360
------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales (204,616) (237,048) (261,007)
Selling and administrative expenses (58,117) (58,050) (55,385)
Restructuring expenses (6,643) (3,776) (3,908)
------------------------------------------------------------------------------------------------------------
Total costs and expenses (269,376) (298,874) (320,300)
------------------------------------------------------------------------------------------------------------
Gain (loss) on disposals 442 (955) (2,924)
------------------------------------------------------------------------------------------------------------
Operating income (loss) 8,688 (12,246) (19,864)
------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 125 786 1,519
Interest expense (15,147) (13,970) (9,148)
Amortization of deferred financing fees (993) (905) (840)
Minority interest (1,724) (704) (125)
Equity in operations of PTVI and other 279 (746) (375)
Vendor settlement 750 -- --
Playboy.com registration statement expenses -- -- (1,582)
Legal settlement -- -- (622)
Other, net (569) (542) (362)
------------------------------------------------------------------------------------------------------------
Total nonoperating expense (17,279) (16,081) (11,535)
------------------------------------------------------------------------------------------------------------
Loss before income taxes and cumulative effect of change
in accounting principle (8,591) (28,327) (31,399)
Income tax expense (8,544) (996) (16,227)
------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of change in accounting principle (17,135) (29,323) (47,626)
Cumulative effect of change in accounting principle (net of tax) -- (4,218) --
------------------------------------------------------------------------------------------------------------
Net loss $ (17,135) $ (33,541) $ (47,626)
============================================================================================================
Basic and diluted weighted average number
of common shares outstanding 25,595 24,411 24,240
============================================================================================================
Basic and diluted earnings per common share
Loss before cumulative effect of change in accounting principle $ (0.67) $ (1.20) $ (1.96)
Cumulative effect of change in accounting principle (net of tax) -- (0.17) --
------------------------------------------------------------------------------------------------------------
Net loss $ (0.67) $ (1.37) $ (1.96)
============================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
34
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Dec. 31, Dec. 31,
2002 2001
-------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 4,118 $ 4,610
Marketable securities 2,677 3,182
Receivables, net of allowance for doubtful accounts of
$5,124 and $6,406, respectively 42,211 41,846
Receivables from related parties 1,542 12,417
Inventories, net 10,498 13,962
Deferred subscription acquisition costs 12,038 12,111
Other current assets 11,296 7,857
-------------------------------------------------------------------------------------------
Total current assets 84,380 95,985
-------------------------------------------------------------------------------------------
Receivables from related parties -- 50,000
Property and equipment, net 11,716 10,749
Programming costs, net 52,347 56,213
Goodwill 111,893 112,338
Trademarks 55,219 52,185
Distribution agreements, net of accumulated
amortization of $6,598 and $2,199, respectively 34,284 26,301
Other noncurrent assets 19,882 22,469
-------------------------------------------------------------------------------------------
Total assets $ 369,721 $ 426,240
===========================================================================================
Liabilities
Financing obligations $ 6,402 $ 8,561
Financing obligations to related parties 17,235 15,000
Acquisition liabilities 13,427 21,023
Accounts payable 24,596 19,293
Accounts payable to related parties -- 169
Accrued salaries, wages and employee benefits 10,419 8,717
Deferred revenues 52,633 47,913
Deferred revenues from related parties -- 8,382
Other liabilities and accrued expenses 17,648 18,453
-------------------------------------------------------------------------------------------
Total current liabilities 142,360 147,511
-------------------------------------------------------------------------------------------
Financing obligations 58,865 73,017
Financing obligations to related parties 10,000 5,000
Acquisition liabilities 39,685 41,079
Deferred revenues from related parties -- 44,350
Net deferred tax liabilities 12,375 5,313
Other noncurrent liabilities 18,621 28,445
-------------------------------------------------------------------------------------------
Total liabilities 281,906 344,715
-------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity
Common stock, $0.01 par value
Class A voting - 7,500,000 shares authorized; 4,864,102 issued 49 49
Class B nonvoting - 30,000,000 shares authorized; 21,422,321
and 19,930,142 issued, respectively 214 199
Capital in excess of par value 146,091 123,090
Accumulated deficit (54,060) (36,925)
Unearned compensation - restricted stock (2,713) (3,019)
Accumulated other comprehensive loss (1,766) (1,869)
-------------------------------------------------------------------------------------------
Total shareholders' equity 87,815 81,525
-------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 369,721 $ 426,240
===========================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
35
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Retained Unearned Accumulated
Class A Class B Capital in Earnings Comp. - Other
Common Common Excess of (Accum. Restricted Comprehensive
Stock Stock Par Value Deficit) Stock Income (Loss) Total
------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 49 $ 196 $ 120,337 $ 44,242 $ (3,624) $ 81 $ 161,281
Net loss -- -- -- (47,626) -- -- (47,626)
Shares issued, vested or forfeited
under stock plans, net -- -- 510 -- 911 -- 1,421
Other comprehensive loss -- -- -- -- -- (563) (563)
Other -- -- (328) -- -- -- (328)
------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 49 196 120,519 (3,384) (2,713) (482) 114,185
Net loss -- -- -- (33,541) -- -- (33,541)
Shares issued, vested or forfeited
under stock plans, net -- 3 2,504 -- (306) -- 2,201
Other comprehensive loss -- -- -- -- -- (1,631) (1,631)
Disposal -- -- -- -- -- 244 244
Other -- -- 67 -- -- -- 67
------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 49 199 123,090 (36,925) (3,019) (1,869) 81,525
Net loss -- -- -- (17,135) -- -- (17,135)
Shares issued, vested or forfeited
under stock plans, net -- -- 6 -- 306 -- 312
Shares issued related to the Califa
acquisition -- 15 22,826 -- -- -- 22,841
Other comprehensive income -- -- -- -- -- 94 94
Other -- -- 169 -- -- 9 178
------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 49 $ 214 $ 146,091 $(54,060) $ (2,713) $ (1,766) $ 87,815
==============================================================================================================================
Comprehensive loss was as follows:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/02 12/31/01 12/31/00
------------------------------------------------------------------------------------
Net loss $ (17,135) $ (33,541) $ (47,626)
------------------------------------------------------------------------------------
Unrealized loss on marketable
securities (555) (350) (533)
Derivative gain (loss) 500 (1,184) --
Foreign currency translation gain (loss) 149 (97) (30)
------------------------------------------------------------------------------------
Total other comprehensive income (loss) 94 (1,631) (563)
------------------------------------------------------------------------------------
Comprehensive loss $ (17,041) $ (35,172) $ (48,189)
====================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
36
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/02 12/31/01 12/31/00
----------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (17,135) $ (33,541) $ (47,626)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities
Depreciation of property and equipment 3,781 3,897 3,561
Amortization of intangible assets 7,212 10,612 8,097
Amortization of investments in entertainment programming 40,626 37,395 33,253
Amortization of deferred financing fees 993 905 840
Equity in operations of PTVI and other (279) 746 375
(Gain) loss on disposals (442) 955 2,924
Cumulative effect of change in accounting principle -- 4,218 --
Deferred income taxes 7,018 634 12,950
Changes in current assets and liabilities
Receivables 5,537 5,822 (3,305)
Receivables from related parties (30,164) (4,458) 4,832
Inventories 3,464 3,468 (1,129)
Deferred subscription acquisition costs 73 403 1,065
Other current assets (4,225) 944 1,797
Accounts payable (139) (6,587) (7,024)
Accounts payable to related parties (148) (549) (1,972)
Accrued salaries, wages and employee benefits 954 (486) 76
Deferred revenues 3,892 1,122 (456)
Deferred revenues from related parties 18,618 3,985 (2,128)
Acquisition liability interest 4,836 3,777 --
Other liabilities and accrued expenses 6,494 1,034 3,634
------- ------- -------
Net change in current assets and liabilities 9,192 8,475 (4,610)
------- ------- -------
Decrease in receivables from related parties 25,000 6,525 4,350
Investments in entertainment programming (41,717) (37,254) (33,061)
Increase in trademarks (3,034) (2,625) (7,080)
(Increase) decrease in other noncurrent assets 209 (173) (384)
Decrease in deferred revenues from related parties (21,325) (6,525) (4,350)
Decrease in other noncurrent liabilities (1,553) (737) (160)
International TV joint venture restructuring 4,738 -- --
Other, net 1,044 (1,452) (229)
----------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 14,328 (7,945) (31,150)
----------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Payments for acquisitions (435) (935) (1,152)
Proceeds from disposals 1,517 3,276 5,384
Additions to property and equipment (4,318) (3,233) (5,265)
Funding of equity interests -- (1,875) (2,238)
Other, net 78 (86) (618)
----------------------------------------------------------------------------------------------------------
Net cash used for investing activities (3,158) (2,853) (3,889)
----------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net proceeds from sale of Playboy.com Series A Preferred Stock -- 13,066 --
Proceeds from financing obligations 5,000 10,000 28,250
Repayment of financing obligations (16,311) (11,672) (15,000)
Payment of deferred financing fees (585) (454) (590)
Proceeds from stock plans 234 2,141 1,385
Other, net -- (207) --
----------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (11,662) 12,874 14,045
----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (492) 2,076 (20,994)
Cash and cash equivalents at beginning of year 4,610 2,534 23,528
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 4,118 $ 4,610 $ 2,534
==========================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation: The consolidated financial statements include our
accounts and all majority-owned subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
Use of estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Although these estimates are
based on management's knowledge of current events and actions it may undertake
in the future, they may ultimately differ from actual results.
Reclassifications: Certain amounts reported for prior periods have been
reclassified to conform to the current year's presentation.
New accounting pronouncements: In December 2002, the FASB issued Statement 148,
Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FASB Statement No. 123. Statement 148 amends Statement 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to Statement 123's fair value method of
accounting for stock-based compensation. Statement 148 also requires disclosure
in the summary of significant accounting policies footnote of the method of
accounting for stock options used in each period presented and a tabular
presentation of the actual or pro forma effect of using the fair value method of
accounting for stock-based compensation. Additionally, Statement 148 requires
disclosure of the same pro forma information in interim financial statements.
The transition provisions and annual disclosure requirements of Statement 148
are effective for fiscal years ending after December 15, 2002. The interim
disclosure requirements are effective for periods beginning after December 15,
2002. As we have elected to continue to apply the intrinsic value-based method
of accounting for stock-based compensation, the adoption of Statement 148 did
not have a material impact on our financial statements. See Note (Q) Stock
Plans.
The following pro forma information presents our net loss and basic and diluted
earnings per share, or EPS, assuming stock-based compensation expense had been
determined consistent with Statement 123 (in thousands, except per share
amounts):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/02 12/31/01 12/31/00
--------------------------------------------------------------------------------
Net loss
As reported $ (17,135) $ (33,541) $ (47,626)
Pro forma (20,240) (37,197) (51,449)
Basic and Diluted EPS
As reported (0.67) (1.37) (1.96)
Pro forma $ (0.79) $ (1.52) $ (2.12)
--------------------------------------------------------------------------------
Cumulative effect of change in accounting principle: During 2001, we adopted
Statement 139, Rescission of FASB Statement No. 53 and Amendments to FASB
Statements No. 63, 89, and 121 and SOP 00-2, Accounting by Producers or
Distributors of Films. Statement 139 rescinded FASB Statement 53, Financial
Reporting by Producers and Distributors of Motion Picture Films. SOP 00-2
established new film accounting and reporting standards for producers or
distributors of films, including changes in revenue recognition and accounting
for marketing, development and overhead costs. SOP 00-2 also requires all
programming costs to be classified on the balance sheet as noncurrent assets. As
a result of the adoption of SOP 00-2, we recorded a noncash charge of $4.2
million, or $0.17 per basic and diluted common share, in 2001, representing a
"Cumulative effect of change in accounting principle." There was no related
income tax effect. The charge primarily related to reversals of previously
recognized revenues which under the new rules were considered not yet earned,
combined with a write-off of marketing costs that were previously capitalized
and are no longer capitalizable under the new rules.
38
Revenue recognition: Domestic TV networks DTH and cable revenues are recognized
based on PPV buys and monthly subscriber counts reported each month by the
system operators. International TV revenues received from PTVI, for the license
of the exclusive international TV rights for the use of the Playboy tradename,
film and video library, and for the acquisition of the international rights to
the Spice film library, the U.K. and Japan Playboy TV networks and certain
international distribution contracts, were recognized generally as the
consideration was paid to us, less our 19.9% ownership interest in such
transactions. License fees from PTVI for current output production were
recognized as programming was available, less our 19.9% ownership interest in
such transactions. On December 24, 2002, we completed the restructuring of the
ownership of our international TV joint ventures, significantly expanding our
ownership of Playboy TV and movie networks outside of the United States and
Canada. See Note (C) Restructuring of Ownership of International TV Joint
Ventures. Revenues from the sale of Playboy magazine and Internet subscriptions
are recognized over the terms of the subscriptions. Revenues from newsstand
sales of Playboy magazine and special editions (net of estimated returns) and
revenues from the sale of Playboy magazine advertisements are recorded when each
issue goes on sale. Revenues from e-commerce are recognized when the items are
shipped, which is when title passes.
Cash equivalents: Cash equivalents are temporary cash investments with an
original maturity of three months or less at date of purchase and are stated at
cost, which approximates fair value.
Marketable securities: Marketable securities are classified as
available-for-sale securities and are stated at fair value. Net unrealized
holding gains and losses are included in "Accumulated other comprehensive loss."
Inventories: Inventories are stated at the lower of cost (specific cost and
average cost) or fair value.
Property and equipment: Property and equipment are stated at cost. Costs
incurred for computer software developed or obtained for internal use are
capitalized for application development activities and immediately expensed for
preliminary project activities or post-implementation activities. Depreciation
is recorded using the straight-line method over the estimated useful lives of
the assets. The useful life for building improvements is ten years, furniture
and equipment ranges from four to ten years and software ranges from one to five
years. Leasehold improvements are depreciated using a straight-line basis over
the shorter of their estimated useful lives or the terms of the related leases.
Repair and maintenance costs are expensed as incurred and major betterments are
capitalized. Sales and retirements of depreciable property and equipment are
recorded by removing the related cost and accumulated depreciation from the
accounts, and any related gains or losses are included in nonoperating results.
Advertising costs: We expense advertising costs as incurred, except for
direct-response advertising. Direct-response advertising consists primarily of
costs associated with the promotion of Playboy magazine subscriptions,
principally the production of direct-mail solicitation materials and postage,
and the distribution of direct- and e-commerce mailings for use in the Playboy
Online Group and previously for the Catalog Group. The capitalized
direct-response advertising costs are amortized over the period during which the
future benefits are expected to be received, generally six to 12 months. See
Note (K) Advertising Costs.
Programming costs and amortization: Programming costs include original
programming and film acquisition costs, which are generally capitalized and
amortized. The portion of original programming costs assigned to the domestic TV
networks market is principally amortized using the straight-line method over
three years. Prior to the December 2002 PTVI restructuring, the portion of
original programming costs assigned to the international TV market was fully
amortized upon availability to PTVI. Existing library original programming costs
allocated to the international TV market were amortized proportionately with
license fees recognized related to the PTVI agreement. The portion of original
programming costs assigned to the worldwide home video market is amortized using
the individual-film-forecast-computation method. Film acquisition costs assigned
to domestic markets are amortized principally using the straight-line method
over the license term, generally three years or less, while those assigned to
the international TV market were fully amortized upon availability to PTVI.
