UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2006
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 001-14790
Playboy Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-4249478
(State of incorporation) (I.R.S. Employer 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
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ----------------------------------------------- -----------------------------------------
Class A Common Stock, par value $0.01 per share New York Stock Exchange
Class B Common Stock, par value $0.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark 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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of Class A Common Stock held by nonaffiliates on June
30, 2006 (based upon the closing sale price on the New York Stock Exchange), was
$13,395,006. The aggregate market value of Class B Common Stock held by
nonaffiliates on June 30, 2006 (based upon the closing sale price on the New
York Stock Exchange), was $202,055,760.
At February 28, 2007, there were 4,864,102 shares of Class A Common Stock and
28,365,413 shares of Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required for Part II. Item 5 and Part III. Items 10-14 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 2007.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains "forward-looking statements,"
including statements in Part I. Item 1. "Business," Part I. Item 1A. "Risk
Factors" and Part II. Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations," among other places, as to expectations,
beliefs, plans, objectives and future financial performance, and assumptions
underlying or concerning the foregoing. We use words such as "may," "will,"
"would," "could," "should," "believes," "estimates," "projects," "potential,"
"expects," "plans," "anticipates," "intends," "continues" and other similar
terminology. These forward-looking statements involve known and unknown risks,
uncertainties and other factors, which could cause our actual results,
performance or outcomes to differ materially from those expressed or implied in
the forward-looking statements. We want to caution you not to place undue
reliance on any forward-looking statements. We undertake no obligation to
publicly update any forward-looking statements, whether as a result of new
information, future events or otherwise.
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 regulations, actions or
initiatives, including:
(a) attempts to limit or otherwise regulate the sale, distribution
or transmission of adult-oriented materials, including print,
television, video, Internet and wireless 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 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;
(3) Our ability to manage the risk associated with our exposure to foreign
currency exchange rate fluctuations;
(4) Changes in general economic conditions, consumer spending habits, viewing
patterns, fashion trends or the retail sales environment which, in each
case, could reduce demand for our programming and products and impact our
advertising revenues;
(5) Our ability to protect our trademarks, copyrights and other intellectual
property;
(6) Risks as a distributor of media content, including our becoming subject to
claims for defamation, invasion of privacy, negligence, copyright, patent
or trademark infringement, and other claims based on the nature and
content of the materials we distribute;
(7) The risk our outstanding litigation could result in settlements or
judgments which are material to us;
(8) Dilution from any potential issuance of common stock or convertible debt
in connection with financings or acquisition activities;
(9) 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;
(10) Competition in the television, men's magazine, Internet, new electronic
media and product licensing markets;
(11) Attempts by consumers or private advocacy groups to exclude our
programming or other products from distribution;
(12) Our television, Internet and wireless 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;
(13) Risks associated with losing access to transponders or technical failure
of transponders or other transmitting or playback equipment that is beyond
our control and competition for channel space on linear television
platforms or video-on-demand platforms;
(14) Failure to maintain our agreements with multiple system operators, or
MSOs, and direct-to-home, or DTH, operators on favorable terms, as well as
any decline in our access to, and acceptance by, DTH and/or cable systems
and the possible resulting deterioration in the terms, cancellation of fee
arrangements or pressure on splits with operators of these systems;
(15) Risks that we may not realize the expected increased sales and profits and
other benefits from acquisitions;
(16) Any charges or costs we incur in connection with restructuring measures we
may take in the future;
(17) Risks associated with the financial condition of Claxson Interactive
Group, Inc., our Playboy TV-Latin America, LLC, joint venture partner;
(18) Increases in paper, printing or postage costs;
(19) Risks associated with certain minimum revenue amounts under certain
television distribution agreements;
2
(20) Effects of the national consolidation of the single-copy magazine
distribution system;
(21) Effects of the national consolidation of television distribution companies
(e.g., cable MSOs, satellite platforms and telecommunications companies);
and
(22) Risks associated with the viability of our subscription-, on demand- and
e-commerce-based Internet models.
For a detailed discussion of these and other factors that might affect our
performance, see Part I. Item 1A. "Risk Factors" of this Annual Report on Form
10-K.
3
PLAYBOY ENTERPRISES, INC.
2006 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 5
Item 1A. Risk Factors 15
Item 1B. Unresolved Staff Comments 22
Item 2. Properties 23
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 25
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities 26
Item 6. Selected Financial Data 27
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 42
Item 8. Financial Statements and Supplementary Data 42
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 69
Item 9A. Controls and Procedures 69
Item 9B. Other Information 71
PART III
Item 10. Directors, Executive Officers and Corporate Governance 72
Item 11. Executive Compensation 72
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 72
Item 13. Certain Relationships and Related Transactions, and Director Independence 72
Item 14. Principal Accounting Fees and Services 72
PART IV
Item 15. Exhibits, Financial Statement Schedules 73
4
PART I
Item 1. Business
Playboy Enterprises, Inc., together with its subsidiaries and
predecessors, is referred to in this Annual Report on Form 10-K by terms such as
"we," "us," "our," "Playboy" and the "Company," unless the context requires
otherwise. We were organized in 1953 to publish Playboy magazine and are now a
brand-driven, international multimedia entertainment company. The Playboy brand
is one of the most widely recognized and popular brands in the world. The
strength of our brand drives the financial performance of our media and
merchandising businesses. Our programming and content are available worldwide on
television and online via a network of websites. Playboy magazine is the
best-selling monthly men's magazine in the world based on the combined
circulation of the U.S. and international editions. Our licensing business
leverages the Playboy name, the Rabbit Head Design and our other trademarks
globally on a variety of consumer products, retail stores and location-based
entertainment.
Our businesses are classified into the following three reportable
segments: Entertainment, Publishing and Licensing. Net revenues, income before
income taxes, depreciation and amortization and identifiable assets of each
reportable segment are set forth in Note (R), Segment Information, to the Notes
to Consolidated Financial Statements.
Our trademarks, copyrights and domain names 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 and Spice.
ENTERTAINMENT GROUP
Our Entertainment Group operations include the production and marketing of
television programming for our domestic and international TV businesses,
web-based entertainment experiences, wireless content distribution, e-commerce,
DVD products and satellite radio under the Playboy, Spice and other brand names.
In 2006, we acquired Club Jenna, Inc. and related companies, or Club Jenna, a
multimedia adult entertainment business. Club Jenna adds a premier brand to our
businesses with assets that include successful film production, DVD, online and
mobile businesses as well as a library of content.
Programming
Our Entertainment Group develops, produces, acquires and distributes a
wide range of high-quality lifestyle adult television programming for our
domestic and international TV networks, pay-per-view, or PPV, subscription
pay-per-month, or PPM, video-on-demand, or VOD, subscription video-on-demand, or
SVOD, subscription package, or TIER, and worldwide DVD products. Our proprietary
productions include magazine-format shows, reality-based and dramatic series,
documentaries, live events and celebrity and Playmate programs. Our programming
is featured in a variety of formats, enabling us to leverage our programming
costs over multiple distribution platforms. We have produced a number of shows
that air on the domestic and international Playboy TV networks and are
distributed internationally in countries where we do not have networks.
Additionally, some of our programming has been released into DVD titles and/or
has been licensed to other networks, such as HBO and Showtime. Our original
series programming includes Night Calls, Sexy Girls Next Door, Naked Happy
Girls, Naughty Amateur Home Videos and Totally Busted. Additionally, we produce
shows and series to air on third-party networks, including Girls Next Door on
E!.
We invest in the creation and acquisition of high-quality, adult-oriented
programming to support our worldwide entertainment businesses. We invested $38.5
million, $33.1 million and $41.5 million in entertainment programming in 2006,
2005 and 2004, respectively. These amounts, which also include expenditures for
licensed programming, resulted in the domestic production of 207, 129 and 212
hours of original programming for Playboy TV in 2006, 2005 and 2004,
respectively. At December 31, 2006, our domestic library of primarily exclusive,
Playboy-branded original programming totaled approximately 3,000 hours. In
addition to investing in our productions, we also acquire high-quality adult
movies in various edit standards. A majority of the programming that airs on our
Spice Digital Networks is licensed, on an exclusive basis, from third parties.
We will continue to both acquire and produce original programming with a heavier
emphasis on producing and delivering content for
5
multiple electronic delivery platforms, including both long- and short-form
programming. In addition to utilizing some of the programming we produce for our
websites and for licensing to wireless providers, we invested $5.0 million, $2.2
million and $2.3 million in content specifically for online and wireless
initiatives in 2006, 2005 and 2004, respectively.
Our programming is delivered to direct-to-home, or DTH, and cable
operators through satellite transponders and through outside content processors.
We currently have four transponder service agreements related to our domestic
networks, the terms of which extend through 2008, 2013, 2013 and 2014. We also
have two international transponder service agreements, the terms of which extend
through 2009.
Our state-of-the-art studio in Los Angeles functions as a centralized
digital, technical and programming facility for the Entertainment Group. This
studio enables us to produce original programming in a high-definition format.
We utilize this facility to provide playback, production control and/or
origination services for our own television networks. Most of these services are
also provided for third parties, generating revenues that offset some of our
fixed costs.
Domestic TV
We currently operate several domestic TV networks, including Playboy TV,
Playboy TV en Espanol and the Spice Digital Networks.
Playboy TV, our flagship network, is principally programmed with a variety
of originally produced, unique entertainment content.
Playboy TV en Espanol, an all-Spanish-language network, is similar to and
shares content with the domestic Playboy TV network and includes
locally-produced, proprietary Spanish-language and other original
Spanish-language content.
We offer adult-themed movie networks under the Spice Digital Networks
banner, which includes Club Jenna. Each of these networks features adult movies
under exclusive licenses from leading adult studios, offers a distinct thematic
focus and is available in a variety of editing standards.
Our domestic TV content is primarily distributed through cable, satellite
and telephone companies, or Telcos. Our services are offered on a variety of
distribution platforms with various purchase and/or subscription options
depending on the network or distributor. Our networks are represented across all
platforms and purchase options as outlined below.
The two primary distribution platforms offering our services are
terrestrial cable, e.g., Comcast or Time Warner Cable, which includes VOD; and
DTH, e.g., DirecTV or EchoStar. In addition, Telcos, e.g., Verizon and AT&T, are
beginning to provide cable-style television services through their phone and/or
fiber optic lines and are including our products.
Our TV networks are available either as linear channels or as part of a
VOD service. Our linear channels, offered on cable, DTH and Telco platforms, are
television networks with regularly-scheduled content distributed through a
single network feed to all homes at the same time. VOD, which is currently
available only on cable platforms, makes content available to the consumer
through a television interface at any time the consumer chooses to view it. This
is done by storing a selection of content on a server at the local cable system,
which consumers may access by using their remote control devices at any time and
for a specified time. Consumers then view the content in a DVD-like manner;
i.e., they may pause, fast forward, rewind, stop and resume viewing at a later
time.
Our products are also available on Telco platforms, which are similar to
digital cable, except that the signals are distributed through a phone and/or
fiber optic lines to the home. As in cable, Playboy TV is generally being made
available as a linear service with an SVOD add-on, while our adult content is
provided in the VOD format.
6
The following table sets forth our domestic and Canadian networks and
distribution options:
Network Domestic DTH Domestic Cable Domestic Telcos Canadian DTH
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Playboy TV PPV/PPM PPV/PPM/VOD/SVOD PPM/SVOD PPM
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Playboy TV en Espanol TIER PPV/PPM/ TIER SVOD PPM
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Spice Digital Networks PPV PPV/VOD VOD ---
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In recent years, cable operators have shifted away from analog to digital
technology and away from PPV to VOD in order to counteract competition from DTH
operators. Digital technology allows for the compression of signals so that
several channels may fit into the same bandwidth previously provided by only one
analog channel. Furthermore, digital technology allows for the installation of
VOD functionality. Our linear networks are delivered almost exclusively on a
digital basis.
Playboy TV has the distinction of being the only adult television network
available on all major DTH services in both the United States and Canada.
We currently distribute VOD and SVOD programming through cable operators.
We are in the process of negotiating with the operators that do not currently
offer the SVOD service.
As VOD supplants traditional linear networks, we are seeking to obtain a
leading position in this new phase of technology by leveraging the power of our
brands, our large library of original programming and our relationships with
leading adult studios, while at the same time recognizing that we are operating
in a far more fragmented and competitive marketplace with lower barriers to
entry.
Our revenues, except in the case of TIERs, 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 on the number of buys and/or subscribers.
As part of our distributor negotiations, channel space for our networks is
determined at each distributor's corporate level; however, in some cases, we
negotiate terms at the corporate level with distribution at the affiliate level.
Our distributors determine the retail price of our services.
Our agreements with cable and DTH operators are renewed or renegotiated
from time to time in the ordinary course of business. In some cases, following
the expiration of an agreement, the respective operator and we agree to continue
to operate under the terms of the expired agreement until a new agreement is
negotiated. In any event, our agreements with distributors generally may be
terminated on short notice without penalty.
International
We currently own and operate or license Playboy-, Spice- and
locally-branded TV networks in the United Kingdom, which are further distributed
through DTH and cable television throughout greater Europe. Additionally, we
have networks in Korea, Hong Kong, Australia, New Zealand, Turkey and Israel.
Also, through joint ventures, we have equity interests in networks in Latin
America, Iberia and Japan. These international networks, which are generally
available on both a PPV and PPM basis, principally carry U.S.-originated
content, which is subtitled or dubbed and complemented by some local content. We
also license individual programs from our extensive library to broadcasters
internationally.
7
We own a 19.0% interest in Playboy TV-Latin America, LLC, or PTVLA, a
joint venture with Claxson Interactive Group, Inc., or Claxson, which operates
Playboy TV networks in Latin America and Iberia, as well as Venus, a local adult
service, in Latin America. In these markets, PTVLA operates multiple networks,
distributes Spice Live and licenses content from the Playboy library to other
broadcasters in the territory. Under the terms of our PTVLA operating agreement,
while Claxson has management control, we have significant management influence.
We provide both programming and the use of our trademarks directly to PTVLA in
return for 17.5% of the venture's net revenues with a guaranteed annual minimum.
The term of the program supply and trademark agreement for PTVLA expires in
2022, unless terminated earlier in accordance with the terms of the agreement.
PTVLA provides the feed for Playboy TV en Espanol and we pay PTVLA a 20%
distribution fee for that feed based on the network's net revenues in the U.S.
We have an option to purchase up to an additional 30.9% of PTVLA at fair market
value through December 23, 2022. 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, 2012, and ending December 23, 2022, so long as
we have previously or concurrently exercised the initial 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 both.
However, if we exercise both options concurrently, we must use cash to acquire
the 80.1% of PTVLA that we do not own.
We also hold a 19.9% ownership interest in Playboy Channel Japan, which
includes Playboy Channel and Channel Ruby, a local adult service.
We seek the most appropriate and profitable manner in which to build on
the powerful Playboy and Spice brands in each international 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 in which our programming is
aired. We also look to develop and establish relationships with international
production companies on a local level in order to create original international
product for distribution to our various owned and licensed networks.
We believe we can grow our international television business by (a)
expanding the distribution reach of existing networks, (b) launching and
operating additional networks in existing and new markets and (c) increasing
subscription penetration and buy rates with new programming and scheduling
tactics as well as targeted marketing activities. In addition, we expect that
the continued roll out of digital technology in addressable households in our
existing international markets will favorably impact our growth.
We also distribute our branded content internationally via the Internet
and wireless platforms. We have significant traffic from international users on
our owned and operated websites, Playboy.com and Playboy.co.uk, that results in
customers for our other products and services. Additionally, we license
international websites that feature a blend of original, local-edition Playboy
magazine and U.S. and U.K. websites content. In addition, we have licensees that
distribute our content on the wireless platform in many countries. Demand for
wireless content is increasing as technology and consumer adoption continue to
grow. Our current offerings include graphical images, video clips, mobile
television, ringtones and games. We also create integrated cross-platform mobile
marketing and promotions to leverage opportunities across our businesses.
Online Subscriptions and E-commerce
We operate various subscription-based websites, or clubs, as well as free
and e-commerce websites under our Playboy and other brands.
Our largest club, Playboy Cyber Club, offers access to over 100,000 photos
and videos and offers members the ability to see Playmates, an assortment of
celebrity content and special "online only" features, including Playboy's
franchise of "Cyber Girls" and "Coeds" and an extensive archive of Playboy
magazine interviews. The other clubs include three different broadband
video-specific membership clubs solely offering high-quality video, two personal
Playmate clubs, live video-chat clubs, a thematic pictorial and video club
navigable by niche, a club that features pictorials and videos using the Spice
brand and a club called Playboy Daily, which is used as a marketing tool and is
aimed at consumers who want a Playboy experience at a lower price.
8
We offer two online VOD theaters under the Playboy and Spice brands that
provide consumers the options to view video content on a pay-per-minute basis,
to download entire movies for viewing on their computers and/or to burn movies
to DVD.
We also offer sites branded under the Club Jenna name, including
ClubJenna.com, as well as the niche, reality-based sites produced, marketed and
promoted via our large affiliate network. In 2006, we also introduced a
first-of-its-kind adult SVOD website, Adult.com, which offers users the ability
to pay a recurring subscription fee to stream, download or burn any video in the
entire library.
Our Playboy-branded e-commerce website, PlayboyStore.com, combined with
our Playboy Catalog, offers customers the ability to purchase Playboy-branded
fashions, calendars, DVDs, jewelry, collectibles, back issues of Playboy
magazine and special editions as well as select non-Playboy-branded products.
The Playboy Catalog mails several times per year to millions of consumers
nationwide and in Canada. The Playboy Catalog targets a predominantly male
customer base. In November 2006, we launched a new e-commerce website,
ShoptheBunny.com, and the BUNNYshop Catalog to target a primarily female
audience and showcase Playboy-branded fashions, clubwear, apparel, sleepwear,
lingerie and women's accessories. Also in 2006, we made the strategic decision
to license our Spice-branded e-commerce website, SpiceTVStore.com, and the Spice
Catalog to a third party.
Other Businesses
We launched a site-wide redesign of Playboy.com in 2006. The new
Playboy.com website offers more original content leveraging Playboy magazine's
editorial assets and providing more opportunities to increase online advertising
sales. Additionally, the free area of the website is designed with a goal of
converting visitors to purchasers by directing them to our pay sites.
We distribute our proprietary content domestically in DVD format. We also
distribute non-Playboy-branded movies and adult DVDs, including titles under our
recently acquired Club Jenna brand, and re-package and re-market our catalog of
previously released DVD titles. These DVDs are sold in video and music stores,
other retail outlets and through our and other catalogs and online sites. Image
Entertainment, Inc. is the primary distributor of our Playboy-branded DVD
products in the United States and Canada and Vivid Entertainment Group is our
distributor for our Club Jenna-branded DVD products. Mammoth Entertainment
distributes our titles throughout Europe, Asia and South America.
In 2006, Playboy Radio, a new 24-hour Playboy-branded radio channel,
launched on SIRIUS Satellite Radio. The channel features all-new and exclusive
content and leverages our entertainment assets by expanding the Playboy brand on
the satellite radio platform. The agreement with SIRIUS Satellite Radio replaced
our former agreement with XM Satellite Radio Inc.
Alta Loma Entertainment functions as a production company. It leverages
our assets, including editorial material and the Playboy brand, as well as icons
such as the Playmates, the Playboy Mansion and Hugh M. Hefner, our
Editor-In-Chief and Chief Creative Officer, to develop and co-produce original
programming, such as the top-rated Girls Next Door on E!.
Competition
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 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, (c) negotiate for VOD and SVOD rights and
(d) market our programming to consumers through these operators. Over the past
several years, all of the competitive factors described above have adversely
impacted us, as has consolidation in the DTH and cable systems industries, which
has resulted in fewer, but larger, operators. The availability of, and price
pressure from, more explicit content on the Internet and more pay television
options, both mainstream and adult, also present a significant competitive
challenge. We believe the impact on our movie networks is greater than the
impact on Playboy TV due to the
9
strong brand recognition of Playboy, the quality of our original programming and
our ability to appeal to a broad range of adult audiences.
On the adult side, with VOD's lower cost of entry for programmers compared
to linear networks and capacity constraints disappearing, the market has become
significantly more competitive as we have less shelf space. We encourage
distributors to increase the dollars they spend marketing the full range of
Playboy PPV, VOD, SVOD and monthly subscription options to consumers with
particular emphasis on the value of monthly subscriptions. Our strategy in
response to Spice is to maintain VOD shelf space while reducing costs.
We also face competition in international markets from both the
availability and prevalence of explicit adult content on free television,
specifically in Europe, as well as competitive pay services. In the U.K., our
networks compete with a total of 41 other adult networks, and in Japan, our
channels compete with 14 other adult channels. As in the United States, there
are often low barriers to entry, which yield increasing competition, especially
from companies in Asia and parts of Europe providing local content as opposed to
dubbed U.S. programming.
The Internet is highly competitive, and we continue to compete for
visitors, subscribers, shoppers and advertisers. We believe that the primary
competitive factors affecting our Internet operations include brand recognition,
the quality of our content and products, technology, including the number of
broadband homes, pricing, ease of use, sales and marketing efforts and consumer
demographics. We have the advantage of leveraging the power of our Playboy and
other brands across multiple media platforms.
PUBLISHING GROUP
Our Publishing Group operations include the publication of Playboy
magazine, special editions, and other domestic publishing businesses, including
books and calendars, as well as the licensing of international editions of
Playboy magazine.
Playboy Magazine
Founded by Mr. Hefner in 1953, Playboy magazine plays a key role in
driving the continued popularity and recognition of the Playboy brand as 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 3.0 million copies monthly, while the combined average
circulation of the 22 licensed international editions is approximately 1.1
million copies monthly. According to fall 2006 data published by the independent
market research firm of Mediamark Research, Inc., or MRI, approximately one in
every eight men in the United States aged 18 to 34 reads the U.S. edition of
Playboy magazine.
Playboy magazine is a general-interest magazine, targeted to men, with a
reputation for excellence founded on its high-quality photography,
entertainment, humor, cartoons and articles on current issues, interests and
trends. Playboy magazine 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 the following:
Interviews Pictorials Leading Authors
------------------ ----------------- -----------------
Halle Berry Pamela Anderson Jimmy Breslin
Michael Brown Drew Barrymore Ethan Coen
George Clooney Cindy Crawford Michael Crichton
Bill Gates Carmen Electra Stephen King
Al Franken Daryl Hannah Norman Mailer
Tommy Hilfiger Rachel Hunter Jay McInerney
Arianna Huffington Elle Macpherson Walter Mosley
Michael Jordan Cindy Margolis Joyce Carol Oates
Nicole Kidman Jenny McCarthy Jane Smiley
Jack Nicholson Denise Richards Scott Turow
Donald Trump Anna Nicole Smith John Updike
Kanye West Katarina Witt Kurt Vonnegut
10
Playboy magazine has long been known for publishing the work of top
photographers, writers and artists. Playboy magazine also features lifestyle
articles on consumer electronics and other products, fashion and automobiles and
covers the worlds of sports and entertainment.
According to the independent audit agency Audit Bureau of Circulations, or
ABC, for the six months ended December 31, 2006, Playboy magazine was the 14th
highest-ranking U.S. consumer publication, with a circulation rate base (the
total subscription and newsstand circulation guaranteed to advertisers) of 3.0
million. Playboy magazine's circulation rate base for the same period was
greater than each of Maxim, Stuff, GQ and Esquire.
Playboy magazine has historically generated approximately two-thirds of
its revenues from subscription and newsstand circulation, with the remainder
primarily from advertising. Subscription copies represent approximately 92% of
total copies sold. Managing Playboy magazine's circulation to be primarily
subscription driven provides a relatively stable and desirable circulation base,
which we believe is attractive to advertisers. According to MRI, the median age
of male Playboy magazine readers is 34, with a median annual household income of
approximately $54,000, a demographic that we believe is also attractive to
advertisers. We also derive revenues from the rental of Playboy magazine's
subscriber list.
We attract new subscribers to Playboy magazine through our own direct mail
advertising campaigns, subscription agent campaigns and the Internet, including
Playboy.com. Subscription copies of the magazine are delivered through the
United States Postal Service as periodical mail. We attempt to contain these
costs through presorting and other methods.
Playboy magazine is also available as a digital edition. Each month,
digital copies are delivered to subscribers via the Internet. Digital copies may
also be purchased on a single issue basis.
Playboy magazine is one of the highest priced magazines in the United
States. The basic U.S. newsstand cover price is $5.99 ($6.99 for the December
2006 and January 2007 holiday issues). We generally increase the newsstand cover
price by $1.00 when there is a feature of special appeal. We price test from
time to time; however, no cover price increases are planned for 2007.
Playboy magazine targets a wide range of advertisers. The following table
sets forth advertising by category, as a percent of total advertising pages, and
the total number of advertising pages:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
Category 12/31/06 12/31/05 12/31/04
- --------------------------------------------------------------------------------
Retail/Direct mail 28% 27% 22%
Beer/Wine/Liquor 21 22 23
Tobacco 13 10 17
Apparel/Footwear/Accessories 7 1 4
Home electronics 4 6 8
Automotive 4 6 7
Personal hygiene/Hair care 4 6 4
Toiletries/Cosmetics 4 4 3
Other 15 18 12
- --------------------------------------------------------------------------------
Total 100% 100% 100%
================================================================================
Total advertising pages 429 479 573
================================================================================
We continue to focus on securing new advertisers, including expanding
advertising in underserved categories. We publish the U.S. edition of Playboy
magazine in 15 advertising editions: one upper income zip-coded, eight regional,
two state and four metropolitan editions. All contain the same editorial
material but provide targeting opportunities for advertisers. We implemented 5%,
8% and 4% cost per thousand increases in advertising rates effective with the
January 2007, 2006 and 2005 issues, respectively.
