UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 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
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
----------------------------------------------- ------------------------------
Class A Common Stock, par value $0.01 per share New York Stock Exchange
Class B Common Stock, par value $0.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
--------------------------------------------------------------------------------
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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]
The aggregate market value of Class A Common Stock held by nonaffiliates on June
30, 2008 (based upon the closing sale price on the New York Stock Exchange) was
$7,308,922. The aggregate market value of Class B Common Stock held by
nonaffiliates on June 30, 2008 (based upon the closing sale price on the New
York Stock Exchange) was $100,430,884.
At February 27, 2009, there were 4,864,102 shares of Class A Common Stock and
28,539,827 shares of Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required for Part II. Item 5 and Part III. Items 10-14 of
this report is incorporated herein by reference to the Notice of Annual Meeting
of Stockholders and Proxy Statement (to be filed) relating to the Annual Meeting
of Stockholders to be held in May 2009.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains "forward-looking statements,"
including statements in Part I. Item 1. "Business," Part I. Item 1A. "Risk
Factors" and Part II. Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations," among other places, as to expectations,
beliefs, plans, objectives and future financial performance, and assumptions
underlying or concerning the foregoing. We use words such as "may," "will,"
"would," "could," "should," "believes," "estimates," "projects," "potential,"
"expects," "plans," "anticipates," "intends," "continues" and other similar
terminology. These forward-looking statements involve known and unknown risks,
uncertainties and other factors, which could cause our actual results,
performance or outcomes to differ materially from those expressed or implied in
the forward-looking statements. We want to caution you not to place undue
reliance on any forward-looking statements. We undertake no obligation to
publicly update any forward-looking statements, whether as a result of new
information, future events or otherwise.
The following are some of the important factors that could cause our
actual results, performance or outcomes to differ materially from those
discussed in the forward-looking statements:
(1) Foreign, national, state and local government regulations, actions or
initiatives, including:
(a) attempts to limit or otherwise regulate the sale, distribution
or transmission of adult-oriented materials, including print,
television, video, Internet and wireless materials;
(b) limitations on the advertisement of tobacco, alcohol and other
products which are important sources of advertising revenue
for us; or
(c) substantive changes in postal regulations which could increase
our postage and distribution costs;
(2) Risks associated with our foreign operations, including market acceptance
and demand for our products and the products of our licensees 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, 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, 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;
(20) Effects of the national consolidation of the single-copy magazine
distribution system and risks associated with the financial stability of
major magazine wholesalers;
2
(21) Effects of the national consolidation 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; and
(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.
For a detailed discussion of these and other factors that might affect our
performance, see Part I. Item 1A. "Risk Factors" of this Annual Report on Form
10-K.
3
PLAYBOY ENTERPRISES, INC.
2008 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 5
Item 1A. Risk Factors 13
Item 1B. Unresolved Staff Comments 21
Item 2. Properties 21
Item 3. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 23
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 24
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 42
Item 8. Financial Statements and Supplementary Data 42
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 70
Item 9A. Controls and Procedures 70
Item 9B. Other Information 72
PART III
Item 10. Directors, Executive Officers and Corporate Governance 73
Item 11. Executive Compensation 73
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 73
Item 13. Certain Relationships and Related Transactions, and Director
Independence 73
Item 14. Principal Accounting Fees and Services 73
PART IV
Item 15. Exhibits and Financial Statement Schedules 74
4
PART I
Item 1. Business
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Playboy Enterprises, Inc., together with its subsidiaries and
predecessors, is referred to in this Annual Report on Form 10-K by terms such as
"we," "us," "our," "Playboy" and the "Company," unless the context requires
otherwise. We were organized in 1953 to publish Playboy magazine and are now a
media and lifestyle company marketing the Playboy brand through a wide range of
multimedia properties and licensing initiatives. The Playboy brand is one of the
most widely recognized and popular brands in the world. The strength of our
brand drives the financial performance of our media and licensing businesses.
Our programming and content are available worldwide on television networks,
websites, mobile platforms and radio. Playboy magazine is the best-selling
monthly men's magazine in the world based on the combined circulation of the
U.S. and international editions. Our licensing business leverages the Playboy
name, the Rabbit Head Design and our other trademarks globally on a wide range
of consumer products, Playboy-branded retail stores and entertainment venues.
Our businesses are organized into the following three reportable segments:
Entertainment, Publishing and Licensing. Net revenues, income and loss before
income taxes, depreciation and amortization and identifiable assets of each
reportable segment are set forth in Note (U), Segment Information, to the Notes
to Consolidated Financial Statements.
Our trademarks, copyrights and domain names are critical to the success
and potential growth of all of our businesses. Our trademarks, which are
renewable periodically and which can be renewed indefinitely, include Playboy,
the Rabbit Head Design, Playmate and Spice.
ENTERTAINMENT GROUP
Our Entertainment Group operations include the production, marketing and
sales of programming under the Playboy, Spice and other brand names, which are
distributed through various channels, including domestic and international TV,
Internet, wireless and satellite radio. Also included is e-commerce, a business
we completed outsourcing in 2008.
Programming
Our Entertainment Group develops, produces, acquires and distributes a
wide range of high-quality lifestyle and adult television programming for our
domestic and international TV networks, pay-per-view, or PPV, subscription
pay-per-month, or PPM, video-on-demand, or VOD, subscription video-on-demand, or
SVOD, subscription package, or Tier, and has also historically produced and
distributed content for worldwide DVD products. In late 2008, we made the
strategic decision to exit the DVD business due to the rapid decline in that
format and focus our distribution strategies on digital. Our proprietary
productions include magazine-format shows, reality-based and dramatic series,
documentaries, live events and celebrity and Playmate programs. Our programming
is featured in a variety of formats, enabling us to leverage our programming
costs over multiple distribution platforms. We have produced a number of shows
that air on the domestic and international Playboy TV networks and are
distributed internationally in countries where we do not have networks. Our
original series programming includes Foursome, Money Talks, Naughty Amateur Home
Videos, Search for the Perfect Girlfriend and 69 Sexy Things to Do Before You
Die. Additionally, we develop, co-produce and/or license shows and series to air
on third-party networks, including The Girls Next Door on E! Entertainment
Television, and mainstream motion pictures, including The House Bunny and Miss
March.
We invest in the creation and acquisition of high-quality, adult-oriented
programming to support our worldwide entertainment businesses. We invested $30.2
million, $34.4 million and $36.7 million in entertainment programming in 2008,
2007 and 2006, respectively, with the largest portion of the investment focused
on Playboy TV. At December 31, 2008, our domestic library of primarily
exclusive, Playboy-branded original programming for broadcasting on Playboy TV
worldwide totaled approximately 3,500 hours. In addition to investing in
original productions, we also acquire high-quality adult movies in various
editing standards. A majority of the programming that airs on our Spice Digital
Networks is licensed, on an exclusive basis, from third parties. We will
continue to both produce and acquire original programming with a heavier
emphasis on producing content for delivery on multiple electronic delivery
platforms, including both long- and short-form programming. In addition to
utilizing some of our proprietary programming for wireless and for our websites,
we invested $7.0 million, $5.6 million and $5.0 million in content specifically
for online and wireless initiatives in 2008, 2007 and 2006, respectively.
5
Our programming is delivered to direct-to-home, or DTH, and cable
operators through satellite transponders and outside content processors. We have
two international transponder service agreements, the terms of which extend
through 2009. We are in active negotiations with several providers for these
services when the current agreements expire and expect there to be no
interruption of service. In April 2008, we entered into a services agreement
with Broadcast Facilities, Inc., or BFI, under which BFI provides us with
certain satellite transmission and other related services (including
compression, uplink and playback) for our domestic cable channels. The agreement
continues for an initial term of five years, after which we may renew the
agreement for an additional three years.
Domestic TV
We currently operate the domestic TV networks Playboy TV, Playboy TV en
Espanol and the Spice Digital Networks.
Our flagship service is Playboy TV, with a programming mix that includes a
variety of originally produced and exclusively licensed content.
Playboy TV en Espanol is a Spanish language network. It shares some
content with our domestic Playboy TV network and also includes locally produced,
proprietary Spanish-language and other original Spanish-language content.
Spice Digital Networks feature adult movies under exclusive licenses from
leading adult studios and from our other original productions. These adult movie
networks offer a distinct thematic focus and are available in a variety of
editing standards.
Our domestic TV content is distributed primarily through cable, e.g.,
Comcast and Time Warner Cable; DTH, e.g., DirecTV and EchoStar; and telephone
companies, or Telcos, e.g., Verizon and AT&T, which distribute television via
phone and/or fiber-optic lines. Each of the distributors controls the marketing
and pricing to consumers.
The following table sets forth our domestic and Canadian networks and
distribution options:
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Network Domestic DTH Domestic Cable Domestic Telcos Canadian DTH
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Playboy TV PPV/PPM PPV/PPM/VOD/ PPM/SVOD PPM
SVOD
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Playboy TV en Espanol Tier PPV/PPM/Tier PPM PPM
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Spice Digital Networks PPV PPV/VOD VOD --
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Our TV networks are available either as linear channels or as part of a
VOD service. Our linear channels, offered on cable, DTH and Telco platforms, are
television networks with regularly scheduled content distributed through a
single network feed to all homes at the same time. VOD and SVOD, which are
available on cable and Telco platforms, make content available to the consumer
through a television interface at any time the consumer chooses to view it. In
recent years, cable operators have shifted to digital technology and more
recently begun moving away from linear PPV to VOD in an effort to conserve
bandwidth and meet consumer needs for on-demand programming. We transmit
exclusively in digital, and the vast majority of delivery to consumers is via
digital technology.
Playboy TV is the only adult television network available on all major DTH
services in both the United States and Canada.
As VOD supplants traditional linear networks, we are seeking to establish
a differentiable position in this technology by leveraging the power of our
brands, our large library of original programming and our relationships with
leading adult studios, while at the same time recognizing that we are operating
in a far more fragmented and competitive marketplace with lower costs of entry.
6
Our revenues generally reflect our contractual percentage of the retail
price paid by consumers directly to the system operators. Channel space for our
networks and VOD product is determined at each distributor's corporate level as
part of our distributor negotiations; however, in some cases, we negotiate terms
at the corporate level with distribution at the system level. Our agreements
with cable and DTH operators are renewed or renegotiated from time to time in
the ordinary course of business. In some cases, following the expiration of an
agreement, the respective operator and we agree to continue to operate under the
terms of the expired agreement until a new agreement is negotiated. In any
event, our agreements with distributors generally may be terminated on short
notice without penalty.
International TV
We currently own and operate or license Playboy-, Spice- and
locally-branded TV networks in the United Kingdom, which are further distributed
through DTH and cable throughout greater Europe. Additionally, we have branded
TV networks in Australia, France, Germany, Hong Kong, New Zealand, South Korea
and Turkey. Also, through joint ventures, we have minority equity interests in
TV networks in Latin America, Iberia and Japan. These international networks,
which are generally available on both a PPV and PPM basis, principally carry
U.S.-originated content, which is subtitled or dubbed and complemented by local
content. We also license individual programs from our extensive library to
broadcasters internationally.
We own a 19.0% interest in Playboy TV-Latin America, LLC, or PTVLA, a
joint venture with Claxson Interactive Group, Inc., or Claxson, which operates
Playboy TV networks as well as a local adult service called Venus, in Latin
America and Iberia. PTVLA also operates Lifestyle TV, a male targeted,
ad-supported basic cable channel with a mix of locally produced and acquired
content with no nudity. In these markets, PTVLA has the exclusive right to use
content from the Playboy library. PTVLA also has an agreement with Turner
Broadcasting System Latin America, Inc., or Turner, to exclusively distribute
all PTVLA owned and operated services and to sell advertising on Lifestyle TV.
Turner bundles PTVLA channels with their existing services, including Cartoon
Network, CNN and TNT. PTVLA pays Turner a distribution fee. In addition, PTVLA
has a joint venture with Globomedia S.A., or GLOBO, to own and operate adult TV
services in Brazil. PTVLA owns a 40% interest in the joint venture and GLOBO
owns 60%. In addition, PTVLA has contributed non-branded adult content for use
in DVD distribution and online and mobile markets in Brazil.
While Claxson has management control, we have significant management
influence on our joint venture. We provide both programming and the use of our
trademarks directly to PTVLA in return for 17.5% of the venture's net revenues
with a guaranteed annual minimum. The term of the program supply and trademark
agreement for PTVLA expires in 2022, unless terminated earlier in accordance
with the terms of the agreement. PTVLA provides the feed for Playboy TV en
Espanol and we pay PTVLA a 20% distribution fee for that feed based on the
network's net revenues in the U.S. We have an option to purchase up to an
additional 30.9%, or buy-up option, of PTVLA at fair market value through
December 23, 2022. In addition, we have the option to purchase the remaining
50.1% of PTVLA at fair market value, exercisable at any time during the period
beginning December 23, 2012, and ending December 23, 2022, so long as we have
previously or concurrently exercised the buy-up option. We have the option to
pay the purchase price for the buy-up option in cash, shares of our Class B
common stock, or Class B stock, or a combination of both. However, if we
exercise both options concurrently, we must use cash to acquire the 81.0% of
PTVLA that we do not own.
We also own a 19.9% interest in Playboy Channel Japan, which operates
Playboy Channel and Channel Ruby, a local adult service.
We seek the most appropriate and profitable manner in which to build on
the Playboy brand in each international market. In addition, we seek to build
our Spice and other local brands as well as leverage our infrastructure and
costs among our networks by combining operations where practicable, through
innovative programming and scheduling, through joint programming acquisitions
and by coordinating and sharing marketing activities and materials efficiently
throughout the territories in which our programming is aired. We also look to
develop and establish relationships with international production companies on a
local level in order to create original international product for distribution
to our various owned and licensed networks.
Online/Mobile
We operate various subscription-based and free websites under our Playboy
and other brands. We outsource e-commerce businesses to third parties.
7
Our online websites are in the midst of a major infrastructure overhaul
and redesign effort, which we anticipate to be substantially completed in the
first half of 2009.
Our free website, Playboy.com, offers original content leveraging Playboy
magazine's editorial assets and opportunities to increase online advertising
sales. Additionally, the free area of the website is designed with a goal of
converting visitors to purchasers by directing them to our subscription
offering.
Our largest subscription website, Playboy Cyber Club, offers access to
over 100,000 photos and videos and offers members the ability to see Playmates,
an assortment of celebrity content and special "online only" features, including
our franchises of "Cyber Girls" and "Coeds" and an extensive archive of Playboy
magazine interviews. The other Playboy-branded clubs include broadband
video-specific membership clubs, solely offering high-quality video, and a
thematic, searchable pictorial and video club.
We offer websites branded under the Playboy, Spice and other brands. These
websites are available on a monthly, VOD and/or SVOD basis.
We also distribute our branded content internationally via the Internet
and wireless platforms. We have significant traffic from international users on
our owned and operated websites, Playboy.com and Playboy.co.uk, that results in
customers for our other products and services. Additionally, we have websites in
other countries, some of which were created in conjunction with our
international magazine partners that feature a blend of original, local-edition
Playboy magazine and U.S. and U.K. websites' content. We also have licensees
that distribute our content on the wireless platform internationally. Demand for
wireless content is increasing as technology and consumer adoption continue to
grow. Our current offerings include graphical images, video clips, mobile
television, ringtones and games. We also create integrated cross-platform mobile
marketing and promotions to leverage opportunities across our businesses.
The Playboy-branded e-commerce websites, PlayboyStore.com and
ShopTheBunny.com, combined with their respective Playboy and BUNNYshop Catalogs,
offer customers the ability to purchase Playboy-branded fashions, calendars,
DVDs, jewelry, collectibles, back issues of Playboy magazine and special
editions, as well as select non-Playboy-branded products. We outsourced these
businesses to a third party in early 2008 while retaining significant creative
control. This outsourcing arrangement allows us to earn a high-margin and
profitable royalty on sales with a minimum guarantee. Our Spice-branded
e-commerce website, SpiceTVStore.com, and the Spice Catalog were outsourced in
2006 and we continue to earn a royalty on product sales.
Other Businesses
Playboy Radio is a 24-hour Playboy-branded radio channel available on
SIRIUS Satellite Radio. The channel features new and exclusive Playboy content
and leverages our entertainment assets by expanding our audience of Playboy
consumers to the satellite radio platform.
Alta Loma Entertainment functions as a mainstream production company. It
leverages our assets, including editorial material and the Playboy brand, as
well as icons such as the Playmates, the Playboy Mansion and Hugh M. Hefner, our
Editor-In-Chief and Chief Creative Officer, or Mr. Hefner, to develop,
co-produce and/or license original programming, such as the top-rated The Girls
Next Door on E! Entertainment Television, and motion pictures, such as The House
Bunny and Miss March.
Competition
Competition among television programming providers is intense for both
channel space and viewer spending. Our competition varies in both the type and
quality of programming offered, but consists primarily of other premium pay
services, such as general-interest premium channels and other adult movie pay
services. We compete with other pay services as we attempt to obtain or renew
carriage with DTH operators and cable affiliates; negotiate fee arrangements;
negotiate for VOD and SVOD rights; and market our programming to consumers
through these operators. Over the past several years, all of the competitive
factors described above have adversely impacted us, as has consolidation among
cable systems, which has resulted in fewer, but larger, operators. The
availability of, and price pressure from, more explicit content on the Internet
and more pay television options, both mainstream and adult, also present a
significant competitive challenge.
8
As a result of VOD's lower cost of entry for programmers compared to
linear networks and capacity constraints disappearing, operators are focusing on
VOD and eliminating linear networks. The market has therefore become
significantly more competitive, resulting in a decrease in our overall shelf
space. We encourage distributors to increase their efforts to market the full
range of Playboy PPV, VOD, SVOD and PPM platforms to consumers with particular
emphasis on the value of PPM. Our strategy with respect to Spice is to improve
access to our content while being increasingly cost conscious.
We also face competition in international markets from both the
availability and prevalence of adult content on free television, specifically in
Europe, as well as competitive pay services. As in the U.S., there are often low
costs of entry, which yield increasing competition, especially from companies in
Asia and parts of Europe providing local content as opposed to dubbed U.S.
programming.
Playboy's online business and the Internet in general are highly
competitive. Playboy's online properties compete with other Internet sites for
users and for advertisers, and in particular our premium online clubs compete
for paying subscribers with other premium online providers. Factors that affect
our ability to compete online include the quality of our content, the overall
usability of our websites, the relative ranking of our websites in the major
online search engines, the efficacy of our sales and marketing efforts, and the
recognition, perception and consideration of our brands. Playboy develops new
features, functionality and technology around these factors to remain
competitive and to keep users engaged with Playboy's online properties.
PUBLISHING GROUP
Our Publishing Group operations include the publication of Playboy
magazine, special editions and other domestic publishing businesses, including
books and calendars, and the licensing of international editions of Playboy
magazine.
Domestic Magazine
Founded by Mr. Hefner in 1953, Playboy magazine plays a key role in
driving the continued popularity and recognition of the Playboy brand. Playboy
magazine is the best-selling monthly men's magazine in the world based on the
combined circulation of the U.S. and international editions. In 2008,
circulation of the U.S. edition was approximately 2.6 million copies monthly,
while the combined average circulation of the 26 licensed international editions
was approximately 0.9 million copies monthly. According to fall 2008 data
published by the independent market research firm of Mediamark Research, Inc.,
or MRI, approximately one in every 10 men in the United States aged 18 to 34
reads the U.S. edition of Playboy magazine.
Playboy magazine is a general-interest magazine, targeted to men, with a
reputation for excellence founded on its high-quality photography,
entertainment, humor, cartoons and articles on current issues, interests and
trends. Playboy magazine consistently includes in-depth, candid interviews with
high-profile political, business, entertainment and sports figures, pictorials
of famous women, content by leading authors, and the work of top photographers,
writers and artists. Playboy magazine also features lifestyle articles on
consumer electronics and other products, fashion and automobiles and covers the
worlds of sports and entertainment.
According to the independent audit agency Audit Bureau of Circulations, or
ABC, for the six months ended December 31, 2008, Playboy magazine was the 17th
highest-ranking U.S. consumer publication in terms of circulation rate base (the
total newsstand and subscription circulation guaranteed to advertisers). Playboy
magazine's circulation rate base for the same period was greater than each of
Maxim, GQ and Esquire. To better reflect changes in how and where media is
consumed and in response to the economic challenges of the changing magazine
landscape, we lowered our magazine circulation rate base effective with the
January 2008 issue to 2.6 million from 3.0 million.
Playboy magazine has historically generated approximately two-thirds of
its revenues from subscription and newsstand circulation, with the remainder
primarily from advertising. Subscription copies represent approximately 93% of
total copies sold. According to MRI, the median age of male Playboy magazine
readers is 35, with a median annual household income of approximately $59,000, a
demographic that we believe is also attractive to advertisers. We also derive
revenues from the rental of Playboy magazine's subscriber list.
We attract new subscribers to Playboy magazine through our own direct mail
advertising campaigns, subscription agent campaigns and the Internet, including
Playboy.com. Subscription copies of the magazine are
9
delivered through the United States Postal Service as periodical mail. We
attempt to contain these costs through presorting and other methods.
Playboy magazine is also available as a digital edition. Digital copies
are delivered to subscribers via the Internet. Digital copies may also be
purchased on a single-issue basis.
Playboy magazine is one of the highest priced magazines in the U.S. The
basic U.S. newsstand cover price is $5.99 ($6.99 for the December 2008 and
January 2009 holiday issues). We generally increase the newsstand cover price by
$1.00 when there is a feature of special appeal, and we price test from time to
time.
Playboy magazine targets a wide range of advertisers. The following table
sets forth advertising by category, as a percent of total advertising pages, and
the total number of advertising pages:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
Category 12/31/08 12/31/07 12/31/06
-------------------------------------------------------------------------------
Retail/Direct response 26% 29% 28%
Beer/Wine/Liquor 25 28 21
Tobacco 15 13 13
Automotive and automotive-related 12 6 8
Toiletries/Cosmetics 6 1 4
Other 16 23 26
-------------------------------------------------------------------------------
Total 100% 100% 100%
-------------------------------------------------------------------------------
Total advertising pages 428 460 429
===============================================================================
We continue to focus on securing new advertisers, including expanding
advertising in underserved categories. We publish the U.S. edition of Playboy
magazine in 15 advertising editions: one upper income zip-coded, eight regional,
two state and four metropolitan editions. All contain the same editorial
material but provide targeting opportunities for advertisers. We implemented 4%,
4% and 5% cost per thousand increases in advertising rates effective with the
January 2009, 2008 and 2007 issues, respectively.
Playboy magazine subscriptions are serviced by Communications Data
Services, Inc., or CDS. Pursuant to a subscription fulfillment agreement, CDS
performs a variety of services, including processing orders or transactions;
receiving, verifying, balancing and depositing payments from subscribers;
printing forms and promotional materials; maintaining master files on all
subscribers; issuing bills and renewal notices to subscribers; generating
labels; resolving customer service complaints as directed by us; and furnishing
various reports that enable us to monitor and to account for all aspects of the
subscription operations. The term of our subscription fulfillment agreement
expires June 30, 2011. Either party may terminate the agreement prior to
expiration in the event of material nonperformance by, or insolvency of, the
other party. We pay CDS specified fees and charges based on the types and
amounts of service performed under the agreement. The fees and charges increase
annually based on the consumer price index to a maximum of 6% in one year.
Domestic distribution of Playboy magazine and special editions to
newsstands and other retail outlets is accomplished through Time/Warner Retail
Sales and Marketing, or TWRSM. The copies are shipped in bulk to wholesalers,
who are responsible for local retail distribution. We receive a substantial cash
advance from TWRSM 30 days after the date each issue goes on sale. We recognize
revenues from newsstand sales based on estimated copy sales at the time each
issue goes on sale and adjust for actual sales upon settlement with TWRSM.
Revenue adjustments have not been material. Retailers return unsold copies to
wholesalers, who count and then shred the returned copies and report the returns
by affidavit. The number of copies sold on newsstands varies from month to
month, depending in part on consumer interest in the cover, the pictorials and
the editorial features. Our current agreement with TWRSM expires in January
2012.
Playboy magazine and special editions are printed by Quad/Graphics, Inc.,
or Quad, at a single site, which ships the products to subscribers and
wholesalers. The print runs vary each month based on expected sales and are
determined with input from TWRSM. Paper is the principal raw material used in
the production of these publications. We use a variety of types of high-quality
coated and uncoated papers that are purchased from a number of suppliers around
the world.
10
International Magazine
We license the right to publish international editions of Playboy magazine
in the following 26 countries: Argentina, Brazil, Bulgaria, Colombia, Croatia,
the Czech Republic, Estonia, France, Germany, Greece, Hungary, Italy, Lithuania,
Mexico, the Netherlands, the Philippines, Poland, Portugal, Romania, Russia,
Serbia, Slovakia, Slovenia, Spain, Ukraine and Venezuela.
Local publishing licensees tailor their international editions by mixing
the work of their national writers and artists with editorial and pictorial
content from the U.S. edition. We monitor the content of the international
editions so that they retain the distinctive style, look and quality of the U.S.
edition while meeting the needs of their respective markets. The license
agreements vary, but in general are for terms of three to five years and carry a
guaranteed minimum royalty as well as a formula for computing earned royalties
in excess of the minimum. Royalty computations are based on both circulation and
advertising revenues. The German and Brazilian editions accounted for
approximately one-half of our total revenues from international editions in each
of 2008, 2007 and 2006.
Special Editions and Other
We have created media extensions, such as special editions and calendars,
which are primarily sold in newsstand outlets. We published 25 special editions
in each of 2008, 2007 and 2006, and we expect to publish the same number in
2009. The U.S. newsstand cover price for special editions increased to $10.99
from $9.99 effective with the issues on newsstands in January 2009. We also
license rights to third parties to publish books for which we receive royalties.
Competition
Magazine publishing companies face intense competition for readers,
advertisers and retail shelf space. Magazines and Internet sites primarily aimed
at men are Playboy magazine's principal competitors. Other types of media that
carry advertising, particularly cable and broadcast television, also compete
with Playboy magazine for advertising revenues. Levels of advertising revenues
may be affected by, among other things, competition for and spending by
advertisers, general economic activity and governmental regulation of
advertising content, such as tobacco products. Since only approximately
one-third of Playboy magazine's revenues and less than 10% of our total revenues
are from Playboy magazine advertising, we are not overly dependent on this
source of revenue.
LICENSING GROUP
Our Licensing Group operations include the licensing of consumer products
carrying one or more of our trademarks and/or images, Playboy-branded retail
stores, multifaceted location-based entertainment venues and certain
revenue-generating marketing activities.
We license the Playboy name, the Rabbit Head Design and other images,
trademarks and artwork for the worldwide manufacture, sale and distribution of a
multitude of consumer products. We work with our licensees to develop, market
and distribute high-quality Playboy-branded merchandise. Our licensed product
lines include men's and women's apparel, men's underwear and women's lingerie,
accessories, collectibles, cigars, watches, jewelry, fragrances, shoes, luggage,
bath and body products, small leather goods, stationery, music, eyewear,
barware, home fashions and slot machines. We continually seek to license our
brand name and images in new markets and retail categories. The group also
licenses art-related products based on our extensive art collection, most of
which was originally commissioned as illustrations for Playboy magazine.
Occasionally, we sell small portions of our art and memorabilia collection.
Playboy-branded merchandise is marketed primarily through retail outlets,
including department and specialty stores, as well as through e-commerce
websites and catalogs.
In the fourth quarter of 2008, we acquired and now own and operate a
Playboy-branded retail store in Las Vegas. We also license Playboy-branded
retail stores with locations in Auckland, Bangkok, Hong Kong, Kuala Lumpur, Las
Vegas, London and Melbourne.
Our licensing activities also include multifaceted location-based
entertainment venues. Our first such venue located at the Palms Casino Resort in
Las Vegas opened in 2006. Our venture partner provided the funding for all of
the Playboy elements, which include a 30-foot-tall Rabbit Head on the exterior
of one of their towers, a nightclub, a boutique casino and lounge, a retail
store and a sky villa hotel suite. We contributed the Playboy brand and
trademarks as well as marketing support. In 2007, we announced a joint venture
with Macao Studio City for a
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Playboy-branded entertainment destination in Macao, which will include nightlife
and entertainment options, dining, specialty retail elements and a Hugh M.
Hefner Villa. This venue is expected to open in 2010.
