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 June 30, 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 July 31, 2008, there were 4,864,102 shares of Class A common stock and
28,452,590 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 sales and 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 undertake 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 June 30, 2008 and
2007 (Unaudited) 5
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the Six Months Ended June 30, 2008 and
2007 (Unaudited) 6
Consolidated Balance Sheets at June 30, 2008 (Unaudited)
and December 31, 2007 7
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2008 and 2007 (Unaudited) 8
Notes to Condensed Consolidated Financial Statements
(Unaudited) 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 1A. Risk Factors 25
Item 4. Submissions of Matters to a Vote of Security Holders 25
Item 6. Exhibits 26
4
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
for the Quarters Ended June 30 (Unaudited)
(In thousands, except per share amounts)
2008 2007
-------------------------------------------------------------------------------
Net revenues $ 73,378 $ 85,652
-------------------------------------------------------------------------------
Costs and expenses
Cost of sales (60,125) (67,560)
Selling and administrative expenses (13,522) (14,129)
Restructuring expense 36 (110)
Impairment charge on assets held for sale (103) -
-------------------------------------------------------------------------------
Total costs and expenses (73,714) (81,799)
-------------------------------------------------------------------------------
Operating income (loss) (336) 3,853
-------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 296 623
Interest expense (1,123) (1,204)
Amortization of deferred financing fees (89) (134)
Other, net 175 (168)
-------------------------------------------------------------------------------
Total nonoperating expense (741) (883)
-------------------------------------------------------------------------------
Income (loss) before income taxes (1,077) 2,970
Income tax expense (1,031) (1,059)
-------------------------------------------------------------------------------
Net income (loss) $ (2,108) $ 1,911
===============================================================================
Other comprehensive income (loss)
Unrealized gain (loss) on marketable securities (72) 96
Unrealized gain on derivatives - 47
Foreign currency translation loss (201) (108)
-------------------------------------------------------------------------------
Total other comprehensive income (loss) (273) 35
-------------------------------------------------------------------------------
Comprehensive income (loss) $ (2,381) $ 1,946
===============================================================================
Weighted average number of common shares outstanding
Basic 33,300 33,243
===============================================================================
Diluted 33,300 33,272
===============================================================================
Basic and diluted earnings (loss) per common share $ (0.06) $ 0.06
===============================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
for the Six Months Ended June 30 (Unaudited)
(In thousands, except per share amounts)
2008 2007
-------------------------------------------------------------------------------
Net revenues $ 151,914 $ 171,067
-------------------------------------------------------------------------------
Costs and expenses
Cost of sales (123,881) (135,460)
Selling and administrative expenses (28,227) (27,759)
Restructuring expense (558) (110)
Impairment charge on assets held for sale (103) -
-------------------------------------------------------------------------------
Total costs and expenses (152,769) (163,329)
-------------------------------------------------------------------------------
Operating income (loss) (855) 7,738
-------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 656 1,098
Interest expense (2,256) (2,566)
Amortization of deferred financing fees (178) (268)
Other, net (342) (307)
-------------------------------------------------------------------------------
Total nonoperating expense (2,120) (2,043)
-------------------------------------------------------------------------------
Income (loss) before income taxes (2,975) 5,695
Income tax expense (2,268) (2,310)
-------------------------------------------------------------------------------
Net income (loss) $ (5,243) $ 3,385
===============================================================================
Other comprehensive income (loss)
Unrealized gain (loss) on marketable securities (542) 153
Unrealized gain on derivatives 78 36
Foreign currency translation gain (loss) 182 (285)
-------------------------------------------------------------------------------
Total other comprehensive loss (282) (96)
-------------------------------------------------------------------------------
Comprehensive income (loss) $ (5,525) $ 3,289
===============================================================================
Weighted average number of common shares outstanding
Basic 33,287 33,236
===============================================================================
Diluted 33,287 33,271
===============================================================================
Basic and diluted earnings (loss) per common share $ (0.16) $ 0.10
===============================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
6
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
June 30, Dec. 31,
2008 2007
-------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 25,615 $ 20,603
Marketable securities and short-term investments 3,553 12,952
Receivables, net of allowance for doubtful accounts
of $3,669 and $3,627, respectively 44,735 51,139
