UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2007
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 001-14790
Playboy Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-4249478
(State of incorporation) (I.R.S. Employer Identification Number)
680 North Lake Shore Drive
Chicago, IL 60611
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 751-8000
--------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes |_| No |X|
At October 31, 2007, there were 4,864,102 shares of Class A common stock and
28,396,416 shares of Class B common stock outstanding.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements,"
including statements in Part I, Item 2. "Management's Discussion and Analysis of
Financial Condition and Results of Operations," as to expectations, beliefs,
plans, objectives and future financial performance, and assumptions underlying
or concerning the foregoing. We use words such as "may," "will," "would,"
"could," "should," "believes," "estimates," "projects," "potential," "expects,"
"plans," "anticipates," "intends," "continues" and other similar terminology.
These forward-looking statements involve known and unknown risks, uncertainties
and other factors, which could cause our actual results, performance or outcomes
to differ materially from those expressed or implied in the forward-looking
statements. We want to caution you not to place undue reliance on any
forward-looking statements. We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
The following are some of the important factors that could cause our
actual results, performance or outcomes to differ materially from those
discussed in the forward-looking statements:
(1) Foreign, national, state and local government regulations, actions or
initiatives, including:
(a) attempts to limit or otherwise regulate the sale, distribution or
transmission of adult-oriented materials, including print,
television, video, Internet and wireless materials,
(b) limitations on the advertisement of tobacco, alcohol and other
products which are important sources of advertising revenue for us,
or
(c) substantive changes in postal regulations which could increase our
postage and distribution costs;
(2) Risks associated with our foreign operations, including market acceptance
and demand for our products and the products of our licensees and
partners;
(3) Our ability to manage the risk associated with our exposure to foreign
currency exchange rate fluctuations;
(4) Changes in general economic conditions, consumer spending habits, viewing
patterns, fashion trends or the retail sales environment which, in each
case, could reduce demand for our programming and products and impact our
advertising revenues;
(5) Our ability to protect our trademarks, copyrights and other intellectual
property;
(6) Risks as a distributor of media content, including our becoming subject to
claims for defamation, invasion of privacy, negligence, copyright, patent
or trademark infringement and other claims based on the nature and content
of the materials we distribute;
(7) The risk our outstanding litigation could result in settlements or
judgments which are material to us;
(8) Dilution from any potential issuance of common stock or convertible debt
in connection with financings or acquisition activities;
(9) Competition for advertisers from other publications, media or online
providers or any decrease in spending by advertisers, either generally or
with respect to the adult male market;
(10) Competition in the television, men's magazine, Internet, wireless, new
electronic media and product licensing markets;
(11) Attempts by consumers or private advocacy groups to exclude our
programming or other products from distribution;
(12) Our television, Internet and wireless businesses' reliance on third
parties for technology and distribution, and any changes in that
technology and/or unforeseen delays in its implementation which might
affect our plans and assumptions;
(13) Risks associated with losing access to transponders or technical failure
of transponders or other transmitting or playback equipment that is beyond
our control and competition for channel space on linear television
platforms or video-on-demand platforms;
(14) Failure to maintain our agreements with multiple system operators, or
MSOs, and direct-to-home, or DTH, operators on favorable terms, as well as
any decline in our access to, and acceptance by, DTH and/or cable systems
and the possible resulting deterioration in the terms, cancellation of fee
arrangements or pressure on splits with operators of these systems;
(15) Risks that we may not realize the expected increased sales and profits and
other benefits from acquisitions;
(16) Any charges or costs we incur in connection with restructuring measures we
may take in the future;
(17) Risks associated with the financial condition of Claxson Interactive
Group, Inc., our Playboy TV-Latin America, LLC, joint venture partner;
(18) Increases in paper, printing or postage costs;
(19) Risks associated with certain minimum revenue amounts under certain
television distribution agreements;
2
(20) Effects of the national consolidation of the single-copy magazine
distribution system;
(21) Effects of the national consolidation of television distribution companies
(e.g., cable MSOs, satellite platforms and telecommunications companies);
and
(22) Risks associated with the viability of our subscription, on demand,
e-commerce and ad-supported Internet models.
For a detailed discussion of these and other factors that may affect our
performance, see Part I, Item 1A. "Risk Factors" in our Annual Report on Form
10-K for the year ended December 31, 2006.