Company-wide marketing events, which promote brand awareness, are
approximately break-even and include the Playboy Jazz Festival and Playmate
Promotions. We have produced the Playboy Jazz Festival on an annual basis in Los
Angeles at the Hollywood Bowl since 1979 and continue our sponsorship of related
community events. Playmate Promotions represents the Playmates in advertising
campaigns, trade shows, endorsements, commercials, motion pictures, television
and videos.
While our branded products are unique, the licensing business is intensely
competitive and is extremely sensitive to economic conditions, shifts in
consumer buying habits, fashion and lifestyle trends and changes in the global
retail sales environment.
PROMOTIONAL AND OTHER ACTIVITIES
We believe that our sales of products and services are enhanced by public
recognition of the Playboy brand as symbolic of a lifestyle. In order to
establish public recognition, we, among other activities, purchased in 1971 the
Playboy Mansion in Los Angeles, California, where Mr. Hefner lives. The Playboy
Mansion is used for various corporate activities and serves as a valuable
location for motion picture and television production, magazine photography and
for online, advertising, marketing and sales events. It also enhances our image,
as we host many charitable and civic functions. The Playboy Mansion generates
substantial publicity and recognition, which increases public awareness of us
and our products and services.
The Playboy Foundation seeks to foster social change by providing support
to nonprofit organizations that preserve and encourage open communication about
human sexuality, reproductive health and rights, protecting civil rights and
civil liberties in the United States for all people, people affected by
HIV/AIDS, eliminating censorship and protecting freedom of expression and First
Amendment rights.
Our trademarks, copyrights and online domain names are critical to the
success and growth potential of all of our businesses. We actively protect and
defend them throughout the world and monitor the marketplace for counterfeit
products, including by initiating legal proceedings, when warranted, to prevent
their unauthorized use.
EMPLOYEES
We employed 626 full-time employees at February 27, 2009 compared to 789
at February 29, 2008. No employees are represented by collective bargaining
agreements. We believe we maintain a satisfactory relationship with our
employees.
AVAILABLE INFORMATION
We make available free of charge on our website, PlayboyEnterprises.com,
our annual, quarterly and current reports, and, if applicable, amendments to
those reports, filed or furnished pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and
Exchange Commission.
Also posted on our website are the charters of the Audit Committee and
Compensation Committee of our Board of Directors, our Code of Business Conduct
and our Corporate Governance Guidelines. Copies of these documents are available
free of charge by sending a request to Investor Relations, Playboy Enterprises,
Inc., 680 North Lake Shore Drive, Chicago, Illinois 60611.
As required under Section 302 of the Sarbanes-Oxley Act of 2002, the
certifications of our Chief Executive Officer and Chief Financial Officer are
filed as exhibits to this Annual Report on Form 10-K. In addition, we submitted
to the New York Stock Exchange, or the Exchange, the required annual
certifications of our Chief Executive Officer relating to compliance by us with
the Exchange's corporate governance listing standards. Copies of these
certifications are available to stockholders free of charge by sending a request
to Investor Relations, Playboy Enterprises, Inc., 680 North Lake Shore Drive,
Chicago, Illinois 60611.
12
Item 1A. Risk Factors
---------------------
In addition to the other information contained in this Annual Report on
Form 10-K, the following risk factors should be carefully considered in
evaluating our business and us.
We may not be able to protect our intellectual property rights.
We believe that our trademarks, particularly the Playboy name and Rabbit
Head Design, and other proprietary rights are critical to our success, growth
potential and competitive position. Accordingly, we devote substantial resources
to the establishment and protection of our trademarks and other proprietary
rights. Our actions to establish and protect our trademarks and other
proprietary rights, however, may not prevent imitation of our products by others
or prevent others from claiming violations of their trademarks and proprietary
rights by us. Any infringement or related claims, even if not meritorious, may
be costly and time-consuming to litigate, may distract management from other
tasks of operating the business and may result in the loss of significant
financial and managerial resources, which could harm our business, financial
condition or operating results. These concerns are particularly relevant with
regard to those international markets, such as China, in which it is especially
difficult to enforce intellectual property rights.
Failure to maintain our agreements with multiple system operators, or
MSOs, and DTH operators on favorable terms could adversely affect our business,
financial condition or results of operations.
We currently have agreements with all of the largest MSOs in the United
States. We also have agreements with the principal DTH operators in the United
States and Canada. Our agreements with these operators may be terminated on
short notice without penalty. If one or more MSOs or DTH operators terminate or
do not renew these agreements, or do not renew them on terms as favorable as
those of current agreements, our business, financial condition or results of
operations could be materially adversely affected.
In addition, competition among television programming providers is intense
for both channel space and viewer spending. Our competition varies in both the
type and quality of programming offered, but consists primarily of other premium
pay services, such as general-interest premium channels, and other adult movie
pay services. We compete with other pay services as we attempt to obtain or
renew carriage with DTH operators and individual cable affiliates, negotiate fee
arrangements with these operators, negotiate for VOD and SVOD rights and market
our programming through these operators to consumers. The competition with
programming providers has intensified as a result of consolidation in the DTH
and cable systems industries, which has resulted in fewer, but larger,
operators. Competition has also intensified with VOD's lower cost of entry for
programmers compared to linear networks and with capacity constraints
disappearing. The impact of industry consolidation, any decline in our access to
and acceptance by DTH and/or cable systems and the possible resulting
deterioration in the terms of agreements, cancellation of fee arrangements or
pressure on margin splits with operators of these systems could adversely affect
our business, financial condition or results of operations.
Limits on our access to satellite transponders could adversely affect our
business, financial condition or results of operations.
Our cable television and DTH operations require continued access to
satellite transponders to transmit programming to cable and DTH operators.
Material limitations on our access to these systems or satellite transponder
capacity could materially adversely affect our business, financial condition or
results of operations. Our access to transponders may also be restricted or
denied if:
o we or the satellite transponder providers are indicted or
otherwise charged as a defendant in a criminal proceeding;
o the Federal Communications Commission issues an order
initiating a proceeding to revoke the satellite owner's
authorization to operate the satellite;
o the satellite transponder providers are ordered by a court or
governmental authority to deny us access to the transponder;
o we are deemed by a governmental authority to have violated any
obscenity law; or
o the satellite transponder providers fail to provide the
required services.
In addition to the above, the access of Playboy TV, the Spice Digital
Networks and our other networks to transponders may be restricted or denied if a
governmental authority commences an investigation or makes an
13
adverse finding concerning the content of their transmissions. Technical
failures may also affect our satellite transponder providers' ability to deliver
transmission services.
We are subject to risks resulting from our operations outside the United
States, and we face additional risks and challenges as we continue to expand
internationally.
The international scope of our operations may contribute to volatile
financial results and difficulties in managing our business. For the year ended
December 31, 2008, we derived approximately 32% of our consolidated revenues
from countries outside the United States. Our international operations expose us
to numerous challenges and risks, including, but not limited to, the following:
o adverse political, regulatory, legislative and economic
conditions in various jurisdictions;
o costs of complying with varying governmental regulations;
o fluctuations in currency exchange rates;
o difficulties in developing, acquiring or licensing programming
and products that appeal to a variety of audiences and
cultures;
o scarcity of attractive licensing and joint venture partners;
o the potential need for opening and managing distribution
centers abroad; and
o difficulties in protecting intellectual property rights in
foreign countries.
In addition, important elements of our business strategy, including
capitalizing on advances in technology, expanding distribution of our products
and content and leveraging cross-promotional marketing capabilities, involve a
continued commitment to expanding our business internationally. This
international expansion will require considerable management and financial
resources.
We cannot assure you that one or more of these factors or the demands on
our management and financial resources would not harm any current or future
international operations and our business as a whole.
Any inability to identify, fund investment in and commercially exploit new
technology could have a material adverse impact on our business, financial
condition or results of operations.
We are engaged in businesses that have experienced significant
technological changes over the past several years and are continuing to undergo
technological changes. Our ability to implement our business plan and to achieve
the results projected by management will depend on management's ability to
anticipate technological advances and implement strategies to take advantage of
future technological changes. Any inability to identify, fund investment in and
commercially exploit new technology or the commercial failure of any technology
that we pursue, such as Internet and wireless, could result in our businesses
becoming burdened by obsolete technology and could have a material adverse
impact on our business, financial condition or results of operations.
Our online operations are subject to security risks and systems failures.
Online security breaches could materially adversely affect our business,
financial condition or results of operations. Any well-publicized compromise of
security could deter use of the Internet in general or use of the Internet to
conduct transactions that involve transmitting confidential information or
downloading sensitive materials in particular. In offering online payment
services, we may increasingly rely on technology licensed from third parties to
provide the security and authentication necessary to effect secure transmission
of confidential information such as customer credit card numbers. Advances in
computer capabilities, new discoveries in the field of cryptography or other
developments could compromise or breach the algorithms that we use to protect
our customers' transaction data. If third parties are able to penetrate our
network security or otherwise misappropriate confidential information, we could
be subject to liability, which could result in litigation. In addition,
experienced programmers or "hackers" may attempt to misappropriate proprietary
information or cause interruptions in our services that could require us to
expend significant capital and resources to protect against or remediate these
problems. Increased scrutiny by regulatory agencies, such as the Federal Trade
Commission and state agencies, of the use of customer information could also
result in additional expenses if we are obligated to reengineer systems to
comply with new regulations or to defend investigations of our privacy
practices.
The uninterrupted performance of our computer systems is critical to the
operations of our websites. Our computer systems are located at external
third-party sites, and, as such, may be vulnerable to fire, loss of power,
14
telecommunications failures and other similar catastrophes. In addition, we may
have to restrict access to our websites to solve problems caused by computer
viruses or other system failures. Our customers may become dissatisfied by any
disruption or failure of our computer systems that interrupts our ability to
provide our content. Repeated system failures could substantially reduce the
attractiveness of our websites and/or interfere with commercial transactions,
negatively affecting our ability to generate revenues. Our websites must
accommodate a high volume of traffic and deliver regularly-updated content. Our
sites have, on occasion, experienced slow response times and network failures.
These types of occurrences in the future could cause users to perceive our
websites as not functioning properly and therefore induce them to frequent
websites other than ours. We are also subject to risks from failures in computer
systems other than our own because our customers depend on their own Internet
service providers for access to our sites. Our revenues could be negatively
affected by outages or other difficulties customers experience in accessing our
websites due to Internet service providers' system disruptions or similar
failures unrelated to our systems. Our insurance policies may not adequately
compensate us for any losses that may occur due to any failures in our Internet
systems or the systems of our customers' Internet service providers.
Piracy of our television networks, programming and photographs could
materially reduce our revenues and adversely affect our business, financial
condition or results of operations.
The distribution of our subscription programming by MSOs, DTH operators
and Telcos requires the use of encryption technology to assure that only those
who pay can receive programming. It is illegal to create, sell or otherwise
distribute mechanisms or devices to circumvent that encryption. Nevertheless,
theft of subscription television programming has been widely reported. Theft of
our programming reduces future potential revenue. In addition, theft of our
competitors' programming can also increase our churn rate. Although MSOs, DTH
operators and Telcos continually review and update their conditional access
technology, there can be no assurance that they will be successful in developing
or acquiring the technology needed to effectively restrict or eliminate signal
theft.
Additionally, the development of emerging technologies, including the
Internet and online services, poses the risk of making piracy of our
intellectual property more prevalent. Digital formats, such as the ones we use
to distribute our programming through MSOs, DTH operators, Telcos and the
Internet, are easier to copy, download or intercept. As a result, users can
download, duplicate and distribute unauthorized copies of copyrighted
programming and photographs over the Internet or other media, including DVDs. As
long as pirated content is available, consumers could choose to download or
purchase pirated intellectual property rather than pay to subscribe to our
services or purchase our products.
National consolidation of the single-copy magazine distribution system may
adversely affect our ability to obtain favorable terms on the distribution of
Playboy magazine and special editions and may lead to declines in profitability
and circulation.
In the past decade, the single-copy magazine distribution system has
undergone a dramatic consolidation from more than 180 independent distribution
owners to just three large wholesalers that handle the majority of the
single-copy distribution business. Currently, we rely on a single national
distributor, TWRSM, for the distribution of Playboy magazine and special
editions to newsstands and other retail outlets. As a result of this industry
consolidation, we face increasing pressure to lower the prices we charge to
wholesalers and increase our sell-through rates. If we are forced to lower the
prices we charge wholesalers, we may experience declines in revenue. If we are
unable to meet targeted sell-through rates, we may incur greater expenses in the
distribution process. The combination of these factors could negatively impact
the profitability and newsstand circulation for Playboy magazine and special
editions.
If we are unable to generate revenues from advertising and sponsorships,
or if we were to lose our large advertisers or sponsors, our business would be
harmed.
If companies perceive Playboy magazine, Playboy.com or any of our other
free websites to be limited or ineffective advertising mediums, they may be
reluctant to advertise in our products or to be our sponsors. Our ability to
generate significant advertising and sponsorship revenues depends upon several
factors, including, among others, the following:
o our ability to maintain a large, demographically attractive
subscriber base for Playboy magazine and Playboy.com and any
of our other free websites;
o our ability to offer attractive advertising rates;
o our ability to attract advertisers and sponsors; and
15
o our ability to provide effective advertising delivery and
measurement systems.
Our advertising revenues are also dependent on the level of spending by
advertisers, which is impacted by a number of factors beyond our control,
including general economic conditions, changes in consumer purchasing and
viewing habits and changes in the retail sales environment. Our existing
competitors, as well as potential new competitors, may have significantly
greater financial, technical and marketing resources than we do. These companies
may be able to undertake more extensive marketing campaigns, adopt aggressive
advertising pricing policies and devote substantially more resources to
attracting advertising customers.
We rely on third parties for domestic satellite transmission and other
services, to service our Playboy magazine subscriptions and to print and
distribute the magazine and special editions. We also rely on third parties to
operate our e-commerce and catalog businesses. If these third parties fail to
perform, our business could be harmed.
We rely on BFI for satellite transmission services (including compression,
uplink and playback) for our domestic cable channels. We rely on CDS to service
Playboy magazine subscriptions. The magazine and special editions are printed by
Quad at a single site, which ships the product to subscribers and wholesalers.
We rely on a single national distributor, TWRSM, for the distribution of Playboy
magazine and special editions to newsstands and other retail outlets. We rely on
eFashion Solutions, LLC and other third parties to operate our e-commerce and
catalog businesses. If any of these third parties is unable to or does not
perform and we are unable to find alternative services in a timely fashion, our
business could be adversely affected.
Increases in paper prices or postal rates could adversely affect our
operating performance.
Paper costs are a substantial component of the manufacturing and direct
marketing expenses of our publishing business. The market for paper has
historically been cyclical, resulting in volatility in paper prices. An increase
in paper prices could materially adversely affect our operating performance
unless and until we can pass any increases through to the consumer.
The cost of postage also affects the profitability of Playboy magazine. An
increase in postage rates could materially adversely affect our operating
performance unless and until we can pass the increase through to the consumer.
If we experience a significant decline in our circulation rate base, our
results could be adversely affected.
According to ABC, Playboy magazine was the 17th highest-ranking U.S.
consumer publication in terms of circulation rate base for the six months ended
December 31, 2008. Our circulation is primarily subscription driven, with
subscription copies comprising approximately 93% of total copies sold. If we
either experience a significant decline in subscriptions because we lose
existing subscribers or do not attract new subscribers, our results could be
adversely affected.
We may not be able to compete successfully with direct competitors or with
other forms of entertainment.
We derive a significant portion of our revenues from subscriber-based
fees, advertising and licensing, for which we compete with various other media,
including magazines, newspapers, television, radio, Internet websites and event
or event sponsorships that offer customers information and services similar to
those that we provide. We also compete with providers of alternative
leisure-time activities and media. Competition could result in price reductions,
reduced margins or loss of market share, any of which could have a material
adverse effect on our business, financial condition or results of operations.
We face competition on both country and regional levels. In addition, each
of our businesses competes with companies that deliver content through the same
platforms. Many of our competitors, including large entertainment and media
enterprises, have greater financial and human resources than we do. We cannot
assure you that we can remain competitive with companies that have greater
resources or that offer alternative entertainment and information options.
16
Government regulations could adversely affect our business, financial
condition or results of operations.
Our businesses are regulated by governmental authorities in the countries
in which we operate. Because of our international operations, we must comply
with diverse and evolving regulations. Regulation relates to, among other
things, licensing, access to satellite transponders, commercial advertising,
subscription rates, foreign investment, Internet gaming, use of confidential
customer information and content, including standards of decency/obscenity.
Changes in the regulation of our operations or changes in interpretations of
existing regulations by courts or regulators or our inability to comply with
current or future regulations could adversely affect us by reducing our
revenues, increasing our operating expenses and/or exposing us to significant
liabilities. While we are not able to reliably predict particular regulatory
developments that could affect us adversely, those regulations related to adult
content, the Internet, privacy and commercial advertising illustrate some of the
potential difficulties we face.
o Adult content. Regulation of adult content could prevent us
from making our content available in various jurisdictions or
otherwise have a material adverse effect on our business,
financial condition or results of operations. The governments
of some countries, such as China and India, have sought to
limit the influence of other cultures by restricting the
distribution of products deemed to represent foreign or
"immoral" influences. Regulation aimed at limiting minors'
access to adult content could also increase our cost of
operations and introduce technological challenges, such as by
requiring development and implementation of age verification
systems.
o Internet. Various governmental agencies are considering a
number of legislative and regulatory proposals that may lead
to laws or regulations concerning various aspects of the
Internet, including online content, intellectual property
rights, user privacy, taxation, access charges, liability for
third-party activities and jurisdiction. Regulation of the
Internet could materially adversely affect our business,
financial condition or results of operations by reducing the
overall use of the Internet, reducing the demand for our
services or increasing our cost of doing business.
o Commercial advertising. We receive a significant portion of
our advertising revenues from companies selling alcohol and
tobacco products. For the year ended December 31, 2008,
beer/wine/liquor and tobacco represented 25% and 15%,
respectively, of the total advertising pages in Playboy
magazine. Significant limitations on the ability of those
companies to advertise in Playboy magazine or on our websites
because of either legislative, regulatory or court action
could materially adversely affect our business, financial
condition or results of operations. In 1996, the Food and Drug
Administration announced regulations that prohibited the
publication of tobacco advertisements containing drawings,
colors or pictures. While those regulations were later held
unconstitutional by the Supreme Court of the United States,
future attempts may be made by other federal agencies to
impose similar or other types of advertising limitations.
Our business involves risks of liability claims for media content, which
could adversely affect our business, financial condition or results of
operations.
As a distributor of media content, we may face potential liability for:
o defamation;
o invasion of privacy;
o negligence;
o copyright or trademark infringement; and
o other claims based on the nature and content of the materials
distributed.
These types of claims have been brought, sometimes successfully, against
broadcasters, publishers, online services and other disseminators of media
content. We could also be exposed to liability in connection with material
available through our websites. Any imposition of liability that is not covered
by insurance or is in excess of
17
insurance coverage could have a material adverse effect on us. In addition,
measures to reduce our exposure to liability in connection with material
available through our websites could require us to take steps that would
substantially limit the attractiveness of our websites and/or their availability
in various geographic areas, which would negatively affect their ability to
generate revenues.
Private advocacy group actions targeted at our content could result in
limitations on our ability to distribute our products and programming and
negatively impact our brand acceptance.
Our ability to operate successfully depends on our ability to obtain and
maintain distribution channels and outlets for our products. From time to time,
private advocacy groups have sought to exclude our programming from local pay
television distribution because of the adult-oriented content of the
programming. In addition, from time to time, private advocacy groups have
targeted Playboy magazine and its distribution outlets and advertisers, seeking
to limit the magazine's availability because of its adult-oriented content. In
addition to possibly limiting our ability to distribute our products and
programming, negative publicity campaigns, lawsuits and boycotts could
negatively affect our brand acceptance and cause additional financial harm by
requiring that we incur significant expenditures to defend our business or by
discouraging investors from investing in our securities.
In pursuing selective acquisitions, we may incur various costs and
liabilities and we may never realize the anticipated benefits of the
acquisitions.
If appropriate opportunities become available, we may acquire businesses,
products or technologies that we believe are strategically advantageous to our
business. Transactions of this sort could involve numerous risks, including:
o unforeseen operating difficulties and expenditures arising
from the process of integrating any acquired business, product
or technology, including related personnel;
o diversion of a significant amount of management's attention
from the ongoing development of our business;
o dilution of existing stockholders' ownership interest in us;
o incurrence of additional debt;
o exposure to additional operational risk and liability,
including risks arising from the operating history of any
acquired businesses;
o entry into markets and geographic areas where we have limited
or no experience;
o loss of key employees of any acquired companies;
o adverse effects on our relationships with suppliers and
customers; and
o adverse effects on the existing relationships of any acquired
companies, including suppliers and customers.
Furthermore, we may not be successful in identifying appropriate
acquisition candidates or consummating acquisitions on terms favorable or
acceptable to us or at all.
When we acquire businesses, products or technologies, our due diligence
reviews are subject to inherent uncertainties and may not reveal all potential
risks. We may therefore fail to discover or inaccurately assess undisclosed or
contingent liabilities, including liabilities for which we may have
responsibility as a successor to the seller or the target company. As a
successor, we may be responsible for any past or continuing violations of law by
the seller or the target company, including violations of decency laws. Although
we generally attempt to seek contractual protections, such as representations
and warranties and indemnities, we cannot be sure that we will obtain such
provisions in our acquisitions or that such provisions will fully protect us
from all unknown, contingent or other liabilities or costs. Finally, claims
against us relating to any acquisition may necessitate our seeking claims
against the seller for which the seller may not indemnify us or that may exceed
the scope, duration or amount of the seller's indemnification obligations.
Our significant debt could adversely affect our business, financial
condition or results of operations.
We have a significant amount of debt. At December 31, 2008, we had total
financing obligations of $115.0 million, all of which consisted of our 3.00%
convertible senior subordinated notes due 2025, or convertible notes. In
addition, we had a $50.0 million revolving credit facility, which was reduced to
$30.0 million in February 2009. At
18
February 27, 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 under this facility.
The amount of our existing and future debt could adversely affect us in a
number of ways, including the following:
o we may be unable to obtain additional financing for working
capital, capital expenditures, acquisitions and general
corporate purposes;
o debt-service requirements could reduce the amount of cash we
have available for other purposes; and
o we could be disadvantaged as compared to our competitors, such
as in our ability to adjust to changing market conditions.
Our ability to make payments of principal and interest on our debt depends
upon our future performance, general economic conditions and financial, business
and other factors affecting our operations, many of which are beyond our
control. If we are not able to generate sufficient cash flow from operations in
the future to service our debt, we may be required, among other things:
o to seek additional financing in the debt or equity markets;
o to refinance or restructure all or a portion of our debt;
and/or
o to sell assets.
These measures might not be sufficient to enable us to service our debt.
In addition, any such financing, refinancing or sale of assets might not be
available on economically favorable terms.
The terms of our credit facility impose restrictions on us that may affect
our ability to successfully operate our business.
Our credit facility contains covenants that limit our actions. These
covenants could materially and adversely affect our ability to finance our
future operations or capital needs or to engage in other business activities
that may be in our best interests. The covenants restrict our ability to, among
other things:
o incur or guarantee additional indebtedness;
o repurchase capital stock;
o repurchase convertible notes;
o make loans and investments;
o enter into agreements restricting our subsidiaries' abilities
to pay dividends;
o create liens;
o sell or otherwise dispose of assets;
o enter new lines of business;
o merge or consolidate with other entities; and
o engage in transactions with affiliates.
The credit facility also contains financial covenants requiring us to
maintain specified minimum net worth and interest coverage ratios.
Our ability to comply with these covenants and requirements may be
affected by events beyond our control, such as prevailing economic conditions
and changes in regulations, and if such events occur, we cannot be sure that we
will be able to comply.
We depend on our key personnel.
We believe that our ability to successfully implement our business
strategy and to operate profitably depends on the continued employment of some
of our senior management team. If these members of the management team become
unable or unwilling to continue in their present positions, our business,
financial condition or results of operations could be materially adversely
affected.
19
Ownership of Playboy Enterprises, Inc. is concentrated.
As of December 31, 2008, Mr. Hefner beneficially owned 69.53% of our Class
A common stock. As a result, given that our Class B stock is nonvoting, Mr.
Hefner possesses influence on matters including the election of directors as
well as transactions involving a potential change of control. Mr. Hefner may
support, and cause us to pursue, strategies and directions with which holders of
our securities disagree. The concentration of our share ownership may delay or
prevent a change in control, impede a merger, consolidation, takeover or other
transaction involving us or discourage a potential acquirer from making a tender
offer or otherwise attempting to obtain control of us.
Changes in economic conditions could adversely affect the profitability of
our business.
The global economy is currently experiencing a significant contraction,
with an almost unprecedented lack of availability of commercial and consumer
credit. This current decrease and any future decrease in economic activity in
the U.S. or in other regions of the world in which we do business could
significantly and adversely affect our results of operations and financial
condition. This contraction could cause a decline in spending by consumers and
advertisers, reduce demand for our products and have a material adverse impact
on our business, financial condition or results of operations. In addition, we
currently fulfill a portion of our liquidity requirements from operating cash
flows. Our ability to generate cash flows to meet these requirements could be
adversely affected by a continued decline in economic conditions.
Adverse real estate market conditions could adversely affect our ability
to sublease excess space.
Our ability to sublet our excess space in New York City and Santa Monica,
California may be negatively impacted by the market for commercial rental real
estate and economic conditions in those cities as well as in the national and
global economy generally. If we are unable to sublease our excess space, this
could negatively impact our results of operations and cash flows.
Adverse securities and credit market conditions may significantly affect
our ability to access the capital and credit markets and could harm our
financial position.
The securities and credit markets have been experiencing extreme
volatility and disruption. In some cases, the markets have limited the
availability of funds and increased the costs associated with issuing debt
instruments. Our access to additional financing will depend on a variety of
factors, such as these market conditions, the general availability of credit,
the volume of trading activities, the overall availability of credit to our
industry and our credit ratings. If any of these events were to occur, our
internal sources of liquidity may prove to be insufficient, and, in such case,
we may not be able to obtain additional financing on favorable terms, which
could have an impact on our ability to refinance credit facilities or maturing
debt or to react to changing economic and business conditions.
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, in
which case we would expect to have up to 18 months to take corrective action
before our stock would be delisted. 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.
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
20
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 1B. Unresolved Staff Comments
----------------------------------
None.
Item 2. Properties
------------------
Location Primary Use
-------- -----------
Office Space Leased:
Chicago, Illinois This space serves as our corporate headquarters and is used by
all of our operating groups and executive and administrative
personnel.
London, England This space is used by our Playboy TV U.K. executive and
administrative personnel and as a programming facility.
Los Angeles, California This space serves as our Entertainment Group's headquarters and
is utilized by executive and administrative personnel.
New York, New York This space serves as our Publishing and Licensing Groups'
headquarters, and the Entertainment Group and executive and
administrative personnel use a limited amount of space. We
intend to vacate and sublease this space and relocate these
functions primarily to our Chicago office.
Operations Facilities Leased:
Las Vegas, Nevada This space is used by our Licensing Group as a retail store for
the sale of Playboy-branded merchandise.
Los Angeles, California We began subleasing this production facility to BFI in 2008.
This facility, under separate agreements with BFI, is used as a
centralized digital, technical and programming facility in
support of our Entertainment Group. This facility was formerly
used by us in the same capacities.
Santa Monica, California This space is used by our Publishing Group as a photography
studio and offices. We intend to vacate and sublease this space
and relocate these functions primarily to our Los Angeles
office.
Property Owned:
Los Angeles, California The Playboy Mansion is used for various corporate activities
and serves as a valuable location for motion picture and
television production, magazine photography and for online,
advertising and sales events. It also enhances our image as
host for many charitable and civic functions.
