UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
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
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is 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|
At April 30, 2007, there were 4,864,102 shares of Class A common stock and
28,378,639 shares of Class B common stock outstanding.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements,"
including statements in Part I. Item 2. "Management's Discussion and Analysis of
Financial Condition and Results of Operations," as to expectations, beliefs,
plans, objectives and future financial performance, and assumptions underlying
or concerning the foregoing. We use words such as "may," "will," "would,"
"could," "should," "believes," "estimates," "projects," "potential," "expects,"
"plans," "anticipates," "intends," "continues" and other similar terminology.
These forward-looking statements involve known and unknown risks, uncertainties
and other factors, which could cause our actual results, performance or outcomes
to differ materially from those expressed or implied in the forward-looking
statements. 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 may affect our
performance, see Part 1. Item 1A. "Risk Factors" in our Annual Report on Form
10-K for the year ended December 31, 2006.
3
PLAYBOY ENTERPRISES, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations and Comprehensive
Income for the Quarters Ended March 31, 2007 and 2006 (Unaudited) 5
Condensed Consolidated Balance Sheets at March 31, 2007 (Unaudited)
and December 31, 2006 6
Condensed Consolidated Statements of Cash Flows for the Quarters
Ended March 31, 2007 and 2006 (Unaudited) 7
Notes to Condensed Consolidated Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 1A. Risk Factors 18
Item 6. Exhibits 19
4
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLAYBOY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
for the Quarters Ended March 31 (Unaudited)
(In thousands, except per share amounts)
2007 2006
- -----------------------------------------------------------------------------------------
Net revenues $ 85,415 $ 82,120
- -----------------------------------------------------------------------------------------
Costs and expenses
Cost of sales (66,947) (63,252)
Selling and administrative expenses (14,583) (15,337)
- -----------------------------------------------------------------------------------------
Total costs and expenses (81,530) (78,589)
- -----------------------------------------------------------------------------------------
Operating income 3,885 3,531
- -----------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 475 607
Interest expense (1,362) (1,428)
Amortization of deferred financing fees (134) (134)
Other, net (139) (196)
- -----------------------------------------------------------------------------------------
Total nonoperating expense (1,160) (1,151)
- -----------------------------------------------------------------------------------------
Income before income taxes 2,725 2,380
Income tax expense (1,251) (1,591)
- -----------------------------------------------------------------------------------------
Net income 1,474 789
- -----------------------------------------------------------------------------------------
Other comprehensive income (loss)
Unrealized gain on marketable securities 57 120
Unrealized loss on derivatives (11) (2)
Foreign currency translation gain (loss) (177) 85
- -----------------------------------------------------------------------------------------
Total other comprehensive income (loss) (131) 203
- -----------------------------------------------------------------------------------------
Comprehensive income $ 1,343 $ 992
=========================================================================================
Weighted average number of common shares outstanding
Basic 33,230 33,141
=========================================================================================
Diluted 33,269 33,453
=========================================================================================
Basic and diluted earnings per common share $ 0.04 $ 0.02
=========================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
PLAYBOY ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
March 31, December 31,
2007 2006
- ---------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 25,234 $ 26,748
Marketable securities and short-term investments 15,208 9,000
Receivables, net of allowance for doubtful accounts of
$4,161 and $3,688, respectively 44,185 47,728
Receivables from related parties 2,173 1,791
Inventories 13,338 12,599
Deferred subscription acquisition costs 10,445 9,931
Other current assets 11,237 9,426
- ---------------------------------------------------------------------------------------------
Total current assets 121,820 117,223
- ---------------------------------------------------------------------------------------------
Property and equipment, net 18,860 17,407
Long-term receivables 4,665 4,665
Programming costs, net 56,590 55,183
Goodwill 132,976 132,974
Trademarks 64,141 63,794
Distribution agreements, net of accumulated amortization
of $3,777 and $3,435, respectively 29,363 29,705
Other noncurrent assets 14,457 14,832
- ---------------------------------------------------------------------------------------------
Total assets $ 442,872 $ 435,783
=============================================================================================