Receivables from related parties 2,957 1,704
Inventories 9,366 11,363
Deferred subscription acquisition costs 8,194 8,686
Deferred tax asset 1,320 1,320
Assets held for sale - 4,706
Prepaid expenses and other current assets 9,482 13,402
-------------------------------------------------------------------------------
Total current assets 105,222 125,875
-------------------------------------------------------------------------------
Long-term investments 6,431 6,556
Property and equipment, net 18,190 14,665
Long-term receivables 2,795 2,795
Programming costs, net 54,243 54,926
Goodwill 133,585 133,570
Trademarks 66,107 65,437
Distribution agreements, net of accumulated
amortization of $5,465 and $4,803, respectively 27,675 28,337
Deferred tax asset 1,206 1,206
Other noncurrent assets 11,294 11,789
-------------------------------------------------------------------------------
Total assets $ 426,748 $ 445,156
===============================================================================
Liabilities
Acquisition liabilities $ 2,670 $ 2,134
Accounts payable 31,725 37,842
Accrued salaries, wages and employee benefits 4,157 8,304
Deferred revenues 42,093 43,955
Deferred tax liability 1,490 1,490
Other liabilities and accrued expenses 13,603 14,269
-------------------------------------------------------------------------------
Total current liabilities 95,738 107,994
-------------------------------------------------------------------------------
Financing obligations 115,000 115,000
Acquisition liabilities 5,656 7,936
Deferred tax liability 19,467 18,604
Other noncurrent liabilities 24,439 24,305
-------------------------------------------------------------------------------
Total liabilities 260,300 273,839
-------------------------------------------------------------------------------
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;
28,825,478 and 28,784,079 issued, respectively 288 288
Capital in excess of par value 230,489 229,833
Accumulated deficit (58,009) (52,766)
Treasury stock, at cost - 381,971 shares (5,000) (5,000)
Accumulated other comprehensive loss (1,369) (1,087)
-------------------------------------------------------------------------------
Total shareholders' equity 166,448 171,317
-------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 426,748 $ 445,156
===============================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
7
PLAYBOY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Six Months Ended June 30 (Unaudited)
(In thousands)
2008 2007
-------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) $ (5,243) $ 3,385
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation of property and equipment 2,192 2,232
Amortization of intangible assets 1,130 1,158
Amortization of investments in entertainment
programming 16,333 17,444
Amortization of deferred financing fees 178 268
Stock-based compensation 450 359
Impairment charge on assets held for sale 103 -
Deferred income taxes 863 838
Net change in operating assets and liabilities (1,502) 8,218
Investments in entertainment programming (15,964) (17,627)
Other, net 125 301
-------------------------------------------------------------------------------
Net cash provided by (used for) operating activities (1,335) 16,576
-------------------------------------------------------------------------------
Cash flows from investing activities
Payments for acquisitions (60) (105)
Purchases of investments (588) (6,384)
Proceeds from sales of investments 9,511 -
Additions to assets held for sale (6,920) -
Proceeds from assets held for sale 12,000 -
Additions to property and equipment (5,741) (5,030)
-------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 8,202 (11,519)
-------------------------------------------------------------------------------
Cash flows from financing activities
Payments of acquisition liabilities (2,200) (5,669)
Proceeds from stock-based compensation 67 82
-------------------------------------------------------------------------------
Net cash used for financing activities (2,133) (5,587)
-------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash
equivalents 278 173
-------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 5,012 (357)
Cash and cash equivalents at beginning of period 20,603 26,748
-------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 25,615 $ 26,391
===============================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
8
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 May 2008, the Financial Accounting Standards Board, or the FASB, issued
Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally
Accepted Accounting Principles, or Statement 162. Statement 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements that are presented in
conformity with generally accepted accounting principles. Statement 162 becomes
effective 60 days following the Securities and Exchange Commission's approval of
the Public Company Accounting Oversight Board amendments to AU Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles. We do not expect the adoption of Statement 162 to impact our future
results of operations or financial condition.
In May 2008, the 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 are required to adopt FSP
APB 14-1 at the beginning of 2009 and apply FSP APB 14-1 retrospectively to all
periods presented. We are currently evaluating the impact of adopting FSP APB
14-1 on our results of operations and financial condition.
In April 2008, the FASB issued Staff Position No. FAS 142-3, Determination
of the Useful Life of Intangible Assets, or FSP FAS 142-3. FSP FAS 142-3 amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets. We are required to adopt FSP FAS 142-3 prospectively for
intangible assets acquired on or after January 1, 2009. Intangible assets
acquired prior to January 1, 2009 are not affected by the adoption of FSP FAS
142-3.
