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, 2009
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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section
232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes [ ]
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 [ ]
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, 2009, there were 4,864,102 shares of Class A Common Stock and
28,574,953 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 mobile 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) Further 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 and licensing 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) Further 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, mobile, 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 mobile businesses' reliance on third parties
for technology and distribution, and any changes in that technology,
distribution and/or unforeseen delays in implementation which might affect
our financial results, 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;
(14) Competition for channel space on linear television or video-on-demand
platforms;
(15) 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;
(16) Risks that we may not realize the expected increased sales and profits and
other benefits from acquisitions;
(17) Any charges or costs we incur in connection with restructuring measures we
may take in the future;
(18) Risks associated with the financial condition of Claxson Interactive
Group, Inc., our Playboy TV-Latin America, LLC, joint venture partner;
(19) Increases in paper, printing or postage costs;
2
(20) Effects of the national consolidation of the single-copy magazine
distribution system and risks associated with the financial stability of
major magazine wholesalers;
(21) Effects of the national consolidation and/or bankruptcies of television
distribution companies (e.g., cable MSOs, satellite platforms and
telecommunications companies);
(22) Risks associated with the viability of our subscription, on-demand,
ad-supported and e-commerce Internet models;
(23) Risks that adverse market and economic conditions may result in a decrease
in the value of our investments in marketable securities and risks that
adverse market conditions in the securities and credit markets may
significantly affect our ability to access the capital and credit markets;
and
(24) The risk that our common stock could be delisted from the New York Stock
Exchange, or NYSE, if we fail to meet the NYSE's continued listing
requirements.
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, 2008.
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 Loss
for the Quarters Ended March 31, 2009 and 2008 (Unaudited) 5
Consolidated Balance Sheets at March 31, 2009 (Unaudited)
and December 31, 2008 6
Condensed Consolidated Statements of Cash Flows for the
Quarters Ended March 31, 2009 and 2008 (Unaudited) 7
Notes to Condensed Consolidated Financial Statements
(Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 1A. Risk Factors 23
Item 6. Exhibits 23
4
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
for the Quarters Ended March 31 (Unaudited)
(In thousands, except per share amounts)
2009 2008
- ---------------------------------------------------------------------------------------------
Net revenues $ 61,633 $ 78,536
- ---------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales (50,430) (63,756)
Selling and administrative expenses (12,538) (14,705)
Restructuring expense (3,179) (594)
Impairment charge (5,518) -
- ---------------------------------------------------------------------------------------------
Total costs and expenses (71,665) (79,055)
- ---------------------------------------------------------------------------------------------
Operating loss (10,032) (519)
- ---------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 33 360
Interest expense (2,147) (2,110)
Amortization of deferred financing fees (225) (156)
Other, net (89) (517)
- ---------------------------------------------------------------------------------------------
Total nonoperating expense (2,428) (2,423)
- ---------------------------------------------------------------------------------------------
Loss before income taxes (12,460) (2,942)
Income tax expense (1,202) (1,237)
- ---------------------------------------------------------------------------------------------
Net loss $ (13,662) $ (4,179)
=============================================================================================
Other comprehensive income (loss)
Unrealized loss on marketable securities (26) (470)
Unrealized gain on derivatives - 78
Foreign currency translation gain (loss) (187) 383
- ---------------------------------------------------------------------------------------------
Total other comprehensive loss (213) (9)
- ---------------------------------------------------------------------------------------------
Comprehensive loss $ (13,875) $ (4,188)
=============================================================================================
Weighted average number of common shares outstanding
Basic and diluted 33,388 33,275
=============================================================================================
Basic and diluted loss per common share $ (0.41) $ (0.13)
=============================================================================================
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,
2009 2008
- ---------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 25,902 $ 25,192
Marketable securities and short-term investments 605 6,139
Receivables, net of allowance for doubtful accounts of
$4,397 and $4,084, respectively 34,365 40,428
Receivables from related parties 3,360 2,061
Inventories 6,335 7,341
Deferred tax asset 2,035 2,268
Prepaid expenses and other current assets 6,591 9,127
- ---------------------------------------------------------------------------------------------
Total current assets 79,193 92,556
- ---------------------------------------------------------------------------------------------
Property and equipment, net 20,135 20,319
Programming costs, net 51,281 52,056
Goodwill 22,206 27,758
Trademarks 42,709 42,503
Distribution agreements, net of accumulated amortization
of $6,320 and $6,126, respectively 11,944 12,138
Deferred tax asset 176 180
Other noncurrent assets 5,830 6,078
- ---------------------------------------------------------------------------------------------
Total assets $ 233,474 $ 253,588
=============================================================================================
Liabilities
Acquisition liabilities $ 2,844 $ 2,785
Accounts payable 21,884 24,816
Accrued salaries, wages and employee benefits 9,698 9,159
Deferred revenues 36,764 36,402
Other current liabilities and accrued expenses 13,396 19,557
- ---------------------------------------------------------------------------------------------
Total current liabilities 84,586 92,719
- ---------------------------------------------------------------------------------------------
Financing obligations 100,817 99,763
Acquisition liabilities 5,291 5,419
Deferred tax liability 8,125 7,783
Other noncurrent liabilities 20,213 19,785