Liabilities
Acquisition liabilities $ 10,776 $ 10,773
Accounts payable 30,851 28,846
Accrued salaries, wages and employee benefits 6,753 4,896
Deferred revenues 46,217 45,050
Accrued litigation settlement 2,500 1,800
Other liabilities and accrued expenses 13,266 14,124
- ---------------------------------------------------------------------------------------------
Total current liabilities 110,363 105,489
- ---------------------------------------------------------------------------------------------
Financing obligations 115,000 115,000
Acquisition liabilities 9,833 9,692
Net deferred tax liabilities 18,841 18,422
Other noncurrent liabilities 24,019 23,552
- ---------------------------------------------------------------------------------------------
Total liabilities 278,056 272,155
- ---------------------------------------------------------------------------------------------
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;
28,755,699 and 28,743,914 issued, respectively 288 287
Capital in excess of par value 227,619 227,775
Accumulated deficit (56,217) (57,691)
Treasury stock, at cost, 381,971 shares (5,000) (5,000)
Accumulated other comprehensive loss (1,923) (1,792)
- ---------------------------------------------------------------------------------------------
Total shareholders' equity 164,816 163,628
- ---------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 442,872 $ 435,783
=============================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
6
PLAYBOY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Quarters Ended March 31 (Unaudited)
(In thousands)
2007 2006
- -----------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 1,474 $ 789
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of property and equipment 1,115 885
Amortization of intangible assets 600 285
Amortization of investments in entertainment programming 8,581 8,498
Amortization of deferred financing fees 134 134
Deferred income taxes 419 905
Net change in operating assets and liabilities 5,351 59
Investments in entertainment programming (9,813) (9,331)
Litigation settlement -- (1,000)
Stock-based compensation (234) 793
Other, net (184) 53
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities 7,443 2,070
- -----------------------------------------------------------------------------------------
Cash flows from investing activities
Purchases of investments (6,155) (185)
Additions to property and equipment (2,576) (1,099)
- -----------------------------------------------------------------------------------------
Net cash used for investing activities (8,731) (1,284)
- -----------------------------------------------------------------------------------------
Cash flows from financing activities
Payments of acquisition liabilities (319) (1,457)
Proceeds from stock-based compensation 39 185
- -----------------------------------------------------------------------------------------
Net cash used for financing activities (280) (1,272)
- -----------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 54 44
- -----------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,514) (442)
Cash and cash equivalents at beginning of period 26,748 26,089
- -----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 25,234 $ 25,647
=========================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(A) BASIS OF PREPARATION
The financial information included in these financial statements is
unaudited but, in the opinion of management, reflects all normal recurring and
other adjustments necessary for a fair presentation of the results for the
interim periods. The interim results of operations and cash flows are not
necessarily indicative of those results and cash flows for the entire year.
These financial statements should be read in conjunction with the financial
statements and notes to the financial statements contained in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2006. Certain amounts
reported for the prior periods have been reclassified to conform to the current
year's presentation.
(B) RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2007, the Financial Accounting Standards Board, or the FASB,
issued Statement of Financial Accounting Standards No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities, including an amendment of
FASB Statement No. 115, or Statement 159. Statement 159 allows entities to
voluntarily elect to measure many financial assets and financial liabilities at
fair value. The election is made on an instrument-by-instrument basis and is
irrevocable. We are required to adopt Statement 159 at the beginning of 2008. We
are currently evaluating the impact of adopting Statement 159 on our future
results of operations and financial condition.
In September 2006, 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 and financial condition.
(C) RESTRUCTURING EXPENSES
During the quarter ended March 31, 2007, we made cash payments of $0.2
million and $19 thousand related to our 2006 and 2002 restructuring plans,
respectively. Of the total costs related to our restructuring plans,
approximately $12.2 million was paid by March 31, 2007, with the remaining $0.4
million to be paid through 2008.
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 in 2006 of $2.1 million related to
costs associated with a workforce reduction of 15 employees. In addition, in
2006, 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.