Playboy magazine subscriptions are serviced by Communications Data
Services, Inc., or CDS. Pursuant to a subscription fulfillment agreement, CDS
performs a variety of services, including (a) processing orders or
11
transactions, (b) receiving, verifying, balancing and depositing payments from
subscribers, (c) printing forms and promotional materials, (d) maintaining
master files on all subscribers, (e) issuing bills and renewal notices to
subscribers, (f) generating labels, (g) resolving customer service complaints as
directed by us and (h) furnishing various reports that enable us to monitor and
to account for all aspects of the subscription operations. The term of the
subscription fulfillment agreement expires June 30, 2011. 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 increase annually based on the consumer price
index to a maximum of 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 our shareholders and us against claims arising from
actions or omissions by CDS in compliance with the terms of the agreement or in
compliance with our instructions.
Domestic distribution of Playboy magazine and special editions to
newsstands and other retail outlets is accomplished through Time/Warner Retail
Sales and Marketing, or TWRSM, our national distributor. The copies are shipped
in bulk to wholesalers, who are responsible for local retail distribution. We
receive a substantial cash advance from TWRSM 30 days after the date 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 TWRSM. These revenue adjustments have not been material.
Retailers return unsold copies to wholesalers, who count and then shred the
returned copies and report the returns by affidavit. The number of copies sold
on newsstands varies from month to month, depending in part on consumer interest
in the cover, the pictorials and the editorial features. Our current agreement
with TWRSM expires December 2008.
Playboy magazine and special editions are printed at Quad/Graphics, Inc.,
or Quad, at a single site located in Wisconsin, which ships the products to
subscribers and wholesalers. The print runs vary each month based on expected
sales and are determined with input from TWRSM. 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 papers that are purchased from a number of
suppliers around the world.
Magazine publishing companies face intense competition for readers,
advertisers and retail shelf space. Magazines and Internet sites primarily aimed
at men are Playboy magazine's principal competitors. Other types of media that
carry advertising, particularly cable and broadcast television, also compete
with Playboy magazine for advertising revenues. Levels of advertising revenues
may be affected by, among other things, competition for and spending by
advertisers, general economic activity and governmental regulation of
advertising content, such as tobacco products. However, since only approximately
one-third of Playboy magazine's revenues and less than 10% of our total revenues
are from Playboy magazine advertising, we are not overly dependent on this
source of revenue.
Other Domestic Publishing
Our Publishing Group has also created media extensions, such as special
editions and calendars, which are primarily sold in newsstand outlets. We
published 25 special editions in each of 2006, 2005 and 2004, and we expect to
publish the same number in 2007. The U.S. special editions' newsstand cover
price is $8.99. We price test from time to time; however, no price increases are
planned for 2007. Other domestic publishing also includes the production of
calendars and licensing rights to third parties to publish books for which we
receive royalties.
International Publishing
We license the right to publish 22 international editions of Playboy
magazine to local partners in the following countries: Argentina, Brazil,
Bulgaria, Croatia, the Czech Republic, France, Germany, Greece, Hungary,
Indonesia, Japan, Mexico, the Netherlands, Poland, Romania, Russia, Serbia,
Slovakia, Slovenia, Spain, Ukraine and Venezuela.
Local publishing licensees tailor their international editions by mixing
the work of their national writers and artists with editorial and pictorial
content 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 license
agreements vary but, in general, are for terms of three to five years and carry
a
12
guaranteed minimum royalty as well as a formula for computing earned royalties
in excess of the minimum. Royalty computations are based on both circulation and
advertising revenues. The German and Brazilian editions accounted for
approximately one-half of our total revenues from international editions in
2006, 2005 and 2004.
LICENSING GROUP
Our Licensing Group operations include the licensing of consumer products
carrying one or more of our trademarks and/or images, Playboy-branded retail
stores, location-based entertainment and certain revenue-generating marketing
activities.
We license the Playboy name, the Rabbit Head Design and other images,
trademarks and artwork for the worldwide manufacture, sale and distribution of a
multitude of consumer products. We work with our licensees to develop, market
and distribute high-quality Playboy-branded merchandise. Our licensed product
lines include men's and women's apparel, men's underwear and women's lingerie,
accessories, collectibles, cigars, watches, jewelry, fragrances, shoes, luggage,
bath and body products, small leather goods, stationery, music, eyewear,
barware, home fashions and slot machines. We continually seek to license our
brand name and images in new markets and retail categories, including the launch
in 2007 of Playboygaming.com, a Playboy-branded online casino and poker site.
The group also licenses art-related products based on our extensive art
collection, most of which were originally commissioned as illustrations for
Playboy magazine. Occasionally, we sell small portions of our art and
memorabilia collection through auction houses such as Christie's and Sotheby's.
Playboy-branded merchandise is marketed primarily through retail outlets,
including department and specialty stores, as well as through our and other
e-commerce websites and catalogs.
We also license Playboy concept stores, opening six in the last two years,
with locations in Bangkok, Hong Kong, Kuala Lumpur, Melbourne and two in Las
Vegas. We expect licensees to open four additional stores in 2007, including a
relocated store in Tokyo, and our first store in Europe, which will be in
London.
We have recently expanded our licensing activities to include
location-based entertainment destinations. Our first venue, located at the Palms
Casino Resort in Las Vegas, opened in the fourth quarter of 2006. Our venture
partner provided the funding for all of the Playboy elements, which include a
30-foot tall Rabbit Head on the exterior of their new tower, a nightclub, a
boutique casino and lounge, a retail store and a sky villa hotel suite. We
contributed the Playboy brand and trademarks as well as marketing support.
While our branded products are unique, the licensing business is intensely
competitive and is extremely sensitive to economic conditions, shifts in
consumer buying habits, fashion and lifestyle trends and changes in the global
retail sales environment.
Company-wide marketing events, which are operated at approximately
break-even, consist of the Playboy Jazz Festival and Playmate Promotions. We
have produced the Playboy Jazz Festival on an annual basis in Los Angeles at the
Hollywood Bowl since 1979 and continue our sponsorship of related community
events. Playmate Promotions represents the Playmates in advertising campaigns,
trade shows, endorsements, commercials, motion pictures, television and videos.
SEASONALITY
Our businesses are generally not seasonal in nature; however, e-commerce
revenues are typically impacted by the holiday buying season, and online
subscription revenues are impacted by decreased Internet traffic during the
summer months.
PROMOTIONAL AND OTHER ACTIVITIES
We believe that our sales of products and services are enhanced by public
recognition of the Playboy brand as symbolic of a lifestyle. In order to
establish public recognition, we, among other activities, purchased in 1971 the
Playboy Mansion in Los Angeles, California, where Mr. Hefner lives. The Playboy
Mansion is used for various corporate activities, and serves as a valuable
location for television production, magazine photography and for online,
advertising, marketing and sales events. It also enhances our image, as we host
many charitable and civic
13
functions. The Playboy Mansion generates substantial publicity and recognition,
which increases 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 for the per-unit value of non-business 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, 2006, at a net book
value of $1.6 million, including all improvements and after accumulated
depreciation. We incur all operating expenses of the Playboy Mansion, including
depreciation and taxes, which were $2.1 million, $3.1 million and $3.0 million
for 2006, 2005 and 2004, respectively, net of rent received from Mr. Hefner.
The Playboy Foundation provides financial support to many not-for-profit
organizations and projects throughout the country concerned with issues
historically of importance to Playboy magazine and its readers, including
anti-censorship efforts, civil rights, AIDS education, prevention and research,
reproductive freedom and social justice.
Our trademarks, copyrights and online domain names are critical to the
success and growth potential of all of our businesses. We actively protect and
defend them throughout the world and monitor the marketplace for counterfeit
products, including by initiating legal proceedings, when warranted, to prevent
their unauthorized use.
EMPLOYEES
We employed 782 and 725 full-time employees at February 28, 2007 and 2006,
respectively. 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, as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the United States Securities and Exchange Commission.
Also posted on our website are the charters of the Audit Committee and
Compensation Committee of our Board of Directors, our Code of Business Conduct
and our Corporate Governance Guidelines. Copies of these documents are available
free of charge by sending a request to Investor Relations, Playboy Enterprises,
Inc., 680 North Lake Shore Drive, Chicago, Illinois 60611.
As required under Section 302 of the Sarbanes-Oxley Act of 2002, the
certifications of our Chief Executive Officer and Chief Financial Officer are
filed as exhibits to the Annual Report on Form 10-K. In addition, we submitted
to the New York Stock Exchange, or the Exchange, the required annual
certifications of our Chief Executive Officer relating to compliance by us with
the Exchange's corporate governance listing standards. Copies of these
certifications are available to stockholders free of charge by sending a request
to Investor Relations, Playboy Enterprises, Inc., 680 North Lake Shore Drive,
Chicago, Illinois 60611.
14
Item 1A. Risk Factors
In addition to the other information contained in this Annual Report on
Form 10-K, the following risk factors should be carefully considered in
evaluating our business and us.
We may not be able to protect our intellectual property rights.
We believe that our trademarks, particularly the Playboy name and Rabbit
Head Design, and other proprietary rights are critical to our success, growth
potential and competitive position. Accordingly, we devote substantial resources
to the establishment and protection of our trademarks and other proprietary
rights. Our actions to establish and protect our trademarks and other
proprietary rights, however, may not prevent imitation of our products by others
or prevent others from claiming violations of their trademarks and proprietary
rights by us. Any infringement or related claims, even if not meritorious, may
be costly and time consuming to litigate, may distract management from other
tasks of operating the business and may result in the loss of significant
financial and managerial resources, which could harm our business, financial
condition or operating results. These concerns are particularly relevant with
regard to those international markets, such as China, in which it is especially
difficult to enforce intellectual property rights.
Failure to maintain our agreements with multiple system operators, or
MSOs, and DTH operators on favorable terms could adversely affect our business,
financial condition or results of operations.
We currently have agreements with all of the largest MSOs in the United
States. We also have agreements with the principal DTH operators in the United
States and Canada. Our agreements with these operators may be terminated on
short notice without penalty. If one or more MSOs or DTH operators terminate or
do not renew these agreements, or do not renew them on terms as favorable as
those of current agreements, our business, financial condition or results of
operations could be materially adversely affected.
In addition, 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, and other adult movie
pay services. We compete with other pay services as we attempt to obtain or
renew carriage with DTH operators and individual cable affiliates, negotiate fee
arrangements with these operators, negotiate for VOD and SVOD rights and market
our programming through these operators to consumers. The competition with
programming providers has intensified as a result of consolidation in the DTH
and cable systems industries, which has resulted in fewer, but larger,
operators. Competition has also intensified with VOD's lower cost of entry for
programmers compared to linear networks and with capacity constraints
disappearing. The impact of industry consolidation, any decline in our access
to, and acceptance by, DTH and/or cable systems and the possible resulting
deterioration in the terms of agreements, cancellation of fee arrangements or
pressure on margin splits with operators of these systems could adversely affect
our business, financial condition or results of operations.
Limits on our access to satellite transponders could adversely affect our
business, financial condition or results of operations.
Our cable television and DTH operations require continued access to
satellite transponders to transmit programming to cable and DTH operators.
Material limitations on our access to these systems or satellite transponder
capacity could materially adversely affect our business, financial condition or
results of operations. Our access to transponders may be restricted or denied
if:
o we or the satellite owner are/is indicted or otherwise charged
as a defendant in a criminal proceeding;
o the Federal Communications Commission issues an order
initiating a proceeding to revoke the satellite owner's
authorization to operate the satellite;
o the satellite owner is ordered by a court or governmental
authority to deny us access to the transponder;
o we are deemed by a governmental authority to have violated any
obscenity law; or
o our satellite transponder providers fail to provide the
required services.
15
In addition to the above, the access of Playboy TV, the Spice Digital
Networks and our other networks to transponders may be restricted or denied if a
governmental authority commences an investigation or makes an adverse finding
concerning the content of their transmissions. Technical failures may also
affect our satellite transponder providers' ability to deliver transmission
services.
We are subject to risks resulting from our operations outside the United
States, and we face additional risks and challenges as we continue to expand
internationally.
The international scope of our operations may contribute to volatile
financial results and difficulties in managing our business. For the year ended
December 31, 2006, we derived approximately 29% of our consolidated revenues
from countries outside the United States. Our international operations expose us
to numerous challenges and risks, including, but not limited to, the following:
o adverse political, regulatory, legislative and economic
conditions in various jurisdictions;
o costs of complying with varying governmental regulations;
o fluctuations in currency exchange rates;
o difficulties in developing, acquiring or licensing programming
and products that appeal to a variety of different audiences
and cultures;
o scarcity of attractive licensing and joint venture partners;
o the potential need for opening and managing distribution
centers abroad; and
o difficulties in protecting intellectual property rights in
foreign countries.
In addition, important elements of our business strategy, including
capitalizing on advances in technology, expanding distribution of our products
and content and leveraging cross-promotional marketing capabilities, involve a
continued commitment to expanding our business internationally. This
international expansion will require considerable management and financial
resources.
We cannot assure you that one or more of these factors or the demands on
our management and financial resources would not harm any current or future
international operations and our business as a whole.
Any inability to identify, fund investment in and commercially exploit new
technology could have a material adverse impact on our business, financial
condition or results of operations.
We are engaged in a business that has experienced significant
technological change over the past several years and is continuing to undergo
technological change. Our ability to implement our business plan and to achieve
the results projected by management will depend on management's ability to
anticipate technological advances and implement strategies to take advantage of
technological change. Any inability to identify, fund investment in and
commercially exploit new technology or the commercial failure of any technology
that we pursue, such as VOD and SVOD, could result in our business becoming
burdened by obsolete technology and could have a material adverse impact on our
business, financial condition or results of operations.
Our online operations are subject to security risks and systems failures.
Online security breaches could materially adversely affect our business,
financial condition or results of operations. Any well-publicized compromise of
security could deter use of the Internet in general or use of the Internet to
conduct transactions that involve transmitting confidential information or
downloading sensitive materials in particular. In offering online payment
services, we may increasingly rely on technology licensed from third parties to
provide the security and authentication necessary to effect secure transmission
of confidential information such as customer credit card numbers. Advances in
computer capabilities, new discoveries in the field of cryptography or other
developments could compromise or breach the algorithms that we use to protect
our customers' transaction data. If third parties are able to penetrate our
network security or otherwise misappropriate confidential information, we could
be subject to liability, which could result in litigation. In addition,
experienced programmers or "hackers" may attempt to misappropriate proprietary
information or cause interruptions in our services that could require us to
expend significant capital and resources to protect against or remediate these
16
problems. Increased scrutiny by regulatory agencies, such as the Federal Trade
Commission and state agencies, of the use of customer information could also
result in additional expenses if we are obligated to reengineer systems to
comply with new regulations or to defend investigations of our privacy
practices.
The uninterrupted performance of our computer systems is critical to the
operations of our websites. Our computer systems are located at external
third-party sites, and, as such, may be vulnerable to fire, loss of power,
telecommunications failures and other similar catastrophes. In addition, we may
have to restrict access to our websites to solve problems caused by computer
viruses or other system failures. Our customers may become dissatisfied by any
disruption or failure of our computer systems that interrupts our ability to
provide our content. Repeated system failures could substantially reduce the
attractiveness of our websites and/or interfere with commercial transactions,
negatively affecting our ability to generate revenues. Our websites must
accommodate a high volume of traffic and deliver regularly-updated content. Our
sites have, on occasion, experienced slow response times and network failures.
These types of occurrences in the future could cause users to perceive our
websites as not functioning properly and therefore induce them to frequent
websites other than ours. We are also subject to risks from failures in computer
systems other than our own because our customers depend on their own Internet
service providers for access to our sites. Our revenues could be negatively
affected by outages or other difficulties customers experience in accessing our
websites due to Internet service providers' system disruptions or similar
failures unrelated to our systems. Our insurance policies may not adequately
compensate us for any losses that may occur due to any failures in our Internet
systems or the systems of our customers' Internet service providers.
Piracy of our television networks, programming and photographs could
materially reduce our revenues and adversely affect our business, financial
condition or results of operations.
The distribution of our subscription programming by MSOs and DTH operators
requires the use of encryption technology to assure that only those who pay can
receive programming. It is illegal to create, sell or otherwise distribute
mechanisms or devices to circumvent that encryption. Nevertheless, theft of
subscription television programming has been widely reported. Theft of our
programming reduces future potential revenue. In addition, theft of our
competitors' programming can also increase our churn rate. Although MSOs and DTH
operators continually review and update their conditional access technology,
there can be no assurance that they will be successful in developing or
acquiring the technology needed to effectively restrict or eliminate signal
theft.
Additionally, the development of emerging technologies, including the
Internet and online services, poses the risk of making piracy of our
intellectual property more prevalent. Digital formats, such as the ones we use
to distribute our programming through MSOs, DTH and the Internet, are easier to
copy, download or intercept. As a result, users can download, duplicate and
distribute unauthorized copies of copyrighted programming and photographs over
the Internet or other media, including DVDs. As long as pirated content is
available, many consumers could choose to download or purchase pirated
intellectual property rather than pay to subscribe to our services or purchase
our products.
National consolidation of the single-copy magazine distribution system may
adversely affect our ability to obtain favorable terms on the distribution of
Playboy magazine and special editions and may lead to declines in profitability
and circulation.
In the past decade, the single-copy magazine distribution system has
undergone dramatic consolidation. According to an economic study released by
Magazine Publishers of America in October 2001, the number of magazine
wholesalers has declined from more than 180 independent distribution owners to
just four large wholesalers that handle 90% of the single-copy distribution
business. Currently, we rely on a single national distributor, TWRSM, for the
distribution of Playboy magazine and special editions to newsstands and other
retail outlets. As a result of this industry consolidation, we face increasing
pressure to lower the prices we charge to wholesalers and increase our
sell-through rates. If we are forced to lower the prices we charge wholesalers,
we may experience declines in revenue. If we are unable to meet targeted
sell-through rates, we may incur greater expenses in the distribution process.
The combination of these factors could negatively impact the profitability and
newsstand circulation for Playboy magazine and special editions.
17
If we are unable to generate revenues from advertising and sponsorships,
or if we were to lose our large advertisers or sponsors, our business would be
harmed.
If companies perceive Playboy magazine, Playboy.com or any of our other
free websites to be limited or ineffective advertising mediums, they may be
reluctant to advertise in our products or to be sponsors in us. Our ability to
generate significant advertising and sponsorship revenues depends upon several
factors, including, among others, the following:
o our ability to maintain a large, demographically attractive
subscriber base for Playboy magazine and Playboy.com and any
of our other free websites;
o our ability to offer attractive advertising rates;
o our ability to attract advertisers and sponsors; and
o our ability to provide effective advertising delivery and
measurement systems.
Our advertising revenues are also dependent on the level of spending by
advertisers, which is impacted by a number of factors beyond our control,
including general economic conditions, changes in consumer purchasing and
viewing habits and changes in the retail sales environment. Our existing
competitors, as well as potential new competitors, may have significantly
greater financial, technical and marketing resources than we do. These companies
may be able to undertake more extensive marketing campaigns, adopt aggressive
advertising pricing policies and devote substantially more resources to
attracting advertising customers.
We rely on third parties to service our Playboy magazine subscriptions and
to print and distribute the magazine and special editions. If these third
parties fail to perform, our business could be harmed.
We rely on CDS to service Playboy magazine subscriptions. The magazine and
special editions are printed at Quad at a single site located in Wisconsin,
which ships the product to subscribers and wholesalers. We rely on a single
national distributor, TWRSM, for the distribution of Playboy magazine and
special editions to newsstands and other retail outlets. If CDS, Quad or TWRSM
is unable to or does not perform and we are unable to find alternative services
in a timely fashion, our business could be adversely affected.
Increases in paper prices or postal rates could adversely affect our
operating performance.
Paper costs are a substantial component of the manufacturing and direct
marketing expenses of our publishing business and the direct marketing expenses
of our online business. The market for paper has historically been cyclical,
resulting in volatility in paper prices. An increase in paper prices could
materially adversely affect our operating performance unless and until we can
pass any increases through to the consumer.
The cost of postage also affects the profitability of Playboy magazine and
our e-commerce business. An increase in postage rates could materially adversely
affect our operating performance unless and until we can pass the increase
through to the consumer.
If we experience a significant decline in our circulation rate base, our
results could be adversely affected.
According to ABC, Playboy magazine was the 14th highest-ranking U.S.
consumer publication for the six months ended December 31, 2006. Our circulation
is primarily subscription driven, with subscription copies comprising
approximately 92% of total copies sold. If we either experience a significant
decline in subscriptions because we lose existing subscribers or do not attract
new subscribers, our results could be adversely affected.
We may not be able to compete successfully with direct competitors or with
other forms of entertainment.
We derive a significant portion of our revenues from subscriber-based
fees, advertising and licensing, for which we compete with various other media,
including magazines, newspapers, television, radio and Internet websites that
offer customers information and services similar to those that we provide. We
also compete with providers of alternative leisure-time activities and media.
Competition could result in price reductions, reduced
18
margins or loss of market share, any of which could have a material adverse
effect on our business, financial condition or results of operations.
We face competition on both country and regional levels. In addition, each
of our businesses competes with companies that deliver content through the same
platforms and with companies that operate in different media businesses. Many of
our competitors, including large entertainment and media enterprises, have
greater financial and human resources than we do. We cannot assure you that we
can remain competitive with companies that have greater resources or that offer
alternative entertainment and information options.
Government regulations could adversely affect our business, financial
condition or results of operations.
Our businesses are regulated by governmental authorities in the countries
in which we operate. Because of our international operations, we must comply
with diverse and evolving regulations. Regulation relates to, among other
things, licensing, access to satellite transponders, commercial advertising,
subscription rates, foreign investment, Internet gaming, use of confidential
customer information and content, including standards of decency/obscenity.
Changes in the regulation of our operations or changes in interpretations of
existing regulations by courts or regulators or our inability to comply with
current or future regulations could adversely affect us by reducing our
revenues, increasing our operating expenses and/or exposing us to significant
liabilities. While we are not able to reliably predict particular regulatory
developments that could affect us adversely, those regulations related to adult
content, the Internet, privacy and commercial advertising illustrate some of the
potential difficulties we face.
o Adult content. Regulation of adult content could prevent us
from making our content available in various jurisdictions or
otherwise have a material adverse effect on our business,
financial condition or results of operations. The governments
of some countries, such as China and India, have sought to
limit the influence of other cultures by restricting the
distribution of products deemed to represent foreign or
"immoral" influences. Regulation aimed at limiting minors'
access to adult content could also increase our cost of
operations and introduce technological challenges, such as by
requiring development and implementation of age verification
systems.
o Internet. Various governmental agencies are considering a
number of legislative and regulatory proposals that may lead
to laws or regulations concerning various aspects of the
Internet, including online content, intellectual property
rights, user privacy, taxation, access charges, liability for
third-party activities and jurisdiction. Regulation of the
Internet could materially adversely affect our business,
financial condition or results of operations by reducing the
overall use of the Internet, reducing the demand for our
services or increasing our cost of doing business.
o Regulation of commercial advertising. We receive a significant
portion of our advertising revenues from companies selling
alcohol and tobacco products. For the year ended December 31,
2006, beer/wine/liquor and tobacco represented 21% and 13%,
respectively, of the total advertising pages in Playboy
magazine. Significant limitations on the ability of those
companies to advertise in Playboy magazine or on our websites
because of either legislative, regulatory or court action
could materially adversely affect our business, financial
condition or results of operations. In August 1996, the Food &
Drug Administration announced regulations that prohibited the
publication of tobacco advertisements containing drawings,
colors or pictures. While those regulations were later held
unconstitutional by the Supreme Court of the United States,
future attempts may be made by other federal agencies to
impose similar or other types of advertising limitations.
19
Our business involves risks of liability claims for media content, which
could adversely affect our business, financial condition or results of
operations.
As a distributor of media content, we may face potential liability for:
o defamation;
o invasion of privacy;
o negligence;
o copyright or trademark infringement; and
o other claims based on the nature and content of the materials
distributed.
These types of claims have been brought, sometimes successfully, against
broadcasters, publishers, online services and other disseminators of media
content. We could also be exposed to liability in connection with material
available through our websites. Any imposition of liability that is not covered
by insurance or is in excess of insurance coverage could have a material adverse
effect on us. In addition, measures to reduce our exposure to liability in
connection with material available through our websites could require us to take
steps that would substantially limit the attractiveness of our websites and/or
their availability in various geographic areas, which would negatively affect
their ability to generate revenues.
Private advocacy group actions targeted at our content could result in
limitations on our ability to distribute our products and programming and
negatively impact our brand acceptance.
Our ability to operate successfully depends on our ability to obtain and
maintain distribution channels and outlets for our products. From time to time,
private advocacy groups have sought to exclude our programming from local pay
television distribution because of the adult-oriented content of the
programming. In addition, from time to time, private advocacy groups have
targeted Playboy magazine and its distribution outlets and advertisers, seeking
to limit the magazine's availability because of its adult-oriented content. In
addition to possibly limiting our ability to distribute our products and
programming, negative publicity campaigns, lawsuits and boycotts could
negatively affect our brand acceptance and cause additional financial harm by
requiring that we incur significant expenditures to defend our business or by
discouraging investors from investing in our securities.
In pursuing selective acquisitions, we may incur various costs and
liabilities and we may never realize the anticipated benefits of the
acquisitions.
If appropriate opportunities become available, we may acquire businesses,
products or technologies that we believe are strategically advantageous to our
business. Transactions of this sort could involve numerous risks, including:
o unforeseen operating difficulties and expenditures arising
from the process of integrating any acquired business, product
or technology, including related personnel;
o diversion of a significant amount of management's attention
from the ongoing development of our business;
o dilution of existing stockholders' ownership interest in us;
o incurrence of additional debt;
o exposure to additional operational risk and liability,
including risks arising from the operating history of any
acquired businesses;
o entry into markets and geographic areas where we have limited
or no experience;
o loss of key employees of any acquired companies;
o adverse effects on our relationships with suppliers and
customers; and
o adverse effects on the existing relationships of any acquired
companies, including suppliers and customers.
Furthermore, we may not be successful in identifying appropriate
acquisition candidates or consummating acquisitions on terms favorable or
acceptable to us or at all.
