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
| T | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
2009
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
| £ | 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
(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
| 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 |
| Securities registered pursuant to Section 12(b) of the Act: |
| Title of each class | Name of each exchange on 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]
þ
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]
þ
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]þ No [ ]
£
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £ No £
Indicate by check mark 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'sregistrant’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“large accelerated filer," "accelerated filer"” “accelerated filer” and "smaller“smaller reporting company"company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ]£ Accelerated filer [X]þ 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]
þ
The aggregate market value of Class A Common Stock held by nonaffiliates on June 30, 20082009 (based upon the closing sale price on the New York Stock Exchange) was $7,308,922.$5,142,869. The aggregate market value of Class B Common Stock held by nonaffiliates on June 30, 20082009 (based upon the closing sale price on the New York Stock Exchange) was $100,430,884.
$51,694,140.
At February 27, 2009,26, 2010, there were 4,864,102 shares of Class A Common Stock and 28,539,82728,645,185 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.
2010.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains "forward-looking“forward-looking statements,"” including statements in Part I. Item 1. "Business,"“Business,” Part I. Item 1A. "Risk
Factors"“Risk Factors” and Part II. Item 7. "Management's“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"“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;
| (1) | Foreign, national, state and local government regulations, actions or initiatives, including: |
| (a) | attempts to limit or otherwise regulate the sale, distribution or transmission of adult-oriented materials, including print, television, video, Internet and mobile materials; |
| (b) | attempts to limit or otherwise regulate the sale or distribution of certain consumer products sold by our licensees, including nutraceuticals and energy drinks; or |
| (c) | limitations on the advertisement of tobacco, alcohol and other products which are important sources of advertising revenue for us; |
| (2) | Risks associated with our foreign operations, including market acceptance and demand for our products and the products of our licensees and other business partners; |
| (3) | Our ability to effectively manage 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 decreases in spending by advertisers, either generally or with respect to the men’s market; |
| (10) | Competition in the television, men’s magazine, Internet, mobile and product licensing markets; |
| (11) | Attempts by consumers, distributors, merchants or private advocacy groups to exclude our programming or other products from distribution; |
| (12) | Our television, Internet and mobile businesses’ reliance on third parties for technology and distribution, and any changes in that technology, distribution and/or delays in implementation which might affect our plans, assumptions and financial results; |
| (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 or video-on-demand television platforms; |
| (15) | Failure to maintain our agreements with multiple system operators and direct-to-home, or DTH, operators on favorable terms, as well as any decline in our access to households or acceptance by DTH, cable and/or telephone company systems and the possible resulting cancellation of fee arrangements, pressure on splits or other deterioration of contract terms with operators of these systems; |
| (16) | Risks that we may not realize the expected sales and profits and other benefits from acquisitions; |
| (17) | Any charges or costs we incur in connection with restructuring measures we have taken or may take in the future; |
| (18) | Increases in paper, printing, postage or other manufacturing costs; |
| (19) | Effects of the consolidation of the single-copy magazine distribution system in the U.S. and risks associated with the financial stability of major magazine wholesalers; |
| (20) | Effects of the consolidation and/or bankruptcies of television distribution companies; |
| (21) | Risks associated with the viability of our subscription, ad-supported and e-commerce Internet models; |
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.
| (22) | Our ability to sublet our excess space may be negatively impacted by the market for commercial rental real estate as well as by the global economy generally; |
| (23) | The risk that our common stock could be delisted from the New York Stock Exchange, or NYSE, if we fail to meet the NYSE’s continued listing requirements; |
| (24) | Risks that adverse market conditions in the securities and credit markets may significantly affect our ability to access the capital markets; |
| (25) | The risk that we will be unable to refinance our 3.00% convertible senior subordinated notes due 2025, or convertible notes, or the risk that we will need to refinance our convertible notes, prior to the first put date of March 15, 2012, at significantly higher interest rates; |
| (26) | The risk that we are unable to either extend the maturity date of our existing credit facility beyond the current expiration date of January 31, 2011 or establish a new facility with a later maturity date and acceptable terms; and |
| (27) | Further downward pressure on our operating results and/or further deterioration of economic conditions could result in further impairments of our long-lived assets, including our other intangible assets. |
For a detailed discussion of these and other factors that might affect our performance, see Part I. Item 1A. "Risk Factors"“Risk Factors” of this Annual Report on Form 10-K.
3
PLAYBOY
PLAYBOY ENTERPRISES, INC.
2008
2009 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
| Page | ||
| PART I | ||
| Item 1. | 5 | |
| Item 1A. | 12 | |
| Item 1B. | 21 | |
| Item 2. | 21 | |
| Item 3. | 21 | |
| Item 4. | 22 | |
| PART II | ||
| Item 5. | 23 | |
| Item 6. | 24 | |
| Item 7. | 26 | |
| Item 7A. | 43 | |
| Item 8. | 43 | |
| Item 9. | 71 | |
| Item 9A. | 71 | |
| Item 9B. | 73 | |
| PART III | ||
| Item 10. | 74 | |
| Item 11. | 74 | |
| Item 12. | 74 | |
| Item 13. | 74 | |
| Item 14. | 74 | |
| PART IV | ||
| Item 15. | 75 | |
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"“we,” “us,” “our,” “Playboy” and the "Company,"“Company,” unless the context requires otherwise. We were organized in 1953 to publish Playboy magazine and are now a global 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 televisiontelevi sion networks, websites, mobile platforms and radio. Playboy magazine is the best-selling
monthly men's magazine in the world basedhas a reputation founded on the combined circulation of the
U.S.its high-quality photography and international editions.editorial excellence. 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, PublishingPrint/Digital and Licensing. In concert with the integration of our print and digital businesses in the first quarter of 2009, we moved the reporting of our digital business from the Entertainment Group into the Print/Digital Group, which we formerly called the Publishing Group. These businesses were combined in order to better focus on creating brand-consistent content that extends across print and digital platforms. Amounts reported for prior periods have been reclassified to conform to the revised segment reporting. Net revenues, income and loss before income taxes, depreciation and amortization and identifiable assets of each reportable segment are set forth in Note (U)(S), 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
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, enablingena bling 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,King of Clubs, Naughty Amateur Home Videos, Search for the Perfect Girlfriend, Shoot Out and 69 Sexy Things to Do Before You Die.Die. Additionally, we develop, co-produce and/or license shows and series to air on third-party networks, including The Girls Next Door and Kendra 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 $24.8 million, $30.2 million $34.4 million and $36.7$34.4 million in entertainment programming in 2009, 2008 2007 and 2006,2007, respectively, with the largest portion of the investment focused on Playboy TV. At December 31, 2008,2009, 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 system operators and telephone companies, or Telcos, 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.2014. 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, which consist of Playboy TV, Playboy TV en EspanolEspañol 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 EspanolEspañol is a Spanish language network. It consists primarily of locally produced, proprietary Spanish-language and other original Spanish-language content, but also shares some content with our domestic Playboy TV network and also includes locally produced,
proprietary Spanish-language and other original Spanish-language content.
network.
Spice Digital Networks feature adult movies under exclusive licenses from leading adult studios and from our other original productions.sources. 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., VerizonAT&T and AT&T,Verizon, 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:
| Network | Domestic DTH | Domestic Cable | Domestic Telcos | Canadian |
| Playboy TV | PPV/PPM | PPV/PPM/VOD/ SVOD | PPM/SVOD | PPM |
| Playboy TV en | Tier | PPV/PPM/Tier | PPM | PPM |
| Spice Digital Networks | PPV | PPV/VOD | VOD | VOD |
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 StatesU.S. 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.
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'sdistributor’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 withoutwitho ut penalty.
International TV
We currently own and operate or license Playboy-, Spice- and locally-branded TV networks in the United Kingdom,U.K., which are further distributed through DTH and cable throughout greater Europe. Additionally, we have branded, country-specific TV networks in Australia, France, Germany, Hong Kong, Israel, 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-LatinTV–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 payspay s 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 mobiledigital markets in Brazil.
While Claxson has management control, we have significant management influence on our joint venture. We provideprovided both programming and the use of our trademarks directly to PTVLA in return for 17.5%a percentage of the venture'sventure’s net revenues withagainst a guaranteed annual minimum.minimum guarantee. Commencing in 2010 we provide programming on a fee per program or hour basis and the use of our trademarks directly to PTVLA in return for a percentage of the venture’s net revenues from the exploitation of the Playboy branded channels. 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 EspanolEspañol and we pay PTVLA a 20% distribution fee for that feed based on the network'snetwork̵ 7;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 thea period beginning December 23,in 2012 and ending December 23,in 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.
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 and Kendra on E! Entertainment Television, and motion pictures, such as The House Bunny and Miss March.
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, Telcos 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 pressurep ressure 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'sVOD’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 platformsoptions to consumers with particular emphasis on the value of PPM. Our strategy with respect to Spice iscontinues to be to improve access to our content while being increasingly cost conscious.
We also face growing 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
Print/Digital Group
Our PublishingPrint/Digital Group operations include the publication of Playboy magazine, special editions and other domestic publishingprint businesses, including books and calendars, and the licensing of international editions of Playboy magazine as well as the distribution of content through various subscription-based and free websites and mobile devices under our Playboy magazine.
and other brands. Also included is e-commerce, a business we outsource to third parties.
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, 2009, Playboy magazine was the 17th15th highest-ranking U.S. consumer publication in terms of circulation rate base (the total newsstand and subscription circulation guaranteed to advertisers). Playboy
magazine's magazine’s circulation rate base for the same period was greater than each of Maxim, GQ and Esquire. ToEsquire. Howeve r, 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 magazinePlayboy magazine’s circulation rate base effective with the January 2008January/February 2010 issue to 2.61.5 million from 3.02.6 million.
Playboy magazine has historically generatedgenerates approximately two-thirdsthree-fourths of its revenues from subscription and newsstand circulation, with the remainder primarily from advertising. Subscription copies represent approximately 93%90% of total copies sold. According to MRI,fall 2009 data published by the independent market research firm of Mediamark Research, Inc., the median age of male Playboy magazine readers is 35, with a median annual household income of approximately $59,000,$60,000, a demographic that we believe is also attractive to advertisers. We also derive revenues from the rental of Playboy magazine's 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.Playboy.com. Subscription copies of the magazine are
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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 20082009 holiday issue and Januarythe July/August 2009 holidayand January/February 2010 double 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
===============================================================================
| Fiscal Year | Fiscal Year | Fiscal Year | ||||||||||
| Ended | Ended | Ended | ||||||||||
| Category | 12/31/09 | 12/31/08 | 12/31/07 | |||||||||
| Retail/Direct response | 29 | % | 26 | % | 29 | % | ||||||
| Beer/Wine/Liquor | 20 | 25 | 28 | |||||||||
| Tobacco | 15 | 15 | 13 | |||||||||
| Automotive and automotive-related | 10 | 12 | 6 | |||||||||
| Toiletries/Cosmetics | 6 | 6 | 1 | |||||||||
| Personal hygiene/Haircare | 6 | 2 | 1 | |||||||||
| Other | 14 | 14 | 22 | |||||||||
| Total | 100 | % | 100 | % | 100 | % | ||||||
| Total advertising pages | 285 | 428 | 460 | |||||||||
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%9%, 4% and 5%4% cost per thousand increases in advertising rates effective with the January/February 2010, January 2009 2008 and 2007January 2008 issues, respectively.
In November 2009, we entered into an agreement with American Media, Inc. through its wholly owned subsidiary, American Media Operations, Inc., or AMI, to outsource non-editorial functions of Playboy magazine and other domestic publications, including production, circulation, advertising sales, marketing and other support services. AMI will assist with our subscription, newsstand and printing third-party provider relationships. We began transitioning these functions in November 2009 and expect to complete the transition by the end of the first quarter of 2010. The term of the agreement will expire in 2014.
Playboy magazine subscriptions are serviced by Communications Data Services, Inc., or CDS. PursuantCDS, pursuant to a subscription fulfillmentan 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
expirationwill expire 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.2014. Domestic distribution of Playboy magazine and special editions to newsstands and other retail outlets is accomplished through a national distributor. Time/Warner Retail Sales and Marketing provided this service into the first quarter of 2010, when Distribution Services, Inc., or TWRSM.DSI, a wholly owned subsidiary of AMI, assumed responsibility. 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 TWRSMDSI expires in January
2012.
2014. Playboy magazine and special editions are printed by Quad/Graphics, Inc., or Quad. The agreement with 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.expires in 2015. 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.
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suppliers.
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.magazine. 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 revenuesr evenues from international editions in each of 2009, 2008 2007 and 2006.
2007.
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 2009, 2008 2007 and 2006,2007, and we expect to publish the same number in 2009.2010. 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.
Digital
We distribute content through various subscription-based and free websites as well as through mobile devices under our Playboy and other brands. We outsource our e-commerce business to third parties.
Our free website, Playboy.com, offers original content leveraging Playboy magazine’s editorial assets and opportunities to increase digital 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 “digital 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. 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 mobile platform. Demand for mobile 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.
We invested $6.3 million, $7.0 million and $5.6 million on content specifically for our digital business in 2009, 2008 and 2007, respectively. In addition, we also use proprietary content from our print and television 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 this business to a third party in 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 are also outsourced to a third party, and we earn a royalty on product sales.
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 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-thirdone-fourth of Playboy magazine's m agazine’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 digital business and the Internet in general are highly competitive. Our digital 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. We develop new features, functionality and technology around these factors to remain competitive and to keep users engaged with our digital properties.
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'smen’s and women'swomen’s apparel, men'smen’s underwear and women'swomen’s lingerie, accessories, collectibles, cigars, watches, jewelry, fragrances, shoes, luggage, bath and body products, small leather goods, stationery, music, eyewear, barware, home fashions, nutraceuticals, energy drinks and slot machines. We continually seek to license our brand name and images in new markets and retail categories. The groupWe also licenseslicense art-related products based on our extensive art collection,collectio n, 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
We own and operate a Playboy-branded retail store in Las Vegas. We also license Playboy-branded retail stores within other locations in Auckland, Bangkok, Hong Kong, Kuala Lumpur, Las
Vegas, London and Melbourne.
around the world.
Our licensing activities also include multifaceted location-based entertainment venues. Our first such venue is located at the Palms Casino Resort in Las Vegas opened in 2006.Vegas. 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. Wewe contributed the Playboy brand and trademarks as well as marketing support. In 2007,2009, we announced a joint venturepartnerships with Macao Studio Cityentertainment venue operators for a
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Playboy-branded entertainment destinationdestinations in Macao, which will include nightlifeMiami and entertainment options, dining, specialty retail elements and a Hugh M.
Hefner Villa. This venue isCancún, Mexico. These venues are 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
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 thatworking to eliminate censorship and to protect freedom of expression consistent with the principles of the First Amendment. In addition, the foundation assists progressive efforts to preserve and encourage open communication about reproductive rights and health, 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.
liberties.
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
Employees
We employed 626547 full-time employees at February 27, 200926, 2010 compared to 789626 at February 29, 2008.27, 2009. No employees are represented by collective bargaining agreements. We believe we maintain a satisfactory relationship with our employees.
AVAILABLE INFORMATION
Financial Information about Geographic Areas
Financial information about geographic areas is set forth in Note (S), Segment Information, to the Notes to Consolidated Financial Statements.
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 websitePlayboyEnterprises.com 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,NYSE, the required annual certifications of our Chief Executive Officer relating to compliance by us with the Exchange'sNYSE’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.
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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.U.S. We also have agreements with the principal DTH operators in the United
StatesU.S. 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'sVOD’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.
| · | we or the satellite transponder providers are indicted or otherwise charged as a defendant in a criminal proceeding; |
| · | the Federal Communications Commission issues an order initiating a proceeding to revoke the satellite owner’s authorization to operate the satellite; |
| · | the satellite transponder providers are ordered by a court or governmental authority to deny us access to the transponder; |
| · | we are deemed by a governmental authority to have violated any obscenity law; or |
| · | 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'providers’ ability to deliver transmission services.
We are subject to risks resulting from our operations outside the United
States,U.S., 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, 2008,2009, we derived approximately 32%36% of our consolidated
revenues from countries outside the United States.U.S. 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.
| · | adverse political, regulatory, legislative and economic conditions in various jurisdictions; |
| · | costs of complying with varying governmental regulations; |
| · | fluctuations in currency exchange rates; |
| · | difficulties in developing, acquiring or licensing programming and products that appeal to a variety of audiences and cultures; |
| · | scarcity of attractive licensing and joint venture partners; |
| · | the potential need for opening and managing distribution centers abroad; and |
| · | 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'smanagement’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,mobile, 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 onlinedigital 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' transactioncustomers’ tran saction 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"“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,
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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'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'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'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.
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(1) (1) Certain amounts reported for prior periods have been reclassified to conform to the current year’s presentation.
(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.