8
The following table sets forth the activity and balances of our
restructuring reserves for the year ended December 31, 2006 and for the
three-month period ended March 31, 2007 (in thousands):
Consolidation
of Facilities
Workforce and
Reduction Operations Total
- -------------------------------------------------------------------------------------
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
Cash payments (241) (19) (260)
- -------------------------------------------------------------------------------------
Balance at March 31, 2007 $ 189 $ 249 $ 438
=====================================================================================
(D) EARNINGS PER COMMON SHARE
The following table sets forth the computations of basic and diluted
earnings per share, or EPS (in thousands, except per share amounts):
Quarters Ended
March 31,
-------------------
2007 2006
- --------------------------------------------------------------------------------------
Numerator:
For basic and diluted EPS - net income $ 1,474 $ 789
======================================================================================
Denominator:
For basic EPS - weighted average shares 33,230 33,141
Effect of dilutive potential common shares:
Employee stock options and other 39 312
- --------------------------------------------------------------------------------------
Dilutive potential common shares 39 312
- --------------------------------------------------------------------------------------
For diluted EPS - weighted average shares 33,269 33,453
======================================================================================
Basic and Diluted EPS $ 0.04 $ 0.02
======================================================================================
The following table sets forth the number of shares related to outstanding
options to purchase our Class B common stock, or Class B stock, and the
potential shares of Class B stock contingently issuable under our 3.00%
convertible senior subordinated notes due 2025, or convertible notes. These
shares were not included in the computations of diluted EPS for the quarters
presented, as their inclusion would have been antidilutive (in thousands):
Quarters Ended
March 31,
-----------------
2007 2006
- --------------------------------------------------------------------------------------
Stock options 3,166 2,409
Convertible notes 6,758 6,758
- --------------------------------------------------------------------------------------
Total 9,924 9,167
======================================================================================
9
(E) 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):
March 31, December 31,
2007 2006
- ------------------------------------------------------------------------------------------
Paper $ 3,039 $ 2,917
Editorial and other prepublication costs 7,761 7,425
Merchandise finished goods 2,538 2,257
- -----------------------------------------------------------------------------------------
Total inventories $ 13,338 $ 12,599
=========================================================================================
(F) INCOME TAXES
Our income tax provision consists of foreign income tax, which relates to
our international networks and withholding tax on licensing income, for which we
do not receive a current U.S. income tax benefit due to our net operating loss,
or NOL, position. Our income tax provision also includes deferred federal and
state income taxes related to the amortization of goodwill and other
indefinite-lived intangibles, which cannot be offset against deferred tax assets
due to the indefinite reversal period of the deferred tax liabilities.
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 adopted FIN 48 on
January 1, 2007. Pursuant to FIN 48 and as a result of the implementation of FIN
48, we recognized no adjustment in the liability for unrecognized income tax
benefits. At March 31, 2007, we did not have any material unrecognized income
tax benefits. We do not expect to recognize significant increases or decreases
in unrecognized income tax benefits during 2007.
Our continuing practice is to recognize interest and/or penalties related
to income tax matters in income tax expense.
The statute of limitations for tax years 2003 through 2006 remains open to
examination by the major U.S. taxing jurisdictions to which we are subject. In
addition, for all tax years prior to 2003 generating an NOL, tax authorities can
adjust the amount of NOL. In our international tax jurisdictions, numerous tax
years remain subject to examination by tax authorities, including tax returns
for at least 2002 and subsequent years in all of our major international tax
jurisdictions.
(G) CONTINGENCIES
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, which is 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. We paid $7.7 million at closing with additional payments of $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. No
earnout payments have been made through March 31, 2007.
10
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. No additional
earnout payments have been made in 2007.
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.
(H) BENEFIT PLANS
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. We made cash payments under this policy
of $0.1 million and $0.2 million during the quarters ended March 31, 2007 and
2006, respectively.
(I) STOCK-BASED COMPENSATION
The following table sets forth stock-based compensation expense (benefit)
related to stock options, restricted stock units, other equity awards and our
employee stock purchase plan, or ESPP (in thousands):
Quarters Ended
March 31,
--------------------
2007 2006
- -------------------------------------------------------------------------------------
Stock options $ (283) $ 709
Restricted stock units -- 35
Other equity awards 42 43
ESPP 7 6
- -------------------------------------------------------------------------------------
Total $ (234) $ 793
=====================================================================================
Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment, requires that the total amount of compensation cost
recognized at the end of the vesting period be based on the number of stock
options that actually vest as of the completion of the vesting period. Upon the
vesting of certain stock option grants, we adjusted our stock-based compensation
expense to reflect actual versus estimated forfeitures through March 31, 2007.
During the quarter ended March 31, 2007, we recorded a favorable adjustment of
$1.0 million to reflect higher actual than estimated forfeitures for vested
stock option grants.