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 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),
9
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 future results of operations or financial
condition.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements, or Statement 157. Statement 157
provides enhanced guidance for using fair value to measure assets and
liabilities. We adopted Statement 157 on January 1, 2008, as required for our
financial assets and 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 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 liabilities to have a significant impact on our future
results of operations or financial condition.
(C) SALE OF ASSETS
In April 2008, we completed the sale of assets related to our Los Angeles
production facility to Broadcast Facilities, Inc., or BFI, for $12.0 million.
Our use of the facility for productions had significantly decreased since its
inception, and we believe that our need for linear network transmission capacity
will decrease over the next several years. We recorded a $0.1 million
unfavorable adjustment in the current year quarter related to the $1.5 million
charge on assets held for sale recorded in the prior year.
In connection with the sale of these assets, we entered into an agreement
to sublet the entirety of the leased production facility to BFI for a period
equal to the remaining term of our lease. BFI assumed all of our liabilities and
obligations under the existing facility lease as a part of the sublease and
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 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 and office space. 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 which we may renew the agreement for an
additional three-year term on substantially the same terms and conditions.
(D) RESTRUCTURING EXPENSE
In 2007, we implemented a plan to outsource our e-commerce and catalog
businesses, to sell the assets related to our Los Angeles production facility
and to eliminate office space obtained in 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
10
costs associated with a workforce reduction of 28 employees. During the
six-month period ended June 30, 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 six-month period ended June 30, 2008, we made cash payments of
$0.9 million related to prior years' restructuring plans. Approximately $13.4
million of the total costs of our prior years' restructuring plans was paid
through June 30, 2008, with the remaining $0.2 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
Adjustments to previous estimates (36) - (36)
Cash payments (473) (460) (933)
-------------------------------------------------------------------------------
Balance at June 30, 2008 $ 69 $ 99 $ 168
===============================================================================
(E) 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 Six Months Ended
June 30, June 30,
------------------------ ------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------------------------------
Numerator:
For basic and diluted EPS - net
income (loss) $ (2,108) $ 1,911 $ (5,243) $ 3,385
=================================================================================================
Denominator:
For basic EPS - weighted average shares 33,300 33,243 33,287 33,236
Effect of dilutive potential common shares:
Employee stock options and other - 29 - 35
-------------------------------------------------------------------------------------------------
Dilutive potential common shares - 29 - 35
-------------------------------------------------------------------------------------------------
For diluted EPS - weighted average shares 33,300 33,272 33,287 33,271
=================================================================================================
Basic and diluted earnings (loss) per
common share $ (0.06) $ 0.06 $ (0.16) $ 0.10
=================================================================================================
11
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 and six-month periods ended June 30, 2008 and 2007, as their inclusion
would have been antidilutive (in thousands):
Quarters Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2008 2007 2008 2007
--------------------------------------------------------------------------------
Stock options 3,702 3,283 3,624 3,220
Convertible notes 6,758 6,758 6,758 6,758
--------------------------------------------------------------------------------
Total 10,460 10,041 10,382 9,978
================================================================================
(F) INVENTORIES
In January 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):
June 30, Dec. 31,
2008 2007
-------------------------------------------------------------------------------
Paper $ 3,076 $ 2,948
Editorial and other prepublication costs 5,783 5,518
Merchandise finished goods 507 2,897
-------------------------------------------------------------------------------
Total $ 9,366 $ 11,363
===============================================================================
(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. 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 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 June 30, 2008 and December 31, 2007, 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 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 NOL amount. In our
12
international tax jurisdictions, numerous tax years remain subject to
examination by tax authorities, including tax returns for 2002 and subsequent
years.
(H) 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 liabilities.
Statement 157 requires enhanced disclosures about assets and liabilities
measured at fair value. Our financial assets primarily relate to marketable
securities and investments, while financial 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 financial
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 the following 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.
The following table sets forth our financial assets and liabilities
measured at fair value on a recurring basis and the basis of measurement at June
30, 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 $ 9,984 $ 6,431 $ 3,553(1) $ -
Derivative liabilities $ (152) $ - $ (152) $ -
------------------------------------------------------------------------------------------------------------------------
(1) At December 31, 2007, we had $6.9 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 during the fiscal year ended December
31, 2007, we recorded a charge of $0.1 million in "Other, net" on our
Consolidated Statements of Operations. Through June 30, 2008, we have
received six distributions from the investment, which is being liquidated,
at an average net asset value of 98.26%, resulting in a cumulative
realized loss of $0.1 million. At June 30, 2008, our remaining balance in
this investment was $3.6 million.
