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, 2008
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 001-14790
Playboy Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-4249478
(State 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, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_| Smaller reporting company |_|
(Do not check if a smaller
reporting company)
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, 2008, there were 4,864,102 shares of Class A common stock and
28,435,513 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 and
partners;
(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, wireless, new
electronic media and product licensing markets;
(11) Attempts by consumers, distributors, merchants 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 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, pressure on splits or adverse changes in certain minimum
revenue amounts 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) Effects of the national consolidation of the single-copy magazine
distribution system and risks associated
2
with the financial stability of major magazine wholesalers;
(20) Effects of the national consolidation of television distribution companies
(e.g., cable MSOs, satellite platforms and telecommunications companies);
and
(21) Risks associated with the viability of our subscription, on-demand,
e-commerce and ad-supported Internet models.
For a detailed discussion of these and other factors that may affect our
performance, see Part I, Item 1A. "Risk Factors" in our Annual Report on Form
10-K for the fiscal year ended December 31, 2007.
3
PLAYBOY ENTERPRISES, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the Quarters Ended March 31, 2008 and 2007
(Unaudited) 5
Consolidated Balance Sheets at March 31, 2008 (Unaudited)
and December 31, 2007 6
Condensed Consolidated Statements of Cash Flows for the
Quarters Ended March 31, 2008 and 2007 (Unaudited) 7
Notes to Condensed Consolidated Financial Statements
(Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 1A. Risk Factors 22
Item 6. Exhibits 22
4
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
for the Quarters Ended March 31 (Unaudited)
(In thousands, except per share amounts)
2008 2007
- -------------------------------------------------------------------------------
Net revenues $ 78,536 $ 85,415
- -------------------------------------------------------------------------------
Costs and expenses
Cost of sales (63,756) (67,900)
Selling and administrative expenses (14,705) (13,630)
Restructuring expense (594) --
- -------------------------------------------------------------------------------
Total costs and expenses (79,055) (81,530)
- -------------------------------------------------------------------------------
Operating income (loss) (519) 3,885
- -------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 360 475
Interest expense (1,133) (1,362)
Amortization of deferred financing fees (89) (134)
Other, net (517) (139)
- -------------------------------------------------------------------------------
Total nonoperating expense (1,379) (1,160)
- -------------------------------------------------------------------------------
Income (loss) before income taxes (1,898) 2,725
Income tax expense (1,237) (1,251)
- -------------------------------------------------------------------------------
Net income (loss) $ (3,135) $ 1,474
===============================================================================
Other comprehensive income (loss)
Unrealized gain (loss) on marketable securities (470) 57
Unrealized gain (loss) on derivatives 78 (11)
Foreign currency translation gain (loss) 383 (177)
- -------------------------------------------------------------------------------
Total other comprehensive loss (9) (131)
- -------------------------------------------------------------------------------
Comprehensive income (loss) $ (3,144) $ 1,343
===============================================================================
Weighted average number of common shares outstanding
Basic 33,275 33,230
===============================================================================
Diluted 33,275 33,269
===============================================================================
Basic and diluted earnings (loss) per common share $ (0.09) $ 0.04
===============================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
Mar. 31, Dec. 31,
2008 2007
- ------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 17,670 $ 20,603
Marketable securities and short-term investments 4,505 12,952
Receivables, net of allowance for doubtful accounts of
$3,800 and $3,627, respectively 47,827 51,139
Receivables from related parties 2,656 1,704
Inventories 9,212 11,363
Deferred subscription acquisition costs 9,165 8,686
Deferred tax asset 1,320 1,320
Assets held for sale 11,538 4,706
Prepaid expenses and other current assets 9,943 13,402
- ------------------------------------------------------------------------------------------------
Total current assets 113,836 125,875
- ------------------------------------------------------------------------------------------------
Long-term investments 6,393 6,556
Property and equipment, net 16,367 14,665
Long-term receivables 2,795 2,795
Programming costs, net 54,836 54,926
Goodwill 133,572 133,570
Trademarks 65,852 65,437
Distribution agreements, net of accumulated amortization
of $5,134 and $4,803, respectively 28,006 28,337
Deferred tax asset 1,206 1,206
Other noncurrent assets 11,494 11,789
- ------------------------------------------------------------------------------------------------
Total assets $ 434,357 $ 445,156
================================================================================================
Liabilities
Acquisition liabilities $ 2,181 $ 2,134
Accounts payable 32,305 37,842
Accrued salaries, wages and employee benefits 6,364 8,304
Deferred revenues 43,090 43,955
Deferred tax liability 1,490 1,490
Other liabilities and accrued expenses 13,872 14,269
- ------------------------------------------------------------------------------------------------
Total current liabilities 99,302 107,994
- ------------------------------------------------------------------------------------------------
Financing obligations 115,000 115,000
Acquisition liabilities 7,872 7,936
Deferred tax liability 19,035 18,604