11
(J) SEGMENT INFORMATION
The following table sets forth financial information by reportable segment
(in thousands):
Quarters Ended
March 31,
------------------------
2007 2006
- -----------------------------------------------------------------------------------------------
Net revenues
Entertainment $ 50,858 $ 51,177
Publishing 23,345 23,495
Licensing 11,212 7,448
- -----------------------------------------------------------------------------------------------
Total $ 85,415 $ 82,120
===============================================================================================
Income before income taxes
Entertainment $ 4,304 $ 7,873
Publishing (2,396) (2,297)
Licensing 7,677 4,346
Corporate Administration and Promotion (5,700) (6,391)
Investment income 475 607
Interest expense (1,362) (1,428)
Amortization of deferred financing fees (134) (134)
Other, net (139) (196)
- -----------------------------------------------------------------------------------------------
Total $ 2,725 $ 2,380
===============================================================================================
March 31, December 31,
2007 2006
- -----------------------------------------------------------------------------------------------
Identifiable assets
Entertainment $ 286,957 $ 288,540
Publishing 37,951 38,146
Licensing 11,582 9,386
Corporate Administration and Promotion 106,382 99,711
- -----------------------------------------------------------------------------------------------
Total $ 442,872 $ 435,783
===============================================================================================
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and accompanying notes in Item 1 and with our
Annual Report on Form 10-K for the year ended December 31, 2006. All period
references are to our fiscal periods unless otherwise indicated.
RESULTS OF OPERATIONS (1)
The following table sets forth our results of operations (in millions,
except per share amounts):
Quarters Ended
March 31,
----------------------
2007 2006
- -------------------------------------------------------------------------------------------
Net revenues
Entertainment
Domestic TV $ 19.7 $ 22.3
International TV 13.8 12.4
Online/mobile 15.7 15.3
Other 1.7 1.2
- -------------------------------------------------------------------------------------------
Total Entertainment 50.9 51.2
- -------------------------------------------------------------------------------------------
Publishing
Domestic magazine 19.1 19.2
International magazine 1.9 1.7
Special editions and other 2.3 2.6
- -------------------------------------------------------------------------------------------
Total Publishing 23.3 23.5
- -------------------------------------------------------------------------------------------
Licensing
Consumer products 8.7 6.8
Location-based entertainment 0.9 --
Marketing events 0.3 0.2
Other 1.3 0.4
- -------------------------------------------------------------------------------------------
Total Licensing 11.2 7.4
- -------------------------------------------------------------------------------------------
Total net revenues $ 85.4 $ 82.1
===========================================================================================
Net income
Entertainment
Before programming amortization and online content expenses $ 14.5 $ 17.3
Programming amortization and online content expenses (10.2) (9.4)
- -------------------------------------------------------------------------------------------
Total Entertainment 4.3 7.9
- -------------------------------------------------------------------------------------------
Publishing (2.4) (2.3)
- -------------------------------------------------------------------------------------------
Licensing 7.7 4.3
- -------------------------------------------------------------------------------------------
Corporate Administration and Promotion (5.7) (6.4)
- -------------------------------------------------------------------------------------------
Operating income 3.9 3.5
- -------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 0.5 0.6
Interest expense (1.4) (1.4)
Amortization of deferred financing fees (0.1) (0.1)
Other, net (0.2) (0.2)
- -------------------------------------------------------------------------------------------
Total nonoperating expense (1.2) (1.1)
- -------------------------------------------------------------------------------------------
Income before income taxes 2.7 2.4
Income tax expense (1.2) (1.6)
- -------------------------------------------------------------------------------------------
Net income $ 1.5 $ 0.8
===========================================================================================
Basic and diluted earnings per common share $ 0.04 $ 0.02
===========================================================================================
(1) Certain amounts reported for the prior periods have been reclassified to
conform to the current year's presentation.
13
Our revenues increased $3.3 million, or 4%, compared to the prior year
quarter primarily due to higher Licensing Group revenues.
Operating income increased $0.4 million, or 10%, compared to the prior
year quarter due to higher Licensing Group results combined with lower Corporate
Administration and Promotion expense, which more than offset significantly lower
Entertainment Group results. Year over year Publishing Group results were
comparable. The current year operating results included lower stock option
expense as a result of a higher actual than estimated forfeiture rate, which was
mostly offset by expense related to a reduction in force.
Net income of $1.5 million improved by $0.7 million, or 87%, compared to
the prior year quarter due to the higher operating results previously discussed
combined with a decrease in income tax expense of $0.4 million.
Several of our businesses may experience variations in quarterly
performance. As a result, our performance in any quarter is not necessarily
reflective of full-year or longer-term trends. Playboy magazine newsstand
revenues vary from issue to issue, with revenues generally higher for holiday
issues and any issues including editorial or pictorial features that generate
additional public interest. Advertising revenues also vary from quarter to
quarter depending on economic conditions, holiday issues and changes in
advertising buying patterns. Online subscription revenues and operating results
are impacted by decreased Internet traffic during the summer months and
e-commerce revenues and operating results are typically strongest in the fourth
quarter due to the holiday buying season.