21
Item 3. Legal Proceedings
-------------------------
On February 17, 1998, Eduardo Gongora, or Gongora, filed suit in state
court in Hidalgo County, Texas, against Editorial Caballero SA de CV, or EC,
Grupo Siete International, Inc., or GSI, collectively the Editorial Defendants,
and us. In the complaint, Gongora alleged that he was injured as a result of the
termination of a publishing license agreement, or the License Agreement, between
us and EC for the publication of a Mexican edition of Playboy magazine, or the
Mexican Edition. We terminated the License Agreement on or about January 29,
1998, due to EC's failure to pay royalties and other amounts due us under the
License Agreement. On February 18, 1998, the Editorial Defendants filed a
cross-claim against us. Gongora alleged that in December 1996 he entered into an
oral agreement with the Editorial Defendants to solicit advertising for the
Mexican Edition to be distributed in the United States. The basis of GSI's
cross-claim was that it was the assignee of EC's right to distribute the Mexican
Edition in the United States and other Spanish-speaking Latin American countries
outside of Mexico. On May 31, 2002, a jury returned a verdict against us in the
amount of $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 May 17, 2001, Logix Development Corporation, or Logix, D. Keith
Howington and Anne Howington filed suit in state court in Los Angeles County
Superior Court in California against Spice Entertainment Companies, Inc., or
Spice, Emerald Media, Inc., or EMI, Directrix, Inc., or Directrix, Colorado
Satellite Broadcasting, Inc., New Frontier Media, Inc., J. Roger Faherty, or
Faherty, Donald McDonald, Jr., and Judy Savar. On February 8, 2002, plaintiffs
amended the complaint and added as a defendant Playboy Enterprises, Inc., or
Playboy, which acquired Spice in 1999. The complaint alleged 11 contract and
tort causes of action arising principally out of a January 18, 1997, agreement
between EMI and Logix in which EMI agreed to purchase certain explicit
television channels broadcast over C-band satellite. The complaint further
sought damages from Spice based on Spice's alleged failure to provide
transponder and uplink services to Logix. Playboy and Spice filed a motion to
dismiss the plaintiffs' complaint. After pre-trial motions, Playboy was
dismissed from the case and a number of causes of action were dismissed against
Spice. A trial date for the remaining breach of contract claims against Spice
was set for December 10, 2003, and then continued, first to February 11, 2004,
and then to March 17, 2004. Spice and the plaintiffs filed cross-motions for
summary judgment or, in the alternative, for summary adjudication, on September
5, 2003. Those motions were heard on November 19, 2003, and were denied. In
February 2004, prior to the trial, Spice and the plaintiffs agreed to a
settlement in the amount of $8.5 million, which we recorded as a charge in 2003.
We paid $1.0 million, $1.0 million and $6.5 million in 2006, 2005 and 2004,
respectively. In 2004, we received a $5.6 million insurance recovery partially
related to the prior year litigation settlement with Logix.
On April 12, 2004, Faherty filed suit in the United States District Court
for the Southern District of New York against Spice, Playboy, Playboy
Enterprises International, Inc., or PEII, D. Keith Howington, Anne Howington and
Logix. The complaint alleges that Faherty is entitled to statutory and
contractual indemnification from Playboy, PEII and Spice with respect to defense
costs and liabilities incurred by Faherty in the litigation described in the
preceding paragraph, or the Logix litigation. The complaint further alleges that
Playboy, PEII, Spice, D. Keith Howington, Anne Howington and Logix conspired to
deprive Faherty of his alleged right to indemnification by excluding him from
the settlement of the Logix litigation. On June 18, 2004, a jury entered a
special verdict finding Faherty personally liable for $22.5 million in damages
to the plaintiffs in the Logix litigation. A judgment was entered on the verdict
on or around August 2, 2004. Faherty filed post-trial motions for a judgment
notwithstanding the verdict and a new trial, but these motions were both denied
on or about September 21, 2004. On October 20, 2004, Faherty filed
22
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 December 2008. 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 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 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 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
None.
23
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
--------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
-------------------------------------
Stock price information, as reported in the New York Stock Exchange
Composite Listing, is set forth in Note (W), Quarterly Results of Operations
(Unaudited), to the Notes to Consolidated Financial Statements. Our securities
are traded on the exchange listed on the cover page of this Annual Report on
Form 10-K under the ticker symbols PLA A (Class A voting) and PLA (Class B
nonvoting). At February 27, 2009, there were 3,293 and 10,788 holders of record
of Class A common stock and Class B common stock, or Class B stock,
respectively. There were no cash dividends declared during 2008, 2007 or 2006.
The high and low sales prices for our common stock for each full quarterly
period within the two most recent completed fiscal years are set forth in Note
(W), Quarterly Results of Operations (Unaudited), to the Notes to Consolidated
Financial Statements.
As described in Note (P), Financing Obligations, to the Notes to
Consolidated Financial Statements, in March 2005, we issued and sold in a
private placement $115.0 million aggregate principal amount of our 3.00%
convertible senior subordinated notes due 2025.
The following graph sets forth the five-year cumulative total stockholder
return on our Class B stock with the cumulative total stockholder return of the
Russell 2000 Stock Index and with our peer group for the period from December
31, 2003, through December 31, 2008. The graph reflects $100 invested on
December 31, 2003, in stock or index, including reinvestment of dividends. Our
peer group is comprised of Meredith Corporation, MGM Mirage, Playboy
Enterprises, Inc., Primedia Inc., Time Warner Inc., Viacom Inc., The Walt Disney
Company and World Wrestling Entertainment, Inc.
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
--------------------------------------------------------------------------------
12/03 12/04 12/05 12/06 12/07 12/08
--------------------------------------------------------------------------------
Playboy Enterprises, Inc. 100.00 76.05 85.95 70.92 56.44 13.37
Russell 2000 100.00 118.33 123.72 146.44 144.15 95.44
Peer Group 100.00 104.35 93.76 117.70 109.93 61.17
Other information required under this Item is contained in our Notice of
Annual Meeting of Stockholders and Proxy Statement (to be filed) relating to the
Annual Meeting of Stockholders to be held in May 2009, which will be filed
within 120 days after the close of our fiscal year ended December 31, 2008, and
is incorporated herein by reference.
24
Item 6. Selected Financial Data
-------------------------------
(in thousands, except per share amounts
and number of employees)
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended
12/31/08 12/31/07 12/31/06 12/31/05 12/31/04
-----------------------------------------------------------------------------------------------------------------------------
Selected financial data (1)
Net revenues $ 292,147 $ 339,840 $ 331,142 $ 338,153 $ 329,376
Interest expense, net (3,976) (2,363) (3,164) (4,769) (13,108)
Net income (loss) (156,055) 4,925 2,285 (735) 9,989
Net income (loss) applicable to common shareholders (156,055) 4,925 2,285 (735) 9,561
Basic and diluted earnings (loss) per common share (4.69) 0.15 0.07 (0.02) 0.30
EBITDA: (2)
Net income (loss) (156,055) 4,925 2,285 (735) 9,989
Adjusted for:
Interest expense 4,455 4,874 5,611 6,986 13,687
Income tax expense (benefit) (9,850) 1,928 2,496 3,998 3,845
Depreciation and amortization 39,458 41,198 42,218 42,540 47,100
Amortization of deferred financing fees 356 490 535 635 1,266
Stock options and restricted stock awards 1,032 1,633 1,859 601 682
Equity (income) loss in operations of investments 126 (129) 94 383 71
Impairment charges 146,536 1,508 -- -- --
Impairment charge on investments 2,033 88 -- -- --
Deferred subscription cost write-off 4,820 -- -- -- --
Provisions for reserves 4,121 -- -- -- --
-------------------------------------------------------------------
EBITDA $ 37,032 $ 56,515 $ 55,098 $ 54,408 $ 76,640
=============================================================================================================================
At period end
Cash and cash equivalents and marketable securities
and short-term investments $ 31,331 $ 33,555 $ 35,748 $ 52,052 $ 50,720
Total assets 255,785 445,156 435,783 428,969 416,330
Long-term financing obligations 115,000 115,000 115,000 115,000 80,000
Total shareholders' equity $ 15,079 $ 171,317 $ 163,628 $ 157,247 $ 162,158
Long-term financing obligations as a percentage of
total capitalization 88% 40% 41% 42% 33%
Number of common shares outstanding
Class A voting 4,864 4,864 4,864 4,864 4,864
Class B nonvoting 28,487 28,402 28,362 28,261 28,521
Number of full-time employees 678 801 789 709 645
-----------------------------------------------------------------------------------------------------------------------------
Selected operating data
Cash investments in Company-produced and
licensed entertainment programming $ 30,200 $ 34,405 $ 36,675 $ 33,617 $ 41,457
Cash investments in online content 7,015 5,620 5,031 2,242 2,317
-------------------------------------------------------------------
Total cash investments in programming and content 37,215 40,025 41,916 36,243 43,774
Amortization of investments in Company-produced and
licensed entertainment programming 32,483 33,935 36,564 37,450 41,695
Online content expense 7,015 5,620 5,241 2,626 2,317
-------------------------------------------------------------------
Total amortization of programming and content $ 39,498 $ 39,555 $ 41,805 $ 40,076 $ 44,012
-----------------------------------------------------------------------------------------------------------------------------
For a more detailed description of our financial position, results of
operations and accounting policies, please refer to Part II. Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Part II. Item 8. "Financial Statements and Supplementary Data."
(1) 2008 included $6.8 million of restructuring expense, $146.5 million of
impairment charges, a $4.8 million deferred subscription cost write-off,
$4.1 million of provisions for reserves and a $2.0 million impairment
charge on investments. 2007 included $0.5 million of restructuring
expense, $1.5 million of impairment charges and a $0.1 million impairment
charge on investments. 2006 included $2.0 million of restructuring
expense. 2005 included $19.3 million of debt extinguishment expense
related to the redemption of $80.0 million of 11.00% senior secured notes,
or senior secured notes, issued by our subsidiary PEI Holdings, Inc. 2004
included $5.9 million of debt extinguishment expense related to the
redemption of $35.0 million of the senior secured notes and a $5.6 million
insurance recovery partially related to a litigation settlement recorded
in the prior year.
(2) EBITDA represents earnings from continuing operations before interest
expense, income tax expense or benefit, depreciation of property and
equipment, amortization of intangible assets, amortization of investments
in entertainment programming, amortization of deferred financing fees,
stock-based compensation related to stock options and restricted stock
awards, equity
25
income or loss in operations of investments, impairment charges, deferred
subscription cost write-off and provisions for reserves. We evaluate our
operating results based on several factors, including EBITDA. We consider
EBITDA an important indicator of the operational strength and performance
of our ongoing businesses, including our ability to provide cash flows to
pay interest, service debt and fund capital expenditures. EBITDA
eliminates the effects of certain noncash items as they do not affect our
ability to service debt or make capital expenditures. EBITDA also
eliminates the impact of how we fund our businesses and the effects of
impairment charges on investments and changes in interest rates, which we
believe relate to general trends in global capital markets but are not
necessarily indicative of our operating performance. EBITDA should not be
considered an alternative to any measure of performance or liquidity under
generally accepted accounting principles in the United States. Similarly,
EBITDA should not be inferred as more meaningful than any of those
measures.
26
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------
OVERVIEW
Since our inception in 1953 as the publisher of Playboy magazine, we have
become a media and lifestyle company marketing the Playboy brand through a wide
range of multimedia properties and licensing initiatives. Today, our businesses
are organized into three reportable segments: Entertainment, Publishing and
Licensing.
The following discussion and analysis provides information which we
believe is relevant to an assessment and understanding of our results of
operations and financial condition. The discussion should be read in conjunction
with the financial statements and the accompanying notes.
CURRENT ECONOMIC CONDITIONS
We have previously reported on the challenges facing the media industry
and us, including increased competition for consumers' attention, the migration
of advertisers to other platforms and the increasing costs of paper, postage,
ink and other expenses. Since that time, there has been a steady weakening of
the economy, which has greatly exacerbated the existing challenges. The current
global economic conditions and recent disruption in credit markets pose a risk
to the overall economy that could continue to impact demand for our products and
services. It is unclear the extent to which these conditions will persist and
what overall impact they will have on future spending by consumers and
advertisers as compared to our expectations. Throughout 2008, we have adjusted
our business activities to address the changing economic environment and
industry challenges by taking costs out of our mature TV and print businesses,
developing a restructuring plan to reduce overhead costs, outsourcing our
e-commerce and catalog businesses, selling our production facility, exiting the
DVD market and focusing our strategies on Playboy-branded licensing and digital
distribution. We will continue to adapt our business and strategic plans to
increase shareholder value and profitability, including the integration of our
publishing and online operations, subletting our New York office space and Santa
Monica photography studio, eliminating additional overhead costs and reducing
other expenses.
Despite the current economic conditions, we believe we continue to have
the liquidity to meet our needs for the foreseeable future. For the year ended
December 31, 2008, we generated approximately $3.8 million of net cash from our
operating activities. In addition, at December 31, 2008, we had $25.2 million in
cash and cash equivalents, and there were no borrowings and $0.8 million in
letters of credit outstanding under our $50.0 million revolving credit facility,
resulting in $49.2 million of available borrowings under this facility. Our
credit facility was reduced to $30.0 million in February 2009. At February 27,
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 under
this facility. While we believe our net cash from operating activities in
addition to our cash and committed capacity is sufficient to meet our needs, any
new borrowings in the near term outside of our available borrowings would likely
bear significantly higher interest rates than those of our current credit
facility.
REVENUES
Entertainment Group revenues are generated principally from our domestic
and international TV and online/mobile businesses. Television revenues are
affected by factors including shelf space, retail price and marketing, which are
controlled by our distribution partners, by revenue splits negotiated with
distribution partners and by demand for our programming. Domestic TV revenues
are generated primarily from our Playboy TV- and Spice-branded networks.
Internationally, we own and operate or license Playboy-, Spice- and
locally-branded television networks or blocks of programming. We have minority
equity interests in additional international networks through joint ventures. We
currently generate most of our online/mobile revenues from the sale of our
premium content. These subscription-based revenues are derived from online
clubs, which offer unique content under various brands, most notably Playboy. We
also generate revenues from online advertising sales in conjunction with our
magazine advertising sales efforts and on royalties from e-commerce, a business
we completed outsourcing in 2008. Internationally, we receive licensing fees
from Playboy- and other-branded websites and from content delivered via wireless
devices. Entertainment Group revenues are also generated from developing,
co-producing and/or licensing shows and series to air on third-party networks
and mainstream motion pictures, from license fees for Playboy Radio and from the
sale of DVDs, a business which we previously announced we are exiting to focus
our distribution strategies on digital.
Publishing Group revenues are primarily circulation driven for our
domestic magazine and special editions and include both subscription and
newsstand sales. Additionally, the group generates revenues from advertising
27
sales in Playboy magazine as well as from royalties on circulation and
advertising sales from our 26 licensed international editions.
Licensing Group revenues are generated primarily from royalties on the
wholesale price of our branded products around the world as well as from
multifaceted location-based entertainment venues. We also generate revenues from
periodic sales of small portions of our art and memorabilia collections and from
marketing events such as the annual Playboy Jazz Festival.
COSTS AND OPERATING EXPENSES
Entertainment Group expenses include television programming amortization,
online content, network distribution, hosting, sales and marketing and
administrative expenses. Programming amortization and content expenses are
expenditures associated with the creation of Playboy TV programming, the
licensing of third-party programming and the creation of content for our
websites and wireless and satellite radio providers.
Publishing Group expenses include subscription acquisition, manufacturing,
editorial, shipping, advertising sales and marketing and administrative
expenses.
Licensing Group expenses include agency fees, promotion, development and
administrative expenses.
Corporate Administration and Promotion expenses include general corporate
costs such as technology, legal, security, human resources, finance and investor
relations, as well as expenses related to company-wide marketing and promotions,
including the Playboy Mansion.
28
RESULTS OF OPERATIONS (1)
The following table sets forth our results of operations (in millions,
except per share amounts):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/08 12/31/07 12/31/06
--------------------------------------------------------------------------------------------------------
Net revenues
Entertainment
Domestic TV $ 62.6 $ 75.8 $ 82.5
International TV 49.8 55.9 49.5
Online/mobile 48.4 64.0 62.3
Other 6.4 7.3 6.7
--------------------------------------------------------------------------------------------------------
Total Entertainment 167.2 203.0 201.0
--------------------------------------------------------------------------------------------------------
Publishing
Domestic magazine 68.0 77.0 80.7
International magazine 8.0 7.4 6.6
Special editions and other 8.5 9.4 9.8
--------------------------------------------------------------------------------------------------------
Total Publishing 84.5 93.8 97.1
--------------------------------------------------------------------------------------------------------
Licensing
Consumer products 33.1 34.0 28.2
Location-based entertainment 3.8 3.8 1.2
Marketing events 2.9 3.2 3.0
Other 0.6 2.0 0.6
--------------------------------------------------------------------------------------------------------
Total Licensing 40.4 43.0 33.0
--------------------------------------------------------------------------------------------------------
Total net revenues $ 292.1 $ 339.8 $ 331.1
========================================================================================================
Net income (loss)
Entertainment
Before programming amortization and online content expenses $ 51.8 $ 60.9 $ 65.1
Programming amortization and online content expenses (39.5) (39.6) (41.8)
--------------------------------------------------------------------------------------------------------
Total Entertainment 12.3 21.3 23.3
--------------------------------------------------------------------------------------------------------
Publishing (7.6) (7.6) (5.4)
--------------------------------------------------------------------------------------------------------
Licensing 23.7 26.4 18.9
--------------------------------------------------------------------------------------------------------
Corporate Administration and Promotion (23.9) (28.1) (25.7)
--------------------------------------------------------------------------------------------------------
Segment income 4.5 12.0 11.1
Restructuring expense (6.8) (0.5) (2.0)
Impairment charges (146.5) (1.5) --
Deferred subscription cost write-off (4.8) -- --
Provisions for reserves (4.1) -- --
--------------------------------------------------------------------------------------------------------
Operating income (loss) (157.7) 10.0 9.1
--------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 0.5 2.5 2.4
Interest expense (4.5) (4.9) (5.6)
Amortization of deferred financing fees (0.4) (0.5) (0.5)
Impairment charge on investments (2.0) (0.1) --
Other, net (1.8) (0.2) (0.6)
--------------------------------------------------------------------------------------------------------
Total nonoperating expense (8.2) (3.2) (4.3)
--------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (165.9) 6.8 4.8
Income tax benefit (expense) 9.8 (1.9) (2.5)
--------------------------------------------------------------------------------------------------------
Net income (loss) $ (156.1) $ 4.9 $ 2.3
========================================================================================================
Basic and diluted earnings (loss) per common share $ (4.69) $ 0.15 $ 0.07
========================================================================================================
(1) Certain amounts reported for prior periods have been reclassified to
conform to the current year's presentation.
29
2008 COMPARED TO 2007
Revenues decreased $47.7 million, or 14%, compared to 2007 due to lower
revenues from our Entertainment, Publishing and Licensing Groups.
Segment income decreased $7.5 million, or 62%, compared to 2007 due to the
previously discussed revenue decline, partially offset by lower direct costs and
Corporate Administration and Promotion expenses.
Our operating loss was $157.7 million in 2008 compared to operating income
of $10.0 million in 2007 primarily due to $146.5 million of impairment charges
on goodwill and other intangible assets. In addition, lower segment income,
restructuring charges of $6.8 million, a $4.8 million write-off of deferred
subscription costs and provisions of $2.9 million for a receivable and $1.2
million for archival material during the current year contributed to the
negative comparison.
Net loss was $156.1 million in 2008 compared to net income of $4.9 million
in 2007 primarily as a result of the operating results previously discussed. A
decrease of $2.0 million in investment income, a $2.0 million impairment charge
on investments and unfavorable foreign currency exchange rate fluctuations of
$1.5 million, partially offset by an $11.7 million improvement in income taxes,
contributed to the net income decrease.
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.
While 2008 revenues from our domestic TV networks decreased $13.2 million,
or 17%, profit contribution decreased only $5.9 million. Pay-per-view revenues
were lower for the current year, reflecting consumers' continuing migration from
linear networks to the more competitive video-on-demand platform, where we
control less shelf space. Playboy TV monthly subscription revenues increased for
the current year due to greater availability and growth in certain systems. The
sale of our Los Angeles production facility assets in the second quarter of 2008
resulted, as expected, in lower revenues but increased profit contribution for
the current year.
International TV revenues decreased $6.1 million, or 11%, and profit
contribution decreased $2.3 million in 2008. The current year reflected lower
revenues from our U.K. networks, partially offset by lower volume-related costs,
combined with the impact of cost-saving initiatives and growth in our other
European networks. Foreign currency exchange rate fluctuations decreased both
revenues and expenses, resulting in an overall unfavorable impact on profit
contribution.
Our online websites are in the midst of a major infrastructure overhaul
and redesign effort, which we anticipate to be substantially completed in the
first half of 2009. Online/mobile revenues decreased $15.6 million, or 24%, and
profit contribution decreased $4.9 million in 2008. Additionally, our Playboy
and BUNNYshop e-commerce and catalog businesses were outsourced to eFashion
Solutions, LLC, in early 2008 resulting, as expected, in lower revenues but
higher profit contribution for 2008.
Revenues from other businesses decreased $0.9 million, or 12%, while
profit contribution increased $1.5 million in 2008. Revenues and profit
contribution from our production company, Alta Loma Entertainment, were
favorable. As previously announced, we are exiting the DVD business and plan to
focus on digital distribution. The expected decline in DVD revenues was more
than offset by lower costs, leading to an increase in profit contribution.
The group's administrative expenses decreased $2.6 million, or 14%, in
2008 primarily due to lower compensation-related and other benefits expense.
Programming amortization and online content expenses totaling $39.5
million in 2008 were flat compared to 2007.
Segment income for the group decreased $9.0 million, or 42%, in 2008
compared to 2007 due to the results previously discussed.
30
Publishing Group
All of our domestic magazine revenue streams decreased in 2008 compared to
2007, reflecting weak industry dynamics. This resulted in lower revenues of $9.0
million, or 12%. Subscription revenues decreased $2.2 million, or 5%, primarily
due to 5% fewer copies served. Newsstand revenues decreased $2.0 million, or
23%, on 25% fewer copies sold. Advertising revenues decreased $4.8 million, or
18%, primarily due to lowering our magazine circulation rate base (the total
newsstand and subscription circulation guaranteed to advertisers) effective with
the January 2008 issue. This rate base decrease resulted, as expected, in a 13%
decrease in average net revenue per page. Additionally, due in part to the loss
of a major advertiser, a 6% decrease in the number of advertising pages
contributed to the 2008 advertising revenues decline. Advertising sales for the
2009 first quarter magazine issues are closed, and we expect to report
approximately 28% lower advertising revenues and 32% fewer advertising pages
compared to the 2008 first quarter.
On a combined basis, Playboy print and online advertising revenues
decreased $4.0 million, or 13%, for the year.
International magazine revenues increased $0.6 million, or 8%, in 2008
primarily due to higher royalties from our Brazilian, Russian and German
editions.
Special editions and other revenues decreased $0.9 million, or 10%, in
2008. The decrease was due mainly to 14% fewer newsstand copies of special
editions sold.
The group's 2008 segment loss was flat compared to 2007 primarily due to
lower editorial, manufacturing, subscription collection and advertising sales
and marketing costs coupled with cost savings initiatives, offsetting the
previously discussed revenue declines.
Licensing Group
Licensing Group revenues decreased $2.6 million, or 6%, and segment income
decreased $2.7 million, or 10%, due to lower consumer products revenues,
reflecting the global economic conditions, and $1.3 million less in original art
sales than in 2007.
Corporate Administration and Promotion
Corporate Administration and Promotion expenses decreased $4.2 million, or
15%, in 2008 primarily due to lower compensation-related and other benefits and
trademark defense expenses.
Restructuring Expense
In the fourth quarter of 2008, we developed a restructuring plan in our
continued efforts to reduce costs, primarily related to several senior-level
Corporate and Entertainment Group positions. As a result of this plan, we
recorded a charge of $4.0 million related to workforce reduction costs of 21
employees, most of whose jobs will be eliminated in the first quarter of 2009.
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 first half of 2009, we will report additional restructuring charges
as well as relocation and other expenses related to vacating our New York office
space and other cost-saving initiatives.
In the third quarter of 2008, we developed a restructuring plan in an
effort to lower 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. We
also eliminated approximately 25 open positions. 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 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 an acquisition. This restructuring
plan resulted in the recording of a reserve of $0.4 million for costs associated
with a workforce reduction of 28 employees. As part of this restructuring plan,
we recorded an additional reserve of $0.6 million for contract termination fees
and expenses in 2008.
31
Impairment Charges
In accordance with Financial Accounting Standards Board, or FASB,
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, or Statement 142, and FASB Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, we conduct annual impairment testing of goodwill and other intangible
assets as of October 1st of each year, or in between annual tests if events
occur or circumstances change that would indicate impairment of our goodwill
and/or other intangible assets. Based on the results of our 2008 impairment
testing, we determined certain intangible assets and goodwill were impaired,
necessitating a charge of $146.5 million. We expect to record additional
impairment charges on goodwill of $5.6 million in the first quarter of 2009 as a
result of integrating our publishing and online operations. Further downward
pressure on our operating results and prolonged deterioration of economic
conditions could result in additional future impairments of our long-lived
assets including goodwill. Impairment tests performed in 2007 and 2006 indicated
no impairment was necessary at those times. See Note (O), Intangible Assets, to
the Notes to Consolidated Financial Statements for additional information.
In 2007, we recorded a $1.5 million charge in connection with the
potential sale of assets related to our Los Angeles production facility. The
asset sale was completed in April 2008. See Note (C), Sale of Assets, to the
Notes to Consolidated Financial Statements for additional information.
Deferred Subscription Cost Write-Off
In 2008, we recorded a $4.8 million charge related to the write-off of
deferred subscription costs. These consisted primarily of costs associated with
the promotion of Playboy magazine subscriptions, principally the production of
direct mail solicitation materials and postage. In prior years, in accordance
with the American Institute of Certified Public Accountants' Statement of
Position 93-7, Reporting on Advertising Costs, these direct response advertising
costs were capitalized and amortized over the period during which the future
benefits were expected to be received, generally six to 12 months. Given the
uncertainties of both the magazine environment as well as the economy in
general, we began expensing these costs as incurred and wrote off the remaining
capitalized amount.
Nonoperating Income (Expense)
Nonoperating expense increased $5.0 million in 2008, reflecting
unfavorable foreign currency exchange rate fluctuations of $1.5 million related
to the strengthening of the U.S. dollar against the pound sterling and euro. The
increase also reflects a $2.0 million charge on certain investments deemed to be
other-than-temporarily impaired as a result of adverse market conditions. We
also recorded $2.0 million less in investment income as a result of sales of
investments and lower interest rates during 2008.
Income Tax Expense
We account for income taxes in accordance with FASB Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, or Statement 109.
Statement 109 requires, among other things, the separate recognition of deferred
tax assets and deferred tax liabilities. Such deferred tax assets and deferred
tax liabilities represent the tax effect of temporary differences between
financial reporting and tax reporting measured at enacted tax rates in effect
for the year in which the differences are expected to reverse. On January 1,
2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109, or FIN
48, which requires that we recognize only the impact of tax positions that,
based on their technical merits, are more likely than not to be sustained upon
an audit by the taxing authority.
We make judgments and estimates in determining income tax expense for
financial statement purposes. These judgments and estimates occur in the
calculation of tax credits, benefits and deductions and in the calculation of
certain deferred tax assets and liabilities, which arise from differences in the
timing of recognition of revenue and expense for tax and financial statement
purposes.
We assess the likelihood that we will be able to recover our deferred tax
assets. If recovery is not likely, we increase our provision for taxes by
recording a valuation allowance against the deferred tax assets that we estimate
will not ultimately be recoverable. At December 31, 2008, we recorded an
additional $13.6 million valuation allowance against deferred tax assets related
primarily to current year federal and state net operating losses because we
believe that it is more likely than not that we will not be able to use the net
operating loss carryforwards before they expire.
32
The calculation of our tax liabilities involves dealing with uncertainties
in the application of complex tax regulations. We recognize liabilities for
uncertain tax positions based on FIN 48. It is inherently difficult and
subjective to estimate uncertain tax positions, because we have to determine the
probability of various possible outcomes. We evaluate these uncertain tax
positions on a quarterly basis. This evaluation is based on factors including,
but not limited to, changes in facts or circumstances, changes in tax law,
effectively settled issues under audit and new audit activity. Such a change in
recognition or measurement would result in the recognition of a tax benefit or
an additional charge to the tax provision. At December 31, 2008, we had $8.0
million of unrecognized tax benefits, none of which would affect our effective
tax rate if recognized nor accelerate the payment of cash to the taxing
authority to an earlier period. We do not anticipate that the amount of
unrecognized tax benefits will significantly increase or decrease within the
next 12 months.