Other noncurrent liabilities 24,216 24,305
- ------------------------------------------------------------------------------------------------
Total liabilities 265,425 273,839
- ------------------------------------------------------------------------------------------------
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; 28,812,528 and
28,784,079 issued, respectively 288 288
Capital in excess of par value 230,592 229,833
Accumulated deficit (55,901) (52,766)
Treasury stock, at cost - 381,971 shares (5,000) (5,000)
Accumulated other comprehensive loss (1,096) (1,087)
- ------------------------------------------------------------------------------------------------
Total shareholders' equity 168,932 171,317
- ------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 434,357 $ 445,156
================================================================================================
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)
2008 2007
- -------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) $ (3,135) $ 1,474
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation of property and equipment 1,044 1,115
Amortization of intangible assets 565 600
Amortization of investments in entertainment programming 8,210 8,581
Amortization of deferred financing fees 89 134
Stock-based compensation 584 (234)
Deferred income taxes 431 419
Net change in operating assets and liabilities (1,232) 5,351
Investments in entertainment programming (8,258) (9,813)
Other, net 215 (184)
- ------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities (1,487) 7,443
- ------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchases of investments (397) (6,155)
Proceeds from sales of investments 8,513 --
Additions to assets held for sale (6,832) --
Additions to property and equipment (2,759) (2,576)
- ------------------------------------------------------------------------------------------------
Net cash used for investing activities (1,475) (8,731)
- ------------------------------------------------------------------------------------------------
Cash flows from financing activities
Payments of acquisition liabilities (250) (319)
Proceeds from stock-based compensation 36 39
- ------------------------------------------------------------------------------------------------
Net cash used for financing activities (214) (280)
- ------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 243 54
- ------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (2,933) (1,514)
Cash and cash equivalents at beginning of period 20,603 26,748
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 17,670 $ 25,234
================================================================================================
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, 2007. Certain amounts
reported for the prior periods have been reclassified to conform to the current
year's presentation.
(B) RECENTLY ISSUED ACCOUNTING STANDARDS
In March 2008, the Financial Accounting Standards Board, or the FASB,
issued Statement of Financial Accounting Standards No. 161, Disclosures about
Derivative Instruments and Hedging Activities-an amendment of FASB Statement No.
133, or Statement 161. Statement 161 requires enhanced disclosures about how and
why an entity uses derivative instruments, how derivative instruments and
related hedged items are accounted for under Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities,
and its related interpretations, and how derivative instruments and related
hedged items affect an entity's financial position, financial performance and
cash flows. We are required to adopt Statement 161 at the beginning of 2009.
Since Statement 161 impacts our disclosure but not our accounting treatment for
derivative instruments and related hedged items, our adoption of Statement 161
will not impact our results of operations or financial condition.
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 160, Noncontrolling Interests in Consolidated Financial
Statements-an amendment of ARB No. 51, or Statement 160. Statement 160 clarifies
that a noncontrolling interest (previously referred to as minority interest) in
a subsidiary is an ownership interest in a consolidated entity that should be
reported as equity in the consolidated financial statements. It also requires
consolidated net income to include the amounts attributable to both the parent
and the noncontrolling interest. We are required to adopt Statement 160 at the
beginning of 2009. We are currently evaluating the impact, if any, of adopting
Statement 160 on our future results of operations and financial condition.
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141 (revised 2007), Business Combinations, or Statement 141(R).
Statement 141(R) retains the fundamental requirements of the original
pronouncement requiring that the purchase method be used for all business
combinations. Statement 141(R) defines the acquirer as the entity that obtains
control of one or more businesses in the business combination, establishes the
acquisition date as the date that the acquirer achieves control and requires the
acquirer to recognize the assets acquired, liabilities assumed and any
noncontrolling interest at their fair values as of the acquisition date.
Statement 141(R) also requires, among other things, that acquisition-related
costs be recognized separately from the acquisition. We are required to adopt
Statement 141(R) prospectively for business combinations on or after January 1,
2009. Assets and liabilities that arose from business combinations prior to
January 1, 2009 are not affected by the adoption of Statement 141(R).
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
years 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.
Since we use a December 31 measurement date, this provision of Statement 158
will not have an impact on our 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 adopted Statement 157 on January 1, 2008, as required for our
financial assets and financial
8
liabilities. However, FASB Staff Position FAS 157-2 delayed the effective date
of Statement 157 to the beginning of 2009 for all nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually).
We do not expect the adoption of Statement 157 for our nonfinancial assets and
nonfinancial liabilities to have a significant impact on our future results of
operations or financial condition.