Management believes that these methods have provided a reasonable matching of
expenses with total estimated revenues over the periods that revenues associated
with films and programs are expected to be realized. Film and program
amortization are adjusted periodically to reflect changes in the estimates of
amounts of related future revenues. Film and program costs are stated at the
lower of unamortized cost or estimated net realizable value as determined on a
specific identification basis. See Note (C) Restructuring of Ownership of
International TV Joint Ventures and Note (M) Programming Costs, Net.
39
Intangible assets: On January 1, 2002, we adopted Statement 142, Goodwill and
Other Intangible Assets. Under the new rules, goodwill and intangible assets
with indefinite lives are no longer amortized but are subject to annual
impairment tests. Our indefinite-lived intangible assets consist of trademarks
and certain acquired distribution agreements. Other intangible assets continue
to be amortized over their useful lives. Noncompete agreements are being
amortized using the straight-line method over the lives of the agreements,
either five or ten years. Distribution agreements deemed to have definite lives
are being amortized using the straight-line method over the lives of the
agreements, ranging from three months to eight years. A program supply agreement
will be amortized using the straight-line method over the life of the agreement,
which is ten years. Copyright defense, registration and/or renewal costs are
being amortized using the straight-line method over 15 years. The noncompete
agreements, program supply agreement and copyright costs are all included in
"Other noncurrent assets."
During the first quarter of 2002, we completed the required transitional
impairment tests for goodwill and indefinite-lived intangible assets, which did
not result in an impairment charge. Deferred tax liabilities related to these
assets with indefinite lives will now be realized only if there is a disposition
or an impairment of the value of these intangible assets. We currently have NOLs
available to offset deferred tax liabilities realized within the NOL
carryforward period. However, we cannot be certain that NOLs will be available
when the deferred tax liabilities related to these intangible assets are
realized. Therefore, in the current year, we recorded a noncash income tax
provision of $7.1 million for these deferred tax liabilities, which included
$5.8 million related to a cumulative effect of accounting change.
The following table represents the pro forma effects as if we had adopted
Statement 142 as of January 1, 2000 (in thousands, except per share amounts):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/02 12/31/01 12/31/00
----------------------------------------------------------------------------------------------
Net loss
As reported $ (17,135) $ (33,541) $ (47,626)
Amortization of goodwill and indefinite-lived
intangible assets (net of tax) -- 5,762 5,632
Income tax benefit (expense) 5,293 (17) (6,431)
----------------------------------------------------------------------------------------------
Pro forma $ (11,842) $ (27,796) $ (48,425)
==============================================================================================
Basic and diluted earnings per common share
As reported $ (0.67) $ (1.37) $ (1.96)
Pro forma $ (0.46) $ (1.14) $ (2.00)
==============================================================================================
As a result of the restructuring of the ownership of PTVI in December 2002, we
acquired definite-lived distribution agreements of $3.4 million with a weighted
average life of approximately four years and a definite-lived program supply
agreement of $3.2 million with a life of ten years. The weighted average life of
the aggregate of the definite-lived intangible assets acquired was approximately
seven years. We also acquired indefinite-lived distribution agreements of $9.0
million, which will not be amortized but will be subject to the annual
impairment testing.
Amortized intangible assets consisted of the following (in thousands):
December 31, 2002 December 31, 2001
---------------------------------- ----------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
-----------------------------------------------------------------------------------------
Noncompete
agreements $ 14,000 $ 9,368 $ 4,632 $ 14,000 $ 6,697 $ 7,303
Distribution
agreements 10,893 6,598 4,295 7,500 2,199 5,301
Program supply
agreement 3,226 -- 3,226 -- -- --
Copyrights 2,156 592 1,564 2,183 449 1,734
-----------------------------------------------------------------------------------------
Total amortized
intangible
assets $ 30,275 $ 16,558 $ 13,717 $ 23,683 $ 9,345 $ 14,338
=========================================================================================
40
At December 31, 2002 and 2001, our indefinite-lived intangible assets not
subject to amortization included goodwill of $111.9 million and $112.3 million,
respectively, and trademarks of $55.2 million and $52.2 million, respectively.
Also, of the $34.3 million and $26.3 million of distribution agreements on our
Consolidated Balance Sheets at December 31, 2002 and 2001, $30.0 million and
$21.0 million, respectively, are indefinite-lived.
At December 31, 2002 and 2001, goodwill by reportable segment was $111.4 million
and $111.8 million, respectively, for the Entertainment Group and $0.5 million
for both periods for the Playboy Online Group. The decrease in the Entertainment
Group's goodwill was due to adjustments made to the initial estimate of goodwill
associated with the Califa acquisition in July 2001.
At October 1, 2002, we completed our annual impairment testing of goodwill and
indefinite-lived intangible assets and determined that no impairment exists.
The aggregate amortization expense for intangible assets for 2002, 2001 and 2000
was $7.2 million, $10.6 million and $8.1 million, respectively. Amortization
expense related to intangible assets with definite lives is expected to total
approximately $5.3 million, $2.1 million, $1.5 million, $1.2 million and $0.9
million for each of the next five years, respectively.
Derivative financial instruments: Effective January 1, 2001, we adopted
Statement 133, Accounting for Derivative Instruments and Hedging Activities as
amended by Statement 138, which require all derivative instruments to be
recognized as either assets or liabilities on the balance sheet at fair value
regardless of the purpose or intent for holding the derivative instrument. The
accounting for changes in the fair value of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship
and further, on the type of relationship.
We formally document all relationships between hedging instruments and hedged
items, as well as our risk management objectives and strategies for undertaking
various hedge transactions. We have derivative instruments that have been
designated and qualify as cash flow hedges, which are entered into in order to
hedge the variability of cash flows to be paid related to a recognized liability
and cash flows to be received related to forecasted royalty revenues. In 2001,
we entered into an interest rate swap agreement that was scheduled to mature in
May 2003 that effectively converted $45.0 million of our floating rate debt to
fixed rate debt, thus reducing the impact of interest rate changes on future
interest expense. In addition, to protect against the reduction in value of
foreign currency cash flows, we hedge portions of our forecasted royalty
revenues denominated in foreign currencies, primarily Japanese yen and the Euro,
with forward contracts. We hedge these royalties for periods not exceeding 12
months. At December 31, 2002 and 2001, the fair value and carrying value of our
interest rate swap was a liability of approximately $0.6 million and $1.2
million, respectively, recorded in "Other liabilities and accrued expenses." The
fair value and carrying value of our forward contracts were not material. Since
these derivative instruments are designated and qualify as cash flow hedges, the
effective portion of the gain or loss on the derivative instruments is being
deferred and reported as a component of "Accumulated other comprehensive loss"
and is reclassified into earnings in the same line item where the related
interest expense or royalty revenue is recognized into earnings.
At December 31, 2002 and 2001, we had net unrealized losses totaling $0.7
million and $1.2 million, respectively, in "Accumulated other comprehensive
loss," which represents the effective portion of changes in fair value of the
cash flow hedges. During 2002 and 2001, we reclassified $1.5 million and $0.2
million, respectively, of net losses from "Accumulated other comprehensive loss"
to the Consolidated Statements of Operations, which were offset by net gains on
the items being hedged. In 2002 and 2001, there were no amounts included in
earnings related to hedging ineffectiveness. We expect the amount reclassified
from "Accumulated other comprehensive loss" to earnings within the next 12
months to be losses of approximately $0.7 million.
We also used interest rate swap agreements and forward contracts for hedging
purposes prior to 2001 and the adoption of Statement 133. For interest rate
swaps, the differential to be paid or received was accrued monthly as an
adjustment to interest expense. For forward contracts, gains and losses were
recorded in operating results as part of, and concurrent with, the hedged
transaction.
Earnings per common share: We report both basic and diluted EPS amounts. Basic
EPS is computed by dividing net income (loss) applicable to common shares by the
weighted average number of common shares outstanding during the period. Diluted
EPS adjusts basic EPS for the dilutive effects of stock options and other
potentially dilutive financial instruments. See Note (G) Earnings per Common
Share.
41
Equity in operations of PTVI and other: Prior to the restructuring of the
ownership of PTVI, the equity method was used to account for our 19.9% interest
in the common stock of PTVI due to our ability to exercise significant influence
over PTVI's operating and financial policies. Equity in operations of PTVI
included our 19.9% interest in the results of PTVI, the elimination of
unrealized profits of certain transactions between us and PTVI and gains related
to the transfer of certain assets to PTVI.
Minority interest: In 2001, one of our subsidiaries, Playboy.com, converted
three promissory notes, together with accrued and unpaid interest thereon, into
shares of Playboy.com's Series A Preferred Stock. As part of consolidation,
included in "Minority interest" and "Other noncurrent liabilities" is the
accretion of dividends payable and professional fees related to the preferred
stock. Also included in "Other noncurrent liabilities" is minority interest
associated with the preferred stock. As part of the restructuring of the
ownership of PTVI, Claxson agreed to return its shares of the preferred stock.
Additionally, in 2001, we sold a majority of our interest in VIPress, publisher
of the Polish edition of Playboy magazine. Prior to the sale, the financial
statements of VIPress were included in our financial statements, along with the
related minority interest.
Foreign currency translation: Assets and liabilities in foreign currencies
related to our international TV foreign operations and VIPress, prior to its
sale in 2001, were translated into U.S. dollars at the exchange rate existing at
the balance sheet date. The net exchange differences resulting from these
translations were included in "Accumulated other comprehensive loss." Revenues
and expenses were translated at average rates for the period. In addition, prior
to the restructuring of the ownership of PTVI, we recorded our 19.9% interest in
its foreign currency translation amounts.
(B) ACQUISITION
In July 2001, we acquired The Hot Network and The Hot Zone networks,
together with the related television assets of Califa. In addition, we acquired
the Vivid TV network, now operated as Spice Platinum, and the related television
assets of VODI, a separate entity owned by the sellers. The addition of these
networks into our television networks portfolio enables us to offer a wider
range of adult programming. We accounted for the acquisition under the purchase
method of accounting and, accordingly, the results of these networks since the
acquisition date have been included in our Consolidated Statements of
Operations. In connection with the acquisition and purchase price allocations,
the Entertainment Group recorded goodwill of $27.4 million which is deductible
over 15 years for income tax purposes. The purchase price was recorded at its
net present value and is reported in the Consolidated Balance Sheets as
components of current and noncurrent "Acquisition liabilities."
Subject to the provisions of Statement 141, Business Combinations, we
recorded $30.8 million of intangible assets separate from goodwill. We recorded
$28.5 million for distribution agreements and $2.3 million for noncompete
agreements. All of the noncompete agreements and $7.5 million of the
distribution agreements are being amortized over approximately eight and two
years, respectively, the weighted average lives of these agreements.
Distribution agreements totaling $21.0 million were deemed to have indefinite
lives and are not subject to amortization under Statement 142, Goodwill and
Other Intangible Assets.
The total consideration for the acquisition was $70.0 million and is
required to be paid in installments over a ten-year period ending in 2011. The
nominal consideration for Califa's assets was $28.3 million. We also assumed the
obligations of Califa related to a note payable and noncompete liability. The
nominal consideration for VODI's assets was $41.7 million. We are obligated to
pay up to an additional $12.0 million in consideration should the acquired
assets achieve specified financial performance targets.
We may accelerate all or any portion of the remaining unpaid purchase
price, but only by making the accelerated payments in cash, at a discount rate
to be mutually agreed upon by the parties in good-faith negotiations. However,
if the parties are unable to agree on the discount rate, we may, at our sole
discretion, elect to accelerate the payment at a 10% discount rate if we choose
to accelerate beginning on the 19th month following the closing and until the
36th month following the closing, or at a 12% discount after the 36th month
following the closing.
42
The Califa acquisition agreement gave us the option of paying up to $71
million of the scheduled payments in cash or Class B stock. The number of
shares, if any, we issue in connection with a particular payment or particular
payments is based on the trading prices of the Class B stock surrounding the
applicable payment dates. Prior to each scheduled payment of consideration, we
must provide the sellers with written notice specifying the portion of the
purchase price payment that we intend to pay in cash and the portion in Class B
stock. If we notify the sellers that we intend to issue Class B stock, the
sellers must elect the portion of the shares that the sellers want us to
register under the Securities Act, referred to as the eligible shares. We are
then obligated to issue eligible shares registered under the Securities Act. The
sellers may sell the eligible shares received during the 90-day period following
the date the eligible shares are issued. If we do not get the registration
statement relating to the resale of our shares issued in connection with a
specified payment effective within the periods set forth in the agreement, we
are also obligated to pay the sellers interest on the amount of the payment
until the registration statement is declared effective. The interest payment can
be paid in cash or shares of Class B stock at our option. For purposes of this
discussion, references to eligible shares also include any shares of Class B
stock issued to pay any required interest payments, if applicable. The interest
rate will vary depending on the length of time required after the applicable
payment date to get the registration statement declared effective. The number of
eligible shares that may be sold on any day during a selling period is limited
under the purchase agreement for the networks. A selling period will be extended
if the applicable volume limitations did not permit all of the eligible shares
to be sold during that selling period, assuming that the maximum number of
shares were sold on each day during the period.
If the sellers elect to sell eligible shares during the applicable selling
period, and the proceeds from the sales of those eligible shares are less than
the aggregate value of those eligible shares at the time of their issuance, we
have agreed to make the sellers whole for the shortfall by, at our option, (a)
paying the shortfall in cash, (b) issuing additional shares of Class B stock in
an amount equal to the shortfall, referred to as the make-whole shares, or (c)
increasing the next scheduled payment of consideration to the sellers in an
amount equal to the shortfall plus interest on the shortfall at a specified
interest rate until the next scheduled payment of consideration. The foregoing
make-whole mechanism will apply only to the extent the sellers have sold the
maximum number of shares they are entitled to sell during the applicable selling
period in accordance with the applicable volume limitations.
We are obligated to issue make-whole shares that are registered under the
Securities Act and the sellers are entitled to sell those shares during a 30-day
selling period that follows their issuance. Sales of make-whole shares are also
subject to volume limitations and the selling periods applicable to make-whole
shares will also be extended if the applicable volume limitations did not permit
all of the make-whole shares to be sold during the applicable selling period,
assuming that the maximum number of shares were sold on each day during the
period. If during the applicable selling period for eligible shares or
make-whole shares, the sales proceeds exceed the amount of the purchase price
payment or the amount of the make-whole payment, the sellers will immediately
cease the offering and sale of the remaining eligible shares or make-whole
shares, as applicable, and the remaining eligible shares or make-whole shares,
as applicable, will be returned promptly to us along with any excess sales
proceeds.
On April 17, 2002, a registration statement for the resale of
approximately 1,475,000 shares became effective. These shares were issued in
payment of two installments of consideration, which totaled $22.5 million plus
$0.3 million of accrued interest. The sellers elected to sell the shares and
realized net proceeds from the sale of $19.2 million. As a result, we were
required to provide them with a make-whole payment in either cash or Class B
stock of approximately $3.6 million, plus interest until the date payment was
made.