3
PLAYBOY ENTERPRISES, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations and Comprehensive
Income for the Quarters Ended September 30, 2007 and 2006 (Unaudited) 5
Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss) for the Nine Months Ended September 30, 2007 and 2006 (Unaudited) 6
Condensed Consolidated Balance Sheets at September 30, 2007 (Unaudited)
and December 31, 2006 7
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2007 and 2006 (Unaudited) 8
Notes to Condensed Consolidated Financial Statements (Unaudited) 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 1A. Risk Factors 21
Item 6. Exhibits 22
4
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLAYBOY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
for the Quarters Ended September 30 (Unaudited)
(In thousands, except per share amounts)
2007 2006
--------------------------------------------------------------------------------
Net revenues $ 82,858 $ 82,297
--------------------------------------------------------------------------------
Costs and expenses
Cost of sales (61,409) (63,097)
Selling and administrative expenses (17,312) (15,366)
Restructuring expenses -- (118)
--------------------------------------------------------------------------------
Total costs and expenses (78,721) (78,581)
--------------------------------------------------------------------------------
Operating income 4,137 3,716
--------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 568 527
Interest expense (1,170) (1,471)
Amortization of deferred financing fees (134) (134)
Other, net 163 (165)
--------------------------------------------------------------------------------
Total nonoperating expense (573) (1,243)
--------------------------------------------------------------------------------
Income before income taxes 3,564 2,473
Income tax expense (969) (1,336)
--------------------------------------------------------------------------------
Net income 2,595 1,137
================================================================================
Other comprehensive income (loss)
Unrealized gain on marketable securities 148 107
Unrealized gain (loss) on derivatives (131) 74
Foreign currency translation gain (loss) 83 (131)
--------------------------------------------------------------------------------
Total other comprehensive income 100 50
--------------------------------------------------------------------------------
Comprehensive income $ 2,695 $ 1,187
================================================================================
Weighted average number of common shares outstanding
Basic 33,251 33,169
================================================================================
Diluted 33,301 33,173
================================================================================
Basic and diluted earnings per common share $ 0.08 $ 0.03
================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
PLAYBOY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
for the Nine Months Ended September 30 (Unaudited)
(In thousands, except per share amounts)
2007 2006
--------------------------------------------------------------------------------
Net revenues $ 253,925 $ 244,894
--------------------------------------------------------------------------------
Costs and expenses
Cost of sales (194,888) (191,916)
Selling and administrative expenses (47,052) (44,960)
Restructuring expenses (110) (2,024)
--------------------------------------------------------------------------------
Total costs and expenses (242,050) (238,900)
--------------------------------------------------------------------------------
Gain on disposal -- 29
--------------------------------------------------------------------------------
Operating income 11,875 6,023
--------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 1,666 1,736
Interest expense (3,736) (4,180)
Amortization of deferred financing fees (402) (402)
Other, net (144) (311)
--------------------------------------------------------------------------------
Total nonoperating expense (2,616) (3,157)
--------------------------------------------------------------------------------
Income before income taxes 9,259 2,866
Income tax expense (3,279) (4,247)
--------------------------------------------------------------------------------
Net income (loss) 5,980 (1,381)
================================================================================
Other comprehensive income (loss)
Unrealized gain on marketable securities 301 116
Unrealized gain (loss) on derivatives (95) 13
Foreign currency translation gain (loss) (202) 286
--------------------------------------------------------------------------------
Total other comprehensive income 4 415
--------------------------------------------------------------------------------
Comprehensive income (loss) $ 5,984 $ (966)
================================================================================
Weighted average number of common shares outstanding
Basic 33,241 33,156
================================================================================
Diluted 33,281 33,156
================================================================================
Basic and diluted earnings (loss) per common share $ 0.18 $ (0.04)
================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
6
PLAYBOY ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
September 30, December 31,
2007 2006
--------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 26,203 $ 26,748
Marketable securities and short-term investments 12,381 9,000
Receivables, net of allowance for doubtful
accounts of $3,923 and $3,688, respectively 45,929 47,728
Receivables from related parties 1,818 1,791
Inventories 13,293 12,599
Deferred subscription acquisition costs 9,314 9,931
Other current assets 10,801 9,426
--------------------------------------------------------------------------------
Total current assets 119,739 117,223
--------------------------------------------------------------------------------
Long-term investments 6,523 --
Property and equipment, net 20,561 17,407
Long-term receivables 2,502 4,665
Programming costs, net 54,634 55,183
Goodwill 133,551 132,974
Trademarks 65,038 63,794
Distribution agreements, net of accumulated
amortization of $4,461 and $3,435, respectively 28,679 29,705
Other noncurrent assets 13,531 14,832
--------------------------------------------------------------------------------
Total assets $ 444,758 $ 435,783
================================================================================
Liabilities
Acquisition liabilities $ 5,588 $ 10,773
Accounts payable 35,423 28,846
Accrued salaries, wages and employee benefits 7,543 4,896
Deferred revenues 44,267 45,050
Accrued litigation settlement -- 1,800
Other liabilities and accrued expenses 13,313 14,124
--------------------------------------------------------------------------------
Total current liabilities 106,134 105,489
--------------------------------------------------------------------------------
Financing obligations 115,000 115,000
Acquisition liabilities 7,994 9,692
Net deferred tax liabilities 19,679 18,422
Other noncurrent liabilities 25,075 23,552
--------------------------------------------------------------------------------
Total liabilities 273,882 272,155
--------------------------------------------------------------------------------
Shareholders' equity
Common stock, $0.01 par value
Class A voting - 7,500,000 shares authorized;
4,864,102 issued 49 49
Class B nonvoting - 75,000,000 shares authorized;
28,773,588 and 28,743,914 issued, respectively 288 287
Capital in excess of par value 229,038 227,775
Accumulated deficit (51,711) (57,691)
Treasury stock, at cost, 381,971 shares (5,000) (5,000)
Accumulated other comprehensive loss (1,788) (1,792)
--------------------------------------------------------------------------------
Total shareholders' equity 170,876 163,628
--------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 444,758 $ 435,783
================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
7
PLAYBOY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Nine Months Ended September 30 (Unaudited)
(In thousands)
2007 2006
--------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) $ 5,980 $ (1,381)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation of property and equipment 3,501 2,816
Amortization of intangible assets 1,746 1,294
Amortization of investments in entertainment
programming 25,462 26,768
Amortization of deferred financing fees 402 402
Deferred income taxes 1,257 2,885
Net change in operating assets and liabilities 12,605 (2,587)
Investments in entertainment programming (26,671) (28,264)
Litigation settlement (1,800) (1,000)
Stock-based compensation 1,103 3,235
Other, net (69) 987
--------------------------------------------------------------------------------
Net cash provided by operating activities 23,516 5,155
--------------------------------------------------------------------------------
Cash flows from investing activities
Payments for acquisitions (105) (7,761)
Purchases of investments (9,828) (485)
Proceeds from sales of investments -- 11,000
Additions to property and equipment (6,643) (4,633)
--------------------------------------------------------------------------------
Net cash used for investing activities (16,576) (1,879)
--------------------------------------------------------------------------------
Cash flows from financing activities
Payments of deferred financing fees (123) --
Payments of acquisition liabilities (7,919) (8,296)
Proceeds from stock-based compensation 121 265
--------------------------------------------------------------------------------
Net cash used for financing activities (7,921) (8,031)
--------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash
equivalents 436 370
Net decrease in cash and cash equivalents (545) (4,385)
--------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 26,748 26,089
--------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 26,203 $ 21,704
================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(A) BASIS OF PREPARATION
The financial information included in these financial statements is
unaudited but, in the opinion of management, reflects all normal recurring and
other adjustments necessary for a fair presentation of the results for the
interim periods. The interim results of operations and cash flows are not
necessarily indicative of those results and cash flows for the entire year.