(C) RESTRUCTURING EXPENSE
In 2007, we implemented a plan to outsource our remaining e-commerce and
catalog businesses, to sell the assets related to our Los Angeles production
facility and to eliminate office space obtained as part of the acquisition of
Club Jenna, Inc. and related companies, or Club Jenna. As a result of this
restructuring plan, we recorded a reserve of $0.4 million for costs associated
with a workforce reduction of 28 employees. During the quarter ended March 31,
2008, as part of this restructuring plan, we recorded an additional reserve of
$0.6 million for contract termination fees and expenses related to the 2007
workforce reduction.
During the quarter ended March 31, 2008, we made cash payments of $0.4
million related to prior years' restructuring plans. Approximately $12.9 million
of the total costs of our prior years' restructuring plans was paid through
March 31, 2008, with the remaining $0.7 million to be paid during 2008.
The following table sets forth the activity and balances of our
restructuring reserves, which are included in "Accrued salaries, wages and
employee benefits" and "Other liabilities and accrued expenses" on our
Consolidated Balance Sheets (in thousands):
Consolidation
of Facilities
Workforce and
Reduction Operations Total
- -------------------------------------------------------------------------------
Balance at December 31, 2006 $ 430 $ 268 $ 698
Reserve recorded 429 -- 429
Adjustments to previous estimates 43 (27) 16
Cash payments (473) (127) (600)
- -------------------------------------------------------------------------------
Balance at December 31, 2007 429 114 543
Additional reserve recorded 149 445 594
Cash payments (294) (154) (448)
- -------------------------------------------------------------------------------
Balance at March 31, 2008 $ 284 $ 405 $ 689
===============================================================================
(D) EARNINGS (LOSS) PER COMMON SHARE
The following table sets forth the computations of basic and diluted
earnings (loss) per share, or EPS (in thousands, except per share amounts):
Quarters Ended
March 31,
-------------------
2008 2007
- -------------------------------------------------------------------------------
Numerator:
For basic and diluted EPS - net income (loss) $ (3,135) $ 1,474
===============================================================================
Denominator:
For basic EPS - weighted average shares 33,275 33,230
Effect of dilutive potential common shares:
Employee stock options and other -- 39
- -------------------------------------------------------------------------------
Dilutive potential common shares -- 39
- -------------------------------------------------------------------------------
For diluted EPS - weighted average shares 33,275 33,269
===============================================================================
Basic and diluted earnings (loss) per common share $ (0.09) $ 0.04
===============================================================================
9
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 number of 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,
-------------------
2008 2007
- -------------------------------------------------------------------------------
Stock options 3,546 3,166
Convertible notes 6,758 6,758
- -------------------------------------------------------------------------------
Total 10,304 9,924
===============================================================================
(E) INVENTORIES
On January 15, 2008, we signed an agreement to outsource our Playboy and
BUNNYshop e-commerce and catalog businesses to eFashion Solutions, LLC, or
eFashion. As part of this agreement, we sold all remaining inventory related to
these businesses to eFashion.
The following table sets forth inventories, which are stated at the lower
of cost (specific cost and average cost) or fair value (in thousands):
Mar. 31, Dec. 31,
2008 2007
- -------------------------------------------------------------------------------
Paper $ 3,185 $ 2,948
Editorial and other prepublication costs 5,484 5,518
Merchandise finished goods 543 2,897
- -------------------------------------------------------------------------------
Total $ 9,212 $ 11,363
===============================================================================
(F) INCOME TAXES
Our income tax provision consists primarily of foreign income tax, which
relates to our international television 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.
We utilize the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. We record net deferred tax assets to the extent we believe these
assets will more likely than not be realized. In making such determination, we
consider all available positive and negative evidence, including scheduled
reversals of deferred tax liabilities, projected future taxable income, tax
planning strategies and recent financial performance. As a result of our
cumulative losses in the U.S. and certain foreign jurisdictions, we have
concluded that a full valuation allowance should be recorded for such
jurisdictions.
At March 31, 2008 and December 31, 2007, we had unrecognized tax benefits
of $8.0 million; we do not expect this amount to change significantly over the
next 12 months. Due to the impact of deferred income tax accounting, the
disallowance would not affect the effective income tax rate nor would it
accelerate the payment of cash to the taxing authority to an earlier period.
Our continuing practice is to recognize interest and/or penalties related
to income tax matters in income tax expense.
We file U.S., state and foreign income tax returns in jurisdictions with
varying statutes of limitations. The 2004 through 2007 tax years generally
remain subject to examination by federal and most state tax authorities. In
addition, for all tax years prior to 2004 generating an NOL, tax authorities can
adjust the amount of the NOL. In our
10
international tax jurisdictions, numerous tax years remain subject to
examination by tax authorities, including tax returns for 2002 and subsequent
years.