In 2008, we had a net income tax benefit of $9.8 million compared to a net
income tax expense of $1.9 million in 2007. This reduction was due primarily to
the reversal of deferred tax liabilities associated with the impairment charges
on goodwill and other intangible assets. In 2008, our effective tax rate
differed from the U.S. statutory rate primarily as a result of the net operating
loss, or NOL, carryforwards and the effect of the deferred tax treatment of
certain indefinite-lived intangibles.
In 2007, we recognized a tax benefit associated with the decrease of $2.4
million in the valuation allowance related to the realization of our U.K. NOLs
and the effect of the deferred tax treatment of certain acquired intangibles.
2007 COMPARED TO 2006
Revenues increased $8.7 million, or 3%, compared to 2006 due to continued
revenue growth in our Licensing Group, partially offset by lower revenues from
our Publishing Group. Entertainment Group revenues were flat compared to the
prior year.
Segment income increased $0.9 million, or 8%, compared to 2006 due to
increased profits from our Licensing Group, largely offset by lower results from
our Publishing and Entertainment Groups and higher Corporate Administration and
Promotion expenses.
Operating income of $10.0 million improved $0.9 million, or 10%, compared
to 2006 as a result of the segment results previously discussed. 2007 included a
$1.5 million charge in connection with the sale of assets related to our Los
Angeles production facility and a $0.5 million restructuring charge, compared to
a $2.0 million restructuring charge in 2006.
Net income of $4.9 million improved $2.6 million, or 116%, compared to
2006 primarily as a result of the improved operating results previously
discussed, combined with decreases of $0.7 million and $0.6 million in interest
and income tax expenses, respectively.
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 $6.7 million, or 8%, and
profit contribution decreased $4.2 million in 2007. The decrease in revenues was
primarily due to pressure on splits with operators and a reduction in the total
number of households with access to our linear networks. The profit contribution
decrease was primarily due to the lower revenues, partially offset by lower
marketing expense and the impact of a $1.8 million legal settlement in 2006.
International TV revenues increased $6.4 million, or 13%, and profit
contribution increased $4.0 million in 2007 primarily due to growth in our U.K.
and other European networks. Foreign currency exchange rate fluctuations
increased both revenues and expenses, which resulted in an overall small
favorable impact on profit contribution.
Online/mobile revenues increased $1.7 million, or 3%, and profit
contribution decreased $0.7 million in 2007. Online subscription revenues were
flat for the year, while profit contribution increased slightly. E-commerce
revenues and profit contribution increased from the launch in the fourth quarter
of 2006 of the BUNNYshop combined with improved sales from our Playboy
e-commerce and catalog business. Licensing our Spice
33
e-commerce and catalog business in the third quarter of 2006 also favorably
impacted 2007 profit contribution. Advertising revenues grew 43% due to the
redesign of Playboy.com, largely offset by increased related costs. Mobile
results decreased primarily due to lower royalties from a licensee in Europe.
Revenues from other businesses increased $0.6 million, or 8%, in 2007
primarily due to recording license fees for our production company, Alta Loma
Entertainment. A $1.7 million decrease in profit contribution was impacted by an
acquisition in the second quarter of 2006 and a legal settlement recorded in
2007.
The group's administrative expenses increased $1.6 million, or 10%, in
2007 primarily due to higher compensation-related and other benefits expense.
Programming amortization and online content expenses decreased $2.2
million, or 5%, in 2007.
Segment income for the group decreased $2.0 million, or 9%, in 2007
compared to 2006 due to the results previously discussed.
Publishing Group
Domestic magazine revenues decreased $3.7 million, or 5%, in 2007.
Subscription revenues decreased $3.5 million, or 8%, primarily due to 7% fewer
copies served in 2007. Newsstand revenues decreased $1.0 million, or 10%,
primarily due to 10% fewer copies sold in 2007. Print advertising revenues
increased $0.8 million, or 3%, primarily due to a 6% increase in advertising
pages, partially offset by a 3% decrease in average net revenue per page.
On a combined basis, our Playboy print and online advertising revenues
increased $2.8 million, or 10%, for the year, reflecting growth in online
advertising, driven by the redesign of Playboy.com, which has attracted new
advertisers.
International magazine revenues increased $0.8 million, or 12%, in 2007
due in part to higher royalties as a result of strong performance from our
Brazilian and Russian editions.
Special editions and other revenues decreased $0.4 million, or 4%, in
2007. Special editions revenues decreased $0.7 million primarily due to 16%
fewer newsstand copies sold, partially offset by the impact of a $1.00 cover
price increase effective with the July 2007 issues.
The group's segment loss increased $2.2 million, or 41%, in 2007 primarily
due to the decrease in revenues discussed above combined with higher expenses
related to celebrity pictorials, partially offset by lower manufacturing costs
due to printing fewer copies and fewer editorial pages per issue. The segment
loss included additional expense for subscription collection costs and actual
allocated post-employment benefit costs related to senior editorial employees.
Licensing Group
Licensing Group revenues increased $10.0 million, or 30%, in 2007
primarily due to higher consumer products revenues, principally from Western
Europe and Southeast Asia, and a full year of royalties from our location-based
entertainment venue at the Palms Casino Resort in Las Vegas, which opened in the
fourth quarter of 2006. The year also reflected an increase of $1.4 million
related to sales of original artwork.
The group's segment income increased $7.5 million, or 40%, in 2007
primarily due to the increased revenues previously discussed, partially offset
by higher growth-related costs and compensation-related and other benefits
expense.
Corporate Administration and Promotion
Corporate Administration and Promotion expenses increased $2.4 million, or
9%, in 2007 in part due to additional expense related to certain trademark costs
that we began expensing in the fourth quarter of 2006 and higher
compensation-related and other benefits expense. The previously mentioned
allocation of actual post-employment benefit costs to the Publishing Group
partially offset the unfavorable variance.
34
Restructuring Expense
In 2007, we recorded a charge of $0.4 million related to costs associated
with a workforce reduction of 28 employees.
In 2006, we recorded a charge of $2.1 million related to reducing overhead
costs and annual programming and editorial expenses.
Impairment Charges
In 2007, we recorded a $1.5 million charge in connection with the
potential sale of assets related to our Los Angeles production facility. See
Note (C), Sale of Assets, to the Notes to Consolidated Financial Statements for
additional information.
Nonoperating Income (Expense)
Nonoperating expense was $1.1 million, or 26%, lower in 2007 primarily due
to a $0.7 million decrease in interest expense primarily due to payments made on
acquisition liabilities and a $0.2 million increase in equity income from
Playboy TV-Latin America, LLC.
Income Tax Expense
In 2007, we recognized a tax benefit associated with the decrease of $2.4
million in the valuation allowance related to the realization of our U.K. NOLs
and the effect of the deferred tax treatment of certain acquired intangibles. In
2007, our effective tax rate differed from the U.S. statutory rate primarily as
a result of the NOL carryforwards and the effect of the deferred tax treatment
of certain indefinite-lived intangibles.
In 2006, we modified the assumptions related to the useful lives of
certain distribution agreements that previously were classified as
indefinite-lived. As these distribution agreements are now being amortized, the
deferred tax liability related to the distribution agreements that is expected
to be realized within the NOL carryforward period may be netted against our
deferred tax asset. In 2006, we recorded an income tax benefit for $2.6 million
of the $3.9 million deferred tax liability related to the distribution agreement
modification. In 2007, we recognized an additional income tax benefit of $0.5
million related to the distribution agreements. In 2006, our effective income
tax rate differed from the U.S. statutory rate primarily as a result of foreign
income and withholding taxes, for which no current U.S. income tax benefit is
recognized, and the effect of the deferred tax treatment of certain
indefinite-lived intangibles.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2008, we had $25.2 million in cash and cash equivalents
and $6.1 million of marketable securities and short-term investments compared to
$20.6 million in cash and cash equivalents and $13.0 million of marketable
securities and short-term investments at December 31, 2007. During 2008, we sold
at par all of our $6.0 million of auction rate securities which were included in
marketable securities and short-term investments at December 31, 2007. Total
financing obligations were $115.0 million at both December 31, 2008 and December
31, 2007.
At December 31, 2008, cash generated from our operating activities,
existing cash and cash equivalents and marketable securities and short-term
investments were fulfilling our liquidity requirements. At December 31, 2008, we
also had a $50.0 million credit facility, which was reduced to $30.0 million in
February 2009. This facility can be used for revolving borrowings, issuing
letters of credit or a combination of both. As of February 27, 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 under this
facility.
We believe that cash on hand and operating cash flows, together with funds
available under our credit facility and potential access to credit and capital
markets, will be sufficient to meet our operating expenses, capital expenditures
and other contractual obligations as they become due.
35
DEBT FINANCING
In March 2005, we issued and sold $115.0 million aggregate principal
amount of our 3.00% convertible senior subordinated notes due 2025, or
convertible notes, which included $15.0 million due to the initial purchasers'
exercise of the over-allotment option. The convertible notes bear interest at a
rate of 3.00% per annum on the principal amount of the notes, payable in arrears
on March 15 and September 15 of each year, payment of which began on September
15, 2005. In addition, under certain circumstances beginning in 2012, if the
trading price of the convertible notes exceeds a specified threshold during a
prescribed measurement period prior to any semiannual interest period,
contingent interest will become payable on the convertible notes for that
semiannual interest period at an annual rate of 0.25% per annum.
The convertible notes are convertible into cash and, if applicable, shares
of our Class B common stock, or Class B stock, based on an initial conversion
rate, subject to adjustment, of 58.7648 shares per $1,000 principal amount of
the convertible notes (which represents an initial conversion price of
approximately $17.02 per share) only under the following circumstances: (a)
during any fiscal quarter after the fiscal quarter ending March 31, 2005, if the
closing sale price of our Class B stock for each of 20 or more consecutive
trading days in a period of 30 consecutive trading days ending on the last
trading day of the immediately preceding fiscal quarter exceeds 130% of the
conversion price in effect on that trading day; (b) during the five business day
period after any five consecutive trading day period in which the average
trading price per $1,000 principal amount of convertible notes over that five
consecutive trading day period was equal to or less than 95% of the average
conversion value of the convertible notes during that period; (c) upon the
occurrence of specified corporate transactions, as set forth in the indenture
governing the convertible notes; or (d) if we have called the convertible notes
for redemption. Upon conversion of a convertible note, a holder will receive
cash in an amount equal to the lesser of the aggregate conversion value of the
note being converted and the aggregate principal amount of the note being
converted. If the aggregate conversion value of the convertible note being
converted is greater than the cash amount received by the holder, the holder
will also receive an amount in whole shares of Class B stock equal to the
aggregate conversion value less the cash amount received by the holder. A holder
will receive cash in lieu of any fractional shares of Class B stock. The maximum
conversion rate, subject to adjustment, is 76.3942 shares per $1,000 principal
amount of convertible notes.
The convertible notes mature on March 15, 2025. On or after March 15,
2010, if the closing price of our Class B stock exceeds a specified threshold,
we may redeem any of the convertible notes at a redemption price in cash equal
to 100% of the principal amount of the convertible notes plus any accrued and
unpaid interest up to, but excluding, the redemption date. On or after March 15,
2012, we may at any time redeem any of the convertible notes at the same
redemption price. On each of March 15, 2012, March 15, 2015 and March 15, 2020,
or upon the occurrence of a fundamental change, as specified in the indenture
governing the convertible notes, holders may require us to purchase all or a
portion of their convertible notes at a purchase price in cash equal to 100% of
the principal amount of the notes, plus any accrued and unpaid interest up to,
but excluding, the purchase date.
The convertible notes are unsecured senior subordinated obligations of
Playboy Enterprises, Inc. and rank junior to all of the issuer's senior debt,
including its guarantee of our subsidiary PEI Holdings, Inc., or Holdings,
borrowings under our credit facility; equally with all of the issuer's future
senior subordinated debt; and, senior to all of the issuer's future subordinated
debt. In addition, the assets of the issuer's subsidiaries are subject to the
prior claims of all creditors, including trade creditors, of those subsidiaries.
CREDIT FACILITY
At December 31, 2008, our $50.0 million credit facility provided for
revolving borrowings, the issuance of letters of credit or a combination of both
of up to $50.0 million outstanding at any time. In February 2009, we amended the
terms of our credit facility to, among other things, reduce the size of the
facility to $30.0 million. Borrowings under the credit facility bear interest at
a variable rate, equal to a specified LIBOR or base rate plus a specified
borrowing margin based on our Adjusted EBITDA, as defined in the credit
agreement. We pay fees on the outstanding amount of letters of credit based on
the margin that applies to borrowings that bear interest at a rate based on
LIBOR. All amounts outstanding under the credit facility will mature on January
31, 2011. The obligations of Holdings as borrower under the credit facility are
guaranteed by us and each of our other U.S. subsidiaries. The obligations of the
borrower and nearly all of the guarantors under the credit facility are secured
by a first-priority lien on substantially all of the borrower's and the
guarantors' assets.
36
CALIFA ACQUISITION
In 2008, we made cash payments totaling $1.0 million in accordance with
The Califa Entertainment Group, Inc., or Califa, acquisition agreement. At
December 31, 2008, our remaining acquisition payment obligations, which include
interest, to Califa were $2.8 million, which are payable in cash in quarterly
installments ending in 2011. We have the option of accelerating these remaining
acquisition payments. See the Contractual Obligations table for the future cash
obligations related to our acquisitions. See Note (B), Acquisition, to the Notes
to Consolidated Financial Statements for additional information relating to the
Califa acquisition.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities decreased $20.4 million to $3.8
million in 2008 compared to 2007 primarily due to the operating and nonoperating
results previously discussed combined with decreases in accounts payable and
deferred tax liabilities from 2007.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash provided by investing activities was $4.3 million for 2008
compared to net cash used for investing activities of $19.0 million in 2007.
2008 reflected $10.3 million of net proceeds of marketable securities and
investments and $5.1 million in net proceeds from the sale of our Los Angeles
production facility, offset by $11.0 million of capital expenditures. 2007
reflected $10.5 million of net purchases of marketable securities and
investments and $8.5 million of capital expenditures.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used for financing activities of $2.6 million for 2008 and $11.7
million for 2007 were primarily due to payments in connection with acquisition
liabilities.
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
The negative effect of foreign currency exchange rates on cash and cash
equivalents during 2008 of $1.0 million was due to the strengthening of the U.S.
dollar against foreign currencies, primarily the pound sterling, compared with
the positive effect of foreign currency exchange rates on cash and cash
equivalents during 2007 of $0.3 million, which was due to the weakening of the
U.S. dollar against foreign currencies.
37
CONTRACTUAL OBLIGATIONS
The following table sets forth a summary of our contractual obligations
and commercial commitments at December 31, 2008, as further discussed in the
Notes to Consolidated Financial Statements (in thousands):
2009 2010 2011 2012 2013 Thereafter Total
----------------------------------------------------------------------------------------------------------------------
Long-term financing obligations (1) $ 3,450 $ 3,450 $ 3,450 $ 3,450 $ 3,450 $ 154,675 $ 171,925
Operating leases (2) 6,351 6,569 6,616 6,414 5,396 36,400 67,746
Purchasing obligations:
Licensed programming commitments (3) 4,754 5,000 3,333 -- -- -- 13,087
Other:
Deferred compensation plans 5,428 -- -- -- -- -- 5,428
Acquisition liabilities (1), (4) 3,300 5,300 750 -- -- -- 9,350
Transponder service and other
agreements (5) $ 7,560 $ 5,803 $ 4,919 $ 4,667 $ 1,171 $ -- $ 24,120
----------------------------------------------------------------------------------------------------------------------
(1) Includes interest and principal commitments.
(2) Net of sublease income.
(3) Represents our noncancelable obligations to license programming from other
studios. Typically, the licensing of the programming allows us access to
specific titles or in some cases the studio's entire library over an
extended period of time. We broadcast this programming on our networks
throughout the world, as appropriate.
(4) Includes interest and principal related to the acquisitions of Califa and
Club Jenna, Inc. and related companies.
(5) Represents our obligations under a services agreement under which
Broadcast Facilities, Inc., or BFI, is providing us with certain satellite
transmission and other related services. Also reflects our obligations
under two international transponder agreements.
We have excluded from the table above uncertain tax liabilities as defined
in FIN 48 due to the uncertainty of the amount and period of payment. At
December 31, 2008, our expected payment for significant contractual obligations
includes approximately $8.0 million for unrecognized tax benefits associated
with the adoption of FIN 48. We cannot make a reasonably reliable estimate as to
if or when such amounts may be settled.
CRITICAL ACCOUNTING POLICIES
Our financial statements are prepared in conformity with generally
accepted accounting principles in the United States, which require management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. We believe that of our significant accounting
policies, the following are the more complex and critical areas. For additional
information about our accounting policies, see Note (A), Summary of Significant
Accounting Policies, to the Notes to Consolidated Financial Statements.
REVENUE RECOGNITION
Domestic Television
Our domestic television revenues were $62.6 million and $75.8 million for
the years ended December 31, 2008 and 2007, respectively. In order to record our
revenues, we estimate the number of PPV and VOD buys and monthly subscriptions
using a number of factors including, but not exclusively, the average number of
buys and subscriptions in the prior three months based on actual payments
received and historical data by geographic location. Upon recording the revenue,
we also record the related receivable. We have reserves for uncollectible
receivables based on our experience and monitor and adjust these reserves on a
quarterly basis. At December 31, 2008 and 2007, we had receivables of $12.8
million and $14.8 million, respectively, related to domestic television. We
record adjustments to revenue on a monthly basis as we obtain actual payments
from the providers. Actual subscriber information and payment are generally
received within three months. Historically, our adjustments have not been
material. At any point, our exposure to a material adjustment to revenue is
mitigated because, generally, only the most recent two to three months would not
have been fully adjusted to actual based on payments received.
38
International Television
Our international television revenues were $49.8 million and $55.9 million
for the years ended December 31, 2008 and 2007, respectively. In order to record
our revenues, we estimate the number of PPV and VOD buys and monthly
subscriptions using a number of factors including, but not exclusively, the
average number of buys and subscriptions in the prior month based on
subscription and billing reports provided by platform operators. Upon recording
the revenue, we also record the related receivable. We have reserves for
uncollectible receivables based on our experience and monitor and adjust these
reserves on a monthly basis. At December 31, 2008 and 2007, we had receivables
of $6.8 million and $9.1 million, respectively, related to international
television. We record adjustments to revenue on a monthly basis as we obtain
subscription and billing reports from the platform operators. Actual subscriber
information is generally received within one month. Historically, our
adjustments have not been material. At any point, our exposure to a material
adjustment to revenue is mitigated because, generally, only the most recent
month would not have been fully adjusted to actual based on the prior month's
reports.
Domestic Magazine
Our Playboy magazine revenues were $68.0 million and $77.0 million for the
years ended December 31, 2008 and 2007, respectively, of which 10.0% and 11.5%
were derived from newsstand sales in the respective years. Our print run, which
is developed with input from Time/Warner Retail Sales and Marketing, our
national distributor, varies each month based on expected sales. Our expected
sales are based on analyses of historical demand based on a number of variables,
including content, time of year and the cover price. We record our revenues for
each month's issue utilizing our expected sales. Our revenues are recorded net
of a provision for estimated returns. Substantially all of the magazines to be
returned are returned within 90 days of the date that the subsequent issue goes
on sale. We adjust our provision for returns based on actual returns of the
magazine. Historically, our annual adjustments to Playboy magazine newsstand
revenues have not been material and are driven by differences in actual consumer
demand as compared to expected sales. At any point, our exposure to a material
adjustment to revenue is mitigated because, generally, only the most recent two
to three issues would not have been fully adjusted to actual based on actual
returns received.
Consumer Products Licensing
Our consumer products licensing revenues were $33.1 million and $34.0
million for the years ended December 31, 2008 and 2007, respectively. Our
license agreements vary but, in general, carry a guaranteed minimum royalty as
well as a formula for computing earned royalties in excess of the minimum.
Guaranteed minimum royalties are recognized on a straight-line basis over the
terms of the related agreements. Royalties in excess of the minimum guarantees
are estimated and recorded based upon historical results and current
expectations of each licensee's sales. Our license agreements, in general,
require our licensees to report their actual sales results to us on a quarterly
basis. We record adjustments to revenue on a monthly basis as we obtain sales
reports from our licensees. Historically, our adjustments have not been
material. At any point, our exposure to a material adjustment to revenue is
mitigated because, generally, we receive actual sales reports from our licensees
for the most recent quarter within 45 days of the end of the quarter.
DEFERRED REVENUES
We had deferred revenues related to Playboy magazine subscriptions and
online subscriptions of $27.5 million and $3.2 million, respectively, at
December 31, 2008 and $32.6 million and $4.1 million, respectively, at December
31, 2007. Sales of Playboy magazine and online subscriptions, less estimated
cancellations, are deferred and recognized as revenues proportionately over the
subscription periods. Our estimates of cancellations are based on historical
experience and current marketplace conditions and are adjusted monthly on the
basis of actual results. We have not experienced significant deviations between
estimated and actual results.
STOCK-BASED COMPENSATION
Our stock-based compensation expense related to stock options was $1.4
million and $1.1 million for the years ended December 31, 2008 and 2007,
respectively. On January 1, 2006, we adopted the provisions of Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, or
Statement 123(R), which is a revision of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, under the modified
prospective method. We estimate the value of stock options on the date of grant
using the Lattice Binomial model, or Lattice model. The Lattice model requires
extensive analysis of actual exercise behavior data
39
and a number of complex assumptions including expected volatility, risk-free
interest rate, expected dividends and option cancellations. Forfeitures are
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. We measure stock-based
compensation cost at the grant date based on the value of the award and
recognize the expense over the vesting period. Compensation expense, as
recognized under Statement 123(R), for all stock-based compensation awards is
recognized using the straight-line attribution method.
RELATED PARTY TRANSACTIONS
HUGH M. HEFNER
We own a 29-room mansion located on five and one-half acres in Los
Angeles, California. The Playboy Mansion is used for various corporate
activities and serves as a valuable location for motion picture and television
production, magazine photography and for online, advertising, marketing and
sales events. It also enhances our image as host for many charitable and civic
functions. The Playboy Mansion generates substantial publicity and recognition,
which increases public awareness of us and our products and services. Its
facilities include a tennis court, swimming pool, gymnasium and other
recreational facilities as well as extensive film, video, sound and security
systems. The Playboy Mansion also includes accommodations for guests and serves
as an office and residence for Hugh M. Hefner, our Editor-in-Chief and Chief
Creative Officer, or Mr. Hefner. It has a full-time staff that performs
maintenance, serves in various capacities at the functions held at the Playboy
Mansion and provides our and Mr. Hefner's guests with meals, beverages and other
services.
Under a 1979 lease entered into with Mr. Hefner, the annual rent Mr.
Hefner pays to us for his use of the Playboy Mansion is determined by
independent experts who appraise the value of Mr. Hefner's basic accommodations
and access to the Playboy Mansion's facilities, utilities and attendant services
based on comparable hotel accommodations. In addition, Mr. Hefner is required to
pay the sum of the per-unit value of non-business meals, beverages and other
benefits he and his personal guests receive. These standard food and beverage
per-unit values are determined by independent expert appraisals based on fair
market values. Valuations for both basic accommodations and standard food and
beverage units are reappraised every three years and are annually adjusted
between appraisals based on appropriate consumer price indexes. Mr. Hefner is
also responsible for the cost of all improvements in any Hefner residence
accommodations, including capital expenditures, that are in excess of normal
maintenance for those areas.
Mr. Hefner's usage of Playboy Mansion services and benefits is recorded
through a system initially developed by the professional services firm of
PricewaterhouseCoopers LLP, and now administered by us, with appropriate
modifications approved by the Audit and Compensation Committees of the Board of
Directors. The lease dated June 1, 1979, as amended, between Mr. Hefner and us
renews automatically at December 31st each year and will continue to renew
unless either Mr. Hefner or we terminate it. The rent charged to Mr. Hefner
during 2008 included the appraised rent and the appraised per-unit value of
other benefits, as described above. Within 120 days after the end of our fiscal
year, the actual charge for all benefits for that year is finally determined.
Mr. Hefner pays or receives credit for any difference between the amount finally
determined and the amount he paid over the course of the year. We estimated the
sum of the rent and other benefits payable for 2008 to be $0.7 million, and Mr.
Hefner paid that amount during 2008. The actual rent and other benefits paid for
2007 and 2006 were $0.7 million and $0.8 million, respectively.
We purchased the Playboy Mansion in 1971 for $1.1 million and in the
intervening years have made substantial capital improvements at a cost of $14.3
million through 2008 (including $2.7 million to bring the Hefner residence
accommodations to a standard similar to the Playboy Mansion's common areas). The
Playboy Mansion is included in our Consolidated Balance Sheets at December 31,
2008 and 2007, at a net book value of $1.3 million and $1.4 million,
respectively, including all improvements and after accumulated depreciation. We
incur all operating expenses of the Playboy Mansion, including depreciation and
taxes, which were $1.9 million, $2.8 million and $2.1 million for 2008, 2007 and
2006, respectively, net of rent received from Mr. Hefner.
Holly Madison, Bridget Marquardt and Kendra Wilkinson, the stars of The
Girls Next Door on E! Entertainment Television, resided in the mansion with Mr.
Hefner in 2008 and 2007. The value of rent, food and beverage and other personal
benefits for the use of the Playboy Mansion by Ms. Madison, Ms. Marquardt and
Ms. Wilkinson was charged to Alta Loma Entertainment, our production company.
The aggregate amount of these charges was $0.4 million in each of 2008 and 2007.
In addition, Ms. Madison, Ms. Marquardt and Ms. Wilkinson each receive payments
for services rendered on our behalf, including appearance fees.
40
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2008, 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 142. 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 do not expect the adoption of Statement 160 to have a
significant impact on our future results of operations or financial condition.
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141 (revised 2007), Business Combinations, or Statement 141(R).
Statement 141(R) retains the fundamental requirements of the original
pronouncement requiring that the purchase method be used for all business
combinations. Statement 141(R) defines the acquirer as the entity that obtains
control of one or more businesses in the business combination, establishes the
acquisition date as the date that the acquirer achieves control and requires the
acquirer to recognize the assets acquired, liabilities assumed and any
noncontrolling interest at their fair values as of the acquisition date.
Statement 141(R) also requires, among other things, that acquisition-related
costs be recognized separately from the acquisition. We are required to adopt
Statement 141(R) prospectively for business combinations on or after January 1,
2009. Assets and liabilities that arose from business combinations prior to
January 1, 2009 are not affected by the adoption of Statement 141(R).
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 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 for our financial
assets and liabilities. However, 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
41
disclosed at fair value in the financial statements on a recurring basis (at
least annually). We do not expect the adoption of Statement 157 to have a
significant impact on our future results of operations or financial condition.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------
We are exposed to certain market risks, including changes in foreign
currency exchange rates. In order to manage the risk associated with our
exposure to such fluctuations, we enter into hedging transactions pursuant to
our policies and procedures. We have derivative instruments that have been
designated and qualify as cash flow hedges, which are entered into in order to
hedge the variability of cash flows to be received related to forecasted royalty
payments denominated in the yen and the euro. We hedge these royalties with
forward contracts for periods not exceeding 12 months. We formally document all
relationships between hedging instruments and hedged items, as well as our risk
management objectives and strategies for undertaking various hedge transactions.
We link all hedges that are designated as cash flow hedges to forecasted
transactions. We also assess, both at the inception of the hedge and on an
ongoing basis, whether the derivatives used in hedging transactions are
effective in offsetting changes in cash flows of the hedged items. Any hedge
ineffectiveness is recorded in earnings. We do not use financial instruments for
trading purposes.
We prepared sensitivity analyses to determine the impact of a hypothetical
10% devaluation of the U.S. dollar relative to the foreign currencies of the
countries to which we have exposure, primarily Japan and Germany. Based on our
sensitivity analyses at December 31, 2008 and 2007, such a change in foreign
currency exchange rates would affect our annual consolidated operating results,
financial position and cash flows by approximately $0.1 million and $0.5
million, respectively.
At December 31, 2008 and 2007, we did not have any floating interest rate
exposure. All of our outstanding debt as of those dates consisted of our
convertible notes, which are fixed-rate obligations. The fair value of the
$115.0 million aggregate principal amount of the convertible notes will be
influenced by changes in market interest rates, the share price of our Class B
stock and our credit quality. At December 31, 2008, the convertible notes had an
implied fair value of $51.8 million, but the convertible notes had not traded
since September 2008. The fair value does not necessarily represent the purchase
price for the entire convertible note portfolio.