- ---------------------------------------------------------------------------------------------
Total liabilities 219,032 225,469
- ---------------------------------------------------------------------------------------------
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;
28,933,455 and 28,868,900 issued, respectively 289 288
Capital in excess of par value 259,437 259,240
Accumulated deficit (237,348) (223,686)
Treasury stock, at cost - 381,971 shares (5,000) (5,000)
Accumulated other comprehensive loss (2,985) (2,772)
- ---------------------------------------------------------------------------------------------
Total shareholders' equity 14,442 28,119
- ---------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 233,474 $ 253,588
=============================================================================================
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)
2009 2008
- ---------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (13,662) $ (4,179)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation of property and equipment 1,232 1,044
Amortization of intangible assets 506 565
Amortization of investments in entertainment programming 7,986 8,210
Amortization of deferred financing fees 225 156
Stock-based compensation 178 584
Noncash interest expense 1,054 977
Impairment charge 5,518 -
Deferred income taxes 579 431
Payment of deferred compensation plan (5,133) (106)
Net change in operating assets and liabilities 5,483 (1,126)
Investments in entertainment programming (7,171) (8,258)
Other, net 17 215
- ---------------------------------------------------------------------------------------------
Net cash used for operating activities (3,188) (1,487)
- ---------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchases of investments (93) (397)
Proceeds from sales of investments 5,575 8,513
Additions to assets held for sale - (6,832)
Additions to property and equipment (1,079) (2,759)
Other, net 4 -
- ---------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 4,407 (1,475)
- ---------------------------------------------------------------------------------------------
Cash flows from financing activities
Payments of deferred financing fees (173) -
Payments of acquisition liabilities (250) (250)
Proceeds from stock-based compensation 21 36
- ---------------------------------------------------------------------------------------------
Net cash used for financing activities (402) (214)
- ---------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (107) 243
- ---------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 710 (2,933)
Cash and cash equivalents at beginning of period 25,192 20,603
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 25,902 $ 17,670
=============================================================================================
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, 2008. Certain amounts
reported for the prior periods have been reclassified to conform to the current
year's presentation.
As previously announced, in concert with the integration of our publishing
and online businesses, beginning with the current year quarter, we have moved
the reporting of our online/mobile business from the Entertainment Group into
the new Print/Digital Group, formerly the Publishing Group. The Print/Digital
Group will focus on creating brand-consistent content that extends across print
and digital platforms. Amounts reported for prior periods have been reclassified
to conform to the revised segment reporting.
(B) RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2008, the Financial Accounting Standards Board, or FASB, issued
Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That
May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), or
FSP APB 14-1. FSP APB 14-1 specifies that issuers of convertible debt
instruments that may be settled in cash upon conversion should separately
account for the liability and equity components in a manner that will reflect
the entity's nonconvertible debt borrowing rate when interest cost is recognized
in subsequent periods. We adopted FSP APB 14-1 at the beginning of 2009 and
applied FSP APB 14-1 retrospectively to all prior periods. In applying FSP APB
14-1, we reclassified $29.1 million of the carrying value of our 3.00%
convertible senior subordinated notes due 2025, or convertible notes, and $1.2
million of the issuance costs related to the convertible notes to equity
retroactive to the March 2005 issuance date. These amounts represent the equity
component of the proceeds from the notes calculated assuming a 7.75%
nonconvertible borrowing rate. The discount is being accreted to "Interest
expense" and the debt issuance costs are being amortized to "Amortization of
deferred financing fees" over a seven-year term, which represents the period
beginning on the issuance date of the notes of March 15, 2005 and ending on the
first put date of March 15, 2012. Accordingly, we recorded $4.0 million, $3.8
million, $3.5 million and $2.6 million of additional noncash interest expense
and $0.3 million, $0.2 million, $0.3 million and $0.2 million of additional
amortization of deferred financing fees, or $0.13, $0.12, $0.11 and $0.08 per
basic and diluted share on a combined basis in 2008, 2007, 2006 and 2005,
respectively. We will recognize additional noncash interest expense of $4.4
million and additional amortization of deferred financing fees of $0.3 million
for the year ended December 31, 2009, of which $1.1 million of interest expense
and $0.1 million of amortization of deferred financing fees, or $0.03 per basic
and diluted share on a combined basis, were recognized for the current year
quarter. On January 1, 2009, as a result of adopting FSP APB 14-1, we reduced
the carrying value of the debt in "Financing obligations" by $15.2 million,
decreased "Other noncurrent assets" by $2.2 million, increased "Capital in
excess of par value" by $27.9 million and increased "Accumulated deficit" by
$14.9 million on our Consolidated Balance Sheet.
In March 2008, 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 adopted 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 did 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
8
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 adopted Statement 160 at the beginning of 2009. The adoption of
Statement 160 did 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. FASB Staff Position FAS 157-2, Effective Date of FASB Statement No.
157, 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 adopted Statement 157 on January 1, 2008 for our
financial assets and liabilities and on January 1, 2009 for our nonfinancial
assets and liabilities. The adoption of Statement 157 did not have an impact on
our results of operations or financial condition.
(C) RESTRUCTURING EXPENSE
In the current year quarter, we implemented a restructuring plan to
integrate our print and digital businesses and base them in our Chicago office
as well as to streamline operations across the Company, including the
elimination of additional positions. As a result of this plan, we recorded a
charge of $2.6 million related to the workforce reduction of 107 employees,
whose jobs will be eliminated by the end of the second quarter of 2009.