(G) FAIR VALUE MEASUREMENT
As discussed in Note (B), Recently Issued Accounting Standards, we adopted
Statement 157 on January 1, 2008 for our financial assets and financial
liabilities. Statement 157 requires enhanced disclosures about assets and
liabilities measured at fair value. Our financial assets primarily relate to our
marketable securities and investments. Our financial liabilities primarily
relate to our derivative instruments to hedge the variability of cash flows to
be received related to forecasted royalty payments denominated in the yen and
the euro.
We utilize the market approach to measure fair value for our financial
assets and financial liabilities. The market approach uses prices and other
relevant information generated by market transactions involving identical or
comparable assets or liabilities.
Statement 157 includes a fair value hierarchy that is intended to increase
consistency and comparability in fair value measurements and related
disclosures. The fair value hierarchy is based on observable or unobservable
inputs to valuation techniques that are used to measure fair value. Observable
inputs reflect assumptions market participants would use in pricing an asset or
liability based on market data obtained from independent sources while
unobservable inputs reflect a reporting entity's pricing based upon its own
market assumptions. The fair value hierarchy consists of the following three
levels:
o Level 1: Inputs are quoted prices in active markets for identical assets
or liabilities.
o Level 2: Inputs are quoted prices for similar assets or liabilities in an
active market, quoted prices for identical or similar assets or
liabilities in markets that are not active, inputs other than quoted
prices that are observable and market-corroborated inputs, which are
derived principally from or corroborated by observable market data.
o Level 3: Inputs that are derived from valuation techniques in which one or
more significant inputs or value drivers are unobservable.
The following table sets forth our financial assets and financial
liabilities measured at fair value on a recurring basis and the basis of
measurement at March 31, 2008 (in thousands):
Quoted Prices in Significant
Active Markets for Significant Other Unobservable
Total Fair Value Identical Assets Observable Inputs Inputs
Measurement (Level 1) (Level 2) (Level 3)
- ----------------------------------------------------------------------------------------------------------------------------------
Marketable securities and investments $ 10,898 $ 6,393 $ 4,505(1) $ --
Derivative liabilities $ (446) $ -- $ (446) $ --
- ----------------------------------------------------------------------------------------------------------------------------------
(1) In December 2007, we purchased an investment in an enhanced cash portfolio
as a marketable security for $7.7 million. At December 31, 2007, due to
adverse market conditions, we determined that the market value of this
investment was other-than-temporarily impaired, and we recorded a charge
of $0.1 million in "Other, net" on our Consolidated Statements of
Operations. Through March 31, 2008, we have received four distributions
from the investment, which is being liquidated, at an average net asset
value of 98.63%, resulting in a cumulative realized loss of $42 thousand.
During the quarter ended March 31, 2008, we recorded an additional $0.1
million of unrealized losses. At March 31, 2008, our remaining balance in
this investment was $4.5 million.
(H) CONTINGENCIES
In 2006, we acquired Club Jenna, a multimedia adult entertainment
business, to complement our existing television, online and DVD businesses. We
paid $7.7 million at closing and $1.6 million in 2007 with additional payments
of $1.7 million, $2.3 million and $4.3 million required in 2008, 2009 and 2010,
respectively. Pursuant to the acquisition agreement, we are also obligated to
make future contingent earnout payments based primarily on
11
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, 2008.
In 2005, we acquired an affiliate network of websites to complement our
existing online business. We paid $8.0 million at closing and $2.0 million in
each of 2006 and 2007. Pursuant to the acquisition agreement, we are also
obligated to make future contingent earnout payments over the five-year period
commencing January 1, 2005, 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. No earnout payments were made during the quarter ended
March 31, 2008. During 2007, $0.1 million of earnout payments were made and
recorded as additional purchase price.
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. On January
25, 2008, the Texas Supreme Court denied our petition for review. On February 8,
2008, we filed a petition for rehearing with the Texas Supreme Court. We posted
a bond in the amount of approximately $9.4 million, which represented 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.
(I) BENEFIT PLANS
We currently maintain a practice of paying a separation allowance, which
is not funded, 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. We made cash payments under this policy of $0.2
million and $0.1 million during the quarters ended March 31, 2008 and 2007,
respectively.
(J) STOCK-BASED COMPENSATION
The following table sets forth stock-based compensation expense related to
stock options, restricted stock units, other equity awards and our employee
stock purchase plan, or ESPP (in thousands):
Quarters Ended
March 31,
---------------------
2008 2007
- -------------------------------------------------------------------------------
Stock options $ 464 $ (283)
Restricted stock units 61 --
Other equity awards 53 42
ESPP 6 7
- -------------------------------------------------------------------------------
Total $ 584 $ (234)
===============================================================================
No stock options or restricted stock units were granted during each of the
quarters ended March 31, 2008 and 2007.
FASB Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment, requires that the total amount of compensation expense
recognized reflects the number of stock-based awards that actually vest as of
the completion of their respective vesting periods. Upon the vesting of certain
stock-based awards, we adjusted our stock-based compensation expense to reflect
actual versus estimated forfeitures. During the quarters ended March 31, 2008
and 2007, we recorded an unfavorable adjustment of $0.1 million and a favorable
adjustment of $1.0 million, respectively, to reflect actual forfeitures for
vested stock option grants.