ENTERTAINMENT GROUP
The following discussion focuses on the revenues and profit contribution
before programming amortization and online content expenses of each of our
Entertainment Group businesses.
Revenues from our domestic TV networks decreased $2.6 million, or 12%, and
profit contribution decreased $2.0 million compared to the prior year quarter.
These decreases were due to lower direct-to-home, or DTH, revenues and lower
movie network cable pay-per-view revenues as a result of less overall carriage
of our linear networks due to the loss of exclusive carriage on one satellite
service in the 2006 second quarter and the continuing transition in cable from
linear networks to a more competitive video-on-demand, or VOD, environment.
Expense related to certain distribution agreements that we began amortizing
during the fourth quarter of the prior year and increased distribution expense
related to VOD also contributed to the lower profitability. Partially offsetting
these decreases were favorable variances related to previously estimated
revenues, increased VOD revenues and lower marketing expenses. We believe that
domestic TV revenues have stabilized and that they will remain in line with the
first quarter, excluding the favorable variances related to the previously
estimated revenues.
International TV revenues increased $1.4 million, or 12%, and profit
contribution was flat compared to the prior year quarter.
Online/mobile revenues increased $0.4 million, or 2%, and profit
contribution increased $0.6 million compared to the prior year quarter. Online
subscription revenues increased due to our acquisition in June 2006 of Club
Jenna, Inc. and related companies, or Club Jenna. Advertising revenues from
Playboy.com also increased. E-commerce revenues declined primarily due to
licensing our Spice Catalog in September 2006. Mobile revenues decreased
primarily due to lower royalties, primarily from Europe.
Revenues from other businesses increased $0.5 million, or 40%, as profit
contribution decreased $0.7 million compared to the prior year quarter. The
current quarter results reflected the positive benefits of a full quarter of
Playboy Radio on SIRIUS Satellite Radio and of the Club Jenna acquisition, which
were more than offset by a legal settlement.
The group's administrative expenses increased $0.6 million, or 11%,
compared to the prior year quarter due in part to higher legal and severance
expenses.
Programming amortization and online content expenses increased $0.8
million, or 8%, compared to the prior year quarter primarily due to increased
investments in content to support new and existing websites. We anticipate
annual programming amortization and online content expense to be $39.8 million,
which could vary based on,
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among other things, the timing of completion of productions.
Segment income for the group decreased $3.6 million, or 45%, compared to
the prior year quarter due to the operating results previously discussed. We
believe that the group's segment income in the last nine months of the current
year will be in line with that of the prior year's last nine months.
PUBLISHING GROUP
Domestic magazine revenues were flat compared to the prior year quarter.
Advertising revenues increased $1.0 million due to a 15% increase in advertising
pages coupled with a 6% increase in average net revenue per page. Advertising
sales for the 2007 second quarter magazine issues are closed, and we expect to
report approximately 2% lower advertising revenues and a 6% increase in
advertising pages compared to the 2006 second quarter. Subscription revenues
decreased $1.0 million primarily due to fewer copies served in the current year
quarter. Newsstand revenues were flat compared to the prior year quarter as a 7%
decrease in the number of copies sold in the current year quarter was offset by
a favorable variance related to prior issues.
Revenues from special editions and other decreased $0.3 million, or 11%,
compared to the prior year quarter, as a 17% decrease in the number of special
editions newsstand copies sold in the current year quarter was partially offset
by a favorable variance related to prior issues.
The group's segment results were essentially flat compared to the prior
year quarter as the lower revenues previously discussed combined with the
allocation of actual post-employment benefit costs from Corporate Administration
and Promotion and additional subscription collection costs were mostly offset by
lower manufacturing and administration expenses. We continue to believe that the
group's segment profitability will be consistent with the financial performance
of the last two years.
LICENSING GROUP
Licensing Group revenues increased $3.8 million, or 51%, compared to the
prior year quarter. The current year quarter reflected a $1.3 million sale of
original art compared to $0.4 million in the prior year quarter. The current
year quarter also reflected royalties from our location-based entertainment
venue at the Palms Casino Resort in Las Vegas, which opened in October 2006, and
higher consumer products royalties, principally from Europe, Southeast Asia and
Australia. The group's segment income increased $3.4 million, or 77%, compared
to the prior year quarter as a result of the revenue increases previously
discussed. We are now projecting growth of approximately 20 to 25% in the
Licensing Group's segment income, excluding the impact of the sale of original
art.