At December 31, 2002, the remaining installments of consideration were due as
follows (in thousands):
Fiscal Year Ended December 31
--------------------------------------------------------------------------------
2003 $ 9,500
2004 8,000
2005 8,000
2006 8,000
2007 8,000
2008 1,000
2009 1,000
2010 1,000
2011 750
--------------------------------------------------------------------------------
Total future base payments 45,250
================================================================================
2003 5,000
2004 7,000
--------------------------------------------------------------------------------
Total future performance-based payments $12,000
================================================================================
43
The following unaudited pro forma information presents a summary of our results
of operations assuming the acquisition occurred on January 1, 2000 (in
thousands, except per share amounts):
Fiscal Year Fiscal Year
Ended Ended
12/31/01 12/31/00
-----------------------------------------------------------------------------------------------
Net revenues $ 298,242 $ 321,438
Loss before cumulative effect of change in accounting principle (32,835) (54,997)
Net loss (37,053) (55,150)
Basic and diluted EPS
Loss before cumulative effect of change in accounting principle (1.35) (2.27)
Net loss $ (1.52) $ (2.28)
-----------------------------------------------------------------------------------------------
These unaudited pro forma results have been prepared for comparative
purposes only. They do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred on January 1,
2000, or of future results of operations.
The following reflects amounts assigned to assets, excluding goodwill, and
liabilities of Califa and VODI at the acquisition date (in thousands):
Califa VODI
--------------------------------------------------------------------------------
Current assets $ 4,435 $ 39
Noncurrent assets 29,696 1,150
Current liabilities $ 1,699 $ 99
--------------------------------------------------------------------------------
(C) RESTRUCTURING OF OWNERSHIP OF INTERNATIONAL TV JOINT VENTURES
On December 24, 2002, we completed the restructuring of the ownership of
our international TV joint ventures with Claxson. The restructuring
significantly expanded our ownership of Playboy TV and movie networks outside of
the United States and Canada. The Claxson joint ventures originated when PTVI
and PTVLA were formed in 1999 and 1996, respectively, as joint ventures between
us and Cisneros for the ownership and operation of Playboy TV networks outside
of the United States and Canada. In 2001, Claxson succeeded Cisneros as our
joint venture partner. Prior to the restructuring transaction, parts of which
were effective as of April 1, 2002, PTVI and PTVLA had exclusive rights to
create and launch new television networks under the Playboy and Spice brands
outside of the United States and Canada, and under specified circumstances, to
license programming to third parties. We owned a 19.9% equity interest in PTVI
and a 19% equity interest in PTVLA before the restructuring. PTVLA is now our
sole remaining joint venture with Claxson.
Under the terms of the restructuring transaction, we (a) increased from
19.9% to 100% our ownership in PTVI, (b) acquired the 19.9% equity in two
Japanese networks previously owned by PTVI, (c) retained our existing 19%
ownership in PTVLA, (d) acquired an option to increase our percentage ownership
of PTVLA, (e) obtained 100% distribution rights to Playboy TV en Espanol in the
U.S. Hispanic market, (f) restructured our Latin American Internet joint venture
with Claxson in favor of revenue share and promotional agreements for our
respective Internet businesses in Latin America and (g) received from Claxson
its preferred stock ownership in Playboy.com (approximately 3% equity in
Playboy.com as if converted).
Prior to the restructuring transaction, in return for the exclusive
international TV rights for the use of the Playboy tradename, film and video
library, and for the acquisition of the international rights to the Spice film
library, the U.K. and Japan Playboy TV networks and certain international
distribution contracts, PTVI was obligated to make total payments of $100.0
million to us, related to the above, over six years, of which $42.5 million had
been received prior to the restructuring transaction. The remaining $57.5
million was to be paid to us from 2002 to 2004. We accounted for these revenues
from the original sale of assets and the licensing payments on an "as received"
basis. In return for our increased ownership in PTVI and the other terms of the
restructuring transaction, among other things, (a) we forgave approximately
$12.3 million in current programming and other receivables due from PTVI, (b) we
will no longer receive the library or output agreement payments that we were
scheduled to receive under the original agreement and (c) Claxson is released
from its remaining funding obligations to PTVI.
44
We accounted for this transaction as an unwinding of the PTVI joint
venture and final payment under the original sale of assets and licensing
agreement. Accordingly, any assets originally sold by us to PTVI have been
recorded at their book values prior to the formation of PTVI. The majority of
other PTVI net assets, including identifiable intangible assets created
subsequent to PTVI's formation, have been recorded at 80.1% of their fair value
as a result of the 80.1% additional ownership in PTVI that we have acquired. The
Playboy.com preferred stock surrendered by Claxson has been recorded at its
carrying value. The net value received, measured as described above, was $12.8
million. Of this amount, $12.3 million was applied to our current programming
and other receivables from PTVI. The remaining $0.5 million was recorded as of
the transaction date as the final revenue from the original sale of assets and
licensing agreement.
The following unaudited pro forma information presents a summary of our results
of operations assuming the restructuring transaction occurred on January 1, 2001
(in thousands, except per share amounts):
Fiscal Year Fiscal Year
Ended Ended
12/31/02 12/31/01
-----------------------------------------------------------------------------------------------
Net revenues $ 294,446 $ 301,060
Loss before cumulative effect of change in accounting principle (19,257) (43,804)
Net loss (19,257) (48,022)
Basic and diluted EPS
Loss before cumulative effect of change in accounting principle (0.75) (1.79)
Net loss $ (0.75) $ (1.97)
-----------------------------------------------------------------------------------------------
These unaudited pro forma results have been prepared for comparative
purposes only. They do not purport to be indicative of the results of operations
which actually would have resulted had the restructuring transaction occurred on
January 1, 2001, or of future results of operations.
In 2002, 2001 and 2000, we recognized revenues from PTVI of $16.3 million,
$17.0 million and $17.0 million, respectively, and pre-tax income, including our
equity in the results of PTVI's operations, of $8.4 million, $8.7 million and
$10.7 million, respectively. Amounts related to PTVI, prior to the restructuring
transaction, are reflected in our Consolidated Balance Sheet as follows (in
thousands):
Dec. 31,
2001
--------------------------------------------------------------------------------
Current receivables from related parties $11,935
Noncurrent receivables from related parties 50,000
Accounts payable to related parties 169
Current deferred revenues from related parties 6,525
Noncurrent deferred revenues from related parties $44,350
--------------------------------------------------------------------------------
Summarized financial information for PTVI, which has been derived from its
audited financial statements, is presented below (in thousands):
Dec. 31,
2001
--------------------------------------------------------------------------------
Current assets $ 15,733
Noncurrent assets 66,473
Current liabilities 19,352
Noncurrent liabilities $ 45,700
--------------------------------------------------------------------------------
Fiscal Year Fiscal Year
Ended Ended
12/31/01 12/31/00
-------------------------------------------------------------------------------
Revenues $ 33,669 $ 28,300
Gross profit 7,648 9,766
Net loss $ (19,455) $ (9,935)
-------------------------------------------------------------------------------
In calculating our equity in the results of PTVI's operations, the net
loss as reported by PTVI was adjusted for the elimination of amortization on the
assets acquired by PTVI from us.
45
(D) RESTRUCTURING EXPENSES
In 2002, we announced a Company-wide restructuring initiative in order to
reduce our ongoing operating expenses. The restructuring resulted in a workforce
reduction of approximately 11%, or 70 positions. In connection with the
restructuring, we reported a $5.7 million charge in 2002, of which $2.9 million
related to the termination of 53 employees. The remaining positions were
eliminated through attrition. The initiative also involved consolidation of our
office space in Los Angeles and Chicago, resulting in a charge of $2.8 million.
Of the total $5.7 million of costs related to this restructuring plan,
approximately $0.4 million was paid by December 31, 2002, with most of the
remainder to be paid in 2003 and some payments continuing through 2007.
In 2001, we implemented a restructuring plan in anticipation of a
continuing weak economy. The plan included a reduction in workforce coupled with
vacating portions of certain office facilities by combining operations for
greater efficiency, refocusing sales and marketing, outsourcing some operations
and reducing overhead expenses. Total restructuring charges of $4.6 million were
recorded, including a $0.9 million unfavorable adjustment to the previous
estimate in 2002 due primarily to a change in sublease assumptions. The
restructuring resulted in a workforce reduction of approximately 15%, or 104
positions, through Company-wide layoffs and attrition. Approximately half of
these employees were in the Playboy Online Group. Of the $4.6 million charge,
$2.6 million related to the termination of 88 employees. The remaining positions
were eliminated through attrition. The charge also included $2.0 million related
to the excess space in our Chicago and New York offices. Of the total $4.6
million of costs related to this restructuring plan, approximately $3.4 million
was paid by December 31, 2002, with most of the remainder to be paid in 2003 and
some payments continuing through 2007.
In 2000, realignment of senior management, coupled with staff reductions,
led to a restructuring charge related to the termination of 19 employees, or
approximately 3% of the workforce. Total restructuring charges of $3.8 million
were recorded, including a $0.1 million unfavorable adjustment to the previous
estimate in 2001. Substantially all of the amounts related to this restructuring
were paid by December 31, 2002.
(E) GAIN (LOSS) ON DISPOSALS
In 2001, we sold a majority of our equity interest in VIPress, publisher
of the Polish edition of Playboy magazine. In connection with the sale, we
recorded a gain of $0.4 million. Prior to the sale, the financial statements of
VIPress were included in our financial statements, along with the related
minority interest. Subsequent to the sale, our remaining 20% interest in VIPress
was accounted for under the equity method and, as such, our proportionate share
of the results of VIPress was included in nonoperating results. In 2002, we sold
our remaining 20% interest in VIPress resulting in a gain of $0.4 million. There
was no income tax effect attributable to either transaction due to our NOL
carryforward position.
In 2001, we sold our Collectors' Choice Music catalog and related Internet
business. In connection with the sale, we recorded a loss of $1.3 million and a
related deferred tax benefit of $0.5 million, which was offset by an increase in
the valuation allowance.
In 2000, we sold our Critics' Choice Video catalog and related Internet
business and fulfillment and customer service operations. In connection with the
sale, we recorded a loss of $3.0 million and a related deferred tax benefit of
$0.4 million, which was offset by an increase in the valuation allowance.
46
(F) INCOME TAXES
The income tax provision consisted of the following (in thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/02 12/31/01 12/31/00
--------------------------------------------------------------------------------
Current:
Federal $ -- $ -- $ --
State 120 120 388
Foreign 1,362 242 2,889
--------------------------------------------------------------------------------
Total current 1,482 362 3,277
--------------------------------------------------------------------------------
Deferred:
Federal 6,420 576 12,640
State 642 58 310
Foreign -- -- --
--------------------------------------------------------------------------------
Total deferred 7,062 634 12,950
--------------------------------------------------------------------------------
Total income tax provision $ 8,544 $ 996 $ 16,227
================================================================================
The U.S. statutory tax rate applicable to us for each of 2002, 2001 and
2000 was 35%. The income tax provision differed from a provision computed at the
U.S. statutory tax rate as follows (in thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/02 12/31/01 12/31/00
-----------------------------------------------------------------------------------------------------
Statutory rate tax benefit $ (3,007) $ (9,914) $ (10,990)
Increase (decrease) in taxes resulting from:
Foreign income and withholding tax on licensing income 1,362 242 2,889
State income taxes 762 178 698
Nondeductible expenses 345 673 658
Increase in valuation allowance 9,479 9,902 24,142
Tax benefit of foreign taxes paid or accrued (506) (85) (1,013)
Other 109 -- (157)
-----------------------------------------------------------------------------------------------------
Total income tax provision $ 8,544 $ 996 $ 16,227
=====================================================================================================
Deferred tax assets and liabilities are recognized for the expected future
tax consequences attributable to differences between the financial statement and
tax bases of assets and liabilities using enacted tax rates expected to apply in
the years in which the temporary differences are expected to reverse.
In 2000, we reevaluated our valuation allowance for deferred tax assets
related to the 2000 net operating loss as well as the NOLs and tax credit
carryforwards from prior years. As a result of this review, we increased the
valuation allowance, which resulted in noncash federal income tax expense of
$24.1 million. The 2001 increase in the valuation allowance was due primarily to
the deferred tax asset related to the 2001 net operating loss. Of the 2002
increase in the valuation allowance, $7.1 million was due to the deferred tax
treatment of certain acquired intangibles as a result of the adoption of
Statement 142, Goodwill and Other Intangible Assets, and the remainder was
primarily due to the deferred tax asset related to the 2002 net operating loss.
47
The significant components of our deferred tax assets and deferred tax
liabilities at December 31, 2001 and 2002 are presented below (in thousands):
Dec. 31, Net Dec. 31,
2001 Change 2002
--------------------------------------------------------------------------------
Deferred tax assets:
NOLs $ 26,477 $ (598) $ 25,879
Capital loss carryforwards 8,024 2,553 10,577
Tax credit carryforwards 10,701 313 11,014
Temporary difference related to PTVI 9,158 5,856 15,014
Other deductible temporary differences 18,092 1,761 19,853
--------------------------------------------------------------------------------
Total deferred tax assets 72,452 9,885 82,337
Valuation allowance (54,588) (14,558) (69,146)
--------------------------------------------------------------------------------
Deferred tax assets 17,864 (4,673) 13,191
--------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred subscription acquisition costs (5,570) (130) (5,700)
Intangible assets (11,556) (4,918) (16,474)
Other taxable temporary differences (6,051) 2,659 (3,392)
--------------------------------------------------------------------------------
Deferred tax liabilities (23,177) (2,389) (25,566)
--------------------------------------------------------------------------------
Net deferred tax liabilities $ (5,313) $ (7,062) $(12,375)
================================================================================
At December 31, 2002, we had NOLs of $73.9 million expiring from 2009
through 2021. We had capital loss carryforwards of $30.2 million expiring from
2004 through 2007. In addition, foreign tax credit carryforwards of $9.9 million
and minimum tax credit carryforwards of $1.1 million are available to reduce
future U.S. federal income taxes. The foreign tax credit carryforwards expire in
2003 through 2007, and the minimum tax credit carryforwards have no expiration
date.
(G) EARNINGS PER COMMON SHARE
The following table represents the approximate number of shares related to
options to purchase our Class A and Class B common stock and Class B restricted
stock awards that were outstanding which were not included in the computation of
diluted EPS as the inclusion of these shares would have been antidilutive (in
thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/02 12/31/01 12/31/00
--------------------------------------------------------------------------------
Stock options 2,670 2,245 2,040
Restricted stock awards 250 245 270
--------------------------------------------------------------------------------
Total 2,920 2,490 2,310
================================================================================
As a result, the weighted average number of basic and diluted common
shares outstanding for 2002, 2001 and 2000 were equivalent.
(H) FINANCIAL INSTRUMENTS
Fair Value: The fair value of a financial instrument represents the amount at
which the instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation. For cash and cash
equivalents, receivables, certain other current assets, current maturities of
long-term debt and short-term debt, the amounts reported approximated fair value
due to their short-term nature. For long-term debt related to our former credit
agreement, the amount reported approximated fair value as the interest rate on
the debt was generally reset every quarter to reflect current rates. For the
interest rate swap agreement, based on the fair value, $0.6 million and $1.2
million reflected the estimated amounts that we would have expected to pay if we
had terminated the agreement at December 31, 2002 and 2001, respectively. For
related party long-term debt, the amount reported approximated fair value due to
no significant change in market conditions since December 17, 2001, when the
note was issued. For foreign currency forward contracts, the fair value was
estimated using quoted market prices established by financial institutions for
comparable instruments, which approximated the contracts' values.