(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)
============================================================================
(H) FINANCIAL INSTRUMENTS
(1) At
(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.
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
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 distributiondistribut ion 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
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o our ability to provide effective advertising delivery and
measurement systems.
| · | our ability to maintain a large, demographically attractive subscriber base for Playboy magazine and Playboy.com and any of our other free websites; |
| · | our ability to offer attractive advertising rates; |
| · | our ability to attract advertisers and sponsors; and |
| · | 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 and to service our Playboy magazine subscriptions and to print and
distribute the magazine and special editions.other domestic publications. We also rely on third parties to operate our e-commerce and catalog businesses.business. 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 AMI for non-editorial functions of Playboy magazine and other domestic publications. 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.business. 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 publishingprint 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 ourthe circulation rate base,of Playboy magazine, 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%90% 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 reliablyr eliably predict particular regulatory developments that could affect us adversely, those regulations
related to adult content, the Internet, privacyconsumer products 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.
| · | 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. |
| · | 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. |
| · | Consumer products. Any attempts to limit or otherwise regulate the sale or distribution of certain consumer products sold by our licensees could materially adversely affect our business, financial condition or results of operations. |
| · | Commercial advertising. We receive a significant portion of our advertising revenues from companies selling alcohol and tobacco products. For the year ended December 31, 2009, beer/wine/liquor and tobacco represented 20% 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.
| · | defamation; |
| · | invasion of privacy; |
| · | negligence; |
| · | copyright or trademark infringement; and |
| · | 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'smagazine’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 additionaladditiona l 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.us. 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.
| · | unforeseen operating difficulties and expenditures arising from the process of integrating any acquired business, product or technology, including related personnel; |
| · | diversion of a significant amount of management’s attention from the ongoing development of our business; |
| · | dilution of existing stockholders’ ownership interest in us; |
| · | incurrence of additional debt; |
| · | exposure to additional operational risk and liability, including risks arising from the operating history of any acquired businesses; |
| · | entry into markets and geographic areas where we have limited or no experience; |
| · | loss of key employees of any acquired companies; |
| · | adverse effects on our relationships with suppliers and customers; and |
| · | 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 otherothe r 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'sseller’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 total2009, our financing obligations of $115.0 million, all of which consisted of our 3.00% convertible senior subordinated notes due 2025, or convertible notes. notes, with a principal amount of $115.0 million. Holders of the convertible notes may require us to purchase all, or a portion, of the convertible notes at a purchase price in cash equal to 100% of the principal amount of the convertible notes beginning on the first put date of March 15, 2012. We may not be able to refinance the convertible notes or we may be forced to refinance the convertible notes at higher interest rates. If we are unable to refinance our convertible notes or obtain other financing, we will face substantial liquidity challenges and there can be no assurance that we will have sufficient cash flow o r capital resources to meet our repayment and other obligations.
In addition, we hadhave a $50.0$30.0 million revolving credit facility, which was reduced to
$30.0 million infacility. At February 2009. At
18
February 27, 2009,26, 2010, 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.
| · | we may be unable to obtain additional financing for working capital, capital expenditures, acquisitions and general corporate purposes; |
| · | debt-service requirements could reduce the amount of cash we have available for other purposes; and |
| · | 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.
| · | to seek additional financing in the debt or equity markets; |
| · | to refinance or restructure all or a portion of our debt; and/or |
| · | 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.
| · | incur or guarantee additional indebtedness; |
| · | repurchase capital stock; |
| · | repurchase convertible notes; |
| · | make loans and investments; |
| · | enter into agreements restricting our subsidiaries’ abilities to pay dividends; |
| · | create liens; |
| · | sell or otherwise dispose of assets; |
| · | enter new lines of business; |
| · | merge or consolidate with other entities; and |
| · | 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.
Ownership of Playboy Enterprises, Inc. is concentrated.
As of December 31, 2008,2009, 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 weakness in the global economy is currently experiencing a significant contraction,
with an almost unprecedented lack ofhas impacted the availability of commercial and consumer credit. This current decreaseweakness and any future decrease inweakening of 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 or reduce demand for our products, and haveresulting in 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 declineweakness in economic conditions.
the global economy.
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.conditions. 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 businessbusine ss 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$50.0 million and, at the same time, our total stockholders'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.$50.0 million. The market capitalization requirements further provide that the NYSE will promptly initiate suspension and delisting procedures with respect to our common stock if our global market capitalization for 30 consecutive trading days is less than $15.0 million, (until June 30, 2009,
when this requirement will increase to $25.0 million), in which case we would not be eligible to utilize the cure procedures provided by the NYSE in other circumstances. The minimum stock price requirements of the NYSE provide that the NYSE may take action to delist our common stock if the average closing price of our common stock is less than $1.00 for 30 consecutive trading days, in which case we would expect to have six months to take corrective action before our common stock would be delisted. The NYSE has temporarily suspended its $1.00
minimum stock price requirement until June 30, 2009.
There can be no assurance that we will meet the NYSE'sNYSE’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'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.
| Location | Primary Use |
Office Space Leased:
| Chicago, Illinois | This space serves as our |
| London, England | This space is used by |
| Los Angeles, California | This space serves as our Entertainment |
| New York, New York | We vacated this space |
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 |
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. |
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'sEC’s failure to pay royalties and other amounts due to us under the License Agreement. On February 18, 1998, the Editorial Defendants filed a cross-claim against us. Gongora allegedal leged 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.U.S. The basis of GSI'sGSI’s cross-claim was that it was the assignee of EC'sEC’s right to distribute the Mexican Edition in the United StatesU.S. 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'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'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 Codification Topic 450, Contingencies, or Statement 5,ASC Topic 450, 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.,April 12, 2004, 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 Entertainment Companies, or Spice, Playboy Enterprises, Inc., or Playboy, Playboy Enterprises International, Inc., or PEII, D. Keith Howington, Anne Howington and Logix Development Corporation, or Logix. The complaint alleges that Faherty is entitled to statutory and contractual indemnification from Playboy, PEII and Spice with respect to defense costs and liabilities incurred by Faherty in theconnection with litigation describedthat was settled in the
preceding paragraph,2004, or the Logix litigation. The Logix litigation related to a suit brought by Logix, Keith Howington and Anne Howington against Faherty and other parties alleging certain contract and tort causes of action arising out of an agreement between Emerald Media Inc., or EMI, and Logix in which EMI agreed to purchase certain explicit television channels over C-band satellite. 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'sLogix’s recovery against Faherty has beenb een 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.June 2010. 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. Although the trial court allowed that amendment, that ruling was reversed by the California Court of Appeal on February 18, 2010. In the event Faherty'sFaherty’s indemnification and conspiracy claims go forward against us, we believe they arear e 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,ASC Topic 450, no liability has been accrued.
Item 4. SubmissionReserved
PART II
Item 5. Market for Registrant'sRegistrant’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)(V), 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, 2009,26, 2010, there were 3,2933,279 and 10,78811,600 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 2009, 2008 2007 or 2006.2007. 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)(V), Quarterly Results of Operations (Unaudited)(Una udited), to the Notes to Consolidated Financial Statements.
As described in Note (P)(N), 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, 2003,2004, through December 31, 2008.2009. The graph reflects $100 invested on December 31, 2003,2004, 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
Item 6. Selected Financial Data
- -------------------------------
(in(1)
(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 | ||||||||||||||||
| 12/31/09 | 12/31/08 | 12/31/07 | 12/31/06 | 12/31/05 | ||||||||||||||||
Selected financial data (2) | ||||||||||||||||||||
| Net revenues | $ | 240,353 | $ | 292,147 | $ | 339,840 | $ | 331,142 | $ | 338,153 | ||||||||||
| Interest expense, net | (7,945 | ) | (8,021 | ) | (6,112 | ) | (6,639 | ) | (7,354 | ) | ||||||||||
| Net income (loss) | (51,278 | ) | (160,367 | ) | 910 | (1,456 | ) | (3,532 | ) | |||||||||||
| Basic and diluted earnings (loss) per common share | (1.53 | ) | (4.81 | ) | 0.03 | (0.04 | ) | (0.11 | ) | |||||||||||
EBITDA: (3) | ||||||||||||||||||||
| Net income (loss) | (51,278 | ) | (160,367 | ) | 910 | (1,456 | ) | (3,532 | ) | |||||||||||
| Adjusted for: | ||||||||||||||||||||
| Interest expense | 8,686 | 8,500 | 8,623 | 9,086 | 9,571 | |||||||||||||||
| Income tax expense (benefit) | 2,659 | (9,850 | ) | 1,928 | 2,496 | 3,998 | ||||||||||||||
| Depreciation and amortization | 36,113 | 39,458 | 41,198 | 42,218 | 42,540 | |||||||||||||||
| Amortization of deferred financing fees | 717 | 623 | 756 | 801 | 847 | |||||||||||||||
| EBITDA | (3,103 | ) | (121,636 | ) | 53,415 | 53,145 | 53,424 | |||||||||||||
Adjusted EBITDA: (4) | ||||||||||||||||||||
| Adjusted for: | ||||||||||||||||||||
| Restructuring expense | 19,148 | 6,783 | 445 | 1,998 | 149 | |||||||||||||||
| Stock options and restricted stock awards | 817 | 1,032 | 1,633 | 1,859 | 601 | |||||||||||||||
| Equity (income) loss in operations of investments | (402 | ) | 126 | (129 | ) | 94 | 383 | |||||||||||||
| Impairment charges | 27,724 | 146,536 | 1,508 | - | - | |||||||||||||||
| Impairment charge on investments | - | 2,033 | 88 | - | - | |||||||||||||||
| Deferred subscription cost write-off | - | 4,820 | - | - | - | |||||||||||||||
| Provisions for (recoveries from) reserves | (39 | ) | 4,121 | - | - | - | ||||||||||||||
| Cash investments in entertainment programming | (24,840 | ) | (30,200 | ) | (34,405 | ) | (36,675 | ) | (33,617 | ) | ||||||||||
| Adjusted EBITDA | $ | 19,305 | $ | 13,615 | $ | 22,555 | $ | 20,421 | $ | 20,940 | ||||||||||
| At period end | ||||||||||||||||||||
| Cash and cash equivalents and marketable securities and short-term investments | $ | 24,569 | $ | 31,331 | $ | 33,555 | $ | 35,748 | $ | 52,052 | ||||||||||
| Total assets | 196,832 | 253,588 | 443,226 | 434,119 | 427,571 | |||||||||||||||
| Long-term financing obligations | 104,128 | 99,763 | 95,718 | 91,969 | 88,494 | |||||||||||||||
| Total shareholders’ equity (deficit) | $ | (22,296 | ) | $ | 28,119 | $ | 188,669 | $ | 184,995 | $ | 182,355 | |||||||||
| Long-term financing obligations as a percentage of total capitalization | 127 | % | 78 | % | 34 | % | 33 | % | 33 | % | ||||||||||
| Number of common shares outstanding | ||||||||||||||||||||
| Class A voting | 4,864 | 4,864 | 4,864 | 4,864 | 4,864 | |||||||||||||||
| Class B nonvoting | 28,632 | 28,487 | 28,402 | 28,362 | 28,261 | |||||||||||||||
| Number of full-time employees | 543 | 678 | 801 | 789 | 709 | |||||||||||||||
| Selected operating data | ||||||||||||||||||||
| Cash investments in Company-produced and licensed entertainment programming | $ | 24,840 | $ | 30,200 | $ | 34,405 | $ | 36,675 | $ | 33,617 | ||||||||||
| Cash investments in digital content | 6,272 | 7,015 | 5,620 | 5,031 | 2,242 | |||||||||||||||
| Total cash investments in entertainment programming and digital content | 31,112 | 37,215 | 40,025 | 41,706 | 35,859 | |||||||||||||||
| Amortization of investments in Company-produced and licensed entertainment programming | 29,353 | 32,483 | 33,935 | 36,564 | 37,450 | |||||||||||||||
| Digital content expense | 6,272 | 7,015 | 5,620 | 5,241 | 2,626 | |||||||||||||||
| Total amortization of entertainment programming and digital content | $ | 35,625 | $ | 39,498 | $ | 39,555 | $ | 41,805 | $ | 40,076 | ||||||||||
For a more detailed description of our financial position, results of operations and accounting policies, please refer to Part II. Item 7. "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” and Part II. Item 8. "Financial“Financial Statements and Supplementary Data."
”
| (1) | Certain amounts reported for prior periods have been restated to conform to the current year’s presentation. |
| (2) | 2009 included $19.2 million of restructuring expense and $27.7 million of impairment charges. 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 issued by our subsidiary PEI Holdings, Inc. |
| (3) | 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 and amortization of deferred financing fees. In order to fully assess our financial results, management believes that EBITDA is an appropriate measure for evaluating our operating performance and liquidity, because it reflects the resources available for, among other things, investments in television programming. The resources reflected in EBITDA are not necessarily available for our discretionary use because of legal or functional requirements to conserve funds for capital replacement and expansion, debt service and other commitments and uncertainties. Investors should recognize that EBITDA might not be comparable to similarly titled measures of other companies. EBITDA shou ld be considered in addition to, and not as a substitute for or superior to, any measure of performance, cash flows or liquidity prepared in accordance with U.S. generally accepted accounting principles, or GAAP. |
| (4) | Adjusted EBITDA represents EBITDA adjusted for restructuring and certain noncash items and reduced by cash investments in entertainment programming. In order to fully assess our financial results, management believes that Adjusted EBITDA is an appropriate measure for evaluating our operating performance and liquidity, because it reflects the resources available for strategic opportunities including, among other things, to invest in the business, make strategic acquisitions and strengthen the balance sheet. In addition, a comparable measure of Adjusted EBITDA is used in our credit facility to, among other things, determine the interest rate that we are charged on borrowings under the credit facility. Investors should recognize that Adjusted EBITDA might not be comparable to similarly titled measures of other companies. Adjusted EBITDA should be considered in addition to, and not as a substitute for or superior to , any measure of performance or liquidity under GAAP. Similarly, Adjusted EBITDA should not be inferred as more meaningful than any of those measures. |
Item 7. Management's 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 global 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, PublishingPrint/Digital and Licensing.
The following discussion and analysis provides information whichthat 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
Current Economic Conditions
We have previously reported oncontinue to experience many of the same challenges facingour partners and competitors in the media industry and us, includingare facing, namely increased competition for consumers'consumers’ attention in the face of shrinking overall spending in the television and print businesses, the migration of advertisers to other platforms, higher manufacturing costs and the increasing costs of paper, postage,
ink and other expenses. Since that time, there has been a steady weakeninguncertainty created by the current state of the economy, which has greatly exacerbatedglobal economy. Our licensing business, in spite of the existing challenges. The current
global economic conditionsstrength of our brand and recent disruptionproducts, is negatively impacted by trends in credit markets pose a riskthe retail environment as well as from lower consumer spending and the inability of potential location-based entertainment business partners to the overall economy that could continueobtain project financing. We have made significant changes to impact demand formany of our productsprocesses 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 in order to address the changingcurrent economic environmentclimate 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. Wean d will continue to adaptdo so. Our goal is to narrow our focus to management of the Playboy brand and lifestyle. We are in the process of building a new business model that will create a leaner organization while using others to accelerate growth and strategic plansoperate more efficiently by finding partners with the size, scope and scale needed 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.
assist us in competing in today’s business environment.
Despite the current economic conditions, we believe we continue to have the liquidity to meet our needs for the foreseeable future. For the year endedneeds. At December 31, 2008, we generated approximately $3.8 million of net cash from our
operating activities. In addition, at December 31, 2008,2009, we had $25.2$24.6 million in cash and cash equivalents, and there were no borrowings and $0.8 million in letters of credit outstanding under our $50.0$30.0 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 flows from operating activities in addition to our cash and committedborrowing capacity iswill be sufficient to meet our liquidity needs through 2011, 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
See “Liquidity and Capital Resources” below.
Revenues
Entertainment Group revenues are generated principally from our domestic and international TV and online/mobile businesses. TelevisionTV 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 anda nd mainstream motion pictures, from license fees for Playboy Radio and from the sale of DVDs, a business which we previously announced weexited.
Print/Digital Group revenues are exiting to focusgenerated primarily from our distribution strategies on digital.
Publishing Groupdomestic magazine and digital businesses. Our domestic magazine and special editions revenues are primarily circulation driven for our
domestic magazine and special editions and include both subscription and newsstand sales. Additionally, the group generatesPrint revenues are also generated from advertising 27
sales in Playboy magazine as well as from royalties on circulation and advertising sales from our 26 licensed international editions. We currently generate most of our digital revenues from the sale of our premium content. These subscription-based revenues are derived from digital clubs, which offer unique content under various brands, most notably Playboy. Digital revenues also include advertising sales, royalties from our outsourced e-commerce bus iness, licensing fees from Playboy- and other-branded international websites and from content delivered via mobile devices.