Severance payments under this plan began in the current year quarter and will be
completed by the end of 2009. We will record an additional charge of
approximately $4 million in the second quarter of 2009 largely related to the
exiting of our New York office space.
In the fourth quarter of 2008, we implemented a restructuring plan to
lower overhead costs, primarily related to senior Corporate and Entertainment
Group positions. As a result of this plan, we recorded a charge of $4.0 million
related to 21 employees, most of whose jobs were eliminated in the current year
quarter. Payments under this plan began in the fourth quarter of 2008 and will
be substantially completed by the end of 2009 with some payments continuing into
2010. In the current year quarter, we recorded an unfavorable adjustment of $0.9
million against this plan as a result of changes in plan assumptions.
In the third quarter of 2008, we implemented a restructuring plan to
reduce overhead costs. As a result of this plan, we recorded a charge of $2.2
million related to costs associated with a workforce reduction of 55 employees,
most of whose jobs were eliminated in the fourth quarter of 2008. Payments under
this plan began in the fourth quarter of 2008 and will be substantially
completed by the end of 2009 with some payments continuing into 2010. In the
current year quarter, we recorded a favorable adjustment of $0.3 million to this
plan as a result of changes in plan assumptions.
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 current liabilities and accrued expenses" on our
Consolidated Balance Sheets (in thousands):
Consolidation
of Facilities
Workforce and
Reduction Operations Total
- --------------------------------------------------------------------------------
Balance at December 31, 2007 $ 429 $ 114 $ 543
Reserve recorded 6,357 - 6,357
Additional reserve recorded 150 445 595
Adjustments to previous estimates (128) (41) (169)
Cash payments (1,633) (518) (2,151)
- --------------------------------------------------------------------------------
Balance at December 31, 2008 5,175 - 5,175
Reserve recorded 2,555 - 2,555
Adjustments to previous estimates 624 - 624
Cash payments (3,145) - (3,145)
- --------------------------------------------------------------------------------
Balance at March 31, 2009 $ 5,209 $ - $ 5,209
================================================================================
9
(D) IMPAIRMENT
In accordance with FASB Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets, or Statement 142, we do not amortize
goodwill and trademarks with indefinite lives, but subject them to annual
impairment tests. Due to the current year quarter realignment of our reporting
segments, we conducted interim impairment testing of goodwill in accordance with
Statement 142. As a result, we recorded an impairment charge on goodwill of $5.5
million as certain digital assets were deemed impaired based on their new
reporting segment. This analysis was based in part upon our financial results
during the current year and our expectation of future performance.
(E) 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,
--------------------
2009 2008
- -------------------------------------------------------------------------------
Numerator:
For basic and diluted EPS - net loss $ (13,662) $ (4,179)
===============================================================================
Denominator:
For basic and diluted EPS - weighted average shares 33,388 33,275
===============================================================================
Basic and diluted loss per common share $ (0.41) $ (0.13)
===============================================================================
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
convertible notes. These shares were not included in the computations of diluted
EPS for the quarters ended March 31, 2009 and 2008, as their inclusion would
have been antidilutive (in thousands):
Quarters Ended
March 31,
--------------------
2009 2008
- -------------------------------------------------------------------------------
Stock options 4,575 3,546
Restricted stock 536 -
Convertible notes 6,758 6,758
- -------------------------------------------------------------------------------
Total 11,869 10,304
===============================================================================
(F) 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):
Mar. 31, Dec. 31,
2009 2008
- -------------------------------------------------------------------------------
Paper $ 1,959 $ 2,371
Editorial and other prepublication costs 4,183 4,759
Merchandise finished goods 193 211
- -------------------------------------------------------------------------------
Total $ 6,335 $ 7,341
===============================================================================
(G) 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 in the U.S. Our income tax
provision also includes deferred
10
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 FASB 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, 2009 and December 31, 2008, we had unrecognized tax benefits
of $8.0 million and do not expect this amount to change significantly over the
next 12 months. Due to the impact of deferred income tax accounting, the
disallowance of these benefits would not affect our 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 2005 through 2008 tax years generally
remain subject to examination by federal and most state tax authorities. In
addition, for all tax years prior to 2005 generating an NOL, tax authorities can
adjust the NOL amount. In our international tax jurisdictions, numerous tax
years remain subject to examination by tax authorities, including tax returns
for 2003 and subsequent years.
(H) FAIR VALUE MEASUREMENT
As discussed in Note (B), Recently Issued Accounting Standards, we adopted
Statement 157 for our financial assets and liabilities on January 1, 2008 and
for our nonfinancial assets and liabilities on January 1, 2009. Our assets
primarily relate to marketable securities and investments, while liabilities
primarily relate to derivative instruments to hedge the variability of
forecasted cash receipts related to royalty payments denominated in yen and
euro.
We utilize the market approach to measure fair value for our assets and
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 three levels: Level 1 -
Inputs are quoted prices in active markets for identical assets or liabilities;
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; and Level 3 - Inputs that are derived
from valuation techniques in which one or more significant inputs or value
drivers are unobservable.