48
Concentrations of Credit Risk: Concentration of credit risk with respect to
accounts receivable is limited due to the wide variety of customers and segments
from which our products are sold. At December 31, 2001, we had receivables from
PTVI of $61.9 million, of which $50.0 million represented the noncurrent portion
of the receivable. Prior to the December 2002 restructuring of the ownership of
our international TV joint ventures, PTVI's ability to finance its operations,
including making library license and programming output payments to us, depended
principally on the ability of Claxson, our previous PTVI joint venture partner,
and also us to make capital contributions. As a result of the restructuring, our
receivables exposure related to Claxson has been reduced to $1.3 million in
current receivables at December 31, 2002.
(I) MARKETABLE SECURITIES
Marketable securities, primarily purchased in connection with our deferred
compensation plans, consisted of the following (in thousands):
Dec. 31, Dec. 31,
2002 2001
--------------------------------------------------------------------------------
Cost of marketable securities $ 3,759 $ 3,709
Gross unrealized holding gains -- 10
Gross unrealized holding losses (1,082) (537)
--------------------------------------------------------------------------------
Fair value of marketable securities $ 2,677 $ 3,182
================================================================================
There were no proceeds from the sale of marketable securities for 2002,
2001 and 2000, respectively, and therefore no gains or losses were realized.
Included in "Total other comprehensive income (loss)" for 2002, 2001 and 2000
were net unrealized holding losses of $0.6 million, $0.4 million and $0.5
million, respectively.
(J) INVENTORIES, NET
Inventories, net, consisted of the following (in thousands):
Dec. 31, Dec. 31,
2002 2001
--------------------------------------------------------------------------------
Paper $ 2,470 $ 3,764
Editorial and other prepublication costs 5,992 7,565
Merchandise finished goods 2,036 2,633
--------------------------------------------------------------------------------
Total inventories, net $ 10,498 $ 13,962
================================================================================
(K) ADVERTISING COSTS
At December 31, 2002 and 2001, advertising costs of $6.7 million and $6.8
million, respectively, were deferred and included in "Deferred subscription
acquisition costs" and "Other current assets." For 2002, 2001 and 2000, our
advertising expense was $31.4 million, $35.5 million and $42.7 million,
respectively.
(L) PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of the following (in thousands):
Dec. 31, Dec. 31,
2002 2001
--------------------------------------------------------------------------------
Land $ 292 $ 292
Buildings and improvements 8,624 8,623
Furniture and equipment 18,353 16,289
Leasehold improvements 8,616 9,927
Software 7,515 5,918
--------------------------------------------------------------------------------
Total property and equipment 43,400 41,049
Accumulated depreciation (31,684) (30,300)
--------------------------------------------------------------------------------
Total property and equipment, net $ 11,716 $ 10,749
================================================================================
49
(M) PROGRAMMING COSTS, NET
In 2001, we adopted SOP 00-2, Accounting by Producers or Distributors of
Films, which established new accounting and reporting standards. Programming
costs, net, consisted of the following (in thousands):
Dec. 31, Dec. 31,
2002 2001
--------------------------------------------------------------------------------
Released, less amortization $ 41,935 $ 47,198
Completed, not yet released 7,714 4,815
In-process 2,698 4,200
--------------------------------------------------------------------------------
Total programming costs, net $ 52,347 $ 56,213
================================================================================
Based on management's estimate of future total gross revenues at December
31, 2002, approximately 52% of the completed original programming costs are
expected to be amortized during 2003. Approximately all of the released original
programming costs are expected to be amortized during the next three years.
Additionally, at December 31, 2002, we had $15.4 million of film acquisition
costs. Film acquisition costs assigned to domestic markets are amortized
principally using the straight-line method over the license term, generally
three years or less, while those assigned to the international TV market were
fully amortized upon availability to PTVI.
(N) FINANCING OBLIGATIONS
Financing obligations consisted of the following (in thousands):
Dec. 31, Dec. 31,
2002 2001
---------------------------------------------------------------------------------------
Short-term financing obligations to related parties:
Promissory note, interest at 10.50% $ -- $ 5,000
Promissory note, interest at 12.00% -- 5,000
Promissory note, interest at 8.00% 17,235 5,000
---------------------------------------------------------------------------------------
Total short-term financing obligations to related parties $ 17,235 $ 15,000
=======================================================================================
Long-term financing obligations:
Tranche A term loan, interest at 4.42% and 5.11% at
December 31, 2002 and 2001, respectively $ 7,232 $ 12,136
Tranche B term loan, weighted average interest of 5.67%
and 6.37% at December 31, 2002 and 2001, respectively 55,285 58,942
Revolving credit facility, weighted average interest of 6.25%
and 6.05% at December 31, 2002 and 2001, respectively 2,750 10,500
---------------------------------------------------------------------------------------
Total long-term financing obligations 65,267 81,578
Less current maturities (6,402) (8,561)
---------------------------------------------------------------------------------------
Long-term financing obligations $ 58,865 $ 73,017
=======================================================================================
Long-term financing obligations to related parties:
Promissory note, interest at 9.00% $ 10,000 $ 5,000
=======================================================================================
At December 31, 2002, the aggregate minimum amount of all long-term debt
payable under our former credit facility, excluding the revolving credit
facility, was approximately $6.4 million, $22.2 million, $27.3 million and $16.6
million during 2003, 2004, 2005 and 2006, respectively.
Debt Financings
At December 31, 2002, our credit facility totaled $97.5 million, comprised
of $62.5 million of term loans and a $35.0 million revolving credit facility. At
December 31, 2002, $2.8 million of borrowings and $3.9 million in letters of
credit were outstanding under the revolving credit facility. In January 2003, an
additional $6.0 million letter of credit was issued under the facility as
collateral for a supersedeas bond, which was issued in connection with our
appeal of the verdict in the Gongora lawsuit. See Note (P) Commitments and
Contingencies. A second letter of credit in the amount of $1.7 million was also
issued in January 2003 as collateral for the supersedeas bond, but was not
provided under the credit facility. As a result, we cash collateralized the $1.7
million letter of credit with the issuing bank.
50
The credit facility provided that outstanding borrowings carry interest at
rates equal to specified index rates plus margins that fluctuated based on our
leverage ratio. The term loans consisted of two tranches, Tranche A and Tranche
B, which carried margins of 3.00% and 4.25%, respectively, over LIBOR. We were
assessed a 0.5% commitment fee on the unused portion of the revolving credit
facility. The term loans began amortizing quarterly on March 31, 2001. The
Tranche A term loan and the revolving credit facility were scheduled to mature
on March 15, 2004 and the Tranche B term loan was scheduled to mature on March
15, 2006, prior to the new debt financings discussed below.
On March 11, 2003, we completed the private offering of $115.0 million in
aggregate principal amount of senior secured notes through one of our
wholly-owned subsidiaries, Holdings. The notes mature on March 15, 2010 and bear
interest at the rate of 11.00% per annum, with interest payable on March 15th
and September 15th of each year, beginning September 15, 2003.
The notes are guaranteed 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. The notes and the guarantees rank
equally in right of payment with our and the guarantors' other existing and
future senior debt. The notes and the guarantees are secured by a first-priority
lien on our and each guarantor's trademarks, referred to as the primary
collateral, and by a second-priority lien, junior to a lien for the benefit of
the lenders under the new credit facility, on (a) 100% of the stock of
substantially all of our domestic subsidiaries, excluding the subsidiaries of
Playboy.com, (b) 65% of the capital stock of substantially all of our indirect
first-tier foreign subsidiaries, (c) substantially all of our and each
guarantor's domestic personal property, excluding the primary collateral and (d)
the Playboy Mansion, or collectively, the secondary collateral.
On March 11, 2003, we used $73.3 million of the notes proceeds to repay
$73.0 million in outstanding principal and $0.3 million in accrued interest and
fees on our credit facility. Effective with this repayment, the credit facility
was terminated. In connection with the termination of the credit facility, we
also terminated our existing interest rate swap agreement for $0.4 million,
which was scheduled to mature in May 2003. On March 14, 2003, we paid $17.3
million to the Califa principals in satisfaction of substantially all of our
2003 payment obligations. The remaining $24.0 million of notes proceeds will
provide liquidity for general corporate purposes and be used to pay fees and
expenses associated with the notes offering.
On March 11, 2003, Holdings also entered into a new revolving credit
facility, pursuant to which we are permitted to borrow up to $20.0 million in
revolving borrowings, letters of credit or a combination thereof. For purposes
of calculating interest, revolving loans made under the new credit facility will
be designated at either IBOR plus a borrowing margin based on our adjusted
EBITDA or, in certain circumstances, at a base rate plus a borrowing margin
based on our adjusted EBITDA. Letters of credit issued under the new credit
facility bear fees at IBOR plus a borrowing margin based on our adjusted EBITDA.
All amounts outstanding under the new credit facility will mature on March 11,
2006. At March 27, 2003, there were no borrowings outstanding under the new
credit facility, but the $9.9 million of letters of credit that had been
outstanding under the former credit facility, plus the $1.7 million letter of
credit outstanding outside the former credit facility, were canceled and
reissued under the new credit facility, for a total of $11.6 million in letters
of credit outstanding. Our obligations under the new credit facility are
guaranteed by us and each of the guarantors of the notes. The obligations of us
and each of the guarantors under the new credit facility are secured by a
first-priority lien on the secondary collateral and a second-priority lien on
the primary collateral.
Financing from Related Party
The former credit facility contained a maximum funding limitation which
restricted the amount of funding we could provide to Playboy.com. As a result,
Playboy.com issued Series A Preferred Stock and promissory notes to Mr. Hefner,
as discussed in more detail below, which have provided Playboy.com most of its
required liquidity since 2000. Under the terms of the senior secured notes and
the new credit facility, our ability to invest in Playboy.com is no longer
limited.
51
In 2001, in connection with a private placement of its preferred stock,
Playboy.com converted three $5.0 million convertible promissory notes, together
with accrued and unpaid interest thereon, into shares of Playboy.com's Series A
Preferred Stock. Mr. Hefner was the holder of one of these notes. Playboy.com's
Series A Preferred Stock is convertible into Playboy.com common stock (initially
on a one-for-one basis) and is redeemable by Playboy.com after the fifth
anniversary of the date of its issuance at the option of the holder. In
addition, in the event that a holder elects to cause Playboy.com to redeem
Playboy.com's Series A Preferred Stock at any time after the fifth anniversary
of the date of its issuance and before the 180th day thereafter, and Playboy.com
is not able to, or does not, satisfy such obligation, in cash or stock, we have
agreed that we will redeem all or part of the shares in lieu of redemption by
Playboy.com, either in cash, shares of our Class B stock or any combination
thereof at our option. As part of the ownership restructuring of PTVI, Claxson
agreed to return its shares of Playboy.com Series A Preferred Stock, which
leaves only Mr. Hefner and one unaffiliated investor as minority shareholders of
Playboy.com.
In connection with the sale of the senior secured notes, we restructured
the outstanding indebtedness of Playboy.com owed to Mr. Hefner. In its review of
the Hefner debt restructuring, our Board of Directors appointed a special
committee of independent directors to evaluate, negotiate and determine the
terms on behalf of us. The special committee approved the Hefner debt
restructuring on the terms described below and recommended to the full Board of
Directors that it approve the restructuring on those terms, which it did. In
connection with their respective approvals, the special committee and our Board
of Directors received an opinion from an independent financial advisor of
national standing retained by the special committee to the effect that the
Hefner debt restructuring was fair to us from a financial point of view.
At December 31, 2002 and at the time of the Hefner debt restructuring,
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 in the following manner. A $10.0 million promissory note payable by
Playboy.com to Mr. Hefner was extinguished in exchange for shares of Holdings
Series A Preferred Stock with an aggregate stated value of $10.0 million. We are
required to exchange the Holdings Series A Preferred Stock for shares of our
Class B stock. The two other promissory notes payable by Playboy.com to Mr.
Hefner, in a combined principal amount of $17.2 million plus interest, were
extinguished in exchange for $0.5 million in cash and shares of Holdings Series
B Preferred Stock with an aggregate stated value of $17.2 million. We are
required to exchange the Holdings Series B Preferred Stock for shares of Playboy
Preferred Stock.
In order to issue the Playboy Preferred Stock, our certificate of
incorporation must be amended 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,
has approved the certificate amendment by written consent. Under federal
securities laws, the certificate amendment cannot become effective prior to the
20th calendar day following the mailing to our stockholders of an information
statement that complies with applicable SEC rules. The Holdings Series A
Preferred Stock will be mandatorily exchanged for our Class B stock and the
Holdings Series B Preferred Stock will be mandatorily exchanged for Playboy
Preferred Stock as soon as practicable following the effectiveness of the
certificate amendment.
Holdings will be required to redeem the Holdings Series A Preferred Stock
in September 2010, unless exchanged earlier for our Class B stock, and the
Holdings Series A Preferred Stock will pay an annual dividend of 8.00%, payable
semi-annually. The dividend will be payable in cash, provided that if the
exchange of the Holdings Series A Preferred Stock for shares of our Class B
stock has not occurred prior to the 90th day following the original issuance of
the Holdings Series A Preferred Stock, dividends accruing after that date will
be paid through the issuance of additional shares of Holdings Series A Preferred
Stock. The number of shares of Class B stock issued in the exchange would be
determined by dividing (a) the sum of the aggregate stated value of the then
outstanding shares of Holdings Series A Preferred Stock and the amount of
accrued and unpaid dividends by (b) the weighted average closing price of our
Class B stock during the 90-day period prior to the date of the certificate
amendment.
52
Holdings will be required to redeem the Holdings Series B Preferred Stock
in September 2010, unless exchanged earlier for Playboy Preferred Stock, and the
Holdings Series B Preferred stock will pay an annual cash dividend of 8.00%,
payable semi-annually. Each share of Holdings Series B Preferred Stock will be
exchanged for one share of Playboy Preferred Stock plus an amount equal to any
accrued but unpaid dividends. The Playboy Preferred Stock to be issued in
exchange for the Holdings Series B Preferred Stock will have the same terms as
the Holdings Series B Preferred Stock, except that it will be convertible at the
option of the holder into shares of our Class B stock at a conversion price
equal to 125% of the weighted average closing price of our Class B stock over
the 90-day period prior to the exchange of Holdings Series B Preferred Stock for
Playboy Preferred Stock. After the date that is three years after the date the
Playboy Preferred Stock is issued, if at any time the weighted average closing
price of our Class B stock for 15 consecutive trading days equals or exceeds
150% of the conversion price, we will have the option, by delivering a written
notice to holders of shares of Playboy Preferred Stock, to convert any or all
shares of Playboy Preferred Stock into the number of shares of Class B stock
determined by dividing (a) the sum of the aggregate stated value of such Playboy
Preferred Stock and the amount of accrued and unpaid dividends by (b) the
conversion price.
On September 15, 2010, we will be required to redeem all shares of Playboy
Preferred Stock that are then outstanding at a redemption price equal to $10,000
per share plus the amount of accrued and unpaid dividends. The final redemption
price may be paid, at our option, in either cash or shares of our Class B stock
or any combination of cash and shares of Class B stock. If we elect to pay the
final redemption price in shares of our Class B stock, the number of such shares
to which a holder of shares of Playboy Preferred Stock will be entitled will be
determined by dividing (a) the sum of the aggregate stated value of such Playboy
Preferred Stock and the amount of accrued and unpaid dividends by (b) the
weighted average closing price of our Class B stock over the 90-day period prior
to September 15, 2010.