Item 8. Financial Statements and Supplementary Data
---------------------------------------------------
The following consolidated financial statements and supplementary data are
set forth in this Annual Report on Form 10-K as follows:
Page
----
Consolidated Statements of Operations - Fiscal Years Ended December 31, 2008,
2007 and 2006 43
Consolidated Balance Sheets - December 31, 2008 and 2007 44
Consolidated Statements of Shareholders' Equity - Fiscal Years Ended
December 31, 2008, 2007 and 2006 45
Consolidated Statements of Cash Flows - Fiscal Years Ended December 31, 2008,
2007 and 2006 46
Notes to Consolidated Financial Statements 47
Report of Independent Registered Public Accounting Firm 69
The supplementary data regarding quarterly results of operations are set
forth in Note (W), Quarterly Results of Operations (Unaudited), to the Notes to
Consolidated Financial Statements.
42
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/08 12/31/07 12/31/06
--------------------------------------------------------------------------------------------------------
Net revenues $ 292,147 $ 339,840 $ 331,142
--------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales (236,328) (268,243) (265,032)
Selling and administrative expenses (51,294) (59,601) (55,026)
Restructuring expense (6,783) (445) (1,998)
Impairment charges (146,536) (1,508) --
Deferred subscription cost write-off (4,820) -- --
Provisions for reserves (4,121) -- --
--------------------------------------------------------------------------------------------------------
Total costs and expenses (449,882) (329,797) (322,056)
--------------------------------------------------------------------------------------------------------
Gain on disposal -- -- 29
--------------------------------------------------------------------------------------------------------
Operating income (loss) (157,735) 10,043 9,115
--------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 479 2,511 2,447
Interest expense (4,455) (4,874) (5,611)
Amortization of deferred financing fees (356) (490) (535)
Impairment charge on investments (2,033) (88) --
Other, net (1,805) (249) (635)
--------------------------------------------------------------------------------------------------------
Total nonoperating expense (8,170) (3,190) (4,334)
--------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (165,905) 6,853 4,781
Income tax benefit (expense) 9,850 (1,928) (2,496)
--------------------------------------------------------------------------------------------------------
Net income (loss) $ (156,055) $ 4,925 $ 2,285
========================================================================================================
Weighted average number of common shares outstanding
Basic 33,307 33,246 33,171
========================================================================================================
Diluted 33,307 33,281 33,276
========================================================================================================
Basic and diluted earnings (loss) per common share $ (4.69) $ 0.15 $ 0.07
========================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
43
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Dec. 31, Dec. 31,
2008 2007
-----------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 25,192 $ 20,603
Marketable securities and short-term investments 6,139 12,952
Receivables, net of allowance for doubtful accounts of
$4,084 and $3,627, respectively 40,428 51,139
Receivables from related parties 2,061 1,704
Inventories 7,341 11,363
Deferred subscription acquisition costs -- 7,102
Deferred tax asset 2,268 1,320
Assets held for sale -- 4,706
Prepaid expenses and other current assets 9,127 14,986
-----------------------------------------------------------------------------------------------------
Total current assets 92,556 125,875
-----------------------------------------------------------------------------------------------------
Long-term investments -- 6,556
Property and equipment, net 20,319 14,665
Long-term receivables, net of allowance for doubtful accounts of
$2,795 and $0, respectively -- 2,795
Programming costs, net 52,056 54,926
Goodwill 27,758 133,570
Trademarks 42,503 65,437
Distribution agreements, net of accumulated amortization of
$6,126 and $4,803, respectively 12,138 28,337
Deferred tax asset 180 1,206
Other noncurrent assets 8,275 11,789
-----------------------------------------------------------------------------------------------------
Total assets $ 255,785 $ 445,156
=====================================================================================================
Liabilities
Acquisition liabilities $ 2,785 $ 2,134
Accounts payable 24,816 37,842
Accrued salaries, wages and employee benefits 9,159 8,304
Deferred revenues 36,402 43,955
Deferred tax liability -- 1,490
Other current liabilities and accrued expenses 19,557 14,269
-----------------------------------------------------------------------------------------------------
Total current liabilities 92,719 107,994
-----------------------------------------------------------------------------------------------------
Financing obligations 115,000 115,000
Acquisition liabilities 5,419 7,936
Deferred tax liability 7,783 18,604
Other noncurrent liabilities 19,785 24,305
-----------------------------------------------------------------------------------------------------
Total liabilities 240,706 273,839
-----------------------------------------------------------------------------------------------------
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;
28,868,900 and 28,784,079 issued, respectively 288 288
Capital in excess of par value 231,335 229,833
Accumulated deficit (208,821) (52,766)
Treasury stock, at cost - 381,971 shares (5,000) (5,000)
Accumulated other comprehensive loss (2,772) (1,087)
-----------------------------------------------------------------------------------------------------
Total shareholders' equity 15,079 171,317
-----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 255,785 $ 445,156
=====================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
44
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Accum.
Class A Class B Capital in Other
Common Common Excess of Accum. Treasury Comp.
Stock Stock Par Value Deficit Stock Loss(1) Total
---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2005 $ 49 $ 286 $ 223,537 $ (59,976) $ (5,000) $ (1,649) $ 157,247
Net income -- -- -- 2,285 -- -- 2,285
Shares issued or vested
under stock plans, net -- 1 4,238 -- -- -- 4,239
Adjustment to initially apply
FASB Statement 158 -- -- -- -- -- (1,396) (1,396)
Other comprehensive income -- -- -- -- -- 1,253 1,253
---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2006 49 287 227,775 (57,691) (5,000) (1,792) 163,628
Net income -- -- -- 4,925 -- -- 4,925
Shares issued or vested
under stock plans, net -- 1 2,058 -- -- -- 2,059
Other comprehensive income -- -- -- -- -- 705 705
---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2007 49 288 229,833 (52,766) (5,000) (1,087) 171,317
Net loss -- -- -- (156,055) -- -- (156,055)
Shares issued or vested
under stock plans, net -- -- 1,502 -- -- -- 1,502
Other comprehensive loss -- -- -- -- -- (1,685) (1,685)
---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2008 $ 49 $ 288 $ 231,335 $ (208,821) $ (5,000) $ (2,772) $ 15,079
=================================================================================================================================
(1) Accumulated other comprehensive loss consisted of the following:
Dec. 31, Dec. 31,
2008 2007
----------------------------------------------------------------------------
Unrealized gain (loss) on marketable securities $ (46) $ 197
Derivative loss -- (78)
Actuarial liability adjustment (1,374) (576)
Foreign currency translation loss (1,352) (630)
----------------------------------------------------------------------------
Accumulated other comprehensive loss $ (2,772) $ (1,087)
============================================================================
Comprehensive income (loss) was as follows:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/08 12/31/07 12/31/06
-------------------------------------------------------------------------------------------
Net income (loss) $ (156,055) $ 4,925 $ 2,285
-------------------------------------------------------------------------------------------
Unrealized gain (loss) on marketable securities (243) (50) 113
Derivative gain (loss) 78 (183) 98
Actuarial gain (loss) on liability (798) 975 186
Foreign currency translation gain (loss) (722) (37) 856
-------------------------------------------------------------------------------------------
Total other comprehensive income (loss) (1,685) 705 1,253
-------------------------------------------------------------------------------------------
Comprehensive income (loss) $ (157,740) $ 5,630 $ 3,538
===========================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
45
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/08 12/31/07 12/31/06
--------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) $ (156,055) $ 4,925 $ 2,285
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation of property and equipment 4,692 4,963 3,971
Amortization of intangible assets 2,283 2,300 1,683
Amortization of investments in entertainment programming 32,483 33,935 36,564
Stock-based compensation 1,245 1,856 2,326
Impairment charges 146,536 1,508 --
Impairment charge on investments 2,033 -- --
Provision for reserves 4,121 -- --
Deferred subscription cost write-off 4,820 -- --
Amortization of deferred financing fees 356 490 535
Equity (income) loss in operations of investments 126 (129) 94
Deferred income taxes (12,863) (854) 867
Changes in current assets and liabilities:
Receivables 11,034 (2,342) (103)
Receivables from related parties (357) 87 137
Inventories 4,022 1,236 247
Deferred subscription acquisition costs (91) 1,234 170
Prepaid expenses and other current assets 5,550 (3,565) (1,109)
Accounts payable (12,167) 8,746 3,771
Accrued salaries, wages and employee benefits 989 3,443 (3,796)
Deferred revenues (5,180) (1,095) (937)
Acquisition liability interest 834 1,274 459
Accrued litigation settlements -- (1,800) 800
Other current liabilities and accrued expenses 4,906 93 (2,145)
--------------------------------------------------------------------------------------------------------------
Net change in current assets and liabilities 9,540 7,311 (2,506)
--------------------------------------------------------------------------------------------------------------
Investments in entertainment programming (30,200) (34,405) (36,675)
Increase in trademarks (1,656) (1,704) (2,734)
(Increase) decrease in other noncurrent assets (330) 3,511 (52)
Increase (decrease) in other noncurrent liabilities (5,691) 1,234 2,690
Other, net 2,360 (712) (53)
--------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,800 24,229 8,995
--------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Payments for acquisitions (60) (105) (7,761)
Purchases of investments (1,066) (36,846) (574)
Proceeds from sales of investments 11,355 26,377 18,000
Purchases of assets held for sale (6,895) -- --
Proceeds from assets held for sale 12,000 -- --
Additions to property and equipment (10,985) (8,493) (7,546)
Other, net -- 88 --
--------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 4,349 (18,979) 2,119
--------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Payment of acquisition liabilities (2,700) (11,669) (11,628)
Payment of deferred financing fees -- (212) --
Proceeds from stock-based compensation 118 163 494
--------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (2,582) (11,718) (11,134)
--------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (978) 323 679
--------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 4,589 (6,145) 659
Cash and cash equivalents at beginning of year 20,603 26,748 26,089
--------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 25,192 $ 20,603 $ 26,748
==============================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization: Playboy Enterprises, Inc., together with its subsidiaries
through which we conduct business, is a media and lifestyle company marketing
the Playboy brand through a wide range of multimedia properties and licensing
initiatives with operations in the following business segments: Entertainment,
Publishing and Licensing.
Principles of Consolidation: The consolidated financial statements include
our accounts and all majority-owned subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Although these estimates are
based on management's knowledge of current events and actions it may undertake
in the future, they may ultimately differ from actual results.
Reclassifications: Certain amounts reported for prior periods have been
reclassified to conform to the current year's presentation.
New Accounting Pronouncements: In 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, or Statement 142. 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, or Statement 133, 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
47
interest. We are required to adopt Statement 160 at the beginning of 2009. We do
not expect the adoption of Statement 160 to have a significant impact on our
future results of operations or financial condition.
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141 (revised 2007), Business Combinations, or Statement 141(R).
Statement 141(R) retains the fundamental requirements of the original
pronouncement requiring that the purchase method be used for all business
combinations. Statement 141(R) defines the acquirer as the entity that obtains
control of one or more businesses in the business combination, establishes the
acquisition date as the date that the acquirer achieves control and requires the
acquirer to recognize the assets acquired, liabilities assumed and any
noncontrolling interest at their fair values as of the acquisition date.
Statement 141(R) also requires, among other things, that acquisition-related
costs be recognized separately from the acquisition. We are required to adopt
Statement 141(R) prospectively for business combinations on or after January 1,
2009. Assets and liabilities that arose from business combinations prior to
January 1, 2009 are not affected by the adoption of Statement 141(R).
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 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 for our financial
assets and liabilities. However, 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 do not expect the
adoption of Statement 157 to have a significant impact on our future results of
operations or financial condition.
Revenue Recognition: Domestic and international TV direct-to-home, or DTH,
and cable revenues are recognized based on estimates of pay-per-view and
video-on-demand buys and monthly subscriber counts reported each month by the
system operators and adjusted to actual. The net adjustments to actual have not
been material. International TV third-party revenues are recognized upon
identification of programming scheduled for networks, delivery of programming to
customers and/or upon the commencement of the license term. Revenues from the
sale of Playboy magazine and online subscriptions are recognized over the terms
of the subscriptions. Revenues from newsstand sales of Playboy magazine and
special editions (net of estimated returns) and revenues from the sale of
Playboy magazine advertisements are recorded when each issue goes on sale.
Royalties from licensing our trademarks in our international magazine, consumer
products licensing and location-based entertainment businesses are generally
recognized on a straight-line basis over the terms of the related agreements.
Stock-Based Compensation: On January 1, 2006, we adopted the provisions of
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment, or Statement 123(R), which is a revision of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, or
Statement 123, under the modified prospective method. Statement 123(R)
supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and amends Statement of Financial Accounting Standards No.
95, Statement of Cash Flows. Statement 123(R) requires that all stock-based
compensation to employees, including grants of employee stock options, be
recognized in the income statement based on its fair value.
Stock-based compensation expense is based on awards ultimately expected to
vest, reduced for estimated forfeitures. Forfeitures are estimated at the time
of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. Forfeitures were estimated based on historical
experience. Under the fair value recognition provisions of Statement 123(R), we
measure stock-based compensation cost at the grant date based on the value of
the award and recognize the expense over the vesting period. Compensation
expense, as recognized under Statement 123(R), for all stock-based compensation
awards is recognized using the straight-line attribution method. Stock-based
compensation expense is reflected in "Selling and administrative expenses" on
our Consolidated Statements of Operations and the proceeds are reflected in
"Proceeds from stock-based compensation" on our Consolidated Statements of Cash
Flows. See Note (S), Stock-Based Compensation.
Cash Equivalents: Cash equivalents are temporary cash investments with an
original maturity of three months or less at the date of purchase and are stated
at cost, which approximates fair value.
Marketable Securities and Short-Term Investments: Marketable securities
and short-term investments are classified as available-for-sale securities,
stated at fair value and accounted for under the specific identification method.
Net unrealized holding gains and losses are included in "Accumulated other
comprehensive loss."
48
Accounts Receivable and Allowance for Doubtful Accounts: Trade receivables
are reported at their outstanding unpaid balances less an allowance for doubtful
accounts. The allowance for doubtful accounts is increased by charges to income
and decreased by chargeoffs (net of recoveries) or by reversals to income. We
perform periodic evaluations of the adequacy of the allowance based on our past
loss experience and adverse situations that may affect a customer's ability to
pay. A receivable balance is written off when we deem the balance to be
uncollectible.
Inventories: Inventories are stated at the lower of cost (specific cost
and average cost) or fair value.
Assets Held for Sale: Assets held for sale are reported at the lower of
the carrying amount or fair value, less the estimated costs to sell. See Note
(C), Sale of Assets.
Property and Equipment: Property and equipment are stated at cost. Costs
incurred for computer software developed or obtained for internal use are
capitalized for application development activities and are immediately expensed
for preliminary project activities or post-implementation activities.
Depreciation is recorded using the straight-line method over the estimated
useful lives of the assets. The useful life for building improvements is 10
years; furniture and equipment ranges from one to 10 years; and software ranges
from one to five years. Leasehold improvements are depreciated using the
straight-line method over the shorter of their estimated useful lives or the
terms of the related leases. Repair and maintenance costs are expensed as
incurred and major betterments are capitalized. Sales and retirements of
property and equipment are recorded by removing the related cost and accumulated
depreciation from the accounts, after which any related gains or losses are
recognized.
Advertising Costs: We expense advertising costs as incurred. In 2007 and
2006, direct response advertising costs, which consist primarily of costs
associated with the promotion of Playboy magazine subscriptions, principally the
production of direct mail solicitation materials and postage, and the
distribution of direct- and e-commerce catalog mailings, were capitalized in
accordance with the American Institute of Certified Public Accountants'
Statement of Position 93-7, Reporting on Advertising Costs. These capitalized
direct response advertising costs were amortized over the period during which
the future benefits were expected to be received, generally six to 12 months. In
2008, given the uncertainties of both the magazine environment as well as the
economy in general, we began expensing these costs as incurred and wrote off the
remaining capitalized amount.
Programming Amortization and Online Content Costs: Original programming
and film acquisition costs are primarily assigned to the domestic and
international networks and are capitalized and amortized utilizing the
straight-line method, generally over three years. Online content expenditures
are generally expensed as incurred. We believe that these methods provide a
reasonable matching of expenses with total estimated revenues over the periods
that revenues associated with films, programs and online content are expected to
be realized. Film and program costs are stated at the lower of unamortized cost
or estimated net realizable value as determined on a specific identification
basis and are classified on our Consolidated Balance Sheets as noncurrent
assets. See Note (N), Programming Costs, Net.
Intangible Assets: In accordance with Statement 142, we do not amortize
goodwill and trademarks with indefinite lives, but subject them to annual
impairment tests. Capitalized trademark costs include costs associated with the
acquisition, registration and/or renewal of our trademarks. In 2006, we began
expensing certain costs associated with the defense of such trademarks. Our
non-Playboy trademarks with finite lives are being amortized using the
straight-line method over the lives of the trademarks, either 10 or 20 and
one-quarter years. Copyright costs are being amortized using the straight-line
method over 15 years. Noncompete agreements are being amortized using the
straight-line method over the lives of the agreements, either five or 10 years.
Distribution agreements are being amortized using the straight-line method over
the lives of the agreements, which were determined to be 27 and one-half years.
A program supply agreement is being amortized using the straight-line method
over the 10-year life of the agreement. Other intangible assets continue to be
amortized over their useful lives. The noncompete agreements, program supply
agreement and copyright costs are all included in "Other noncurrent assets" on
our Consolidated Balance Sheets.
In 2006, we modified the assumptions related to the useful lives of
certain distribution agreements that previously were classified as
indefinite-lived. As these distribution agreements are now being amortized, the
deferred tax liability related to the distribution agreements that is expected
to be realized within the net operating loss, or NOL, carryforward period may be
netted against our deferred tax asset. In each of 2008 and 2007, we recorded an
income tax benefit for $0.5 million of the $3.9 million deferred tax liability
related to the modification to the lives of these distribution agreements.
49
As a result of the restructuring of the ownership of Playboy TV
International, LLC, or PTVI, in 2002, we acquired distribution agreements of
$3.4 million with a weighted average life of approximately four years and a
program supply agreement of $3.2 million with a life of 10 years. The weighted
average life of the aggregate of the definite-lived intangible assets acquired
was approximately seven years. We also acquired distribution agreements of $9.0
million, which were previously determined to be indefinite-lived. In 2006, we
modified the lives to 27 and one-half years, which did not materially impact our
results of operations.
We conduct our annual impairment testing of goodwill and indefinite-lived
intangible assets as of every October 1st. If the carrying amount of the asset
is not recoverable based on an analysis using a combined weighted
forecasted-discounted cash flow and market multiple approach, such asset would
be reduced by the estimated shortfall of fair value to recorded value. We must
make assumptions regarding forecasted-discounted cash flows and market multiples
to determine a reporting unit's estimated fair value. Based on the annual
impairment testing as of October 1, 2008, we concluded goodwill required an
impairment charge of $105.8 million, while indefinite-lived trademarks required
an impairment charge of $24.6 million. These non-Playboy trademarks have also
been determined to have a finite life and are now being amortized. If any
estimates or related assumptions change in the future, we may be required to
record an additional impairment charge. See Note (O), Intangible Assets.
In accordance with Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, or Statement
144, we evaluate the potential impairment of finite-lived acquired intangible
assets when appropriate. If the carrying amount of the asset is not recoverable
based on a forecasted-undiscounted cash flow analysis, such asset would be
reduced by the estimated shortfall of fair value to recorded value. Based on the
results of an impairment analysis on finite-lived intangible assets performed as
of October 1, 2008, we recorded an impairment charge of $16.1 million on certain
assets. See Note (O), Intangible Assets.
Derivative Financial Instruments: We account for derivative instruments in
accordance with Statement 133, as amended by Statement of Financial Accounting
Standards No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities, which requires all derivative instruments to be recognized
as either assets or liabilities in the balance sheet at fair value regardless of
the purpose or intent for holding the derivative instrument. The accounting for
changes in the fair value of a derivative instrument depends on whether it has
been designated as and qualifies as part of a hedging relationship and, further,
on the type of relationship.
We formally document all relationships between hedging instruments and
hedged items, as well as our risk management objectives and strategies for
undertaking various hedge transactions. When derivative instruments are
designated and qualify as cash flow or fair value hedges, the effective portion
of the gain or loss on the derivative instruments is deferred and reported as a
component of "Accumulated other comprehensive loss" and is reclassified into
earnings upon execution of the hedged transaction. At December 31, 2008, we had
derivative instruments that have been designated as and qualify for hedge
accounting but were deemed to be ineffective.
We had no unrealized gain or loss at December 31, 2008 and a net
unrealized loss of $0.1 million at December 31, 2007 included in "Accumulated
other comprehensive loss," which represents the effective portion of changes in
fair value of the cash flow hedges.
Earnings per Common Share: We compute basic and diluted earnings per
share, or EPS, in accordance with Statement of Financial Accounting Standards
No. 128, Earnings per Share. Basic EPS is computed by dividing net income (loss)
applicable to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted EPS adjusts basic EPS for the
dilutive effects of stock options and other potentially dilutive financial
instruments. See Note (G), Earnings per Common Share.
Equity Investments: The equity method is used to account for our 19.0%
investment in Playboy TV-Latin America, LLC, or PTVLA, since we have the ability
to exercise influence over PTVLA.
Foreign Currency Translation: Assets and liabilities in foreign currencies
related to our international TV foreign operations were translated into U.S.
dollars at the exchange rate existing at the balance sheet date. The net
exchange differences resulting from these translations were included in
"Accumulated other comprehensive loss" on our Consolidated Statements of
Shareholders' Equity. Revenues and expenses were translated at average rates for
the period.
Transaction gains and losses that arise from foreign exchange rate
fluctuations on transactions denominated in a currency other than U.S. dollars,
except those transactions that operate as a hedge transaction, are included in
50
"Other, net" on our Consolidated Statements of Operations. Foreign currency
transaction loss was $1.2 million in 2008, and foreign currency transaction
gains were $0.3 million and $0.1 million in 2007 and 2006, respectively.
(B) ACQUISITION
In July 2001, we acquired The Hot Network and The Hot Zone networks,
together with the related television assets of Califa Entertainment Group, Inc.,
or Califa. In addition, we acquired the Vivid TV network and the related
television assets of V.O.D., Inc., or VODI, a separate entity owned by the
sellers. We collectively refer to Califa and VODI as the Califa acquisition.
These networks now operate as the Spice Digital Networks. The addition of these
networks into our movie networks portfolio enabled us to offer consumers a wider
range of adult programming. We accounted for the acquisition under the purchase
method of accounting. Accordingly, the results of these networks since the
acquisition date have been included in our Consolidated Statements of
Operations. In connection with the acquisition and purchase price allocations,
the Entertainment Group recorded goodwill of $27.4 million, which is deductible
over 15 years for income tax purposes. Future obligations were recorded at their
net present value and are reported on our Consolidated Balance Sheets as a
component of current and noncurrent "Acquisition liabilities." In 2008, we
recorded an impairment charge on Califa goodwill of $11.7 million. See Note (O),
Intangible Assets.
We recorded $30.8 million of intangible assets separate from goodwill
consisting of $28.5 million for distribution agreements and $2.3 million for
noncompete agreements. All of the noncompete agreements are being amortized over
approximately eight years, which are the weighted average lives of these
agreements. Distribution agreements of $7.5 million were amortized over
approximately two years, which were the weighted average lives of these
agreements. In 2008, we recorded an impairment charge on distribution agreements
of $14.9 million. See Note (O), Intangible Assets. Distribution agreements of
$21.0 million, which were previously determined to be indefinite-lived, are now
being amortized over their modified useful lives of 27 and one-half years.
The total consideration for the acquisition was $70.0 million and is
required to be paid in installments over a 10-year period ending in 2011. The
nominal consideration for Califa's assets was $28.3 million. We also assumed the
obligations of Califa related to a note payable and noncompete liability. The
nominal consideration for VODI's assets was $41.7 million. We were obligated to
pay up to an additional $12.0 million in consideration upon the achievement of
specified financial performance targets, $5.0 million of which we paid in 2003
and $7.0 million of which we paid in 2004. The amounts were recorded at the
acquisition date as part of acquisition liabilities.
We may accelerate all or any portion of the remaining unpaid purchase
price, but only by making the accelerated payments in cash, at a discount rate
to be mutually agreed upon by the parties in good-faith negotiations. However,
if the parties are unable to agree on the discount rate, we may, at our sole
discretion, elect to accelerate the payment at a 12% discount rate.
The Califa acquisition agreement gave us the option of paying up to $71.0
million of the scheduled payments in cash or our Class B common stock, or Class
B stock. The number of shares, if any, we issue in connection with a particular
payment or particular payments is based on the trading prices of the Class B
stock surrounding the applicable payment dates. Prior to each scheduled payment
of consideration, we were to provide the sellers with written notice specifying
the portion of the purchase price payment that we intend to pay in cash and the
portion in Class B stock. In 2008, 2007 and 2006, we paid the sellers $1.0
million, $8.0 million and $8.0 million, respectively, in cash. The remaining
payments of $1.0 million, $1.0 million and $0.8 million due in 2009, 2010 and
2011, respectively, must also be made in cash.
See Note (R), Commitments and Contingencies, for additional information on
other future acquisition payments.
(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 linear networks and our need for their
transmission capacity will decrease over the next several years. We recorded a
$0.1 million unfavorable adjustment in 2008, 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
51
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 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. We also have a dedicated radio
studio and office space at the BFI facility. 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 years on substantially the same terms and conditions.
(D) RESTRUCTURING EXPENSE
In the fourth quarter of 2008, we developed a restructuring plan in our
continued efforts to reduce costs, primarily related to several senior level
Corporate and Entertainment Group positions. As a result of this plan, we
recorded a charge of $4.0 million related to workforce reduction costs of 21
employees, most of whose jobs will be eliminated in the first quarter of 2009.
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 first half of 2009, we will report additional restructuring charges
as well as relocation and other expenses related to vacating our New York office
space and other cost-saving initiatives.
In the third quarter of 2008, we developed a restructuring plan in an
effort to lower 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. We
also eliminated approximately 25 open positions. 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 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 an acquisition. This restructuring
plan resulted in the recording of a reserve of $0.4 million for costs associated
with a workforce reduction of 28 employees. As part of this restructuring plan,
we recorded an additional reserve of $0.6 million for contract termination fees
and expenses in 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 current liabilities and accrued expenses" on our
Consolidated Balance Sheets, for the years ended December 31, 2008 and 2007 (in
thousands):
Consolidation
Workforce of Facilities
Reduction and 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
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
============================================================================
(E) PROVISIONS FOR RESERVES
In 2008, we recorded provisions of $2.9 million for a receivable and $1.2
million for archival material.
52
(F) INCOME TAXES
The following table sets forth the income tax provision (in thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/08 12/31/07 12/31/06
----------------------------------------------------------------------------------------------------
Current:
Federal $ -- $ (153) $ --
State 143 90 120
Foreign 2,870 2,845 1,509
----------------------------------------------------------------------------------------------------
Total current 3,013 2,782 1,629
----------------------------------------------------------------------------------------------------
Deferred:
Federal (11,866) 1,463 160
State (1,695) 209 707
Foreign 698 (2,526) --
----------------------------------------------------------------------------------------------------
Total deferred (12,863) (854) 867
----------------------------------------------------------------------------------------------------
Total income tax expense (benefit) $ (9,850) $ 1,928 $ 2,496
====================================================================================================
The U.S. statutory tax rate applicable to us for each of 2008, 2007 and
2006 was 35%. The following table sets forth the reconciliation of the income
tax expense (benefit) computed at the U.S. federal statutory tax rate to the
actual income tax expense (benefit) (in thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/08 12/31/07 12/31/06
----------------------------------------------------------------------------------------------------
Statutory rate tax expense (benefit) $ (58,067) $ 2,399 $ 1,673
Increase (decrease) in taxes resulting from:
Foreign income and withholding tax on licensing income 2,870 2,845 1,509
State income tax expense (benefit) (1,790) 194 158
Nondeductible expenses 30,564 218 175
Increase (decrease) in valuation allowance 13,582 (2,075) 1,327
Tax benefit of foreign taxes paid or accrued (2,735) (2,541) (2,503)
(Increase) decrease in state/foreign NOLs (1,264) 1,749 (181)
Expired NOL/capital loss carryovers 7,460 1,217 --
Refund from amended federal return -- (2,150) --
Tax audit adjustment -- -- 281
Other expense (benefit) (470) 72 57
----------------------------------------------------------------------------------------------------
Total income tax expense (benefit) $ (9,850) $ 1,928 $ 2,496
====================================================================================================
Deferred tax assets and liabilities are recognized for the expected future
tax consequences attributable to differences between the financial statement and
tax bases of assets and liabilities using enacted tax rates expected to apply in
the years in which the temporary differences are expected to reverse.