11
The following table sets forth our assets and liabilities measured at fair
value on a recurring basis and the basis of measurement at March 31, 2009 (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 $ 605 $ 144 $ 461(1) $ -
Derivative assets $ 263 $ - $ 263 $ -
- ------------------------------------------------------------------------------------------------------------------------
(1) At December 31, 2008, we had $0.9 million in an enhanced cash portfolio
included in "Marketable securities and short-term investments" on our
Consolidated Balance Sheet. Due to adverse market conditions, we
determined that the market value of this investment was
other-than-temporarily impaired, and through March 31, 2009, we had
cumulative impairment charges of $0.9 million. As of March 31, 2009, we
have received 12 distributions from the investment, which is being
liquidated, at an average net asset value of 95.47%, resulting in a
cumulative realized loss of $1.2 million, which includes the impairment
charges. At March 31, 2009, our remaining balance in this investment was
$0.5 million.
(I) CONTINGENCIES
In 2006, we acquired Club Jenna, Inc. and related companies, for which we
paid $7.7 million at closing, $1.6 million in 2007 and $1.7 million in 2008 with
additional purchase price payments of $2.3 million and $4.3 million due in 2009
and 2010, respectively. Pursuant to the acquisition agreement, we are also
obligated to make future contingent earnout payments based primarily on DVD
sales of existing content of the acquired business over a 10-year period and on
content produced by the acquired business during the five-year period after the
closing of the acquisition. No earnout payments have been made through March 31,
2009 and no future earnout payments are expected as we have exited the DVD
business.
In 2005, we acquired an affiliate network of websites. 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, 2009. During 2008, $0.1 million of
earnout payments were made and recorded as additional purchase price.
(J) BENEFIT PLANS
We 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
during each of the quarters ended March 31, 2009 and March 31, 2008.
(K) 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,
-----------------
2009 2008
- -------------------------------------------------------------------------------
Stock options $ 102 $ 464
Restricted stock units (23) 61
Other equity awards 96 53
ESPP 3 6
- -------------------------------------------------------------------------------
Total $ 178 $ 584
===============================================================================
12
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 adjust our
stock-based compensation expense to reflect actual versus estimated forfeitures.
During the quarters ended March 31, 2009 and 2008, we recorded a favorable
adjustment of $0.1 million and an unfavorable adjustment of $0.1 million,
respectively, to reflect actual forfeitures for vested stock option grants.
Stock Options
We estimate the value of options on the date of grant using the Lattice
Binomial model, or Lattice model. The Lattice model requires extensive analysis
of actual exercise and cancellation data and involves a number of complex
assumptions including expected volatility, risk-free interest rate, expected
dividends and option exercises and cancellations.
The following table sets forth the assumptions used for the Lattice model:
Quarters Ended
March 31,
---------------------
2009 2008
- --------------------------------------------------------------------------------
Expected volatility 43% - 97% N/A
Weighted average volatility 57% N/A
Risk-free interest rate 0.14% - 4.71% N/A
Expected dividends - N/A
- --------------------------------------------------------------------------------
The expected life of stock options represents the weighted average period
the stock options are expected to remain outstanding and is a derived output of
the Lattice model. The expected life of stock options is impacted by all of the
underlying assumptions and calibration of the Lattice model. The Lattice model
assumes that exercise behavior is a function of the option's contractual term,
vesting schedule and the extent to which the option's intrinsic value exceeds
the exercise price.
During the quarter ended March 31, 2009, we granted 996,000 stock options,
exercisable for shares of our Class B stock, which vest over a three-year period
from the grant date and expire 10 years from the grant date. The weighted
average expected life for options granted was 6.9 years and the weighted average
fair value per share for options granted was $0.73. No stock options were
granted during the quarter ended March 31, 2008.
The following table sets forth the activity and balances of our stock
options for the quarter ended March 31, 2009:
Weighted
Average
Number of Exercise
Shares Price
- --------------------------------------------------------------------------------
Outstanding at December 31, 2008 3,578,584 $ 15.22
Granted 996,000 1.25
Forfeited (751,000) 24.59
Canceled (140,834) 11.68
- ---------------------------------------------------------------------
Outstanding at March 31, 2009 3,682,750 $ 9.66
================================================================================
At March 31, 2009, we had $1.1 million of unrecognized stock-based
compensation expense related to nonvested stock options, which will be
recognized over a weighted average period of 2.2 years.
Restricted Stock Units
In March 2009, we awarded 332,000 restricted stock units with a grant-date
fair value per share of $1.25, which provide for the issuance of our Class B
stock vesting over a three-year period from the grant date. No restricted stock
units were granted during the quarter ended March 31, 2008.
13
In May 2008, we awarded 270,625 restricted stock units, which provided for
the issuance of our Class B stock if certain performance goals were met. In
March 2009, the Board of Directors modified the 2008 grants by replacing the
performance-based criteria for the vesting of the grants with a service-based
vesting schedule. Pursuant to the requirements of FASB Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment, the fair value
of the grants was remeasured at the modification date to a fair value of $1.25
per share. Accordingly, we recorded a cumulative adjustment credit of $0.1
million related to this modification. The modification did not affect the number
of shares expected to vest and no incremental compensation cost is associated
with the modification.
During the quarter ended March 31, 2009, we determined that the minimum
performance thresholds associated with the 2006 and 2007 restricted stock unit
grants were not achieved. Accordingly, these grants were forfeited.