(O) BENEFIT PLANS
Our Employees Investment Savings Plan is a defined contribution plan
consisting of two components, a profit sharing plan and a 401(k) plan. The
profit sharing plan covers all employees who have completed 12 months of service
of at least 1,000 hours. Our discretionary contribution to the profit sharing
plan is distributed to each eligible employee's account in an amount equal to
the ratio of each eligible employee's compensation, subject to Internal Revenue
Service limitations, to the total compensation paid to all such employees.
Contributions for 2002, 2001 and 2000 were $0.5 million, $0.5 million and $0.7
million, respectively.
All employees are eligible to participate in the 401(k) plan upon the date
of hire. We offer several mutual fund investment options. The purchase of our
stock is not an option. We make matching contributions to the 401(k) plan based
on each participating employee's contributions and eligible compensation. Our
matching contributions for 2002, 2001 and 2000 related to this plan were $1.1
million, $1.2 million and $1.3 million, respectively.
We have two nonqualified deferred compensation plans, which permit certain
employees and all nonemployee directors to annually elect to defer a portion of
their compensation. A match is provided to employees who participate in the
deferred compensation plan, at a certain specified minimum level, and whose
annual eligible earnings exceed the salary limitation contained in the 401(k)
plan. All amounts deferred and earnings credited under these plans are 100%
immediately vested and are general unsecured obligations. Such obligations
totaled $3.4 million and $3.9 million at December 31, 2002 and 2001,
respectively, and are included in "Other noncurrent liabilities."
We have an Employee Stock Purchase Plan to provide substantially all
regular full- and part-time employees an opportunity to purchase shares of our
Class B stock through payroll deductions. The funds are withheld and then used
to acquire stock on the last trading day of each quarter, based on the closing
price less a 15% discount. At December 31, 2002, a total of approximately 40,000
shares of Class B stock were available for future purchases under this plan.
(P) COMMITMENTS AND CONTINGENCIES
Our principal lease commitments are for office space, operations
facilities and furniture and equipment. Some of these leases contain renewal or
end-of-lease purchase options. Our restructuring initiatives in 2002 and 2001
included the consolidation of our office space in our Chicago, New York and Los
Angeles locations. In our restructuring efforts, we have subleased a portion of
our excess office space, and expect to sublease our remaining excess office
space. See Note (D) Restructuring Expenses.
53
Rent expense was as follows (in thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/02 12/31/01 12/31/00
--------------------------------------------------------------------------------
Minimum rent expense $ 11,343 $ 15,406 $ 15,165
Sublease income (1,036) (1,372) (395)
--------------------------------------------------------------------------------
Net rent expense $ 10,307 $ 14,034 $ 14,770
================================================================================
There was no contingent rent expense in any of these periods. The minimum
commitments at December 31, 2002, under operating leases with initial or
remaining noncancelable terms in excess of one year, were as follows (in
thousands):
Operating
Fiscal Year Ended December 31 Leases
--------------------------------------------------------------------------------
2003 $ 10,487
2004 9,513
2005 7,316
2006 6,948
2007 6,225
Later years 35,139
Less minimum sublease income (4,702)
--------------------------------------------------------------------------------
Net minimum lease commitments $ 70,926
================================================================================
Our entertainment programming is delivered to DTH and cable operators
through communications satellite transponders. We currently have two transponder
service agreements related to our domestic networks, the terms of which
currently extend through 2010 and 2015. We also have two international
transponder service agreements as a result of the December 2002 restructuring of
the ownership of PTVI, both of which expire in 2004. At December 31, 2002,
future commitments related to these four agreements were $4.6 million, $4.2
million, $3.5 million, $3.5 million and $3.5 million for 2003, 2004, 2005, 2006
and 2007, respectively, and $16.7 million thereafter. These service agreements
contain protections typical in the industry against transponder failure,
including access to spare transponders, and conditions under which our access
may be denied. Major limitations on our access to DTH or cable systems or
satellite transponder capacity could materially adversely affect our operating
performance. There have been no instances in which we have been denied access to
transponder service.
On February 17, 1998, Gongora filed suit in state court in Hidalgo County,
Texas against the Editorial Defendants and us. In the complaint, Gongora alleged
that he was injured as a result of the termination of the License Agreement
between us and EC for the publication of the Mexican Edition. We terminated the
License Agreement on or about January 29, 1998 due to EC's failure to pay
royalties and other amounts due us under the License Agreement. On February 18,
1998, the Editorial Defendants filed a cross-claim against us. Gongora alleged
that in December 1996 he entered into an oral agreement with the Editorial
Defendants to solicit advertising for the Mexican Edition to be distributed in
the United States. The basis of GSI's cross-claim was that it was the assignee
of EC's right to distribute the Mexican Edition in the United States and other
Spanish-speaking Latin American countries outside of Mexico. On May 31, 2002, a
jury returned a verdict against us in the amount of $4.4 million. Under the
verdict, Gongora was awarded no damages. GSI and EC were awarded $4.1 million in
out-of-pocket expenses and $0.3 million for lost profits, respectively, even
though the jury found that EC had failed to comply with the terms of the License
Agreement. On October 24, 2002, the trial court signed a judgment against us for
$4.4 million plus pre- and post-judgment interest and costs. On November 22,
2002, we filed post-judgment motions challenging the judgment in the trial
court. The trial court overruled those motions and we are vigorously pursuing an
appeal with the State Appellate Court sitting in Corpus Christi challenging the
verdict. We have posted a bond in the amount of approximately $7.7 million
(which represents the amount of the judgment, costs and estimated pre- and
post-judgment interest) in connection with the appeal. We, on advice of legal
counsel, believe that it is not probable that a material judgment against us
will be sustained. In accordance with Statement 5, Accounting for Contingencies,
no liability has been accrued.
54
On May 17, 2001, Logix, D. Keith Howington and Anne Howington filed suit
in state court in Los Angeles County Superior Court in California against Spice,
EMI, 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. On July 10, 2002, Playboy and Spice
filed motions to dismiss in the Bankruptcy Court. The case was subsequently
remanded to state court on October 31, 2002. Discovery has only very recently
resumed in the action. Playboy and Spice filed motions to dismiss the first
amended complaint on December 6, 2002. A hearing on the motions took place on
February 5, 2003, and we are awaiting a decision. We intend to vigorously defend
against these claims and we believe we have good defenses to them. At this
preliminary point in the action, however, it is not possible to determine if
there is any potential liability or whether any liability may be material or is
likely.
On September 26, 2002, Directrix filed suit in the U.S. Bankruptcy Court
in the Southern District of New York against Playboy Entertainment Group, Inc.
In the complaint, Directrix alleged that it was injured as a result of the
termination of a Master Services Agreement under which Directrix was to perform
services relating to the distribution, production and post production of our
cable networks and a sublease agreement under which Directrix would have
subleased office, technical and studio space at our Los Angeles, California
production facility. Directrix also alleged that we breached an agreement under
which Directrix had the right to transmit and broadcast certain versions of
films through C-band satellite, commonly known as the TVRO market, and Internet
distribution. On November 15, 2002, we filed an answer denying Directrix's
allegations and filed counterclaims against Directrix seeking damages in
connection with the Sublease Agreement and Directrix's breach of the Master
Services Agreement. On January 7, 2003, Directrix moved to dismiss one of our
counterclaims. Both sides have commenced discovery. We intend to vigorously
defend ourselves against Directrix's claims. We believe the claims are without
merit and that we have good defenses against them. We believe it is not probable
that a material judgment against us will result.
(Q) STOCK PLANS
We have various stock plans for key employees and nonemployee directors
which provide for the grant of nonqualified and incentive stock options and
shares of restricted stock, deferred stock and other performance-based equity
awards. The exercise price of options granted equals or exceeds the fair value
at the grant date. In general, options become exercisable over a two- to
four-year period from the grant date and expire ten years from the grant date.
Restricted stock awards provide for the issuance of Class B stock subject to
restrictions that lapse if we meet specified operating income objectives
pertaining to a fiscal year. Vesting requirements for certain restricted stock
awards lapse automatically, regardless of whether or not we have achieved those
objectives, generally ten years from the award date. In addition, one of the
plans pertaining to nonemployee directors also allows for the issuance of Class
B stock as awards and payment for annual retainers and meeting fees.
55
At December 31, 2002, a total of 449,855 shares of Class B stock were
available for future grants under the various stock plans combined. Stock option
transactions are summarized as follows:
Stock Options Outstanding
--------------------------------------------------------------------------------
Weighted Average
Shares Exercise Price
--------------------------------------------------------------------------------
Class A Class B Class A Class B
--------------------------------------------------------------------------------
Outstanding at December 31, 1999 5,000 1,835,500 $ 7.38 $ 17.91
Granted -- 367,500 -- 21.42
Exercised -- (109,335) -- 10.44
Canceled -- (252,250) -- 20.33
-----------------------------------------------------------
Outstanding at December 31, 2000 5,000 1,841,415 7.38 18.72
Granted -- 537,000 -- 12.28
Exercised (5,000) (235,779) 7.38 8.27
Canceled -- (77,500) -- 16.77
-----------------------------------------------------------
Outstanding at December 31, 2001 -- 2,065,136 -- 18.31
Granted -- 781,250 -- 14.91
Exercised -- (11,500) -- 10.31
Canceled -- (219,000) -- 16.19
-----------------------------------------------------------
Outstanding at December 31, 2002 -- 2,615,886 $ -- $ 17.51
================================================================================
The following table summarizes information regarding stock options at December
31, 2002:
Options Outstanding Options Exercisable
---------------------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
-----------------------------------------------------------------------------------------
Class B
$8.25-$15.85 1,592,886 7.36 $ 13.28 615,386 $ 12.08
16.59-21.00 487,500 6.16 20.71 475,500 20.81
$24.13-$31.50 535,500 6.38 27.17 415,500 25.92
-----------------------------------------------------------------------------------------
Total Class B 2,615,886 6.94 $ 17.51 1,506,386 $ 18.65
=========================================================================================
The weighted average exercise prices for Class A and Class B exercisable
options at December 31, 2000 were $7.38 and $14.68, respectively. The weighted
average exercise price for Class B exercisable options at December 31, 2001 was
$18.27. There were no Class A options outstanding at December 31, 2001.
The following table summarizes transactions related to restricted stock awards:
Restricted Stock Awards Outstanding Class B
--------------------------------------------------------------------------------
Outstanding at December 31, 1999 307,498
Awarded 25,750
Vested --
Canceled (93,124)
--------------------------------------------------------------------------------
Outstanding at December 31, 2000 240,124
Awarded 45,000
Vested --
Canceled (21,250)
--------------------------------------------------------------------------------
Outstanding at December 31, 2001 263,874
Awarded 15,000
Vested --
Canceled (37,500)
--------------------------------------------------------------------------------
Outstanding at December 31, 2002 241,374
================================================================================
For 2002, 2001 and 2000, the weighted average fair value of restricted
stock awarded was $11.82, $14.37 and $14.20, respectively.
56
For the pro forma disclosures related to stock-based compensation in Note
(A) Summary of Significant Accounting Policies, the estimated fair value of the
options is amortized to expense over their respective vesting periods. The fair
value of each option grant was estimated on the grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/02 12/31/01 12/31/00
-------------------------------------------------------------------------------
Risk-free interest rate 4.64% 4.98% 6.27%
Expected stock price volatility 50.20% 49.70% 46.10%
Expected dividend yield -- -- --
-------------------------------------------------------------------------------
For 2002, 2001 and 2000, an expected life of six years was used for all of
the stock options, and the weighted average fair value of options granted was
$7.97, $6.59 and $11.42, respectively.
(R) SALE OF SECURITIES
The Califa acquisition agreement gave us the option of paying up to $71
million of the purchase price in cash or Class B stock through 2007. On April
17, 2002, a registration statement for the resale of approximately 1,475,000
shares became effective. These shares were issued in payment of two installments
of consideration, which totaled $22.5 million plus $0.3 million of accrued
interest. The sellers elected to sell the shares and realized net proceeds from
the sale of $19.2 million. As a result, we were required to provide them with a
make-whole payment in either cash or Class B stock of approximately $3.6
million, plus interest until the date payment was made.
(S) PUBLIC EQUITY OFFERING
In 2000, Playboy.com, a component of the Playboy Online Group, filed a
registration statement for a sale of a minority of its equity in an initial
public offering. Due to market conditions, the registration statement was
subsequently withdrawn. Deferred costs of $1.6 million were written off in 2000
as nonoperating expense.
(T) CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest and income taxes was as follows (in thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/02 12/31/01 12/31/00
--------------------------------------------------------------------------------
Interest $ 9,260 $ 8,730 $ 8,281
Income taxes $ 1,485 $ 782 $ 1,728
--------------------------------------------------------------------------------
In 2002 and 2001, we had noncash activities related to the Califa
acquisition. See Note (B) Acquisition. In 2002, we had noncash activities
related to the conversion of two related party promissory notes and accrued
interest into a new promissory note.
(U) SEGMENT INFORMATION
Our businesses are currently classified into the following four reportable
segments: Entertainment, Publishing, Playboy Online and Licensing Businesses.
Formerly, we operated a fifth segment, Catalog, which we divested in connection
with our sale of the Collectors' Choice Music catalog in 2001 and the Critics'
Choice Video catalog in 2000. Entertainment Group operations include the
production and marketing of adult television programming for our domestic and
international TV networks and worldwide home video products. Publishing Group
operations include the publication of Playboy magazine; other domestic
publishing businesses, comprising special editions, calendars and ancillary
businesses; and the licensing of international editions of Playboy magazine.
Playboy Online Group operations include our network of free, subscription,
e-commerce and other sites on the Internet. Licensing Businesses Group
operations combine certain brand-related businesses, such as the licensing of
consumer products carrying one or more of our trademarks and artwork, as well as
certain Company-wide marketing activities.
These reportable segments are based on the nature of the products offered.
Our chief operating decision maker evaluates performance and allocates resources
based on several factors, of which the primary financial measure is segment
operating results. The accounting policies of the reportable segments are the
same as those described in Note (A) Summary of Significant Accounting Policies.