(I) CONTINGENCIES
We acquired the Club Jenna business in 2006, 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 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 June 30, 2008.
13
In 2005, we made an acquisition of 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. During each
six-month period ended June 30, 2008 and 2007, earnout payments of $0.1 million
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 Texas 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. 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 and have not recorded a liability for this case in
accordance with FASB Statement of Financial Accounting Standards No. 5,
Accounting for Contingencies.
(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 $0.1 million
and $0.3 million during the quarter and six-month period ended June 30, 2008,
respectively, and $0.1 million and $0.2 million during the quarter and six-month
period ended June 30, 2007, respectively.
(K) STOCK-BASED COMPENSATION
Upon adoption of FASB Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment, or Statement 123(R), we began estimating
the value of options on the date of grant using the Lattice Binomial model, or
the Lattice model. The Lattice model requires extensive analysis of actual
exercise and cancellation data and includes a number of complex assumptions
related to 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 Six Months Ended
June 30, June 30,
----------------------------- ------------------------------
2008 2007 2008 2007
---------------------------------------------------------------------------------------------------------
Expected volatility 31% - 41% 25% - 41% 31% - 41% 25% - 41%
Weighted average volatility 35% 34% 35% 34%
Risk-free interest rate 1.95% - 5.10% 4.67% - 5.04% 1.95% - 5.10% 4.67% - 5.04%
Expected dividends - - - -
---------------------------------------------------------------------------------------------------------
The expected life of stock options represents the weighted average period
the stock options are expected to remain outstanding and is a derived output of
the Lattice model. The expected life of stock options is impacted by all of the
underlying assumptions and calibration of the Lattice model. The Lattice model
assumes that exercise behavior is a function of the option's contractual term,
vesting schedule and the extent to which the option's intrinsic value exceeds
the exercise price.
During the quarter and six-month period ended June 30, 2008, we granted
171,000 stock options, exercisable for shares of our Class B stock, which will
vest over a three-year period from the grant date and expire ten years from the
grant date. During the quarter and six-month period ended June 30, 2007, we
granted 160,000 stock
14
options. During the current year quarter and six-month period, the weighted
average expected life for options granted was 6.7 years and during the prior
year quarter and six-month period, it was 6.3 years. During the current year
quarter and six-month period, the weighted average fair value per share for
options granted was $2.45 and during the prior year quarter and six-month
period, it was $4.64.
During the quarter and six-month period ended June 30, 2008, we awarded
270,625 restricted stock units, which provide for the issuance of our Class B
stock if certain performance goals are met. Pursuant to the requirements of
Statement 123(R), we will establish a measurement date and disclose the grant
date fair value and expense for these restricted stock units in the applicable
reporting period after the performance goals are approved. During the quarter
and six-month period ended June 30, 2007, we granted 250,625 restricted stock
units that provide for the issuance of our Class B stock if two-year cumulative
operating income target thresholds are met. During the prior year quarter and
six-month period, the weighted average grant date fair value for restricted
stock units was $10.61. In the quarter ended June 30, 2008, we determined that
it was unlikely that the minimum threshold associated with the 2007 grants would
be met. Therefore, in the quarter ended June 30, 2008, we reversed $0.6 million
of stock-based compensation expense, which included $0.5 million that was
recorded in 2007 related to this restricted stock unit grant.
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 Six Months Ended
June 30, June 30,
--------------------- --------------------
2008 2007 2008 2007
-------------------------------------------------------------------------------
Stock options $ 380 $ 448 $ 844 $ 165
Restricted stock units (563) 87 (502) 87
Other equity awards 43 50 96 92
ESPP 6 8 12 15
-------------------------------------------------------------------------------
Total $ (134) $ 593 $ 450 $ 359
===============================================================================
Statement 123(R) requires that the total amount of compensation expense
recognized reflect 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 six-month periods ended June 30,
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.