20
When we acquire businesses, products or technologies, our due diligence
reviews are subject to inherent uncertainties and may not reveal all potential
risks. We may therefore fail to discover or inaccurately assess undisclosed or
contingent liabilities, including liabilities for which we may have
responsibility as a successor to the seller or the target company. As a
successor, we may be responsible for any past or continuing violations of law by
the seller or the target company, including violations of decency laws. Although
we generally attempt to seek contractual protections, such as representations
and warranties and indemnities, we cannot be sure that we will obtain such
provisions in our acquisitions or that such provisions will fully protect us
from all unknown, contingent or other liabilities or costs. Finally, claims
against us relating to any acquisition may necessitate our seeking claims
against the seller for which the seller may not indemnify us or that may exceed
the scope, duration or amount of the seller's indemnification obligations.
Our significant debt could adversely affect our business, financial
condition or results of operations.
We have a significant amount of debt. At December 31, 2006, we had total
financing obligations of $115.0 million, all of which consisted of our 3.00%
convertible senior subordinated notes due 2025. In addition, we have a $50.0
million revolving credit facility. At December 31, 2006, there were no
borrowings and $10.6 million in letters of credit outstanding under this
facility, permitting $39.4 million of available borrowings under this facility.
The amount of our existing and future debt could adversely affect us in a
number of ways, including the following:
o we may be unable to obtain additional financing for working
capital, capital expenditures, acquisitions and general
corporate purposes;
o debt-service requirements could reduce the amount of cash we
have available for other purposes;
o we could be disadvantaged as compared to our competitors, such
as in our ability to adjust to changing market conditions; and
o we may be restricted in our ability to make strategic
acquisitions and to exploit business opportunities.
Our ability to make payments of principal and interest on our debt depends
upon our future performance, general economic conditions and financial, business
and other factors affecting our operations, many of which are beyond our
control. If we are not able to generate sufficient cash flow from operations in
the future to service our debt, we may be required, among other things:
o to seek additional financing in the debt or equity markets;
o to refinance or restructure all or a portion of our debt;
and/or
o to sell assets.
These measures might not be sufficient to enable us to service our debt.
In addition, any such financing, refinancing or sale of assets might not be
available on economically favorable terms.
The terms of our existing credit facility impose restrictions on us that
may affect our ability to successfully operate our business.
Our existing credit facility contains covenants that limit our actions.
These covenants could materially and adversely affect our ability to finance our
future operations or capital needs or to engage in other business activities
that may be in our best interests. The covenants limit our ability to, among
other things:
o incur or guarantee additional indebtedness;
o repurchase capital stock;
o make loans and investments;
o enter into agreements restricting our subsidiaries' abilities
to pay dividends;
o create liens;
o sell or otherwise dispose of assets;
21
o enter new lines of business;
o merge or consolidate with other entities; and
o engage in transactions with affiliates.
The credit facility also contains financial covenants requiring us to
maintain specified minimum net worth and interest coverage ratios.
Our ability to comply with these covenants and requirements may be
affected by events beyond our control, such as prevailing economic conditions
and changes in regulations, and if such events occur, we cannot be sure that we
will be able to comply.
We depend on our key personnel.
We believe that our ability to successfully implement our business
strategy and to operate profitably depends on the continued employment of some
of our senior management team. If these members of the management team become
unable or unwilling to continue in their present positions, our business,
financial condition or results of operations could be materially adversely
affected.
Ownership of Playboy Enterprises, Inc. is concentrated.
As of December 31, 2006, Mr. Hefner beneficially owned 69.53% of our Class
A common stock. As a result, given that our Class B stock is nonvoting, Mr.
Hefner possesses influence on matters including the election of directors as
well as transactions involving a potential change of control. Mr. Hefner may
support, and cause us to pursue, strategies and directions with which holders of
our securities disagree. The concentration of our share ownership may delay or
prevent a change in control, impede a merger, consolidation, takeover or other
transaction involving us or discourage a potential acquirer from making a tender
offer or otherwise attempting to obtain control of us.
Item 1B. Unresolved Staff Comments
None.
22
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 and
executive and administrative personnel.
Los Angeles, California This space serves as our Entertainment Group's
headquarters and is utilized by executive and
administrative personnel.
New York, New York This space serves as our Publishing and
Licensing Groups' headquarters, and the
Entertainment Group and executive and
administrative personnel use a limited amount of
space.
London, England This space is used by our Playboy TV U.K.
executive and administrative personnel and as a
programming facility.
Operations Facilities Leased:
Los Angeles, California This space is used by our Entertainment Group as
a centralized digital, technical and programming
facility. We also utilize parts of this facility
to handle similar functions for others.
Santa Monica, California This space is used by our Publishing Group as a
photography studio and offices.
Rocklin, California This space is used by our Entertainment Group in
the production and distribution of content.
Scottsdale, Arizona This space is used by our Entertainment Group in
the production of content.
Property Owned:
Los Angeles, California The Playboy Mansion is used for various
corporate activities and serves as a valuable
location for television production, magazine
photography and for online, advertising and
sales events. It also enhances our image as host
for many charitable and civic functions.
23
Item 3. Legal Proceedings
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 approximately $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
approximately $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 vigorously pursued an appeal with the State
Appellate Court sitting in Corpus Christi challenging the verdict. We have
posted a bond in the amount of approximately $9.4 million, which represents the
amount of the judgment, costs and estimated pre- and post-judgment interest, in
connection with the appeal. On May 25, 2006, the State Appellate Court reversed
the judgment by the trial court, rendered judgment for us on the majority of the
plaintiffs' claims and remanded the remaining claims for a new trial. On July
14, 2006, the plaintiffs filed a motion for rehearing and en banc
reconsideration, which we opposed. On October 12, 2006, the State Appellate
Court denied plaintiff's motion. On December 27, 2006, we filed a petition for
review with the Texas Supreme Court. We, on advice of legal counsel, believe
that it is not probable that a material judgment against us will be obtained. In
accordance with Statement of Financial Accounting Standards No. 5, Accounting
for Contingencies, or Statement 5, 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, or
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 sought 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 the plaintiffs' complaint. After
pre-trial motions, Playboy was dismissed from the case and a number of causes of
action were dismissed against Spice. A trial date for the remaining breach of
contract claims against Spice was set for December 10, 2003, and then continued,
first to February 11, 2004, and then to March 17, 2004. Spice and the plaintiffs
filed cross-motions for summary judgment or, in the alternative, for summary
adjudication, on September 5, 2003. Those motions were heard on November 19,
2003, and were denied. In February 2004, prior to the trial, Spice and the
plaintiffs agreed to a settlement in the amount of $8.5 million, which we
recorded as a charge in the fourth quarter of 2003. We paid $1.0 million, $1.0
million and $6.5 million in 2006, 2005 and 2004, respectively. In the fourth
quarter of 2004, we received a $5.6 million insurance recovery partially related
to the prior year litigation settlement with Logix.
On April 12, 2004, Faherty filed suit in the United States District Court
for the Southern District of New York against Spice, Playboy, Playboy
Enterprises International, Inc., or PEII, D. Keith Howington, Anne Howington and
Logix. The complaint alleges that Faherty is entitled to statutory and
contractual indemnification from Playboy, PEII and Spice with respect to defense
costs and liabilities incurred by Faherty in the litigation described in the
preceding paragraph, or the Logix litigation. The complaint further alleges that
Playboy, PEII, Spice, D. Keith Howington, Anne Howington and Logix conspired to
deprive Faherty of his alleged right to indemnification by excluding him from
the settlement of the Logix litigation. On June 18, 2004, a jury entered a
special verdict finding Faherty personally liable for $22.5 million in damages
to the plaintiffs in the Logix litigation. A judgment was entered on the verdict
on or around August 2, 2004. Faherty filed post-trial motions for a judgment
notwithstanding the verdict and a new trial, but these motions were both denied
on or about September 21, 2004. On October 20, 2004, Faherty filed
24
a notice of appeal from the verdict. As of November 30, 2006, the appeal was
fully briefed. In consideration of this appeal, Faherty and Playboy have agreed
to seek a temporary stay of the indemnification action filed in the United
States District Court for the Southern District of New York. In the event
Faherty's indemnification and conspiracy claims go forward against us, we
believe they are without merit and that we have good defenses against them. As
such, based on the information known to us to date, we do not believe that it is
probable that a material judgment against us will result. In accordance with
Statement 5, no liability has been accrued.
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 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 through
Internet distribution. On November 15, 2002, we filed an answer denying
Directrix's allegations, along with counterclaims against Directrix relating to
the Master Services Agreement and seeking damages. On May 15, 2003, we filed an
amended answer and counterclaims. On July 30, 2003, Directrix moved to dismiss
one of the amended counterclaims, and on October 20, 2003, the Court denied
Directrix's motion. The parties were engaged in discovery. In January 2007, the
parties agreed in principle to a settlement and release of the claims between
them. Under the settlement, which is subject to the approval of the Bankruptcy
Court, we agreed to provide a payment in the amount of $1.8 million, which we
recorded as a charge in the fourth quarter of 2006. The settlement will be paid
in 2007. The settlement is a compromise of disputed claims and is not an
admission of liability. We believe we had good defenses against Directrix's
claims, but made the reasonable business decision to settle the litigation to
avoid further management distraction and defense costs, which we had estimated
would have approximately equaled the amount of the settlement.
Item 4. Submission of Matters to a Vote of Security Holders
None.
25
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Stock price information, as reported in the New York Stock Exchange
Composite Listing, is set forth in Note (T), Quarterly Results of Operations
(Unaudited), to the Notes to Consolidated Financial Statements. Our securities
are traded on the exchange listed on the cover page of this Annual Report on
Form 10-K under the ticker symbols PLA A (Class A voting) and PLA (Class B
nonvoting). At February 28, 2007, there were 3,330 and 8,419 holders of record
of Class A common stock and Class B common stock, or Class B stock,
respectively. There were no cash dividends declared during 2006, 2005 or 2004.
As previously reported in our Current Report on Form 8-K, dated March 9,
2005 and filed March 15, 2005, and our Current Report on Form 8-K, dated March
28, 2005 and filed April 1, 2005 and as more fully described in Note (L),
Financing Obligations, to the Notes to Consolidated Financial Statements, in
March 2005, we issued and sold in a private placement $115.0 million aggregate
principal amount of our 3.00% convertible senior subordinated notes due 2025.
The following graph sets forth the five-year cumulative total stockholder
return on our Class B stock with the cumulative total return of the Russell 2000
Stock Index and with our peer group for the period from December 31, 2001,
through December 31, 2006. The graph reflects $100 invested on December 31,
2001, in stock or index, including reinvestment of dividends. Our peer group is
comprised of Time Warner Inc., Meredith Corporation, MGM Mirage, Playboy
Enterprises, Inc., Primedia, Inc., The Walt Disney Company, World Wrestling
Entertainment, Inc. and Viacom Inc.
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
- --------------------------------------------------------------------------------
12/01 12/02 12/03 12/04 12/05 12/06
- --------------------------------------------------------------------------------
Playboy Enterprises, Inc. 100.00 59.98 95.68 72.76 82.24 67.85
Russell 2000 100.00 79.52 117.09 138.55 144.86 171.47
Peer Group 100.00 63.32 80.10 83.58 75.10 94.95
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 2007, which will be filed within 120 days after the close of our
fiscal year ended December 31, 2006, and is incorporated herein by reference.
26
Item 6. Selected Financial Data
(in thousands, except per share amounts
and number of employees)
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended
12/31/06 12/31/05 12/31/04 12/31/03 12/31/02
- ---------------------------------------------------------------------------------------------------------------------------
Selected financial data (1)
Net revenues $ 331,142 $ 338,153 $ 329,376 $ 315,844 $ 277,622
Interest expense, net (3,164) (4,769) (13,108) (15,946) (15,022)
Net income (loss) 2,285 (735) 9,989 (7,557) (17,135)
Net income (loss) applicable to common shareholders 2,285 (735) 9,561 (8,450) (17,135)
Basic and diluted earnings (loss) per common share
Net income (loss) 0.07 (0.02) 0.30 (0.31) (0.67)
EBITDA: (2)
Net income (loss) 2,285 (735) 9,989 (7,557) (17,135)
Adjusted for:
Interest expense 5,611 6,986 13,687 16,309 15,147
Income tax expense 2,496 3,998 3,845 4,967 8,544
Depreciation and amortization 42,218 42,540 47,100 49,558 51,619
Amortization of deferred financing fees 535 635 1,266 1,407 993
Stock options and restricted stock awards 1,859 601 682 45 2,748
Equity in operations of investments 94 383 71 80 (279)
---------------------------------------------------------------------
EBITDA $ 55,098 $ 54,408 $ 76,640 $ 64,809 $ 61,637
===========================================================================================================================
At period end
Cash and cash equivalents and marketable securities
and short-term investments $ 35,748 $ 52,052 $ 50,720 $ 34,878 $ 6,795
Total assets 435,783 428,969 416,330 413,809 365,470
Long-term financing obligations 115,000 115,000 80,000 115,000 68,865
Redeemable preferred stock -- -- -- 16,959 --
Total shareholders' equity $ 163,628 $ 157,247 $ 162,158 $ 100,344 $ 81,523
Long-term financing obligations as a percentage of
total capitalization 41% 41% 32% 52% 44%
Number of common shares outstanding
Class A voting 4,864 4,864 4,864 4,864 4,864
Class B nonvoting 28,362 28,261 28,521 22,579 21,181
Number of full-time employees 789 709 645 592 581
- ---------------------------------------------------------------------------------------------------------------------------
Selected operating data
Cash investments in Company-produced and
licensed entertainment programming $ 38,475 $ 33,075 $ 41,457 $ 44,727 $ 41,717
Cash investments in online content 5,031 2,242 2,317 2,436 4,434
---------------------------------------------------------------------
Total cash investments in programming and content 43,506 35,317 43,774 47,163 46,151
Amortization of investments in Company-produced
and licensed entertainment programming 36,564 37,450 41,695 40,603 40,626
Amortization of investments in online content 5,241 2,626 2,317 2,436 4,434
---------------------------------------------------------------------
Total amortization of programming and content $ 41,805 $ 40,076 $ 44,012 $ 43,039 $ 45,060
- ---------------------------------------------------------------------------------------------------------------------------
For a more detailed description of our financial position, results of
operations and accounting policies, please refer to Part II. Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," or MD&A, and Part II. Item 8. "Financial Statements and
Supplementary Data."
(1) 2006 included $2.0 million of restructuring expenses. 2005 included $19.3
million of debt extinguishment expense related to the redemption of $80.0
million of 11.00% senior secured notes, or senior secured notes, issued by
our subsidiary PEI Holdings, Inc., or Holdings. 2004 included $5.9 million
of debt extinguishment expense related to the redemption of $35.0 million
of the senior secured notes and a $5.6 million insurance recovery
partially related to a litigation settlement recorded in the prior year.
2003 included an $8.5 million charge related to the litigation settlement
and $3.3 million of debt extinguishment expense related to prior financing
obligations, which were paid upon completion of our debt offering. 2002
included a $5.8 million noncash income tax charge related to our adoption
of Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, and $6.6 million in restructuring expenses.
27
(2) EBITDA represents earnings from continuing operations before interest
expense, income taxes, depreciation of property and equipment,
amortization of intangible assets, amortization of investments in
entertainment programming, amortization of deferred financing fees, stock
options and restricted stock awards related to stock-based compensation
and equity in operations of investments. 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
the terms of our credit facility. EBITDA should not be considered an
alternative to any measure of performance or liquidity under generally
accepted accounting principles in the United States. Similarly, EBITDA
should not be inferred as more meaningful than any of those measures.
28
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
become a brand-driven, international multimedia entertainment company. Today,
our businesses are classified into three reportable segments: Entertainment,
Publishing and Licensing.
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of our
results of operations and financial condition. The discussion should be read in
conjunction with the financial statements and the accompanying notes.
REVENUES
We currently generate most of our Entertainment Group revenues from
pay-per-view, or PPV, fees for our television programming offerings, including
Playboy- and Spice-branded domestic and international television programming.
Our television revenues are affected by factors including shelf space, retail
price and marketing, which are controlled by the distributors, as well as the
revenue splits we negotiate with distributors and the demand for our
programming. We believe television revenues will increasingly be generated from
video-on-demand, or VOD, and subscription video-on-demand, or SVOD, purchases by
consumers. Internationally, we own and operate or license Playboy-, Spice- and
locally-branded television networks or blocks of programming and we have equity
interests in additional networks through joint ventures. In the Internet space,
we also receive licensing fees from Playboy- and other-branded websites and from
content delivered via wireless devices to providers outside of the United
States. We derive subscription revenues from multiple online clubs, which offer
unique content under various brands, including Playboy and Spice. E-commerce
revenues include the sale of our branded and third-party consumer products, both
online and through direct mail. In addition, we monetize online traffic via
advertising in conjunction with our magazine ad sales efforts. Entertainment
Group revenues are also generated from the sale of DVDs and from license fees
for Playboy Radio on SIRIUS Satellite Radio.
Publishing Group revenues are primarily circulation driven for Playboy
magazine and special editions and include both subscription and newsstand sales.
Additionally, the group generates revenues from advertising sales in Playboy
magazine as well as from circulation and advertising royalties from our licensed
international editions.
Licensing Group revenues are principally generated from royalties on the
wholesale sale of our branded products around the world, as well as from
location-based entertainment. We also generate revenues from periodic auction
sales of small portions of our art and memorabilia collection and from marketing
events such as the annual Playboy Jazz Festival.
COSTS AND OPERATING EXPENSES
Entertainment Group expenses include television programming amortization,
online content, network distribution, hosting, sales and marketing and
administrative expenses. Programming amortization and content expenses are
expenditures associated with the creation of Playboy programming, the licensing
of third-party programming for our adult movie business and the creation of
content for our websites and wireless and satellite radio providers.
Publishing Group expenses include manufacturing, subscription promotion,
editorial, shipping and administrative expenses. Manufacturing, which includes
the production of the magazine, represents the largest cost for the group.
Licensing Group expenses include agency fees, promotion, development and
administrative expenses.
Corporate Administration and Promotion expenses include general corporate
costs such as technology, legal, security, human resources, finance and investor
relations and communications, as well as expenses related to company-wide
marketing, promotions and the Playboy Mansion.
29
RESULTS OF OPERATIONS (1)
The following table sets forth our results of operations (in millions,
except per share amounts):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/06 12/31/05 12/31/04
- ---------------------------------------------------------------------------------------------------------
Net revenues
Entertainment
Domestic TV $ 82.5 $ 98.6 $ 96.9
International 55.7 52.1 45.3
Online subscriptions and e-commerce 52.1 46.9 40.2
Other 10.7 6.4 6.9
- ---------------------------------------------------------------------------------------------------------
Total Entertainment 201.0 204.0 189.3
- ---------------------------------------------------------------------------------------------------------
Publishing
Playboy magazine 80.7 89.4 101.5
Special editions and other 9.8 10.5 11.9
International publishing 6.6 6.6 6.4
- ---------------------------------------------------------------------------------------------------------
Total Publishing 97.1 106.5 119.8
- ---------------------------------------------------------------------------------------------------------
Licensing
International licensing 22.8 19.0 12.4
Domestic licensing 5.4 5.2 4.9
Marketing events 3.0 3.0 2.8
Other 1.8 0.5 0.2
- ---------------------------------------------------------------------------------------------------------
Total Licensing 33.0 27.7 20.3
- ---------------------------------------------------------------------------------------------------------
Total net revenues $ 331.1 $ 338.2 $ 329.4
=========================================================================================================
Net income (loss)
Entertainment
Before programming amortization and online content expenses $ 65.1 $ 81.2 $ 77.0
Programming amortization and online content expenses (41.8) (40.1) (44.0)
- ---------------------------------------------------------------------------------------------------------
Total Entertainment 23.3 41.1 33.0
- ---------------------------------------------------------------------------------------------------------
Publishing (5.4) (6.5) 6.2
- ---------------------------------------------------------------------------------------------------------
Licensing 18.9 16.0 10.6
- ---------------------------------------------------------------------------------------------------------
Corporate Administration and Promotion (25.7) (19.6) (18.2)
- ---------------------------------------------------------------------------------------------------------
Segment income 11.1 31.0 31.6
Restructuring expenses (2.0) (0.1) (0.7)
- ---------------------------------------------------------------------------------------------------------
Operating income 9.1 30.9 30.9
- ---------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 2.4 2.2 0.6
Interest expense (5.6) (7.0) (13.7)
Amortization of deferred financing fees (0.5) (0.6) (1.3)
Minority interest -- (1.6) (1.4)
Debt extinguishment expenses -- (19.3) (5.9)
Insurance settlement -- -- 5.6
Other, net (0.6) (1.3) (1.0)
- ---------------------------------------------------------------------------------------------------------
Total nonoperating expense (4.3) (27.6) (17.1)
- ---------------------------------------------------------------------------------------------------------
Income before income taxes 4.8 3.3 13.8
Income tax expense (2.5) (4.0) (3.8)
- ---------------------------------------------------------------------------------------------------------
Net income (loss) $ 2.3 $ (0.7) $ 10.0
=========================================================================================================
Net income (loss) $ 2.3 $ (0.7) $ 10.0
- ---------------------------------------------------------------------------------------------------------
Dividend requirements of preferred stock -- -- (0.4)
- ---------------------------------------------------------------------------------------------------------
Income (loss) applicable to common shareholders $ 2.3 $ (0.7) $ 9.6
=========================================================================================================
Basic and diluted earnings (loss) per common share $ 0.07 $ (0.02) $ 0.30
=========================================================================================================
(1) Certain amounts reported for prior periods have been reclassified to
conform to the current year's presentation.
30
2006 COMPARED TO 2005
Our revenues decreased $7.1 million, or 2%, compared to the prior year due
to a continued decrease in revenues from our Publishing Group combined with
lower revenues from our Entertainment Group, partially offset by higher revenues
from our Licensing Group.
Segment income decreased $19.9 million, or 64%, compared to the prior year
due to significantly lower results from our Entertainment Group combined with
higher Corporate Administration and Promotion expenses, partially offset by
improved results from our Licensing and Publishing Groups.
Operating income of $9.1 million for the current year included $2.0
million of restructuring expenses primarily related to a cost reduction plan
implemented during the year.
Net income of $2.3 million improved $3.0 million over the prior year as
the lower operating results previously discussed were more than offset by debt
extinguishment and minority interest expenses of $19.3 million and $1.6 million,
respectively, in the prior year and decreases of $1.5 million and $1.4 million
in income tax and interest expenses, respectively, in the current year.
Entertainment Group
The following discussion focuses on the revenue and profit contribution
before programming amortization and online content expenses of each of our
Entertainment Group businesses.
Revenues from our domestic TV networks decreased $16.1 million, or 16%, in
2006.
Playboy TV network revenues decreased $6.0 million in 2006 with cable
revenues decreasing $3.0 million and direct-to-home, or DTH, revenues decreasing
$1.2 million. These decreases were largely due to the continued impact of a
consumer shift from PPV to VOD purchasing.
Movie business revenues decreased $12.2 million in 2006 primarily due to
the decline of PPV as a result of less overall carriage of adult linear networks
and less shelf space in VOD compared to linear PPV. We expect these trends to
continue to negatively impact our movie networks. The loss of two channels to a
competitor on the largest satellite TV provider also contributed to the lower
movie revenues. We expect the loss of carriage and the impact of less shelf
space to unfavorably impact movie business revenues and profitability through
2007. Additionally, 2007 will also include an increase in expense of
approximately $1.3 million related to a change in the estimated useful lives of
certain distribution agreements.
The prior year was favorably impacted by the discontinuation of a
distributor's high-definition subscription service agreement, which resulted in
the accelerated recognition of $1.4 million of deferred revenues associated with
the agreement.
Revenues from VOD increased $0.9 million in 2006.
Revenues associated with our studio facility increased $1.2 million in
2006 primarily due to the addition of new third-party networks.
Profit contribution from our domestic TV networks decreased $22.4 million
as a result of the lower revenues previously discussed combined with a $1.8
million legal settlement in the fourth quarter of the current year and increased
expenses primarily related to marketing and staffing. See Part I. Item 3. "Legal
Proceedings" for additional information.
International revenues increased $3.6 million, or 7%, in 2006.
International television revenues increased $2.7 million in 2006 primarily due
to increased DTH and cable revenues from our U.K. television business combined
with favorable foreign currency exchange rates, partially offset by lower
revenues from several third-party licensees. International online and wireless
revenues increased $0.9 million due to higher royalties combined with revenues
from our acquisition of Club Jenna, Inc. and related companies, or Club Jenna, a
multimedia adult entertainment
31
business, in the current year. International profit contribution was flat as a
result of the higher revenues previously discussed, offset mostly by higher
international distribution and staffing expenses.
Online subscriptions and e-commerce revenues increased $5.2 million, or
11%, in 2006. Positive results from our acquisitions of an affiliate network of
websites late in the prior year and Club Jenna in the current year were
partially offset by the impacts of a termination payment we received in the
prior year related to the discontinuation of a marketing alliance and the
licensing of our Spice Catalog in the current year. Online subscriptions and
e-commerce profit contribution decreased $0.2 million, or 1%, as the revenue
increases previously discussed were more than offset by costs associated with
the acquired businesses and higher marketing expenses. We expect our online
subscription business to continue its year-over-year growth in 2007 as broadband
penetration increases and as we continue to expand our product offerings,
particularly in video.
Revenues from other businesses increased $4.3 million, or 69%, in 2006,
driven by worldwide DVD sales and advertising revenues from the acquired
businesses combined with revenues resulting from the current-year launch of
Playboy Radio on SIRIUS Satellite Radio. Profit contribution increased $1.5
million, or 100%, in 2006 due to the revenue increases previously discussed,
partially offset by higher costs largely related to the acquired businesses.