CORPORATE ADMINISTRATION AND PROMOTION
Corporate Administration and Promotion expense decreased $0.7 million, or
11%, compared to the prior year quarter, primarily due to the allocation of
actual post-employment benefit costs to the Publishing Group in the current year
quarter, partially offset by expense related to certain trademark costs that
were previously capitalized. We believe Corporate Administration and Promotion
expense will increase compared to 2006, reflecting both an inflation-related
increase and the impact of the previously mentioned trademark costs.
RESTRUCTURING EXPENSES
During the quarter ended March 31, 2007, we made cash payments of $0.2
million and $19 thousand related to our 2006 and 2002 restructuring plans,
respectively. Of the total costs related to our restructuring plans,
approximately $12.2 million was paid by March 31, 2007, with the remaining $0.4
million to be paid through 2008.
INCOME TAX EXPENSE
Our effective income tax rate differs from the U.S. statutory rate. Our
income tax provision consists of foreign income tax, which relates to our
international networks and withholding tax on licensing income, for which we do
not receive a current U.S. income tax benefit due to our net operating loss
position. Our income tax provision also includes deferred federal and state
income taxes related to the amortization of goodwill and other indefinite-lived
intangibles, which cannot be offset against deferred tax assets due to the
indefinite reversal period of the
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deferred tax liabilities.
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. We adopted FIN 48 on January 1, 2007. Pursuant to FIN 48 and as a result of
the implementation of FIN 48, we recognized no adjustment in the liability for
unrecognized income tax benefits. At March 31, 2007, we did not have any
material unrecognized income tax benefits. We do not expect to recognize
significant increases or decreases in unrecognized tax benefits during 2007.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2007, we had $25.2 million in cash and cash equivalents
compared to $26.7 million in cash and cash equivalents at December 31, 2006. We
also had $9.0 million and $3.0 million of auction rate securities, or ARS,
included in marketable securities and short-term investments at March 31, 2007
and December 31, 2006, respectively. 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 March 31, 2007 and December 31, 2006.
At March 31, 2007, 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 March 31, 2007, 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.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $7.4 million, an increase of
$5.4 million compared to the prior year quarter primarily due to changes in
working capital.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used for investing activities was $8.7 million, an increase of
$7.4 million compared to the prior year quarter. This increase was primarily due
to the purchase of $6.0 million in ARS and capital expenditures of $2.6 million,
which were primarily related to leasehold improvements at our New York office
and Los Angeles programming facility and technology-related items.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used for financing activities was $0.3 million, a decrease of
$1.0 million compared to the prior year quarter primarily due to lower
acquisition liability payments related to our international TV business.
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
The positive effect of foreign currency exchange rates on cash and cash
equivalents during the current year and prior year quarter was due to the
weakening of the U.S. dollar against the Euro and pound sterling.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2007, the Financial Accounting Standards Board, or the FASB,
issued Statement of Financial Accounting Standards No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities, including an amendment of
FASB Statement No. 115, or Statement 159. Statement 159 allows entities to
voluntarily elect to measure many financial assets and financial liabilities at
fair value. The election is made on an instrument-by-instrument basis and is
irrevocable. We are required to adopt Statement 159 at the beginning of 2008. We
are currently evaluating the impact of adopting Statement 159 on our future
results of operations and financial condition.
In September 2006, 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 and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 2007, we did not have any floating interest rate exposure.
All of our outstanding debt as of that date consisted of the 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 March 31, 2007,
the convertible notes had an implied fair value of $108.7 million.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange
Act) as of the end of the period covered by this quarterly report. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, our disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by us in the reports that
we file or submit under the Exchange Act.
Internal Control over Financial Reporting
There have not been any changes in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes to our Legal Proceedings as contained
in our Annual Report on Form 10-K for the year ended December 31, 2006.
ITEM 1A. RISK FACTORS
There have been no material changes to our Risk Factors as contained in
our Annual Report on Form 10-K for the year ended December 31, 2006.
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ITEM 6. EXHIBITS
Exhibit Number Description
- -------------- -----------
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
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PLAYBOY ENTERPRISES, INC.
(Registrant)
Date: May 9, 2007 By /s/ Linda Havard
----------------
Linda G. Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)
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EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
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
21