These financial statements should be read in conjunction with the financial
statements and notes to the financial statements contained in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2006. Certain amounts
reported for the prior periods have been reclassified to conform to the current
year's presentation.
(B) RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2007, the Financial Accounting Standards Board, or the FASB,
issued Statement of Financial Accounting Standards No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities, including an amendment of
FASB Statement No. 115, or Statement 159. Statement 159 allows entities to
voluntarily elect to measure many financial assets and financial liabilities at
fair value. The election is made on an instrument-by-instrument basis and is
irrevocable. We are required to adopt Statement 159 at the beginning of 2008.
The impact of the adoption of Statement 159 will be dependent upon the extent to
which we elect to measure eligible items at fair value. We are currently
evaluating the impact, if any, of adopting Statement 159 on our future results
of operations and financial condition.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and
132(R), or Statement 158. Statement 158 requires an entity to (a) recognize in
its statement of financial position an asset or an obligation for a defined
benefit postretirement plan's funded status, (b) measure a defined benefit
postretirement plan's assets and obligations that determine its funded status as
of the end of the employer's fiscal year and (c) recognize changes in the funded
status of a defined benefit postretirement plan in comprehensive income in the
year in which the changes occur. We adopted the recognition and related
disclosure provisions of Statement 158 effective December 31, 2006. The
measurement date provision of Statement 158 is effective at the end of 2008. We
do not expect the measurement date provision of adopting Statement 158 to have a
significant impact on our future results of operations or financial condition.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements, or Statement 157. Statement 157
provides enhanced guidance for using fair value to measure assets and
liabilities. We are required to adopt Statement 157 effective at the beginning
of 2008. We are currently evaluating the impact, if any, of adopting Statement
157 on our future results of operations and financial condition.
(C) RESTRUCTURING EXPENSES
During the nine-month period ended September 30, 2007, we recorded an
unfavorable adjustment of $47 thousand related to restructuring plans we
implemented in 2002 and 2001 and an unfavorable adjustment of $63 thousand
related to our 2006 restructuring plan as a result of changes in plan
assumptions related to excess office space and employee severance. In 2006, we
recorded a favorable adjustment of $0.2 million and an unfavorable adjustment of
$0.1 million related to our 2002 and 2001 restructuring plans, respectively, as
a result of changes in plan assumptions primarily related to excess office
space.
During the nine-month period ended September 30, 2007, we made cash
payments of $0.5 million related to prior years' restructuring plans. Of the
total costs related to our restructuring plans, approximately $12.4 million was
paid through September 30, 2007, with the remaining $0.3 million to be paid
through 2008.
9
The following table sets forth the activity and balances of our
restructuring reserves, which are included in Other liabilities and accrued
expenses on the Condensed Consolidated Balance Sheets, for the year ended
December 31, 2006 and for the nine-month period ended September 30, 2007 (in
thousands):
Consolidation
of Facilities
Workforce and
Reduction Operations Total
-------------------------------------------------------------------------------------
Balance at December 31, 2005 $ -- $ 1,210 $ 1,210
Reserve recorded 2,103 -- 2,103
Adjustments to previous estimates -- (105) (105)
Other -- (574) (574)
Cash payments (1,673) (263) (1,936)
-------------------------------------------------------------------------------------
Balance at December 31, 2006 430 268 698
Adjustments to previous estimates 63 47 110
Cash payments (473) (56) (529)
-------------------------------------------------------------------------------------
Balance at September 30, 2007 $ 20 $ 259 $ 279
=====================================================================================
(D) EARNINGS PER COMMON SHARE
The following table sets forth the computations of basic and diluted
earnings per share, or EPS (in thousands, except per share amounts):
Quarters Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2007 2006 2007 2006
--------------------------------------------------------------------------------------------------------
Numerator:
For basic and diluted EPS - net income (loss) $ 2,595 $ 1,137 $ 5,980 $ (1,381)
========================================================================================================
Denominator:
For basic EPS - weighted average shares 33,251 33,169 33,241 33,156
Effect of dilutive potential common shares:
Employee stock options and other 50 4 40 --
--------------------------------------------------------------------------------------------------------
Dilutive potential common shares 50 4 40 --
--------------------------------------------------------------------------------------------------------
For diluted EPS - weighted average shares 33,301 33,173 33,281 33,156
========================================================================================================
Basic and diluted earnings (loss) per common
share $ 0.08 $ 0.03 $ 0.18 $ (0.04)
========================================================================================================
The following table sets forth the number of shares related to outstanding
options to purchase our Class B common stock, or Class B stock, and the
potential number of shares of Class B stock contingently issuable under our
3.00% convertible senior subordinated notes due 2025, or convertible notes.
These shares were not included in the computations of diluted EPS for the
quarters and nine-month periods ended September 30, 2007 and 2006, as their
inclusion would have been antidilutive (in thousands):
Quarters Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2007 2006 2007 2006
--------------------------------------------------------------------------------------------------------
Stock options 3,058 3,892 3,163 3,425
Convertible notes 6,758 6,758 6,758 6,758
--------------------------------------------------------------------------------------------------------
Total 9,816 10,650 9,921 10,183
========================================================================================================
10
(E) INVENTORIES
The following table sets forth inventories, which are stated at the lower
of cost (specific cost and average cost) or fair value (in thousands):
September 30, December 31,
2007 2006
---------------------------------------------------------------------------
Paper $ 3,271 $ 2,917
Editorial and other prepublication costs 6,532 7,425
Merchandise finished goods 3,490 2,257
---------------------------------------------------------------------------
Total inventories $ 13,293 $ 12,599
===========================================================================
(F) INCOME TAXES
Our income tax provision consists primarily of foreign income tax, which
relates to our international networks and withholding tax on licensing income,
for which we do not receive a current U.S. income tax benefit due to our net
operating loss position. Our income tax provision also includes deferred federal
and state income taxes related to the amortization of goodwill and other
indefinite-lived intangibles, which cannot be offset against deferred tax assets
due to the indefinite reversal period of the deferred tax liabilities.