In 2008, we had a net income tax benefit of $9.8 million compared to a net
income tax expense of $1.9 million in 2007. This reduction was due primarily to
the reversal of deferred tax liabilities associated with the impairment charges
on goodwill and other intangible assets.
In 2007, the valuation allowance decreased by $2.4 million as a result of
the realization of our U.K. NOLs and the effect of the deferred tax treatment of
certain acquired intangibles. In 2006, the valuation allowance increased by $1.9
million related to the realization of the deferred tax benefit of our NOLs and
foreign tax credits and the effect of the deferred tax treatment of certain
acquired intangibles.
In 2006, we modified the assumptions related to the useful lives of
certain distribution agreements that previously were classified as
indefinite-lived. As these distribution agreements are now being amortized, the
deferred tax liability related to the distribution agreements that is expected
to be realized within the NOL carryforward period may be netted against our
deferred tax asset. In 2006, we recorded an income tax benefit for $2.6 million
of the $3.9 million deferred tax liability related to the distribution agreement
modification. In each of
53
2008 and 2007, we recognized an additional income tax benefit of $0.5 million
related to the distribution agreements.
The following table sets forth the significant components of our deferred
tax assets and liabilities (in thousands):
Dec. 31, Dec. 31,
2008 2007
-------------------------------------------------------------------------------
Deferred tax assets:
NOL carryforwards $ 51,754 $ 48,513
Tax credit carryforwards 18,781 16,046
Temporary difference related to PTVI 4,830 5,720
Other deductible temporary differences 45,832 36,931
-------------------------------------------------------------------------------
Total deferred tax assets 121,197 107,210
Valuation allowance (88,400) (74,818)
-------------------------------------------------------------------------------
Deferred tax assets 32,797 32,392
-------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred subscription acquisition costs (1,487) (4,620)
Intangible assets (19,144) (31,004)
Other taxable temporary differences (17,501) (14,336)
-------------------------------------------------------------------------------
Deferred tax liabilities (38,132) (49,960)
-------------------------------------------------------------------------------
Deferred tax liabilities, net $ (5,335) $ (17,568)
===============================================================================
At December 31, 2008, we had federal NOLs of $118.1 million expiring at
various intervals between the years 2009 through 2028, state and local NOLs of
$106.7 million expiring at various intervals between the years 2009 through 2028
and foreign NOLs of $6.9 million that have no expiration date. In addition,
foreign tax credit carryforwards of $17.7 million and minimum tax credit
carryforwards of $1.1 million are available to reduce future U.S. federal income
taxes. The foreign tax credit carryforwards expire in 2015 through 2018 and the
minimum tax credit carryforwards have no expiration date.
On January 1, 2007, we adopted the provisions of FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB
Statement No. 109, or FIN 48. As a result of the implementation of FIN 48, we
recognized no material adjustment in the liability for unrecognized income tax
benefits.
Our continuing practice is to recognize interest and penalties related to
income tax matters in income tax expense.
The following table sets forth a reconciliation of the beginning and
ending amount of unrecognized tax benefits (in thousands):
Fiscal Year Fiscal Year
Ended Ended
12/31/08 12/31/07
-------------------------------------------------------------------------------
Unrecognized tax benefits at beginning of year $ 7,978 $ 7,978
Increase (decrease) for prior year tax positions -- --
Increase (decrease) for current year tax positions -- --
Increase (decrease) related to settlements -- --
Increase (decrease) related to statute lapse -- --
-------------------------------------------------------------------------------
Unrecognized tax benefits at end of year $ 7,978 $ 7,978
===============================================================================
At December 31, 2008, we had unrecognized tax benefits of $8.0 million; we
do not expect this amount to change significantly over the next 12 months.
Because of the impact of deferred income tax accounting, the disallowance would
not affect the effective income tax rate nor would it accelerate the payment of
cash to the taxing authority to an earlier period.
The statute of limitations for tax years 2005 through 2008 remains open to
examination by the major U.S. taxing jurisdictions to which we are subject. In
addition, for all tax years prior to 2005 generating an NOL, tax authorities can
adjust the amount of NOL. In our international tax jurisdictions, numerous tax
years remain subject
54
to examination by tax authorities, including tax returns for at least 2003 and
subsequent years in all of our major international tax jurisdictions.
(G) EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted EPS
(in thousands, except per share amounts):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/08 12/31/07 12/31/06
----------------------------------------------------------------------------------------
Numerator:
For basic and diluted EPS - net income (loss) $ (156,055) $ 4,925 $ 2,285
========================================================================================
Denominator:
For basic EPS - weighted average shares 33,307 33,246 33,171
Effect of dilutive potential common shares:
Employee stock options and other -- 35 105
----------------------------------------------------------------------------------------
Dilutive potential common shares -- 35 105
----------------------------------------------------------------------------------------
For diluted EPS - weighted average shares 33,307 33,281 33,276
========================================================================================
Basic and diluted EPS $ (4.69) $ 0.15 $ 0.07
========================================================================================
The following table sets forth the number of shares related to outstanding
options to purchase our Class B stock and the potential shares of Class B stock
contingently issuable under our 3.00% convertible senior subordinated notes due
2025, or convertible notes. These shares were not included in the computations
of diluted EPS for the years presented, as their inclusion would have been
antidilutive (in thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/08 12/31/07 12/31/06
----------------------------------------------------------------------------------------
Stock options 3,627 3,133 3,387
Convertible notes 6,758 6,758 6,758
----------------------------------------------------------------------------------------
Total 10,385 9,891 10,145
========================================================================================
(H) FINANCIAL INSTRUMENTS
Fair Value: The fair value of a financial instrument represents the amount
at which the instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation. For cash and cash
equivalents, receivables and certain other current assets, the amounts reported
approximated fair value due to their short-term nature. As described in Note
(P), Financing Obligations, in March 2005, we issued and sold in a private
placement $115.0 million aggregate principal amount of our convertible notes. As
of December 31, 2008 and 2007, the fair value of the convertible notes was
determined to be $51.8 million and $103.9 million, respectively. The convertible
notes had not traded since September 2008. The fair value does not necessarily
represent the purchase price for the entire convertible note portfolio.
Concentrations of Credit Risk: Concentration of credit risk with respect
to accounts receivable is limited due to the wide variety of customers to whom
and segments from which our products are sold and/or licensed.
55
(I) MARKETABLE SECURITIES AND INVESTMENTS
The following table sets forth marketable securities and investments (in
thousands):
Dec. 31, Dec. 31,
2008 2007
---------------------------------------------------------------------------------------------
Marketable securities and short-term investments:
Cost of marketable securities $ 890 $ 6,927
Cost of short-term investments 5,249 6,000
Gross unrealized holding gains -- 25
---------------------------------------------------------------------------------------------
Fair value of marketable securities and short-term investments 6,139 12,952
---------------------------------------------------------------------------------------------
Long-term investments:
Cost of long-term investments -- 6,384
Gross unrealized holding gains -- 290
Gross unrealized holding losses -- (118)
---------------------------------------------------------------------------------------------
Fair value of long-term investments -- 6,556
---------------------------------------------------------------------------------------------
Total marketable securities and investments $ 6,139 $ 19,508
=============================================================================================
We purchased $1.1 million of investments and received proceeds of $11.4
million from the sales of investments in 2008. We had realized losses of $0.8
million in 2008 compared to realized gains of $0.2 million and $31,000 in 2007
and 2006, respectively. Included in "Comprehensive income (loss)" were net
unrealized holding losses of $0.2 million and $0.1 million for 2008 and 2007,
respectively, and a net unrealized holding gain of $0.1 million for 2006. We
recognized interest income of $0.5 million, $2.5 million and $2.4 million during
2008, 2007 and 2006, respectively.
At December 31, 2008 and December 31, 2007, due to adverse market
conditions, we determined that the market value of our investment in an enhanced
cash portfolio was other-than-temporarily impaired, and we recorded impairment
charges of $0.8 million and $0.1 million on our Consolidated Statements of
Operations in 2008 and 2007, respectively.
In addition, at December 31, 2008, we recorded an impairment charge of
$1.2 million on certain investments related to our nonqualified deferred
compensation plans. These investments were deemed to be other-than-temporarily
impaired as a result of adverse market conditions.
(J) FAIR VALUE MEASUREMENT
As discussed in Note (A), Summary of Significant Account Policies, we
adopted Statement 157 on January 1, 2008 for our financial assets and
liabilities. 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 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.
56
The following table sets forth our financial assets and liabilities
measured at fair value on a recurring basis and the basis of measurement at
December 31, 2008 (in thousands):
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable
Total Fair Value Assets Inputs Inputs
Measurement (Level 1) (Level 2) (Level 3)
------------------------------------------------------------------------------------------------------------
Marketable securities and investments $ 6,139 $ 5,249 $ 890(1) $ --
Derivative assets $ 42 $ -- $ 42 $ --
------------------------------------------------------------------------------------------------------------
(1) At December 31, 2008 and December 31, 2007, we had $0.9 million and $6.9
million, respectively, in an enhanced cash portfolio included in
"Marketable securities and short-term investments" on our Consolidated
Balance Sheets. Due to adverse market conditions, we determined that the
market value of this investment was other-than-temporarily impaired, and
during the fiscal years ended December 31, 2008 and December 31, 2007, we
recorded impairment charges of $0.8 million and $0.1 million,
respectively. Through December 31, 2008, we have received 10 distributions
from the investment, which is being liquidated, at an average net asset
value of 96.61%, resulting in a cumulative realized loss of $1.1 million,
which includes $0.9 million of impairment charges.
(K) 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
those 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):
Dec. 31, Dec. 31,
2008 2007
-------------------------------------------------------------------------------
Paper $ 2,371 $ 2,948
Editorial and other prepublication costs 4,759 5,518
Merchandise finished goods 211 2,897
-------------------------------------------------------------------------------
Total inventories $ 7,341 $ 11,363
===============================================================================
(L) ADVERTISING COSTS
At December 31, 2008 and 2007, advertising costs of $0 and $7.2 million,
respectively, were deferred and included in "Deferred subscription acquisition
costs" and "Prepaid expenses and other current assets" on our Consolidated
Balance Sheets. For 2008, 2007 and 2006, our advertising expense was $22.9
million, $28.0 million and $27.7 million, respectively.
(M) PROPERTY AND EQUIPMENT, NET
The following table sets forth property and equipment, net (in thousands):
Dec. 31, Dec. 31,
2008 2007
-------------------------------------------------------------------------------
Land $ 292 $ 292
Buildings and improvements 8,872 8,775
Furniture and equipment 23,544 22,019
Leasehold improvements 17,181 13,002
Software 16,389 12,895
-------------------------------------------------------------------------------
Total property and equipment 66,278 56,983
Accumulated depreciation (45,959) (42,318)
-------------------------------------------------------------------------------
Total property and equipment, net $ 20,319 $ 14,665
===============================================================================
57
(N) PROGRAMMING COSTS, NET
The following table sets forth programming costs, net (in thousands):
Dec. 31, Dec. 31,
2008 2007
-------------------------------------------------------------------------------
Released, less amortization $ 35,290 $ 31,531
Completed, not yet released 7,903 8,149
In-process 8,863 15,246
-------------------------------------------------------------------------------
Total programming costs, net $ 52,056 $ 54,926
===============================================================================
(O) INTANGIBLE ASSETS
In accordance with Statement 142, we do not amortize goodwill and
trademarks with indefinite lives, but subject them to annual impairment tests.
As of October 1, 2008, we evaluated goodwill and other indefinite lived assets
for impairment using a combined weighted forecasted-discounted cash flow method
and a market multiple approach and concluded goodwill required an impairment
charge of $105.8 million, while certain indefinite-lived non-Playboy trademarks
required an impairment charge of $24.6 million. These trademarks have also been
determined to have a finite life and are now being amortized. This analysis was
based in part upon our financial results during the year and our current
expectation of future performance. At December 31, 2008 and 2007, our
indefinite-lived intangible assets that are not amortized but subject to our
annual impairment test included goodwill, reflected entirely in the
Entertainment Group, of $27.8 million and $133.6 million, respectively, and
trademarks of $42.5 million and $65.4 million, respectively. For the years ended
December 31, 2008 and 2007, the aggregate amount of goodwill acquired was $35
thousand and $0.6 million, respectively.
In accordance with Statement 144, we evaluate the potential impairment of
finite-lived acquired intangible assets when appropriate. If the carrying amount
of the asset is not recoverable based on a forecasted-undiscounted cash flow
analysis, such asset would be reduced by the estimated shortfall of fair value
to recorded value. Based on the results of an impairment analysis on
finite-lived intangible assets performed as of October 1, 2008, we recorded an
impairment charge of $16.1 million.
The following table sets forth our amortizable intangible assets (in
thousands):
Gross Carrying Accumulated Net Carrying
December 31, 2008 Amount Amortization Impairment Amount
--------------------------------------------------------------------------------------------------
Noncompete agreements $ 14,050 $ (13,688) $ -- $ 362
Distribution agreements 33,140 (6,126) (14,876) 12,138
Non-Playboy trademarks 29,303 (1,913) (24,580) 2,810
Program supply agreement 3,226 (1,936) -- 1,290
Trademark license agreement 2,530 (845) (1,175) 510
Copyrights 2,194 (1,427) -- 767
Other 621 (542) -- 79
--------------------------------------------------------------------------------------------------
Total amortizable intangible assets $ 85,064 $ (26,477) $ (40,631) $ 17,956
==================================================================================================
Gross Carrying Accumulated Net Carrying
December 31, 2007 Amount Amortization Impairment Amount
--------------------------------------------------------------------------------------------------
Noncompete agreements $ 14,000 $ (13,545) $ -- $ 455
Distribution agreements 33,140 (4,803) -- 28,337
Program supply agreement 3,226 (1,613) -- 1,613
Trademark license agreement 2,530 (542) -- 1,988
Copyrights 2,064 (1,281) -- 783
Other 665 (535) -- 130
--------------------------------------------------------------------------------------------------
Total amortizable intangible assets $ 55,625 $ (22,319) $ -- $ 33,306
==================================================================================================
The aggregate amortization expense for intangible assets with definite
lives for 2008, 2007 and 2006 was $2.3 million, $2.3 million and $1.7 million,
respectively. The aggregate amortization expense for intangible assets with
definite lives is expected to total approximately $1.6 million, $1.5 million,
$1.4 million, $1.3 million and $0.9 million for 2009, 2010, 2011, 2012 and 2013,
respectively.
58
(P) FINANCING OBLIGATIONS
The following table sets forth financing obligations (in thousands):
Dec. 31, Dec. 31,
2008 2007
-------------------------------------------------------------------------------
Convertible senior subordinated notes, interest of 3.00% $ 115,000 $ 115,000
-------------------------------------------------------------------------------
Total financing obligations $ 115,000 $ 115,000
===============================================================================
Debt Financing
In March 2005, we issued and sold $115.0 million aggregate principal
amount of our convertible notes, which included $15.0 million due to the initial
purchasers' exercise of the over-allotment option. The net proceeds of
approximately $110.3 million from the issuance and sale of the convertible
notes, after deducting the initial purchasers' discount and offering expenses,
were used, together with available cash, (a) to complete a tender offer and
consent solicitation for, and to purchase and retire all of the $80.0 million
outstanding principal amount of the 11.00% senior secured notes issued by our
subsidiary PEI Holdings, Inc., or Holdings, for a total of approximately $95.2
million, including the bond tender premium and consent fee of $14.9 million and
other expenses of $0.3 million, (b) to purchase 381,971 shares of our Class B
stock for an aggregate purchase price of $5.0 million concurrently with the sale
of the convertible notes and (c) for working capital and general corporate
purposes.
The convertible notes bear interest at a rate of 3.00% per annum on the
principal amount of the notes, payable in arrears on March 15th and September
15th of each year, payment of which began on September 15, 2005. In addition,
under certain circumstances beginning in 2012, if the trading price of the
convertible notes exceeds a specified threshold during a prescribed measurement
period prior to any semiannual interest period, contingent interest will become
payable on the convertible notes for that semiannual interest period at an
annual rate of 0.25% per annum.
The convertible notes are convertible into cash and, if applicable, shares
of our Class B stock based on an initial conversion rate, subject to adjustment,
of 58.7648 shares per $1,000 principal amount of the convertible notes (which
represents an initial conversion price of approximately $17.02 per share) only
under the following circumstances: (a) during any fiscal quarter after the
fiscal quarter ending March 31, 2005, if the closing sale price of our Class B
stock for each of 20 or more consecutive trading days in a period of 30
consecutive trading days ending on the last trading day of the immediately
preceding fiscal quarter exceeds 130% of the conversion price in effect on that
trading day; (b) during the five business day period after any five consecutive
trading day period in which the average trading price per $1,000 principal
amount of convertible notes over that five consecutive trading day period was
equal to or less than 95% of the average conversion value of the convertible
notes during that period; (c) upon the occurrence of specified corporate
transactions, as set forth in the indenture governing the convertible notes; or
(d) if we have called the convertible notes for redemption. Upon conversion of a
convertible note, a holder will receive cash in an amount equal to the lesser of
the aggregate conversion value of the note being converted and the aggregate
principal amount of the note being converted. If the aggregate conversion value
of the convertible note being converted is greater than the cash amount received
by the holder, the holder will also receive an amount in whole shares of Class B
stock equal to the aggregate conversion value less the cash amount received by
the holder. A holder will receive cash in lieu of any fractional shares of Class
B stock. The maximum conversion rate, subject to adjustment, is 76.3942 shares
per $1,000 principal amount of the convertible notes.
The convertible notes mature on March 15, 2025. On or after March 15,
2010, if the closing price of our Class B stock exceeds a specified threshold,
we may redeem any of the convertible notes at a redemption price in cash equal
to 100% of the principal amount of the convertible notes, plus any accrued and
unpaid interest up to, but excluding, the redemption date. On or after March 15,
2012, we may at any time redeem any of the convertible notes at the same
redemption price. On each of March 15, 2012, March 15, 2015 and March 15, 2020,
or upon the occurrence of a fundamental change, as specified in the indenture
governing the convertible notes, holders may require us to purchase all or a
portion of their convertible notes at a purchase price in cash equal to 100% of
the principal amount of the notes, plus any accrued and unpaid interest up to,
but excluding, the purchase date.
The convertible notes are unsecured senior subordinated obligations of
Playboy Enterprises, Inc. and rank junior to all of the issuer's senior debt,
including its guarantee of Holdings' borrowings under our credit facility;
equally with all of the issuer's future senior subordinated debt; and, senior to
all of the issuer's future subordinated
59
debt. In addition, the assets of the issuer's subsidiaries are subject to the
prior claims of all creditors, including trade creditors, of those subsidiaries.
Credit Facility
At December 31, 2008, our $50.0 million credit facility provided for
revolving borrowings, the issuance of letters of credit or a combination of both
of up to $50.0 million outstanding at any time. In February 2009, we amended the
terms of our credit facility to, among other things, reduce the size of the
facility to $30.0 million. Borrowings under the credit facility bear interest at
a variable rate, equal to a specified LIBOR or base rate plus a specified
borrowing margin based on our Adjusted EBITDA, as defined in the credit
agreement. We pay fees on the outstanding amount of letters of credit based on
the margin that applies to borrowings that bear interest at a rate based on
LIBOR. All amounts outstanding under the credit facility will mature on January
31, 2011. The obligations of Holdings as borrower under the credit facility are
guaranteed by us and each of our other U.S. subsidiaries. The obligations of the
borrower and nearly all of the guarantors under the credit facility are secured
by a first-priority lien on substantially all of the borrower's and the
guarantors' assets. At December 31, 2008, there were no borrowings and $0.8
million in letters of credit outstanding under this facility, resulting in $49.2
million of available borrowings under this facility. At February 27, 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 under this
facility.
(Q) BENEFIT PLANS
Our Employees Investment Savings Plan is a defined contribution plan
consisting of two components: a profit sharing plan and a 401(k) plan. The
profit sharing plan covers all employees who have completed 12 months of service
of at least 1,000 hours. Our discretionary contribution to the profit sharing
plan is distributed to each eligible employee's account in an amount equal to
the ratio of each eligible employee's compensation, subject to Internal Revenue
Service limitations, to the total compensation paid to all such employees. We
did not make any contributions to the plan in 2008. Total contributions for 2007
and 2006 related to this plan were $0.5 million and $0.3 million, respectively.
Eligible employees may participate in our 401(k) plan upon their date of
hire. Our 401(k) plan offers several mutual fund investment options. The
purchase of our stock has never been an option. We make matching contributions
to our 401(k) plan based on each participating employee's contributions and
eligible compensation. Our matching contribution expense for 2008, 2007 and 2006
related to this plan were $1.6 million, $1.4 million and $1.4 million,
respectively.
We had two nonqualified deferred compensation plans during 2008, which
permitted certain employees and all nonemployee directors to annually elect to
defer a portion of their compensation. A match was provided to employees who
participated in the deferred compensation plan, at a certain specified minimum
level, and whose annual eligible earnings exceeded the salary limitation
contained in the 401(k) plan. All amounts contributed and earnings credited
under these plans were general unsecured obligations. Such obligations totaled
$5.4 million and $6.7 million at December 31, 2008 and December 31, 2007,
respectively, and are included in "Other current liabilities and accrued
expenses" and "Other noncurrent liabilities," respectively, on our Consolidated
Balance Sheets. In December 2008, participants chose, in accordance with
transition rules in effect in connection with a change to the tax laws governing
deferred compensation, to receive their account balances in full. Assets from
both plans will be fully distributed in 2009.
We currently maintain a practice of paying a separation allowance under
our salary continuation policy to employees with at least five years of
continuous service who voluntarily terminate employment with us and are at age
60 or thereafter, which is not funded. Payments in 2008, 2007 and 2006 under
this policy were $0.9 million, $0.6 million and $0.3 million, respectively. In
2008, 2007 and 2006 we recorded expense, based on actuarial estimates, of $0.5
million, $0.5 million and $0.6 million, respectively.
We adopted the recognition and related disclosure provisions of Statement
158 effective December 31, 2006, with the projected benefit obligation reflected
in "Other current liabilities and accrued expenses" and "Other noncurrent
liabilities" on our Consolidated Balance Sheets. At December 31, 2008 and 2007,
the accumulated benefit obligation was $3.3 million and $3.0 million,
respectively. At December 31, 2008 and 2007, the projected benefit obligation
was $4.4 million and $4.0 million, respectively. Our estimated future benefit
payments are $0.5 million, $0.5 million, $0.5 million, $0.4 million and $0.5
million for 2009, 2010, 2011, 2012 and 2013, respectively,
60
and $2.2 million for the five-year period ending December 31, 2018. The
assumptions used to compute the 2008 projected benefit obligation included a
discount rate of 6.00% and a rate of compensation increase of 4.00%.
(R) COMMITMENTS AND CONTINGENCIES
Our principal lease commitments are for office space, operations
facilities and furniture and equipment. Some of these leases contain renewal
options. In connection with the sale of assets related to our Los Angeles
production facility, 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. See Note (C), Sale of Assets.
The following table sets forth rent expense, net (in thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/08 12/31/07 12/31/06
-------------------------------------------------------------------------------
Minimum rent expense $ 12,503 $ 15,147 $ 15,437
Sublease income (2,148) -- --
-------------------------------------------------------------------------------
Rent expense, net $ 10,355 $ 15,147 $ 15,437
===============================================================================
There was no contingent rent expense in 2008, 2007 and 2006.
The following table sets forth the minimum future commitments and total
minimum future sublease income at December 31, 2008, under operating leases with
initial or remaining noncancelable terms in excess of one year (in thousands):
Minimum
Lease Sublease
Commitments Income
-------------------------------------------------------------------------------
2009 $ 8,928 $ (2,577)
2010 9,220 (2,651)
2011 9,344 (2,728)
2012 9,277 (2,863)
2013 8,451 (3,054)
Later years 47,726 (11,327)
-------------------------------------------------------------------------------
Total $ 92,946 $ (25,200)
===============================================================================
We entered into a services agreement with BFI to provide us with certain
satellite transmission and other related services, the terms of which extend
through 2013. At December 31, 2008, the future commitments related to this
agreement were $5.7 million, $5.8 million, $4.9 million, $4.7 million, and $1.2
million for 2009, 2010, 2011, 2012 and 2013, respectively.
We had two international transponder service agreements, the terms of
which extend through 2009. At December 31, 2008, the future commitment related
to these two agreements was $1.9 million.
We had noncancelable obligations to license programming from other studios
of $4.8 million, $5.0 million and $3.3 million for 2009, 2010 and 2011,
respectively.
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 December
31, 2008, and no future earnouts are expected as we are exiting 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
61
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 of 2008, 2007
and 2006, 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 posted a bond in the amount of
approximately $9.4 million, which represented the amount of the judgment, costs
and estimated pre- and post-judgment interest. We 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. 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.
(S) STOCK-BASED COMPENSATION
We have stock plans for key employees and nonemployee directors, which
provide for the grant of nonqualified and incentive stock options and/or shares
of restricted stock units and other equity awards in our Class B stock. The
Compensation Committee of the Board of Directors, which is composed entirely of
independent nonemployee directors, administers all the plans. These plans are
designed to further our growth, development and financial success by providing
key employees with strong additional incentives to maximize long-term
stockholder value. The Compensation Committee believes that this objective can
be best achieved through assisting key employees to become owners of our stock,
which aligns their interests with our interests. As stockholders, key employees
will benefit directly from our growth, development and financial success. These
plans also enable us to attract and retain the services of those executives whom
we consider essential to our long-range success by providing these executives
with a competitive compensation package and an opportunity to become owners of
our stock. At December 31, 2008, we had 2,826,120 shares of our Class B stock
available for grant under these plans.
Stock options, exercisable for shares of our Class B stock, generally vest
ratably over a three- to four-year period from the grant date and expire 10
years from the grant date.
In 2008, we awarded restricted stock units, which provided for the
issuance of our Class B stock if certain performance-based goals were met. As of
December 31, 2008, the performance goals were not formally approved by the Board
of Directors. Pursuant to the requirements of Statement 123(R), we have measured
the fair value expense to be recognized during 2008 based upon the December 31,
2008 closing price of our Class B stock, resulting in expense of $0.1 million.
In the first quarter of 2009, the Board of Directors replaced the
performance-based criteria for the vesting of these grants with a time-based
vesting schedule. We completed the final measurement of fair value for the 2008
grants awarded and will record expense prospectively on this basis.
The 2006 grants of restricted stock units provide for the issuance of our
Class B stock if three-year cumulative operating income target thresholds are
met. The 2007 restricted stock unit grants provide for the issuance of our Class
B stock if two-year cumulative operating income target thresholds are met; the
2007 grants are also subject to an additional one-year service requirement for
the units to vest. The operating income minimum thresholds established for each
grant were not achieved, and the restricted stock units for those grants were
forfeited in 2009.
We also have an Employee Stock Purchase Plan, or ESPP, that provides
substantially all regular full- and part-time employees an opportunity to
purchase shares of our Class B stock through payroll deductions. The funds are
withheld and then used to acquire stock on the last trading day of each quarter,
based on that day's closing price less a 15% discount. ESPP expense is reflected
in "Selling and administrative expenses" on our Consolidated Statements of
Operations and the proceeds are reflected in "Proceeds from stock-based
compensation" on our Consolidated Statements of Cash Flows. At December 31,
2008, we had 37,750 shares of our Class B stock available for purchase under
this plan.
One of our stock plans pertaining to nonemployee directors also allows for
the issuance of our Class B stock as awards and payments for retainer, committee
and meeting fees.
62
Stock-Based Compensation Expense
The following table sets forth stock-based compensation expense related to
stock options, restricted stock units, our ESPP and other equity awards for
2008, 2007 and 2006 (in thousands, except per share amounts):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/08 12/31/07 12/31/06
-------------------------------------------------------------------------------
Stock options $ 1,439 $ 1,131 $ 3,141
Restricted stock units (407) 502 (1,282)
ESPP 21 29 29
Other equity awards 192 194 438
-------------------------------------------------------------------------------
Total $ 1,245 $ 1,856 $ 2,326
===============================================================================
Stock option and restricted stock option expense for 2008, 2007 and 2006
include adjustments reflecting actual versus estimated forfeitures.