The group's administrative expenses decreased $5.0 million, or 20%, in
2006 due to the elimination of our intra-company agreements related to
trademark, content and administrative fees that had been paid by Playboy.com,
Inc., or Playboy.com, to us as a result of our October 2005 repurchase of the
remaining minority interest of Playboy.com, partially offset by higher
staffing-related expenses, in large part associated with the acquired
businesses.
Programming amortization and online content expenses increased $1.7
million, or 4%, in 2006, primarily due to new programming costs to support our
acquired businesses and Playboy Radio, partially offset by a change in the mix
of television programming.
Segment income for the group decreased $17.8 million, or 43%, in 2006
compared to 2005 due to the previously discussed operating results.
Publishing Group
Playboy magazine revenues decreased $8.7 million, or 10%, in 2006.
Advertising revenues decreased $4.0 million due to 10% fewer advertising pages
coupled with a 4% decrease in average net revenue per page. Advertising sales
for the 2007 first quarter magazine issues are closed, and we expect to report
approximately 22% higher advertising revenues and a 15% increase in advertising
pages compared to the 2006 first quarter. Subscription revenues also decreased
$4.0 million primarily due to lower average revenue per copy combined with fewer
copies served. Newsstand revenues decreased $0.7 million primarily due to 15%
fewer copies sold in the current year. This decrease was partially mitigated by
the impact of a $1.00 cover price increase effective with the February 2006
issue.
Revenues from special editions and other decreased $0.7 million, or 7%, in
2006. Special editions revenues decreased $0.5 million primarily due to 15%
fewer newsstand copies sold in the current year, partially offset by the impact
of a $1.00 cover price increase effective with the November 2005 issues and by a
favorable variance related to prior issues.
International publishing revenues were flat for the year.
The group's segment loss improved $1.1 million, or 17%, as lower
subscription acquisition amortization, editorial content, manufacturing,
advertising sales, marketing and administration expenses were partially offset
by the lower revenues previously discussed and by higher operating expenses
related to international publishing in the current year.
We believe that the Publishing Group's 2007 segment profitability will be
consistent with the financial performance of the last two years.
32
Licensing Group
Licensing Group revenues increased $5.3 million, or 19%, in 2006 primarily
due to higher international royalties, principally from Europe, and royalties
from our new location-based entertainment venue at the Palms Casino Resort in
Las Vegas, which opened in the fourth quarter of the current year. The group's
segment income increased $2.9 million, or 19%, due to the increased revenues
previously discussed, partially offset by higher growth-related costs. We expect
that in 2007 the Licensing Group will report 15-20% increases versus 2006 in
revenues and segment income.
Corporate Administration and Promotion
Corporate Administration and Promotion expenses increased $6.1 million, or
31%, in 2006 primarily due to the elimination of our intra-company agreements
related to trademark, content and administrative fees as a result of the
Playboy.com minority interest repurchase previously discussed and higher
promotional spending. In 2007, Corporate Administration and Promotion expenses
will include an increase of approximately $2.0 million related to expensing
certain trademark costs that we previously capitalized.
Restructuring Expenses
In 2006, we implemented a cost reduction plan that will result in lower
overhead costs and annual programming and editorial expenses. As a result of the
2006 restructuring plan, we reported a charge of $2.1 million related to costs
associated with a workforce reduction of 15 employees. In addition, we recorded
a favorable adjustment of $0.2 million and an unfavorable adjustment of $0.1
million related to the 2002 and 2001 restructuring plans, respectively, as a
result of changes in plan assumptions primarily related to excess office space.
During the year, we made cash payments of $1.7 million, $0.2 million and $26
thousand related to our 2006, 2002 and 2001 restructuring plans, respectively.
Of the total costs related to our restructuring plans, approximately $11.9
million was paid by December 31, 2006, with the remaining $0.7 million to be
paid through 2008.
In 2005, we recorded an additional charge of $0.1 million related to the
2002 restructuring plan as a result of changes in plan assumptions primarily
related to excess office space. There were no additional charges related to the
2001 restructuring plan.
In 2004, we recorded a restructuring charge of $0.5 million related to the
realignment of our entertainment and online businesses. In addition, primarily
due to excess office space, we recorded additional charges of $0.4 million
related to the 2002 restructuring plan and reversed $0.2 million related to the
2001 restructuring plan as a result of changes in plan assumptions.
Nonoperating Income (Expense)
Nonoperating expense decreased $23.3 million, or 84%, in 2006. The prior
year included $19.3 million of debt extinguishment expense related to a debt
refinancing and $1.6 million of minority interest expense related to the
previously discussed repurchase of the remaining minority interest in
Playboy.com. The current year reflects a decrease in interest expense of $1.4
million, which is also a result of our 2005 debt refinancing.
Income Tax Expense
Our effective income tax rate differs from the U.S. statutory rate
primarily as a result of foreign income and withholding tax, for which no
current U.S. income tax benefit is recognized, and the deferred tax treatment of
certain indefinite-lived intangibles.
In 2006, we modified the assumptions related to the useful lives of
certain distribution agreements that previously were classified as
indefinite-lived. As these distribution agreements are now being amortized, the
deferred tax liability related to the distribution agreements that is expected
to be realized within the net operating loss, or NOL, carryforward period may be
netted against our deferred tax asset. In 2006, we recorded an income tax
benefit for $2.6 million of the $3.9 million deferred tax liability related to
the distribution agreement modification. In 2005, our effective income tax rate
differed from the U.S. statutory rate primarily as a result of the reduction in
33
the valuation allowance corresponding to the utilization of our NOL
carryforwards. The benefit of our NOL carryforwards was partially offset by
foreign income and withholding tax, for which no current U.S. income tax benefit
is recognized, and the deferred tax treatment of certain indefinite-lived
intangibles.
2005 COMPARED TO 2004
Our revenues increased $8.8 million, or 3%, compared to 2004 due to higher
revenues from our Entertainment and Licensing Groups, partially offset by
expected lower revenues from our Publishing Group.
Operating income of $30.9 million was flat for 2005, reflecting improved
results from our Entertainment and Licensing Groups, offset by significantly
lower results from our Publishing Group and higher Corporate Administration and
Promotion expenses.
The net loss of $0.7 million for 2005 included $19.3 million of debt
extinguishment expense. A decrease in interest expense related to our first
quarter debt refinancing favorably impacted 2005. In 2004, we recorded $5.9
million of debt extinguishment expense and received a $5.6 million insurance
recovery partially related to a charge recorded in 2004 for a litigation
settlement with Logix Development Corporation, or Logix.
Entertainment Group
The following discussion focuses on the revenue and profit contribution
before programming amortization and online content expenses of each of our
Entertainment Group businesses.
Revenues from our domestic TV networks increased $1.7 million, or 2%, in
2005. DTH revenues increased $2.9 million primarily due to subscriber growth and
an increase in average PPV buys. The revenue increases were partially offset by
decreased Playboy TV cable PPV buys, as certain cable companies continue
migrating consumers from linear channels to VOD. As a result of this transition
to VOD, revenues from Playboy TV cable decreased $2.0 million in 2005. Movie
business revenues decreased $3.7 million primarily as a result of decreased PPV
buys stemming from the transition to VOD. Total VOD revenues increased $2.8
million in 2005 due to the continued roll out of VOD service in additional cable
systems as well as to a growing number of consumer buys in existing cable
systems. Revenues associated with renting our studio facility and providing
various related services to third parties increased $0.8 million in 2005.
Domestic TV network revenues were favorably impacted by the discontinuation of a
distributor's high-definition subscription service agreement, which resulted in
the accelerated recognition of the remaining $1.4 million of deferred revenue
associated with the service agreement. In 2004, movie business revenues were
impacted by a $1.5 million unfavorable adjustment from an unanticipated
retroactive rate reduction related to the earlier acquisition of one large
multiple system operator by another. Profit contribution from domestic TV
networks decreased $0.2 million for 2005. A $1.3 million adjustment for a
contractual obligation related to licensed programming combined with higher
overhead costs related to the operation of our production facility more than
offset the revenue increases described above.
International revenues increased $6.8 million, or 15%, in 2005.
International television revenues increased $4.7 million in 2005 primarily due
to increased revenues from several third-party licensees and new networks in
operation for a full year in Australia and Germany. Additionally, the launch of
three DTH channels in the U.K. contributed favorably to 2005 revenues.
International online and wireless revenues increased $2.1 million, or 67%, due
to increased royalties from existing wireless partners and new license
agreements. Profit contribution from our international entertainment businesses
increased $3.7 million in 2005 due to the higher revenues previously discussed,
partially offset by increased marketing and operating costs related to the newly
launched channels.
Online subscriptions and e-commerce revenues increased $6.7 million, or
17%, in 2005. Online subscription revenues increased $4.6 million in 2005
primarily due to the acquisition of an affiliate network of websites late in the
year. E-commerce revenues increased $2.1 million in 2005 as a result of a $1.2
million payment we received related to the termination of a marketing alliance
combined with increased catalog and business-to-business revenues. Profit
contribution was flat for 2005 as the revenue increases discussed above were
mostly offset by higher online subscription expenses primarily due to increased
technology and marketing initiatives and expenses related to our newly acquired
affiliate network of websites. Also offsetting were higher e-commerce expenses
primarily due to catalog production, marketing, product and fulfillment
expenses.
34
Profit contribution from other businesses decreased $0.1 million in 2005.
Lower worldwide DVD cost of sales and marketing expenses combined with higher
Alta Loma and online advertising revenues were more than offset by lower
worldwide DVD revenues and a $1.1 million favorable adjustment recorded in 2004.
The group's administrative expenses decreased $0.8 million in 2005
primarily due to lower legal costs in 2005 and a contractually obligated
severance charge recorded in 2004, partially offset by higher performance-based
compensation expense in 2005.
Programming amortization and online content expenses decreased $3.9
million, or 9%, primarily due to the mix of programming.
As a result of the above, segment income for the group increased $8.1
million, or 25%, in 2005 compared to 2004.
Publishing Group
Playboy magazine revenues decreased $12.1 million, or 12%, in 2005.
Advertising revenues decreased $6.7 million due to fewer advertising pages and
slightly lower net revenue per page. Newsstand revenues in 2005 were $3.6
million lower principally due to fewer copies sold during 2005, partially offset
by higher display costs in 2004. Additionally, 2005 included an unfavorable
variance of $0.6 million related to prior years' issues. Subscription revenues
decreased $1.8 million primarily due to lower average revenue per copy,
partially offset by an increase in the number of subscription copies served and
lower bad debt expense in 2005. Higher favorable adjustments recorded in 2004 to
recognize revenues for paid subscriptions that were not served also contributed
to the decrease in 2005.
Revenues from our other domestic publishing businesses decreased $1.4
million, or 12%. This was primarily due to fewer newsstand copies of special
editions sold in 2005 combined with an unfavorable variance related to prior
years' issues, partially offset by higher display costs in 2004.
International publishing revenues increased $0.2 million, or 3%.
The group's segment profitability decreased $12.7 million in 2005 as a
result of the lower revenues discussed above combined with higher paper costs of
$1.7 million and higher subscription acquisition expenses of $1.0 million,
partially offset by a decrease of $3.2 million in editorial content expenses in
2005.
Licensing Group
Licensing Group revenues increased $7.4 million, or 37%, in 2005 primarily
due to higher royalties from existing and new licensees in Europe and Asia. The
group's segment income increased $5.4 million, or 50%, due to the revenue
increase, partially offset by higher revenue-related expenses and development
costs related to our location-based entertainment business.
Corporate Administration and Promotion
Corporate Administration and Promotion expenses for 2005 increased $1.4
million, or 8%, largely due to an increase in performance-based compensation and
audit expenses, partially offset by the impact of a legal settlement in 2004.
Restructuring Expenses
In 2005, we recorded an additional charge of $0.1 million related to the
2002 restructuring plan as a result of changes in plan assumptions primarily
related to excess office space. There were no additional charges related to the
2001 restructuring plan. Of the total costs related to these restructuring
plans, approximately $10.0 million was paid by December 31, 2005, with the
remainder of $1.2 million to be paid through 2007.
In 2004, we recorded a restructuring charge of $0.5 million relating to
the realignment of our entertainment
35
and online businesses. In addition, primarily due to excess office space, we
recorded additional charges of $0.4 million related to the 2002 restructuring
plan and reversed $0.2 million related to the 2001 restructuring plan as a
result of changes in plan assumptions.
Income Tax Expense
Our effective income tax rate differs from U.S. statutory rates primarily
as a result of the increase in the valuation allowance related to the
recognition of our NOL carryforwards and the effect of the deferred tax
treatment of certain indefinite-lived intangibles.
In 2005, we increased the valuation allowance, as adjusted, by $2.6
million related to the recognition of our NOLs and the effect of the deferred
tax treatment of certain acquired intangibles. In 2004, we decreased the
valuation allowance by $9.2 million, of which $4.8 million was due to the
reduction in the deferred tax asset related to 2004 net income with the
remainder primarily due to the expiration of a portion of our capital loss
carryforward and the deferred tax treatment of certain acquired intangibles.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2006, we had $26.7 million in cash and cash equivalents
compared to $26.1 million in cash and cash equivalents at December 31, 2005. We
also had $3.0 million of auction rate securities, or ARS, included in marketable
securities and short-term investments at December 31, 2006, compared to $21.0
million at December 31, 2005. This decrease is primarily related to our
acquisition of Club Jenna and capital expenditures in the current year. ARS
generally have long-term maturities; however, these investments have
characteristics similar to short-term investments because at predetermined
intervals, typically every 28 days, there is a new auction process. Total
financing obligations were $115.0 million at both December 31, 2006 and December
31, 2005.
At December 31, 2006, cash generated from our operating activities,
existing cash and cash equivalents and marketable securities and short-term
investments were fulfilling our liquidity requirements. We also had a $50.0
million credit facility, which can be used for revolving borrowings, issuing
letters of credit or a combination of both. At December 31, 2006, there were no
borrowings and $10.6 million in letters of credit outstanding under this
facility, resulting in $39.4 million of available borrowings under this
facility.
We believe that cash on hand and operating cash flows, together with funds
available under our credit facility and potential access to credit and capital
markets, will be sufficient to meet our operating expenses, capital expenditures
and other contractual obligations as they become due.
DEBT FINANCING
In March 2005, we issued and sold $115.0 million aggregate principal
amount of our 3.00% convertible senior subordinated notes due 2025, or
convertible notes, which included $15.0 million due to the initial purchasers'
exercise of the over-allotment option. The convertible notes bear interest at a
rate of 3.00% per annum on the principal amount of the notes, payable in arrears
on March 15 and September 15 of each year, payment of which began on September
15, 2005. In addition, under certain circumstances beginning in 2012, if the
trading price of the convertible notes exceeds a specified threshold during a
prescribed measurement period prior to any semi-annual interest period,
contingent interest will become payable on the convertible notes for that
semi-annual interest period at an annual rate of 0.25% per annum.
The convertible notes are convertible into cash and, if applicable, shares
of our Class B common stock, or Class B stock, based on an initial conversion
rate, subject to adjustment, of 58.7648 shares per $1,000 principal amount of
the convertible notes (which represents an initial conversion price of
approximately $17.02 per share) only under the following circumstances: (a)
during any fiscal quarter after the fiscal quarter ending March 31, 2005, if the
closing sale price of our Class B stock for each of 20 or more consecutive
trading days in a period of 30 consecutive trading days ending on the last
trading day of the immediately preceding fiscal quarter exceeds 130% of the
conversion price in effect on that trading day; (b) during the five business day
period after any five consecutive trading day period in which the average
trading price per $1,000 principal amount of convertible notes over that five
consecutive trading day period was equal to or less than 95% of the average
conversion value of the convertible
36
notes during that period; (c) upon the occurrence of specified corporate
transactions, as set forth in the indenture governing the convertible notes; or
(d) if we have called the convertible notes for redemption. Upon conversion of a
convertible note, a holder will receive cash in an amount equal to the lesser of
the aggregate conversion value of the note being converted and the aggregate
principal amount of the note being converted. If the aggregate conversion value
of the convertible note being converted is greater than the cash amount received
by the holder, the holder will also receive an amount in whole shares of Class B
stock equal to the aggregate conversion value less the cash amount received by
the holder. A holder will receive cash in lieu of any fractional shares of Class
B stock. The maximum conversion rate, subject to adjustment, is 76.3942 shares
per $1,000 principal amount of convertible notes.
The convertible notes mature on March 15, 2025. On or after March 15,
2010, if the closing price of our Class B stock exceeds a specified threshold,
we may redeem any of the convertible notes at a redemption price in cash equal
to 100% of the principal amount of the convertible notes plus any accrued and
unpaid interest up to, but excluding, the redemption date. On or after March 15,
2012, we may at any time redeem any of the convertible notes at the same
redemption price. On each of March 15, 2012, March 15, 2015 and March 15, 2020,
or upon the occurrence of a fundamental change, as specified in the indenture
governing the convertible notes, holders may require us to purchase all or a
portion of their convertible notes at a purchase price in cash equal to 100% of
the principal amount of the notes, plus any accrued and unpaid interest up to,
but excluding, the purchase date.
The convertible notes are unsecured senior subordinated obligations of
Playboy Enterprises, Inc. and rank junior to all of the issuer's senior debt,
including its guarantee of our subsidiary PEI Holdings, Inc., or Holdings,
borrowings under our credit facility; equally with all of the issuer's future
senior subordinated debt; and, senior to all of the issuer's future subordinated
debt. In addition, the assets of the issuer's subsidiaries are subject to the
prior claims of all creditors, including trade creditors, of those subsidiaries.
CREDIT FACILITY
At December 31, 2006, we had a $50.0 million credit facility, which
provides for revolving borrowings of up to $50.0 million and the issuance of up
to $30.0 million in letters of credit, subject to a maximum of $50.0 million in
combined borrowings and letters of credit outstanding at any time. Borrowings
under the credit facility bear interest at a variable rate, equal to a specified
Eurodollar, LIBOR or base rate plus a specified borrowing margin based on our
Adjusted EBITDA, as defined in the credit agreement. We pay fees on the
outstanding amount of letters of credit based on the margin that applies to
borrowings that bear interest at a rate based on LIBOR. All amounts outstanding
under the credit facility will mature on April 1, 2008. Holdings' obligations as
borrower under the credit facility are guaranteed by us and each of our other
United States subsidiaries. The obligations of the borrower and nearly all of
the guarantors under the credit facility are secured by a first-priority lien on
substantially all of the borrower's and the guarantors' assets.
CALIFA ACQUISITION
The Califa Entertainment Group, Inc., or Califa, acquisition agreement
gives us the option of paying $7.0 million of the remaining $11.8 million
purchase price consideration in cash or our Class B stock. We intend to make a
total of $8.0 million in payments that are due in 2007 in cash. We also have the
option of accelerating remaining acquisition payments. See the Contractual
Obligations table for the future cash obligations related to our acquisitions.
See Note (B), Acquisition, to the Notes to Consolidated Financial Statements for
additional information relating to the Califa acquisition.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $9.4 million for 2006, a
decrease of $18.4 million compared to the prior year primarily due to the
operating and nonoperating results previously discussed.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash provided by investing activities was $1.7 million for 2006.
Proceeds from the sales of marketable securities and short-term investments of
$17.4 million were used primarily to fund the $7.7 million due at closing
37
for the acquisition of Club Jenna and $7.5 million for capital expenditures,
which where primarily technology related. The Club Jenna acquisition requires us
to make additional payments of $1.6 million, $1.7 million, $2.3 million and $4.3
million in 2007, 2008, 2009 and 2010, respectively.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used for financing activities was $11.1 million for 2006
primarily due to payments of $11.6 million in connection with acquisition
liabilities. The prior year reflects $115.0 million of proceeds from our
convertible notes, and the use of the proceeds to pay $95.2 million in
connection with the purchase and retirement of all of the $80.0 million
outstanding principal amount of 11.00% senior secured notes issued by one of our
subsidiaries and $5.1 million of related financing fees. Proceeds from the
convertible notes offering were also used to purchase 381,971 shares of our
Class B stock for $5.0 million. Additionally, we repurchased the remaining
outstanding Playboy.com Series A Preferred Stock that was held by Hugh M.
Hefner, our Editor-In-Chief and Chief Creative Officer, and an unrelated third
party for $14.1 million in the prior year period.
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
The positive effect of foreign currency exchange rates on cash and cash
equivalents during 2006 was due to the weakening of the U.S. dollar against
foreign currencies, primarily the pound sterling. Conversely, the negative
effect of foreign currency exchange rates on cash and cash equivalents during
the prior year was due to the strengthening of the U.S. dollar against foreign
currencies, primarily the pound sterling.
CONTRACTUAL OBLIGATIONS
The following table sets forth a summary of our contractual obligations
and commercial commitments at December 31, 2006, as further discussed in the
Notes to Consolidated Financial Statements (in thousands):
2007 2008 2009 2010 2011 Thereafter Total
- --------------------------------------------------------------------------------------------------------------------
Long-term financing obligations (1) $ 3,450 $ 3,450 $ 3,450 $ 3,450 $ 3,450 $ 161,575 $ 178,825
Operating leases 13,699 13,654 9,324 8,997 9,129 67,158 121,961
Purchase obligations:
Licensed programming
commitments (2) 7,452 5,224 4,000 4,667 4,000 -- 25,343
Other: (3)
Acquisition liabilities (1), (4) 11,669 2,700 3,300 5,300 750 -- 23,719
Transponder service agreements $ 6,963 $ 6,982 $ 4,875 $ 3,480 $ 3,480 $ 7,395 $ 33,175
- --------------------------------------------------------------------------------------------------------------------
(1) Includes interest and principal commitments.
(2) Represents our non-cancelable obligations to license programming from
other studios. Typically, the licensing of the programming allows us
access to specific titles or in some cases the studio's entire library
over an extended period of time. We broadcast this programming on our
networks throughout the world, as appropriate.
(3) We have obligations of $6.2 million recorded in "Other noncurrent
liabilities" at December 31, 2006, under two nonqualified deferred
compensation plans, which permit certain employees and all non-employee
directors to annually elect to defer a portion of their compensation.
These amounts have not been included in the table, as the dates of payment
are not known at the balance sheet date.
(4) Includes liabilities related to the acquisitions of Califa, Playboy TV
International, LLC, Club Jenna and an affiliate network of websites.
38
CRITICAL ACCOUNTING POLICIES
Our financial statements are prepared in conformity with generally
accepted accounting principles in the United States, which require 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 are the more complex and critical areas. For additional
information about our accounting policies, see Note (A), Summary of Significant
Accounting Policies, to the Notes to Consolidated Financial Statements.
REVENUE RECOGNITION
Domestic Television
Our domestic television revenues were $82.5 million and $98.6 million for
the years ended December 31, 2006 and 2005, respectively. In order to record our
revenues, we estimate the number of PPV buys and monthly subscriptions using a
number of factors including, but not exclusively, the average number of buys and
subscriptions in the prior three months based on actual payments received and
historical data by geographic location. Upon recording the revenue, we also
record the related receivable. We have reserves for uncollectible receivables
based on our experience and monitor and adjust these reserves on a quarterly
basis. At December 31, 2006 and 2005, we had receivables of $13.2 million and
$17.2 million, respectively, related to domestic television. We record
adjustments to revenue on a monthly basis as we obtain actual payments from the
providers. Actual subscriber information and payment are generally received
within three months. Historically, our adjustments have not been material. At
any point, our exposure to a material adjustment to revenue is mitigated
because, generally, only the most recent two to three months would not have been
fully adjusted to actual based on payments received.
International Television
Our international television revenues were $49.5 million and $46.9 million
for the years ended December 31, 2006 and 2005, respectively. In order to record
our revenues, we estimate the number of PPV and VOD buys and monthly
subscriptions using a number of factors including, but not exclusively, the
average number of buys and subscriptions in the prior month based on
subscription and billing reports provided by platform operators. Upon recording
the revenue, we also record the related receivable. We have reserves for
uncollectible receivables based on our experience and monitor and adjust these
reserves on a monthly basis. At December 31, 2006 and 2005, we had receivables
of $8.0 million and $8.5 million, respectively, related to international
television. We record adjustments to revenue on a monthly basis as we obtain
subscription and billing reports from the platform operators. Actual subscriber
information is generally received within one month. Historically, our
adjustments have not been material. At any point, our exposure to a material
adjustment to revenue is mitigated because, generally, only the most recent
month would not have been fully adjusted to actual based on the prior month's
reports.
Playboy Magazine
Our Playboy magazine revenues were $80.7 million and $89.4 million for the
years ended December 31, 2006 and 2005, respectively, of which 12.1% and 11.7%
were derived from newsstand sales in the respective years. Our print run, which
is developed with input from Time/Warner Retail Sales and Marketing, our
national distributor, varies each month based on expected sales. Our expected
sales are based on analyses of historical demand based on a number of variables,
including content, time of year and the cover price. We record our revenues for
each month's issue utilizing our expected sales. Our revenues are recorded net
of a provision for estimated returns. Substantially all of the magazines to be
returned are returned within 90 days of the date that the subsequent issue goes
on sale. We adjust our provision for returns based on actual returns of the
magazine. Historically, our annual adjustments to Playboy magazine newsstand
revenues have not been material and are driven by differences in actual consumer
demand as compared to expected sales. At any point, our exposure to a material
adjustment to revenue is mitigated because, generally, only the most recent two
to three issues would not have been fully adjusted to actual based on actual
returns received.
39
DEFERRED REVENUES
At December 31, 2006, we had $34.3 million and $4.0 million of deferred
revenues related to Playboy magazine subscriptions and online subscriptions,
respectively. Sales of Playboy magazine and online subscriptions, less estimated
cancellations, are deferred and recognized as revenues proportionately over the
subscription periods. Our estimates of cancellations are based on historical
experience and current marketplace conditions and are adjusted monthly on the
basis of actual results. We have not experienced significant deviations between
estimated and actual results.
STOCK-BASED COMPENSATION
Our stock-based compensation expense related to stock options was $3.1
million for the year ended December 31, 2006. On January 1, 2006, we adopted the
provisions of Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment, or Statement 123(R), which is a revision of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, under the modified prospective method. We estimate the value of
stock options on the date of grant using the Lattice Binomial model, or Lattice
model. The Lattice model requires extensive analysis of actual exercise behavior
data and a number of complex assumptions including expected volatility,
risk-free interest rate, expected dividends and option cancellations.