57
The following table represents financial information by reportable segment (in
thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/02 12/31/01 12/31/00
----------------------------------------------------------------------------------------------------
Net revenues (1)
Entertainment $ 121,639 $ 113,833 $ 100,955
Publishing 111,802 124,496 135,508
Playboy Online 30,964 27,499 25,291
Licensing Businesses 13,217 10,769 9,246
Catalog -- 10,986 32,360
----------------------------------------------------------------------------------------------------
Total $ 277,622 $ 287,583 $ 303,360
====================================================================================================
Loss before income taxes and cumulative effect of change
in accounting principle
Entertainment $ 32,365 $ 29,921 $ 25,287
Publishing 2,669 1,776 6,881
Playboy Online (8,916) (21,673) (25,199)
Licensing Businesses 4,581 2,614 887
Catalog -- (453) 54
Corporate Administration and Promotion (15,810) (19,700) (20,942)
Restructuring expenses (6,643) (3,776) (3,908)
Gain (loss) on disposals 442 (955) (2,924)
Investment income 125 786 1,519
Interest expense (15,147) (13,970) (9,148)
Amortization of deferred financing fees (993) (905) (840)
Minority interest (1,724) (704) (125)
Equity in operations of PTVI and other 279 (746) (375)
Vendor settlement 750 -- --
Playboy.com registration statement expenses -- -- (1,582)
Legal settlement -- -- (622)
Other, net (569) (542) (362)
----------------------------------------------------------------------------------------------------
Total $ (8,591) $ (28,327) $ (31,399)
====================================================================================================
Depreciation and amortization (2) (3)
Entertainment $ 48,538 $ 45,585 $ 39,020
Publishing 371 560 617
Playboy Online 1,083 1,980 1,702
Licensing Businesses 46 209 197
Catalog -- 26 126
Corporate Administration and Promotion 1,581 3,544 3,249
----------------------------------------------------------------------------------------------------
Total $ 51,619 $ 51,904 $ 44,911
====================================================================================================
Identifiable assets (2) (4)
Entertainment $ 263,416 $ 317,848 $ 267,142
Publishing 43,861 49,219 56,191
Playboy Online 4,047 4,463 7,675
Licensing Businesses 4,726 4,732 5,003
Catalog 36 1,244 3,797
Corporate Administration and Promotion 53,635 48,734 48,680
----------------------------------------------------------------------------------------------------
Total $ 369,721 $ 426,240 $ 388,488
====================================================================================================
(1) Net revenues include revenues attributable to foreign countries of
approximately $45,695, $48,522 and $50,165 in 2002, 2001 and 2000,
respectively. Revenues from individual foreign countries were not
material. Revenues are generally attributed to countries based on the
location of customers, except licensing businesses royalties where
revenues are attributed based upon the location of licensees.
(2) The majority of our property and equipment and capital expenditures are
reflected in Corporate Administration and Promotion; depreciation,
however, is allocated to the reportable segments.
(3) Amounts include depreciation of property and equipment, amortization of
intangible assets and amortization of investments in entertainment
programming.
(4) Our long-lived assets located in foreign countries were not material.
58
(V) RELATED PARTY TRANSACTIONS
In 1971, we purchased the Playboy Mansion in Holmby Hills, California,
where our founder, Hugh M. Hefner, lives. The Playboy Mansion is used for
various corporate activities, including serving as a valuable location for video
production, magazine photography, online events, business meetings, enhancing
our image, charitable functions and a wide variety of other promotional and
marketing activities. The Playboy Mansion generates substantial publicity and
recognition which increase public awareness of us and our products and services.
Mr. Hefner pays us rent for that portion of the Playboy Mansion used exclusively
for his and his personal guests' residence as well as the per-unit value of
nonbusiness meals, beverages and other benefits received by him and his personal
guests. The Playboy Mansion is included in our Consolidated Balance Sheets at
December 31, 2002 and 2001 at a net book value, including all improvements and
after accumulated depreciation, of $1.9 million and $2.0 million, respectively.
The operating expenses of the Playboy Mansion, including depreciation and taxes,
were $3.6 million, $3.2 million and $3.2 million for 2002, 2001 and 2000,
respectively, net of rent received from Mr. Hefner. The sum of the rent and
other benefits payable for 2002 was estimated by us to be $1.1 million, and Mr.
Hefner paid that amount during 2002. The actual rent and other benefits payable
for 2001 and 2000 were $1.3 million and $1.1 million, respectively.
From time to time, we enter into barter transactions in which we secure
air transportation for Mr. Hefner in exchange for advertising pages in Playboy
magazine. Mr. Hefner reimburses us for our direct costs of providing these ad
pages. We receive significant promotional benefit from these transactions.
At December 31, 2002 and at the time of the Hefner debt restructuring,
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 as previously discussed in Note (N) Financing Obligations.
Prior to the December 2002 PTVI ownership restructuring, we also had
material related party transactions with PTVI. See Note (C) Restructuring of
Ownership of International TV Joint Ventures.
(W) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
2002 and 2001 (in thousands, except per share amounts):
Quarters Ended Fiscal
----------------------------------------- Year
2002 Mar. 31 June 30 Sept. 30 Dec. 31 Ended
--------------------------------------------------------------------------------
Net revenues $ 66,147 $70,566 $67,372 $73,537 $277,622
Operating income 2,249 2,168 4,188 83 8,688
Net loss (9,387) (3,064) (639) (4,045) (17,135)
Basic and diluted EPS (0.38) (0.12) (0.01) (0.16) $ (0.67)
Common stock price
Class A high 15.06 14.65 11.45 9.55
Class A low 12.37 10.72 7.70 6.50
Class B high 17.50 16.75 13.12 10.85
Class B low $ 14.12 $ 12.18 $ 8.50 $ 7.48
--------------------------------------------------------------------------------
Quarters Ended Fiscal
----------------------------------------- Year
2001 Mar. 31 June 30 Sept. 30 Dec. 31 Ended
--------------------------------------------------------------------------------
Net revenues $ 65,410 $71,889 $73,176 $77,108 $287,583
Operating income (loss) (4,990) (4,736) 2,546 (5,066) (12,246)
Net loss (11,794) (7,970) (2,088) (11,689) (33,541)
Basic and diluted EPS (0.49) (0.32) (0.09) (0.47) $ (1.37)
Common stock price
Class A high 12.07 14.35 16.51 14.84
Class A low 8.38 8.70 9.82 10.00
Class B high 13.49 16.89 19.75 17.23
Class B low $ 9.75 $ 9.63 $ 11.11 $ 11.72
--------------------------------------------------------------------------------
59
Revenues and cost of sales for 2001 have been adjusted by $0.9 million for
each quarter and $3.6 million for the year to report certain vendor costs in the
Publishing Group as contra-revenue rather than cost of sales in accordance with
Emerging Issues Task Force Issue 00-25, Vendor Income Statement Characterization
of Consideration Paid to a Reseller of the Vendor's Products.
The net loss for the quarter ended March 31, 2002 included a $5.8 million
noncash income tax charge related to our adoption of Statement 142, Goodwill and
Other Intangible Assets. See Note (A) Summary of Significant Accounting
Policies.
Operating income for the quarter ended December 31, 2002 included
restructuring expenses of $6.6 million. See Note (D) Restructuring Expenses. The
net loss for the quarter included a nonoperating gain of $0.7 million related to
a vendor settlement.
The net loss for the quarter ended March 31, 2001 included a $4.2 million
noncash charge representing a "Cumulative effect of change in accounting
principle" related to the adoption of SOP 00-2, Accounting by Producers or
Distributors of Films. See Note (A) Summary of Significant Accounting Policies.
The operating loss for the quarter ended December 31, 2001 included
restructuring expenses of $3.5 million. See Note (D) Restructuring Expenses. The
operating loss for the quarter also included a loss on the sale of our
Collectors' Choice Music business of $1.3 million. See Note (E) Gain (Loss) on
Disposals.
60
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Playboy Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Playboy
Enterprises, Inc. as of December 31, 2002 and 2001, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 2002. Our audits also included the
financial statement schedule for the years ended December 31, 2002, 2001 and
2000 listed in the Index at Item 15(a). These consolidated financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits. We did not audit the financial statements of
Playboy TV International, LLC ("PTVI"), an unconsolidated affiliate accounted
for using the equity method for the years ended December 31, 2001 and 2000. The
investment in PTVI was $1,750,586 at December 31, 2001. The Company's equity in
the losses of PTVI was $826,206 and $283,095 for the years ended December 31,
2001 and 2000, respectively. Those statements were audited by other auditors
whose report has been furnished to us, and contains an explanatory paragraph
expressing uncertainty about PTVI's ability to continue as a going concern. Our
opinion, insofar as it relates to data included for PTVI, is based solely on the
report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Playboy Enterprises, Inc. at December 31,
2002 and 2001, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
In 2002, as discussed in Note A, the Company changed its method of
accounting for goodwill to conform with Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets." In 2001, as discussed
in Note A, the Company changed its methods of accounting for production and
distribution of films and for derivative financial instruments, in accordance
with new professional standards.
Ernst & Young LLP
Chicago, Illinois
February 14, 2003, except for Notes N and V,
as to which the date is March 14, 2003
61
REPORT OF MANAGEMENT
The consolidated financial statements and all related financial
information in this Form 10-K Annual Report are our responsibility. The
financial statements, which include amounts based on judgments, have been
prepared in accordance with accounting principles generally accepted in the
United States. Other financial information in this Form 10-K Annual Report is
consistent with that in the financial statements.
We maintain a system of internal controls that we believe provides
reasonable assurance that transactions are executed in accordance with
management's authorization and are properly recorded, that assets are
safeguarded and that accountability for assets is maintained. The system of
internal controls is characterized by a control-oriented environment within the
Company, which includes written policies and procedures, careful selection and
training of personnel, and internal audits.
Ernst & Young LLP, independent auditors, have audited and reported on our
consolidated financial statements for the fiscal years ended December 31, 2002,
2001 and 2000. Their audits were performed in accordance with auditing standards
generally accepted in the United States.
The Audit Committee of the Board of Directors, composed of four
nonmanagement directors, meets periodically with Ernst & Young LLP, management
representatives and our internal auditor to review internal accounting control
and auditing and financial reporting matters. Both Ernst & Young LLP and the
internal auditor have unrestricted access to the Audit Committee and may meet
with it without management representatives being present.
Christie Hefner
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Linda G. Havard
Executive Vice President, Finance and Operations,
and Chief Financial Officer
(Principal Financial and Accounting Officer)
62
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Information required by Items 10, 11, 12 and 13 is contained in our Proxy
Statement (to be filed) relating to the Annual Meeting of Stockholders to be
held in May 2003, which will be filed within 120 days after the close of our
fiscal year ended December 31, 2002, and is incorporated herein by reference.
Item 14. Controls and Procedures
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-14(c) and 15d-14(c) under the Exchange Act, as amended) as of a
date within 90 days prior to the filing date of this Form 10-K Annual Report, or
the Evaluation Date. Based on such evaluation, such officers have concluded
that, as of the Evaluation Date, our disclosure controls and procedures are
effective in alerting them on a timely basis to material information relating to
us, including our consolidated subsidiaries, that is required to be included in
our reports filed or submitted under the Exchange Act.
(b) CHANGES IN INTERNAL CONTROLS
Since the Evaluation Date, there have not been any significant changes in
our internal controls or in other factors that could significantly affect such
controls.
PART IV
Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) Certain Documents Filed as Part of the Form 10-K
Our Financial Statements and Supplementary Data following are as
set forth under Part II. Item 8. of this Form 10-K Annual Report: Page
----
Consolidated Statements of Operations - Fiscal Years Ended
December 31, 2002, 2001 and 2000 34
Consolidated Balance Sheets - December 31, 2002 and 2001 35
Consolidated Statements of Shareholders' Equity - Fiscal Years
Ended December 31, 2002, 2001 and 2000 36
Consolidated Statements of Cash Flows - Fiscal Years Ended
December 31, 2002, 2001 and 2000 37
Notes to Consolidated Financial Statements 38
Report of Independent Auditors 61
Report of Management 62
Schedule II - Valuation and Qualifying Accounts 74
63
(b) Reports on Form 8-K
On December 26, 2002, we filed a Current Report on Form 8-K under Item 9.,
announcing the completion of the restructuring of the ownership of our
international TV joint venture relationships with Claxson.
(c) Exhibits
See Exhibit Index.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PLAYBOY ENTERPRISES, INC.
March 27, 2003 By s/Linda Havard
-------------------------------------
Linda G. Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Authorized Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
s/Christie Hefner March 27, 2003
-------------------------------------
Christie Hefner
Chairman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer)
s/Richard S. Rosenzweig March 25, 2003
-------------------------------------
Richard S. Rosenzweig
Executive Vice President and Director
s/Dennis S. Bookshester March 26, 2003
-------------------------------------
Dennis S. Bookshester
Director
s/David I. Chemerow March 27, 2003
-------------------------------------
David I. Chemerow
Director
s/Donald G. Drapkin March 27, 2003
-------------------------------------
Donald G. Drapkin
Director
s/Jerome H. Kern March 26, 2003
-------------------------------------
Jerome H. Kern
Director
s/Sol Rosenthal March 25, 2003
-------------------------------------
Sol Rosenthal
Director
s/Sir Brian Wolfson March 27, 2003
-------------------------------------
Sir Brian Wolfson
Director
s/Linda Havard March 27, 2003
-------------------------------------
Linda G. Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
65
EXHIBIT INDEX
All agreements listed below may have additional exhibits which are not
attached. All such exhibits are available upon request, provided the requesting
party shall pay a fee for copies of such exhibits, which fee shall be limited to
our reasonable expenses incurred in furnishing these documents.