At December 31, 2008, there was $0.8 million of unrecognized stock-based
compensation expense related to nonvested stock options, which will be
recognized over a weighted average period of 1.3 years.
At December 31, 2008, performance goals associated with the 2008
restricted stock unit grants were not yet established. Pursuant to the
requirements of Statement 123(R), we recorded $0.1 million of compensation
expense in 2008 related to these grants based on the fair value of the
underlying stock. Also, in 2008, we determined it was unlikely that the minimum
threshold associated with the 2007 grants would be met. Therefore, we reversed
$0.5 million of stock-based compensation expense that was recorded in 2007
related to these restricted stock unit grants. As of December 31, 2008, there
was $0.3 million of unrecognized stock-based compensation expense related to
nonvested restricted stock units, which will be recognized over 2.2 years.
In 2006, we determined that it was unlikely that the minimum threshold
associated with the 2004 restricted stock unit grants would be met. Therefore,
in 2006 we reversed $0.6 million and $0.7 million of stock-based compensation
expense that was recorded in 2005 and 2004, respectively, related to the 2004
grants.
Stock Options
We estimate the value of stock options on the date of grant using the
Lattice Binomial model, or Lattice model. The Lattice model requires extensive
analysis of actual exercise behavior data and a number of complex assumptions
including expected volatility, risk-free interest rate, expected dividends and
option cancellations.
The following table sets forth the assumptions used for the Lattice model:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/08 12/31/07 12/31/06
-------------------------------------------------------------------------------
Expected volatility 31% - 41% 25% - 41% 29% - 43%
Weighted average volatility 35% 34% 38%
Risk-free interest rate 1.95% - 5.10% 4.67% - 5.04% 4.32% - 5.16%
Expected dividends -- -- --
-------------------------------------------------------------------------------
The expected life of stock options represents the weighted average period
the stock options are expected to remain outstanding and is a derived output of
the Lattice model. The expected life of stock options is impacted by all of the
underlying assumptions and calibration of the Lattice model. The Lattice model
assumes that exercise behavior is a function of the option's remaining
contractual life and the extent to which the option's fair market value exceeds
the exercise price. The Lattice model estimates the probability of exercise as a
function of these two variables based upon the entire history of exercises and
vested cancellations on all past option grants.
The weighted average expected life for options granted during 2008, 2007
and 2006 using the Lattice model was 6.7 years, 6.3 years and 5.9 years,
respectively. The weighted average fair value per share for stock options
granted during 2008, 2007 and 2006 using the Lattice model was $2.45, $4.64 and
$6.03, respectively.
63
The following table sets forth stock option activity for the year ended
December 31, 2008:
Weighted
Average
Number of Exercise
Shares Price
--------------------------------------------------------------------------------
Outstanding at December 31, 2007 3,546,250 $ 15.60
Granted 171,000 5.72
Canceled (138,666) 13.27
-------------------------------------------------------------------
Outstanding at December 31, 2008 3,578,584 $ 15.22
================================================================================
During 2008 and 2007, there were no exercises of stock options. The
aggregate intrinsic value for options exercised during 2006 was $0.1 million.
At December 31, 2008, the weighted average remaining contractual lives of
options outstanding and options exercisable were 4.0 years and 3.4 years,
respectively. At December 31, 2008, the number of options exercisable was
3,105,759 and the weighted average exercise price per share of options
exercisable was $15.97.
There were no aggregate intrinsic values related to options outstanding
and options exercisable at December 31, 2008.
The following table sets forth the activity and balances of our stock
options not yet vested for the year ended December 31, 2008:
Weighted
Average
Number of Grant-Date
Shares Fair Value
--------------------------------------------------------------------------------
Outstanding at December 31, 2007 707,833 $ 5.61
Granted 171,000 2.45
Vested (365,509) 5.71
Canceled (40,499) 4.66
-------------------------------------------------------------------
Outstanding at December 31, 2008 472,825 $ 4.47
================================================================================
The total fair value of options vested in 2008, 2007 and 2006 was $2.1
million, $2.7 million and $3.0 million, respectively.
Restricted Stock Units
At December 31, 2008, we had 632,750 restricted stock units outstanding,
none of which were vested.
64
The following table sets forth the activity and balances of our restricted
stock units for the years ended December 31, 2008, 2007 and 2006:
Weighted
Average
Number of Grant-Date
Shares Fair Value
--------------------------------------------------------------------------------
Outstanding at December 31, 2005 319,000 $ 12.91
Granted 233,500 13.51
Forfeited (112,000) 14.23
Canceled (107,500) 13.34
------------------------------------------------------------------
Outstanding at December 31, 2006 333,000 12.75
Granted 250,625 10.61
Forfeited (121,000) 11.86
Canceled (28,750) 13.25
------------------------------------------------------------------
Outstanding at December 31, 2007 433,875 11.73
Granted 270,625 2.16
Canceled (71,750) 8.37
------------------------------------------------------------------
Outstanding at December 31, 2008 632,750 $ 8.02
================================================================================
In 2008, we issued 270,625 shares of restricted stock units at a weighted
average fair value per share of $2.16, and 25,000 of these shares were canceled
during the year.
Employee Stock Purchase Plan
Stock-based compensation expense related to our ESPP was $21,000 for 2008
and $29,000 for each of 2007 and 2006.
Other Equity Awards
We issued 33,674 shares of our Class B stock during 2008 related to other
equity awards. Stock-based compensation expense related to other equity awards
was $0.2 million, $0.2 million and $0.4 million for 2008, 2007 and 2006,
respectively.
Income Taxes
On November 10, 2005, the FASB issued Staff Position No. FAS 123(R)-3,
Transition Election Related to Accounting for Tax Effects of Share-Based Payment
Awards, or FSP FAS 123(R)-3. We have elected to adopt the alternative transition
method provided in FSP FAS 123(R)-3 for calculating the tax effects of
stock-based compensation pursuant to Statement 123(R). The alternative
transition method simplifies the calculation of the beginning balance of the
additional paid-in capital pool, or APIC pool, related to the tax effect of
employee stock-based compensation. This method also has subsequent impact on the
APIC pool and Consolidated Statements of Cash Flows relating to the tax effects
of employee stock-based compensation awards that are outstanding upon adoption
of Statement 123(R).
Under Statement 123(R), the income tax effects of share-based payments are
recognized for financial reporting purposes only if such awards would result in
deductions on our income tax returns. The settlement of share-based payments to
date that would have resulted in an excess tax benefit would have increased our
existing NOL carryforward. Under Statement 123(R), no excess tax benefits
resulting from the settlement of a share-based payment can result in a tax
deduction before realization of the tax benefit; i.e., the recognition of excess
tax benefits cannot be recorded until the excess benefit reduces current income
taxes payable. Additionally, as a result of our existing NOL carryforward
position, no excess tax benefits relating to share-based payments have been
recorded for the years ended December 31, 2008 and 2007.
65
(T) CONSOLIDATED STATEMENTS OF CASH FLOWS
The following table sets forth cash paid for interest and income taxes (in
thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/08 12/31/07 12/31/06
--------------------------------------------------------------------------------
Interest $ 4,864 $ 5,042 $ 5,308
Income taxes $ 2,343 $ 2,166 $ 1,976
--------------------------------------------------------------------------------
(U) SEGMENT INFORMATION
Our businesses are currently organized into the following three reportable
segments: Entertainment, Publishing and Licensing. Entertainment Group
operations include the production, marketing and sales of programming under the
Playboy, Spice and other brand names, which are distributed through various
channels, including domestic and international TV, Internet, wireless and
satellite radio. Also included is e-commerce, a business we completed
outsourcing in 2008. Publishing Group operations include the publication of
Playboy magazine, special editions and other domestic publishing businesses,
including books and calendars, and the licensing of international editions of
Playboy magazine. Licensing Group operations include the licensing of consumer
products carrying one or more of our trademarks and/or images, Playboy-branded
retail stores, multifaceted location-based entertainment venues and certain
revenue-generating marketing activities.
These reportable segments are based on the nature of the products offered.
Our chief operating decision maker evaluates performance and allocates resources
based on several factors, of which the primary financial measure is segment
operating results. The accounting policies of the reportable segments are the
same as those described in Note (A), Summary of Significant Accounting Policies.
66
The following table sets forth financial information by reportable segment
(in thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/08 12/31/07 12/31/06
-------------------------------------------------------------------------------
Net revenues (1)
Entertainment $ 167,263 $ 203,065 $ 201,068
Publishing 84,467 93,774 97,078
Licensing 40,417 43,001 32,996
-------------------------------------------------------------------------------
Total $ 292,147 $ 339,840 $ 331,142
===============================================================================
Income (loss) before income taxes (2)
Entertainment $ 12,301 $ 21,291 $ 23,299
Publishing (7,580) (7,568) (5,374)
Licensing 23,676 26,432 18,927
Corporate Administration and Promotion (23,872) (28,159) (25,768)
Restructuring expense (6,783) (445) (1,998)
Impairment charges (146,536) (1,508) --
Deferred subscription cost write-off (4,820) -- --
Provision for reserves (4,121) -- --
Gain on disposal -- -- 29
Nonoperating expenses (8,170) (3,190) (4,334)
-------------------------------------------------------------------------------
Total $ (165,905) $ 6,853 $ 4,781
===============================================================================
Depreciation and amortization (3), (4)
Entertainment $ 37,430 $ 39,453 $ 41,056
Publishing 368 297 190
Licensing 183 94 28
Corporate Administration and Promotion 1,477 1,354 944
-------------------------------------------------------------------------------
Total $ 39,458 $ 41,198 $ 42,218
===============================================================================
Dec. 31, Dec. 31,
2008 2007
-------------------------------------------------------------------------------
Identifiable assets (3), (5)
Entertainment $ 129,701 $ 287,940
Publishing 22,403 35,320
Licensing 7,601 11,560
Corporate Administration and Promotion 96,080 110,336
-------------------------------------------------------------------------------
Total $ 255,785 $ 445,156
===============================================================================
(1) Net revenues include revenues attributable to foreign countries of
approximately $94,003, $113,139 and $96,238 in 2008, 2007 and 2006,
respectively. Revenues from the U.K. were $26,373, $39,066 and $39,330 in
2008, 2007 and 2006, respectively. No other individual foreign country's
revenue was material. Revenues are generally attributed to countries based
on the location of customers, except licensing royalties for which
revenues are attributed based upon the location of licensees.
(2) Income before income taxes includes income attributable to foreign
countries of approximately $4,628, $6,617 and $3,664 in 2008, 2007 and
2006, respectively.
(3) The majority of our property and equipment and capital expenditures are
reflected in Corporate Administration and Promotion; depreciation,
however, is partially allocated to the reportable segments.
(4) Amounts include depreciation of property and equipment, amortization of
intangible assets and amortization of investments in entertainment
programming.
(5) Our long-lived assets located in foreign countries were not material.
(V) RELATED PARTY TRANSACTIONS
In 1971, we purchased the Playboy Mansion in Los Angeles, California,
where Hugh M. Hefner, our Editor-In-Chief and Chief Creative Officer, or Mr.
Hefner, lives. The Playboy Mansion is used for various corporate activities and
serves as a valuable location for motion picture and television production,
magazine photography and for online, advertising and sales events. It also
enhances our image, as we host many charitable and civic functions. The Playboy
Mansion generates substantial publicity and recognition, which increase public
awareness of us and our
67
products and services. Mr. Hefner pays us rent for that portion of the Playboy
Mansion used exclusively for his and his personal guests' residence as well as
the per-unit value of non-business meals, beverages and other benefits received
by him and his personal guests. The Playboy Mansion is included in our
Consolidated Balance Sheets at December 31, 2008 and 2007 at a net book value,
including all improvements and after accumulated depreciation, of $1.3 million
and $1.4 million, respectively. The operating expenses of the Playboy Mansion,
including depreciation and taxes, were $1.9 million, $2.8 million and $2.1
million for 2008, 2007 and 2006, respectively, net of rent received from Mr.
Hefner. We estimated the sum of the rent and other benefits payable for 2008 to
be $0.7 million, and Mr. Hefner paid that amount during 2008. The actual rent
and other benefits paid for 2007 and 2006 were $0.7 million and $0.8 million,
respectively.
Holly Madison, Bridget Marquardt and Kendra Wilkinson, the stars of The
Girls Next Door on E! Entertainment Television, resided in the mansion with Mr.
Hefner in 2008 and 2007. The value of rent, food and beverage and other personal
benefits for the use of the Playboy Mansion by Ms. Madison, Ms. Marquardt and
Ms. Wilkinson was charged to Alta Loma Entertainment, our production company.
The aggregate amount of these charges was $0.4 million in each of 2008 and 2007.
In addition, Ms. Madison, Ms. Marquardt and Ms. Wilkinson each receive payments
for services rendered on our behalf, including appearance fees.
(W) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth a summary of the unaudited quarterly
results of operations for 2008 and 2007 (in thousands, except share amounts):
Quarters Ended
-------------------------------------------
2008 Mar. 31 June 30 Sept. 30 Dec. 31
----------------------------------------------------------------------------------------------------
Net revenues $ 78,536 $ 73,378 $ 70,342 $ 69,891
Operating loss (519) (336) (2,739) (154,141)
Net loss (3,135) (2,108) (5,150) (145,662)
Basic and diluted loss per common share (1) (0.09) (0.06) (0.15) (4.37)
Common stock price:
Class A high 9.66 10.35 5.57 4.20
Class A low 7.56 5.20 4.00 1.72
Class B high 9.16 8.88 5.44 3.96
Class B low $ 7.76 $ 4.88 $ 3.56 $ 1.03
----------------------------------------------------------------------------------------------------
Quarters Ended
-------------------------------------------
2007 Mar. 31 June 30 Sept. 30 Dec. 31
----------------------------------------------------------------------------------------------------
Net revenues $ 85,415 $ 85,652 $ 82,858 $ 85,915
Operating income (loss) 3,885 3,853 4,137 (1,832)
Net income (loss) 1,474 1,911 2,595 (1,055)
Basic and diluted earnings (loss) per common share (1) 0.04 0.06 0.08 (0.03)
Common stock price:
Class A high 12.30 12.10 11.91 11.93
Class A low 9.80 9.46 8.92 8.33
Class B high 11.79 11.69 11.94 12.00
Class B low $ 9.90 $ 9.72 $ 10.15 $ 8.87
----------------------------------------------------------------------------------------------------
(1) Quarterly and year-to-date computations of per share amounts are made
independently; therefore, the sum of per share amounts for the quarters
may not equal per share amounts for the years.
The quarters ended March 31, 2008, September 30, 2008, December 31, 2008,
June 30, 2007 and December 31, 2007 included restructuring expense of $0.6
million, $2.2 million, $4.0 million, $0.1 million and $0.4 million, respectively
(see Note (D), Restructuring Expense). The quarters ended December 31, 2008,
June 30, 2008 and December 31, 2007 included $146.4 million ($131.2 million
after tax), $0.1 million and $1.5 million, respectively, of impairment charges
(see Note (C), Sale of Assets, and Note (O), Intangible Assets). The quarter
ended December 31, 2008 included a $4.8 million write-off of deferred
subscription costs. The quarter ended September 30, 2008 included provisions of
$2.9 million for a receivable and $1.2 million for archival material (see Note
(E), Provision for Reserves). The quarters ended December 31, 2008 and December
31, 2007 included impairment charges on investments of $2.0 million and $0.1
million, respectively.
68
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Playboy Enterprises, Inc.
We have audited the accompanying Consolidated Balance Sheets of Playboy
Enterprises, Inc. and subsidiaries, or the Company, as of December 31, 2008 and
2007, and the related Consolidated Statements of Operations, Consolidated
Statements of Shareholders' Equity, and Consolidated Statements of Cash Flows
for each of the three years in the period ended December 31, 2008. Our audits
also included the financial statement schedule listed in the index of Part IV,
Item 15. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company at
December 31, 2008 and 2007, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2008, in conformity with U.S. generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
As described in Note (F) to the Notes to Consolidated Financial
Statements, the Company adopted Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109 effective January 1, 2007.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the Company's internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control-Integrated Framework, issued by the Committee of
Sponsoring Organizations of the Treadway Commission, and our report dated March
12, 2009, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Chicago, Illinois
March 12, 2009
69
Item 9. Changes in and Disagreements with Accountants on Accounting and
--------------------------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 9A. Controls and Procedures
--------------------------------
(a) Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our
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(f) under the Securities Exchange Act of 1934, as
amended, or the Exchange Act) as of December 31, 2008. Based on that evaluation,
our Interim Chief Executive Officer and Chief Financial Officer have concluded
that, as of December 31, 2008, our disclosure controls and procedures are
effective.
(b) Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rules 13a-15(f) and 15d-15(f). Our internal control system was designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of the consolidated financial statements for external
purposes in accordance with generally accepted accounting principles.
Under the supervision of and with the participation of our management,
including our Interim Chief Executive Officer and Chief Financial Officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2008. In making this evaluation,
management used the criteria set forth in Internal Control-Integrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on our evaluation, our management believes that our internal control over
financial reporting is effective as of December 31, 2008.
Ernst & Young LLP, an independent registered public accounting firm, who
audited and reported on the consolidated financial statements included in this
Annual Report on Form 10-K, has issued an attestation report on the
effectiveness of the Company's internal control over financial reporting as
stated in their report which is included herein.
70
(c) Report of Independent Registered Public Accounting Firm on Internal
Control Over Financial Reporting
To the Board of Directors and Shareholders of Playboy Enterprises, Inc.
We have audited Playboy Enterprises, Inc.'s internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Playboy
Enterprises, Inc.'s management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in Management's Annual Report
on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on the company's internal control over financial reporting based on
our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, Playboy Enterprises, Inc. maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the Consolidated Balance
Sheets of Playboy Enterprises, Inc. as of December 31, 2008 and 2007, and the
related Consolidated Statements of Operations, Consolidated Statements of
Shareholders' Equity, and Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 2008 of Playboy Enterprises, Inc.
and our report dated March 12, 2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Chicago, Illinois
March 12, 2009
71
(d) Change in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial
reporting during the fiscal quarter ended December 31, 2008, that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Item 9B. Other Information
--------------------------
None.
72
PART III
Item 10. Directors, Executive Officers and Corporate Governance
---------------------------------------------------------------
The information required by Item 10 is included in our Proxy Statement (to
be filed) relating to the Annual Meeting of Stockholders to be held in May 2009,
which will be filed within 120 days after the close of our fiscal year ended
December 31, 2008, and is incorporated herein by reference, pursuant to General
Instruction G(3).
We have adopted a code of ethics that applies to our Chief Executive
Officer, Chief Financial Officer and Corporate Controller. That code is part of
our Code of Business Conduct, which is available free of charge through our
website, PlayboyEnterprises.com, and is available in print to any shareholder
who sends a request for a paper copy to: Investor Relations, Playboy
Enterprises, Inc., 680 North Lake Shore Drive, Chicago, Illinois 60611. We
intend to include on our website any amendment to, or waiver from, a provision
of the Code of Business Conduct that applies to our Chief Executive Officer,
Chief Financial Officer and Corporate Controller that relates to any element of
the code of ethics definition enumerated in Item 406(b) of Regulation S-K.
Item 11. Executive Compensation
-------------------------------
The information required by Item 11 is included in our Proxy Statement (to
be filed) relating to the Annual Meeting of Stockholders to be held in May 2009,
which will be filed within 120 days after the close of our fiscal year ended
December 31, 2008, and is incorporated herein by reference (excluding the Report
of the Compensation Committee and the Performance Graph), pursuant to General
Instruction G(3).
Item 12. Security Ownership of Certain Beneficial Owners and Management and
--------------------------------------------------------------------------------
Related Stockholder Matters
---------------------------
The following table sets forth information regarding outstanding options
and shares reserved for future issuance as of December 31, 2008:
Class B Common Stock
-------------------------------------------------------
Weighted
Average Exercise Number of Shares
Number of Options Price of Options Remaining for
Outstanding Outstanding Future Issuance
-----------------------------------------------------------------------------------------------------------
Total equity compensation plans approved by
security holders 3,578,584 $ 15.22 2,826,120
===========================================================================================================
The other information required by Item 12 is included in our Proxy
Statement (to be filed) relating to the Annual Meeting of Stockholders to be
held in May 2009, which will be filed within 120 days after the close of our
fiscal year ended December 31, 2008, and is incorporated herein by reference,
pursuant to General Instruction G(3).
Item 13. Certain Relationships and Related Transactions, and Director
--------------------------------------------------------------------------------
Independence
------------
The information required by Item 13 is included in our Proxy Statement (to
be filed) relating to the Annual Meeting of Stockholders to be held in May 2009,
which will be filed within 120 days after the close of our fiscal year ended
December 31, 2008, and is incorporated herein by reference, pursuant to General
Instruction G(3).
Item 14. Principal Accounting Fees and Services
-----------------------------------------------
The information required by Item 14 is included in our Proxy Statement (to
be filed) relating to the Annual Meeting of Stockholders to be held in May 2009,
which will be filed within 120 days after the close of our fiscal year ended
December 31, 2008, and is incorporated herein by reference, pursuant to General
Instruction G(3).
73
PART IV
Item 15. Exhibits and Financial Statement Schedules
---------------------------------------------------
FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
Page
----
(1) Financial Statements
Our Financial Statements and Supplementary Data following are
as set forth under Part II. Item 8. of this Annual Report on Form 10-K:
Consolidated Statements of Operations - Fiscal Years Ended December 31, 2008,
2007 and 2006 43
Consolidated Balance Sheets - December 31, 2008 and 2007 44
Consolidated Statements of Shareholders' Equity - Fiscal Years Ended
December 31, 2008, 2007 and 2006 45
Consolidated Statements of Cash Flows - Fiscal Years Ended December 31, 2008,
2007 and 2006 46
Notes to Consolidated Financial Statements 47
Report of Independent Registered Public Accounting Firm 69
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts 75
All other schedules have been omitted because they are not required or
applicable or because the required information is shown in the Consolidated
Financial Statements or notes thereto.
(3) Exhibits
See Exhibit Index, which appears at the end of this document and which is
incorporated herein by reference.
74
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
===============================================================================================================================
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------------------------------------------------------------------------------------------------------------------------------
Additions
------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
Description of Period Expenses Accounts Deductions of Period
------------------------------------------- ------------- ------------- ------------ ------------ -------------
Allowance deducted in the balance sheet
from the asset to which it applies:
Fiscal Year Ended December 31, 2008:
Allowance for doubtful accounts $ 3,627 $ 1,195 $ 703(1) $ 1,441(2) $ 4,084
============= ============= ============ ============ =============
Allowance for returns $ 21,898 $ -- $ 29,362(3) $ 31,427(4) $ 19,833
============= ============= ============ ============ =============
Deferred tax asset valuation allowance $ 74,818 $ 13,582(5) $ -- $ -- $ 88,400
============= ============= ============ ============ =============
Fiscal Year Ended December 31, 2007:
Allowance for doubtful accounts $ 3,688 $ 1,465 $ 823(1) $ 2,349(2) $ 3,627
============= ============= ============ ============ =============
Allowance for returns $ 24,652 $ -- $ 35,167(3) $ 37,921(4) $ 21,898
============= ============= ============ ============ =============
Deferred tax asset valuation allowance $ 77,180 $ -- $ -- $ 2,362(6) $ 74,818
============= ============= ============ ============ =============
Fiscal Year Ended December 31, 2006:
Allowance for doubtful accounts $ 3,883 $ 592 $ 144(1) $ 931(2) $ 3,688
============= ============= ============ ============ =============
Allowance for returns $ 27,777 $ 242 $ 41,322(3) $ 44,689(4) $ 24,652
============= ============= ============ ============ =============
Deferred tax asset valuation allowance $ 75,295 $ 1,327(5) $ 558(7) $ -- $ 77,180
============= ============= ============ ============ =============
Notes:
(1) Primarily represents provisions for unpaid subscriptions charged to net
revenues.
(2) Primarily represents uncollectible accounts written off less recoveries.
(3) Represents provisions charged to net revenues for estimated returns of
Playboy magazine, other domestic publishing products and domestic DVD
products.
(4) Represents settlements on provisions previously recorded.
(5) Represents noncash federal income tax expense related to increasing the
valuation allowance.
(6) Primarily represents noncash foreign income tax benefit related to
decreasing the valuation allowance.
(7) Represents noncash federal tax adjustment related to the adoption of FASB
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).
75
EXHIBIT INDEX
-------------
All agreements listed below may have additional exhibits, which are not
attached. All such exhibits are available upon request, provided the requesting
party shall pay a fee for copies of such exhibits, which fee shall be limited to
our reasonable expenses incurred in furnishing these documents.
Exhibit
Number Description
------- -----------
#2.1 Asset Purchase Agreement, dated June 29, 2001, by and among Playboy
Enterprises, Inc., Califa Entertainment Group, Inc., V.O.D., Inc.,
Steven Hirsch, Dewi James and William Asher (incorporated by
reference to Exhibit 2.1 from the Current Report on Form 8-K dated
July 6, 2001)
3.1 Certificate of Incorporation of Playboy Enterprises, Inc.
(incorporated by reference to Exhibit 3 from our quarterly report on
Form 10-Q for the quarter ended March 31, 2003)
3.2 Amended and Restated Bylaws of Playboy Enterprises, Inc.
(incorporated by reference to Exhibit 3.1 from the Current Report on
Form 8-K dated December 16, 2008)
3.3 Certificate of Amendment of the Amended and Restated Certificate of
Incorporation of Playboy Enterprises, Inc. (incorporated by reference
to Exhibit 3.2 from our quarterly report on Form 10-Q for the quarter
ended June 30, 2004, or the June 30, 2004 Form 10-Q)
4.1 Indenture, dated March 15, 2005, between Playboy Enterprises, Inc.
and LaSalle Bank National Association, as Trustee (incorporated by
reference to Exhibit 4.1 from the Current Report on Form 8-K dated
March 9, 2005, or the March 9, 2005 Form 8-K)
4.2 Form of 3.00% Convertible Senior Subordinated Notes due 2025
(included in Exhibit 4.1)
4.3 Registration Rights Agreement, dated March 15, 2005, among Playboy
Enterprises, Inc. and the Initial Purchasers named therein
(incorporated by reference to Exhibit 4.2 from the March 9, 2005 Form
8-K)
10.1 Playboy Magazine Printing and Binding Agreement
#a Printing and Binding Agreement, dated October 22, 1997, between
Playboy Enterprises, Inc. and Quad/Graphics, Inc. (incorporated
by reference to Exhibit 10.4 from our transition period report
on Form 10-K for the six months ended December 31, 1997, or the
Transition Period Form 10-K)
#b Amendment, dated March 3, 2000, to Printing and Binding
Agreement between Playboy Enterprises, Inc. and Quad/Graphics,
Inc. (incorporated by reference to Exhibit 10.1 from our
quarterly report on Form 10-Q for the quarter ended March 31,
2000)
c Second Amendment, dated March 2, 2004, to Printing and Binding
Agreement between Playboy Enterprises, Inc. and Quad/Graphics,
Inc. (incorporated by reference to Exhibit 10.1 from our annual
report on Form 10-K for the year ended December 31, 2003)
d Third Amendment, dated July 30, 2007, to Printing and Binding
Agreement between Playboy Enterprises, Inc. and Quad/Graphics,
Inc. (incorporated by reference to Exhibit 10.2 from our
quarterly report on Form 10-Q for the quarter ended September
30, 2007)
10.2 Playboy Magazine Distribution Agreement
a Distribution Agreement, dated January 1, 2006, between
Time/Warner Retail Sales & Marketing Inc. (f/k/a Warner
Publisher Services, Inc.) and Playboy Enterprises, Inc.
(incorporated by reference to Exhibit 10.10 from the March 31,
2006 Form 10-Q)
@#b Amendment, effective as of January 20, 2009, to Distribution
Agreement between Time/Warner Retail Sales & Marketing Inc.
(f/k/a Warner Publisher Services, Inc.) and Playboy Enterprises,
Inc.