Forfeitures are estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. We measure
stock-based compensation cost at the grant date based on the value of the award
and recognize the expense over the vesting period. Compensation expense, as
recognized under Statement 123(R), for all stock-based compensation awards is
recognized using the straight-line attribution method.
RELATED PARTY TRANSACTIONS
HUGH M. HEFNER
We own a 29-room mansion located on five and one-half acres in Los
Angeles, California. The Playboy Mansion is used for various corporate
activities, and serves as a valuable location for television production,
magazine photography and for online, advertising, marketing and sales events. It
also enhances our image as host for many charitable and civic functions. The
Playboy Mansion generates substantial publicity and recognition, which increases
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 Mr.
Hefner. It has a full-time staff that performs maintenance, serves in various
capacities at the functions held at the Playboy Mansion and provides our and Mr.
Hefner's guests with meals, beverages and other services.
Under a 1979 lease 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 non-business 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 are annually adjusted
between appraisals 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 professional services 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 dated June 1, 1979, as amended, between Mr. Hefner and us
renews automatically at December 31st each year and will continue to renew
unless either Mr. Hefner or we terminate it. The rent charged to Mr. Hefner
during 2006 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
40
of the year. We estimated the sum of the rent and other benefits payable for
2006 to be $0.9 million, and Mr. Hefner paid that amount during 2006. The actual
rent and other benefits paid for 2005 and 2004 were $1.1 million and $1.3
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 $14.2
million through 2006 (including $2.7 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 Sheets at December 31,
2006 and 2005, at a net book value of $1.6 million and $1.5 million,
respectively, including all improvements and after accumulated depreciation. We
incur all operating expenses of the Playboy Mansion, including depreciation and
taxes, which were $2.1 million, $3.1 million and $3.0 million for 2006, 2005 and
2004, respectively, net of rent received from Mr. Hefner.
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006, the United States Securities and Exchange Commission
issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements, or SAB 108. SAB 108 addresses quantifying the financial statement
effects of misstatements, specifically, how the effects of prior year
uncorrected errors must be considered in quantifying misstatements using both a
balance sheet and income statement approach and evaluating whether either
approach results in a misstated amount that, when all relevant quantitative and
qualitative factors are considered, is material. SAB 108 became effective with
our fiscal year ended December 31, 2006, and did not have an impact on our
results of operations or financial condition.
In September 2006, the Financial Accounting Standards Board, or the FASB,
issued Statement of Financial Accounting Standards No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans - an
amendment of FASB Statements No. 87, 88, 106, and 132(R), or Statement 158.
Statement 158 requires an entity to (a) recognize in its statement of financial
position an asset or an obligation for a defined benefit postretirement plan's
funded status, (b) measure a defined benefit postretirement plan's assets and
obligations that determine its funded status as of the end of the employer's
fiscal year and (c) recognize changes in the funded status of a defined benefit
postretirement plan in comprehensive income in the year in which the changes
occur. We adopted the recognition and related disclosure provisions of Statement
158 effective December 31, 2006. The measurement date provision of Statement 158
is effective at the end of 2008. We do not expect the measurement date provision
of adopting Statement 158 to have a significant impact on our future results of
operations or financial condition.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements, or Statement 157. Statement 157
provides enhanced guidance for using fair value to measure assets and
liabilities. We are required to adopt Statement 157 effective at the beginning
of 2008. We are currently evaluating the impact of adopting Statement 157 on our
future results of operations or financial condition.
In June 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, or FIN
48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in a company's financial statements and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on description, classification, interest and penalties,
accounting in interim periods, disclosure and transition. We are required to
adopt FIN 48 effective at the beginning of 2007. We do not expect the adoption
of FIN 48 to have a significant impact on our results of operations or financial
condition.
41
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks, including changes in 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 received
related to forecasted royalty payments denominated in the Japanese Yen and the
Euro. We hedge these royalties with forward contracts 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 forecasted transactions. 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. Any hedge ineffectiveness is recorded in earnings. We do not use
financial instruments for trading purposes.
We 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, 2006 and 2005, such a change in foreign
currency exchange rates would affect our annual consolidated operating results,
financial position and cash flows by approximately $0.5 million in each period.
At December 31, 2006 and 2005, we did not have any floating interest rate
exposure. All of our outstanding debt as of those dates consisted of 3.00%
convertible senior subordinated notes due 2025, or convertible notes, which are
fixed-rate obligations. The fair value of the $115.0 million aggregate principal
amount of the convertible notes will be influenced by changes in market interest
rates, the share price of our Class B stock and our credit quality. At December
31, 2006, the convertible notes had an implied fair value of $110.2 million.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements and supplementary data are
set forth in this Annual Report on Form 10-K as follows:
Page
----
Consolidated Statements of Operations - Fiscal Years Ended December 31, 2006,
2005 and 2004 43
Consolidated Balance Sheets - December 31, 2006 and 2005 44
Consolidated Statements of Shareholders' Equity - Fiscal Years Ended
December 31, 2006, 2005 and 2004 45
Consolidated Statements of Cash Flows - Fiscal Years Ended December 31, 2006,
2005 and 2004 46
Notes to Consolidated Financial Statements 47
Report of Independent Registered Public Accounting Firm 68
The supplementary data regarding quarterly results of operations are set
forth in Note (T), Quarterly Results of Operations (Unaudited), to the Notes to
Consolidated Financial Statements.
42
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/06 12/31/05 12/31/04
- --------------------------------------------------------------------------------------------------------------------
Net revenues $ 331,142 $ 338,153 $ 329,376
- --------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales (262,242) (250,319) (240,835)
Selling and administrative expenses (57,816) (56,838) (56,894)
Restructuring expenses (1,998) (149) (744)
- --------------------------------------------------------------------------------------------------------------------
Total costs and expenses (322,056) (307,306) (298,473)
- --------------------------------------------------------------------------------------------------------------------
Gains on disposal 29 14 2
- --------------------------------------------------------------------------------------------------------------------
Operating income 9,115 30,861 30,905
- --------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 2,447 2,217 579
Interest expense (5,611) (6,986) (13,687)
Amortization of deferred financing fees (535) (635) (1,266)
Minority interest -- (1,557) (1,436)
Debt extinguishment expenses -- (19,280) (5,908)
Insurance settlement -- -- 5,638
Other, net (635) (1,357) (991)
- --------------------------------------------------------------------------------------------------------------------
Total nonoperating expense (4,334) (27,598) (17,071)
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 4,781 3,263 13,834
Income tax expense (2,496) (3,998) (3,845)
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 2,285 $ (735) $ 9,989
====================================================================================================================
Net income (loss) $ 2,285 $ (735) $ 9,989
Dividend requirements of preferred stock -- -- (428)
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common shareholders $ 2,285 $ (735) $ 9,561
====================================================================================================================
Weighted average number of common shares outstanding
Basic 33,171 33,163 31,581
====================================================================================================================
Diluted 33,276 33,163 31,767
====================================================================================================================
Basic and diluted earnings (loss) per common share $ 0.07 $ (0.02) $ 0.30
====================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
43
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Dec. 31, Dec. 31,
2006 2005
- --------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 26,748 $ 26,089
Marketable securities and short-term investments 9,000 25,963
Receivables, net of allowance for doubtful accounts of
$3,688 and $3,883, respectively 47,728 46,296
Receivables from related parties 1,791 1,928
Inventories 12,599 12,846
Deferred subscription acquisition costs 9,931 10,452
Other current assets 9,426 8,761
- --------------------------------------------------------------------------------------------------------------------
Total current assets 117,223 132,335
- --------------------------------------------------------------------------------------------------------------------
Property and equipment, net 17,407 13,771
Long-term receivables 4,665 2,628
Programming costs, net 55,183 52,683
Goodwill 132,974 122,448
Trademarks 63,794 61,139
Distribution agreements, net of accumulated amortization
of $3,435 and $2,779, respectively 29,705 30,362
Other noncurrent assets 14,832 13,603
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 435,783 $ 428,969
====================================================================================================================
Liabilities
Acquisition liabilities $ 10,773 $ 11,782
Accounts payable 28,846 25,429
Accrued salaries, wages and employee benefits 4,896 10,068
Deferred revenues 45,050 45,987
Accrued litigation settlement 1,800 1,000
Other liabilities and accrued expenses 14,124 16,396
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 105,489 110,662
- --------------------------------------------------------------------------------------------------------------------
Financing obligations 115,000 115,000
Acquisition liabilities 9,692 11,792
Net deferred tax liabilities 18,422 17,555
Other noncurrent liabilities 23,552 16,713
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 272,155 271,722
- --------------------------------------------------------------------------------------------------------------------
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-- 75,000,000 shares authorized; 28,743,914
and 28,643,443 issued, respectively 287 286
Capital in excess of par value 227,775 223,537
Accumulated deficit (57,691) (59,976)
Treasury stock, at cost, 381,971 shares (5,000) (5,000)
Accumulated other comprehensive loss (1,792) (1,649)
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 163,628 157,247
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 435,783 $ 428,969
====================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
44
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Accum.
Class A Class B Capital in Other
Preferred Common Common Excess of Accum. Treasury Comp.
Stock Stock Stock Par Value Deficit Stock Loss(1) Total
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 16,959 $ 49 $ 226 $ 152,969 $ (68,802) $ -- $ (1,057) $ 100,344
Net income -- -- -- -- 9,989 -- -- 9,989
Shares issued or vested
under stock plans, net -- -- -- 619 -- -- -- 619
Conversion of Playboy preferred A
to Playboy class B common (16,959) -- 15 16,721 -- -- -- (223)
Preferred stock dividends -- -- -- -- (428) -- -- (428)
Shares issued in public equity offering -- -- 44 51,815 -- -- -- 51,859
Other comprehensive loss -- -- -- -- -- -- (163) (163)
Other -- -- -- 161 -- -- -- 161
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 -- 49 285 222,285 (59,241) -- (1,220) 162,158
Net loss -- -- -- -- (735) -- -- (735)
Shares issued or vested
under stock plans, net -- -- 1 1,219 -- -- -- 1,220
Minimum benefit liability adjustment -- -- -- -- -- -- (341) (341)
Other comprehensive loss -- -- -- -- -- -- (88) (88)
Treasury stock purchase -- -- -- -- -- (5,000) -- (5,000)
Other -- -- -- 33 -- -- -- 33
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2005 -- 49 286 223,537 (59,976) (5,000) (1,649) 157,247
Net income -- -- -- -- 2,285 -- -- 2,285
Shares issued or vested
under stock plans, net -- -- 1 4,238 -- -- -- 4,239
Adjustment to initially apply FASB
Statement 158 -- -- -- -- -- -- (1,396) (1,396)
Other comprehensive income -- -- -- -- -- -- 1,253 1,253
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2006 $ -- $ 49 $ 287 $ 227,775 $ (57,691) $ (5,000) $ (1,792) $ 163,628
==================================================================================================================================
(1) Accumulated other comprehensive loss consisted of the following:
Fiscal Year Fiscal Year
Ended Ended
12/31/06 12/31/05
- ------------------------------------------------------------------------------
Unrealized gain on marketable securities $ 247 $ 134
Derivative gain 105 7
Minimum benefit liability adjustment -- (341)
Adjustment to initially apply FASB
Statement 158 (1,396) --
Actuarial liability adjustment (155) --
Foreign currency translation loss (593) (1,449)
- ------------------------------------------------------------------------------
Accumulated other comprehensive loss $ (1,792) $ (1,649)
==============================================================================
Comprehensive income (loss) was as follows:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/06 12/31/05 12/31/04
- --------------------------------------------------------------------------------------------
Net income (loss) $ 2,285 $ (735) $ 9,989
Unrealized gain (loss) on marketable securities 113 (24) 423
Derivative gain (loss) 98 87 (52)
Minimum benefit liability adjustment -- (341) --
Actuarial gain on liability 186 -- --
Foreign currency translation gain (loss) 856 (151) (534)
- --------------------------------------------------------------------------------------------
Total other comprehensive income (loss) 1,253 (429) (163)
- --------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 3,538 $ (1,164) $ 9,826
============================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
45
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/06 12/31/05 12/31/04
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) $ 2,285 $ (735) $ 9,989
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation of property and equipment 3,971 3,188 3,169
Amortization of intangible assets 1,683 1,902 2,236
Amortization of investments in entertainment programming 36,564 37,450 41,695
Stock-based compensation 2,326 155 129
Amortization of deferred financing fees 535 635 1,266
Minority interest -- 1,557 1,436
Debt extinguishment expenses -- 19,280 5,908
Equity losses in operations of investments 94 383 451
Insurance settlement -- -- 5,638
Deferred income taxes 867 2,532 1,146
Changes in current assets and liabilities:
Receivables (103) (1,112) 6,926
Receivables from related parties 137 (647) (55)
Inventories 247 (409) (420)
Deferred subscription acquisition costs 521 2,652 (1,345)
Other current assets (1,460) 299 1,596
Accounts payable 3,771 3,084 396
Accrued salaries, wages and employee benefits (3,796) 2,776 (3,721)
Deferred revenues (937) (5,434) (2,542)
Acquisition liability interest 459 (55) (2,340)
Accrued litigation settlements 800 (1,875) (5,500)
Other liabilities and accrued expenses (2,145) (719) (6,707)
- --------------------------------------------------------------------------------------------------------------------------
Net change in current assets and liabilities (2,506) (1,440) (13,712)
- --------------------------------------------------------------------------------------------------------------------------
Investments in entertainment programming (38,475) (33,075) (41,457)
Increase in trademarks (2,734) (2,242) (2,014)
(Increase) decrease in other noncurrent assets (52) (69) 428
Decrease in accrued litigation settlement -- -- (1,000)
Increase (decrease) in other noncurrent liabilities 2,690 (1,244) 852
Other, net 2,174 (499) (24)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 9,422 27,778 16,136
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Payments for acquisitions (7,761) (8,283) --
Proceeds from disposal -- -- 152
Purchases of investments (574) (53,446) (20,000)
Proceeds from sales of investments 18,000 51,511 --
Additions to property and equipment (7,546) (5,590) (2,875)
Other, net (427) -- 137
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 1,692 (15,808) (22,586)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from equity offering -- -- 51,859
Proceeds from financing obligations -- 115,000 --
Repayment of financing obligations -- (80,000) (35,000)
Payment of debt extinguishment expenses -- (15,197) (3,850)
Payment of acquisition liabilities (11,628) (8,804) (11,271)
Purchase of treasury stock -- (5,000) --
Payment of deferred financing fees -- (5,077) --
Payment of preferred stock dividends -- -- (651)
Repurchase of minority interest in a controlled subsidiary -- (14,074) --
Proceeds from stock-based compensation 494 1,066 490
Other, net -- (39) (18)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (11,134) (12,125) 1,559
- --------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 679 (424) 227
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 659 (579) (4,664)
Cash and cash equivalents at beginning of year 26,089 26,668 31,332
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 26,748 $ 26,089 $ 26,668
==========================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization: Playboy Enterprises, Inc., together with its subsidiaries
through which we conduct business, is a brand-driven, international multimedia
entertainment company with operations in the following business segments:
Entertainment, Publishing and Licensing.
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 generally accepted accounting principles 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 September 2006, the United States
Securities and Exchange Commission issued Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements, or SAB 108. SAB 108
addresses quantifying the financial statement effects of misstatements,
specifically, how the effects of prior year uncorrected errors must be
considered in quantifying misstatements using both a balance sheet and income
statement approach and evaluating whether either approach results in a misstated
amount that, when all relevant quantitative and qualitative factors are
considered, is material. SAB 108 became effective with our fiscal year ended
December 31, 2006, and did not have an impact on our results of operations or
financial condition.
In September 2006, the Financial Accounting Standards Board, or the FASB,
issued Statement of Financial Accounting Standards No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans - an
amendment of FASB Statements No. 87, 88, 106, and 132(R), or Statement 158.
Statement 158 requires an entity to (a) recognize in its statement of financial
position an asset or an obligation for a defined benefit postretirement plan's
funded status, (b) measure a defined benefit postretirement plan's assets and
obligations that determine its funded status as of the end of the employer's
fiscal year and (c) recognize changes in the funded status of a defined benefit
postretirement plan in comprehensive income in the year in which the changes
occur. We adopted the recognition and related disclosure provisions of Statement
158 effective December 31, 2006. The measurement date provision of Statement 158
is effective at the end of 2008. We do not expect the measurement date provision
of adopting Statement 158 to have a significant impact on our future results of
operations or financial condition.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements, or Statement 157. Statement 157
provides enhanced guidance for using fair value to measure assets and
liabilities. We are required to adopt Statement 157 effective at the beginning
of 2008. We are currently evaluating the impact of adopting Statement 157 on our
future results of operations or financial condition.
In June 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, or FIN
48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in a company's financial statements and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on description, classification, interest and penalties,
accounting in interim periods, disclosure and transition. We are required to
adopt FIN 48 effective at the beginning of 2007. We do not expect the adoption
of FIN 48 to have a significant impact on our results of operations or financial
condition.
Revenue Recognition: Domestic and international TV direct-to-home, or DTH,
and cable revenues are recognized based on estimates of pay-per-view, or PPV,
buys and monthly subscriber counts reported each month
47
by the system operators and adjusted to actual. The net adjustments to actual
have not been material. International TV third-party revenues are recognized
upon identification of programming scheduled for networks, delivery of
programming to customers and/or upon the commencement of the license term.
Revenues from the sale of Playboy magazine and online 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, except for those from licensed
operations, are recognized when the items are shipped, which is when title
passes. Royalties from licensing our trademarks in our international publishing,
product licensing and location-based entertainment businesses are generally
recognized on a straight-line basis over the terms of the related agreements.
Stock-Based Compensation: On January 1, 2006, we adopted the provisions of
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment, or Statement 123(R), which is a revision of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, or
Statement 123, under the modified prospective method. Statement 123(R)
supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, or APB 25, and amends Statement of Financial Accounting
Standards No. 95, Statement of Cash Flows. Statement 123(R) requires that all
stock-based compensation to employees, including grants of employee stock
options, be recognized in the income statement based on its fair value. Under
the modified prospective method, results for prior periods have not been
restated.
Stock-based compensation expense is based on awards ultimately expected to
vest, reduced for estimated forfeitures. Forfeitures are estimated at the time
of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. Forfeitures were estimated based on historical
experience. In our pro forma information required under Statement 123 for the
periods prior to fiscal 2006, we accounted for forfeitures as they occurred.
Under the fair value recognition provisions of Statement 123(R), we measure
stock-based compensation cost at the grant date based on the value of the award
and recognize the expense over the vesting period. Compensation expense, as
recognized under Statement 123(R), for all stock-based compensation awards is
recognized using the straight-line attribution method. Stock-based compensation
expense is reflected in our Consolidated Statements of Operations in "Selling
and administrative expenses" and the proceeds are reflected in our Consolidated
Statements of Cash Flows in "Proceeds from stock-based compensation." See Note
(O), Stock-Based Compensation.
Cash Equivalents: Cash equivalents are temporary cash investments with an
original maturity of three months or less at the date of purchase and are stated
at cost, which approximates fair value.
Marketable Securities: Marketable securities are classified as
available-for-sale securities, stated at fair value and accounted for under the
specific identification method. Net unrealized holding gains and losses are
included in "Accumulated other comprehensive loss."
Accounts Receivable and Allowance for Doubtful Accounts: Trade receivables
are reported at their outstanding unpaid balances less an allowance for doubtful
accounts. The allowance for doubtful accounts is increased by charges to income
and decreased by chargeoffs (net of recoveries) or by reversals to income. We
perform periodic evaluations of the adequacy of the allowance based on our past
loss experience and adverse situations that may affect a customer's ability to
pay.
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 are 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 one to ten years; and software ranges
from one to five years. Leasehold improvements are depreciated using the
straight-line method 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
property and equipment are recorded by removing the related cost and accumulated
depreciation from the accounts, after which any related gains or losses are
recognized.
48
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 catalog mailings. In accordance
with AICPA Statement of Position 93-7, Reporting on Advertising Costs, these
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.
Programming Amortization and Online Content Costs: Original programming
and film acquisition costs are primarily assigned to the domestic and
international networks and are capitalized and amortized utilizing the
straight-line method, generally over three years. Online content expenditures
are generally expensed as incurred. We believe that these methods provide a
reasonable matching of expenses with total estimated revenues over the periods
that revenues associated with films, programs and online content are expected to
be realized. Film and program costs are stated at the lower of unamortized cost
or estimated net realizable value as determined on a specific identification
basis and are classified on the Consolidated Balance Sheets as noncurrent
assets. See Note (K), Programming Costs, Net.
Intangible Assets: In accordance with Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, we do not amortize
goodwill and trademarks with indefinite lives, but subject them to annual
impairment tests. Noncompete agreements are being amortized using the
straight-line method over the lives of the agreements, either five or ten years.
Distribution agreements are being amortized using the straight-line method over
the lives of the agreements, ranging from three months to 27 and one-half years.
Capitalized trademark costs include costs associated with the acquisition,
registration and/or renewal of our trademarks. In the fourth quarter of 2006, we
began expensing certain costs associated with the defense of such trademarks. As
a result, we expensed $0.5 million for 2006. A program supply agreement is
amortized using the straight-line method over the ten-year life of the
agreement. Copyright costs are being amortized using the straight-line method
over 15 years. Other intangible assets continue to be amortized over their
useful lives. The noncompete agreements, program supply agreement and copyright
costs are all included in "Other noncurrent assets."
In 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 be realized only if there is a disposition or an
impairment of the value of these intangible assets. We currently have net
operating losses, or NOLs, available to offset deferred tax liabilities realized
within the NOL carryforward period. However, we cannot be certain that NOLs will
be available when the deferred tax liabilities related to these intangible
assets are realized. Therefore, in 2002, we recorded a noncash income tax
provision of $7.1 million for these deferred tax liabilities, which included
$5.8 million related to the cumulative effect of changing the accounting for
amortization from prior years.
In the fourth quarter of 2006, we modified the assumptions related to the
useful lives of certain distribution agreements that previously were classified
as indefinite-lived. As these distribution agreements are now being amortized,
the deferred tax liability related to the distribution agreements that is
expected to be realized within the NOL carryforward period may be netted against
our deferred tax asset. In 2006, we recorded an income tax benefit for $2.6
million of the $3.9 million deferred tax liability related to the modification
to the lives of these distribution agreements. The additional amortization in
2006 related to this change in estimate was $0.3 million.
In 2004, we sold our Sarah Coventry trademarks and service marks for their
approximate book value, pursuant to an agreement that was amended in 2006, under
which we will continue to receive payments through December 31, 2011. Such
trademarks and service marks revert back to us in the event of a default by the
buyer.
As a result of the restructuring of the ownership of Playboy TV
International, LLC, or PTVI, in 2002, we acquired distribution agreements of
$3.4 million with a weighted average life of approximately four years and a
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 distribution agreements of $9.0
million, which were previously determined to be indefinite-lived. In 2006, we
modified the lives to 27 and one-half years, which did not materially impact our
results of operations.
49
The following table sets forth our amortizable intangible assets (in
thousands):
December 31, 2006 December 31, 2005
---------------------------------- ----------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
- ---------------------------------------------------------------------------------------------
Noncompete
agreements $ 14,000 $ 13,415 $ 585 $ 14,000 $ 13,185 $ 815
Distribution
agreements 33,140 3,435 29,705 3,151 2,779 372
Program supply
agreement 3,226 1,290 1,936 3,226 968 2,258
Trademark license
agreements 2,880 262 2,618 -- -- --
Copyrights 1,983 1,143 840 2,047 1,011 1,036
Other 420 348 72 267 267 --
- ---------------------------------------------------------------------------------------------
Total amortizable
intangible assets $ 55,649 $ 19,893 $ 35,756 $ 22,691 $ 18,210 $ 4,481
=============================================================================================
At December 31, 2006 and 2005, our indefinite-lived intangible assets not
subject to amortization included goodwill of $133.0 million and $122.4 million,
respectively, and trademarks of $63.8 million and $61.1 million, respectively.
At December 31, 2006 and 2005, goodwill by reportable segment, reflected
entirely in the Entertainment Group, was $133.0 million and $122.4 million,
respectively. For the years ended December 31, 2006 and 2005, the aggregate
amount of goodwill acquired was $10.6 million and $10.5 million, respectively.
The aggregate amortization expense for intangible assets with definite
lives for 2006, 2005 and 2004 was $1.7 million, $1.9 million and $2.2 million,
respectively. The aggregate amortization expense for intangible assets with
definite lives is expected to total approximately $2.4 million, $2.3 million,
$2.3 million, $2.3 million and $2.2 million for 2007, 2008, 2009, 2010 and 2011,
respectively.
We conduct our annual impairment testing of goodwill and indefinite-lived
intangible assets as of every October 1st. If the carrying amount of the asset
is not recoverable based on a forecasted-discounted cash flow analysis, such
asset would be reduced by the estimated shortfall of fair value to recorded
value. We must make assumptions regarding forecasted-discounted cash flows to
determine a reporting unit's estimated fair value. If these estimates or related
assumptions change in the future, we may be required to record an impairment
charge. Based upon our impairment testing, we determined that no impairments of
intangible assets existed as of October 1, 2006.
In accordance with Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, we evaluate the
potential impairment of finite-lived acquired intangible assets when
appropriate. If the carrying amount of the asset is not recoverable based on a
forecasted-undiscounted cash flow analysis, such asset would be reduced by the
estimated shortfall of fair value to recorded value.
Derivative Financial Instruments: We account for derivative instruments in
accordance with Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended by Statement of
Financial Accounting Standards No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, which requires 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 as 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. At December 31, 2006, we had derivative
instruments that have been designated as and qualify as cash flow hedges, which
are entered into in order to hedge the variability of cash flows to be received
related to forecasted royalty payments denominated in the
50
Japanese Yen and the Euro. We hedge these royalties with forward contracts for
periods not exceeding 12 months. The fair value and carrying value of our
forward contracts are 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 royalty revenue is recognized.