We utilize the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. We record net deferred tax assets to the extent we believe these
assets will more likely than not be realized. In making such determination, we
consider all available positive and negative evidence, including scheduled
reversals of deferred tax liabilities, projected future taxable income, tax
planning strategies and recent financial performance. As a result of our recent
cumulative losses in the U.S. and certain foreign jurisdictions, we have
concluded that a full valuation allowance should be recorded for such
jurisdictions.
In June 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, or FIN
48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in a company's financial statements and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on description, classification, interest and penalties,
accounting in interim periods, disclosure and transition. We adopted FIN 48 on
January 1, 2007. As a result of the implementation of FIN 48, we recognized no
adjustment in the liability for unrecognized income tax benefits. There have
been no material changes to the amount of uncertain tax positions since the
adoption of FIN 48. At September 30, 2007, we did not have any material
unrecognized income tax benefits. We do not expect to recognize significant
increases or decreases in unrecognized income tax benefits over the next 12
months.
Our continuing practice is to recognize interest and/or penalties related
to income tax matters in income tax expense.
We file U.S., state and foreign income tax returns in jurisdictions with
varying statutes of limitations. The 2003 through 2006 tax years generally
remain subject to examination by federal and most state tax authorities.
(G) CONTINGENCIES
In 2006, we recorded a charge of $1.8 million, based on an agreement in
principle, for the settlement of litigation with Directrix, Inc., or Directrix.
The settlement amount was paid in August 2007. The settlement was a compromise
of disputed claims and was not an admission of liability. We believe that we had
good defenses against Directrix's claims, but made the reasonable business
decision to settle the litigation to avoid further management distraction and
defense costs, which we had estimated would have approximately equaled the
amount of the settlement.
In 2006, we acquired Club Jenna, Inc. and related companies, a multimedia
adult entertainment business, to complement our existing television, online and
DVD businesses. We paid $7.7 million at closing and $1.6 million in
11
2007 with additional payments of $1.7 million, $2.3 million and $4.3 million
required in 2008, 2009 and 2010, respectively. Pursuant to the acquisition
agreement, we are also obligated to make future contingent earnout payments
based primarily on sales of existing content of the acquired business over a
ten-year period and on content produced by the acquired business during the
five-year period after the closing of the acquisition. If the required
performance benchmarks are achieved, any contingent earnout payments will be
recorded as additional purchase price. No earnout payments have been made
through September 30, 2007.
In 2005, we acquired an affiliate network of websites to complement our
existing online business. We paid $8.0 million at closing, $2.0 million in 2006
and $2.0 million in September 2007. Pursuant to the asset purchase agreement, we
are also obligated to make future contingent earnout payments over the five-year
period commencing January 1, 2005 based primarily on the financial performance
of the acquired business. If the required performance benchmarks are achieved,
any contingent earnout payments will be recorded as additional purchase price
and/or compensation expense. During 2007 and 2006, earnout payments of $0.1
million were made each year and recorded as additional purchase price.
In 2002, a $4.4 million verdict was entered against us by a state trial
court in Texas in a lawsuit with a former publishing licensee. We terminated the
license in 1998 due to the licensee's failure to pay royalties and other amounts
due us under the license agreement. We appealed and the State Appellate Court
reversed the judgment by the trial court, rendered judgment for us on the
majority of plaintiffs' claims and remanded the remaining claims for a new
trial. We filed a petition for review with the Texas Supreme Court. We posted a
bond in the amount of approximately $9.4 million, which represented the amount
of the judgment, costs and estimated pre- and post-judgment interest. We, on
advice of legal counsel, believe that it is not probable that a material
judgment against us will be sustained and have not recorded a liability for this
case in accordance with Statement of Financial Accounting Standards No. 5,
Accounting for Contingencies.
(H) BENEFIT PLANS
We currently maintain a practice of paying a separation allowance under
our salary continuation policy to employees with at least five years of
continuous service who voluntarily terminate employment with us and are at age
60 or thereafter, which is not funded. We made cash payments under this policy
of $0.2 million and $0.4 million during the quarter and nine-month period ended
September 30, 2007, respectively, and $37 thousand and $0.3 million during the
quarter and nine-month period ended September 30, 2006, respectively.
(I) STOCK-BASED COMPENSATION
Upon adoption of Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment, or Statement 123(R), we began estimating
the value of options on the date of grant using the Lattice Binomial model, or
the Lattice model. The Lattice model requires extensive analysis of actual
exercise and cancellation data and includes a number of complex assumptions
related to expected volatility, risk-free interest rate, expected dividends and
option exercises and cancellations.
The following table sets forth the assumptions used for the Lattice model:
Quarters Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
2007 2006 2007 2006
----------------------------------------------------------------------------------------------------------
Expected volatility N/A 31% - 42% 25% - 41% 29% - 43%
Weighted average volatility N/A 37% 34% 38%
Risk-free interest rate N/A 4.62% - 5.16% 4.67% - 5.04% 4.32% - 5.16%
Expected dividends N/A -- -- --
----------------------------------------------------------------------------------------------------------
The expected life of stock options represents the weighted average period
the stock options are expected to remain outstanding and is a derived output of
the Lattice model. The expected life of stock options is impacted by all of the
underlying assumptions and calibration of the Lattice model. The Lattice model
assumes that exercise behavior is a function of the option's contractual term,
vesting schedule and the extent to which the option's intrinsic value exceeds
the exercise price.
12
No stock options were granted during the third quarter of 2007; during the
nine-month period ended September 30, 2007, we granted 160,000 stock options,
exercisable for shares of our Class B stock, which will vest over a three-year
period from the grant date and expire ten years from the grant date. During the
quarter and nine-month period ended September 30, 2006, we granted 135,000 and
805,500 stock options, respectively. For options granted during the current
nine-month period, the weighted average expected life was 6.3 years; during the
prior year quarter, it was 6.0 years; and for the nine-month period of 2006, it
was 5.9 years. For options granted during the current nine-month period, the
weighted average fair value per share was $4.64; during the quarter ended
September 30, 2006, it was $4.17; and for the nine-month period ended September
30, 2006, it was $6.03.