The following table sets forth the activity and balances of our restricted
stock units for the quarter ended March 31, 2009:
Weighted
Average
Number of Grant-Date
Shares Fair Value
- --------------------------------------------------------------------------------
Outstanding at December 31, 2008 632,750 $ 8.02
Granted 332,000 1.25
Forfeited (385,875) 11.74
Canceled (43,125) 1.55
- -------------------------------------------------------------------
Outstanding at March 31, 2009 535,750 $ 1.25
================================================================================
At March 31, 2009, we had $0.4 million of unrecognized stock-based
compensation expense related to nonvested restricted stock units, which will be
recognized over a weighted average period of 2.6 years.
14
(L) SEGMENT INFORMATION
The following table sets forth financial information by reportable segment
(in thousands):
Quarters Ended
March 31,
---------------------
2009 2008
- -------------------------------------------------------------------------------
Net revenues
Entertainment $ 26,181 $ 32,669
Print/Digital 26,080 35,376
Licensing 9,372 10,491
- -------------------------------------------------------------------------------
Total $ 61,633 $ 78,536
===============================================================================
Loss before income taxes
Entertainment $ 2,950 $ 2,359
Print/Digital (3,628) (2,828)
Licensing 5,606 6,643
Corporate (6,263) (6,099)
Restructuring expense (3,179) (594)
Impairment charge (5,518) -
Investment income 33 360
Interest expense (2,147) (2,110)
Amortization of deferred financing fees (225) (156)
Other, net (89) (517)
- -------------------------------------------------------------------------------
Total $ (12,460) $ (2,942)
===============================================================================
Mar. 31, Dec. 31,
2009 2008
- -------------------------------------------------------------------------------
Identifiable assets
Entertainment $ 110,937 $ 115,230
Print/Digital 25,227 36,874
Licensing 8,164 7,601
Corporate 89,146 93,883
- -------------------------------------------------------------------------------
Total $ 233,474 $ 253,588
===============================================================================
As previously announced, in concert with the integration of our publishing
and online businesses, beginning with the current year quarter, we have moved
the reporting of our online/mobile business from the Entertainment Group into
the new Print/Digital Group, formerly the Publishing Group. The Print/Digital
Group will focus on creating brand-consistent content that extends across print
and digital platforms. These reporting changes are in conformity with the
requirements of FASB Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information, and better
reflect how management views the Company's operations. The revised segment
reporting is reflected throughout this report for all periods presented. Amounts
reported for prior periods have been reclassified to conform to the revised
segment reporting.
15
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, 2008.
RESULTS OF OPERATIONS (1)
The following table sets forth our results of operations (in millions,
except per share amounts):
Quarters Ended
March 31,
-------------------
2009 2008
- -------------------------------------------------------------------------------
Net revenues
Entertainment
Domestic TV $ 13.3 $ 16.5
International TV 11.3 14.7
Other 1.6 1.5
- -------------------------------------------------------------------------------
Total Entertainment 26.2 32.7
- -------------------------------------------------------------------------------
Print/Digital
Domestic magazine 13.5 16.1
International magazine 1.7 2.1
Special editions and other 1.6 1.9
Digital 9.3 15.2
- -------------------------------------------------------------------------------
Total Print/Digital 26.1 35.3
- -------------------------------------------------------------------------------
Licensing
Consumer products 7.8 9.2
Location-based entertainment 1.1 0.9
Marketing events 0.1 0.2
Other 0.3 0.2
- -------------------------------------------------------------------------------
Total Licensing 9.3 10.5
- -------------------------------------------------------------------------------
Total net revenues $ 61.6 $ 78.5
===============================================================================
Net loss
Entertainment
Before programming amortization $ 11.0 $ 10.5
Programming amortization (8.0) (8.2)
- -------------------------------------------------------------------------------
Total Entertainment 3.0 2.3
- -------------------------------------------------------------------------------
Print/Digital (3.6) (2.8)
- -------------------------------------------------------------------------------
Licensing 5.6 6.7
- -------------------------------------------------------------------------------
Corporate (6.3) (6.1)
- -------------------------------------------------------------------------------
Segment income (loss) (1.3) 0.1
Restructuring expense (3.2) (0.6)
Impairment charge (5.5) -
- -------------------------------------------------------------------------------
Operating loss (10.0) (0.5)
- -------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income - 0.3
Interest expense (2.1) (2.1)
Amortization of deferred financing fees (0.3) (0.2)
Other, net (0.1) (0.5)
- -------------------------------------------------------------------------------
Total nonoperating expense (2.5) (2.5)
- -------------------------------------------------------------------------------
Loss before income taxes (12.5) (3.0)
Income tax expense (1.2) (1.2)
- -------------------------------------------------------------------------------
Net loss $ (13.7) $ (4.2)
- -------------------------------------------------------------------------------
Basic and diluted loss per share $ (0.41) $ (0.13)
===============================================================================
(1) Certain amounts reported for the prior periods have been reclassified to
conform to the current year's presentation.
16
OVERVIEW
Our total revenues decreased $16.9 million, or 22%, compared to the prior
year quarter due to lower revenues from each of our groups, but our segment loss
of $1.3 million for the current year quarter was only $1.4 million below the
prior year quarter largely due to the results of our cost reduction efforts.