The following table sets forth stock option activity for the six-month
period ended June 30, 2008:
Weighted
Average
Number of Exercise
Shares Price
-------------------------------------------------------------------------------
Outstanding at December 31, 2007 3,546,250 $ 15.60
Granted 171,000 5.72
Canceled (21,500) 12.71
-----------------------------------------------------------------
Outstanding at June 30, 2008 3,695,750 $ 15.16
===============================================================================
15
(L) SEGMENT INFORMATION
The following table sets forth financial information by reportable segment
(in thousands):
Quarters Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2008 2007 2008 2007
----------------------------------------------------------------------------------------------------------
Net revenues
Entertainment $ 41,142 $ 51,838 $ 89,056 $ 102,696
Publishing 20,589 22,658 40,720 46,003
Licensing 11,647 11,156 22,138 22,368
----------------------------------------------------------------------------------------------------------
Total $ 73,378 $ 85,652 $ 151,914 $ 171,067
==========================================================================================================
Income (loss) before income taxes
Entertainment $ 1,810 $ 7,301 $ 4,509 $ 11,605
Publishing (1,954) (2,273) (5,122) (4,669)
Licensing 6,081 5,523 12,724 13,200
Corporate Administration and Promotion (6,206) (6,588) (12,305) (12,288)
Restructuring expense 36 (110) (558) (110)
Impairment charge on assets held for sale (103) - (103) -
Investment income 296 623 656 1,098
Interest expense (1,123) (1,204) (2,256) (2,566)
Amortization of deferred financing fees (89) (134) (178) (268)
Other, net 175 (168) (342) (307)
----------------------------------------------------------------------------------------------------------
Total $ (1,077) $ 2,970 $ (2,975) $ 5,695
==========================================================================================================
June 30, Dec. 31,
2008 2007
----------------------------------------------------------------------------------------------------------
Identifiable assets
Entertainment $ 283,879 $ 287,940
Publishing 30,992 35,320
Licensing 12,488 11,560
Corporate Administration and Promotion 99,389 110,336
----------------------------------------------------------------------------------------------------------
Total $ 426,748 $ 445,156
==========================================================================================================
16
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 (1)
The following table sets forth our results of operations (in millions,
except per share amounts):
Quarters Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2008 2007 2008 2007
-------------------------------------------------------------------------------------------------------------------
Net revenues
Entertainment
Domestic TV $ 14.8 $ 21.6 $ 31.3 $ 41.3
International TV 13.4 13.7 28.1 27.5
Online/mobile 11.6 14.8 26.8 30.5
Other 1.4 1.7 2.9 3.4
-------------------------------------------------------------------------------------------------------------------
Total Entertainment 41.2 51.8 89.1 102.7
-------------------------------------------------------------------------------------------------------------------
Publishing
Domestic magazine 16.8 19.0 32.9 38.1
International magazine 1.9 1.8 4.0 3.7
Special editions and other 1.9 1.9 3.8 4.2
-------------------------------------------------------------------------------------------------------------------
Total Publishing 20.6 22.7 40.7 46.0
-------------------------------------------------------------------------------------------------------------------
Licensing
Consumer products 8.0 7.5 17.2 16.2
Location-based entertainment 1.3 0.9 2.2 1.8
Marketing events 2.3 2.3 2.5 2.6
Other - 0.5 0.2 1.8
-------------------------------------------------------------------------------------------------------------------
Total Licensing 11.6 11.2 22.1 22.4
-------------------------------------------------------------------------------------------------------------------
Total net revenues $ 73.4 $ 85.7 $ 151.9 $ 171.1
===================================================================================================================
Net income (loss)
Entertainment
Before programming amortization and online content expenses $ 11.7 $ 17.4 $ 24.2 $ 31.9
Programming amortization and online content expenses (9.9) (10.1) (19.7) (20.3)
-------------------------------------------------------------------------------------------------------------------
Total Entertainment 1.8 7.3 4.5 11.6
-------------------------------------------------------------------------------------------------------------------
Publishing (1.9) (2.3) (5.1) (4.7)
-------------------------------------------------------------------------------------------------------------------
Licensing 6.0 5.5 12.7 13.2
-------------------------------------------------------------------------------------------------------------------
Corporate Administration and Promotion (6.2) (6.6) (12.3) (12.3)
-------------------------------------------------------------------------------------------------------------------
Segment income (loss) (0.3) 3.9 (0.2) 7.8
Restructuring expense - (0.1) (0.6) (0.1)
Impairment charge on assets held for sale (0.1) - (0.1) -
-------------------------------------------------------------------------------------------------------------------
Operating income (loss) (0.4) 3.8 (0.9) 7.7
-------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 0.4 0.6 0.7 1.1
Interest expense (1.2) (1.1) (2.3) (2.5)
Amortization of deferred financing fees (0.1) (0.2) (0.2) (0.3)
Other, net 0.2 (0.1) (0.3) (0.3)
-------------------------------------------------------------------------------------------------------------------
Total nonoperating expense (0.7) (0.8) (2.1) (2.0)
-------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (1.1) 3.0 (3.0) 5.7
Income tax expense (1.0) (1.1) (2.2) (2.3)
-------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (2.1) $ 1.9 $ (5.2) $ 3.4
-------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings (loss) per common share $ (0.06) $ 0.06 $ (0.16) $ 0.10
===================================================================================================================
(1) Certain amounts reported for the prior periods have been reclassified to
conform to the current year's presentation.