No restricted stock units were granted during the third quarter of 2007;
during the nine-month period ended September 30, 2007, we granted 250,625
restricted stock units, which provide for the issuance of our Class B stock if
we meet our two-year cumulative operating income target thresholds as of
December 31, 2008, with an additional one-year holding period for restricted
stock units that vest based on performance. During the quarter and nine-month
period ended September 30, 2006, we granted 45,000 and 233,500 restricted stock
units, respectively. For restricted stock units granted during the current
nine-month period, the weighted average fair value per share was $10.61; during
the quarter ended September 30, 2006, it was $9.33; and for the nine-month
period ended September 30, 2006, it was $13.51.
The following table sets forth stock-based compensation expense related to
stock options, restricted stock units, other equity awards and our employee
stock purchase plan, or ESPP (in thousands):
Quarters Ended Nine Months Ended
September 30, September 30,
------------------- ---------------------
2007 2006 2007 2006
------------------------------------------------------------------------------
Stock options $ 481 $ 1,087 $ 646 $ 2,592
Restricted stock units 208 308 295 503
Other equity awards 49 40 141 120
ESPP 6 6 21 20
------------------------------------------------------------------------------
Total $ 744 $ 1,441 $ 1,103 $ 3,235
==============================================================================
Statement 123(R) requires that the total amount of compensation expense
recognized reflects the number of stock options that actually vest as of the
completion of the vesting period. Upon the vesting of certain stock option
grants, we adjusted our stock-based compensation expense to reflect actual
versus estimated forfeitures. During the nine-month period ended September 30,
2007, we recorded favorable adjustments of $1.0 million to reflect that actual
forfeitures for vested stock option grants exceeded the estimated amounts.
13
(J) SEGMENT INFORMATION
The following table sets forth financial information by reportable segment
(in thousands):
Quarters Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
2007 2006 2007 2006
---------------------------------------------------------------------------------------
Net revenues
Entertainment $ 49,579 $ 50,198 $ 152,275 $ 148,920
Publishing 23,115 24,585 69,118 71,870
Licensing 10,164 7,514 32,532 24,104
---------------------------------------------------------------------------------------
Total $ 82,858 $ 82,297 $ 253,925 $ 244,894
=======================================================================================
Income before income taxes
Entertainment $ 7,188 $ 5,851 $ 18,793 $ 18,605
Publishing (1,490) (891) (6,159) (4,940)
Licensing 6,340 4,632 19,540 13,054
Corporate Administration and Promotion (7,901) (5,758) (20,189) (18,701)
Restructuring expenses -- (118) (110) (2,024)
Gain on disposal -- -- -- 29
Investment income 568 527 1,666 1,736
Interest expense (1,170) (1,471) (3,736) (4,180)
Amortization of deferred financing fees (134) (134) (402) (402)
Other, net 163 (165) (144) (311)
---------------------------------------------------------------------------------------
Total $ 3,564 $ 2,473 $ 9,259 $ 2,866
=======================================================================================
September 30, December 31,
2007 2006
---------------------------------------------------------------------------------------
Identifiable assets
Entertainment $ 285,081 $ 288,540
Publishing 34,317 38,146
Licensing 10,953 9,386
Corporate Administration and Promotion 114,407 99,711
---------------------------------------------------------------------------------------
Total $ 444,758 $ 435,783
=======================================================================================
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and accompanying notes in Item 1 of this
Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the
year ended December 31, 2006. All period references are to our fiscal periods
unless otherwise indicated.
RESULTS OF OPERATIONS (1)
The following table sets forth our results of operations (in millions,
except per share amounts):
Quarters Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2007 2006 2007 2006
-------------------------------------------------------------------------------------------------------------------
Net revenues
Entertainment
Domestic TV $ 17.6 $ 20.5 $ 58.9 $ 63.7
International TV 14.3 12.4 41.8 36.5
Online/mobile 15.3 15.4 45.6 44.2
Other 2.4 1.9 6.0 4.5
-------------------------------------------------------------------------------------------------------------------
Total Entertainment 49.6 50.2 152.3 148.9
-------------------------------------------------------------------------------------------------------------------
Publishing
Domestic magazine 18.3 19.7 56.4 59.1
International magazine 1.9 1.7 5.6 5.0
Special editions and other 2.9 3.2 7.1 7.8
-------------------------------------------------------------------------------------------------------------------
Total Publishing 23.1 24.6 69.1 71.9
-------------------------------------------------------------------------------------------------------------------
Licensing
Consumer products 8.7 6.8 24.9 20.5
Location-based entertainment 0.9 0.3 2.7 0.3
Marketing events 0.4 0.3 3.0 2.8
Other 0.1 0.1 1.9 0.5
-------------------------------------------------------------------------------------------------------------------
Total Licensing 10.1 7.5 32.5 24.1
-------------------------------------------------------------------------------------------------------------------
Total net revenues $ 82.8 $ 82.3 $ 253.9 $ 244.9
===================================================================================================================
Net income (loss)
Entertainment
Before programming amortization and online content expenses $ 16.4 $ 16.7 $ 48.3 $ 49.2
Programming amortization and online content expenses (9.2) (10.9) (29.5) (30.6)
-------------------------------------------------------------------------------------------------------------------
Total Entertainment 7.2 5.8 18.8 18.6
-------------------------------------------------------------------------------------------------------------------
Publishing (1.4) (0.8) (6.1) (4.9)
-------------------------------------------------------------------------------------------------------------------
Licensing 6.3 4.6 19.5 13.0
-------------------------------------------------------------------------------------------------------------------
Corporate Administration and Promotion (7.9) (5.8) (20.2) (18.7)
-------------------------------------------------------------------------------------------------------------------
Segment income 4.2 3.8 12.0 8.0
Restructuring expenses -- (0.1) (0.1) (2.0)
-------------------------------------------------------------------------------------------------------------------
Operating income 4.2 3.7 11.9 6.0
-------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 0.6 0.6 1.7 1.8
Interest expense (1.2) (1.5) (3.7) (4.2)
Amortization of deferred financing fees (0.1) (0.1) (0.4) (0.4)
Other, net 0.1 (0.2) (0.2) (0.3)
-------------------------------------------------------------------------------------------------------------------
Total nonoperating expense (0.6) (1.2) (2.6) (3.1)
-------------------------------------------------------------------------------------------------------------------
Income before income taxes 3.6 2.5 9.3 2.9
Income tax expense (1.0) (1.4) (3.3) (4.3)
-------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 2.6 $ 1.1 $ 6.0 $ (1.4)
-------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings (loss) per common share $ 0.08 $ 0.03 $ 0.18 $ (0.04)
===================================================================================================================
(1) Certain amounts reported for the prior periods have been reclassified to
conform to the current year's presentation.