Licensing Group revenues are generated primarily from royalties on the wholesale price of our branded products around the world, as well asroyalties from
multifaceted location-based entertainment venues. We alsovenues and from owned and licensed Playboy-branded retail stores. Additionally, we 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
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.
Publishingprovider.
Print/Digital Group expenses include subscription acquisition, manufacturing, editorial, shipping, advertising sales, hosting, digital content and marketing and administrative expenses. Digital content expenses are expenditures associated with the creation of content for our websites and mobile providers.
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 the operation of our retail store.
Corporate expenses include the costs of supporting our businesses, company-wide marketing and promotions, including the Playboy Mansion.
28
Mansion, and protecting our intellectual properties.
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 | ||||||||||
| 12/31/09 | 12/31/08 | 12/31/07 | ||||||||||
| Net revenues | ||||||||||||
| Entertainment | ||||||||||||
| Domestic TV | $ | 50.5 | $ | 62.6 | $ | 75.8 | ||||||
| International TV | 42.6 | 49.8 | 55.9 | |||||||||
| Other | 5.0 | 6.4 | 7.3 | |||||||||
| Total Entertainment | 98.1 | 118.8 | 139.0 | |||||||||
| Print/Digital | ||||||||||||
Domestic magazine | 55.0 | 68.0 | 77.0 | |||||||||
| International magazine | 6.3 | 8.0 | 7.4 | |||||||||
| Special editions and other | 6.8 | 8.5 | 9.4 | |||||||||
| Digital | 37.4 | 48.4 | 64.0 | |||||||||
| Total Print/Digital | 105.5 | 132.9 | 157.8 | |||||||||
| Licensing | ||||||||||||
| Consumer products | 29.0 | 33.1 | 34.0 | |||||||||
| Location-based entertainment | 4.6 | 3.8 | 3.8 | |||||||||
| Marketing events | 2.5 | 2.9 | 3.2 | |||||||||
| Other | 0.7 | 0.6 | 2.0 | |||||||||
| Total Licensing | 36.8 | 40.4 | 43.0 | |||||||||
| Total net revenues | $ | 240.4 | $ | 292.1 | $ | 339.8 | ||||||
| Net income (loss) | ||||||||||||
| Entertainment | ||||||||||||
| Before programming amortization | $ | 39.2 | $ | 40.6 | $ | 45.2 | ||||||
| Programming amortization | (29.3 | ) | (32.5 | ) | (34.0 | ) | ||||||
| Total Entertainment | 9.9 | 8.1 | 11.2 | |||||||||
| Print/Digital | 1.6 | (3.4 | ) | 2.5 | ||||||||
| Licensing | 21.0 | 23.7 | 26.4 | |||||||||
| Corporate | (25.4 | ) | (23.9 | ) | (28.1 | ) | ||||||
| Segment income | 7.1 | 4.5 | 12.0 | |||||||||
| Restructuring expense | (19.2 | ) | (6.8 | ) | (0.5 | ) | ||||||
| Impairment charges | (27.7 | ) | (146.5 | ) | (1.5 | ) | ||||||
| Deferred subscription cost write-off | - | (4.8 | ) | - | ||||||||
| Provisions for reserves | - | (4.1 | ) | - | ||||||||
| Operating income (loss) | (39.8 | ) | (157.7 | ) | 10.0 | |||||||
| Nonoperating income (expense) | ||||||||||||
| Investment income | 0.8 | 0.5 | 2.5 | |||||||||
| Interest expense | (8.7 | ) | (8.5 | ) | (8.6 | ) | ||||||
| Amortization of deferred financing fees | (0.7 | ) | (0.7 | ) | (0.8 | ) | ||||||
| Impairment charge on investments | - | (2.0 | ) | (0.1 | ) | |||||||
| Other, net | (0.2 | ) | (1.8 | ) | (0.2 | ) | ||||||
| Total nonoperating expense | (8.8 | ) | (12.5 | ) | (7.2 | ) | ||||||
| Income (loss) before income taxes | (48.6 | ) | (170.2 | ) | 2.8 | |||||||
| Income tax benefit (expense) | (2.7 | ) | 9.8 | (1.9 | ) | |||||||
| Net income (loss) | $ | (51.3 | ) | $ | (160.4 | ) | $ | 0.9 | ||||
| Basic and diluted earnings (loss) per common share | $ | (1.53 | ) | $ | (4.81 | ) | $ | 0.03 | ||||
2009 Compared to 2008
Revenues decreased $51.7 million, or 18%, compared to 2008. The decrease was driven by our Entertainment and Print/Digital Groups and was primarily due to lower revenues from our mature television and print businesses. Also contributing were lower digital revenues due to lower paysites revenues and the outsourcing of our e-commerce business in 2008 and lower Licensing Group revenues due to the continuing effects of the global economic slowdown.
Segment income increased $2.6 million compared to 2008 due to improved results from our Entertainment and Print/Digital Groups, largely due to cost-savings initiatives implemented in 2009 and 2008, partially offset by lower Licensing Group results and higher Corporate expense. We expect more than 20% growth in segment income in 2010 compared to 2009.
Operating results improved $117.9 million compared to 2008 primarily due to a $118.8 million decrease in impairment charges in 2009.
Net loss improved $109.1 million in 2009 primarily due to the operating results previously discussed.
Entertainment Group
Domestic TV revenues decreased $12.1 million, or 19%, in 2009 primarily reflecting continued consumer migration to the video-on-demand, or VOD, platform as cable and satellite providers continue to eliminate linear channels in order to increase bandwidth. We have less shelf space on VOD than we did when linear networks were the only way consumers could buy our TV products due to lowered barriers to entry for our competitors. This results in fewer opportunities for consumers to purchase our products. Our results also reflect consumer migration to Internet-based adult options. These factors have led to falling transactional pay-per-view, or PPV, and VOD revenues, trends we expect will continue into the future. The sale of our Los Angeles production facility in the second quarter of 2008 al so contributed to the revenue decline in 2009.
International TV revenues decreased $7.2 million, or 14%, in 2009. The decrease was largely due to foreign currency exchange rate fluctuations. Also contributing were lower sales in Europe due primarily to the expiration or loss of several contracts in the current year's presentation.
29
year, some of which were replaced by contracts with less favorable terms, partially offset by revenues due to expansion into new territories in the current year. The impact of the economic recession on consumer spending and increased competition among providers, particularly in the U.K. where we derive significant revenues, have made our International TV business more challenging. We expect these challenges to continue into the future.
Revenues from other businesses decreased $1.4 million, or 22%, in 2009 primarily due to our exiting the DVD business in the third quarter of 2008.
The group’s segment income improved $1.8 million in 2009 as our cost-savings initiatives, including exiting the DVD business, foreign currency exchange rate fluctuations on costs and lower programming amortization and administration expenses more than offset the revenue declines previously discussed.
Print/Digital Group
Domestic magazine revenues decreased $13.0 million, or 19%, compared to 2008. This decrease was due primarily to industry dynamics including lower overall spending by advertisers, fewer subscribers and decreasing newsstand sales.
Subscription revenues decreased $2.8 million, or 7%, compared to 2008 COMPARED TOprimarily due to 13% fewer average paid copies served. Industry sources believe most magazine subscriptions are down due to competition for readers, including from the Internet, as well as lower consumer spending due to the weak economy. The decrease was partially offset by the favorable effect of revenues reflecting the combined January/February 2010 issue in 2009, resulting in the recognition of revenues for 13 issues in 2009 compared to 12 issues in 2008. Consequently, we expect to recognize revenues for 11 issues in 2010.
Newsstand revenues decreased $1.8 million, or 25%, in 2009 compared to 2008 primarily due to 23% fewer copies sold. The current year reflects continued overall weakness in the newsstand business due to the clutter created
by a large number of titles, fewer newsstand outlets and competition from free content on the Internet. In addition, newsstand revenues were negatively impacted by one fewer issue in 2009.
Advertising revenues decreased $8.4 million, or 39%, compared to 2008 primarily due to a 33% decrease in the number of advertising pages and a 9% decrease in average net revenue per page, reflecting lower overall spending by advertisers and one fewer issue in 2009. Effective with the January/February 2010 issue, we lowered the circulation rate base (the total newsstand and subscription circulation guaranteed to advertisers) of Playboy magazine to 1.5 million from 2.6 million, which will negatively impact 2010 advertising revenues. Advertising sales for the 2010 first quarter magazine issues are closed, and we expect to report advertising revenues to be approximately 45% lower and advertising pages to be flat compared to the 2009 fi rst quarter. On a combined basis, Playboy print and digital advertising revenues decreased $8.7 million, or 34%, compared to 2008.
International magazine revenues decreased $1.7 million, or 21%, compared to 2008 due largely to lower royalties from our European editions. Special editions and other revenues decreased $1.7 million, or 20%, in 2009 compared to 2008 due mainly to 20% fewer newsstand copies sold. The same industry dynamics that are impacting Playboy magazine in the domestic market are also impacting our other print businesses.
Digital revenues decreased $11.0 million, or 23%, compared to 2008. Paysites revenues in the current year were lower due to increasing amounts of competing free content available on the Internet. We completed a major infrastructure overhaul, redesign and relaunch of the free portions of our website to improve the customer and advertiser experience and our competitive position. With the redesign completed, we continue our focus on our paysites and increasing profitability by building traffic and conversions. The decrease in revenues is also in part a result of the outsourcing of our e-commerce business during 2008.
Segment results improved $5.0 million compared to 2008. Significant reductions in manufacturing, shipping and subscription promotion costs, attributable to the combined issues in 2009 and our decision to reduce Playboy magazine’s guaranteed rate base effective with the January/February 2010 issue, and other cost-savings initiatives implemented in the current and previous years more than offset the lower revenues in the current year. In addition, the outsourcing of our e-commerce business contributed to the improved segment results in the current year.
In November 2009, we entered into an agreement with American Media, Inc. through its wholly owned subsidiary, American Media Operations, Inc., or AMI, to outsource non-editorial functions of Playboy magazine and other domestic publications, including production, circulation, advertising sales, marketing and other support services. We began transitioning these functions in November 2009 and expect to complete the transition by the end of the first quarter of 2010. We believe our agreement with AMI will significantly reduce our cost structure related to manufacturing and marketing and increase domestic magazine revenues from growth in newsstand and advertising sales. As a result, we expect Playboy magazine will lose approximately $5.0 million in 2010 before reaching profitability by late 2011.
Licensing Group
Licensing Group revenues decreased $3.6 million, or 9%, compared to 2008. Despite the strength of our brand and our products and our expansion into new product lines and territories, the continued overall weakness of the global economy translated into lower retail sales for our licensees and in turn lower royalties to us. This is largely reflected in lower international consumer products royalties, primarily from Western Europe. We expect our international consumer products royalties to increase as overall economic conditions improve.
The group’s segment income decreased $2.7 million compared to 2008 primarily due to the decrease in revenues discussed above.
Corporate
Corporate expense increased $1.5 million in 2009 primarily due to favorable adjustments related to our now-terminated deferred compensation plan in the prior year and costs associated with senior management transitions in the current year, partially offset by the effects of our cost-savings initiatives in the current year. For 2010, we expect Corporate expense to be flat or decrease slightly compared to 2009.
Restructuring Expense
In the fourth quarter of 2009, we implemented a plan to outsource non-editorial functions of Playboy magazine and other domestic publications to AMI as well as to reduce other overhead costs. As a result of this plan, we recorded a charge of $3.7 million related to a workforce reduction of 26 employees, most of whose positions will be eliminated by the end of the first quarter of 2010, and contract termination fees. Severance payments under this plan began in the fourth quarter of 2009 and will be completed by 2011.
In the second quarter of 2009, we recorded a charge of $9.3 million related to our plan to vacate our leased New York office space. The charge primarily reflected the discounted value of our remaining lease obligation net of estimated sublease income. In the fourth quarter of 2009, we recorded an unfavorable adjustment of $2.6 million due to changes in assumptions for estimated sublease income resulting from the difficult New York real estate market. We expect to record additional restructuring charges of $9.0 million over the remaining approximate nine-year term of the lease, or $1.0 million on average annually. The additional restructuring charges represent depreciation of leasehold improvements and furniture and equipment as well as accretion of the difference between the nominal and discounted remaining lease obligation net of estimated sublease income. We recorded an additional $0.8 million of these restructuring charges representing depreciation and accretion in the current year and expect to record $1.3 million in 2010.
In the first quarter of 2009, we implemented a restructuring plan to integrate our print and digital businesses in our Chicago office as well as to streamline operations across the Company, including the elimination of positions. As a result of this plan, we recorded a charge of $2.6 million related to the workforce reduction of 107 employees, whose positions were eliminated by the end of the second quarter of 2009. Severance payments under this plan began in the first quarter of 2009 and were substantially completed by the end of the year with some payments continuing into 2010. We subsequently recorded a favorable adjustment of $0.1 million as a result of changes in assumptions for this plan.
In the fourth quarter of 2008, we implemented a restructuring plan to lower overhead costs, primarily related to senior Corporate and Entertainment Group positions. As a result of this plan, we recorded a charge of $4.0 million related to 21 employees, most of whose positions were eliminated in the first quarter of 2009. Payments under this plan began in the fourth quarter of 2008 and were largely completed by the end of 2009 with some payments continuing into 2011. We recorded an unfavorable adjustment of $0.8 million during the current year as a result of changes in assumptions for this plan.
In the third quarter of 2008, we implemented a restructuring plan to reduce overhead costs. As a result of this plan, we recorded a charge of $2.2 million related to costs associated with a workforce reduction of 55 employees, most of whose positions were eliminated in the fourth quarter of 2008. Payments under this plan began in the fourth quarter of 2008 and were substantially completed by the end of 2009 with some payments continuing into 2010. We recorded a favorable adjustment of $0.5 million during the current year as a result of changes in assumptions for this plan.
Impairment Charges
In accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 350, Intangibles–Goodwill and Other, or ASC Topic 350, we conduct annual impairment testing of goodwill and other indefinite-lived 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 indefinite-lived intangible assets. In accordance with ASC Topic 360, Property, Plant, and Equipment, or ASC Topic 360, we evaluate the potential impairment of finite-lived acquired intangible assets when there are indicators of impairment. Based on the results of our 2009 annual impairment testing, we determined an impairment charge of $22.2 million, the entire goodwill balance at the time of our impairment testing, was necessary under ASC Topic 350 and no impairment charge was necessary under ASC Topic 360. For the forecasted-discounted cash flows analysis used in our annual impairment testing in 2009, we projected lower cash flows from our Entertainment Group, which was the reporting unit tested, compared to our projections used in the 2008 annual impairment test as a result of the continuing migration from linear television networks to the more competitive VOD platform in the U.S. and abroad, as previously discussed. Based on the results of our 2008 annual impairment testing, we determined an impairment charge of $146.5 million was necessary for 2008. The 2008 charge consisted of $105.8 million of goodwill and $24.6 million of trademarks impaired under ASC Topic 350 and $16.1 million of other intangible assets impaired under ASC Topic 360.
In concert with the integration of our print and digital businesses in the first quarter of 2009, we moved the reporting of our digital business from the Entertainment Group into the Print/Digital Group, which we formerly called the Publishing Group. These businesses were combined in order to better focus on creating brand-consistent content that extends across print and digital platforms. Due to this realignment of our operating segments, which are also our reporting units as defined in ASC Topic 350, we conducted interim impairment testing of goodwill in accordance with ASC Topic 350. Interim testing of goodwill was also necessitated by lower expected financial results in the new Print/Digital Group than that of the former Entertainment Group, which contained the digital business’ ; assets prior to the realignment of our operating segments. As a result of this testing, the implied fair value of goodwill of the new Print/Digital operating segment was lower than its carrying value, and we recorded an impairment charge on the entire balance of the Print/Digital Group’s goodwill of $5.5 million in the first quarter of 2009.
We continue to have access to our credit facility after the impairment charges.
Further downward pressure on our operating results and/or further deterioration of economic conditions could result in additional future impairments of our long-lived assets, including our other intangible assets. See Critical Accounting Policies and Note (M), Intangible 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. Prior to 2008, in accordance with the American Institute of Certified Public Accountants’ Statement of Position 93-7, Reporting on Advertising Costs, which is incorporated in ASC Topic 340, Other Assets and Deferred 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. 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.
Nonoperating Income (Expense)
Nonoperating expense decreased $3.7 million in 2009, largely reflecting a $2.0 million charge on certain investments deemed to be other-than-temporarily impaired as a result of adverse market conditions in 2008. The decrease also reflects unfavorable foreign currency exchange rate fluctuations of $1.2 million in 2008.
Income Tax Benefit (Expense)
We account for income taxes using the asset and liability method in accordance with ASC Topic 740, Income Taxes, or ASC Topic 740. ASC Topic 740 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.