Exhibit
Number Description
#2.1 Asset Purchase Agreement, dated as of June 29, 2001, by and among
Playboy Enterprises, Inc., Califa Entertainment Group, Inc., V.O.D.,
Inc., Steven Hirsch, Dewi James and William Asher (incorporated by
reference to Exhibit 2.1 from the Current Report on Form 8-K dated
July 6, 2001)
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 from the Current Report on
Form 8-K dated March 15, 1999, or the March 15, 1999 Form 8-K)
3.2 Certificate of Amendment of the Amended and Restated Certificate of
Incorporation of the Company, dated March 15, 1999 (incorporated by
reference to Exhibit 3.2 from the March 15, 1999 Form 8-K)
3.3 Certificate of Amendment of the Amended and Restated Certificate of
Incorporation of the Company, dated March 15, 1999 (incorporated by
reference to Exhibit 3.3 from the March 15, 1999 Form 8-K)
3.4 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.4 from the March 15, 1999 Form 8-K)
@4.1 11% Senior Secured Notes due 2010
a Indenture, dated as of March 11, 2003, or the Indenture,
between PEI Holdings, Inc., the Guarantors party thereto and
Bank One, N.A., as Trustee
b Form of 11% Senior Secured Note due 2010 (included in Exhibit
4.1(a))
c Pledge Agreement, dated as of March 11, 2003, between PEI
Holdings, Inc. and Bank One, N.A., as Trustee under the
Indenture
d Pledge Agreement, dated as of March 11, 2003, among Chelsea
Court Holdings LLC, as the limited partner in 1945/1947 Cedar
River C.V., Candlelight Management LLC, as the general partner
in 1945/1947 Cedar River C.V., and Bank One, N.A., as Trustee
under the Indenture
e Pledge Agreement, dated as of March 11, 2003, between Claridge
Organization LLC and Bank One, N.A., as Trustee under the
Indenture
f Pledge Agreement, dated as of March 11, 2003, between Playboy
Clubs International, Inc. and Bank One, N.A., as Trustee under
the Indenture
g Pledge Agreement, dated as of March 11, 2003, between CPV
Productions, Inc. and Bank One, N.A., as Trustee under the
Indenture
h Pledge Agreement, dated as of March 11, 2003, between Playboy
Entertainment Group, Inc. and Bank One, N.A., as Trustee under
the Indenture
i Pledge Agreement, dated as of March 11, 2003, between Playboy
Gaming International, Ltd. and Bank One, N.A., as Trustee
under the Indenture
j Pledge Agreement, dated as of March 11, 2003, between Playboy
Entertainment Group, Inc. and Bank One, N.A., as Trustee under
the Indenture
k Pledge Agreement, dated as of March 11, 2003, between Playboy
Enterprises, Inc. and Bank One, N.A., as Trustee under the
Indenture
l Pledge Agreement, dated as of March 11, 2003, between Playboy
Enterprises International, Inc. and Bank One, N.A., as Trustee
under the Indenture
m Pledge Agreement, dated as of March 11, 2003, between Planet
Playboy, Inc. and Bank One, N.A., as Trustee under the
Indenture
n Pledge Agreement, dated as of March 11, 2003, between Spice
Entertainment, Inc. and Bank One, N.A., as Trustee under the
Indenture
o Pledge Agreement, dated as of March 11, 2003, between Playboy
TV International, LLC and Bank One, N.A., as Trustee under the
Indenture
p Pledge Agreement, dated as of March 11, 2003, between Playboy
TV International, LLC and Bank One, N.A., as Trustee under the
Indenture
q Security Agreement, dated as of March 11, 2003, between PEI
Holdings, Inc. and Bank One, N.A., in its capacity as Trustee
under the Indenture
66
r Security Agreement, dated as of March 11, 2003, among Playboy
Enterprises, Inc. and each of the domestic subsidiaries of PEI
Holdings, Inc. set forth on the signature pages thereto and
Bank One, N.A., in its capacity as Trustee under the Indenture
s Trademark Security Agreement, dated as of March 11, 2003, by
AdulTVision Communications, Inc., Alta Loma Entertainment,
Inc., Lifestyle Brands, Ltd., Playboy Entertainment Group,
Inc., Spice Entertainment, Inc., Playboy Enterprises
International, Inc. and Spice Hot Entertainment, Inc. in favor
of Bank One, N.A., in its capacity as Trustee under the
Indenture
t Copyright Security Agreement, dated as of March 11, 2003, by
After Dark Video, Inc., Alta Loma Distribution, Inc., Alta
Loma Entertainment, Inc., Impulse Productions, Inc., Indigo
Entertainment, Inc., MH Pictures, Inc., Mystique Films, Inc.,
Playboy Entertainment Group, Inc., Precious Films, Inc. and
Women Productions, Inc. in favor of Bank One, N.A., in its
capacity as Trustee under the Indenture
u Lease Subordination Agreement, dated as of March 11, 2003, by
and among Hugh M. Hefner, Playboy Enterprises International,
Inc. and Bank One, N.A., as Trustee for various noteholders
v Second Priority Deed of Trust with Assignment of Rents,
Security Agreement and Fixture Filing, dated as of March 11,
2003, made and executed by Playboy Enterprises International,
Inc. in favor of Fidelity National Title Insurance Company for
the benefit of Bank One, N.A., as Trustee pursuant to the
Indenture
w Intercreditor Agreement, dated as of March 11, 2003, between
Bank of America, N.A., as agent, and Bank One, N.A., as
trustee
x Registration Rights Agreement, dated as of March 11, 2003, by
and among PEI Holdings, Inc., Playboy Enterprises, Inc., the
subsidiary guarantors listed on the signature pages thereof
and Banc of America Securities LLC and Lazard Freres & Co. LLC
@4.2 Exchange Agreement, dated as of March 11, 2003, among Hugh M.
Hefner, Playboy.com, Inc., PEI Holdings, Inc. and Playboy
Enterprises, Inc.
@4.3 Credit Agreement, dated as of March 11, 2003, among PEI Holdings,
Inc., each lender from time to time party thereto and Bank of
America, N.A. as Agent (see Exhibit 10.9)
10.1 Playboy Magazine Printing and Binding Agreement
&a October 22, 1997 Agreement between Playboy Enterprises, Inc.
and Quad/Graphics, Inc. (incorporated by reference to Exhibit
10.4 from our transition period report on Form 10-K for the
six months ended December 31, 1997, or the Transition Period
Form 10-K)
#b Amendment to October 22, 1997 Agreement dated as of March 3,
2000 (incorporated by reference to Exhibit 10.1 from our
quarterly report on Form 10-Q for the quarter ended March 31,
2000)
10.2 Playboy Magazine Distribution Agreement dated as of July 2, 1999
between Playboy Enterprises, Inc. and Warner Publisher Services,
Inc. (incorporated by reference to Exhibit 10.4 from our quarterly
report on Form 10-Q for the quarter ended September 30, 1999)
10.3 Playboy Magazine Subscription Fulfillment Agreement
a July 1, 1987 Agreement between Communication Data Services,
Inc. and Playboy Enterprises, Inc. (incorporated by reference
to Exhibit 10.12(a) from our annual report on Form 10-K for
the year ended June 30, 1992, or the 1992 Form 10-K)
b Amendment dated as of June 1, 1988 to said Fulfillment
Agreement (incorporated by reference to Exhibit 10.12(b) from
our annual report on Form 10-K for the year ended June 30,
1993, or the 1993 Form 10-K)
c Amendment dated as of July 1, 1990 to said Fulfillment
Agreement (incorporated by reference to Exhibit 10.12(c) from
our annual report on Form 10-K for the year ended June 30,
1991, or the 1991 Form 10-K)
d Amendment dated as of July 1, 1996 to said Fulfillment
Agreement (incorporated by reference to Exhibit 10.5(d) from
our annual report on Form 10-K for the year ended June 30,
1996, or the 1996 Form 10-K)
#e Amendment dated as of July 7, 1997 to said Fulfillment
Agreement (incorporated by reference to Exhibit 10.6(e) from
the Transition Period Form 10-K)
#f Amendment dated as of July 1, 2001 to said Fulfillment
Agreement (incorporated by reference to Exhibit 10.1 from our
quarterly report on Form 10-Q for the quarter ended September
30, 2001, or the September 30, 2001 Form 10-Q)
67
10.4 Transponder Service Agreements
a SKYNET Transponder Service Agreement dated March 1, 2001
between Playboy Entertainment Group, Inc. and LORAL SKYNET
(incorporated by reference to Exhibit 10.1 from our quarterly
report on Form 10-Q for the quarter ended March 31, 2001)
b SKYNET Transponder Service Agreement dated February 8, 1999 by
and between Califa Entertainment Group, Inc. and LORAL SKYNET
c Transfer of Service Agreement dated February 22, 2002 between
Califa Entertainment Group, LORAL SKYNET and Spice Hot
Entertainment, Inc.
d Amendment One to the Transponder Service Agreement between
Spice Hot Entertainment, Inc. and LORAL SKYNET dated February
28, 2002
(items (b), (c) and (d) incorporated by reference to Exhibits
10.4(b), (c) and (d), respectively, from our annual report on Form
10-K for the year ended December 31, 2001, or the 2001 Form 10-K)
@e Transponder Service Agreement dated August 12, 1999 between
British Sky Broadcasting Limited and The Home Video Channel
Limited
&10.5 Playboy TV - Latin America, LLC Agreements
a Second Amended and Restated Operating Agreement for Playboy TV
- Latin America, LLC, effective as of April 1, 2002, by and
between Playboy Entertainment Group, Inc. and Lifford
International Co. Ltd. (BVI)
b Playboy TV - Latin America Program Supply and Trademark
License Agreement, dated as of December 23, 2002 and effective
as of April 1, 2002, by and between Playboy Entertainment
Group, Inc. and Playboy TV - Latin America, LLC
(items (a) and (b) incorporated by reference to Exhibits 10.1 and
10.2, respectively, from the Current Report on Form 8-K dated
December 23, 2002 and filed with the SEC on February 12, 2003)
10.6 Transfer Agreement, dated as of December 23, 2002, by and among
Playboy Enterprises, Inc., Playboy Entertainment Group, Inc.,
Playboy Enterprises International, Inc., Claxson Interactive Group
Inc., Carlyle Investments LLC (in its own right and as a successor
in interest to Victoria Springs Investments Ltd.), Carlton
Investments LLC (in its own right and as a successor in interest to
Victoria Springs Investments Ltd.), Lifford International Co. Ltd.
(BVI) and Playboy TV International, LLC. (incorporated by reference
to Exhibit 2.1 from the Current Report on Form 8-K dated December
23, 2002 and filed with the SEC on January 7, 2003)
#10.7 Amended and Restated Affiliation and License Agreement dated May 17,
2002 between DirecTV, Inc. and Playboy Entertainment Group, Inc.,
Spice Entertainment, Inc., Spice Hot Entertainment, Inc. and Spice
Platinum Entertainment, Inc. regarding DBS Satellite Exhibition of
Programming (incorporated by reference to Exhibit 10.1 from the June
30, 2002 Form 10-Q)
10.8 Fulfillment and Customer Service Services Agreement dated October 2,
2000 between Infinity Resources, Inc. and Playboy.com, Inc.
(incorporated by reference to Exhibit 10.13 from our annual report
on Form 10-K for the year ended December 31, 2000, or the 2000 Form
10-K)
@10.9 Credit Agreement, dated March 11, 2003, or the Credit Agreement,
among PEI Holdings, Inc., each lender from time to time party
thereto and Bank of America, N.A., as Agent
a Credit Agreement
a-1 Master Corporate Guaranty, dated March 11, 2003
b Security Agreement, dated as of March 11, 2003, between PEI
Holdings, Inc. and Bank of America, N.A., as Agent under the
Credit Agreement
c Security Agreement, dated as of March 11, 2003, among Playboy
Enterprises, Inc. and each of the domestic subsidiaries of PEI
Holdings, Inc. set forth on the signature pages thereto and
Bank of America, N.A., as Agent under the Credit Agreement
d Pledge Agreement, dated as of March 11, 2003, between PEI
Holdings, Inc. and Bank of America, N.A., as agent for the
various financial institutions from time to time parties to
the Credit Agreement
e Pledge Agreement, dated as of March 11, 2003, among Chelsea
Court Holdings LLC, as the limited partner in 1945/1947 Cedar
River C.V., Candlelight Management LLC, as the general partner
in 1945/1947 Cedar River C.V., and Bank of America, N.A., as
agent for the various financial institutions from time to time
parties to the Credit Agreement
f Pledge Agreement, dated as of March 11, 2003, between Claridge
Organization LLC and Bank of America, N.A., as agent for the
various financial institutions from time to time parties to
the Credit Agreement
68
g Pledge Agreement, dated as of March 11, 2003, between Playboy
Clubs International, Inc. and Bank of America, N.A., as agent
for the various financial institutions from time to time
parties to the Credit Agreement
h Pledge Agreement, dated as of March 11, 2003, between CPV
Productions, Inc. and Bank of America, N.A., as agent for the
various financial institutions from time to time parties to
the Credit Agreement
i Pledge Agreement, dated as of March 11, 2003, between Playboy
Entertainment Group, Inc. and Bank of America, N.A., as agent
for the various financial institutions from time to time
parties to the Credit Agreement
j Pledge Agreement, dated as of March 11, 2003, between Playboy
Gaming International, Ltd. and Bank of America, N.A., as agent
for the various financial institutions from time to time
parties to the Credit Agreement
k Pledge Agreement, dated as of March 11, 2003, between Playboy
Entertainment Group, Inc. and Bank of America, N.A., as agent
for the various financial institutions from time to time
parties to the Credit Agreement
l Pledge Agreement, dated as of March 11, 2003, between Playboy
Enterprises, Inc. and Bank of America, N.A., as agent for the
various financial institutions from time to time parties to
the Credit Agreement
m Pledge Agreement, dated as of March 11, 2003, between Playboy
Enterprises International, Inc. and Bank of America, N.A., as
agent for the various financial institutions from time to time
parties to the Credit Agreement
n Pledge Agreement, dated as of March 11, 2003, between Planet
Playboy, Inc. and Bank of America, N.A., as agent for the
various financial institutions from time to time parties to
the Credit Agreement
o Pledge Agreement, dated as of March 11, 2003, between Spice
Entertainment, Inc. and Bank of America, N.A., as agent for
the various financial institutions from time to time parties
to the Credit Agreement
p Pledge Agreement, dated as of March 11, 2003, between Playboy
TV International, LLC and Bank of America, N.A., as agent for
the various financial institutions from time to time parties
to the Credit Agreement
q Pledge Agreement, dated as of March 11, 2003, between Playboy
TV International, LLC and Bank of America, N.A., as agent for
the various financial institutions from time to time parties
to the Credit Agreement
r Trademark Security Agreement, dated as of March 11, 2003, by
AdulTVision Communications, Inc., Alta Loma Entertainment,
Inc., Lifestyle Brands, Ltd., Playboy Entertainment Group,
Inc., Spice Entertainment, Inc., Playboy Enterprises
International, Inc. and Spice Hot Entertainment, Inc. in favor
of Bank of America, N.A., as Agent under the Credit Agreement
s Copyright Security Agreement, dated March 11, 2003, by After
Dark Video, Inc., Alta Loma Distribution, Inc., Alta Loma
Entertainment, Inc., Impulse Productions, Inc., Indigo
Entertainment, Inc., MH Pictures, Inc., Mystique Films, Inc.,
Playboy Entertainment Group, Inc., Precious Films, Inc. and
Women Productions, Inc. in favor of Bank of America, N.A., as
Agent under the Credit Agreement
t Lease Subordination Agreement, dated as of March 11, 2003, by
and among Hugh M. Hefner, Playboy Enterprises International,
Inc. and Bank of America, N.A., as Agent for various lenders
u Deed of Trust with Assignment of Rents, Security Agreement and
Fixture Filing, dated as of March 11, 2003, made and executed
by Playboy Enterprises International, Inc. in favor of
Fidelity National Title Insurance Company for the benefit of
Bank of America, N.A., as agent for Lenders under the Credit
Agreement
69
10.10 February 26, 1999 Credit Agreement
a Credit Agreement, dated as of February 26, 1999, among New
Playboy, Inc., PEI Holdings, Inc., the Lenders named in the
February 26, 1999 Credit Agreement, ING (U.S.) Capital LLC, as
Syndication Agent, and Credit Suisse First Boston, as
Administrative Agent, as Collateral Agent and as Issuing Bank
b Subsidiary Guarantee Agreement, dated as of March 15, 1999,
among certain subsidiaries of Playboy Enterprises, Inc. and
Credit Suisse First Boston, as Collateral Agent
c Indemnity, Subrogation and Contribution Agreement, dated as of
March 15, 1999, among Playboy Enterprises, Inc., PEI Holdings,
Inc., certain other subsidiaries of Playboy Enterprises, Inc.,
and Credit Suisse First Boston, as Collateral Agent
d Pledge Agreement, dated as of March 15, 1999, among Playboy
Enterprises, Inc., PEI Holdings, Inc., certain other
subsidiaries of Playboy Enterprises, Inc., and Credit Suisse
First Boston, as Collateral Agent
e Security Agreement, dated as of March 15, 1999, among Playboy
Enterprises, Inc., PEI Holdings, Inc., certain other
subsidiaries of Playboy Enterprises, Inc., and Credit Suisse
First Boston, as Collateral Agent
(items (a) through (e) incorporated by reference to Exhibits
10.21(a) through (e), respectively, from our annual report on Form
10-K for the year ended December 31, 1998)
f First Amendment to February 26, 1999 Credit Agreement dated as
of June 14, 1999
g Second Amendment to February 26, 1999 Credit Agreement dated
as of January 31, 2000
(items (f) and (g) incorporated by reference to Exhibits 10.18(f)
and (g), respectively, from our annual report on Form 10-K for the
year ended December 31, 1999)
h Third Amendment to February 26, 1999 Credit Agreement dated as
of June 9, 2000 (incorporated by reference to Exhibit 10.1
from our quarterly report on Form 10-Q for the quarter ended
June 30, 2000)
i Fourth Amendment to February 26, 1999 Credit Agreement dated
as of June 1, 2001 (incorporated by reference to Exhibit 10.1
from our quarterly report on Form 10-Q for the quarter ended
June 30, 2001)
j Fifth Amendment to February 26, 1999 Credit Agreement dated as
of April 12, 2002 (incorporated by reference to Exhibit 10.1
from our quarterly report on Form 10-Q for the quarter ended
March 31, 2002, or the March 31, 2002 Form 10-Q)
k Sixth Amendment to February 26, 1999 Credit Agreement dated as
of October 15, 2002 (incorporated by reference to Exhibit 10.1
from our quarterly report on Form 10-Q for the quarter ended
September 30, 2002, or the September 30, 2002 From 10-Q)
@10.11 Exchange Agreement, dated as of March 11, 2003, among Hugh M.