15
Our revenues increased $0.5 million for the quarter as higher revenues
from our Licensing Group were mostly offset by lower revenues from our
Entertainment and Publishing Groups. Our revenues increased $9.0 million for the
nine-month period as higher revenues from our Entertainment and Licensing Groups
were partially offset by lower revenues from our Publishing Group.
Segment income increased $0.4 million for the quarter as increased profits
from our Entertainment and Licensing Groups were mostly offset by lower
Publishing Group results and higher Corporate Administration and Promotion
expenses. Segment income increased $4.0 million for the nine-month period
primarily due to increased profits from our Licensing Group partially offset by
lower Publishing Group results and higher Corporate Administration and Promotion
expenses.
Operating income increased $0.5 million and $5.9 million for the quarter
and nine-month period, respectively, due to the improved segment income coupled
with $0.1 million and $1.9 million of lower restructuring expenses in the
current quarter and nine-month period, respectively, compared to the prior year.
Net income of $2.6 million and $6.0 million for the quarter and nine-month
period, respectively, improved by $1.5 million and $7.4 million compared to the
respective prior year periods.
Several of our businesses may experience variations in quarterly
performance. As a result, our performance in any quarter is not necessarily
reflective of full-year or longer-term trends. Playboy magazine newsstand
revenues vary from issue to issue, with revenues generally higher for holiday
issues and any issues including editorial or pictorial features that generate
additional public interest. Advertising revenues also vary from quarter to
quarter depending on economic conditions, holiday issues and changes in
advertising buying patterns. Online subscription revenues and operating results
are impacted by decreased Internet traffic during the summer months, and
e-commerce revenues and operating results are typically strongest in the fourth
quarter due to the holiday buying season.
ENTERTAINMENT GROUP
The following discussion focuses on the revenues and profit contribution
of each of our Entertainment Group businesses before programming amortization
and online content expenses.
Revenues from our domestic TV networks decreased $2.9 million, or 14%, for
the quarter and $4.8 million, or 8%, for the nine-month period. These decreases
reflect in part the impact of one of our largest multiple system operators
erroneously over-reporting prior periods' sales to us, thus reducing revenues
for the current quarter. We continue to believe that revenues have stabilized,
excluding the impact of the current and prior two quarters' adjustments.
Profit contribution from our domestic TV networks decreased $2.5 million
and $3.6 million for the quarter and nine-month period, respectively. These
decreases were primarily due to the lower revenues discussed above, increased
volume-related video-on-demand distribution expense and expense related to
certain carriage distribution agreements that we began amortizing during the
fourth quarter of the prior year, partially offset by lower marketing expense.
International TV revenues increased $1.9 million, or 15%, and $5.3
million, or 14%, and profit contribution increased $2.3 million and $3.8 million
for the quarter and nine-month period, respectively, reflecting growth in our UK
and other European networks. Foreign currency exchange rate fluctuations had a
favorable impact on revenues and profit contribution for the current quarter and
nine-month period.
Online/mobile revenues were flat for the quarter and increased $1.4
million, or 3%, for the nine-month period, and profit contribution decreased
$0.6 million for the quarter and increased $0.5 million for the nine-month
period. Online subscription revenues were lower for the quarter due to delays in
new site launches but higher for the nine-month period primarily due to our
acquisition of Club Jenna, Inc. and related companies, or Club Jenna, in June
2006. E-commerce revenues were higher due to revenues from our new BUNNYshop
Catalog and improved sales from our Playboy Catalog, more than offsetting the
impact of licensing our Spice Catalog in September 2006, leading to lower
revenues but higher profit contribution. Advertising revenues were higher due to
a redesign of the Playboy.com website, attracting new advertisers. Mobile
revenues decreased primarily due to lower royalties,
16
principally from a licensee in Europe due to delays in launching new products.
Revenues from other businesses increased $0.5 million, or 25%, and $1.5
million, or 33%, for the quarter and nine-month period, respectively, largely
due to recording license fees for our production company, Alta Loma
Entertainment, for the quarter. Profit contribution increased $0.2 million for
the quarter and decreased $0.3 million for the nine-month period impacted by the
Club Jenna acquisition in June 2006 and a legal settlement recorded in the
current year.
The group's administrative expenses decreased $0.3 million, or 5%, for the
quarter, due primarily to staffing-related expenses incurred in the prior year,
and increased $1.3 million, or 8%, for the nine-month period, primarily in
support of the acquired businesses.
Programming amortization and online content expenses decreased $1.7
million, or 15%, and $1.1 million, or 3%, for the quarter and nine-month period,
respectively, primarily due to fewer programs being licensed and created. We
anticipate that 2007 programming amortization and online content expenses will
be less than $40.0 million compared to $41.8 million for 2006.
Segment income for the group increased $1.4 million, or 23%, for the
quarter and $0.2 million, or 1%, for the nine-month period, due to the results
previously discussed. We believe the group will report segment income in 2007
similar to that of the previous year.
PUBLISHING GROUP
Domestic magazine revenues decreased $1.4 million, or 7%, and $2.7
million, or 5%, for the quarter and nine-month period, respectively.