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, 2009, we recorded an additional $21.0 million valuation allowance against deferred tax assets related primarily to current year federal and state net operating losses, or NOLs, because we believe that it is more likely than not that we will not be able to use the NOL carryforwards before they expire.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. 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, expiration of the statute of limitations, 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, 2009, 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 t he next 12 months.
In 2009, we had a net income tax expense of $2.7 million compared to a net income tax benefit of $9.8 million in 2008. The 2009 net income tax expense is due principally to foreign income tax withholding and the deferred tax impact of various definite-lived intangible assets along with the tax benefit of $1.4 million associated with the reversal of deferred tax liabilities associated with the impairment charges on goodwill. In 2009, 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 intangible assets.
In 2008, we recognized a tax benefit of $9.8 million due primarily to the reversal of deferred tax liabilities associated with the impairment charges on goodwill and other intangible assets.
2008 Compared to 2007
Revenues decreased $47.7 million, or 14%, compared to 2007 due to lower revenues from our Entertainment, PublishingPrint/Digital 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 year2008 contributed to the negative comparison.
Net loss was $156.1$160.4 million in 2008 compared to net income of $4.9$0.9 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
Domestic TV 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-viewin 2008. PPV revenues were lower for the current year,2008, reflecting consumers'consumers’ continuing migration from linear networks to the more competitive video-on-demandVOD platform, where we control less shelf space. Playboy TV monthly subscription revenues increased for the current year2008 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 foralso contributed to the current year.
revenue decline.
International TV revenues decreased $6.1 million, or 11%, and profit
contribution decreased $2.3 million in 2008. The current year reflected2008 reflecting lower revenues from our U.K. networks and unfavorable foreign currency exchange rate fluctuations. The revenue decline was 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
contribution2008 largely due to lower DVD revenues as a result of our exit from this business in the third quarter of 2008 to focus on digital distribution. The revenue decline was partially offset by favorable revenues 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. Entertainment.
The expected decline in DVD revenues was more
than offset by lower costs, leading to an increase in profit contribution.
The group's administrative expensesgroup’s segment income decreased $2.6$3.1 million or 14%, in 2008 primarily due to the revenue declines previously discussed, partially offset by our exiting of unprofitable businesses, lower compensation-relatedadministrative expenses, lower programming amortization expense 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.
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Publishingimpact of cost-savings initiatives.
Print/Digital 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 onlinedigital 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
Digital revenues decreased $15.6 million, or 24%, in 2008. Our websites were in the midst of a major infrastructure overhaul and redesign effort at December 31, 2008, segment losswhich was flatcompleted in the second quarter of 2009. Additionally, we completed the outsourcing of our e-commerce business in early 2008 resulting, as expected, in lower revenues but higher profit contribution for 2008.
Segment results for the group decreased $5.9 million in 2008 compared to 2007 primarily due to the revenue decreases previously discussed, partially offset by lower editorial, manufacturing, subscription collection and advertising sales and marketing costs coupled with cost savings initiatives, offsetting the
previously discussed revenue declines.
initiatives.
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,recorded charges of $6.8 million primarily related to several senior-level
Corporate and Entertainment Group positions. As a resultworkforce reductions 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.
76 employees.
In 2007, we implemented a plan to outsource our e-commerce and catalog
businesses, to sell the assetsrecorded charges of $0.5 million primarily 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.
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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 total impairment charge of $146.5 million. We expect to record additional
impairment charges onmillion was necessary for the year ended December 31, 2008. This charge consisted of $105.8 million of goodwill and $24.6 million of $5.6trademarks impaired under ASC Topic 350 and $16.1 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-livedother intangible assets including goodwill.impaired under ASC Topic 360. Impairment tests performed in 2007 and 2006 indicated no impairment was necessary at those times.that time. See Critical Accounting Policies and Note (O)(M), 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)(B), 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$5.3 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.
Benefit (Expense)
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.
intangible assets.
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.
intangible assets.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2008,2009, we had $24.5 million in cash and cash equivalents compared to $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, 2007.2008. During 2008,2009, we sold at par all ofinvestments related to our $6.0 million of auction rate securities whichnow-terminated deferred compensation plan that 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, 2007.2008. At December 31, 2009 and 2008, our outstanding debt consisted solely of the $115.0 million principal amount of our 3.00% convertible senior subordinated notes due 2025, or convertible notes, with a carrying value of $104.1 million at December 31, 2009 and $99.8 million at December 31, 2008.
At December 31, 2009, cash generated from our operating activities, existing cash and cash equivalents and marketable securities and short-term investments were fulfilling our liquidity requirements. At December 31, 2008,2009, we also had a $50.0$30.0 million credit facility, which was reduced to $30.0 million in
February 2009.facility. This facility can be used for revolving borrowings, issuing letters of credit or a combination of both. As of February 27, 2009,26, 2010, 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.
Our future net cash flows from operating activities are dependent on many factors, including industry specific trends and overall economic conditions. As described above, market driven trends are negatively impacting our revenues, primarily within our mature television and print businesses. We expect that these trends will continue for the foreseeable future. In response to these market driven trends, we have taken a number of significant actions designed to reduce our overall cost structure and preserve cash flow, some of which are described in “Restructuring Expense” above. We believe that cash on handgenerated from operations, our existing cash and operating cash flows, together withequivalents and funds available under our credit facility and potential accesswill provide sufficient liquidity to creditfund our operations and capital
markets, will be sufficient to meet our operating expenses,expec ted capital expendituresexpenditure requirements and other contractual obligations as they become due.
due through 2011. A prolonged continuation of the economic and industry trends described above could adversely affect our future net cash flows from operating activities, which could require us to seek other sources of funds.
As discussed below, holders of our convertible notes may require us to purchase all or a portion of the convertible notes at a purchase price in cash equal to 100% of the principal amount of the convertible notes beginning on the first put date of March 15, 2012. We believe that this put option will likely be exercised by holders of our convertible notes because the trading price of the convertible notes is significantly below the put option purchase price. As a result, we expect to be required to refinance this obligation prior to the put date. We cannot be certain whether such refinancing will take the form of debt, equity or a combination thereof. Issuance of debt would likely increase our interest expense, and the issuance of equity could be dilutive to our existing stockholders.
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'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 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, contingentco ntingent 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 tradingtr ading 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'sissuer’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'sissuer’s future senior subordinated debt; and, senior to all of the issuer'sissuer’s future subordinated debt. In addition, the assets of the issuer'sissuer’s subsidiaries are subject to the prior claims of all creditors, including trade creditors, of those subsidiaries.
CREDIT FACILITY
At the beginning of 2009, we adopted FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), or FSP APB 14-1, which is incorporated in ASC Topic 470, Debt. The convertible notes had a carrying value of $104.1 million at December 31, 2009 and $99.8 million at December 31, 2008. The difference between the principal amount of $115.0 million and the financing obligation carrying value reflects the discount associated with applying the estimated 7.75% nonconvertible borrowing rate at the time of issuance of our convertible notes. The total discount will be amortized to interest e xpense under the effective interest rate method over a seven-year term, representing the period beginning on the issuance date of the convertible notes of March 15, 2005 and ending on the first put date of March 15, 2012. See “Recently Issued Accounting Standards” below.
Credit Facility
At December 31, 2008,2009, our $50.0$30.0 million credit facility provided for revolving borrowings, the issuance of letters of credit or a combination of both of up to $50.0$30.0 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'sborrower’s and the guarantors'guarantors’ assets.
36
CALIFA ACQUISITION
In 2008, we made
Cash Flows From Operating Activities
Net cash payments totaling $1.0used for operating activities was $0.7 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,2009 compared 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
Netnet cash provided by operating activities decreased $20.4 million toof $3.8 million in 2008 compared to 20072008. This unfavorable variance was primarily due to payments of our now-terminated deferred compensation plan combined with the operating and nonoperating results previously discussed combined with decreases in accounts payable and
deferred tax liabilities from 2007.
CASH FLOWS FROM INVESTING ACTIVITIES
discussed.
Cash Flows From Investing Activities
Net cash provided by investing activities was $3.2 million for 2009 and $4.3 million for 2008
compared to2008. 2009 reflected $6.8 million of net cash used for investing activitiesproceeds of $19.0marketable securities and investments, offset by $3.6 million in 2007.of capital expenditures. 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
Cash Flows From Financing Activities
Net cash used for financing activities of $3.4 million for 2009 and $2.6 million for 2008 and $11.7
million for 2007 were primarily due to payments in connection withrelated to our acquisitions of Club Jenna, Inc. and related companies, or Club Jenna, and the Califa Entertainment Group, Inc., or Califa. See Note (P), Commitments and Contingencies, to the Notes to Consolidated Financial Statements for additional information relating to the Club Jenna and Califa acquisition liabilities.
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
Effect of Exchange Rate Changes on Cash and Cash Equivalents
The positive effect of foreign currency exchange rates on cash and cash equivalents during 2009 of $0.3 million was due to the weakening of the U.S. dollar against foreign currencies, primarily the pound sterling. This compares to 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 effectsterling.
Contractual Obligations
The following table sets forth a summary of our contractual obligations and commercial commitments at December 31, 2008,2009, as further discussed in the Notes to Consolidated Financial Statements (in thousands):
| 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | ||||||||||||||||||||||
Long-term financing obligations (1) | $ | 3,450 | $ | 3,450 | $ | 3,450 | $ | 3,450 | $ | 3,450 | $ | 151,225 | $ | 168,475 | ||||||||||||||
Operating leases (2) | 6,611 | 6,636 | 6,429 | 5,411 | 6,035 | 30,376 | 61,498 | |||||||||||||||||||||
| Purchasing obligations: | ||||||||||||||||||||||||||||
Licensed programming commitments (3) | 5,645 | 3,906 | - | - | - | - | 9,551 | |||||||||||||||||||||
| Other: | ||||||||||||||||||||||||||||
Acquisition liabilities (4) | 5,300 | 750 | - | - | - | - | 6,050 | |||||||||||||||||||||
Transponder service and other agreements (5) | 8,593 | 7,704 | 7,450 | 3,954 | 2,229 | - | 29,930 | |||||||||||||||||||||
| Total obligations | $ | 29,599 | $ | 22,446 | $ | 17,329 | $ | 12,815 | $ | 11,714 | $ | 181,601 | $ | 275,504 | ||||||||||||||
| (1) | Includes interest and principal commitments. |
| (2) | Net of sublease income. |
| (3) | Represents our noncancelable obligations |
| (4) | Includes interest and principal related to the acquisitions of Califa and Club Jenna. |
| (5) | Represents our obligations under a services agreement under which Broadcast Facilities, Inc., |
We have excluded from the above table above uncertain tax liabilities as defined in FIN 48ASC Topic 740 due to the uncertainty of the amount and period of payment. At December 31, 2008,2009, our expected payment for significant contractual obligations includes approximately $8.0 million for unrecognized tax benefits associated
with the adoption of FIN 48.benefits. 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,U.S., 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
Revenue Recognition
Domestic Television
Our domestic television revenues were $62.6$50.5 million and $75.8$62.6 million for the years ended December 31, 20082009 and 2007,2008, 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, 20082009 and 2007,2008, we had receivables of $12.8$8.9 million and $14.8$12.8 million, respectively, related to domestic television. We record adjustments to revenuerev enue 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.
International Television
Our international television revenues were $49.8$42.6 million and $55.9$49.8 million for the years ended December 31, 20082009 and 2007,2008, 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. UponInternational 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. Up on 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, 20082009 and 2007,2008, we had receivables of $6.8$7.9 million and $9.1$6.8 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'smonth’s reports.
Domestic Magazine
Our Playboy magazine revenues were $68.0$55.0 million and $77.0$68.0 million for the years ended December 31, 20082009 and 2007,2008, respectively, of which 10.0%9.2% and 11.5%10.0% 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 newsstand 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'smonth’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 subsequentsubs equent 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.material. 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$29.0 million and $34.0$33.1 million for the years ended December 31, 20082009 and 2007,2008, 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'slicensee’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,Histori cally, 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
Deferred Revenues
We had deferred revenues related to Playboy magazine subscriptions and onlinedigital subscriptions of $19.4 million and $3.1 million, respectively, at December 31, 2009 and $27.5 million and $3.2 million, respectively, at December 31, 2008 and $32.6 million and $4.1 million, respectively, at December
31, 2007.2008. Sales of Playboy magazine and onlinedigital 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
Stock-Based Compensation
Our stock-based compensation expense related to stock options was $1.4$0.7 million and $1.1$1.4 million for the years ended December 31, 2009 and 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 behaviorand cancellation data 39
and involves a number of complex assumptions including expected volatility, risk-free interest rate, expected dividends and stock option exercises and 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),ASC Topic 718, Compensation–Stock Compensation, for all stock-based compensation awards is recognized using the straight-line attribution method.
Goodwill
We had no goodwill at December 31, 2009 and $27.8 million of goodwill at December 31, 2008. In accordance with ASC Topic 350, we do not amortize goodwill, but subject it to annual impairment tests. We conduct our annual impairment testing of goodwill 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. If the carrying amount of the reporting unit exceeds the fair value of the reporting unit based on an analysis using a combined weighted forecasted-discounted cash flow and market multiple approach, an impairment loss is recognized to the extent the implied fair value of the reporting unit’s goodwill is less than its carrying amount.
For the annual impairment testing as of October 1, 2008, we made assumptions to determine the estimated fair value using a combined forecasted-discounted cash flows and market multiples approach for the Entertainment Group, which was the reporting unit for our goodwill. Management believed these assumptions were consistent with those that would be utilized by a market participant in performing similar valuations. The assumptions for our forecasted-discounted cash flow analysis include projections of revenues, cost of sales, selling, general and administrative costs and cash flows considering planned business and operational strategies over a long-term planning horizon of five years, a growth rate thereafter and discount rates. The valuations employ present value techniques to measure fai r value and consider market factors. We assumed a discount rate of 14.0%, which was based on the weighted average cost of capital derived from public companies considered to be reasonably comparable to our Entertainment Group with respect to their cost of equity, cost of debt, capital structure and inherent market risk. We also assumed modest growth over the next five years and an annual growth rate of 3.0% thereafter, which took into account management’s assumptions on Company-specific and macroeconomic risks. The migration from linear networks to the more competitive VOD platform and competition from online content combined with weakness in the overall economy resulted in our lowering forecasted growth of the Entertainment Group compared to our forecasts used in the 2007 impairment testing. Market multiples for comparable companies vary, reflecting differing investor sentiment toward each of the companies, as well as the specific industry and the general economy. The multiples selected and applied to the financial results of our Entertainment Group are at a discount to the comparable companies’ median multiples given the groups’ recent financial performance, partially offset by projected operational improvement. The selected multiples give consideration to such factors as size, profitability and historical and projected trends in revenues.
In addition to our annual impairment testing, we tested a portion of our goodwill for impairment as of January 1, 2009 due to a realignment of our operating segments, which are also our reporting units as defined in ASC Topic 350. In concert with the integration of our print and digital businesses in the first quarter of 2009, we moved the reporting of our digital business from the Entertainment Group into the Print/Digital Group, which we formerly called the Publishing Group. Interim testing of goodwill was also necessitated by lower expected financial results in the new Print/Digital Group than that of the former Entertainment Group, which contained the digital business’ assets prior to the realignment of our operating segments.
For the annual impairment testing as of October 1, 2009, we followed the same procedures that we did for the annual impairment testing as of October 1, 2008. The continuing migration from linear networks to the more competitive VOD platform and competition from online content combined with continued weakness in the overall economy resulted in our further lowering forecasted growth of the Entertainment Group compared to our forecasts used in the 2008 impairment testing. Accordingly, for the annual impairment testing as of October 1, 2009, we assumed lower projected cash flow growth over the next five years and an annual growth rate of 0.5% thereafter. We also assumed a discount rate of 13.0% as a result of changes in the overall business climate. If the discount rate used in the forecaste d-discounted cash flow analysis as of October 1, 2009 was 1.0% lower and the growth rate used was 1.0% higher, the change in the estimated fair value would not have affected the goodwill impairment charge recorded in 2009.
Based on these impairment tests, we concluded the fair values of the reporting units tested based on the equally weighted forecasted-discounted cash flow and market multiple analyses were lower than the carrying values for each impairment test. This determination required fair value estimates be made for the applicable reporting units’ assets and liabilities, including intangible assets, to derive the fair value of the reporting units’ goodwill. The fair
value of the intangible assets were generally determined using forecasted-discounted cash flow analyses and discount rates that reflected the nature and characteristics, inherent risk and expected duration of the projected cash flows for each asset. For each of our impairment tests, the fair value of goodwill was compared to its carrying value, resulting in goodwill impairment charges of $5.5 million related to our Print/Digital Group and $22.2 million related to our Entertainment Group in 2009 and $105.8 million related to our Entertainment Group in 2008.
As a result of the impairment charges to our goodwill in the current year, we have no remaining goodwill at December 31, 2009.