A $5.5 million impairment charge during the current year quarter, a $2.6
million increase in restructuring expense and lower segment income compared to
the prior year quarter resulted in our operating and net loss increasing by $9.5
million compared to the prior year quarter.
As previously announced, in concert with the integration of our publishing
and online businesses, beginning with the current year quarter, we have moved
the reporting of our online/mobile business from the Entertainment Group into
the new Print/Digital Group, formerly the Publishing Group. The Print/Digital
Group will focus on creating brand-consistent content that extends across print
and digital platforms. Amounts reported for prior periods have been reclassified
to conform to the revised segment reporting.
CURRENT ECONOMIC CONDITIONS
We have been reporting on the challenges we and the media industry are
facing, including increased competition for consumers' attention, the migration
of advertisers to other platforms, the increasing costs of paper, postage, ink
and other expenses and the current state of the global economy. We have made
significant changes to our processes and business activities to address the
changing economic environment and industry challenges. To that end, we have
developed and begun implementing plans to reduce overhead costs, including both
employees and facilities, the strategic realignment of our print and digital
businesses and a strategic focus on Playboy-branded licensing, resulting in the
sale of our Los Angeles production facility assets, the outsourcing of our
e-commerce and catalog businesses and our exiting of the DVD market. We will
continue to adapt our business and strategic plans to increase shareholder value
and profitability.
ENTERTAINMENT GROUP
Domestic TV revenues decreased $3.2 million, or 19%, compared to the prior
year quarter, in part reflecting consumers' continuing migration from linear
networks to the more competitive video-on-demand platform, where we control less
shelf space. The sale of our Los Angeles production facility assets in the
second quarter of 2008 accounted for the majority of the lower revenues.
International TV revenues decreased $3.4 million, or 23%, compared to the
prior year quarter primarily reflecting foreign currency exchange rate
fluctuations.
Revenues from other businesses were flat compared to the prior year
quarter. Revenues from our production company, Alta Loma Entertainment, were
favorable. As described in previous filings, we have exited the DVD business to
focus on digital distribution, which resulted in lower revenues.
Segment income for the group increased $0.7 million, or 25%, compared to
the prior year quarter. The lower revenues previously discussed were more than
offset by lower costs associated with the sale of our Los Angeles production
facility and the exiting of the DVD business, foreign currency exchange rate
fluctuations and lower group administrative expenses.
PRINT/DIGITAL GROUP
Our domestic magazine revenue streams continued to decline during the
current year quarter, reflecting industry dynamics and resulting in a $2.6
million, or 16%, decrease in revenues compared to the prior year quarter.
Subscription revenues were $0.7 million, or 7%, lower primarily due to 6% fewer
paid copies served in the current year quarter. Newsstand revenues decreased
$0.8 million, or 39%, on 33% fewer copies sold in the current year quarter. 32%
fewer advertising pages compared to the prior year quarter resulted in a $1.1
million, or 28%, decrease in advertising revenues. Advertising sales for the
2009 second quarter magazine issues are closed, and we expect to report
approximately 39% lower advertising revenues and 38% fewer advertising pages
compared to the 2008 second quarter.
17
On a combined basis, Playboy print and digital advertising revenues
decreased $1.2 million, or 25%, compared to the prior year quarter.
International magazine revenues decreased $0.4 million, or 17%, compared
to the prior year quarter largely due to lower royalties from our German
edition.
Special editions and other revenues decreased $0.3 million, or 19%,
compared to the prior year quarter due mainly to 18% fewer newsstand copies
sold.
Digital revenues decreased $5.9 million, or 39%, compared to the prior
year quarter largely due to outsourcing our Playboy and BUNNYshop e-commerce and
catalog business during the prior year quarter coupled with lower paysite
revenues, which were impacted by continued competition. In the second quarter of
2009, we completed a major infrastructure overhaul, redesign and relaunch of our
websites.
The group's segment loss increased $0.8 million, or 28%, compared to the
prior year quarter as the revenue declines discussed earlier, combined with
higher direct response advertising costs in the current year quarter, were
mostly offset by lower e-commerce, manufacturing, severance and subscription
mailing costs and other cost savings initiatives. We expect to report a modest
improvement in domestic magazine's segment results for the year and improved
segment income for the digital business by year end.
LICENSING GROUP
Licensing Group revenues for the current year quarter were $1.2 million,
or 11%, lower than the prior year quarter. International consumer products
royalties were lower primarily from Western European licensees as a result of
the economic recession. Partially offsetting were higher domestic consumer
products revenues resulting in part from our acquisition of a Playboy retail
store in Las Vegas in the fourth quarter of 2008.
The group's segment income decreased $1.1 million, or 16%, compared to the
prior year quarter primarily due to the changes in revenues discussed above.
Segment income was also impacted by costs related to the acquired retail store.
We expect revenues and segment income in the second half of 2009 to increase
compared to the prior year period.
CORPORATE
Corporate expenses increased $0.2 million, or 3%, compared to the prior
year quarter.
RESTRUCTURING EXPENSE
In the current year quarter, we implemented a restructuring plan to
integrate our print and digital businesses and base them in our Chicago office
as well as to streamline operations across the Company, including the
elimination of additional positions. As a result of this plan, we recorded a
charge of $2.6 million related to the workforce reduction of 107 employees,
whose jobs will be eliminated by the end of the second quarter of 2009.