We had net unrealized gains of $0.1 million and $7 thousand in 2006 and
2005, respectively, included in "Accumulated other comprehensive loss," which
represents the effective portion of changes in fair value of the cash flow
hedges. We do not expect any significant losses to be reclassified from
"Accumulated other comprehensive loss" to earnings within the next 12 months.
Earnings per Common Share: We compute basic and diluted earnings per
share, or EPS, in accordance with Statement of Financial Accounting Standards
No. 128, Earnings per Share. Basic EPS is computed by dividing net income (loss)
applicable to common shareholders 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 (E), Earnings per Common Share.
Equity Investments: Prior to the 2002 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 on
certain transactions between us and PTVI and gains related to the transfer of
certain assets to PTVI. Beginning in 2003, the equity method is used to account
for our 19.0% investment in Playboy TV-Latin America, LLC, or PTVLA, since the
restructuring gave us the ability to exercise influence over PTVLA. The cost
method was used prior to the restructuring.
Minority Interest: In 2001, our subsidiary Playboy.com, Inc., or
Playboy.com, issued $15.3 million of its Series A Preferred Stock, of which $5.0
million was purchased by Hugh M. Hefner, our Editor-In-Chief and Chief Creative
Officer. In connection with the restructuring of our international TV joint
ventures, we received the Playboy.com Series A Preferred Stock that was owned by
an affiliate of Claxson Interactive Group, Inc., or Claxson. In 2005, we
repurchased the remaining outstanding Playboy.com Series A Preferred Stock that
was held by Mr. Hefner and an unrelated third party for $14.1 million. Included
in this amount was $3.9 million of accrued dividends. Pursuant to its terms, the
Playboy.com Series A Preferred Stock was canceled, retired and ceased to be
outstanding as a result of the repurchases. Subsequently, Playboy.com became a
wholly owned subsidiary of ours.
Foreign Currency Translation: Assets and liabilities in foreign currencies
related to our international TV foreign operations 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.
(B) ACQUISITION
In July 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 and the related
television assets of V.O.D., Inc., or VODI, a separate entity owned by the
sellers. We collectively refer to Califa and VODI as the Califa acquisition.
These networks now operate as the Spice Digital Networks. The addition of these
networks into our movie networks portfolio enabled us to offer consumers a wider
range of adult programming. We accounted for the acquisition under the purchase
method of accounting. 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. Future obligations were recorded at their
net present value and are reported in the Consolidated Balance Sheets as a
component of current and noncurrent "Acquisition liabilities."
We recorded $30.8 million of intangible assets separate from goodwill
consisting of $28.5 million for distribution agreements and $2.3 million for
noncompete agreements. All of the noncompete agreements are being amortized over
approximately eight years, which are the weighted average lives of these
agreements. Distribution agreements of $7.5 million were being amortized over
approximately two years, which were the weighted average
51
useful lives of these agreements. Distribution agreements of $21.0 million,
which were previously determined to be indefinite-lived, are now being amortized
over their modified useful lives of 27 and one-half years.
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 were obligated to
pay up to an additional $12.0 million in consideration upon the achievement of
specified financial performance targets, $5.0 million of which we paid on
February 28, 2003 and $7.0 million of which we paid on March 1, 2004. The
amounts were recorded at the acquisition date as part of acquisition
liabilities.
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 12% discount rate.
The Califa acquisition agreement gave us the option of paying up to $71.0
million of the scheduled payments in cash or our Class B common stock, 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. In each of 2006 and 2005, we paid the sellers $8.0
million in cash. On February 14, 2007, we informed the sellers that we would be
making the last payment, which is payable in cash or Class B stock, of $7.0
million, in the form of cash. All remaining payments must also be made in cash.
The following table sets forth the remaining installments of consideration
(in thousands):
2007 $ 8,000
2008 1,000
2009 1,000
2010 1,000
2011 750
- --------------------------------------------------------------------------------
Total future payments $ 11,750
================================================================================
(C) RESTRUCTURING EXPENSES
In 2006, we implemented a cost reduction plan that will result in lower
overhead costs and annual programming and editorial expenses. As a result of the
2006 restructuring plan, we reported a charge of $2.1 million related to costs
associated with a workforce reduction of 15 employees. In addition, we recorded
a favorable adjustment of $0.2 million and an unfavorable adjustment of $0.1
million related to the 2002 and 2001 restructuring plans, respectively, as a
result of changes in plan assumptions primarily related to excess office space.
During the year, we made cash payments of $1.7 million, $0.2 million and $26
thousand related to our 2006, 2002 and 2001 restructuring plans, respectively.
Of the total costs related to our restructuring plans, approximately $11.9
million was paid by December 31, 2006, with the remaining $0.7 million to be
paid through 2008.
In 2005, we recorded an additional charge of $0.1 million related to the
2002 restructuring plan as a result of changes in plan assumptions primarily
related to excess office space. There were no additional charges related to the
2001 restructuring plan.
In 2004, we recorded a restructuring charge of $0.5 million relating to
the realignment of our entertainment and online businesses. In addition,
primarily due to excess office space, we recorded additional charges of $0.4
million related to the 2002 restructuring plan and reversed $0.2 million related
to the 2001 restructuring plan as a result of changes in plan assumptions.
52
The following table sets forth the activity and balances of our
restructuring reserves for the years ended December 31, 2006 and 2005 (in
thousands):
Consolidation
Workforce of Facilities and
Reduction Operations Total
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 $ 179 $ 1,827 $ 2,006
Adjustments to previous estimates 17 132 149
Cash payments (196) (749) (945)
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 2005 -- 1,210 1,210
Reserve recorded 2,103 -- 2,103
Adjustments to previous estimates -- (105) (105)
Other -- (574) (574)
Cash payments (1,673) (263) (1,936)
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 2006 $ 430 $ 268 $ 698
============================================================================================================
(D) INCOME TAXES
The following table sets forth the income tax provision (in thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/06 12/31/05 12/31/04
- -----------------------------------------------------------------------------------------------------------
Current:
State $ 120 $ 105 $ 93
Foreign 1,509 1,361 2,606
- -----------------------------------------------------------------------------------------------------------
Total current 1,629 1,466 2,699
- -----------------------------------------------------------------------------------------------------------
Deferred:
Federal 160 2,302 1,042
State 707 230 104
Foreign -- -- --
- -----------------------------------------------------------------------------------------------------------
Total deferred 867 2,532 1,146
- -----------------------------------------------------------------------------------------------------------
Total income tax provision $ 2,496 $ 3,998 $ 3,845
===========================================================================================================
The U.S. statutory tax rate applicable to us for each of 2006, 2005 and
2004 was 35%. The following table sets forth the reconciliation of the income
tax provision to the provision computed at the U.S. statutory tax rate (in
thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/06 12/31/05 12/31/04
- ------------------------------------------------------------------------------------------------------------
Statutory rate tax provision $ 1,673 $ 1,142 $ 4,842
Increase (decrease) in taxes resulting from:
Foreign income and withholding tax on licensing income 1,509 1,629 2,606
State income taxes 158 335 197
Nondeductible expenses 175 295 661
Increase (decrease) in valuation allowance 1,327 2,632 (9,163)
Tax benefit of foreign taxes paid or accrued (2,503) (1,843) (1,341)
Tax benefit of state/foreign NOLs (181) (188) --
Expiration of capital loss carryforward -- -- 5,969
Tax audit adjustment 281 -- --
Other 57 (4) 74
- ------------------------------------------------------------------------------------------------------------
Total income tax provision $ 2,496 $ 3,998 $ 3,845
============================================================================================================
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
53
apply in the years in which the temporary differences are expected to reverse.
In 2006, we modified the assumptions related to the useful lives of
certain distribution agreements that previously were classified as
indefinite-lived. As these distribution agreements are now being amortized, the
deferred tax liability related to the distribution agreements that is expected
to be realized within the NOL carryforward period may be netted against our
deferred tax asset. In 2006, we recorded an income tax benefit for $2.6 million
of the $3.9 million deferred tax liability related to the distribution agreement
modification.
In 2006, the valuation allowance increased by $1.9 million related to the
recognition of the deferred tax benefit of our NOLs and foreign tax credits and
the effect of the deferred tax treatment of certain acquired intangibles. In
2005, the valuation allowance, as adjusted, increased by $2.6 million related to
the recognition of the deferred tax benefit of our NOLs and the effect of the
deferred tax treatment of certain acquired intangibles.
The following table sets forth the significant components of our deferred
tax assets and deferred tax liabilities (in thousands):
Dec. 31, Dec. 31,
2006 2005
- --------------------------------------------------------------------------------
Deferred tax assets:
NOL carryforwards $ 47,476 $ 45,263
Capital loss carryforwards 1,629 1,870
Tax credit carryforwards 13,505 11,001
Temporary difference related to PTVI 6,651 7,423
Other deductible temporary differences 32,580 27,731
- --------------------------------------------------------------------------------
Total deferred tax assets 101,841 93,288
Valuation allowance (77,180) (75,295)
- --------------------------------------------------------------------------------
Deferred tax assets 24,661 17,993
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred subscription acquisition costs (4,808) (4,594)
Intangible assets (27,587) (23,530)
Other taxable temporary differences (10,688) (7,424)
- --------------------------------------------------------------------------------
Deferred tax liabilities (43,083) (35,548)
- --------------------------------------------------------------------------------
Deferred tax liabilities, net $ (18,422) $ (17,555)
================================================================================
At December 31, 2006, we had federal NOLs of $102.7 million expiring from
2009 through 2026, state and local NOLs of $94.6 million expiring from 2007
through 2026 and foreign NOLs of $13.1 million that have no expiration date.
Also at December 31, 2006, we had capital loss carryforwards of $4.7 million
expiring in 2007. In addition, foreign tax credit carryforwards of $12.4 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
2014 through 2016 and the minimum tax credit carryforwards have no expiration
date.
54
(E) EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted EPS
(in thousands, except per share amounts):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/06 12/31/05 12/31/04
- -----------------------------------------------------------------------------------------------
Numerator:
For basic EPS - net income (loss) $ 2,285 $ (735) $ 9,561
Preferred stock dividends -- -- 428
- -----------------------------------------------------------------------------------------------
For diluted EPS - net income (loss) $ 2,285 $ (735) $ 9,989
===============================================================================================
Denominator:
For basic EPS - weighted average shares 33,171 33,163 31,581
Effect of dilutive potential common shares:
Employee stock options and other 105 -- 186
- -----------------------------------------------------------------------------------------------
Dilutive potential common shares 105 -- 186
- -----------------------------------------------------------------------------------------------
For diluted EPS - weighted average shares 33,276 33,163 31,767
===============================================================================================
Basic and Diluted EPS $ 0.07 $ (0.02) $ 0.30
===============================================================================================
The following table sets forth the number of shares related to outstanding
options to purchase our Class B stock, the potential shares of Class B stock
contingently issuable under our 3.00% convertible senior subordinated notes due
2025, or convertible notes, and our Playboy Series A convertible preferred
stock, or Playboy Preferred Stock. These shares were not included in the
computations of diluted EPS for the years presented, as their inclusion would
have been antidilutive (in thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/06 12/31/05 12/31/04
- -----------------------------------------------------------------------------------------------
Stock options 3,387 2,371 2,336
Convertible notes 6,758 6,758 --
Playboy preferred stock -- -- 743
- -----------------------------------------------------------------------------------------------
Total 10,145 9,129 3,079
===============================================================================================
(F) 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 and certain other current assets, the amounts reported
approximated fair value due to their short-term nature. As described in Note
(L), Financing Obligations, in March 2005, we issued and sold in a private
placement $115.0 million aggregate principal amount of our convertible notes. As
of December 31, 2006 and 2005, the fair value of the convertible notes was
determined to be $110.2 million and $116.7 million, respectively. 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.
Concentrations of Credit Risk: Concentration of credit risk with respect
to accounts receivable is limited due to the wide variety of customers to whom
and segments from which our products are sold and/or licensed.
55
(G) MARKETABLE SECURITIES AND SHORT-TERM INVESTMENTS
The following table sets forth marketable securities, primarily purchased
in connection with our deferred compensation plans, and short-term investments,
which represent auction rate securities, or ARS, (in thousands):
Dec. 31, Dec. 31,
2006 2005
- ----------------------------------------------------------------------------------------
Cost of marketable securities $ 5,753 $ 4,829
Cost of short-term investments 3,000 21,000
Gross unrealized holding gains 341 215
Gross unrealized holding losses (94) (81)
- ----------------------------------------------------------------------------------------
Fair value of marketable securities and short-term investments $ 9,000 $ 25,963
========================================================================================
We purchased $0.6 million of marketable securities and received proceeds
of $18.0 million from the sale of short-term investments in 2006. We realized
gains totaling $31 thousand and $0.1 million in 2006 and 2005, respectively.
There were no such proceeds in 2004 and, therefore, no gains or losses were
realized. Included in "Comprehensive income (loss)" were a net unrealized
holding gain of $0.1 million and a net unrealized holding loss of $24 thousand
for 2006 and 2005, respectively. We recognized interest income of $0.6 million,
$0.9 million and $0.1 million on ARS during 2006, 2005 and 2004, respectively.
(H) INVENTORIES
The following table sets forth inventories, which are stated at the lower
of cost (specific cost and average cost) or fair value (in thousands):
Dec. 31, Dec. 31,
2006 2005
- ---------------------------------------------------------------------------------------
Paper $ 2,917 $ 3,939
Editorial and other prepublication costs 7,425 6,529
Merchandise finished goods 2,257 2,378
- ---------------------------------------------------------------------------------------
Total inventories $ 12,599 $ 12,846
=======================================================================================
(I) ADVERTISING COSTS
At December 31, 2006 and 2005, advertising costs of $7.3 million and $8.1
million, respectively, were deferred and included in "Deferred subscription
acquisition costs" and "Other current assets." For 2006, 2005 and 2004, our
advertising expense was $26.6 million, $25.7 million and $24.8 million,
respectively.
(J) PROPERTY AND EQUIPMENT, NET
The following table sets forth property and equipment, net (in thousands):
Dec. 31, Dec. 31,
2006 2005
- ----------------------------------------------------------------------------------------
Land $ 292 $ 292
Buildings and improvements 8,773 8,712
Furniture and equipment 24,288 20,658
Leasehold improvements 13,670 11,564
Software 11,623 10,169
- ----------------------------------------------------------------------------------------
Total property and equipment 58,646 51,395
Accumulated depreciation (41,239) (37,624)
- ----------------------------------------------------------------------------------------
Total property and equipment, net $ 17,407 $ 13,771
========================================================================================
56
(K) PROGRAMMING COSTS, NET
The following table sets forth programming costs, net (in thousands):
Dec. 31, Dec. 31,
2006 2005
- ---------------------------------------------------------------------------------------
Released, less amortization $ 43,228 $ 38,044
Completed, not yet released 4,207 4,589
In-process 7,748 10,050
- ---------------------------------------------------------------------------------------
Total programming costs, net $ 55,183 $ 52,683
=======================================================================================
Based on management's estimate of future total gross revenues at December
31, 2006, approximately 53% of the completed original programming costs is
expected to be amortized during 2007. We expect to amortize virtually all of the
released, original programming costs during the next three years. At December
31, 2006, we had $14.4 million of film acquisition costs, which are typically
amortized using the straight-line method, generally over three years or less,
which is our estimate of the length of time during which we plan to re-air a
film or program on our television networks.
(L) FINANCING OBLIGATIONS
The following table sets forth financing obligations (in thousands):
Dec. 31, Dec. 31,
2006 2005
- ---------------------------------------------------------------------------------------
Convertible senior subordinated notes, interest of 3.00% $115,000 $115,000
- ---------------------------------------------------------------------------------------
Total financing obligations $115,000 $115,000
=======================================================================================
DEBT FINANCINGS
In March 2005, we issued and sold $115.0 million aggregate principal
amount of our convertible notes, which included $15.0 million due to the initial
purchasers' exercise of the over-allotment option. The net proceeds of
approximately $110.3 million from the issuance and sale of the convertible
notes, after deducting the initial purchasers' discount and offering expenses,
were used, together with available cash, (a) to complete a tender offer and
consent solicitation for, and to purchase and retire all of the $80.0 million
outstanding principal amount of the 11.00% senior secured notes, or senior
secured notes, issued by our subsidiary PEI Holdings, Inc., or Holdings, for a
total of approximately $95.2 million, including the bond tender premium and
consent fee of $14.9 million and other expenses of $0.3 million, (b) to purchase
381,971 shares of our Class B stock for an aggregate purchase price of $5.0
million concurrently with the sale of the convertible notes and (c) for working
capital and general corporate purposes.
The convertible notes bear interest at a rate of 3.00% per annum on the
principal amount of the notes, payable in arrears on March 15th and September
15th of each year, payment of which began on September 15, 2005. In addition,
under certain circumstances beginning in 2012, if the trading price of the
convertible notes exceeds a specified threshold during a prescribed measurement
period prior to any semi-annual interest period, contingent interest will become
payable on the convertible notes for that semi-annual interest period at an
annual rate of 0.25% per annum.
The convertible notes are convertible into cash and, if applicable, shares
of our Class B stock based on an initial conversion rate, subject to adjustment,
of 58.7648 shares per $1,000 principal amount of the convertible notes (which
represents an initial conversion price of approximately $17.02 per share) only
under the following circumstances: (a) during any fiscal quarter after the
fiscal quarter ending March 31, 2005, if the closing sale price of our Class B
stock for each of 20 or more consecutive trading days in a period of 30
consecutive trading days ending on the last trading day of the immediately
preceding fiscal quarter exceeds 130% of the conversion price in effect on that
trading day; (b) during the five business day period after any five consecutive
trading day period in which the average trading price per $1,000 principal
amount of convertible notes over that five consecutive trading day period was
equal to or less than 95% of the average conversion value of the convertible
notes during that period;
57
(c) upon the occurrence of specified corporate transactions, as set forth in the
indenture governing the convertible notes; or (d) if we have called the
convertible notes for redemption. Upon conversion of a convertible note, a
holder will receive cash in an amount equal to the lesser of the aggregate
conversion value of the note being converted and the aggregate principal amount
of the note being converted. If the aggregate conversion value of the
convertible note being converted is greater than the cash amount received by the
holder, the holder will also receive an amount in whole shares of Class B stock
equal to the aggregate conversion value less the cash amount received by the
holder. A holder will receive cash in lieu of any fractional shares of Class B
stock. The maximum conversion rate, subject to adjustment, is 76.3942 shares per
$1,000 principal amount of the convertible notes.
The convertible notes mature on March 15, 2025. On or after March 15,
2010, if the closing price of our Class B stock exceeds a specified threshold,
we may redeem any of the convertible notes at a redemption price in cash equal
to 100% of the principal amount of the convertible notes, plus any accrued and
unpaid interest up to, but excluding, the redemption date. On or after March 15,
2012, we may at any time redeem any of the convertible notes at the same
redemption price. On each of March 15, 2012, March 15, 2015 and March 15, 2020,
or upon the occurrence of a fundamental change, as specified in the indenture
governing the convertible notes, holders may require us to purchase all or a
portion of their convertible notes at a purchase price in cash equal to 100% of
the principal amount of the notes, plus any accrued and unpaid interest up to,
but excluding, the purchase date.
The convertible notes are unsecured senior subordinated obligations of
Playboy Enterprises, Inc. and rank junior to all of the issuer's senior debt,
including its guarantee of Holdings' borrowings under our credit facility;
equally with all of the issuer's future senior subordinated debt; and, senior to
all of the issuer's future subordinated debt. In addition, the assets of the
issuer's subsidiaries are subject to the prior claims of all creditors,
including trade creditors, of those subsidiaries.
CREDIT FACILITY
At December 31, 2006, we had a $50.0 million credit facility, which
provides for revolving borrowings of up to $50.0 million and the issuance of up
to $30.0 million in letters of credit, subject to a maximum of $50.0 million in
combined borrowings and letters of credit outstanding at any time. Borrowings
under the credit facility bear interest at a variable rate, equal to a specified
Eurodollar, LIBOR or base rate plus a specified borrowing margin based on our
Adjusted EBITDA, as defined in the credit agreement. We pay fees on the
outstanding amount of letters of credit based on the margin that applies to
borrowings that bear interest at a rate based on LIBOR. All amounts outstanding
under the credit facility will mature on April 1, 2008. Holdings' obligations as
borrower under the credit facility are guaranteed by us and each of our other
United States subsidiaries. The obligations of the borrower and nearly all of
the guarantors under the credit facility are secured by a first-priority lien on
substantially all of the borrower's and the guarantors' assets.
FINANCING FROM RELATED PARTY
At December 31, 2002, Playboy.com had an aggregate of $27.2 million of
outstanding indebtedness to Mr. Hefner, in the form of three promissory notes.
Upon the closing of the senior secured notes offering on March 11, 2003,
Playboy.com's debt to Mr. Hefner was restructured. One promissory note, in the
amount of $10.0 million, was extinguished in exchange for shares of Holdings
Series A Preferred Stock with an aggregate stated value of $10.0 million. The
two other promissory notes, in a combined principal amount of $17.2 million,
were extinguished in exchange for $0.5 million in cash and shares of Holdings
Series B Preferred Stock with an aggregate stated value of $16.7 million.
Pursuant to the terms of an exchange agreement between us, Holdings, Playboy.com
and Mr. Hefner and certificates of designation governing the Holdings Series A
and Series B Preferred Stocks, we were required to exchange the Holdings Series
A Preferred Stock for shares of Playboy Class B stock and to exchange the
Holdings Series B Preferred Stock for shares of Playboy Preferred Stock.
On May 1, 2003, we exchanged the Holdings Series A Preferred Stock plus
accumulated dividends for 1,122,209 shares of Playboy Class B stock and
exchanged the Holdings Series B Preferred Stock for 1,674 shares of Playboy
Preferred Stock with an aggregate stated value of $16.7 million. The Playboy
Preferred Stock accrued dividends at a rate of 8.00% per annum, which were paid
semi-annually.
The Playboy Preferred Stock was convertible at the option of Mr. Hefner,
the holder, into shares of our Class
58
B stock at a conversion price of $11.2625, which was 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.
In 2005, we repurchased the remaining outstanding Playboy.com Series A
Preferred Stock that was held by Mr. Hefner and an unrelated third party. These
shares were part of the $15.3 million issued by our subsidiary Playboy.com in
2001 of which $5.0 million was purchased by Mr. Hefner. Pursuant to its terms,
the Playboy.com Series A Preferred Stock was canceled, retired and ceased to be
outstanding as a result of the repurchases. Subsequently, Playboy.com became a
wholly owned subsidiary of ours.
(M) 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. Total
contributions for 2006, 2005 and 2004 related to this plan were $0.3 million,
$1.5 million and $1.3 million, respectively.
Eligible employees may participate in our 401(k) plan upon their date of
hire. Our 401(k) plan offers several mutual fund investment options. The
purchase of our stock is not an option. We make matching contributions to our
401(k) plan based on each participating employee's contributions and eligible
compensation. Our matching contributions for 2006, 2005 and 2004 related to this
plan were $1.4 million, $1.3 million and $1.2 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 contributed and earnings credited under these plans are
general unsecured obligations. Such obligations totaled $6.2 million and $5.3
million for 2006 and 2005, respectively, and are included in "Other noncurrent
liabilities."
We currently maintain a practice of paying a separation allowance under
our salary continuation policy to employees with at least five years of
continuous service who voluntarily terminate employment with us and are at age
60 or thereafter, which is not funded. Payments in 2006, 2005 and 2004 under
this policy were approximately $0.3 million, $0.2 million and $40 thousand,
respectively. In 2006, 2005 and 2004 we recorded expenses, based on actuarial
estimates, of $0.6 million, $0.5 million and $0.5 million, respectively. We
adopted the recognition and related disclosure provisions of Statement 158
effective December 31, 2006, with the projected benefit obligation reflected in
"Other noncurrent liabilities." Prior to 2006, the accumulated benefit
obligation was also reflected in "Other noncurrent liabilities." At December 31,
2006 and 2005, the accumulated benefit obligation was $3.7 million and $3.6
million, respectively. At December 31, 2006 and 2005, the projected benefit
obligation was $5.1 million and $5.0 million, respectively. In 2005, we recorded
an additional minimum liability of $0.3 million to "Accumulated other
comprehensive loss." Our estimated future benefit payments are $0.6 million,
$0.6 million, $0.6 million, $0.7 million and $0.7 million for 2007, 2008, 2009,
2010 and 2011, respectively, and $3.7 million for the five-year period ending
December 31, 2016. The assumptions we used to compute the projected benefit
obligation included a discount rate of 5.75% and a rate of compensation increase
of 4.00%.
59
The following table sets forth the incremental effects of applying
Statement 158 on individual line items of our Consolidated Balance Sheet at
December 31, 2006 (in thousands):
Before After
Application of Application of
Statement 158 Adjustments Statement 158
- ---------------------------------------------------------------------------------------
Liability for pension benefits $ 3,710 $ 1,396 $ 5,106
Total liabilities 270,759 1,396 272,155
Accumulated other comprehensive loss (396) (1,396) (1,792)
Total shareholders' equity $ 165,024 $ (1,396) $ 163,628
- ----------------------------------------------------------------------------------------
(N) 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.
The following table sets forth rent expense, net (in thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/06 12/31/05 12/31/04
- ----------------------------------------------------------------------------------------
Minimum rent expense $ 15,437 $ 14,670 $ 13,495
Sublease income -- -- (419)
- ----------------------------------------------------------------------------------------
Rent expense, net $ 15,437 $ 14,670 $ 13,076
========================================================================================
There was no contingent rent expense in 2006, 2005 and 2004.