RELATED PARTY TRANSACTIONS
HUGH
Hugh M. HEFNER
Hefner
We own a 29-room mansion located on five and one-half acres in Los Angeles, California.Angeles. 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 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-ChiefEditor - -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'sHefner’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'sHefner’s basic accommodations and access to the Playboy Mansion'sMansion’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'sHefner’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 31st31st each year and will continue to renew unless either Mr. Hefner or we terminate it. The rent charged to Mr. Hefner during 20082009 included the appraised rent and the appraised per-unit value of other benefits, as described above. Within 120 days after the end of our fiscalfisca l 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 20082009 to be $0.7$0.8 million, and Mr. Hefner paid that amount during 2008.amount. The actual rent and other benefits paid for
2007 and 2006 were $0.7 million for each of 2008 and $0.8 million, respectively.
2007.
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$14.4 million through 20082009 (including $2.7 million to bring the Hefner residence accommodations to a standard similar to the Playboy Mansion'sMansion’s common areas). The Playboy Mansion is included in our Consolidated Balance Sheets at December 31, 20082009 and 2007,2008, at a net book value of $1.3$1.2 million and $1.4$1.3 million, respectively, including all improvements and after accumulated depreciation. We incur all operating expenses of the Playboy Mansion, including depreciation and taxes, which were $2.3 million, $1.9 million and $2.8 million for 2009, 2008 and $2.1 million for 2008, 2007, and
2006, respectively, net of rent received from Mr. Hefner.
Crystal Harris, Holly Madison, Bridget Marquardt, Karissa Shannon, Kristina Shannon and Kendra Wilkinson, the stars of The Girls Next Door on E! Entertainment Television, resided in the mansion with Mr. Hefner at various times in 20082009 and 2007.2008. The value of rent, food and beverage and other personal benefits for thetheir 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 $0.3 million and $0.4 million in 2009 and 2008, respectively. In addition, each of 2008 and 2007.
In addition, Ms. Madison, Ms. Marquardt and Ms. Wilkinson each receivethese individuals receives or has received payments for services rendered on our behalf, including appearance fees.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2008,June 2009, the FASB issued Statement of Financial Accounting Standards No. 162, 168, TheFASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles, or Statement 162. 168. Statement 162 identifies the sources168, which is incorporated in ASC Topic 105, Generally Accepted Accounting Principles, establishes only two levels of accounting principles and the
framework for selecting the principles to be used in the preparation of
financial statements that are presented in conformity withU.S. generally accepted accounting principles. Statement 162 becomes effective 60 days followingprinciples, or GAAP, authoritative and nonauthoritative. The FASB Accounting Standards Codification™, or the Codification, is now the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission's approvalCommission, or SEC, which are sources of authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC accounting literature not included in the Public CompanyCodification is nonauthoritative. We adopted Statement 168 beginning with the third quarter of 2009. As the Codification does not change or alter existing GAAP, the adoption of Statement 168 did not impact our results of operations or financial condition.
In June 2009, the FASB issued Statement of Financial Accounting Oversight Board amendmentsStandards No. 167, Amendments to AU Section 411, The MeaningFASB Interpretation No. 46(R), or Statement 167. Statement 167, which is incorporated in ASC Topic 810, Consolidation, changes the approach to determining the primary beneficiary of Present Fairly in
Conformity With Generally Accepted Accounting Principles.a variable interest entity, or VIE, and requires companies to more frequently assess whether they must consolidate VIEs. We are required to adopt Statement 167 at the beginning of 2010. We do not expect the adoption of Statement 162167 to have a significant impact on our future results of operations or financial condition.
In April 2009, the FASB issued Staff Position No. FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, or FSP FAS 141(R)-1. FSP FAS 141(R)-1, which is incorporated in ASC Topic 805, Business Combinations, amends and clarifies existing guidance to address application issues raised on initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. FSP FAS 141(R)-1 is effective for assets and liabilities arising from contingencies in business comb inations for which the acquisition date is on or after the beginning of the first annual reporting period beginning after December 15, 2008. In the second quarter of 2009, we adopted the provisions of FSP FAS 141(R)-1 effective January 1, 2009. The adoption of FSP FAS 141(R)-1 did not have an impact on our results of operations or financial condition.
In May 2008, the FASB issued Staff Position No.FSP APB 14-1, Accounting for
Convertible which is incorporated in ASC Topic 470, Debt, Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement), or FSP APB 14-1. FSP APB 14-1which 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'sentity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. We are required to adoptadopted FSP APB 14-1 at the beginning of 2009 and applyapplied FSP APB 14-1 retrospectively to all periods presented. Weapplicable prior periods. In applying FSP APB 14-1, we reclassified $29.1 million of the carrying value of our convertible notes and $1.2 million of the issuance costs related to the convertible notes to equity retroactive to the March 2005 iss uance date. These amounts represent the equity component of the proceeds from the convertible notes calculated assuming a 7.75% nonconvertible borrowing rate. The discount is being accreted to “Interest expense” and the debt issuance costs are currently evaluatingbeing amortized to “Amortization of deferred financing fees” over a seven-year term, which represents the impactperiod beginning on the March 15, 2005 issuance date of the convertible notes and ending on the first put date of March 15, 2012. Accordingly, in 2008, 2007, 2006 and 2005, we recorded $4.0 million, $3.8 million, $3.5 million and $2.6 million of additional noncash interest expense and $0.3 million, $0.2 million, $0.3 million and $0.2 million of additional amortization of deferred financing fees, or $0.13, $0.12, $0.11 and $0.08 per basic and diluted share on a combined basis, respectively. For the year ended December 31, 2009, we recognized additional noncash interest expense of $4.4 million and additional amortization of deferred financing fees of $0.3 million, or $0.14 per basic and diluted share on a combined basis. On January 1, 2009, as a result of adopting FSP APB 14-1, we reduced the carrying value of the debt in “Financing obligations” by $15.2 million, decreased “Other noncurrent assets” by $2.2 million, increased “Capital in excess of par value” by $27.9 million and increased “Accumulated deficit” by $14.9 million on our resultsConsolidated Balance Sheet.
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 arear e 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, 20082009 and 2007,2008, 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$0.1 million, respectively.
At December 31, 20082009 and 2007,2008, 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, 2008,2009, the convertible notes had an implied fair value of $51.8 million, but the convertible notes had not traded
since September 2008.$100.1 million. 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 | 44 |
| Consolidated Balance Sheets | 45 |
| Consolidated Statements of | 46 |
| Consolidated Statements of Cash Flows | 47 |
| Notes to Consolidated Financial Statements | 48 |
| Report of Independent Registered Public Accounting Firm | 70 |
The supplementary data regarding quarterly results of operations are set forth in Note (W)(V), Quarterly Results of Operations (Unaudited), to the Notes to Consolidated Financial Statements.
42
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in
(in thousands, except per share amounts)
| Fiscal Year | Fiscal Year | Fiscal Year | ||||||||||
| Ended | Ended | Ended | ||||||||||
| 12/31/09 | 12/31/08 | 12/31/07 | ||||||||||
| Net revenues | $ | 240,353 | $ | 292,147 | $ | 339,840 | ||||||
| Costs and expenses | ||||||||||||
| Cost of sales | (184,890 | ) | (236,328 | ) | (268,243 | ) | ||||||
| Selling and administrative expenses | (48,405 | ) | (51,294 | ) | (59,601 | ) | ||||||
| Restructuring expense | (19,148 | ) | (6,783 | ) | (445 | ) | ||||||
| Impairment charges | (27,724 | ) | (146,536 | ) | (1,508 | ) | ||||||
| Deferred subscription cost write-off | - | (4,820 | ) | - | ||||||||
| Recoveries from (provisions for) reserves | 39 | (4,121 | ) | - | ||||||||
| Total costs and expenses | (280,128 | ) | (449,882 | ) | (329,797 | ) | ||||||
| Operating income (loss) | (39,775 | ) | (157,735 | ) | 10,043 | |||||||
| Nonoperating income (expense) | ||||||||||||
| Investment income | 741 | 479 | 2,511 | |||||||||
| Interest expense | (8,686 | ) | (8,500 | ) | (8,623 | ) | ||||||
| Amortization of deferred financing fees | (717 | ) | (623 | ) | (756 | ) | ||||||
| Impairment charge on investments | - | (2,033 | ) | (88 | ) | |||||||
| Other, net | (182 | ) | (1,805 | ) | (249 | ) | ||||||
| Total nonoperating expense | (8,844 | ) | (12,482 | ) | (7,205 | ) | ||||||
| Income (loss) before income taxes | (48,619 | ) | (170,217 | ) | 2,838 | |||||||
| Income tax benefit (expense) | (2,659 | ) | 9,850 | (1,928 | ) | |||||||
| Net income (loss) | $ | (51,278 | ) | $ | (160,367 | ) | $ | 910 | ||||
| Weighted average number of common shares outstanding | ||||||||||||
| Basic | 33,447 | 33,307 | 33,246 | |||||||||
| Diluted | 33,447 | 33,307 | 33,281 | |||||||||
| Basic and diluted earnings (loss) per common share | $ | (1.53 | ) | $ | (4.81 | ) | $ | 0.03 | ||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
43
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in
(in thousands, except share data)
| Dec. 31, | Dec. 31, | |||||||
| 2009 | 2008 | |||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | 24,569 | $ | 25,192 | ||||
| Marketable securities and short-term investments | - | 6,139 | ||||||
| Receivables, net of allowance for doubtful accounts of $3,834 and $4,084, respectively | 31,942 | 40,428 | ||||||
| Receivables from related parties | 2,897 | 2,061 | ||||||
| Inventories | 3,951 | 7,341 | ||||||
| Deferred tax asset | 1,487 | 2,268 | ||||||
| Prepaid expenses and other current assets | 5,048 | 9,127 | ||||||
| Total current assets | 69,894 | 92,556 | ||||||
| Property and equipment, net | 18,438 | 20,319 | ||||||
| Programming costs, net | 47,516 | 52,056 | ||||||
| Goodwill | - | 27,758 | ||||||
| Trademarks, net | 43,964 | 42,503 | ||||||
| Distribution agreements, net of accumulated amortization of $6,751 and $6,126, respectively | 11,513 | 12,138 | ||||||
| Deferred tax asset | - | 180 | ||||||
| Other noncurrent assets | 5,507 | 6,078 | ||||||
| Total assets | $ | 196,832 | $ | 253,588 | ||||
| Liabilities | ||||||||
| Acquisition liabilities | $ | 4,802 | $ | 2,785 | ||||
| Accounts payable | 21,138 | 24,816 | ||||||
| Accrued salaries, wages and employee benefits | 10,123 | 9,159 | ||||||
| Deferred revenues | 27,417 | 36,402 | ||||||
| Other current liabilities and accrued expenses | 17,519 | 19,557 | ||||||
| Total current liabilities | 80,999 | 92,719 | ||||||
| Financing obligations | 104,128 | 99,763 | ||||||
| Acquisition liabilities | 703 | 5,419 | ||||||
| Deferred tax liability | 7,706 | 7,783 | ||||||
| Other noncurrent liabilities | 25,592 | 19,785 | ||||||
| Total liabilities | 219,128 | 225,469 | ||||||
| Shareholders’ equity (deficit) | ||||||||
| 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; 29,014,343 and 28,868,900 issued, respectively | 289 | 288 | ||||||
| Capital in excess of par value | 260,379 | 259,240 | ||||||
| Accumulated deficit | (274,964 | ) | (223,686 | ) | ||||
| Treasury stock, at cost – 381,971 shares | (5,000 | ) | (5,000 | ) | ||||
| Accumulated other comprehensive loss | (3,049 | ) | (2,772 | ) | ||||
| Total shareholders’ equity (deficit) | (22,296 | ) | 28,119 | |||||
| Total liabilities and shareholders’ equity (deficit) | $ | 196,832 | $ | 253,588 | ||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
44
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'SHAREHOLDERS’ EQUITY (in(DEFICIT)
(in thousands)
Class A Common Stock | Class B Common Stock | Capital in Excess of Par Value | Accum. Deficit | Treasury Stock | Accum. Other Comp. Loss(1) | Total | ||||||||||||||||||||||
| Balance at December 31, 2006 | $ | 49 | $ | 287 | $ | 255,680 | $ | (64,229 | ) | $ | (5,000 | ) | $ | (1,792 | ) | $ | 184,995 | |||||||||||
| Net income | - | - | - | 910 | - | - | 910 | |||||||||||||||||||||
| 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 | 257,738 | (63,319 | ) | (5,000 | ) | (1,087 | ) | 188,669 | ||||||||||||||||||
| Net loss | - | - | - | (160,367 | ) | - | - | (160,367 | ) | |||||||||||||||||||
| 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 | 259,240 | (223,686 | ) | (5,000 | ) | (2,772 | ) | 28,119 | ||||||||||||||||||
| Net loss | - | - | - | (51,278 | ) | - | - | (51,278 | ) | |||||||||||||||||||
| Shares issued or vested under stock plans, net | - | 1 | 1,139 | - | - | - | 1,140 | |||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | (277 | ) | (277 | ) | |||||||||||||||||||
| Balance at December 31, 2009 | $ | 49 | $ | 289 | $ | 260,379 | $ | (274,964 | ) | $ | (5,000 | ) | $ | (3,049 | ) | $ | (22,296 | ) | ||||||||||
| (1) | Accumulated other comprehensive loss |
| Dec. 31, | Dec. 31, | |||||||
| 2009 | 2008 | |||||||
| Unrealized loss on marketable securities | $ | - | $ | (46 | ) | |||
| Actuarial liability adjustment | (2,082 | ) | (1,374 | ) | ||||
| Foreign currency translation loss | (967 | ) | (1,352 | ) | ||||
| Accumulated other comprehensive loss | $ | (3,049 | ) | $ | (2,772 | ) | ||
Comprehensive income (loss) was as follows:
| Fiscal Year | Fiscal Year | Fiscal Year | ||||||||||
| Ended | Ended | Ended | ||||||||||
| 12/31/09 | 12/31/08 | 12/31/07 | ||||||||||
| Net income (loss) | $ | (51,278 | ) | $ | (160,367 | ) | $ | 910 | ||||
| Change in unrealized gain (loss) on marketable securities | 46 | (243 | ) | (50 | ) | |||||||
| Derivative gain (loss) | - | 78 | (183 | ) | ||||||||
| Actuarial gain (loss) on liability | (708 | ) | (798 | ) | 975 | |||||||
| Foreign currency translation gain (loss) | 385 | (722 | ) | (37 | ) | |||||||
| Total other comprehensive income (loss) | (277 | ) | (1,685 | ) | 705 | |||||||
| Comprehensive income (loss) | $ | (51,555 | ) | $ | (162,052 | ) | $ | 1,615 | ||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
45
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
(in thousands)
| Fiscal Year | Fiscal Year | Fiscal Year | ||||||||||
| Ended | Ended | Ended | ||||||||||
| 12/31/09 | 12/31/08 | 12/31/07 | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Net income (loss) | $ | (51,278 | ) | $ | (160,367 | ) | $ | 910 | ||||
| Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: | ||||||||||||
| Depreciation of property and equipment | 5,115 | 4,692 | 4,963 | |||||||||
| Amortization of intangible assets | 1,645 | 2,283 | 2,300 | |||||||||
| Amortization of investments in entertainment programming | 29,353 | 32,483 | 33,935 | |||||||||
| Stock-based compensation | 1,015 | 1,245 | 1,856 | |||||||||
| Impairment charges | 27,724 | 146,536 | 1,508 | |||||||||
| Noncash interest expense | 4,365 | 4,045 | 3,749 | |||||||||
| Payments of deferred compensation plan | (5,304 | ) | (185 | ) | (429 | ) | ||||||
| Impairment charge on investments | - | 2,033 | - | |||||||||
| Provisions for (recoveries from) reserves | (39 | ) | 4,121 | - | ||||||||
| Deferred subscription cost write-off | - | 4,820 | - | |||||||||
| Amortization of deferred financing fees | 717 | 623 | 756 | |||||||||
| Equity (income) loss in operations of investments | (402 | ) | 126 | (129 | ) | |||||||
| Deferred income taxes | 884 | (12,863 | ) | (854 | ) | |||||||
| Changes in current assets and liabilities: | ||||||||||||
| Receivables | 8,525 | 11,034 | (2,342 | ) | ||||||||
| Receivables from related parties | (836 | ) | (357 | ) | 87 | |||||||
| Inventories | 3,390 | 4,022 | 1,236 | |||||||||
| Deferred subscription acquisition costs | - | (91 | ) | 1,234 | ||||||||
| Prepaid expenses and other current assets | 4,067 | 5,550 | (3,565 | ) | ||||||||
| Accounts payable | (3,903 | ) | (12,167 | ) | 8,746 | |||||||
| Accrued salaries, wages and employee benefits | 964 | 989 | 3,443 | |||||||||
| Deferred revenues | (8,985 | ) | (5,180 | ) | (1,095 | ) | ||||||
| Acquisition liability interest | 601 | 834 | 1,274 | |||||||||
| Accrued litigation settlements | - | - | (1,800 | ) | ||||||||
| Other current liabilities and accrued expenses | 3,300 | 5,091 | 522 | |||||||||
| Net change in current assets and liabilities | 7,123 | 9,725 | 7,740 | |||||||||
| Investments in entertainment programming | (24,840 | ) | (30,200 | ) | (34,405 | ) | ||||||
| Increase in trademarks | (1,687 | ) | (1,656 | ) | (1,704 | ) | ||||||
| (Increase) decrease in other noncurrent assets | (342 | ) | (330 | ) | 3,511 | |||||||
| Increase (decrease) in other noncurrent liabilities | 5,408 | (5,691 | ) | 1,234 | ||||||||
| Other, net | (137 | ) | 2,360 | (712 | ) | |||||||
| Net cash provided by (used for) operating activities | (680 | ) | 3,800 | 24,229 | ||||||||
| Cash flows from investing activities | ||||||||||||
| Payments for acquisitions | - | (60 | ) | (105 | ) | |||||||
| Purchases of investments | (94 | ) | (1,066 | ) | (36,846 | ) | ||||||
| Proceeds from sales of investments | 6,873 | 11,355 | 26,377 | |||||||||
| Purchases of assets held for sale | - | (6,895 | ) | - | ||||||||
| Proceeds from assets held for sale | - | 12,000 | - | |||||||||
| Additions to property and equipment | (3,607 | ) | (10,985 | ) | (8,493 | ) | ||||||
| Other, net | - | - | 88 | |||||||||
| Net cash provided by (used for) investing activities | 3,172 | 4,349 | (18,979 | ) | ||||||||
| Cash flows from financing activities | ||||||||||||
| Payment of acquisition liabilities | (3,300 | ) | (2,700 | ) | (11,669 | ) | ||||||
| Payment of deferred financing fees | (174 | ) | - | (212 | ) | |||||||
| Proceeds from stock-based compensation | 81 | 118 | 163 | |||||||||
| Net cash used for financing activities | (3,393 | ) | (2,582 | ) | (11,718 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 278 | (978 | ) | 323 | ||||||||
| Net increase (decrease) in cash and cash equivalents | (623 | ) | 4,589 | (6,145 | ) | |||||||
| Cash and cash equivalents at beginning of year | 25,192 | 20,603 | 26,748 | |||||||||
| Cash and cash equivalents at end of year | $ | 24,569 | $ | 25,192 | $ | 20,603 | ||||||
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
| (A) | Summary of Significant Accounting Policies |
Organization: Playboy Enterprises, Inc., together with its subsidiaries through which we conduct business, is a global 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, PublishingPrint/Digital 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 StatesU.S., or GAAP, 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'smanagement’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'syear’s presentation.