Subscription revenues decreased $1.0 million, or 8%, and $2.8 million, or 8%,
for the quarter and nine-month period, respectively, primarily due to downward
pressure on both renewal rates and direct-to-publisher subscription
acquisitions. Newsstand revenues decreased $0.7 million, or 30%, and $1.0
million, or 13%, for the quarter and nine-month period, respectively, primarily
due to 23% and 13% fewer copies sold, respectively. Advertising revenues
increased $0.3 million, or 4%, and $1.1 million, or 6%, for the quarter and
nine-month period, respectively. The quarter increase reflects an 8% increase in
advertising pages, partially offset by a 4% decrease in average net revenue per
page due to the mix of advertisers. The nine-month period reflects a 9% increase
in advertising pages, partially offset by a 3% decrease in average net revenue
per page, again due to the mix of advertisers. Advertising sales for the 2007
fourth quarter magazine issues are closed, and we expect to report approximately
3% lower advertising revenues on a 1% increase in advertising pages compared to
the 2006 fourth quarter.
We believe that the complementary nature of our online and print
businesses will allow us to grow our overall audience for Playboy content and
effectively aggregate that audience for our advertising partners. On a combined
basis, our online and print advertising revenues increased $0.8 million for the
quarter and $2.3 million for the nine-month period. We project combined Playboy
online and print advertising revenues will increase for the 2007 fourth quarter
compared to the 2006 fourth quarter. To better reflect changes in how and where
media is consumed and in response to the challenging magazine landscape, we are
adjusting our magazine rate base (the total newsstand and subscription
circulation guaranteed to advertisers) to 2.6 million from 3.0 million,
effective with the January 2008 issue.
International magazine revenues increased $0.2 million, or 11%, and $0.6
million, or 12%, for the quarter and nine-month period, respectively.
Special editions and other revenues decreased $0.3 million, or 9%, and
$0.7 million, or 9%, for the quarter and nine-month period, respectively. Fewer
special editions newsstand copies sold in both periods resulted in revenue
decreases of $0.2 million and $0.9 million for the quarter and nine-month
period, respectively.
The group's segment loss increased $0.6 million, or 67%, and $1.2 million,
or 25%, for the quarter and nine-month period, respectively. Both current
periods were impacted by additional expensing of subscription collection costs,
and the current nine-month period also included actual allocated post-employment
benefit costs related to senior editorial employees. On a comparable basis
without the subscription collection and post-employment benefit costs, segment
results would have improved for the nine-month period as the higher advertising
revenues and cost
17
reductions more than offset the circulation revenue declines previously
discussed and higher editorial costs. The group's results for the fourth quarter
are expected to be in line with those of the current quarter.
LICENSING GROUP
Licensing Group revenues increased $2.6 million, or 35%, and $8.4 million,
or 35%, for the quarter and nine-month period, respectively, reflecting higher
consumer products royalties and royalties from our location-based entertainment
venue at the Palms Casino Resort in Las Vegas, which opened in October 2006. The
nine-month period also reflected $1.8 million in sales of original artwork
compared to $0.5 million in the prior year period. The group's segment income
increased $1.7 million, or 37%, and $6.5 million, or 50%, for the quarter and
nine-month period, respectively, as a result of these revenue increases,
partially offset by growth-related costs. We now anticipate growth in segment
income for the year of approximately 25 to 30%, excluding the impact of original
art sales.
CORPORATE ADMINISTRATION AND PROMOTION
Corporate Administration and Promotion expenses increased $2.1 million, or
37%, and $1.5 million, or 8%, for the quarter and nine-month period,
respectively. Both current periods reflected additional expense related to
certain trademark costs that were previously capitalized. The quarter was
unfavorably impacted by the timing of some expenses. The nine-month period was
favorably impacted by the previously mentioned allocation of actual
post-employment benefit costs to the Publishing Group.
RESTRUCTURING EXPENSES
During the nine-month period, we recorded an unfavorable adjustment of
$0.1 million as a result of changes in plan assumptions and made cash payments
of $0.5 million related to prior restructuring plans. Of the total costs related
to our restructuring plans, approximately $12.4 million was paid through
September 30, 2007, with the remaining $0.3 million to be paid through 2008.
INCOME TAX EXPENSE
Income tax expense decreased $0.4 million, or 27%, for the quarter and
$1.0 million, or 23%, for the nine-month period. These decreases were primarily
the result of a decrease in deferred income tax expense due to a fourth quarter
2006 modification of the assumptions related to the useful lives of certain
carriage distribution agreements.
Our effective income tax rate differs from the U.S. statutory rate. Our
income tax provision consists of foreign income tax, which relates to our
international networks and withholding tax on licensing income, for which we do
not receive a current U.S. income tax benefit due to our net operating loss
position. Our income tax provision also includes deferred federal and state
income taxes related to the amortization of goodwill and other indefinite-lived
intangibles, which cannot be offset against deferred tax assets due to the
indefinite reversal period of the deferred tax liabilities.
In June 2006, the Financial Accounting Standards Board, or the FASB,
issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109, or FIN 48. We adopted FIN 48 on
January 1, 2007. As a result of the implementation of FIN 48, we recognized no
adjustment in the liability for unrecognized income tax benefits. There have
been no material changes to the amount of uncertain tax positions since the
adoption of FIN 48. At September 30, 2007, we did not have any material
unrecognized income tax benefits. We do not expect to recognize significant
increases or decreases in unrecognized tax benefits over the next 12 months.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2007, we had $26.2 million in cash and cash equivalents
compared to $26.7 million in cash and cash equivalents at December 31, 2006. We
also had $12.4 million and $3.0 million of auction rate securities, or ARS,
included in marketable securities and short-term investments at September 30,
2007 and December 31, 2006, respectively. ARS generally have long-term
maturities; however, these investments have characteristics similar to
18
short-term investments because at predetermined intervals, typically every 28
days, there is a new auction process. Total financing obligations were $115.0
million at both September 30, 2007 and December 31, 2006.