17
Revenues decreased $12.3 million, or 14%, for the quarter and $19.2
million, or 11%, for the six-month period largely due to lower domestic TV,
online/mobile and domestic magazine revenues.
Segment results decreased $4.2 million for the quarter and $8.0 million
for the six-month period primarily due to lower results from our Entertainment
Group largely due to lower revenues. In addition, the quarter and six-month
period include the reversals of $1.1 million and $0.5 million, respectively, of
variable compensation expense, which were previously accrued in each of the
segments.
Operating results decreased $4.2 million for the quarter and $8.6 million
for the six-month period primarily due to the lower segment results previously
discussed. Additionally, the current year six-month period reflected $0.6
million of restructuring expense.
Net losses were $2.1 million and $5.2 million for the current year quarter
and six-month period, respectively. These compared to net income of $1.9 million
and $3.4 million in the respective prior year periods. The changes in results
were 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 $6.8 million, or 31%, for
the quarter and $10.0 million, or 24%, for the six-month period, and profit
contribution decreased $5.2 million for the quarter and $7.6 million for the
six-month period. Increases in Playboy TV monthly subscription revenues for the
quarter and six-month period were more than offset by lower pay-per-view
revenues reflecting the continued migration from linear networks to the more
competitive video-on-demand platform. The decreases also reflected the impact of
unfavorable variances in the current year quarter and six-month period compared
to favorable variances in the prior year periods related to previously estimated
revenues. The sale of our Los Angeles production facility assets in April 2008
resulted, as expected, in lower revenues but increased profit contribution for
the quarter and six-month period.
International TV revenues were basically flat as they decreased $0.3
million, or 2%, for the quarter and increased $0.6 million, or 2%, for the
six-month period. Profit contribution decreased $0.5 million for the quarter but
increased $1.1 million for the six-month period. The quarter and six-month
period reflected lower revenues from our U.K. networks offset by growth in our
other European networks. Lower costs and foreign currency exchange rate
fluctuations had a favorable impact on results for the six-month period.
Online/mobile revenues decreased $3.2 million, or 22%, for the quarter and
$3.7 million, or 12%, for the six-month period, and profit contribution
decreased $0.2 million for the quarter and $2.0 million for the six-month
period. Our online websites are in the midst of a major infrastructure overhaul
and redesign effort, which we anticipate to be substantially complete by the end
of 2008. We believe that this will generate more traffic, resulting in higher
revenue and profit contribution from the online business in 2009. During this
transition, we expect lower revenues and profit contribution. Additionally, our
Playboy and BUNNYshop e-commerce and catalog businesses were outsourced to
eFashion Solutions, LLC, with planned lower revenues but higher profit
contribution for the quarter and six-month period.
Revenues from other businesses decreased $0.3 million, or 25%, for the
quarter and $0.5 million, or 16%, for the six-month period, and profit
contribution increased $0.2 million for the quarter and $1.2 million for the
six-month period primarily as a result of a decrease in DVD sales which was more
than offset by lower costs.
The group's administrative expenses were flat for the quarter and
increased $0.4 million, or 4%, for the six-month period.
Programming amortization and online content expenses decreased $0.2
million, or 2%, for the quarter and $0.6 million, or 3%, for the six-month
period.
Segment income for the group decreased $5.5 million, or 75%, for the
quarter and $7.1 million, or 61%, for the six-month period due to the results
previously discussed.
18
PUBLISHING GROUP
Domestic magazine revenues decreased across all revenue streams,
reflecting industry dynamics. This resulted in lower revenues of $2.2 million,
or 11%, for the quarter and $5.2 million, or 14%, for the six-month period.