The following table sets forth the minimum future commitments at December
31, 2006, under operating leases with initial or remaining noncancelable terms
in excess of one year (in thousands):
2007 $ 13,774
2008 13,654
2009 9,324
2010 8,997
2011 9,129
Later years 67,158
Less minimum sublease income (75)
- --------------------------------------------------------------------------------
Minimum lease commitments, net $ 121,961
================================================================================
Our entertainment programming is delivered to DTH and cable operators
through communications satellite transponders. We currently have four
transponder service agreements related to our domestic networks, the terms of
which extend through 2008, 2013, 2013 and 2014. We also have two international
transponder service agreements, the terms of which extend through 2009. At
December 31, 2006, future commitments related to these six agreements were $7.0
million, $7.0 million, $4.9 million, $3.5 million and $3.5 million for 2007,
2008, 2009, 2010 and 2011, respectively, and $7.4 million thereafter.
In 2006, we recorded $1.8 million, based on an agreement in principle, for
the settlement of litigation with Directrix, Inc., or Directrix. The settlement
amount, subject to Bankruptcy Court approval, will be paid in 2007. The
settlement is a compromise of disputed claims and is not an admission of
liability. We believe that we had good defenses against Directrix's claims, but
made the reasonable business decision to settle the litigation to avoid further
management distraction and defense costs, which we had estimated would have
approximately equaled the amount of the settlement.
In 2006, we acquired Club Jenna, Inc. and related companies, a multimedia
adult entertainment business, to complement our existing television, online and
DVD businesses. As the pro forma results would not be materially different from
actual results, they are not presented. We paid $7.7 million at closing with
additional payments of
60
$1.6 million, $1.7 million, $2.3 million and $4.3 million required in 2007,
2008, 2009 and 2010, respectively. Pursuant to the acquisition agreement, we are
also obligated to make future contingent earnout payments based primarily on
sales of existing content of the acquired business over a ten-year period and on
content produced by the acquired business during the five-year period after the
closing of the acquisition. If the required performance benchmarks are achieved,
any contingent earnout payments will be recorded as additional purchase price.
In 2006, no earnout payments were earned.
In 2005, we acquired an affiliate network of websites to complement our
existing online business. We paid $8.0 million at closing, $2.0 million in 2006
and an additional payment of $2.0 million is required in 2007. Pursuant to the
asset purchase agreement, we are also obligated to make future contingent
earnout payments over a five-year period based primarily on the financial
performance of the acquired business. If the required performance benchmarks are
achieved, any contingent earnout payments will be recorded as additional
purchase price and/or compensation expense. During 2006, an earnout payment of
$0.1 million was made and recorded as additional purchase price.
In 2003, we recorded $8.5 million for the settlement of litigation with
Logix Development Corporation, which related to events prior to our 1999
acquisition of Spice Entertainment Companies, Inc. We made payments of $1.0
million, $1.0 million and $6.5 million in 2006, 2005 and 2004, respectively.
In 2002, a $4.4 million verdict was entered against us by a state trial
court in Texas in a lawsuit with a former publishing licensee. We terminated the
license in 1998 due to the licensee's failure to pay royalties and other amounts
due us under the license agreement. We appealed and the State Appellate Court
reversed the judgment by the trial court, rendered judgment for us on the
majority of plaintiffs' claims and remanded the remaining claims for a new
trial. We filed a petition for review with the Texas Supreme Court. We have
posted a bond in the amount of approximately $9.4 million, which represents the
amount of the judgment, costs and estimated pre- and post-judgment interest. We,
on advice of legal counsel, believe that it is not probable that a material
judgment against us will be sustained and have not recorded a liability for this
case in accordance with Statement of Financial Accounting Standards No. 5,
Accounting for Contingencies.
(O) STOCK-BASED COMPENSATION
We have stock plans for key employees and nonemployee directors, which
provide for the grant of nonqualified and incentive stock options and/or shares
of restricted stock units, deferred stock and other equity awards in our Class B
stock. The Compensation Committee of the Board of Directors, which is composed
entirely of independent nonemployee directors, administers all the plans. These
plans are designed to further our growth, development and financial success by
providing key employees with strong additional incentives to maximize long-term
stockholder value. The Compensation Committee believes that this objective can
be best achieved through assisting key employees to become owners of our stock,
which aligns their interests with our interests. As stockholders, key employees
will benefit directly from our growth, development and financial success. These
plans also enable us to attract and retain the services of those executives whom
we consider essential to our long-range success by providing these executives
with a competitive compensation package and an opportunity to become owners of
our stock. At December 31, 2006, we had 3,088,954 shares of our Class B stock
available for grant under these plans.
Stock options, exercisable for shares of our Class B stock, generally vest
over a two-to four-year period from the grant date and expire ten years from
the grant date.
Restricted stock unit grants provide for the issuance of our Class B stock
if three-year cumulative operating income target thresholds are met. If the
operating income minimum threshold is not achieved, the restricted stock units
for that grant are forfeited.
One of our stock plans pertaining to nonemployee directors also allows for
the issuance or deferral of our Class B stock as awards and payments for
retainer, committee and meeting fees.
Finally, we also have an Employee Stock Purchase Plan, or ESPP, that
provides substantially all regular full- and part-time employees an opportunity
to purchase shares of our Class B stock through payroll deductions. The
61
funds are withheld and then used to acquire stock on the last trading day of
each quarter, based on that day's closing price less a 15% discount. ESPP
expense is reflected in our Consolidated Statements of Operations in "Selling
and administrative expenses" and the proceeds are reflected in our Consolidated
Statements of Cash Flows in "Proceeds from stock-based compensation." At
December 31, 2006, we had 89,751 shares of our Class B stock available for
purchase under this plan.
Valuation Information
Upon adoption of Statement 123(R), we began estimating the value of stock
options on the date of grant using the Lattice Binomial model, or Lattice model.
Prior to the adoption of Statement 123(R), the value of each employee stock
option was estimated on the date of grant using the Black-Scholes model for the
purpose of pro forma financial information in accordance with Statement 123. The
Lattice model requires extensive analysis of actual exercise behavior data and a
number of complex assumptions including expected volatility, risk-free interest
rate, expected dividends and option cancellations.
The following table sets forth the assumptions used for the Lattice model
in 2006 and the Black-Scholes model in 2005:
Fiscal Year Ended
December 31,
---------------------------
2006 2005
- ----------------------------------------------------------------------------
Expected volatility 37% - 38% 46%
Risk-free interest rate 4.32% - 4.80% 3.80% - 4.18%
Expected dividends - -
- ----------------------------------------------------------------------------
The expected life of stock options represents the weighted average period
the stock options are expected to remain outstanding and is a derived output of
the Lattice model. The expected life of stock options is impacted by all of the
underlying assumptions and calibration of the Lattice model. The Lattice model
assumes that exercise behavior is a function of the option's remaining vested
life and the extent to which the option's fair value exceeds the exercise price.
The Lattice model estimates the probability of exercise as a function of these
two variables based upon the entire history of exercises and cancellations on
all past option grants.
The weighted average expected life for options granted during 2006 using
the Lattice model was 5.9 years and the weighted average expected life for
options granted during 2005 using the Black-Scholes model was 6.0 years. The
weighted average fair value per share for stock options granted during 2006,
using the Lattice model, was $6.03 and the weighted average fair value per share
for stock options granted during 2005, using the Black-Scholes model, was $5.85.
Stock Option Activity
The following table sets forth stock option activity for the year ended
December 31, 2006:
Number of Weighted Average
Shares Exercise Price
- ------------------------------------------------------------------------
Outstanding at December 31, 2005 3,374,135 $ 15.85
Granted 805,500 13.64
Exercised (29,666) 11.17
Canceled (467,553) 13.63
- -----------------------------------------------------
Outstanding at December 31, 2006 3,682,416 $ 15.65
========================================================================
At December 31, 2006, the weighted average remaining contractual lives of
options outstanding and options exercisable were 5.6 years and 4.3 years,
respectively. At December 31, 2006, the number of options exercisable and the
weighted average exercise price of options exercisable were 2,613,750 and
$16.69, respectively.
During 2006, we had proceeds of $0.3 million from exercises of stock
options. The aggregate intrinsic value for options exercised during 2006 was
approximately $0.1 million. There were 805,500 options granted in 2006,
62
which had an aggregate intrinsic value of $0.3 million. The aggregate intrinsic
values of options outstanding and options exercisable at December 31, 2006, were
$1.1 million and $0.8 million, respectively. The aggregate intrinsic values for
options granted and options exercised during 2005 were $1.2 million and $0.5
million, respectively.
As a result of adopting Statement 123(R) on January 1, 2006, our income
(loss) from continuing operations before income taxes, income (loss) from
continuing operations and net income (loss) for 2006 was $3.2 million lower than
if we had continued to account for stock-based compensation under APB 25. Basic
and diluted EPS for 2006 was $0.10 lower than if we had continued to account for
stock-based compensation under APB 25.
The following table sets forth stock-based compensation expense related to
stock options and to our ESPP for 2006 and pro forma amounts for 2005 and 2004
(in thousands, except per share amounts):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/06 12/31/05 12/31/04
- -------------------------------------------------------------------------------------------
Stock options $ 3,141 $ 2,950 $ 2,759
ESPP 29 16 17
- -------------------------------------------------------------------------------------------
Total $ 3,170 $ 2,966 $ 2,776
===========================================================================================
Net income (loss)
As reported $ 2,285 $ (735) $ 9,989
Fair value of stock-based compensation
excluded from net income, gross (2,966) (2,776)
----------- -----------
Pro forma $ (3,701) $ 7,213
=========== ===========
Basic and diluted EPS
As reported $ 0.07 $ (0.02) $ 0.30
Pro forma $ (0.11) $ 0.22
- -------------------------------------------------------------------------------------------
As of December 31, 2006, there was $4.0 million of unrecognized
stock-based compensation expense related to non-vested stock options, which will
be recognized over a weighted average period of 1.5 years.
Restricted Stock Unit Activity
At December 31, 2006, we had 333,000 restricted stock units outstanding,
none of which were vested, and all of which were performance-based awards
contingent upon meeting certain performance goals.
The following table sets forth the activity and balances of our restricted
stock units for the years ended December 31, 2006, 2005 and 2004:
Weighted
Average
Number of Grant-Date
Shares Fair Value
- -------------------------------------------------------------------------
Outstanding at December 31, 2003 - $ -
Granted 173,000 14.04
Canceled (9,000) 14.23
- ------------------------------------------------------------
Outstanding at December 31, 2004 164,000 14.03
Granted 182,000 11.85
Canceled (27,000) 12.42
- ------------------------------------------------------------
Outstanding at December 31, 2005 319,000 12.92
Granted 233,500 13.51
Forfeited (112,000) 14.23
Canceled (107,500) 12.42
- ------------------------------------------------------------
Outstanding at December 31, 2006 333,000 $ 12.89
=========================================================================
63
In 2006, we determined that the minimum threshold associated with the 2004
grants was not achieved and those grants were forfeited. Also in 2006, we
determined that it was unlikely that the minimum threshold associated with the
2006 grants would be met. Therefore, in 2006 we reversed $1.9 million of
stock-based compensation expense, which included $0.6 million and $0.7 million
that was recorded in 2005 and 2004, respectively, related to these restricted
stock unit grants. As of December 31, 2006, there was no unrecognized
stock-based compensation expense related to non-vested restricted stock units to
be recognized in future periods.
Other Equity Awards
We issued 53,444 shares of our Class B stock during 2006 related to other
equity awards. Stock-based compensation expense related to other equity awards
was $0.6 million, $0.2 million and $0.3 million for 2006, 2005 and 2004,
respectively.
Employee Stock Purchase Plan
Stock-based compensation expense related to our ESPP was $29 thousand for
2006.
Income Taxes
On November 10, 2005, the FASB issued Staff Position No. 123(R)-3,
Transition Election Related to Accounting for Tax Effects of Share-Based Payment
Awards, or Staff Position 123(R)-3. We have elected to adopt the alternative
transition method provided in Staff Position 123(R)-3 for calculating the tax
effects of stock-based compensation pursuant to Statement 123(R). The
alternative transition method simplifies the calculation of the beginning
balance of the additional paid-in capital pool, or APIC pool, related to the tax
effect of employee stock-based compensation. This method also has subsequent
impact on the APIC pool and Consolidated Statements of Cash Flows relating to
the tax effects of employee stock-based compensation awards that are outstanding
upon adoption of Statement 123(R).
Under Statement 123(R), the income tax effects of share-based payments are
recognized for financial reporting purposes only if such awards would result in
deductions on our income tax returns. The settlement of share-based payments to
date that would have resulted in an excess tax benefit would have increased our
existing NOL carryforward. Under Statement 123(R), no excess tax benefits
resulting from the settlement of a share-based payment can result in a tax
deduction before realization of the tax benefit; i.e., the recognition of excess
tax benefits cannot be recorded until the excess benefit reduces current income
taxes payable. Additionally, as a result of our existing NOL carryforward
position, no tax benefit relating to share-based payments has been recorded for
the year ended December 31, 2006.
(P) PUBLIC EQUITY OFFERING
On April 26, 2004, we completed a public offering of 6,021,340 Class B
shares at $12.69 per share, before underwriting discounts. Included in this
offering were 4,385,392 shares sold by Playboy, 1,485,948 shares sold by Mr.
Hefner, and 150,000 shares sold by Ms. Christie Hefner, our Chairman and Chief
Executive Officer. Playboy's shares included 3,600,000 initial shares, plus an
additional 785,392 shares due to the underwriters' exercise of their
over-allotment option. The shares sold by Mr. Hefner consisted of all of the
shares of Class B stock he received upon conversion, at the time of the
offering, of all of the outstanding shares of Playboy Preferred Stock. Mr.
Hefner and Ms. Hefner paid for expenses related to this transaction based on the
number of shares each sold proportionate to the total number of shares sold in
the offering.
Net proceeds to us from the sale of our shares were approximately $51.9
million. On June 11, 2004, we used $39.8 million of the net proceeds of this
sale to redeem $35.0 million in aggregate principal amount of the outstanding
senior secured notes, which included a $3.9 million bond redemption premium and
accrued and unpaid interest of $0.9 million. We used approximately $0.7 million
of the net proceeds to pay accrued and unpaid dividends on the Playboy Preferred
Stock up to the time of conversion. The balance of the net proceeds was used for
general corporate purposes on an ongoing basis.
64
(Q) CONSOLIDATED STATEMENTS OF CASH FLOWS
The following table sets forth cash paid for interest and income taxes (in
thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/06 12/31/05 12/31/04
- --------------------------------------------------------------------------------
Interest $ 5,308 $ 8,615 $ 21,326
Income taxes $ 1,976 $ 2,416 $ 2,544
- --------------------------------------------------------------------------------
In 2005, we used the net proceeds from the convertible notes to, among
other things, complete a tender offer and consent solicitation for, and to
purchase and retire all of the $80.0 million outstanding principal amount of
Holdings' senior secured notes. See Note (L), Financing Obligations.
(R) SEGMENT INFORMATION
Our businesses are currently classified into the following three
reportable segments: Entertainment, Publishing and Licensing. Entertainment
Group operations include the production and marketing of television programming
for our domestic and international TV networks, web-based entertainment
experiences, wireless content distribution, e-commerce, worldwide DVD products
and satellite radio under the Playboy, Spice and other brand names. Publishing
Group operations include the publication of Playboy magazine, as well as other
domestic publishing businesses, including special editions, books and calendars
and the licensing of international editions of Playboy magazine. Licensing Group
operations include the licensing of consumer products carrying one or more of
our trademarks and/or images, Playboy-branded retail stores, location-based
entertainment and certain revenue-generating 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.
The following table sets forth financial information by reportable segment
(in thousands): (1)
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/06 12/31/05 12/31/04
- --------------------------------------------------------------------------------
Net revenues (2)
Entertainment $ 201,068 $ 203,994 $ 189,311
Publishing 97,078 106,513 119,816
Licensing 32,996 27,646 20,249
- --------------------------------------------------------------------------------
Total $ 331,142 $ 338,153 $ 329,376
================================================================================
Income before income taxes
Entertainment $ 23,299 $ 41,130 $ 32,943
Publishing (5,374) (6,471) 6,233
Licensing 18,927 15,969 10,678
Corporate Administration and Promotion (25,768) (19,632) (18,207)
Restructuring expenses (1,998) (149) (744)
Gains on disposal 29 14 2
Nonoperating expense (4,334) (27,598) (17,071)
- --------------------------------------------------------------------------------
Total $ 4,781 $ 3,263 $ 13,834
================================================================================
65
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/06 12/31/05 12/31/04
- --------------------------------------------------------------------------------
Depreciation and amortization (3),(4)
Entertainment $ 41,056 $ 41,603 $ 45,847
Publishing 190 159 231
Licensing 28 13 28
Corporate Administration and Promotion 944 765 994
- --------------------------------------------------------------------------------
Total $ 42,218 $ 42,540 $ 47,100
================================================================================
Identifiable assets (3),(5)
Entertainment $ 288,540 $ 274,473 $ 262,498
Publishing 38,146 38,833 45,724
Licensing 9,386 7,539 5,331
Corporate Administration and Promotion 99,711 108,124 102,777
- --------------------------------------------------------------------------------
Total $ 435,783 $ 428,969 $ 416,330
================================================================================
(1) Certain amounts reported for the prior periods have been reclassified to
conform to the current year's presentation.
(2) Net revenues include revenues attributable to foreign countries of
approximately $96,238, $89,731 and $78,337 in 2006, 2005 and 2004,
respectively. Revenues from the U.K. were $39,330, $34,451 and $29,657 in
2006, 2005 and 2004, respectively. No other individual foreign country's
revenue was material. Revenues are generally attributed to countries based
on the location of customers, except licensing royalties for which
revenues are attributed based upon the location of licensees.
(3) The majority of our property and equipment and capital expenditures are
reflected in Corporate Administration and Promotion; depreciation,
however, is partially allocated to the reportable segments.
(4) Amounts include depreciation of property and equipment, amortization of
intangible assets and amortization of investments in entertainment
programming.
(5) Our long-lived assets located in foreign countries were not material.
(S) RELATED PARTY TRANSACTIONS
In 1971, we purchased the Playboy Mansion in Los Angeles, California,
where Mr. Hefner lives. The Playboy Mansion is used for various corporate
activities, and serves as a valuable location for television production,
magazine photography and for online, advertising and sales events. It also
enhances our image, as we host many charitable and civic functions. 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 non-business 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, 2006 and 2005, at a
net book value, including all improvements and after accumulated depreciation,
of $1.6 million and $1.5 million, respectively. The operating expenses of the
Playboy Mansion, including depreciation and taxes, were $2.1 million, $3.1
million and $3.0 million for 2006, 2005 and 2004, respectively, net of rent
received from Mr. Hefner. We estimated the sum of the rent and other benefits
payable for 2006 to be $0.9 million, and Mr. Hefner paid that amount during
2006. The actual rent and other benefits paid for 2005 and 2004 were $1.1
million and $1.3 million, respectively.
On April 26, 2004, Mr. Hefner converted his $16.7 million of Playboy
Preferred Stock into 1,485,948 shares of our Class B stock and sold these shares
as part of our public equity offering on that date. See Note (P), Public Equity
Offering.
In 2005, we repurchased the remaining outstanding Playboy.com Series A
Preferred Stock that was held by Mr. Hefner and an unrelated third party. These
shares were part of $15.3 million issued by our subsidiary Playboy.com in 2001,
of which $5.0 million was purchased by Mr. Hefner. See Note (L), Financing
Obligations.
66
(T) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth a summary of the unaudited quarterly
results of operations for 2006 and 2005 (in thousands, except share amounts):
Quarters Ended
-----------------------------------------
2006 Mar. 31 June 30 Sept. 30 Dec. 31
- ----------------------------------------------------------------------------------------------
Net revenues $ 82,120 $ 80,477 $ 82,297 $ 86,248
Operating income (loss) 3,531 (1,224) 3,716 3,092
Net income (loss) 789 (3,307) 1,137 3,666
Basic and diluted earnings (loss) per common share 0.02 (0.10) 0.03 0.11
Common stock price
Class A high 13.40 13.03 9.85 12.29
Class A low 12.20 8.30 8.71 9.35
Class B high 15.50 14.50 10.20 12.65
Class B low $ 12.85 $ 8.90 $ 9.02 $ 9.16
- ----------------------------------------------------------------------------------------------
Quarters Ended
-----------------------------------------
2005 Mar. 31 June 30 Sept. 30 Dec. 31
- ----------------------------------------------------------------------------------------------
Net revenues $ 83,451 $ 82,871 $ 80,884 $ 90,947
Operating income 10,908 7,309 5,349 7,295
Net income (loss) (13,119) 4,640 3,178 4,566
Basic and diluted earnings (loss) per common share (0.39) 0.14 0.10 0.14
Common stock price
Class A high 13.55 12.20 12.80 13.49
Class A low 10.51 10.85 11.15 11.30
Class B high 14.85 13.37 14.41 15.88
Class B low $ 11.33 $ 11.80 $ 12.57 $ 13.14
- ----------------------------------------------------------------------------------------------
Quarterly and year-to-date computations of per share amounts are made
independently; therefore, the sum of per share amounts for the quarters may not
equal per share amounts for the year.
Operating loss for the quarter ended June 30, 2006, included $1.9 million
of restructuring expense. See Note (C), Restructuring Expenses.
Net loss for the quarter ended March 31, 2005, included $19.3 million of
debt extinguishment expense related to the redemption of $80.0 million aggregate
principal amount of Holdings senior secured notes. See Note (L), Financing
Obligations.
67
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Playboy Enterprises, Inc.
We have audited the accompanying Consolidated Balance Sheets of Playboy
Enterprises, Inc. and subsidiaries, or the Company, as of December 31, 2006 and
2005, and the related Consolidated Statements of Operations, Consolidated
Statements of Shareholders' Equity and Consolidated Statements of Cash Flows for
each of the three years in the period ended December 31, 2006. Our audits also
included the financial statement schedule listed in the index of Part IV, Item
15. These 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 conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company at
December 31, 2006 and 2005, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
2006, in conformity with U.S. generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed in Note (A), Note (N) and Note (P) to the Notes to
Consolidated Financial Statements, the Company adopted Statement of Financial
Accounting Standards No. 123 (revised), Share-Based Payment effective January 1,
2006, and certain provisions of Statement of Financial Accounting Standards No.
158, Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans as of December 31, 2006.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2006,
based on the criteria established in Internal Control-Integrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission,
and our report dated March 9, 2007, expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
Chicago, Illinois
March 9, 2007
68
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our
Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended, or the Exchange Act) as of December 31, 2006. Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that, as
of December 31, 2006, our disclosure controls and procedures are effective.
(b) Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rules 13a-15(f) and 15d-15(f). Our internal control system was designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of the consolidated financial statements for external
purposes in accordance with generally accepted accounting principles.
Under the supervision of and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of the effectiveness of our internal control over financial
reporting as of December 31, 2006. In making this evaluation, management used
the criteria set forth in Internal Control-Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our
evaluation, our management believes that our internal control over financial
reporting is effective as of December 31, 2006.
Management's assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2006, has been audited by Ernst & Young
LLP, an independent registered public accounting firm, as stated in their
report, which is included herein.
69
(c) Report of Independent Registered Public Accounting Firm on Internal
Control Over Financial Reporting
To the Board of Directors and Shareholders of Playboy Enterprises, Inc.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Playboy
Enterprises, Inc., or the Company, maintained effective internal control over
financial reporting as of December 31, 2006, based on the criteria established
in Internal Control-Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission, or COSO. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States), or PCAOB. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2006, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2006, based on the
COSO criteria.
We also have audited, in accordance with the standards of the PCAOB, the
Consolidated Balance Sheets of the Company as of December 31, 2006 and 2005, and
the related Consolidated Statements of Operations, Consolidated Statements of
Shareholders' Equity and Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 2006, and our report dated March 9,
2007, expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
Chicago, Illinois
March 9, 2007
70
(d) Change in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial
reporting during the fiscal quarter ended December 31, 2006, that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Item 9B. Other Information
None.
71
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 is included in our Proxy Statement (to
be filed) relating to the Annual Meeting of Stockholders to be held in May 2007,
which will be filed within 120 days after the close of our fiscal year ended
December 31, 2006, and is incorporated herein by reference, pursuant to General
Instruction G(3).
We have adopted a code of ethics that applies to our Chief Executive
Officer, Chief Financial Officer and Corporate Controller. That code is part of
our Code of Business Conduct, which is available free of charge through our
website, www.playboyenterprises.com, and is available in print to any
shareholder who sends a request for a paper copy to: Investor Relations, Playboy
Enterprises, Inc., 680 North Lake Shore Drive, Chicago, Illinois 60611. We
intend to include on our website any amendment to, or waiver from, a provision
of the Code of Business Conduct that applies to our Chief Executive Officer,
Chief Financial Officer and Corporate Controller that relates to any element of
the code of ethics definition enumerated in Item 406(b) of Regulation S-K.
Item 11. Executive Compensation
The information required by Item 11 is included in our Proxy Statement (to
be filed) relating to the Annual Meeting of Stockholders to be held in May 2007,
which will be filed within 120 days after the close of our fiscal year ended
December 31, 2006, and is incorporated herein by reference (excluding the Report
of the Compensation Committee and the Performance Graph), pursuant to General
Instruction G(3).
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth information regarding outstanding options
and shares reserved for future issuance as of December 31, 2006:
Class B Common Stock
----------------------------------------------
Weighted
Average Number
Number of Exercise Price of Shares
Options of Options Remaining for
Outstanding Outstanding Future Issuance
- -------------------------------------------------------------------------------------------
Total equity compensation plans approved by
security holders 3,682,416 $15.65 3,088,954
===========================================================================================
The other information required by Item 12 is included in our Proxy
Statement (to be filed) relating to the Annual Meeting of Stockholders to be
held in May 2007, which will be filed within 120 days after the close of our
fiscal year ended December 31, 2006, and is incorporated herein by reference,
pursuant to General Instruction G(3).