New Accounting Pronouncements: In May 2008,June 2009, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles, or Statement 168. Statement 168, which is incorporated in FASB Accounting Standards Codification, or ASC, Topic 105, Generally Accepted Accounting Principles, establishes only two levels of GAAP, authoritative and nonauthoritative. The FASB Acco unting Standards Codification™, or the Codification, is now the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission, or SEC, which are sources of authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC accounting literature not included in the Codification is nonauthoritative. We adopted Statement 168 beginning with the third quarter of 2009. As the Codification does not change or alter existing GAAP, the adoption of Statement 168 did not impact our results of operations or financial condition.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles,167, Amendments to FASB Interpretation No. 46(R), or Statement 162.167. Statement 162 identifies167, which is incorporated in ASC Topic 810, Consolidation, changes the sourcesapproach to determining the primary beneficiary of accounting principlesa variable interest entity, or VIE, and requires companies to more frequently assess whether they must consolidate VIEs. We are required to adopt Statement 167 at the framework for selecting the principles to be used in the preparationbeginning 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.2010. We do not expect the adoption of Statement 162167 to have a significant impact on our future results of operations or financial condition.
In April 2009, the FASB issued Staff Position No. FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, or FSP FAS 141(R)-1. FSP FAS 141(R)-1, which is incorporated in ASC Topic 805, Business Combinations, amends and clarifies existing guidance to address application issues raised on initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. FSP FAS 141(R)-1 is effective for assets and liabilities arising from contingencies in business comb inations for which the acquisition date is on or after the beginning of the first annual reporting period beginning after December 15, 2008. In the second quarter of 2009, we adopted the provisions of FSP FAS 141(R)-1 effective January 1, 2009. The adoption of FSP FAS 141(R)-1 did not have an impact on our 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 is incorporated in ASC Topic 470, Debt, and 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'sentity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. We are required to adoptadopted FSP APB 14-1 at the beginning of 2009 and applyapplied FSP APB 14-1 retrospectively to all periods presented. Weapplicable prior periods. In applying FSP APB 14-1, we reclassified $29.1 million of the carrying value of our 3.00% convertible senior subordinated notes due 2025, or convertible notes, and $1.2 million of the issuance costs related to the convertible notes to equity retroactive to the March 2005 issuance date. These amounts represent the equity
component of the proceeds from the convertible notes calculated assuming a 7.75% nonconvertible borrowing rate. The discount is being accreted to “Interest expense” and the debt issuance costs are currently evaluatingbeing amortized to “Amortization of deferred financing fees” over a seven-year term, which represents the impactperiod beginning on the March 15, 2005 issuance date of the convertible notes and ending on the first put date of March 15, 2012. Accordingly, in 2008, 2007, 2006 and 2005, we recorded $4.0 million, $3.8 million, $3.5 million and $2.6 million of additional noncash interest expense and $0.3 million, $0.2 million, $0.3 million and $0.2 million of additional amortization of deferred financing fees, or $0.13, $0.12, $0.11 and $0.08 per basic and diluted share on a combined basis, respectively. For the year ended Decemb er 31, 2009, we recognized additional noncash interest expense of $4.4 million and additional amortization of deferred financing fees of $0.3 million, or $0.14 per basic and diluted share on a combined basis. On January 1, 2009, as a result of adopting FSP APB 14-1, we reduced the carrying value of the debt in “Financing obligations” by $15.2 million, decreased “Other noncurrent assets” by $2.2 million, increased “Capital in excess of par value” by $27.9 million and increased “Accumulated deficit” by $14.9 million on our 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.
Balance Sheet.
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 onlinedigital subscriptions are recognized proportionately over the terms
of the subscriptions.subscription periods. Revenues from newsstand sales of o f 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),ASC Topic 718, Compensation–Stock Compensation, or ASC Topic 718, 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),ASC Topic 718, for all stock-based compensation awards is recognized using the straight-line attribution method. Stock-based compensation expense is reflected in "Selling“Selling and administrative expenses"expenses” on our Consolidated Statements of Operations and the proceeds are reflected in "Proceeds“Proceeds from stock-based compensation"compensation” on our Consolidated Statements of Cash Flows. See Note (S)(Q), 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“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 chargeoffscharge-offs (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'scustomer’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.cost less accumulated depreciation. 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 onethree 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. RepairRep air 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 consistconsisted 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'Accountants’ Statement of Position 93-7, Reporting on Advertising Costs.Costs, which has been incorporated in ASC Topic 340, Other Assets and Deferred Costs. These capitalized direct responseres ponse 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. Also in 2008, we outsourced our e-commerce business. For 2009, 2008 and 2007, our advertising expense was $13.1 million, $22.9 million and $28.0 million, respectively.
Programming Amortization and OnlineDigital Content Costs: Original programming and film acquisition costs are primarily assigned to the domestic and international TV networks and are capitalized and amortized utilizing the straight-line method, generally over three years. OnlineDigital 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 onlinedigital 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)(L), Programming Costs, Net.
Intangible Assets: In accordance with Statement 142,ASC, Topic 350, Intangibles–Goodwill and Other, or ASC Topic 350, we do not amortize goodwill and trademarks with indefinite lives, but subject them to annual impairment tests.tests, or in between annual impairment tests if events occur or circumstances change that would indicate impairment of our goodwill and/or other intangible assets. Capitalized trademark costs include costs associated with the acquisition, registration and/or renewal of our trademarks. In 2006, we began
expensingWe expense certain costs associated with the defense of such trademarks. $41.4 million of the total $44.0 million of our trademarks at December 31, 2009 are indefinite-lived Playboy-bra nded trademarks. Our non-Playboy trademarks, with finite livestotaling $2.6 million at December 31, 2009, are being amortized using the straight-line method over the lives of the trademarks, either 10 or 20 and one-quarter years.years; prior to our 2008 impairment testing, these non-Playboy trademarks were deemed to have indefinite lives. 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 10-year lives of the agreements, either five or 10 years.agreements. 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“Other noncurrent assets"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.1st of each year, or in between annual tests if events or circumstances change that would indicate impairment of our goodwill and/or other intangible assets. 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'sunit’s estimated fair value.
Based on the annual impairment testing as of October 1, 2008,2009, we concluded goodwill required an impairment charge of $105.8$22.2 million, while indefinite-lived trademarks requiredwhich reflected our entire goodwill balance at the time of impairment testing. In concert with the integration of our print and digital businesses in the first quarter of 2009, we moved the reporting of our digital business from the Entertainment Group into the Print/Digital Group, which we formerly called the Publishing Group. These businesses were combined in order to better focus on creating brand-consistent content that extends across print and digital platforms. Due to this realignment of our operating segments, which are also our reporting units as defined in ASC Topic 350, we conducted interim impairment testing of goodwill in accordance with ASC Topi c 350. Interim testing of goodwill was also necessitated by lower expected financial results in the new Print/Digital Group than that of the former Entertainment Group, which contained the digital business’ assets prior to the realignment of our operating segments. As a result of this testing, the implied fair value of goodwill of
the new Print/Digital operating segment was lower than its carrying value, and we recorded an impairment charge on the entire balance 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 changethe Print/Digital Group’s goodwill of $5.5 million in the first quarter of 2009.
We recorded no impairment charge in 2009 on our other indefinite-lived intangible assets, which consisted of $41.4 million of Playboy-branded trademarks at December 31, 2009. In 2009, the segment income of our Licensing Group was $21.0 million. Assuming that segment income remains flat in these businesses, though we believe that there will be future we maygrowth, the value of the Playboy trademarks would be required to
record an additional impairment charge. See Note (O), Intangible Assets.
recoverable in approximately two years. These trademarks also support other Playboy-branded businesses such as our international magazine, TV and digital businesses.
In accordance with Statement of Financial Accounting Standards No. 144,
Accounting for the ImpairmentASC Topic 360, Property, Plant, and Equipment, or Disposal of Long-Lived Assets, or Statement
144,ASC Topic 360, 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 an2009, no impairment charge of $16.1 million on certain
assets.was necessary in 2009. See Note (O)(M), Intangible Assets.
If any estimates or related assumptions change in the future, we may be required to record additional impairment charges. See Note (M), 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 InstrumentsASC Topic 815, Derivatives 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.instruments. 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“Accumulated other comprehensive loss"loss” and is reclassified into earnings upon execution of the hedged transaction. At December 31, 2008,2009, we had derivative instruments that have been designatedwere not effective and as andsuch do not qualify for hedge accounting but were deemed to be ineffective.accounting. We had no unrealized gainderivative gains or losslosses at December 31, 2008 and a net
unrealized loss of $0.1 million at2009 or December 31, 2007 included in "Accumulated
other comprehensive loss," which represents the effective portion of changes in
fair value of the cash flow hedges.
2008.
Earnings per Common Share: We compute basic and diluted earnings per share, or EPS, in accordance with Statement of Financial Accounting Standards
No. 128, ASC Topic 260, Earnings per Share.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, if any, of stock options and other potentially dilutive financial instruments. See Note (G)(F), Earnings per Common Share.
Equity Investments: The equity method is used to account for our 19.0% investment in Playboy TV-LatinTV–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“Accumulated other comprehensive loss"loss” on our Consolidated Statements of Shareholders' Equity.Shareholders’ Equity (Deficit). 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"“Other, net” on our Consolidated Statements of Operations. Foreign currency transaction loss wasgains were immaterial in 2009, foreign currency transaction losses were $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
2007.
| (B) | Sale of Assets |
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 believebelieved that linear networks and our need for their transmission capacity willwould 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.
2007 and a $0.1 million unfavorable adjustment to this charge in 2008.
In connection with the sale of these assets, in 2008 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 definitionstandard-definition cable channels. If we launch high
definitionhigh-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
| (C) | Restructuring Expense |
In the fourth quarter of 2009, we implemented a plan to outsource non-editorial functions of Playboy magazine and other domestic publications to American Media, Inc. through its wholly owned subsidiary, American Media Operations, Inc., as well as to reduce other overhead costs. As a result of this plan, we recorded a charge of $3.7 million related to a workforce reduction of 26 employees, most of whose positions will be eliminated by the end of the first quarter of 2010, and contract termination fees. Severance payments under this plan began in the fourth quarter of 2009 and will be completed by 2011.
In the second quarter of 2009, we recorded a charge of $9.3 million related to our plan to vacate our leased New York office space. The charge primarily reflected the discounted value of our remaining lease obligation net of estimated sublease income. In the fourth quarter of 2009, we recorded an unfavorable adjustment of $2.6 million due to changes in assumptions for estimated sublease income resulting from the difficult New York real estate market. We expect to record additional restructuring charges of $9.0 million over the remaining approximate nine-year term of the lease, or $1.0 million on average annually. The additional restructuring charges represent depreciation of leasehold improvements and furniture and equipment as well as accretion of the difference between the nominal and discounted remaining lease obligation net of estimated sublease income. We recorded an additional $0.8 million of these restructuring charges representing depreciation and accretion in the current year and expect to record $1.3 million in 2010.
In the first quarter of 2009, we implemented a restructuring plan to integrate our print and digital businesses in our Chicago office as well as to streamline operations across the Company, including the elimination of positions. As a result of this plan, we recorded a charge of $2.6 million related to the workforce reduction of 107 employees, whose positions were eliminated by the end of the second quarter of 2009. Severance payments under this plan began in the first quarter of 2009 and were substantially completed by the end of the year with some payments continuing into 2010. We subsequently recorded a favorable adjustment of $0.1 million as a result of changes in assumptions for this plan.
In the fourth quarter of 2008, we developedimplemented a restructuring plan in our
continued efforts to reducelower overhead 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 bepositions were eliminated in the first quarter of 2009. Payments under this plan began in the fourth quarter of 2008 and will be
substantiallywere largely completed by the end of 2009 with some payments continuing into 2010. In2011. We recorded an unfavorable adjustment of $0.8 million during the first halfcurrent year as a result 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.
changes in assumptions for this plan.
In the third quarter of 2008, we developedimplemented a restructuring plan in an
effort to lowerreduce 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 jobspositions 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 bewere substantially completed by the end of 2009 with some payments continuing into 2010. In 2007, we implementedWe recorded a plan to outsource our e-commerce and catalog
businesses, to sellfavorable adjustment of $0.5 million during the assets related to our Los Angeles production facility
and to eliminate office space obtainedcurrent year as a result of changes in an acquisition. This restructuring
plan resulted in the recordingassumptions for this plan.