Severance payments under this plan began in the current year quarter and will be
completed by the end of 2009. We will record an additional charge of
approximately $4 million in the second quarter of 2009 largely related to the
exiting of our New York office space.
In the fourth quarter of 2008, we implemented a restructuring plan to
lower overhead costs, primarily related to senior Corporate and Entertainment
Group positions. As a result of this plan, we recorded a charge of $4.0 million
related to 21 employees, most of whose jobs were eliminated in the current year
quarter. Payments under this plan began in the fourth quarter of 2008 and will
be substantially completed by the end of 2009 with some payments continuing into
2010. In the current year quarter, we recorded an unfavorable adjustment of $0.9
million against this plan as a result of changes in plan assumptions.
In the third quarter of 2008, we implemented a restructuring plan to
reduce overhead costs. As a result of this plan, we recorded a charge of $2.2
million related to costs associated with a workforce reduction of 55 employees,
most of whose jobs were eliminated in the fourth quarter of 2008. Payments under
this plan began in the fourth quarter of 2008 and will be substantially
completed by the end of 2009 with some payments continuing into 2010. In
18
the current year quarter, we recorded a favorable adjustment of $0.3 million to
this plan as a result of changes in plan assumptions.
IMPAIRMENT CHARGE
Due to the current year quarter realignment of our reporting segments, we
conducted interim impairment testing of goodwill in accordance with Financial
Accounting Standards Board, or FASB, Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets. As a result, we recorded an
impairment charge on goodwill of $5.5 million as certain digital assets were
deemed impaired based on their new reporting segment.
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, 2009, we had $25.9 million in cash and cash equivalents
compared to $25.2 million in cash and cash equivalents at December 31, 2008. At
March 31, 2009 and December 31, 2008, our outstanding debt consisted solely of
our $115.0 million 3.00% convertible senior subordinated notes due 2025, or
convertible notes. At the beginning of 2009, we adopted FASB Staff Position No.
APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in
Cash upon Conversion (Including Partial Cash Settlement), or FSP APB 14-1, and
are now reporting our financing obligations as $100.8 million and $99.8 million
at March 31, 2009 and December 31, 2008, respectively. The difference between
the principal amount of $115.0 million and the financing obligation reported
represents the discount associated with applying the estimated 7.75%
nonconvertible borrowing rate at the time of issuance of our convertible notes.
The total discount will be amortized over a seven-year term, which represents
the period beginning on the issuance date of the notes of March 15, 2005 and
ending on the first put date of March 15, 2012. See "Recently Issued Accounting
Standards" below.
At March 31, 2009, 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 $30.0 million credit
facility, which can be used for revolving borrowings, issuing letters of credit
or a combination of both. As of March 31, 2009, there were no borrowings and
$0.8 million in letters of credit outstanding under this facility, resulting in
$29.2 million of available borrowings.
DERIVATIVE INSTRUMENTS
We hedge the variability of forecasted cash receipts related to royalty
payments denominated in yen and 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 current year quarter, 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 immaterial gains.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used for operating activities for the current year quarter was
$3.2 million compared to $1.5 million in the prior year quarter. This increase
was primarily due to the operating results discussed earlier combined with the
distribution of deferred compensation plan account balances, partially offset by
changes in accounts receivable, accounts payable and accrued salaries, wages and
employee benefits.
19
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash provided by investing activities for the current year quarter was
$4.4 million compared to net cash used for investing activities of $1.5 million
in the prior year quarter. The current year quarter reflected net proceeds from
sales of investments of $5.5 million related to the termination of our deferred
compensation plan combined with additions of $1.1 million to property and
equipment. The net cash used during the prior year quarter reflected net
proceeds from sales of investments of $8.1 million, primarily reflecting the
sale of auction rate securities and the liquidation of a portion of our
investment in an enhanced cash portfolio, together with additions of $6.8
million related to the sale of our Los Angeles production facility assets in the
second quarter of 2008.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used for financing activities for the current year quarter was
$0.4 million compared to $0.2 million in the prior year quarter. The change
reflected $0.2 million of financing fees related to amending our credit facility
during the current year quarter.