10.3 Playboy Magazine Subscription Fulfillment Agreement
a Fulfillment Agreement, dated July 1, 1987, between
Communications Data Services, Inc. and Playboy Enterprises
International, Inc. (incorporated by reference to Exhibit
10.12(a) from our annual report on Form 10-K for the year ended
June 30, 1992, or the 1992 Form 10-K)
76
b Amendment, dated June 1, 1988, to Fulfillment Agreement between
Communications Data Services, Inc. and Playboy Enterprises
International, Inc. (incorporated by reference to Exhibit
10.12(b) from our annual report on Form 10-K for the year ended
June 30, 1993, or the 1993 Form 10-K)
c Amendment, dated July 1, 1990, to Fulfillment Agreement between
Communications Data Services, Inc. and Playboy Enterprises
International, Inc. (incorporated by reference to Exhibit
10.12(c) from our annual report on Form 10-K for the year ended
June 30, 1991, or the 1991 Form 10-K)
d Amendment, dated July 1, 1996, to Fulfillment Agreement between
Communications Data Services, Inc. and Playboy Enterprises
International, Inc. (incorporated by reference to Exhibit
10.5(d) from our annual report on Form 10-K for the year ended
June 30, 1996, or the 1996 Form 10-K)
#e Amendment, dated July 7, 1997, to Fulfillment Agreement between
Communications Data Services, Inc. and Playboy Enterprises
International, Inc. (incorporated by reference to Exhibit
10.6(e) from the Transition Period Form 10-K)
#f Amendment, dated July 1, 2001, to Fulfillment Agreement between
Communications Data Services, Inc. and Playboy Enterprises
International, Inc. (incorporated by reference to Exhibit 10.1
from our quarterly report on Form 10-Q for the quarter ended
September 30, 2001, or the September 30, 2001 Form 10-Q)
#g Amendment, dated March 9, 2006, to Fulfillment Agreement between
Communications Data Services, Inc. and Playboy Enterprises
International, Inc. (incorporated by reference to Exhibit 10.9
from our quarterly report on Form 10-Q for the quarter ended
March 31, 2006, or the March 31, 2006 Form 10-Q)
10.4 Playboy TV UK Limited and UK/BENELUX Limited
a Transponder Service Agreement, dated August 12, 1999, between
British Sky Broadcasting Limited and The Home Video Channel
Limited (incorporated by reference to Exhibit 10.4(e) from our
annual report on Form 10-K for the year ended December 31, 2002,
or the 2002 Form 10-K)
#b Contract for a Combined Compressed Uplink and Eurobird Space
Segment Service, dated May 12, 2003, between British
Telecommunications plc and Playboy TV UK Limited
c Contract Amendment Agreement (No. 1), dated May 12, 2003,
between British Telecommunications plc and Playboy TV UK Limited
#d Contract for a Combined Compressed Uplink and Eurobird Space
Segment Service, dated May 12, 2004, between British
Telecommunications plc and Playboy TV UK/BENELUX Limited
#e Contract Amendment Agreement (No. 1), dated November 30, 2004,
between British Telecommunications plc and Playboy TV UK/BENELUX
Limited
(items (b) through (e) incorporated by reference to Exhibits 10.6.1
through 10.7.2, respectively, from the March 31, 2006 Form 10-Q)
#10.5 Playboy TV-Latin America, LLC Agreements
a Third Amended and Restated Operating Agreement for Playboy
TV-Latin America, LLC, effective as of November 10, 2006, by and
between Playboy Entertainment Group, Inc. and Lifford
International Co. Ltd. (BVI)
b Amended and Restated Program Supply and Trademark License
Agreement, dated November 10, 2006, between Playboy
Entertainment Group, Inc. and Playboy TV-Latin America, LLC
(items (a) and (b) incorporated by reference to Exhibits 10.7(c) and
(d), respectively, from our annual report on Form 10-K for the year
ended December 31, 2006)
10.6 Transfer Agreement, dated December 23, 2002, by and among Playboy
Enterprises, Inc., Playboy Entertainment Group, Inc., Playboy
Enterprises International, Inc., Claxson Interactive Group Inc.,
Carlyle Investments LLC (in its own right and as a successor in
interest to Victoria Springs Investments Ltd.), Carlton Investments
LLC (in its own right and as a successor in interest to Victoria
Springs Investments Ltd.), Lifford International Co. Ltd. (BVI) and
Playboy TV International, LLC (incorporated by reference to Exhibit
2.1 from Current Report on Form 8-K dated December 23, 2002)
77
#10.7 Amended and Restated Affiliation and License Agreement regarding DBS
Satellite Exhibition of Programming, dated May 17, 2002, between
DirecTV, Inc. and Playboy Entertainment Group, Inc., Spice
Entertainment, Inc., Spice Hot Entertainment, Inc. and Spice Platinum
Entertainment, Inc. (incorporated by reference to Exhibit 10.1 from
our quarterly report on Form 10-Q for the quarter ended June 30,
2002, or the June 30, 2002 Form 10-Q)
#10.8 Affiliation Agreement with Time Warner Cable Inc.
a Affiliation Agreement, dated July 8, 2004, between Playboy
Entertainment Group, Inc., Spice Entertainment, Inc., Spice Hot
Entertainment, Inc., and Time Warner Cable Inc. (incorporated by
reference to Exhibit 10.1 from our quarterly report on Form 10-Q
for the quarter ended September 30, 2004, or the September 30,
2004 Form 10-Q)
b Amendment to Affiliation Agreement, effective as of March 31,
2008, between Playboy Entertainment Group, Inc., Spice
Entertainment, Inc., Spice Hot Entertainment, Inc., and Time
Warner Cable Inc. (incorporated by reference to Exhibit 10.1
from Amendment No. 1 to our quarterly report on Form 10-Q for
the quarter ended March 31, 2008, filed with the SEC on February
20, 2009, or the March 31, 2008 Form 10-Q/A)
10.9 Affiliation Agreement between Spice, Inc., and Satellite Services,
Inc.
a Affiliation Agreement, dated November 1, 1992, between Spice,
Inc., and Satellite Services, Inc.
b Amendment No. 1 to Affiliation Agreement, dated September 29,
1994, between Spice, Inc., and Satellite Services, Inc.
c Letter Agreement, dated July 18, 1997, amending the Affiliation
Agreement between Spice, Inc., and Satellite Services, Inc.
d Letter Agreement, dated December 18, 1997, amending the
Affiliation Agreement between Spice, Inc., and Satellite
Services, Inc.
e Amendment, effective as of September 26, 2005, to Affiliation
Agreement between Spice, Inc., and Satellite Services, Inc.
(items (a) through (e) incorporated by reference to Exhibits 10.1.1
through 10.1.5, respectively, from our quarterly report on Form 10-Q
for the quarter ended September 30, 2005, or the September 30, 2005
Form 10-Q)
10.10 Affiliation Agreement between Playboy Entertainment Group, Inc., and
Satellite Services, Inc.
a Affiliation Agreement, dated February 10, 1993, between Playboy
Entertainment Group, Inc., and Satellite Services, Inc.
b Amendment to Affiliation Agreement, effective as of September
26, 2005, between Playboy Entertainment Group, Inc., and
Satellite Services, Inc.
(items (a) and (b) incorporated by reference to Exhibits 10.2.1 and
10.2.2, respectively, from the September 30, 2005 Form 10-Q)
#10.11 Amended and Restated Agreement, dated August 1, 2007, by and between
Playboy Entertainment Group, Inc. and Spice Hot Entertainment, Inc.,
and DirecTV, Inc. (incorporated by reference to Exhibit 10.3 from
Amendment No. 1 to our quarterly report on Form 10-Q for the quarter
ended September 30, 2007 Form 10-Q, filed with the SEC on February
20, 2009, or the September 30, 2007 Form 10-Q/A)
#10.12 Services Agreement, dated April 1, 2008 between Broadcast Facilities,
Inc. and Playboy Entertainment Group, Inc. (incorporated by reference
to Exhibit 10.2 from Amendment No. 1 to our quarterly report on Form
10-Q for the quarter ended June 30, 2008, filed with the SEC on
February 20, 2009)
10.13 Content License, Marketing and Sales Agreement
#a Content License, Marketing and Sales Agreement, dated January
15, 2008, between Playboy.com, Inc. and eFashion Solutions, LLC
(incorporated by reference to Exhibit 10.2 to the March 31, 2008
Form 10-Q/A)
@#b First Amendment to the Content License, Marketing and Sales
Agreement, effective as of March 1, 2008, between Playboy.com,
Inc. and eFashion Solutions, LLC
78
#10.14 Agreement dated October 4, 2004, between Playboy Enterprises
International, Inc., Fiesta Palms LLC, N-M Ventures II, LLC and Nine
Group LLC (incorporated by reference to Exhibit 10.1 from our
quarterly report on Form 10-Q for the quarter ended June 30, 2007, or
the June 30, 2007 Form 10-Q)
10.15 Amended and Restated Credit Agreement, effective as of April 1, 2005,
or the Credit Agreement, among PEI Holdings, Inc., as borrower, and
Bank of America, N.A., as Agent and the other lenders from time to
time party thereto
a Credit Agreement (incorporated by reference to Exhibit 10.1 to
our quarterly report on Form 10-Q for the quarter ended March
31, 2005)
b First Amendment to the Credit Agreement, dated March 10, 2006,
among PEI Holding, Inc., as borrower, Bank of America, N.A., as
Agent, and the other Lenders Party thereto (incorporated by
reference to Exhibit 10.15(b) from the 2005 Form 10-K)
c Master Corporate Guaranty, dated March 11, 2003
d Security Agreement, dated March 11, 2003, between PEI Holdings,
Inc. and Bank of America, N.A., as Agent under the Credit
Agreement
e Security Agreement, dated March 11, 2003, among Playboy
Enterprises, Inc. and each of the domestic subsidiaries of PEI
Holdings, Inc. set forth on the signature pages thereto and Bank
of America, N.A., as Agent under the Credit Agreement
f Pledge Agreement, dated March 11, 2003, between PEI Holdings,
Inc. and Bank of America, N.A., as agent for the various
financial institutions from time to time parties to the Credit
Agreement
g Pledge Agreement, dated March 11, 2003, among Chelsea Court
Holdings LLC, as the limited partner in 1945/1947 Cedar River
C.V., Candlelight Management LLC, as the general partner in
1945/1947 Cedar River C.V., and Bank of America, N.A., as agent
for the various financial institutions from time to time parties
to the Credit Agreement
h Pledge Agreement, dated March 11, 2003, between Claridge
Organization LLC and Bank of America, N.A., as agent for the
various financial institutions from time to time parties to the
Credit Agreement
i Pledge Agreement, dated March 11, 2003, between Playboy Clubs
International, Inc. and Bank of America, N.A., as agent for the
various financial institutions from time to time parties to the
Credit Agreement
j Pledge Agreement, dated March 11, 2003, between CPV Productions,
Inc. and Bank of America, N.A., as agent for the various
financial institutions from time to time parties to the Credit
Agreement
k Pledge Agreement, dated March 11, 2003, between Playboy
Entertainment Group, Inc. and Bank of America, N.A., as agent
for the various financial institutions from time to time parties
to the Credit Agreement
l Pledge Agreement, dated March 11, 2003, between Playboy Gaming
International, Ltd. and Bank of America, N.A., as agent for the
various financial institutions from time to time parties to the
Credit Agreement
m Pledge Agreement, dated March 11, 2003, between Playboy
Entertainment Group, Inc. and Bank of America, N.A., as agent
for the various financial institutions from time to time parties
to the Credit Agreement
n Pledge Agreement, dated March 11, 2003, between Playboy
Enterprises, Inc. and Bank of America, N.A., as agent for the
various financial institutions from time to time parties to the
Credit Agreement
o Pledge Agreement, dated March 11, 2003, between Playboy
Enterprises International, Inc. and Bank of America, N.A., as
agent for the various financial institutions from time to time
parties to the Credit Agreement
p Pledge Agreement, dated March 11, 2003, between Planet Playboy,
Inc. and Bank of America, N.A., as agent for the various
financial institutions from time to time parties to the Credit
Agreement
q Pledge Agreement, dated March 11, 2003, between Spice
Entertainment, Inc. and Bank of America, N.A., as agent for the
various financial institutions from time to time parties to the
Credit Agreement
r Pledge Agreement, dated March 11, 2003, between Playboy TV
International, LLC and Bank of America, N.A., as agent for the
various financial institutions from time to time parties to the
Credit Agreement
79
s Pledge Agreement, dated March 11, 2003, between Playboy TV
International, LLC and Bank of America, N.A., as agent for the
various financial institutions from time to time parties to the
Credit Agreement
t Trademark Security Agreement, dated March 11, 2003, by
AdulTVision Communications, Inc., Alta Loma Entertainment, Inc.,
Lifestyle Brands, Ltd., Playboy Entertainment Group, Inc., Spice
Entertainment, Inc., Playboy Enterprises International, Inc. and
Spice Hot Entertainment, Inc. in favor of Bank of America, N.A.,
as Agent under the Credit Agreement
u Copyright Security Agreement, dated March 11, 2003, by After
Dark Video, Inc., Alta Loma Distribution, Inc., Alta Loma
Entertainment, Inc., Impulse Productions, Inc., Indigo
Entertainment, Inc., MH Pictures, Inc., Mystique Films, Inc.,
Playboy Entertainment Group, Inc., Precious Films, Inc. and
Women Productions, Inc. in favor of Bank of America, N.A., as
Agent under the Credit Agreement
v Lease Subordination Agreement, dated March 11, 2003, by and
among Hugh M. Hefner, Playboy Enterprises International, Inc.
and Bank of America, N.A., as Agent for various lenders
w Deed of Trust with Assignment of Rents, Security Agreement and
Fixture Filing, dated March 11, 2003, made and executed by
Playboy Enterprises International, Inc. in favor of Fidelity
National Title Insurance Company for the benefit of Bank of
America, N.A., as Agent for Lenders under the Credit Agreement
(items (c) through (w) incorporated by reference to Exhibits 10.9(b)
through (u), respectively, from the 2002 Form 10-K)
x Pledge Amendment, dated July 22, 2003, between Playboy
Entertainment Group, Inc. and Bank of America, N.A., as agent
for the various financial institutions from time to time parties
to the Credit Agreement (incorporated by reference to Exhibit
10.9(i)-1 from our May 19, 2003 Form S-4)
y First Amendment to Deed of Trust With Assignment of Rents,
Security Agreement and Fixture Filing, dated September 15, 2004,
made and executed between Playboy Enterprises International,
Inc. and Bank of America, N.A., as Agent (incorporated by
reference to Exhibit 10.4 from the September 30, 2004 Form 10-Q)
z Second Amendment to the Credit Agreement, or the Second
Amendment, dated April 27, 2006
aa Reaffirmation of Guaranty, dated April 27, 2006, to the Credit
Agreement, by each of the Guarantors, pursuant to the Second
Amendment
bb Third Amendment to the Credit Agreement, dated May 15, 2006
cc Pledge Amendment, dated May 15, 2006, from Playboy Enterprises
International, Inc.
dd Pledge Amendment, dated May 15, 2006, from Playboy Entertainment
Group, Inc.
ee Joinder to the Master Corporate Guaranty, dated May 15, 2006, by
Playboy.com, Inc., Playboy.com Internet Gaming, Inc.,
Playboy.com Racing, Inc., SpiceTV.com, Inc., and CJI Holdings,
Inc., and accepted by Bank of America, N.A., as agent for
Lenders
ff Joinder to Security Agreement, dated May 15, 2006, by
Playboy.com, Inc., Playboy.com Internet Gaming, Inc.,
Playboy.com Racing, Inc., SpiceTV.com, Inc. and CJI Holdings,
Inc., and accepted by Bank of America, N.A., as agent for the
Lenders
gg Pledge Agreement, dated May 15, 2006, between Playboy.com, Inc.
and Bank of America, N.A., as agent for the Lenders
hh Pledge Agreement, dated May 15, 2006, between Playboy.com
Internet Gaming Inc. and Bank of America, N.A., as agent for the
Lenders
ii Trademark Security Agreement, dated May 15, 2006, by
Playboy.com, Inc. in favor of Bank of America, N.A., as agent
for the Lenders
jj Copyright Security Agreement, dated May 15, 2006, by
Playboy.com, Inc. in favor of Bank of America, N.A., as agent
for the Lenders
(items (z) through (jj) incorporated by reference to Exhibits 10.1.1
through 10.2.9, respectively, from our quarterly report on Form 10-Q
for the quarter ended June 30, 2006)
kk Fourth Amendment to the Credit Agreement, or the Fourth
Amendment, dated July 21, 2006
ll Reaffirmation of Guaranty, dated July 21, 2006, by each of the
Guarantors, pursuant to the Fourth Amendment
mm Fifth Amendment to the Credit Agreement, or the Fifth Amendment,
dated September 28, 2006
80
nn Reaffirmation of Guaranty, dated September 28, 2006, by each of
the Guarantors, pursuant to the Fifth Amendment
oo Joinder and Amendment No. 1 to Master Corporate Guaranty, dated
September 28, 2006, by Playboy Enterprises, Inc., Playboy
Enterprises International, Inc., Spice Hot Entertainment, Inc.
and Spice Platinum Entertainment, Inc., and accepted by Bank of
America, N.A., as agent for the Lenders
(items (kk) through (oo) incorporated by reference to Exhibits 10.1.1
through 10.2.3, respectively, from the September 30, 2006 Form 10-Q)
pp Sixth Amendment to the Credit Agreement, dated September 28,
2007 (incorporated by reference to Exhibit 10.1 to the September
30, 2007 Form 10-Q/A)
@qq Seventh Amendment to the Credit Agreement, dated February 17,
2009
10.16 Exchange Agreement, dated March 11, 2003, among Hugh M. Hefner,
Playboy.com, Inc., PEI Holdings, Inc. and Playboy Enterprises, Inc.
(incorporated by reference to Exhibit 4.2 from the 2002 Form 10-K)
10.17 Playboy Mansion West Lease Agreement, as amended, between Playboy
Enterprises, Inc. and Hugh M. Hefner
a Letter of Interpretation of Lease
b Agreement of Lease
(items (a) and (b) incorporated by reference to Exhibits 10.3(a) and
(b), respectively, from the 1991 Form 10-K)
c Amendment to Lease Agreement, dated January 12, 1998
(incorporated by reference to Exhibit 10.2 from our quarterly
report on Form 10-Q for the quarter ended March 31, 1998, or the
March 31, 1998 Form 10-Q)
d Lease Subordination Agreement, dated March 11, 2003, by and
among Hugh M. Hefner, Playboy Enterprises International, Inc.
and Bank of America, N.A., as Agent for various lenders (see
Exhibit 10.22(v)) (incorporated by reference to Exhibit 10.9(t)
from the 2002 Form 10-K)
10.18 Los Angeles Office Lease Documents
a Agreement of Lease, dated April 23, 2002, between Los Angeles
Media Tech Center, LLC and Playboy Enterprises, Inc.
(incorporated by reference to Exhibit 10.4 from the June 30,
2002 Form 10-Q)
b First Amendment to Agreement of Lease, dated June 28, 2002
(incorporated by reference to Exhibit 10.4 from our quarterly
report on Form 10-Q for the quarter ended September 30, 2002, or
the September 30, 2002 Form 10-Q)
c Second Amendment to Agreement of Lease, dated September 23, 2004
(incorporated by reference to Exhibit 10.2 from the September
30, 2004 Form 10-Q)
10.19 Chicago Office Lease Documents
a Office Lease, dated April 7, 1988, by and between Playboy
Enterprises, Inc. and LaSalle National Bank as Trustee under
Trust No. 112912 (incorporated by reference to Exhibit 10.7(a)
from the 1993 Form 10-K)
b First Amendment to Office Lease, dated October 26, 1989
(incorporated by reference to Exhibit 10.15(b) from our annual
report on Form 10-K for the year ended June 30, 1995, or the
1995 Form 10-K)
c Second Amendment to Office Lease, dated June 1, 1992
(incorporated by reference to Exhibit 10.1 from our quarterly
report on Form 10-Q for the quarter ended December 31, 1992)
d Third Amendment to Office Lease, dated August 30, 1993
(incorporated by reference to Exhibit 10.15(d) from the 1995
Form 10-K)
e Fourth Amendment to Office Lease, dated August 6, 1996
(incorporated by reference to Exhibit 10.20(e) from the 1996
Form 10-K)
f Fifth Amendment to Office Lease, dated March 19, 1998
(incorporated by reference to Exhibit 10.3 from the March 31,
1998 Form 10-Q)
81
g Sixth Amendment to Office Lease, effective as of May 1, 2006
(incorporated by reference to Exhibit 10.9.1 from the September
30, 2006 Form 10-Q)
10.20 New York Office Lease Documents
a Agreement of Lease, dated August 11, 1992, between Playboy
Enterprises, Inc. and Lexington Building Co. (incorporated by
reference to Exhibit 10.9(b) from the 1992 Form 10-K)
b Second Amendment to Agreement of Lease, dated June 28, 2004
(incorporated by reference to Exhibit 10.4 from the June 30,
2004 Form 10-Q)
10.21 Los Angeles Studio Facility Lease Documents
a Agreement of Lease, dated September 20, 2001, between Kingston
Andrita LLC and Playboy Entertainment Group, Inc. (incorporated
by reference to Exhibit 10.3(a) from the September 30, 2001 Form
10-Q)
b First Amendment to Agreement of Lease, dated May 15, 2002
(incorporated by reference to Exhibit 10.3 from the June 30,
2002 Form 10-Q)
c Second Amendment to Agreement of Lease, dated July 23, 2002
(incorporated by reference to Exhibit 10.6 from the September
30, 2002 Form 10-Q)
d Third Amendment to Agreement of Lease, dated October 31, 2002
e Fourth Amendment to Agreement of Lease, dated December 2, 2002
f Fifth Amendment to Agreement of Lease, dated December 31, 2002
g Sixth Amendment to Agreement of Lease, dated January 31, 2003
(items (d) through (g) incorporated by reference to Exhibits 10.17(d)
through (g), respectively, from the 2002 Form 10-K)
h Guaranty, dated September 20, 2001, by Playboy Entertainment
Group, Inc. in favor of Kingston Andrita LLC (incorporated by
reference to Exhibit 10.3(c) from the September 30, 2001 Form
10-Q)
i Seventh Amendment to Agreement of Lease, dated July 23, 2003
(incorporated by reference to Exhibit 10.1 from our quarterly
report on Form 10-Q for the quarter ended September 30, 2003)
#j Sublease Agreement, dated April 1, 2008, between Broadcast
Facilities, Inc. and Playboy Entertainment Group, Inc.
(incorporated by reference to Exhibit 10.1 from our quarterly
report on Form 10-Q for the quarter ended June 30, 2008)
*10.22 Selected Company Remunerative Plans
a Executive Protection Program, dated March 1, 1990 (incorporated
by reference to Exhibit 10.18(c) from the 1995 Form 10-K)
b Amended and Restated Playboy Enterprises, Inc. Deferred
Compensation Plan, effective as of January 1, 2005 (incorporated
by reference to Exhibit 10.2(a) from our quarterly report on
Form 10-Q for the quarter ended June 30, 1998, or the June 30,
1998 Form 10-Q)
c First Amendment to the Playboy Enterprises, Inc. Deferred
Compensation Plan, as amended and restated January 1, 2005
(incorporated by reference to Exhibit 10.1 from our quarterly
report on Form 10-Q for the quarter ended September 30, 2008, or
the September 30, 2008 Form 10-Q)
@d Second Amendment to the Playboy Enterprises, Inc. Deferred
Compensation Plan, as amended and restated January 1, 2005
@e Third Amendment to the Playboy Enterprises, Inc. Deferred
Compensation Plan, as amended and restated January 1, 2005
f Amended and Restated Playboy Enterprises, Inc. Board of
Directors' Deferred Compensation Plan, effective as of January
1, 2005 (incorporated by reference to Exhibit 10.2(b) from the
June 30, 1998 Form 10-Q)
g First Amendment to the Playboy Enterprises, Inc. Board of
Directors' Deferred Compensation Plan, as amended and restated
January 1, 2005 (incorporated by reference to Exhibit 10.2 from
the September 30, 2008 Form 10-Q)
@h Second Amendment to the Playboy Enterprises, Inc. Board of
Directors' Deferred Compensation Plan, as amended and restated
January 1, 2005
@i Third Amendment to the Playboy Enterprises, Inc. Board of
Directors' Deferred Compensation Plan, as amended and restated
January 1, 2005
82
@j Amended and Restated Playboy Enterprises, Inc. Employee
Investment Savings Plan
*10.23 1991 Directors' Plan
a First Amended and Restated Playboy Enterprises, Inc. 1991
Non-Qualified Stock Option Plan for Non-Employee Directors,
effective as of September 17, 2008 (incorporated by reference to
Exhibit 10.3 from the September 30, 2008 Form 10-Q)
b Playboy Enterprises, Inc. 1991 Non-Qualified Stock Option
Agreement for Non-Employee Directors (incorporated by reference
to Exhibit 10.4(nn) from the 1991 Form 10-K)
*10.24 1995 Stock Incentive Plan
a Third Amended and Restated Playboy Enterprises, Inc. 1995 Stock
Incentive Plan, as amended and restated as of September 17, 2008
(incorporated by reference to Exhibit 10.4 from the September
30, 2008 Form 10-Q)
b Form of Non-Qualified Stock Option Agreement for Non-Qualified
Stock Options which may be granted under the Plan
c Form of Incentive Stock Option Agreement for Incentive Stock
Options which may be granted under the Plan
d Form of Restricted Stock Agreement for Restricted Stock issued
under the Plan
(items (b), (c) and (d) incorporated by reference to Exhibits 4.3,
4.4 and 4.5, respectively, from our Registration Statement No.
33-58145 on Form S-8 dated March 20, 1995)
e Form of Section 162(m) Restricted Stock Agreement for Section
162(m) Restricted Stock issued under the Plan (incorporated by
reference to Exhibit 10.1(e) from our annual report on Form 10-K
for the year ended June 30, 1997)
*10.25 1997 Directors' Plan
a Second Amended and Restated 1997 Equity Plan for Non-Employee
Directors of Playboy Enterprises, Inc., as amended and restated
as of September 17, 2008 (incorporated by reference to Exhibit
10.5 from the September 30, 2008 Form 10-Q)
b Form of Restricted Stock Agreement for Restricted Stock issued
under the Plan (incorporated by reference to Exhibit 10.1(b)
from our quarterly report on Form 10-Q for the quarter ended
September 30, 1997)
@c First Amendment to the Second Amended and Restated 1997 Equity
Plan for Non-Employee Directors of Playboy Enterprises, Inc., as
amended and restated as of September 17, 2008
*10.26 Playboy Enterprises, Inc. Employee Stock Purchase Plan, as amended
and restated (incorporated by reference to Exhibit 10.4 from the June
30, 2007 Form 10-Q)
*10.27 Selected Employment, Termination and Other Agreements
@a Form of Severance Agreement, dated September 1, 2008, between
Playboy Enterprises, Inc. and each of Linda Havard and Alex
Vaickus
@b Form of Severance Agreement, dated September 1, 2008, between
Playboy Enterprises, Inc. and each of Martha Lindeman, Richard
Rosenzweig and Howard Shapiro
@c Amended and Restated Employment Agreement, dated September 1,
2008, between Playboy Enterprises, Inc. and Robert Meyers
@#d Separation Agreement, dated February 9, 2009, between Playboy
Enterprises, Inc. and Christie Hefner
@21 Subsidiaries
@23 Consent of Ernst & Young LLP
@31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
83
@31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
@32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
----------
* Indicates management compensation plan
# Certain information omitted pursuant to a request for confidential
treatment filed separately with and granted by the SEC
@ Filed herewith
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PLAYBOY ENTERPRISES, INC.
March 13, 2009 By /s/ Linda Havard
-----------------------------
Linda G. Havard
Executive Vice President
and Chief Financial Officer
(Authorized Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Jerome Kern March 13, 2009
----------------------------------------
Jerome Kern
Interim Chairman of the Board,
Interim Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Richard S. Rosenzweig March 13, 2009
----------------------------------------
Richard S. Rosenzweig
Executive Vice President and Director
/s/ Dennis S. Bookshester March 13, 2009
----------------------------------------
Dennis S. Bookshester
Director
/s/ David I. Chemerow March 13, 2009
----------------------------------------
David I. Chemerow
Director
/s/ Christie Hefner March 13, 2009
----------------------------------------
Christie Hefner
Director
/s/ Charles Hirschhorn March 13, 2009
----------------------------------------
Charles Hirschhorn
Director
/s/ Russell I. Pillar March 13, 2009
----------------------------------------
Russell I. Pillar
Director
/s/ Sol Rosenthal March 13, 2009
----------------------------------------
Sol Rosenthal
Director
/s/ Linda Havard March 13, 2009
----------------------------------------
Linda G. Havard
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
85