The following table sets forth the activity and balances of our
restructuring reserves, which are included in "Accrued“Accrued salaries, wages and employee benefits" and "Otherbenefits,” “Other current liabilities and accrued expenses"expenses” and “Other noncurrent liabilities” on our Consolidated Balance Sheets for the years ended December 31, 2008 and 2007 (in thousands):
Consolidation
Workforce
Workforce Reduction | Consolidation of Facilities and Operations | Total | ||||||||||
| Balance at December 31, 2007 | $ | 429 | $ | 114 | $ | 543 | ||||||
| Reserve recorded | 6,357 | - | 6,357 | |||||||||
| Additional reserve recorded | 150 | 445 | 595 | |||||||||
| Adjustments to previous estimates | (128 | ) | (41 | ) | (169 | ) | ||||||
| Cash payments | (1,633 | ) | (518 | ) | (2,151 | ) | ||||||
| Balance at December 31, 2008 | 5,175 | - | 5,175 | |||||||||
| Reserve recorded | 5,943 | 9,383 | 15,326 | |||||||||
| Accretion of discount on net lease obligation | - | 611 | 611 | |||||||||
| Adjustments to previous estimates | 241 | 2,627 | 2,868 | |||||||||
| Cash payments | (6,670 | ) | (1,954 | ) | (8,624 | ) | ||||||
| Balance at December 31, 2009 | $ | 4,689 | $ | 10,667 | $ | 15,356 | ||||||
The above table excludes depreciation of Facilities
Reductionleasehold improvements and Operations Total
- ----------------------------------------------------------------------------
Balance at December 31, 2006 $ 430 $ 268 $ 698
Reserve recorded 429 -- 429
Adjustmentsfurniture and equipment related 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
our leased New York office space.
| (D) | 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
| (E) | Income Taxes |
The following table sets forth the income tax provision (in thousands):
| Fiscal Year | Fiscal Year | Fiscal Year | ||||||||||
| Ended | Ended | Ended | ||||||||||
| 12/31/09 | 12/31/08 | 12/31/07 | ||||||||||
| Current: | ||||||||||||
| Federal | $ | (57 | ) | $ | - | $ | (153 | ) | ||||
| State | 94 | 143 | 90 | |||||||||
| Foreign | 1,738 | 2,870 | 2,845 | |||||||||
| Total current | 1,775 | 3,013 | 2,782 | |||||||||
| Deferred: | ||||||||||||
| Federal | (282 | ) | (11,866 | ) | 1,463 | |||||||
| State | (40 | ) | (1,695 | ) | 209 | |||||||
| Foreign | 1,206 | 698 | (2,526 | ) | ||||||||
| Total deferred | 884 | (12,863 | ) | (854 | ) | |||||||
| Total income tax expense (benefit) | $ | 2,659 | $ | (9,850 | ) | $ | 1,928 | |||||
The U.S. statutory tax rate applicable to us for each of 2009, 2008 2007 and 20062007 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 | ||||||||||
| 12/31/09 | 12/31/08 | 12/31/07 | ||||||||||
| Statutory rate tax expense (benefit) | $ | (17,017 | ) | $ | (58,067 | ) | $ | 2,399 | ||||
| Increase (decrease) in taxes resulting from: | ||||||||||||
| Foreign income and withholding tax on licensing income | 1,738 | 2,870 | 2,845 | |||||||||
| State income tax expense (benefit) | 131 | (1,790 | ) | 194 | ||||||||
| Nondeductible expenses | 3,381 | 30,564 | 218 | |||||||||
| Increase (decrease) in valuation allowance | 21,023 | 13,582 | (2,075 | ) | ||||||||
| Tax benefit of foreign taxes paid or accrued | (14 | ) | (2,735 | ) | (2,541 | ) | ||||||
| (Increase) decrease in state/foreign NOLs | (844 | ) | (1,264 | ) | 1,749 | |||||||
| (Increase) decrease in NOL/capital loss carryovers | (1,897 | ) | 7,460 | 1,217 | ||||||||
| Increase in deductible temporary differences | (3,503 | ) | - | - | ||||||||
| Refund from amended federal return | - | - | (2,150 | ) | ||||||||
| Other expense (benefit) | (339 | ) | (470 | ) | 72 | |||||||
| Total income tax expense (benefit) | $ | 2,659 | $ | (9,850 | ) | $ | 1,928 | |||||
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 2009, we had a net income tax expense of $2.7 million due principally to foreign income tax withholding and the deferred tax impact of various definite-lived intangibles along with the tax benefit of $1.4 million associated with the reversal of deferred tax liabilities associated with the impairment charges on goodwill. In 2008, we had a net income tax benefit of $9.8 million compared toprimarily as a net
income tax expenseresult 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)
===============================================================================
| Dec. 31, | Dec. 31, | |||||||
| 2009 | 2008 | |||||||
| Deferred tax assets: | ||||||||
| NOL carryforwards | $ | 67,057 | $ | 51,754 | ||||
| Tax credit carryforwards | 18,795 | 18,781 | ||||||
| Temporary difference related to Playboy TV International, LLC | 3,969 | 4,830 | ||||||
| Other deductible temporary differences | 49,961 | 45,832 | ||||||
| Total deferred tax assets | 139,782 | 121,197 | ||||||
| Valuation allowance | (109,423 | ) | (88,400 | ) | ||||
| Deferred tax assets | 30,359 | 32,797 | ||||||
| Deferred tax liabilities: | ||||||||
| Deferred subscription acquisition costs | (224 | ) | (1,487 | ) | ||||
| Intangible assets | (20,945 | ) | (19,144 | ) | ||||
| Other taxable temporary differences | (15,409 | ) | (17,501 | ) | ||||
| Deferred tax liabilities | (36,578 | ) | (38,132 | ) | ||||
| Deferred tax liabilities, net | $ | (6,219 | ) | $ | (5,335 | ) | ||
At December 31, 2008,2009, we had federal NOLs of $118.1$158.1 million expiring at
various intervals between the years 20092010 through 2028,2029, state and local NOLs of $106.7$136.8 million expiring at various intervals between the years 20092010 through 20282029, capital loss carryforwards of $1.1 million expiring in 2013 and 2014 and foreign NOLs of $6.9$1.6 million that have no expiration date. In addition, foreign tax credit carryforwards of $17.7$17.9 million and minimum tax credit carryforwards of $1.1$0.9 million are available to reduce future U.S. federal income taxes. The foreign tax credit carryforwards expire in 2015between 2016 through 20182019 and the minimum tax credit carryforwards have no expiration date.
On January 1, 2007, we adopted the provisions
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 amountamounts 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
===============================================================================
| Fiscal Year | Fiscal Year | |||||||
| Ended | Ended | |||||||
| 12/31/09 | 12/31/08 | |||||||
| 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, 2008,2009, 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 20052006 through 20082009 remains open to examination by the major U.S. taxing jurisdictions to which we are subject. In addition, for all tax years prior to 20052006 generating an NOL, tax authorities can adjust the amount of an NOL. In our international tax jurisdictions, numerous tax years remain subject 54
to examination by tax authorities, including tax returns for at least 20032004 and subsequent years in all of our major international tax jurisdictions.
(G) EARNINGS PER COMMON SHARE
| (F) | 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 | ||||||||||
| 12/31/09 | 12/31/08 | 12/31/07 | ||||||||||
| Numerator: | ||||||||||||
| For basic and diluted EPS – net income (loss) | $ | (51,278 | ) | $ | (160,367 | ) | $ | 910 | ||||
| Denominator: | ||||||||||||
| For basic EPS – weighted average shares | 33,447 | 33,307 | 33,246 | |||||||||
| Effect of dilutive potential common shares: | ||||||||||||
| Employee stock options and other | - | - | 35 | |||||||||
| Dilutive potential common shares | - | - | 35 | |||||||||
| For diluted EPS – weighted average shares | 33,447 | 33,307 | 33,281 | |||||||||
| Basic and diluted EPS | $ | (1.53 | ) | $ | (4.81 | ) | $ | 0.03 | ||||
The following table sets forth the number of shares related to outstanding options to purchase ourClass B stock, the number of restricted stock units, or RSUs, that provide for the issuance of 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 years presented, as their inclusion would have been antidilutive (in thousands):
| Fiscal Year | Fiscal Year | Fiscal Year | ||||||||||
| Ended | Ended | Ended | ||||||||||
| 12/31/09 | 12/31/08 | 12/31/07 | ||||||||||
| Stock options | 3,941 | 3,627 | 3,133 | |||||||||
| RSUs | 540 | - | - | |||||||||
| Convertible notes | 6,758 | 6,758 | 6,758 | |||||||||
| Total | 11,239 | 10,385 | 9,891 | |||||||||
| (G) | 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)(N), Financing Obligations, in March 2005, we issued and sold in a private placement $115.0 million aggregate principal amount of our convertible notes. As
ofAt December 31, 20082009 and 2007,2008, the fair value of the convertible notes was determined to be $100.1 million and $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 pricepri ce 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
| (H) | Marketable Securities and Investments |
The following table sets forth marketable securities and investments (in thousands):
| Dec. 31, | Dec. 31, | |||||||
| 2009 | 2008 | |||||||
| Marketable securities and short-term investments: | ||||||||
| Cost of marketable securities | $ | - | $ | 890 | ||||
| Cost of short-term investments | - | 5,249 | ||||||
| Gross unrealized holding gains (losses) | - | - | ||||||
| Fair value of marketable securities and short-term investments | $ | - | $ | 6,139 | ||||
We purchased $1.1$0.1 million of investments and received proceeds of $11.4$6.9 million from the sales of investments in 2008.2009. We had net realized gains of $0.6 million in 2009 compared to net realized losses, including certain impairments, of $0.8 million in 2008 compared toand net realized gains of $0.2 million and $31,000 in 2007
and 2006, respectively. Included2007. Net unrealized holding gains or losses recorded in "Comprehensive“Comprehensive income (loss)"” in 2009 were immaterial. We recorded net unrealized holding losses in “Comprehensive income (loss)” of $0.2 million in 2008 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.
in 2007.
At December 31, 2008, we had $0.9 million in an enhanced cash portfolio included in “Marketable securities and December 31, 2007, dueshort-term investments” on our Consolidated Balance Sheet. Due to adverse market conditions, we determined that the market value of ourthis investment in an enhanced
cash portfolio was other-than-temporarily impaired, and through December 31, 2008, we recorded cumulative impairment charges of $0.8$0.9 million. During 2009, our holdings in this enhanced cash portfolio were liquidated in their entirety and we recorded a realized gain of $0.7 million and $0.1 million on our Consolidated Statementsdue to increases in market value of Operations in 2008 and 2007, respectively.
the investment subsequent to the recording of the impairment charges.
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 discussedWe have since terminated the deferred compensation plan and sold all related investments in Note (A), Summary2009.
| (I) | Fair Value Measurement |
We adopted FASB Statement of Financial Accounting Standards No. 157, on January 1, 2008Fair Value Measurements, which is incorporated in ASC Topic 820, for our financial assets and liabilities.liabilities on January 1, 2008 and for our nonfinancial assets and liabilities on January 1, 2009. Our financial assets primarily relate to marketable securities and
investments, while financial liabilities primarily relate to derivative instruments used to hedge the variability of forecasted cash receipts related to royalty payments denominated in yen, while our financial liabilities relate to derivative instruments used to hedge the variability of forecasted cash receipts related to royalty payments denominated in euro. Derivative instruments in asset positions are included in “Prepaid expenses and euro.
other current assets” and derivative instruments in lia bility positions are included in “Other current liabilities and accrued expenses” on our Consolidated Balance Sheets.
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
ASC Topic 820 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'sentity’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, quotedqu oted 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, 20082009 (in thousands):
| Total Fair Value Measurement | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Derivative assets | $ | 21 | $ | - | $ | 21 | $ | - | ||||||||
| Derivative liabilities | $ | (6 | ) | $ | - | $ | (6 | ) | $ | - | ||||||
| (J) | Inventories |
In 2009, the January and February 2010 issues of Playboy magazine were combined into a double issue. As a result, we have lower inventories at December 31, 2008 and2009 compared to 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.
2008.
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
| Dec. 31, | Dec. 31, | |||||||
| 2009 | 2008 | |||||||
| Paper | $ | 1,191 | $ | 2,371 | ||||
| Editorial and other prepublication costs | 2,230 | 4,759 | ||||||
| Merchandise finished goods | 530 | 211 | ||||||
| Total inventories | $ | 3,951 | $ | 7,341 | ||||
| (K) | 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
| Dec. 31, | Dec. 31, | |||||||
| 2009 | 2008 | |||||||
| Land | $ | 292 | $ | 292 | ||||
| Buildings and improvements | 8,890 | 8,872 | ||||||
| Furniture and equipment | 23,742 | 23,544 | ||||||
| Leasehold improvements | 17,284 | 17,181 | ||||||
| Software | 16,989 | 16,389 | ||||||
| Total property and equipment | 67,197 | 66,278 | ||||||
| Accumulated depreciation | (48,759 | ) | (45,959 | ) | ||||
| Total property and equipment, net | $ | 18,438 | $ | 20,319 | ||||
| (L) | 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
| Dec. 31, | Dec. 31, | |||||||
| 2009 | 2008 | |||||||
| Released, less amortization | $ | 33,919 | $ | 35,290 | ||||
| Completed, not yet released | 7,647 | 7,903 | ||||||
| In-process | 5,950 | 8,863 | ||||||
| Total programming costs, net | $ | 47,516 | $ | 52,056 | ||||
| (M) | Intangible Assets |
In accordance with Statement 142,ASC Topic 350, we do not amortize goodwill and
trademarks with indefinite lives, but subject them toconduct annual impairment tests.
Astesting of October 1, 2008, we evaluated goodwill and other indefinite livedindefinite-lived intangible assets foras 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 indefinite-lived intangible assets. We estimate the implied fair value of the goodwill and other intangible assets 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 uponon our financial results during the current year and our current
expectation of future performance. At December 31,performance, which are Level 3 inputs within the fair value hierarchy under ASC Topic 820 as described in Note (I), Fair Value M easurement. Based on the results of our 2009 and 2008 annual impairment testing, we determined impairment charges of $22.2 million and 2007,$146.5 million were necessary for 2009 and 2008, respectively. The $22.2 million charge in 2009 reflected the entire goodwill balance of the Entertainment Group at the time of our impairment testing. The 2008 charge consisted of $105.8 million of goodwill and $24.6 million of trademarks impaired under ASC Topic 350 and $16.1 million of other intangible assets impaired under ASC Topic 360.
In concert with the integration of our print and digital businesses in the first quarter of 2009, we moved the reporting of our digital business from the Entertainment Group into the Print/Digital Group, which we formerly called the Publishing Group. These businesses were combined in order to better focus on creating brand-consistent content that extends across print and digital platforms. Due to this realignment of our operating segments, which are also our reporting units as defined in ASC Topic 350, we conducted interim impairment testing of goodwill in accordance with ASC Topic 350. Interim testing of goodwill was also necessitated by lower expected financial results in the new Print/Digital Group than that of the former Entertainment Group, which contained the digital business’ ; assets prior to the realignment of our operating segments. We estimated the implied fair value of the goodwill using a combined weighted forecasted-discounted cash flow method and a market multiple approach based in part on our financial results during the current year and our expectation of future performance, which are Level 3 inputs within the fair value hierarchy under ASC Topic 820, as described in Note (I), Fair Value Measurement. As a result of this testing, the implied fair value of goodwill of the new Print/Digital operating segment was lower than its carrying value, and we recorded an impairment charge on the entire balance of the Print/Digital Group’s goodwill of $5.5 million in the first quarter of 2009.
Further downward pressure on our operating results and/or further deterioration of economic conditions could result in additional future impairments of our long-lived assets, including our other intangible assets.
Our indefinite-lived intangible assets that are not amortized but subject to our annual impairment test included goodwill, reflected entirely in the
Entertainment Group,consisted of $41.4 million of trademarks at December 31, 2009 and $27.8 million of goodwill and $133.6$39.7 million respectively, andof trademarks at December 31, 2008. Our trademarks also included finite-lived non-Playboy trademarks of $42.5$2.6 million and $65.4 million, respectively. For the years endedat December 31, 2009 and $2.8 million at December 31, 2008. These finite-lived non-Playboy trademarks were deemed to be indefinite lived prior to the 2008 and 2007, the aggregate amountimpairment charge of goodwill acquired was $35
thousand and $0.6 million, respectively.
$24.6 million.
In accordance with Statement 144,ASC Topic 360, 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 analysisanalyses on finite-lived intangible assets performed as of October 1, 2009 and October 1, 2008, no impairment charge was necessary in 2009 and we recorded an impairment charge of $16.1 million.
million in 2008.
The following table sets forth our amortizable intangible assets (in thousands):
| December 31, 2009 | Gross Carrying Amount | Accumulated Amortization | Impairment | Net Carrying Amount | ||||||||||||
| Noncompete agreements | $ | 14,050 | $ | (13,855 | ) | $ | - | $ | 195 | |||||||
| Distribution agreements | 18,264 | (6,751 | ) | - | 11,513 | |||||||||||
| Non-Playboy trademarks | 4,723 | (2,138 | ) | - | 2,585 | |||||||||||
| Program supply agreement | 3,226 | (2,258 | ) | - | 968 | |||||||||||
| Trademark license agreement | 1,355 | (956 | ) | - | 399 | |||||||||||
| Copyrights | 2,215 | (1,575 | ) | - | 640 | |||||||||||
| Other | 610 | (543 | ) | - | 67 | |||||||||||
| Total amortizable intangible assets | $ | 44,443 | $ | (28,076 | ) | $ | - | $ | 16,367 | |||||||
| December 31, 2008 | Gross Carrying Amount | Accumulated Amortization | Impairment | Net Carrying 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 | ||||||
The aggregate amortization expense for intangible assets with definite lives for 2009, 2008 and 2007 and 2006 was $2.3$1.6 million, $2.3 million and $1.7$2.3 million, respectively. The aggregate amortization expense for finite-lived intangible assets with
definite livesoutstanding at December 31, 2009 is expected to total approximately $1.6 million, $1.5 million, $1.4 million, $1.3 million, $1.0 million and $0.9$0.8 million for 2009, 2010, 2011, 2012, 2013 and 2013,2014, 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
===============================================================================
| (N) | Financing Obligations |
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'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'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$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 15th15th and September 15th15th 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 theth e 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'sissuer’s senior debt, including its guarantee of Holdings'Holdings’ borrowings under our credit facility; equally with all of the issuer'sissuer’s future senior subordinated debt; and, senior to all of the issuer'sissuer’s future subordinated
59
debt. In addition, the assets of the issuer'sissuer’s subsidiaries are subject to the prior claims of all creditors, including trade creditors, of those subsidiaries.