12
(K) SEGMENT INFORMATION
The following table sets forth financial information by reportable segment
(in thousands):
Quarters Ended
March 31,
---------------------
2008 2007
- -------------------------------------------------------------------------------
Net revenues
Entertainment $ 47,914 $ 50,858
Publishing 20,131 23,345
Licensing 10,491 11,212
- -------------------------------------------------------------------------------
Total $ 78,536 $ 85,415
===============================================================================
Income (loss) before income taxes
Entertainment $ 2,699 $ 4,304
Publishing (3,168) (2,396)
Licensing 6,643 7,677
Corporate Administration and Promotion (6,099) (5,700)
Restructuring expense (594) --
Investment income 360 475
Interest expense (1,133) (1,362)
Amortization of deferred financing fees (89) (134)
Other, net (517) (139)
- -------------------------------------------------------------------------------
Total $ (1,898) $ 2,725
===============================================================================
Mar. 31, Dec. 31,
2008 2007
- -------------------------------------------------------------------------------
Identifiable assets
Entertainment $ 285,801 $ 287,940
Publishing 31,866 35,320
Licensing 11,388 11,560
Corporate Administration and Promotion 105,302 110,336
- -------------------------------------------------------------------------------
Total $ 434,357 $ 445,156
===============================================================================
(L) SUBSEQUENT EVENT
On April 1, 2008, we completed the sale of the assets related to our Los
Angeles production facility to Broadcast Facilities, Inc., or BFI, for $12.0
million. Our need for the facility had significantly decreased since its
inception, and we believe that the need for linear network transmission capacity
will continue to decrease over the next several years. We recorded a $1.5
million charge on assets held for sale in 2007.
In connection with the sale of these assets, we entered into an agreement
to sublet the entirety of the leased production facility in Los Angeles to BFI
for a period equal to the remaining term of our lease. BFI has agreed to assume
all of our liabilities and obligations under the existing lease of the facility
as a part of the sublease and has provided a letter of credit in the amount of
$5.0 million to secure the performance of its obligations under the sublease.
Also in connection with the sale of these assets, we have assigned our
rights and obligations under our four domestic transponder agreements to BFI and
entered into a services agreement under which BFI is providing us with certain
satellite transmission and other related services (including compression, uplink
and playback) for our standard definition cable channels. If we launch high
definition cable channels during the term of the services agreement, BFI will
also provide such services for these channels. BFI is also providing us with a
dedicated radio studio, office space and, upon our request, certain optional
services. The agreement includes other terms and conditions which are standard
for an agreement of this nature and continues for an initial term of five years.
After the initial term, we may renew the agreement for an additional three-year
term on substantially the same terms and conditions.
13
The foregoing description of the terms of the sublease and services
agreements is a summary and by its nature is incomplete. For further information
regarding the terms and conditions of these agreements, reference is made to the
text of the agreements, which will be filed as exhibits to our Quarterly Report
on Form 10-Q for the quarter ended June 30, 2008.
14
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 of this
Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the
fiscal year ended December 31, 2007.
RESULTS OF OPERATIONS
The following table sets forth our results of operations (in millions,
except per share amounts):
Quarters Ended
March 31,
---------------------
2008 2007
- -------------------------------------------------------------------------------
Net revenues
Entertainment
Domestic TV $ 16.5 $ 19.7
International TV 14.7 13.8
Online/mobile 15.2 15.7
Other 1.5 1.7
- -------------------------------------------------------------------------------
Total Entertainment 47.9 50.9
- -------------------------------------------------------------------------------
Publishing
Domestic magazine 16.1 19.1
International magazine 2.1 1.9
Special editions and other 1.9 2.3
- -------------------------------------------------------------------------------
Total Publishing 20.1 23.3
- -------------------------------------------------------------------------------
Licensing
Consumer products 9.2 8.7
Location-based entertainment 0.9 0.9
Marketing events 0.2 0.3
Other 0.2 1.3
- -------------------------------------------------------------------------------
Total Licensing 10.5 11.2
- -------------------------------------------------------------------------------
Total net revenues $ 78.5 $ 85.4
===============================================================================
Net income (loss)
Entertainment
Before programming amortization and online content
expenses $ 12.5 $ 14.5
Programming amortization and online content expenses (9.8) (10.2)
- -------------------------------------------------------------------------------
Total Entertainment 2.7 4.3
- -------------------------------------------------------------------------------
Publishing (3.2) (2.4)
- -------------------------------------------------------------------------------
Licensing 6.7 7.7
- -------------------------------------------------------------------------------
Corporate Administration and Promotion (6.1) (5.7)
- -------------------------------------------------------------------------------
Segment income 0.1 3.9
Restructuring expense (0.6) --
- -------------------------------------------------------------------------------
Operating income (loss) (0.5) 3.9
- -------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 0.3 0.5
Interest expense (1.1) (1.4)
Amortization of deferred financing fees (0.1) (0.1)
Other, net (0.5) (0.2)
- -------------------------------------------------------------------------------
Total nonoperating expense (1.4) (1.2)
- -------------------------------------------------------------------------------
Income (loss) before income taxes (1.9) 2.7
Income tax expense (1.2) (1.2)
- -------------------------------------------------------------------------------
Net income (loss) $ (3.1) $ 1.5
- -------------------------------------------------------------------------------
Basic and diluted earnings (loss) per common share $ (0.09) $ 0.04
===============================================================================
15
Revenues decreased $6.9 million, or 8%, compared to the prior year quarter
largely due to lower domestic TV and domestic magazine revenues combined with
the impact of an opportunistic sale of original artwork in the prior year
quarter.