Item 13. Certain Relationships and Related Transactions, and Director
Independence
The information required by Item 13 is included in our Proxy Statement (to
be filed) relating to the Annual Meeting of Stockholders to be held in May 2007,
which will be filed within 120 days after the close of our fiscal year ended
December 31, 2006, and is incorporated herein by reference, pursuant to General
Instruction G(3).
Item 14. Principal Accounting Fees and Services
The information required by Item 14 is included in our Proxy Statement (to
be filed) relating to the Annual Meeting of Stockholders to be held in May 2007,
which will be filed within 120 days after the close of our fiscal year ended
December 31, 2006, and is incorporated herein by reference, pursuant to General
Instruction G(3).
72
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
(1) Financial Statements
Our Financial Statements and Supplementary Data
following are as set forth under Part II.
Item 8. of this Annual Report on Form 10-K: Page
----
Consolidated Statements of Operations - Fiscal
Years Ended December 31, 2006, 2005 and 2004 43
Consolidated Balance Sheets - December 31,
2006 and 2005 44
Consolidated Statements of Shareholders'
Equity - Fiscal Years Ended December 31, 2006,
2005 and 2004 45
Consolidated Statements of Cash Flows - Fiscal
Years Ended December 31, 2006, 2005 and 2004 46
Notes to Consolidated Financial Statements 47
Report of Independent Registered Public
Accounting Firm 68
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts 74
All other schedules have been omitted because they are not
required, are not applicable or the required information is
shown in the Consolidated Financial Statements or notes
thereto.
(3) Exhibits
See Exhibit Index, which appears at the end of this document
and which is incorporated herein by reference.
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, 2006:
Allowance for doubtful accounts $ 3,883 $ 592 $ 144 (1) $ 931 (2) $ 3,688
=========== =========== =========== =========== ===========
Allowance for returns $ 27,777 $ 242 $ 41,322 (3) $ 44,689 (4) $ 24,652
=========== =========== =========== =========== ===========
Deferred tax asset valuation allowance $ 75,295 $ 1,327 (6) $ 558 (5) $ -- $ 77,180
=========== =========== =========== =========== ===========
Fiscal Year Ended December 31, 2005:
Allowance for doubtful accounts $ 3,897 $ 890 $ 706 (1) $ 1,610 (2) $ 3,883
=========== =========== =========== =========== ===========
Allowance for returns $ 28,284 $ 260 $ 44,960 (3) $ 45,727 (4) $ 27,777
=========== =========== =========== =========== ===========
Deferred tax asset valuation allowance $ 72,663 $ 2,632 (6) $ -- $ -- $ 75,295
=========== =========== =========== =========== ===========
Fiscal Year Ended December 31, 2004:
Allowance for doubtful accounts $ 4,364 $ 239 $ 1,133 (1) $ 1,839 (2) $ 3,897
=========== =========== =========== =========== ===========
Allowance for returns $ 27,137 $ 203 $ 43,766 (3) $ 42,822 (4) $ 28,284
=========== =========== =========== =========== ===========
Deferred tax asset valuation allowance $ 84,454 $ -- $ (2,628)(7) $ 9,163 (8) $ 72,663
=========== =========== =========== =========== ===========
Notes:
(1) Primarily represents provisions for unpaid subscriptions charged to net
revenues.
(2) Primarily represents uncollectible accounts written off less recoveries.
(3) Represents provisions charged to net revenues for estimated returns of
Playboy magazine, other domestic publishing products and domestic DVD
products.
(4) Represents settlements on provisions previously recorded.
(5) Represents noncash federal tax adjustment related to the adoption of
Statement of Financial Accounting Standards No. 158, Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans - an amendment
of FASB Statements No. 87, 88, 106 and 132(R).
(6) Represents noncash federal income tax expense related to increasing the
valuation allowance.
(7) Represents adjustments to net operating loss and tax credit carryovers.
(8) Represents noncash federal income tax benefit related to reducing the
valuation allowance.
74
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 Certificate of Incorporation of Playboy Enterprises, Inc. (incorporated
by reference to Exhibit 3 from our quarterly report on Form 10-Q dated
March 31, 2003)
3.2 Amended and Restated Bylaws of Playboy Enterprises, Inc. (incorporated
by reference to Exhibit 3.4 from the Current Report on Form 8-K dated
March 15, 1999)
3.3 Certificate of Amendment of the Amended and Restated Certificate of
Incorporation of Playboy Enterprises, Inc. (incorporated by reference
to Exhibit 3.2 from our quarterly report on Form 10-Q dated June 30,
2004, or the June 30, 2004 Form 10-Q)
4.1 Indenture, dated March 15, 2005, between Playboy Enterprises, Inc. and
LaSalle Bank National Association, as Trustee (incorporated by
reference to Exhibit 4.1 from the Current Report on Form 8-K dated
March 9, 2005, or the March 9, 2005 Form 8-K)
4.2 Form of 3.00% Convertible Senior Subordinated Notes due 2025 (included
in Exhibit 4.1)
4.3 Registration Rights Agreement, dated March 15, 2005, among Playboy
Enterprises, Inc. and the Initial Purchasers named therein
(incorporated by reference to Exhibit 4.2 from the March 9, 2005 Form
8-K)
10.1 Playboy Magazine Printing and Binding Agreement
#a October 22, 1997 Agreement between Playboy Enterprises, Inc. and
Quad/Graphics, Inc. (incorporated by reference to Exhibit 10.4
from 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)
c Second Amendment to October 22, 1997 Agreement dated as of March
2, 2004 (incorporated by reference to Exhibit 10.1 from our
annual report on Form 10-K for the year ended December 31, 2003,
or the 2003 Form 10-K)
10.2 Playboy Magazine Distribution Agreement
a July 2, 1999 Agreement between Warner Publisher Services, Inc.
and Playboy Enterprises, Inc. (incorporated by reference to
Exhibit 10.4 from our quarterly report on Form 10-Q for the
quarter ended September 30, 1999)
#b May 4, 2004 Agreement between Warner Publisher Services, Inc. and
Playboy Enterprises, Inc. (incorporated by reference to Exhibit
10.1 from the June 30, 2004 Form 10-Q)
c Amendment to May 4, 2004 Agreement dated as of December 12, 2005
d Amendment to December 12, 2005 Agreement dated as of January 13,
2006
(items (c) and (d) incorporated by reference to Exhibits 10.2(c) and
10.2(d), respectively, from our annual report on Form 10-K for the year
ended December 31, 2005, or the 2005 Form 10-K)
75
10.3 Playboy Magazine Subscription Fulfillment Agreement
a July 1, 1987 Agreement between Communications 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)
#g Seventh Amendment (related to Subscription Fulfillment Agreement,
dated July 1, 1987, as amended), dated March 7, 2006, by and
between Communications Data Services, Inc. and Playboy
Enterprises International, Inc. (incorporated by reference to
Exhibit 10.9 from our quarterly report on Form 10-Q for the
quarter ended March 31, 2006, or the March 31, 2006 Form 10-Q)
10.4 Transponder Service Agreements
a SKYNET Transponder Service Agreement dated March 1, 2001 between
Playboy Entertainment Group, Inc. and Loral Skynet (incorporated
by reference to Exhibit 10.1 from 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, Inc., 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 (incorporated by reference to Exhibit 10.4(e) from our
annual report on Form 10-K for the year ended December 31, 2002,
or the 2002 Form 10-K)
f First Amendment dated as of May 7, 2004 between Playboy and Loral
Skynet extending its current term expiration of January 31, 2010
to January 31, 2013
g Intelsat LLC acquired assets of Loral Skynet effective March 17,
2004
(items (f) and (g) incorporated by reference to Exhibits 10.4(f) and
(g), respectively, from our annual report on Form 10-K for the year
ended December 31, 2004, or the 2004 Form 10-K)
h Transfer of Service Agreement (related to Contract Number
T79903021), dated as of October 25, 2004, among Spice Hot
Entertainment, Inc., Andrita Studios, Inc., and Loral Skynet
#i Transfer of Service Agreement (related to Contract Number
T70102100), dated February 4, 2004, among Playboy Entertainment
Group, Inc., Andrita Studios, Inc. and Loral Skynet
j Amendment No. 1 to Contract Number T70102100 (IA7-C15) dated as
of May 7, 2004, between Intelsat USA Sales Corp. and Andrita
Studios, Inc.
#k Agreement Concerning Skynet Space Segment Service (Contract
Number T70309257), dated as of November 20, 2003, between Andrita
Studios, Inc. and Loral Skynet
#l Amendment No. 1 to Contract Number T70309257 (IA7-C9) dated as of
May 7, 2004, between Intelsat USA Sales Corp. and Andrita
Studios, Inc.
76
#m Digital Channel Platform Agreement (Contract Number GSS0210100)
dated as of February 4, 2003, between Loral Skynet and Playboy
Entertainment Group, Inc.
#n Amendment No. 1 to Contract Number GSS0210100 (Digital Channel
Platform) dated as of May 7, 2004, between Intelsat USA Sales
Corp. and Playboy Entertainment Group, Inc.
(items (h) through (n) incorporated by reference to Exhibits 10.1
through 10.4.2, respectively, from the March 31, 2006 Form 10-Q)
#10.5 Omnibus Amendment to Agreements between Playboy Entertainment Group,
Inc. Andrita Studios, Inc. and Intelsat USA Sales Corp., dated as of
December 22, 2005 (incorporated by reference to Exhibit 10.5 from the
March 31, 2006 Form 10-Q)
10.6 Playboy TV UK Limited and UK/BENELUX Limited
#a Contract for a Combined Compressed Uplink and Eurobird Space
Segment Service, dated as of May 12, 2003, between British
Telecommunications plc and Playboy TV UK Limited
b Contract Amendment Agreement (Number 1) dated as of May 12, 2003,
between British Telecommunications plc and Playboy TV UK Limited
#c Contract for a Combined Compressed Uplink and Eurobid Space
Segment Service, dated as of May 12, 2004, between British
Telecommunications plc and Playboy TV UK/BENELUX Limited
#d Contract Amendment Agreement (Number 1) dated as of November 30,
2004, between British Telecommunications plc and Playboy TV
UK/BENELUX Limited
(items (a) through (d) incorporated by reference to Exhibits 10.6.1
through 10.7.2, respectively, from the March 31, 2006 Form 10-Q)
#10.7 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, or the December 23, 2002 Form 8-K, and filed with the Securities
Exchange Commission, or SEC, on February 12, 2003)
@c Third Amended and Restated Operating Agreement for Playboy TV -
Latin America, LLC, effective as of November 10, 2006, by and
between Playboy Entertainment Group, Inc. and Lifford
International Co. Ltd. (BVI)
@d Amended and Restated Program Supply and Trademark License
Agreement, dated as of November 10, 2006, between Playboy
Entertainment Group, Inc. and Playboy TV - Latin America, LLC.
#10.8 Amended and Restated Full-Time Satellite and Terrestrial Services
Agreement, dated as of September 30, 2003, between T-Systems Canada,
Inc. and STV International B.V. (incorporated by reference to Exhibit
10.8 from the March 31, 2006 Form 10-Q)
#10.9 Agreement dated as of January 1, 2006, between Time/Warner Retail Sales
& Marketing Inc. (f/k/a Warner Publisher Services, Inc.) and Playboy
Enterprises, Inc. (incorporated by reference to Exhibit 10.10 from the
March 31, 2006 Form 10-Q)
#10.10 Satellite Capacity Lease, dated as of August 21, 2006, by and among
Playboy Entertainment Group, Inc., Spice Hot Entertainment, Inc. and
Transponder Encryption Services Corporation (incorporated by reference
to Exhibit 10.3 from our quarterly report on Form 10-Q for the quarter
ended September 30, 2006, or the September 30, 2006 Form 10-Q)
10.11 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.,
77
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
December 23, 2002 Form 8-K, and filed with the SEC on January 7, 2003)
#10.12 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 our quarterly report on
Form 10-Q dated June 30, 2002, or the June 30, 2002 Form 10-Q)
#10.13 Affiliation Agreement dated July 8, 2004 between Playboy Entertainment
Group, Inc., Spice Entertainment, Inc., Spice Hot Entertainment, Inc.,
and Time Warner Cable Inc. (incorporated by reference to Exhibit 10.1
from our quarterly report on Form 10-Q dated September 30, 2004, or the
September 30, 2004 Form 10-Q)
10.14 Affiliation Agreement between Spice, Inc., and Satellite Services, Inc.
a Affiliation Agreement, dated November 1, 1992, between Spice,
Inc., and Satellite Services, Inc.
b Amendment No. 1, dated September 29, 1994, to Affiliation
Agreement, dated November 1, 1992, between Spice, Inc., and
Satellite Services, Inc.
c Letter Agreement, dated July 18, 1997, amending the Affiliation
Agreement, dated November 1, 1992, between Spice, Inc., and
Satellite Services, Inc.
d Letter Agreement, dated December 18, 1997, amending the
Affiliation Agreement, dated November 1, 1992, between Spice,
Inc., and Satellite Services, Inc.
e Amendment, effective September 26, 2005, to Affiliation
Agreement, dated November 1, 1992, between Spice, Inc., and
Satellite Services, Inc.
(items (a) through (e) incorporated by reference to Exhibits 10.1.1
through 10.1.5, respectively, from our quarterly report on Form 10-Q
dated September 30, 2005, or the September 30, 2005 Form 10-Q)
10.15 Affiliation Agreement between Playboy Entertainment Group, Inc., and
Satellite Services, Inc.
a Affiliation Agreement, dated February 10, 1993, between Playboy
Entertainment Group, Inc., and Satellite Services, Inc.
b Amendment, effective September 26, 2005, to Affiliation
Agreement, dated February 10, 1993, between Playboy Entertainment
Group, Inc., and Satellite Services, Inc.
(items (a) and (b) incorporated by reference to Exhibits 10.2.1 and
10.2.2, respectively, from the September 30, 2005 Form 10-Q)
10.16 Master Lease Agreement dated December 22, 2003 between The Walden Asset
Group, LLC and Playboy Entertainment Group, Inc.
a Master Lease Agreement
b Equipment Schedule No. 1
c Acceptance Certificate for Equipment Schedule No. 1
(items (a) through (c) incorporated by reference to Exhibit 10.8 from
the 2003 Form 10-K)
10.17 Acknowledgement of Assignment dated December 22, 2003 among Playboy
Entertainment Group, Inc., The Walden Asset Group, LLC and General
Electric Capital Corporation (incorporated by reference to Exhibit 10.9
from the 2003 Form 10-K)
#10.18 Corporate Guaranty dated December 22, 2003 executed by General Electric
Capital Corporation regarding the Master Lease Agreement dated December
22, 2003 (incorporated by reference to Exhibit 10.10 from the 2003 Form
10-K)
#10.19 Fulfillment and Customer Service Services Agreement dated January 2,
2004 between Infinity Resources, Inc. and Playboy.com, Inc.
(incorporated by reference to Exhibit 10.2 from the June 30, 2004 Form
10-Q)
78
@#10.20 Amended and Restated Agreement, dated September 16, 2006, by and
between Playboy Entertainment Group, Inc. and Spice Hot Entertainment,
Inc., and DirecTV, Inc.
10.21 Amended and Restated Credit Agreement, effective April 1, 2005, or the
Credit Agreement, among PEI Holdings, Inc., as borrower, and Bank of
America, N.A., as Agent and the other lenders from time to time party
thereto
a Credit Agreement (incorporated by reference to Exhibit 10.1 to
our quarterly report on Form 10-Q dated March 31, 2005)
b First Amendment to the Credit Agreement dated March 10, 2006
among PEI Holding, Inc., as borrower, Bank of America, N.A., as
Agent, and the other Lenders Party thereto (incorporated by
reference to Exhibit 10.15(b) from the 2005 Form 10-K)
c Master Corporate Guaranty, dated March 11, 2003
d Security Agreement, dated as of March 11, 2003, between PEI
Holdings, Inc. and Bank of America, N.A., as Agent under the
Credit Agreement
e 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
f 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
g 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
h 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
i 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
j 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
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
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
m 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
n 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
o 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
p 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
q 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
79
r 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
s 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
t 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
u 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
v 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
w 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
(items (c) through (w) incorporated by reference to Exhibits 10.9(b)
through (u), respectively, from the 2002 Form 10-K)
x Pledge Amendment, dated July 22, 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 (incorporated by reference to Exhibit
10.9(i)-1 from our May 19, 2003 Form S-4)
y First Amendment, dated September 15, 2004, to Deed of Trust With
Assignment of Rents, Security Agreement and Fixture Filing, dated
as of March 11, 2003, made and executed between Playboy
Enterprises International, Inc. and Bank of America, N.A., as
Agent (incorporated by reference to Exhibit 10.4 from the
September 30, 2004 Form 10-Q)
z Second Amendment, dated as of April 27, 2006, to the Credit
Agreement, or the Second Amendment
aa Reaffirmation of Guaranty, dated as of April 27, 2006, to the
Credit Agreement, by each of the Guarantors, pursuant to the
Second Amendment
bb Third Amendment, dated as of May 15, 2006, to the Credit
Agreement
cc Pledge Amendment, dated as of May 15, 2006, from Playboy
Enterprises International, Inc.
dd Pledge Amendment, dated as of May 15, 2006, from Playboy
Entertainment Group, Inc.
ee Joinder to the Master Corporate Guaranty, dated as of May 15,
2006, by Playboy.com, Inc., Playboy.com Internet Gaming, Inc.,
Playboy.com Racing, Inc., SpiceTV.com, Inc., and CJI Holdings,
Inc., and accepted by Bank of America, N.A., as agent for Lenders
ff Joinder to Security Agreement, dated as of May 15, 2006, by
Playboy.com, Inc., Playboy.com Internet Gaming, Inc., Playboy.com
Racing, Inc., SpiceTV.com, Inc. and CJI Holdings, Inc., and
accepted by Bank of America, N.A., as agent for the Lenders
gg Pledge Agreement, dated as of May 15, 2006, between Playboy.com,
Inc. and Bank of America, N.A., as agent for the Lenders
hh Pledge Agreement, dated as of May 15, 2006, between Playboy.com
Internet Gaming Inc. and Bank of America, N.A., as agent for the
Lenders
ii Trademark Security Agreement, dated as of May 15, 2006, by
Playboy.com, Inc. in favor of Bank of America, N.A., as agent for
the Lenders
jj Copyright Security Agreement, dated as of May 15, 2006, by
Playboy.com, Inc. in favor of Bank of America, N.A., as agent for
the Lenders
80
(items (z) through (jj) incorporated by reference to Exhibits 10.1.1
through 10.2.9, respectively, from our quarterly report on Form 10-Q
for the quarter ended June 30, 2006, or the June 30, 2006 Form 10-Q)
kk Fourth Amendment, dated as of July 21, 2006, to the Credit
Agreement, or the Fourth Amendment
ll Reaffirmation of Guaranty, dated as of July 21, 2006, by each of
the Guarantors, pursuant to the Fourth Amendment
mm Fifth Amendment, dated as of September 28, 2006, to the Credit
Agreement, or the Fifth Amendment
nn Reaffirmation of Guaranty, dated as of September 28, 2006, by
each of the Guarantors, pursuant to the Fifth Amendment
oo Joinder and Amendment No. 1 to Master Corporate Guaranty, dated
as of September 28, 2006, by Playboy Enterprises, Inc., Playboy
Enterprises International, Inc., Spice Hot Entertainment, Inc.
and Spice Platinum Entertainment, Inc., and accepted by Bank of
America, N.A., as agent for the Lenders.
(items (kk) through (oo) incorporated by reference to Exhibits 10.1.1
through 10.2.3, respectively, from the September 30, 2006 Form 10-Q)
10.22 Exchange Agreement, dated as of March 11, 2003, among Hugh M. Hefner,
Playboy.com, Inc., PEI Holdings, Inc. and Playboy Enterprises, Inc.
(incorporated by reference to Exhibit 4.2 from the 2002 Form 10-K)
10.23 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 of America, N.A., as Agent for various lenders (see Exhibit
10.21(v))
(item (d) incorporated by reference to Exhibit 10.9(t) from the 2002
Form 10-K)
10.24 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 our quarterly
report on Form 10-Q for the quarter ended September 30, 2002, or
the September 30, 2002 Form 10-Q)
c Second Amendment to April 23, 2002 Lease dated September 23, 2004
(incorporated by reference to Exhibit 10.2 from the September 30,
2004 Form 10-Q)
10.25 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)
81
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)
g Sixth Amendment to April 7, 1988 Lease effective May 1, 2006
(incorporated by reference to Exhibit 10.9.1 from the September
30, 2006 Form 10-Q)
10.26 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 Second Amendment to August 11, 1992 Lease dated June 28, 2004
(incorporated by reference to Exhibit 10.4 from the June 30, 2004
Form 10-Q)
10.27 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
(items (d) through (g) incorporated by reference to Exhibits 10.17(d)
through (g), respectively, from the 2002 Form 10-K)
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)
i Seventh Amendment to September 20, 2001 Lease dated July 23, 2003
(incorporated by reference to Exhibit 10.1 from our quarterly
report on Form 10-Q dated September 30, 2003)
10.28 Rocklin Studio Facility Lease Documents
a Agreement of Lease dated September 21, 2005 between Joseph H.
Lackey and ICS Entertainment, Inc. (incorporated by reference to
Exhibit 10.22(a) from the 2005 Form 10-K)
*10.29 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)
d Amended and Restated Playboy Enterprises, Inc. Board of
Directors' Deferred Compensation Plan, effective January 1, 2005
e Amended and Restated Playboy Enterprises, Inc. Deferred
Compensation Plan, effective January 1, 2005
f Fourth Amendment, dated as of August 30, 2006, to the Playboy
Enterprises, Inc. Employee Investment Savings Plan (as amended
and restated January 1, 1997)
(items (d) through (f) incorporated by reference to Exhibits 10.4
through 10.6, respectively, from the September 30, 2006 Form 10-Q)
82
*10.30 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)
c Playboy Enterprises, Inc. 1991 NonQualified Stock Option Plan for
NonEmployee Directors, as amended (incorporated by reference to
Exhibit 10.23(c) from the 2004 Form 10-K)
*10.31 1995 Stock Incentive Plan
a Second Amended and Restated Playboy Enterprises, Inc. 1995 Stock
Incentive Plan (incorporated by reference to Exhibit 10.25(a)
from the 2003 Form 10-K)
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)
f Amendment to the Second Amended and Restated Playboy Enterprises,
Inc. 1995 Stock Incentive Plan (incorporated by reference to
Exhibit 10.24(f) from the 2004 Form 10-K)
g Amendment to the Second Amended and Restated Playboy Enterprises,
Inc. 1995 Stock Incentive Plan, effective August 30, 2006
(incorporated by reference to Exhibit 10.7 from the September 30,
2006 Form 10-Q)
@h Amendment to the Second Amended and Restated Playboy Enterprises,
Inc. 1995 Stock Incentive Plan, effective November 29, 2006
*10.32 1997 Directors' Plan
a Amended and Restated 1997 Equity Plan for NonEmployee Directors
of Playboy Enterprises, Inc. (incorporated by reference to
Exhibit 10.6(a) from the 2003 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)
c Amendment to the Amended and Restated 1997 Equity Plan for
Non-Employee Directors of Playboy Enterprises, Inc. (incorporated
by reference to Exhibit 10.25(c) from the 2004 Form 10-K)
@d Amendment to the Amended and Restated 1997 Equity Plan for
Non-Employee Directors of Playboy Enterprises, Inc., effective
November 29, 2006
*10.33 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 June 27, 1997)
*10.34 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 our June 30, 1999 Form 10-Q)
c Playboy Enterprises, Inc. Employee Stock Purchase Plan, as
amended and restated through April 25, 2006 (incorporated by
reference to Exhibit 10.3 from the June 30, 2006 Form 10-Q)
@d Amendment to the Playboy Enterprises, Inc. Employee Stock
Purchase Plan, effective November 29, 2006
83
*10.35 Selected Employment, Termination and Other Agreements
a Form of Severance Agreement by and between Playboy Enterprises,
Inc. and each of Linda Havard, Christie Hefner, Martha Lindeman,
Richard Rosenzweig, Howard Shapiro and Alex Vaickus (incorporated
by reference to Exhibit 10.23(a) from the 2001 Form 10-K)
b Memorandum dated May 21, 2002 regarding severance agreement for
Linda Havard (incorporated by reference to Exhibit 10.6 from the
June 30, 2002 Form 10-Q)
c Employment Agreement dated as of September 15, 2006, between
Playboy Enterprises, Inc. and Robert Meyers
d Severance Agreement dated as of September 18, 2006, between
Playboy Enterprises, Inc. and Robert Meyers
(items (c) and (d) are incorporated by reference to Exhibits 10.8.1 and
10.8.2, respectively, from the September 30, 2006 Form 10-Q)
@21 Subsidiaries
@23 Consent of Ernst & Young LLP
@31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
@31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
@32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
- ----------
* Indicates management compensation plan
# Certain information omitted pursuant to a request for confidential
treatment filed separately with and granted by the SEC
@ Filed herewith
84
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 16, 2007 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 16, 2007
- ----------------------------------------------
Christie Hefner
Chairman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer)
/s/Richard S. Rosenzweig March 16, 2007
- ----------------------------------------------
Richard S. Rosenzweig
Executive Vice President and Director
/s/Dennis S. Bookshester March 16, 2007
- ----------------------------------------------
Dennis S. Bookshester
Director
/s/David I. Chemerow March 16, 2007
- ----------------------------------------------
David I. Chemerow
Director
/s/Donald G. Drapkin March 16, 2007
- ----------------------------------------------
Donald G. Drapkin
Director
/s/Charles Hirschhorn March 16, 2007
- ----------------------------------------------
Charles Hirschhorn
Director
/s/Jerome H. Kern March 16, 2007
- ----------------------------------------------
Jerome H. Kern
Director
/s/Russell I. Pillar March 16, 2007
- ----------------------------------------------
Russell I. Pillar
Director
/s/Sol Rosenthal March 16, 2007
- ----------------------------------------------
Sol Rosenthal
Director
/s/Linda Havard March 16, 2007
- ---------------------------------------------
Linda G. Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
85