Hefner, Playboy.com, Inc., PEI Holdings, Inc. and Playboy
Enterprises, Inc. (see Exhibit 4.2)
10.12 Promissory Notes issued by Playboy.com, Inc. to Hugh M. Hefner
a Promissory Note dated September 26, 2001 (incorporated by
reference to Exhibit 10.2 from the September 30, 2001 Form
10-Q)
b First Amendment to September 26, 2001 Promissory Note dated
July 1, 2002 (incorporated by reference to Exhibit 10.3 from
the September 30, 2002 Form 10-Q)
c Promissory Note dated December 17, 2001
d Agreement, dated December 17, 2001, by and between Playboy
Enterprises, Inc. and Hugh M. Hefner relating to that certain
Promissory Note, dated as of December 17, 2001
(items (c) and (d) incorporated by reference to Exhibits 10.1 and
10.2, respectively, from the Current Report on Form 8-K dated
December 27, 2001)
e Promissory Note dated September 27, 2002 (incorporated by
reference to Exhibit 10.2 from the September 30, 2002 Form
10-Q)
70
10.13 Playboy Mansion West Lease Agreement, as amended, between Playboy
Enterprises, Inc. and Hugh M. Hefner
a Letter of Interpretation of Lease
b Agreement of Lease
(items (a) and (b) incorporated by reference to Exhibits 10.3(a) and
(b), respectively, from the 1991 Form 10-K)
c Amendment to Lease Agreement dated as of January 12, 1998
(incorporated by reference to Exhibit 10.2 from our quarterly
report on Form 10-Q for the quarter ended March 31, 1998, or
the March 31, 1998 Form 10-Q)
@d Lease Subordination Agreement, dated as of March 11, 2003, by
and among Hugh M. Hefner, Playboy Enterprises International,
Inc. and Bank One, N.A., as Trustee for various noteholders
(see Exhibit 4.1(u))
@e Lease Subordination Agreement, dated as of March 11, 2003, by
and among Hugh M. Hefner, Playboy Enterprises International,
Inc. and Bank of America, N.A., as Agent for various lenders
(see Exhibit 10.9(t))
10.14 Los Angeles Office Lease Documents
a Agreement of Lease dated April 23, 2002 between Los Angeles
Media Tech Center, LLC and Playboy Enterprises, Inc.
(incorporated by reference to Exhibit 10.4 from the June 30,
2002 Form 10-Q)
b First Amendment to April 23, 2002 Lease dated June 28, 2002
(incorporated by reference to Exhibit 10.4 from the September
30, 2002 Form 10-Q)
10.15 Chicago Office Lease Documents
a Office Lease dated April 7, 1988 by and between Playboy
Enterprises, Inc. and LaSalle National Bank as Trustee under
Trust No. 112912 (incorporated by reference to Exhibit 10.7(a)
from the 1993 Form 10-K)
b First Amendment to April 7, 1988 Lease dated October 26, 1989
(incorporated by reference to Exhibit 10.15(b) from our annual
report on Form 10-K for the year ended June 30, 1995, or the
1995 Form 10-K)
c Second Amendment to April 7, 1988 Lease dated June 1, 1992
(incorporated by reference to Exhibit 10.1 from our quarterly
report on Form 10-Q for the quarter ended December 31, 1992)
d Third Amendment to April 7, 1988 Lease dated August 30, 1993
(incorporated by reference to Exhibit 10.15(d) from the 1995
Form 10-K)
e Fourth Amendment to April 7, 1988 Lease dated August 6, 1996
(incorporated by reference to Exhibit 10.20(e) from the 1996
Form 10-K)
f Fifth Amendment to April 7, 1988 Lease dated March 19, 1998
(incorporated by reference to Exhibit 10.3 from the March 31,
1998 Form 10-Q)
10.16 New York Office Lease Documents
a Agreement of Lease dated August 11, 1992 between Playboy
Enterprises, Inc. and Lexington Building Co. (incorporated by
reference to Exhibit 10.9(b) from the 1992 Form 10-K)
b Agreement of Sublease between Playboy Enterprises
International, Inc. and Concentra Managed Care Services, Inc.
dated February 13, 2002 (incorporated by reference to Exhibit
10.3 from the March 31, 2002 Form 10-Q)
10.17 Los Angeles Studio Facility Lease Documents
a Agreement of Lease dated September 20, 2001 between Kingston
Andrita LLC and Playboy Entertainment Group, Inc.
(incorporated by reference to Exhibit 10.3(a) from the
September 30, 2001 Form 10-Q)
b First Amendment to September 20, 2001 Lease dated May 15, 2002
(incorporated by reference to Exhibit 10.3 from the June 30,
2002 Form 10-Q)
c Second Amendment to September 20, 2001 Lease dated July 23,
2002 (incorporated by reference to Exhibit 10.6 from the
September 30, 2002 Form 10-Q)
@d Third Amendment to September 20, 2001 Lease dated October 31,
2002
@e Fourth Amendment to September 20, 2001 Lease dated December 2,
2002
@f Fifth Amendment to September 20, 2001 Lease dated December 31,
2002
@g Sixth Amendment to September 20, 2001 Lease dated January 31,
2003
h Guaranty dated September 20, 2001 by Playboy Entertainment
Group, Inc. in favor of Kingston Andrita LLC (incorporated by
reference to Exhibit 10.3(c) from the September 30, 2001 Form
10-Q)
71
10.18 Itasca Warehouse Lease Documents
a Agreement dated as of September 6, 1996 between Centerpoint
Properties Corporation and Playboy Enterprises, Inc.
(incorporated by reference to Exhibit 10.23 from the 1996 Form
10-K)
b Amendment to September 6, 1996 Lease dated June 1, 1997
(incorporated by reference to Exhibit 10.25(b) from our annual
report on Form 10-K for the year ended June 30, 1997, or the
1997 Form 10-K)
c Real Estate Sublease Agreement dated October 2, 2000 between
Playboy Enterprises, Inc. and Infinity Resources, Inc.
(incorporated by reference to Exhibit 10.20(c) from the 2000
Form 10-K)
*10.19 Selected Company Remunerative Plans
a Executive Protection Program dated March 1, 1990 (incorporated
by reference to Exhibit 10.18(c) from the 1995 Form 10-K)
b Amended and Restated Deferred Compensation Plan for Employees
effective January 1, 1998
c Amended and Restated Deferred Compensation Plan for Board of
Directors' effective January 1, 1998
(items (b) and (c) incorporated by reference to Exhibits 10.2(a) and
(b), respectively, from our quarterly report on Form 10-Q for the
quarter ended June 30, 1998)
*10.20 1989 Option Plan
a Playboy Enterprises, Inc. 1989 Stock Option Plan, as amended,
For Key Employees (incorporated by reference to Exhibit
10.4(mm) from the 1991 Form 10-K)
b Playboy Enterprises, Inc. 1989 Stock Option Agreement
c Letter dated July 18, 1990 pursuant to the June 7, 1990
recapitalization regarding adjustment of options
(items (b) and (c) incorporated by reference to Exhibits 10.19(c)
and (d), respectively, from the 1995 Form 10-K)
d Consent and Amendment regarding the 1989 Option Plan
(incorporated by reference to Exhibit 10.4(aa) from the 1991
Form 10-K)
*10.21 1991 Directors' Plan
a Playboy Enterprises, Inc. 1991 NonQualified Stock Option Plan
for NonEmployee Directors, as amended
b Playboy Enterprises, Inc. 1991 NonQualified Stock Option
Agreement for NonEmployee Directors
(items (a) and (b) incorporated by reference to Exhibits 10.4(rr)
and (nn), respectively, from the 1991 Form 10-K)
*10.22 1995 Stock Incentive Plan
a Amended and Restated Playboy Enterprises, Inc. 1995 Stock
Incentive Plan (incorporated by reference to Exhibit 10.3 from
our quarterly report on Form 10-Q for the quarter ended June
30, 1999, or the June 30, 1999 Form 10-Q)
b Form of NonQualified Stock Option Agreement for NonQualified
Stock Options which may be granted under the Plan
c Form of Incentive Stock Option Agreement for Incentive Stock
Options which may be granted under the Plan
d Form of Restricted Stock Agreement for Restricted Stock issued
under the Plan
(items (b), (c) and (d) incorporated by reference to Exhibits 4.3,
4.4 and 4.5, respectively, from our Registration Statement No.
33-58145 on Form S-8 dated March 20, 1995)
e Form of Section 162(m) Restricted Stock Agreement for Section
162(m) Restricted Stock issued under the Plan (incorporated by
reference to Exhibit 10.1(e) from the 1997 Form 10-K)
*10.23 1997 Directors' Plan
a 1997 Equity Plan for NonEmployee Directors of Playboy
Enterprises, Inc., as amended (incorporated by reference to
Exhibit 10.25(a) from the 2000 Form 10-K)
b Form of Restricted Stock Agreement for Restricted Stock issued
under the Plan (incorporated by reference to Exhibit 10.1(b)
from our quarterly report on Form 10-Q for the quarter ended
September 30, 1997)
72
*10.24 Form of Nonqualified Option Agreement between Playboy Enterprises,
Inc. and each of Dennis S. Bookshester and Sol Rosenthal
(incorporated by reference to Exhibit 4.4 from our Registration
Statement No. 333-30185 on Form S-8 dated November 13, 1996)
*10.25 Employee Stock Purchase Plan
a Playboy Enterprises, Inc. Employee Stock Purchase Plan, as
amended and restated (incorporated by reference to Exhibit
10.2 from our quarterly report on Form 10-Q for the quarter
ended March 31, 1997)
b Amendment to Playboy Enterprises, Inc. Employee Stock Purchase
Plan, as amended and restated (incorporated by reference to
Exhibit 10.4 from the June 30, 1999 Form 10-Q)
*10.26 Selected Employment, Termination and Other Agreements
a Form of Severance Agreement by and between Playboy
Enterprises, Inc. and each of James English, Linda Havard,
Christie Hefner, Martha Lindeman, Richard Rosenzweig, Howard
Shapiro, Alex Vaickus and David Zucker (incorporated by
reference to Exhibit 10.23(a) from the 2001 Form 10-K)
b Letter Agreement dated December 30, 2000 regarding employment
of James English (incorporated by reference to Exhibit
10.28(g) from the 2000 Form 10-K)
c Employment Agreement dated May 14, 2002 between David Zucker
and Playboy Enterprises, Inc.
d Memorandum dated May 21, 2002 regarding severance agreement
for Linda Havard
(items (c) and (d) incorporated by reference to Exhibits 10.5 and
10.6, respectively, from the June 30, 2002 Form 10-Q)
@10.27 11% Senior Secured Notes due 2010 (see Exhibit 4.1)
@21 Subsidiaries
@23.1 Consent of Ernst & Young LLP
@23.2 Consent of Deloitte & Touche LLP
@99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Playboy TV International, LLC Joint Venture financial statements for
the year ended December 31, 2001 (incorporated by reference to
Exhibit 99 from the 2001 Form 10-K)
----------
* Indicates management compensation plan
# Certain information omitted pursuant to a request for confidential
treatment filed separately with and granted by the SEC
& Certain information omitted pursuant to a request for confidential
treatment filed separately with the SEC
@ Filed herewith
73
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
==================================================================================================================
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
------------------------------------------------------------------------------------------------------------------
Additions
--------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
Description of Period Expenses Accounts Deductions of Period
---------------------------------------- ---------- ---------- ---------- ---------- ----------
Allowance deducted in the balance sheet
from the asset to which it applies:
Fiscal Year Ended December 31, 2002:
Allowance for doubtful accounts $ 6,406 $ 213 $ 2,010(a) $ 3,505(b) $ 5,124
========== ========== ========== ========== ==========
Allowance for returns $ 30,514 $ -- $ 48,227(c) $ 54,146(d) $ 24,595
========== ========== ========== ========== ==========
Deferred tax asset valuation allowance $ 54,588 $ 14,558(e) $ -- $ -- $ 69,146
========== ========== ========== ========== ==========
Fiscal Year Ended December 31, 2001:
Allowance for doubtful accounts $ 15,994 $ 584 $ 1,690(a) $ 11,862(b) $ 6,406
========== ========== ========== ========== ==========
Allowance for returns $ 28,815 $ -- $ 52,698(c) $ 50,999(d) $ 30,514
========== ========== ========== ========== ==========
Deferred tax asset valuation allowance $ 45,044 $ 9,544(e) $ -- $ -- $ 54,588
========== ========== ========== ========== ==========
Fiscal Year Ended December 31, 2000:
Allowance for doubtful accounts $ 17,970 $ 723 $ 1,108(a) $ 3,807(b) $ 15,994
========== ========== ========== ========== ==========
Allowance for returns $ 21,295 $ -- $ 51,205(c) $ 43,685(d) $ 28,815
========== ========== ========== ========== ==========
Deferred tax asset valuation allowance $ 19,783 $ 24,142(e) $ 1,119(f) $ -- $ 45,044
========== ========== ========== ========== ==========
Notes:
(a) Primarily represents provisions for unpaid subscriptions charged to net
revenues. Also, includes a $660 provision in 2002 related to the December
2002 PTVI restructuring.
(b) Includes a reversal in 2001 of a $10,000 provision related to assuming an
obligation in the Califa acquisition. Also, primarily represents
uncollectible accounts less recoveries.
(c) Represents provisions charged to net revenues for estimated returns of
Playboy magazine, other domestic publishing products and domestic home
videos.
(d) Represents settlements on provisions previously recorded.
(e) Represents noncash federal income tax expense related to increasing the
valuation allowance.
(f) Represents the unrealizable portion of the change in the gross deferred
tax asset.
74
CERTIFICATIONS
I, Christie Hefner, Chairman of the Board, Chief Executive Officer and Director
of Playboy Enterprises, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Playboy Enterprises,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of the Evaluation Date; and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003 s/Christie Hefner
------------------------------------
Name: Christie Hefner
Title: Chairman of the Board,
Chief Executive Officer and Director
75
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 annual report on Form 10-K of Playboy Enterprises,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of the Evaluation Date; and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003 s/Linda Havard
------------------------------------
Name: Linda G. Havard
Title: Executive Vice President,
Finance and Operations,
and Chief Financial Officer
76