Segment income decreased $3.8 million, or 98%, compared to the prior year
quarter due to lower results from each of our groups, primarily due to the lower
revenues discussed above.
Operating results decreased $4.4 million compared to the prior year
quarter due to the lower segment income previously discussed, coupled with $0.6
million of restructuring expense in the current year quarter.
Net loss for the current year quarter was $3.1 million compared to net
income of $1.5 million in the prior year quarter. This decrease is primarily due
to the lower operating results previously discussed.
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 $3.2 million, or 16%,
compared to the prior year quarter primarily due to the impact of an unfavorable
variance related to previously estimated revenues in the current year quarter
compared to a favorable variance in the prior year quarter. Additionally,
Playboy TV monthly subscription revenues increased for the current year quarter,
but were more than offset by lower pay-per-view revenues reflecting continued
consumer migration from linear networks to the more competitive video-on-demand
platform. Profit contribution decreased $2.3 million compared to the prior year
quarter as lower expenses partially offset the revenue decline.
International TV revenues increased $0.9 million, or 6%, and profit
contribution increased $1.5 million compared to the prior year quarter primarily
due to growth in our European networks. A decrease in costs from our U.K.
networks also had a favorable impact on profit contribution in the current year
quarter.
Online/mobile revenues decreased $0.5 million, or 3%, and profit
contribution decreased $1.8 million compared to the prior year quarter. This
business is in transition and is expected to have lower revenues and profit
contribution during this time. Additionally, our Playboy and BUNNYshop
e-commerce and catalog businesses have been outsourced to eFashion Solutions,
LLC, which will start negatively impacting revenues and positively impacting
profit contribution.
Revenues from other businesses decreased $0.2 million, or 7%. Profit
contribution increased $0.9 million compared to the prior year quarter primarily
due to a legal settlement recorded in the prior year quarter.
The group's administrative expenses increased $0.3 million, or 7%,
compared to the prior year quarter.
Programming amortization and online content expenses decreased $0.4
million, or 4%, compared to the prior year quarter.
Segment income for the group decreased $1.6 million, or 37%, compared to
the prior year quarter due to the results previously discussed.
PUBLISHING GROUP
Domestic magazine revenues decreased $3.0 million, or 16%, compared to the
prior year quarter. Subscription revenues decreased $0.8 million, or 7%,
primarily due to 5% fewer copies served in the current year quarter. Newsstand
revenues decreased $0.4 million, or 16%, primarily due to 20% fewer copies sold.
As previously announced, advertising revenues decreased $1.9 million, or 32%,
due to a 22% decrease in average net revenue per page, largely due to our lower
rate base effective with the January 2008 issue, combined with 12% fewer
advertising pages, due in part to the loss of a major advertiser. Advertising
sales for the 2008 second quarter magazine issues are closed, and we expect to
report approximately 10% lower advertising revenues and 5% fewer advertising
pages compared to the 2007 second quarter.
16
On a combined basis, Playboy print and online advertising revenues
decreased $1.9 million, or 30%, compared to the prior year quarter.
International magazine revenues increased $0.2 million, or 11%, compared
to the prior year quarter.
Special editions and other revenues decreased $0.4 million, or 16%,
compared to the prior year quarter due mainly to special editions, the result of
14% fewer newsstand copies sold, partially offset by the impact of a $1.00 cover
price increase effective with the July 2007 issues.
Segment loss for the group increased $0.8 million, or 32%, compared to the
prior year quarter. Lower manufacturing costs due to printing fewer copies and
pages per issue, lower editorial costs and lower post-employment benefit costs
largely offset the revenue decline and severance expense in the current year
quarter.
LICENSING GROUP
Licensing Group revenues decreased $0.7 million, or 6%, compared to the
prior year quarter. International consumer products royalties were 10% higher
but the prior year quarter was favorably impacted by a $1.3 million
opportunistic sale of original art.