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
The $0.1 million negative effect of foreign currency exchange rates on our
cash and cash equivalents during the current year quarter was due to the
strengthening of the U.S. dollar against the pound sterling and euro; the $0.2
million positive effect of foreign currency exchange rates on our cash and cash
equivalents during the prior year quarter was a result of the weakening of the
U.S. dollar against the pound sterling and euro.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2008, the FASB issued FSP APB 14-1, which specifies that issuers of
convertible debt instruments that may be settled in cash upon conversion should
separately account for the liability and equity components in a manner that will
reflect the entity's nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. We adopted FSP APB 14-1 at the beginning of
2009 and applied FSP APB 14-1 retrospectively to all prior periods. In applying
FSP APB 14-1, we reclassified $29.1 million of the carrying value of the
convertible notes and $1.2 million of the issuance costs related to the
convertible notes to equity retroactive to the March 2005 issuance date. These
amounts represent the equity component of the proceeds from the notes calculated
assuming a 7.75% nonconvertible borrowing rate. The discount is being accreted
to "Interest expense" and the debt issuance costs are being amortized to
"Amortization of deferred financing fees" over a seven-year term, which
represents the period beginning on the issuance date of the notes of March 15,
2005 and ending on the first put date of March 15, 2012. Accordingly, we
recorded $4.0 million, $3.8 million, $3.5 million and $2.6 million of additional
noncash interest expense and $0.3 million, $0.2 million, $0.3 million and $0.2
million of additional amortization of deferred financing fees, or $0.13, $0.12,
$0.11 and $0.08 per basic and diluted share on a combined basis in 2008, 2007,
2006 and 2005, respectively. We will recognize additional noncash interest
expense of $4.4 million and additional amortization of deferred financing fees
of $0.3 million for the year ended December 31, 2009, of which $1.1 million of
interest expense and $0.1 million of amortization of deferred financing fees, or
$0.03 per basic and diluted share on a combined basis, were recognized for the
current year quarter. On January 1, 2009, as a result of adopting FSP APB 14-1,
we reduced the carrying value of the debt in "Financing obligations" by $15.2
million, decreased "Other noncurrent assets" by $2.2 million, increased "Capital
in excess of par value" by $27.9 million and increased "Accumulated deficit" by
$14.9 million on our Consolidated Balance Sheet.
In March 2008, 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 adopted 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 did not impact our results of operations or financial
condition.
20
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 adopted Statement 160 at the beginning of
2009. The adoption of Statement 160 did 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. FASB Staff Position FAS 157-2, Effective Date of FASB Statement No.
157, 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 adopted Statement 157 on January 1, 2008 for our
financial assets and liabilities and on January 1, 2009 for our nonfinancial
assets and liabilities. The adoption of Statement 157 did not have an impact on
our 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, 2009. Information regarding
market risks as of December 31, 2008 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, 2008.
At March 31, 2009, we did not have any floating interest rate exposure. As
of that date, all of our outstanding debt consisted of the 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, 2009, the convertible notes had an implied fair value of
$63.5 million.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Interim 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 Interim 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.
21
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 $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 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, 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. On May 16, 2008, the Texas Supreme
Court denied our motion for rehearing. The posted bond has been canceled and the
remaining claims will be retried. We, on advice of legal counsel, believe that
it is not probable that a material judgment against us will be obtained. In
accordance with Financial Accounting Standards Board 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, 2008, 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's 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 2009. In
late June 2008, plaintiffs in the Logix litigation filed a motion in the trial
court seeking to amend a $40.0 million judgment previously entered on consent
against defendant Emerald Media Inc., or EMI, seeking to add Faherty as a
judgment debtor. 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
22
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.
ITEM 1A. RISK FACTORS
For a detailed discussion of 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, 2008. Except as set forth below, there have been no
material changes to these risk factors.
If we do not meet the continued listing requirements of the New York Stock
Exchange, or NYSE, our common stock may be delisted.
Our common stock is listed on the NYSE, which maintains continued listing
requirements relating to, among other things, market capitalization and minimum
stock price. The market capitalization requirements provide that the NYSE may
take action to delist our common stock if our average global market
capitalization for 30 consecutive trading days is less than $75.0 million and,
at the same time, our total stockholders' equity is less than $75.0 million. The
market capitalization requirements further provide that the NYSE will promptly
initiate suspension and delisting procedures with respect to our common stock if
our global market capitalization for 30 consecutive trading days is less than
$15.0 million (until June 30, 2009, when this requirement will increase to $25.0
million), in which case we would not be eligible to utilize the cure procedures
provided by the NYSE in other circumstances. The minimum stock price
requirements of the NYSE provide that the NYSE may take action to delist our
common stock if the average closing price of our common stock is less than $1.00
for 30 consecutive trading days, in which case we would expect to have six
months to take corrective action before our common stock would be delisted. The
NYSE has temporarily suspended its $1.00 minimum stock price requirement until
June 30, 2009.
On April 16, 2009, we received a notice from the NYSE that we were not in
compliance with one of the NYSE's continued listing standards because our total
market capitalization was less than $75.0 million over a consecutive
30-trading-day period and our last reported stockholders' equity was less than
$75.0 million. In accordance with NYSE procedures, we have 45 days from the
receipt of such notice to submit a business plan to the NYSE demonstrating how
we intend to comply with the NYSE's continued listing standards within 18
months. We intend to submit such a plan within the required time frame. During
this time, our common stock will continue to be listed on the NYSE, subject to
compliance with other NYSE listing requirements. If the NYSE accepts our plan,
we would be subject to quarterly monitoring for compliance with the plan. If the
NYSE does not accept our plan, we would be subject to suspension by the NYSE.
There can be no assurance that we will meet the NYSE's continued listing
standards or that the NYSE will not act to suspend trading in our common stock
and initiate delisting procedures. The suspension and delisting of our common
stock by the NYSE and the movement of trading of our common stock to another
securities exchange or over-the-counter market could materially adversely impact
our business and liquidity and the price of our common stock. It could, among
other things, reduce our stockholders' ability to buy and sell our common stock,
reduce the number of investors willing to hold or acquire our common stock, or
inhibit our ability to arrange financing or access the public capital markets.
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
23
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 11, 2009 By /s/ Linda Havard
------------ ----------------
Linda G. Havard
Executive Vice President
and Chief Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)
24
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
25