Subscription revenues decreased $0.6 million, or 6%, for the quarter and $1.4
million, or 7%, for the six-month period primarily due to 5% fewer copies served
in the current year quarter and six-month period. Newsstand revenues decreased
$0.9 million, or 41%, for the quarter and $1.3 million, or 28%, for the
six-month period primarily due to 28% and 27% fewer copies sold, respectively.
Advertising revenues decreased $0.6 million, or 10%, for the quarter and $2.5
million, or 21%, for the six-month period primarily due to 7% and 14% decreases
in average net revenue per page, respectively, largely due to our lower rate
base effective with the January 2008 issue, combined with 3% and 8% fewer
advertising pages compared to the respective prior year periods due in part to
the loss of a major advertiser. Advertising sales for the 2008 third quarter
magazine issues are closed, and we expect to report approximately 15% lower
advertising revenues and 10% fewer advertising pages compared to the 2007 third
quarter.
On a combined basis, Playboy print and online advertising revenues
decreased $0.6 million, or 8%, for the quarter and $2.5 million, or 19%, for the
six-month period.
International magazine revenues were flat for the quarter and increased
$0.3 million, or 7%, for the six-month period.
Special editions and other revenues were flat for the quarter and
decreased $0.4 million, or 8%, for the six-month period. The decrease for the
six-month period was due mainly to 12% fewer newsstand copies of special
editions sold, partially offset by the impact of a $1.00 cover price increase
effective with the July 2007 issues.
Segment loss for the group improved $0.4 million, or 14%, for the quarter
as the previously discussed revenue declines together with severance expense and
higher paper and postage prices in the current year quarter were more than
offset by lower editorial, post-employment benefit and manufacturing costs.
Segment loss for the six-month period increased $0.4 million, or 10%, as the
previously discussed revenue declines together with severance expense and higher
paper and postage prices in the current year period were partially offset by
lower editorial, post-employment benefit, manufacturing and subscription
collection costs.
LICENSING GROUP
Licensing Group revenues increased $0.4 million, or 4%, for the quarter
and decreased $0.3 million, or 1%, for the six-month period. The current year
quarter and six-month period reflected higher consumer products royalties,
principally from Southeast Asia, and higher location-based entertainment
royalties. The prior year quarter and six-month period were favorably impacted
by $0.4 million and $1.7 million, respectively, of sales of original art.
Excluding the original art sales, revenues for the group would have increased 8%
for the quarter and 7% for the six-month period.
The group's segment income increased $0.5 million, or 10%, and decreased
$0.5 million, or 4%, for the quarter and six-month period, respectively,
primarily due to the changes in revenues discussed above.
CORPORATE ADMINISTRATION AND PROMOTION
Corporate Administration and Promotion expenses decreased $0.4 million, or
6%, for the quarter and were flat for the six-month period.
RESTRUCTURING EXPENSE
In 2007, we implemented a plan to outsource our e-commerce and catalog
businesses, to sell the assets related to our Los Angeles production facility
and to eliminate office space obtained in 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 six-month period ended June 30, 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.
19
During the six-month period ended June 30, 2008, we made cash payments of
$0.9 million related to prior years' restructuring plans. Approximately $13.4
million of the total costs of our prior years' restructuring plans was paid
through June 30, 2008, with the remaining $0.2 million to be paid during 2008.
INCOME TAX EXPENSE
Income tax expense of $1.0 million for the quarter and $2.2 million for
the six-month period was flat compared to the respective prior year periods.
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 June 30, 2008, we had $25.6 million in cash and cash equivalents
compared to $20.6 million in cash and cash equivalents at December 31, 2007.
During the six-month period ended June 30, 2008, we sold at par all of our $6.0
million of auction rate securities, or ARS, which had been included in
marketable securities and short-term investments at December 31, 2007. Total
financing obligations were $115.0 million at both June 30, 2008 and December 31,
2007.
At June 30, 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 June 30, 2008, there were no borrowings under this
facility and $1.2 million in letters of credit outstanding, resulting in $48.8
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 six-month period ended June 30, 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 $0.2 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 six-month period ended June
30, 2008 was $1.3 million, compared to net cash provided by operating activities
of $16.6 million in the prior year period. This decrease was primarily due to
the operating results discussed earlier 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 inventories.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash provided by investing activities for the six-month period ended
June 30, 2008 was $8.2 million, compared to net cash used for investing
activities of $11.5 million in the prior year period. This change reflected net
proceeds of $5.1 million related to the April 2008 sale of assets related to our
Los Angeles production facility and net proceeds from sales of investments of
$8.9 million, primarily reflecting the sale of our ARS and proceeds from the
liquidation of a portion of our investment in an enhanced cash portfolio during
the current year period, compared to net purchases of investments of $6.4
million in the prior year period.