The group's segment income decreased $1.0 million, or 13%, compared to the
prior year quarter primarily due to these decreased revenues.
CORPORATE ADMINISTRATION AND PROMOTION
Corporate Administration and Promotion expenses increased $0.4 million, or
7%, compared to the prior year quarter.
RESTRUCTURING EXPENSE
In 2007, we implemented a plan to outsource our remaining e-commerce and
catalog businesses, to sell the assets related to our Los Angeles production
facility and to eliminate office space obtained as part of the acquisition of
Club Jenna, Inc. and related companies. As a result of this restructuring plan,
we recorded a reserve of $0.4 million for costs associated with a workforce
reduction of 28 employees. During the quarter ended March 31, 2008, as part of
this restructuring plan, we recorded an additional reserve of $0.6 million for
contract termination fees and expenses related to the 2007 workforce reduction.
During the quarter ended March 31, 2008, we made cash payments of $0.4
million related to prior years' restructuring plans. Approximately $12.9 million
of the total costs of our prior years' restructuring plans was paid through
March 31, 2008, with the remaining $0.7 million to be paid during 2008.
INCOME TAX EXPENSE
Income tax expense of $1.2 million for the current year quarter was flat
compared to the prior year quarter.
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 television 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 deferred tax liabilities.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2008, we had $17.7 million in cash and cash equivalents
compared to $20.6 million in cash and cash equivalents at December 31, 2007.
During the quarter ended March 31, 2008, we sold our $6.0 million of auction
rate securities, or ARS, which were included in marketable securities and
short-term investments at December 31, 2007. Total financing obligations were
$115.0 million at both March 31, 2008 and December 31, 2007.
17
At March 31, 2008, 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 have 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, 2008, there were no borrowings under this
facility and $10.6 million in letters of credit outstanding, resulting in $39.4
million of available borrowings.
DERIVATIVE INSTRUMENTS
We hedge the variability of cash flows we expect to receive related to
royalty payments denominated in the yen and the euro with derivative
instruments. These royalties are hedged with forward contracts for periods not
exceeding 12 months. The fair value and carrying value of our forward contracts
are not material. For the quarter ended March 31, 2008, hedges deemed to be
ineffective due to us not being able to exactly match the settlement date of the
hedges to the receipt of these royalty payments resulted in losses of $0.4
million, which were recorded as "Other, net" on the Consolidated Statements of
Operations and Comprehensive Income (Loss).
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used for operating activities for the quarter ended March 31,
2008 was $1.5 million, compared to net cash provided by operating activities of
$7.4 million in the prior year quarter. This decrease was primarily due to the
previously discussed operating results combined with decreases in accounts
payable and accrued salaries, wages and employee benefits, partially offset by
decreases in prepaid expenses and other current assets and entertainment
programming investments.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used for investing activities for the quarter ended March 31,
2008 was $1.5 million, a decrease of $7.3 million compared to the prior year
quarter. This decrease reflected net proceeds from sales of investments of $8.1
million, primarily reflecting the sale of our ARS and a portion of our
investment in an enhanced cash portfolio, and additions of $6.8 million related
to the April 1, 2008 sale of assets related to our Los Angeles production
facility during the current year quarter, compared to net purchases of
investments of $6.2 million in the prior year quarter.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used for financing activities of $0.2 million for the quarter
ended March 31, 2008 was flat compared to the prior year quarter.
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
The positive effects of foreign currency exchange rates on cash and cash
equivalents during the current year and prior year quarter of $0.2 million and
$0.1 million, respectively, were due to the weakening of the U.S. dollar against
certain foreign currencies.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 2008, the Financial Accounting Standards Board, or the FASB,
issued Statement of Financial Accounting Standards No. 161, Disclosures about
Derivative Instruments and Hedging Activities-an amendment of FASB Statement No.
133, or Statement 161. Statement 161 requires enhanced disclosures about how and
why an entity uses derivative instruments, how derivative instruments and
related hedged items are accounted for under Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities,
and its related interpretations, and how derivative instruments and related
hedged items affect an entity's financial position, financial performance and
cash flows. We are required to adopt Statement 161 at the beginning of 2009.
Since Statement 161 impacts our disclosure but not our accounting treatment for
derivative instruments and related hedged items, our adoption of Statement 161
will not impact our results of operations or financial condition.
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 160, Noncontrolling Interests in Consolidated Financial
Statements-an amendment of ARB No. 51, or Statement 160. Statement 160 clarifies
that a noncontrolling interest (previously referred to as minority interest) in
a subsidiary is an ownership
18
interest in a consolidated entity that should be reported as equity in the
consolidated financial statements. It also requires consolidated net income to
include the amounts attributable to both the parent and the noncontrolling
interest. We are required to adopt Statement 160 at the beginning of 2009. We
are currently evaluating the impact, if any, of adopting Statement 160 on our
future results of operations and financial condition.