At September 30, 2007, cash generated from our operating activities,
existing cash and cash equivalents and marketable securities and short-term
investments were fulfilling our liquidity requirements. In addition, our $50.0
million credit facility, which can be used for revolving borrowings, issuing
letters of credit or a combination of both, had no borrowings and $10.6 million
in letters of credit outstanding, resulting in $39.4 million of available
borrowings under this facility at September 30, 2007.
CREDIT FACILITY
We amended our $50.0 million credit facility effective September 28, 2007.
The agreement now provides for revolving borrowings, the issuance of letters of
credit or a combination of both of up to $50.0 million outstanding at any time.
The borrowing rates and financial covenants contained in the amendment did not
change materially, but we obtained additional flexibility in other restrictive
covenants. 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 September 28, 2010. The obligations of
our subsidiary PEI Holdings, Inc. as borrower under the credit facility are
guaranteed by us and each of our other United States 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.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities for the nine months ended
September 30, 2007 was $23.5 million, an increase of $18.4 million compared to
the prior year period primarily due to changes in working capital.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used for investing activities for the nine months ended September
30, 2007 was $16.6 million, an increase of $14.7 million compared to the prior
year period. This increase was primarily due to the purchase of $9.4 million of
ARS and capital expenditures of $6.6 million, which were primarily related to
leasehold improvements at our New York office and Los Angeles programming
facility and technology-related items. The prior year period reflected proceeds
of $11.0 million from the sale of ARS and payments for acquisitions of $7.8
million primarily related to the acquisition of Club Jenna.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used for financing activities of $7.9 million was flat for the
nine months ended September 30, 2007 compared to the prior year period.
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
The positive effect of foreign currency exchange rates on cash and cash
equivalents during the current year and prior year periods was due to the
weakening of the U.S. dollar against the pound sterling and Euro.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of FASB Statement No. 115, or Statement 159.
Statement 159 allows entities to voluntarily elect to measure many financial
assets and financial liabilities at fair value. The election is made on an
instrument-by-instrument basis and is irrevocable. We are required to adopt
Statement 159 at the beginning of 2008. The impact of the adoption of Statement
159 will be dependent upon the extent to which we elect to measure eligible
items at fair value. We are currently evaluating the impact, if any, of adopting
Statement 159 on our future results of operations and financial condition.
19
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and
132(R), or Statement 158. Statement 158 requires an entity to (a) recognize in
its statement of financial position an asset or an obligation for a defined
benefit postretirement plan's funded status, (b) measure a defined benefit
postretirement plan's assets and obligations that determine its funded status as
of the end of the employer's fiscal year and (c) recognize changes in the funded
status of a defined benefit postretirement plan in comprehensive income in the
year in which the changes occur. We adopted the recognition and related
disclosure provisions of Statement 158 effective December 31, 2006. The
measurement date provision of Statement 158 is effective at the end of 2008. We
do not expect the measurement date provision of adopting Statement 158 to have a
significant impact on our future results of operations or financial condition.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements, or Statement 157. Statement 157
provides enhanced guidance for using fair value to measure assets and
liabilities. We are required to adopt Statement 157 effective at the beginning
of 2008. We are currently evaluating the impact, if any, of adopting Statement
157 on our future results of operations and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks, including changes in foreign
currency exchange rates. There was no material change in our exposure to such
fluctuations during the first nine months of 2007. Information regarding market
risks as of December 31, 2006 is contained in Item 7A. "Quantitative And
Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for
the year ended December 31, 2006.
At September 30, 2007, we did not have any floating interest rate
exposure. All of our outstanding debt as of that date consisted of the 3.00%
convertible senior subordinated notes due 2025, or convertible notes, which are
fixed-rate obligations. The fair value of the $115.0 million aggregate principal
amount of the convertible notes is influenced by changes in market interest
rates, the share price of our Class B stock and our credit quality. At September
30, 2007, the convertible notes had an implied fair value of $105.4 million.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange
Act) as of the end of the period covered by this quarterly report. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, our disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by us in the reports that
we file or submit under the Exchange Act.
Internal Control over Financial Reporting
There have not been any changes in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
20
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes to our Legal Proceedings as contained
in our Annual Report on Form 10-K for the year ended December 31, 2006.
ITEM 1A. RISK FACTORS
There have been no material changes to our Risk Factors as contained in
our Annual Report on Form 10-K for the year ended December 31, 2006.
21
ITEM 6. EXHIBITS
Exhibit Number Description
-------------- -----------
10.1* Sixth Amendment to the Amended and Restated Credit Agreement, dated
September 28, 2007, among PEI Holdings, Inc., as borrower, and Bank of
America, N.A., as Agent, and the other lenders from time to time party
thereto
10.2 Third Amendment to October 22, 1997 Playboy Magazine Printing and
Binding Agreement between Playboy Enterprises, Inc. and Quad/Graphics,
Inc. dated July 30, 2007
10.3* Amended and Restated Agreement, made as of August 1, 2007, by and
between Playboy Entertainment Group, Inc. and Spice Hot Entertainment,
Inc., and DirecTV, Inc.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
* Portions of this exhibit have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment pursuant to Rule 24b-2 of the Securities and Exchange Act of
1934.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PLAYBOY ENTERPRISES, INC.
-------------------------
(Registrant)
Date: November 8, 2007 By /s/ Linda Havard
---------------- ---------------------------
Linda G. Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)
23
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
10.1* Sixth Amendment to the Amended and Restated Credit Agreement, dated
September 28, 2007, among PEI Holdings, Inc., as borrower, and Bank of
America, N.A., as Agent, and the other lenders from time to time party
thereto
10.2 Third Amendment to October 22, 1997 Playboy Magazine Printing and
Binding Agreement between Playboy Enterprises, Inc. and Quad/Graphics,
Inc. dated July 30, 2007
10.3* Amended and Restated Agreement, made as of August 1, 2007, by and
between Playboy Entertainment Group, Inc. and Spice Hot Entertainment,
Inc., and DirecTV, Inc.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
* Portions of this exhibit have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment pursuant to Rule 24b-2 of the Securities and Exchange Act of
1934.
24