20
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used for financing activities for the six-month period ended June
30, 2008 was $2.1 million, a decrease of $3.5 million compared to the prior year
period. The decrease reflected payments of acquisition liabilities of $2.2
million during the current year period compared to payments of acquisition
liabilities of $5.7 million in the prior year period.
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 six-month periods ended June 30, 2008 and 2007 of $0.3
million and $0.2 million, respectively, were due to the weakening of the U.S.
dollar against certain foreign currencies.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2008, the Financial Accounting Standards Board, or the FASB, issued
Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally
Accepted Accounting Principles, or Statement 162. Statement 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements that are presented in
conformity with generally accepted accounting principles. Statement 162 becomes
effective 60 days following the Securities and Exchange Commission's approval of
the Public Company Accounting Oversight Board amendments to AU Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles. We do not expect the adoption of Statement 162 to impact our future
results of operations or financial condition.
In May 2008, the 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 are required to adopt FSP
APB 14-1 at the beginning of 2009 and apply FSP APB 14-1 retrospectively to all
periods presented. We are currently evaluating the impact of adopting FSP APB
14-1 on our results of operations and financial condition.
In April 2008, the FASB issued Staff Position No. FAS 142-3, Determination
of the Useful Life of Intangible Assets, or FSP FAS 142-3. FSP FAS 142-3 amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets. We are required to adopt FSP FAS 142-3 prospectively for
intangible assets acquired on or after January 1, 2009. Intangible assets
acquired prior to January 1, 2009 are not affected by the adoption of FSP FAS
142-3.
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 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.
21
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 future results of operations or financial
condition.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements, or Statement 157. Statement 157
provides enhanced guidance for using fair value to measure assets and
liabilities. We adopted Statement 157 on January 1, 2008, as required for our
financial assets and 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 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 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 six-month period ended June 30, 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 June 30, 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 June 30,
2008, the convertible notes had an implied fair value of $90.4 million.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange
Act) as of the end of the period covered by this quarterly report. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, our disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by us in the reports that
we file or submit under the Exchange Act.
22
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.
23
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 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 December 2008. In
late June 2008, plaintiffs in the Logix litigation filed a motion in the trial
court seeking to amend a $40 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
24
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
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 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of shareholders was held on May 21, 2008. At the
meeting, the following director nominees were elected:
Votes Votes
Nominee For Withheld
--------------------------------------------------------------------------------
Dennis S. Bookshester 4,694,941 2,955
David I. Chemerow 4,695,517 2,379
Christie Hefner 4,643,025 54,871
Charles Hirschhorn 4,695,515 2,381
Jerome H. Kern 4,694,944 2,952
Russell I. Pillar 4,695,519 2,377
Sol Rosenthal 4,694,936 2,960
Richard S. Rosenzweig 4,642,520 55,376
--------------------------------------------------------------------------------
Also at the meeting, the shareholders ratified the appointment of Ernst &
Young LLP as our independent registered public accounting firm, or Auditors, as
set forth below:
Votes Votes
Matter For Against Abstain
--------------------------------------------------------------------------------
Auditors 4,696,224 1,472 199
--------------------------------------------------------------------------------
25
ITEM 6. EXHIBITS
Exhibit Number Description
-------------- -----------
10.1* Sublease Agreement dated April 1, 2008 between Broadcast Facilities,
Inc. and Playboy Entertainment Group, Inc.
10.2* Services Agreement dated April 1, 2008 between Broadcast Facilities,
Inc. and Playboy Entertainment Group, Inc.
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.
26
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: August 8, 2008 By /s/ Linda Havard
---------------------------
Linda G. Havard
Executive Vice President
and Chief Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)
27
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
10.1* Sublease Agreement dated April 1, 2008 between Broadcast Facilities,
Inc. and Playboy Entertainment Group, Inc.
10.2* Services Agreement dated April 1, 2008 between Broadcast Facilities,
Inc. and Playboy Entertainment Group, Inc.
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.
28