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141 (revised 2007), Business Combinations, or Statement 141(R).
Statement 141(R) retains the fundamental requirements of the original
pronouncement requiring that the purchase method be used for all business
combinations. Statement 141(R) defines the acquirer as the entity that obtains
control of one or more businesses in the business combination, establishes the
acquisition date as the date that the acquirer achieves control and requires the
acquirer to recognize the assets acquired, liabilities assumed and any
noncontrolling interest at their fair values as of the acquisition date.
Statement 141(R) also requires, among other things, that acquisition-related
costs be recognized separately from the acquisition. We are required to adopt
Statement 141(R) prospectively for business combinations on or after January 1,
2009. Assets and liabilities that arose from business combinations prior to
January 1, 2009 are not affected by the adoption of Statement 141(R).
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.
Since we use a December 31 measurement date, this provision of Statement 158
will not have an impact on our 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 adopted Statement 157 on January 1, 2008, as required for our
financial assets and financial liabilities. However, FASB Staff Position FAS
157-2 delayed the effective date of Statement 157 to the beginning of 2009 for
all nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). We do not expect the adoption of Statement 157 for
our nonfinancial assets and nonfinancial liabilities to have a significant
impact on our future results of operations or financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks, including changes in foreign
currency exchange rates. There was no material change in our exposure to such
fluctuations during the quarter ended March 31, 2008. Information regarding
market risks as of December 31, 2007 is contained in Item 7A. "Quantitative And
Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2007.
At March 31, 2008, we did not have any floating interest rate exposure. As
of that date, all of our outstanding debt 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 is influenced by changes in market interest rates, the
share price of our Class B common stock and our credit quality. At March 31,
2008, the convertible notes had an implied fair value of $99.1 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
19
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.
20
PART II
OTHER INFORMATION
ITEM 1. 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, 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 plaintiffs' motion. On December 27, 2006, we filed a petition for
review with the Texas Supreme Court. On January 25, 2008, the Texas Supreme
Court denied our petition for review. On February 8, 2008, we filed a petition
for rehearing 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 April 12, 2004, J. Roger Faherty, or Faherty, filed suit in the United
States District Court for the Southern District of New York against Spice
Entertainment Companies, or Spice, Playboy Enterprises, Inc., or Playboy,
Playboy Enterprises International, Inc., or PEII, D. Keith Howington, Anne
Howington and Logix Development Corporation, or 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 our Annual Report on Form 10-K for the
fiscal year ended December 31, 2007, 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 a notice of appeal from the verdict. As a result of rulings by the
California Court of Appeal and the California Supreme Court as recently as
February 13, 2008, Logix' recovery against Faherty has been reduced
significantly, although certain portions of the case have been set for a
retrial. In light of these rulings, however, when coupled with any offset as a
result of the settlement of the Logix litigation, any ultimate net recovery by
Logix against Faherty will be severely reduced and might be entirely eliminated.
In consideration of this appeal, Faherty and Playboy have agreed to continue a
temporary stay of the indemnification action filed in the United States District
Court for the Southern District of New York through the end of June 2008. 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.
21
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 fiscal year ended December 31, 2007.
ITEM 6. EXHIBITS
Exhibit Number Description
- -------------- -----------
10.1* Amendment, effective March 31, 2008, to Affiliation Agreement, dated
July 8, 2004, between Playboy Entertainment Group, Inc., Spice
Entertainment, Inc., Spice Hot Entertainment, Inc., and Time Warner
Cable Inc.
10.2* Content License, Marketing and Sales Agreement, dated January 15, 2008,
between Playboy.com, Inc. and eFashion Solutions, LLC
10.3* First Amendment, effective February 2, 2008, to the Content License,
Marketing and Sales Agreement, dated January 15, 2008, between
Playboy.com, Inc. and eFashion Solutions, LLC
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
* Portions of this exhibit have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment pursuant to Rule 24b-2 of the Securities and Exchange Act of
1934.
22
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, 2008 By /s/ Linda Havard
----------------
Linda G. Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)
23
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
10.1* Amendment, effective March 31, 2008, to Affiliation Agreement, dated
July 8, 2004, between Playboy Entertainment Group, Inc., Spice
Entertainment, Inc., Spice Hot Entertainment, Inc., and Time Warner
Cable Inc.
10.2* Content License, Marketing and Sales Agreement, dated January 15, 2008,
between Playboy.com, Inc. and eFashion Solutions, LLC
10.3* First Amendment, effective February 2, 2008, to the Content License,
Marketing and Sales Agreement, dated January 15, 2008, between
Playboy.com, Inc. and eFashion Solutions, LLC
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
* Portions of this exhibit have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment pursuant to Rule 24b-2 of the Securities and Exchange Act of
1934.
24