Credit Facility
Financing obligations on our Consolidated Balance Sheets consisted of the $115.0 million principal amount of our convertible notes with a carrying value of $104.1 million at December 31, 2009 and $99.8 million at December 31, 2008. The carrying value of the convertible notes represents the $115.0 million principal amount less the unamortized discount. Refer to Note (A), Summary of Significant Accounting Policies, for further information.
The fair value of the convertible notes is influenced by changes in market interest rates, the share price of Class B stock and our credit quality. At December 31, 2008,2009, the convertible notes had an estimated fair value of $100.1 million. This fair value was estimated using quoted market prices that are similar to Level 2 inputs within the ASC Topic 820 fair value hierarchy.
Credit Facility
At December 31, 2009, our $50.0$30.0 million credit facility provided for revolving borrowings, the issuance of letters of credit or a combination of both of up to $50.0$30.0 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 from $50.0 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'sborrower’s and the guarantors'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
| (O) | 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'semployee’s account in an amount equal to the ratio of each eligible employee'semployee’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 2009 or 2008. Total contributions forin 2007
and 2006 related to this plan were $0.5 million and $0.3 million, respectively.
million.
Eligible employees may participate in our 401(k) plan upon their date of hire. OurThe 401(k) plan offers several mutual fund investment options. The purchase of our stock has never been an option. We make matching contributions to ourthe 401(k) plan based on each participating employee'semployee’s contributions and eligible compensation. OurThe matching contribution expense for 2009, 2008 2007 and 20062007 related to this plan werewas $1.3 million, $1.6 million, $1.4 million and $1.4 million, respectively.
We had two nonqualified deferred compensation plans during 2008, whichthat were terminated in 2008. The plans 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 arewere included in "Other“Other current liabilities and accrued expenses" and "Other noncurrent liabilities," respectively,expenses” on our Consolidated Balance Sheets.Sheet. In December 2008, participants chose, in accordance with transition rules in effect in connectionconne ction with a change to the tax laws governing deferred compensation, to receive their account balances in full. Assets from both plans will bewere fully distributed in 2009 and we had no such obligations remaining under these plans at December 31, 2009.
We currently maintain a practice of paying a separation allowance, which is not funded, under our salary continuation policy to employees with at least five years of continuous service who voluntarily terminate employment with us and are at age 60 or thereafter, which is not funded.thereafter. Payments in 2009, 2008 2007 and 20062007 under this policy were $1.1 million, $0.9 million $0.6 million and $0.3$0.6 million, respectively. In each of 2009, 2008 2007 and 20062007 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,million.
In accordance with theASC Topic 715, Compensation–Retirement Benefits, we have a projected benefit obligation related to our salary continuation policy reflected in "Other“Other current liabilities and accrued expenses"expenses” and "Other“Other noncurrent liabilities"liabilities” on our Consolidated Balance Sheets. At December 31, 20082009 and 2007,2008, the accumulated benefit obligation was $3.3$3.5 million and $3.0$3.3 million, respectively. At December 31, 20082009 and 2007,2008, the projected benefit obligation was $4.4$4.5 million and $4.0$4.4 million, respectively. Our estimated future benefit payments are $0.5 million, $0.5 million, $0.5$1.0 million, $0.4 million, $0.4 million, $0.3 million and $0.5$0.3 million for 2009, 2010, 2011, 2012, 2013 and 2013,2014, respectively, 60
and $2.2$1.4 million for the five-year periodp eriod ending December 31, 2018.2019. The assumptions used to compute the 20082009 projected benefit obligation included a discount rate of 6.00%5.20% and a rate of compensation increase of 4.00%.
(R) COMMITMENTS AND CONTINGENCIES
| (P) | 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 in 2008, 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)(B), 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
===============================================================================
| Fiscal Year | Fiscal Year | Fiscal Year | ||||||||||
| Ended | Ended | Ended | ||||||||||
| 12/31/09 | 12/31/08 | 12/31/07 | ||||||||||
| Minimum rent expense | $ | 11,004 | $ | 12,503 | $ | 15,147 | ||||||
| Sublease income | (2,863 | ) | (2,148 | ) | - | |||||||
| Rent expense, net | $ | 8,141 | $ | 10,355 | $ | 15,147 | ||||||
There was no contingent rent expense in 2009, 2008 2007 and 2006.
2007.
The following table sets forth the future minimum futurelease commitments and total
minimum future sublease income at December 31, 2008,2009, 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
Minimum Lease Commitments | Sublease Income | |||||||
| 2010 | $ | 9,263 | $ | (2,652 | ) | |||
| 2011 | 9,365 | (2,729 | ) | |||||
| 2012 | 9,292 | (2,863 | ) | |||||
| 2013 | 8,465 | (3,054 | ) | |||||
| 2014 | 9,089 | (3,054 | ) | |||||
| Later years | 38,648 | (8,272 | ) | |||||
| Total | $ | 84,122 | $ | (22,624 | ) | |||
In 2008, 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, 2008,2009, 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 hadhave two international transponder service agreements, the terms of which extend through 2009.2014. At December 31, 2008,2009, the future commitmentcommitments related to these two agreements was $1.9 million.
were $2.8 million, $2.8 million, $2.8 million, $2.8 million and $2.2 million for 2010, 2011, 2012, 2013 and 2014, respectively.
We hadhave noncancelable obligations to license programming from other studios of $4.8 million, $5.0$5.6 million and $3.3$3.9 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 and $2.3 million in 2009 with one additional deferred purchase price paymentspayment of $2.3 million and $4.3 million due in 2009
and 2010, respectively.2010. 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, 2008,2009, and no future earnoutsearnout payments are expected as we are exitinghave exited the DVD business.
In 2005, we acquired an affiliate network of websites. We paid $8.0 million at closing and $2.0 million in each of 2006 and 2007. Pursuant to the acquisition agreement, we are also obligated to make future contingent earnout payments over the five-year period commencing January 1, 2005, based primarily on the 61
financial performance of the acquired business. If the required performance
benchmarks are achieved, any contingentNo earnout payments will be recorded as
additional purchase price and/or compensation expense.were made during 2009. During each of 2008 2007
and 2006,2007, earnout payments of $0.1 million were made.
In 2001, we acquired the Califa Entertainment Group, Inc.. 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. In 2009, 2008 and 2007, we paid the sellers $1.0 million, $1.0 million and $8.0 million, respectively, in cash. The remaining payments of $1.0 million and $0.8 million due in 2010 and 2011, respectively, must also be made and recorded as additionalin cash. We may accelerate all or any portion of the remaining unpaid purchase price.
price 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.
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'slicensee’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'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
ASC Topic 450, Contingencies.
| (Q) | 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 unitsRSUs 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 and nonemployee directors 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 and nonemployee direc tors 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, 2008,2009, we had 2,826,1204,870,025 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 ofAt December 31, 2008, the performance goals were not formally approved by the Board
of Directors. Pursuant to the requirements of Statement 123(R),2009, we have measured
the fair value expense to be recognized during 2008 based upon thehad 3,808,921 stock options outstanding.
At December 31, 2008 closing price2009, we had 536,625 RSUs outstanding, none 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
grantwhich were not achieved, and the restricted stock units for those grants were
forfeited in 2009.
vested.
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'sday’s closing price less a 15% discount. ESPP expense is reflected in "Selling“Selling and administrative expenses"expenses” on our Consolidated Statements of Operations and the proceeds are reflected in "Proceeds“Proceeds from stock-based compensation"compensation” on our Consolidated Statements of Cash Flows. At December 31, 2008,2009, we had 37,750200,687 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, ourRSUs, the ESPP and other equity awards for 2009, 2008 and 2007 and 2006 (in thousands, except per share amounts)thousands):
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
===============================================================================
| Fiscal Year | Fiscal Year | Fiscal Year | ||||||||||
| Ended | Ended | Ended | ||||||||||
| 12/31/09 | 12/31/08 | 12/31/07 | ||||||||||
| Stock options | $ | 679 | $ | 1,439 | $ | 1,131 | ||||||
| RSUs | 138 | (407 | ) | 502 | ||||||||
| ESPP | 15 | 21 | 29 | |||||||||
| Other equity awards | 183 | 192 | 194 | |||||||||
| Total | $ | 1,015 | $ | 1,245 | $ | 1,856 | ||||||
Stock option and restricted stock optionRSU expense for 2008, 2007 and 2006the periods presented include adjustments reflecting actual versus estimated forfeitures.
At December 31, 2008, there was $0.82009, we had $2.4 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 $0.33.1 years, and $0.7 million of unrecognized stock-based compensation expense related to nonvested restricted stock units,RSUs, which will be recognized over 2.2a weighted average period of 2.8 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
During 2009, we granted 2,205,000 stock options exercisable for shares of Class B stock, of which 1,200,000 stock options were granted to Scott N. Flanders, our Chief Executive Officer and Director, or Mr. Flanders. These stock options vest ratably over a three-year period from the grant date and expire 10 years from the grant date except for the stock options granted to Mr. Flanders that vest ratably over a four-year period.
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 behaviorand cancellation data and involves a number of complex assumptions including expected volatility, risk-free interest rate, expected dividends and stock option exercises and 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 -- -- --
- -------------------------------------------------------------------------------
| Fiscal Year | Fiscal Year | Fiscal Year | ||||||||||
| Ended | Ended | Ended | ||||||||||
| 12/31/09 | 12/31/08 | 12/31/07 | ||||||||||
| Expected volatility | 43% - 104 | % | 31% - 41 | % | 25% - 41 | % | ||||||
| Weighted average volatility | 60 | % | 35 | % | 34 | % | ||||||
| Risk-free interest rate | 0.04% - 4.74 | % | 1.95% - 5.10 | % | 4.67% - 5.04 | % | ||||||
| Expected dividends | - | - | - | |||||||||
The expected life of stock options represents the weighted average period the stock options are expected to remain outstanding and is a derived output of the Lattice model. The expected life of stock options is impacted by all of the underlying assumptions and calibration of the Lattice model. The Lattice model assumes that exercise behavior is a function of the option'sstock option’s remaining contractual lifeterm, vesting schedule and the extent to which the option's fair marketstock option’s intrinsic 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 stock options granted during 2009, 2008 2007
and 20062007 using the Lattice model was 6.7 years, 6.36.7 years and 5.96.3 years, respectively. The weighted average fair value per share for stock options granted during 2009, 2008 2007 and 20062007 using the Lattice model was $1.25, $2.45 and $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
================================================================================
2009:
Number of Shares | Weighted Average Exercise Price | |||||||
| Outstanding at December 31, 2008 | 3,578,584 | $ | 15.22 | |||||
| Granted | 2,205,000 | 2.05 | ||||||
| Forfeited | (751,000 | ) | 24.59 | |||||
| Canceled | (1,223,663 | ) | 9.83 | |||||
| Outstanding at December 31, 2009 | 3,808,921 | $ | 7.48 | |||||
During 2009, 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, 2008,2009, the weighted average remaining contractual lives of stock options outstanding and stock options exercisable were 4.06.6 years and 3.43.5 years, respectively. At December 31, 2008,2009, the number of stock options exercisable was 3,105,7591,758,601 and the weighted average exercise price per share of stock options exercisable was $15.97.$13.32. The aggregate intrinsic value for stock options outstanding at December 31, 2009 was $2.1 million. There werewas no aggregate intrinsic valuesvalue related to options outstanding
andstock options exercisable at December 31, 2008.
2009.
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
================================================================================
2009:
Number of Shares | Weighted Average Grant-Date Fair Value | |||||||
| Outstanding at December 31, 2008 | 472,825 | $ | 4.47 | |||||
| Granted | 2,205,000 | 1.25 | ||||||
| Vested | (182,512 | ) | 5.34 | |||||
| Canceled | (444,993 | ) | 2.17 | |||||
| Outstanding at December 31, 2009 | 2,050,320 | $ | 1.43 | |||||
The total fair value of stock options vested in 2009, 2008 and 2007 and 2006 was $1.0 million, $2.1 million and $2.7 million, and $3.0 million, respectively.
Restricted Stock Units
At December 31,
During 2009, we granted 485,000 RSUs with a weighted average grant-date fair value of $1.71 that provided for the issuance of Class B stock, of which 150,000 RSUs with a grant-date fair value of $2.71 were granted to Mr. Flanders. These RSUs vest ratably over a three-year period from the grant date except for the RSUs granted to Mr. Flanders that vest ratably over a four-year period.
In 2008, we had 632,750 restrictedgranted 270,625 RSUs that provided for the issuance of Class B stock if certain performance goals were met. In March 2009, the Board of Directors modified the 2008 grants by replacing the performance-based criteria for the vesting of the grants with a service-based vesting schedule. Pursuant to the requirements of ASC Topic 718, the fair value of the grants was remeasured at the modification date to a fair value of $1.25 per share. Accordingly, we recorded a cumulative adjustment credit of $0.1 million related to this modification. The modification did not affect the number of shares expected to vest and no incremental compensation cost was associated with the modification.
The 2006 grants of RSUs provided for the issuance of Class B stock if three-year cumulative operating income target thresholds were met. The 2007 grants of RSUs provided for the issuance of Class B stock if two-year cumulative operating income target thresholds were met; the 2007 grants were also subject to an additional one-year service requirement for the units outstanding,
none of whichto vest. The operating income minimum thresholds established for each grant were vested.
64
not achieved, and the RSUs for those grants were forfeited in 2009.
The following table sets forth theRSU activity and balances of our restricted
stock units for the yearsyear 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
================================================================================
2009:
Number of Shares | Weighted Average Grant-Date Fair Value | |||||||
| Outstanding at December 31, 2008 | 632,750 | $ | 8.02 | |||||
| Granted | 485,000 | 1.71 | ||||||
| Forfeited | (385,875 | ) | 11.74 | |||||
| Canceled | (195,250 | ) | 1.32 | |||||
| Outstanding at December 31, 2009 | 536,625 | $ | 1.66 | |||||
In 2008,2009, we issued 270,625485,000 shares of restricted stock units at a weighted
average fair value per share of $2.16,RSUs and 25,00084,000 of these shares were canceled during the year.
Employee Stock Purchase Plan
Stock-based compensation expense related to ourthe ESPP was $15,000, $21,000 for 2008 and $29,000 for each2009, 2008 and 2007, respectively.
Other Equity Awards
We issued 33,674108,380 shares of our Class B stock during 20082009 related to other equity awards. Stock-based compensation expense related to other equity awards was $0.2 million, $0.2 million and $0.4$0.2 million for 2009, 2008 and 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)-3ASC Topic 718 for calculating the tax effects of stock-based compensation pursuant to Statement 123(R). The alternative
transitionand use the simplified method simplifies the calculation offor calculating 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).
ASC Topic 718.
Under Statement 123(R),ASC Topic 718, 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.carryforwards. Under Statement 123(R),ASC Topic 718, 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, 2009, 2008 and 2007.
65
(T) CONSOLIDATED STATEMENTS OF CASH FLOWS
| (R) | 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
| Fiscal Year | Fiscal Year | Fiscal Year | ||||||||||
| Ended | Ended | Ended | ||||||||||
| 12/31/09 | 12/31/08 | 12/31/07 | ||||||||||
| Interest | $ | 4,459 | $ | 4,864 | $ | 5,042 | ||||||
| Income taxes | $ | 2,358 | $ | 2,343 | $ | 2,166 | ||||||
| (S) | Segment Information |
Our businesses are currently organized into the following three reportable segments: Entertainment, PublishingPrint/Digital 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. PublishingPrint/Digital Group operations include the publicationcreation of content for distribution through the print platforms of Playboy magazine, special editions, and other domestic publishing businesses,publications, including books and calendars, and the licensing of international editions of Playboy magazine.magazine and the digital platforms of the Internet and mobile. Also included is e-commerce, a business we outsource to third parties. Licensing Group operations include thet he 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.
In concert with the integration of our print and digital businesses in the first quarter of 2009, we moved the reporting of our digital business from the Entertainment Group into the Print/Digital Group, which we formerly called the Publishing Group. These businesses were combined in order to better focus on creating brand-consistent content that extends across print and digital platforms. These reporting changes are in conformity with the requirements of ASC Topic 280, Segment Reporting, and better reflect how management views the Company’s operations. The revised segment reporting is reflected throughout this report for all periods presented. Amounts reported for prior periods have been reclassified to conform to the revise d segment reporting.
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
| Fiscal Year | Fiscal Year | Fiscal Year | ||||||||||
| Ended | Ended | Ended | ||||||||||
| 12/31/09 | 12/31/08 | 12/31/07 | ||||||||||
Net revenues (1) | ||||||||||||
| Entertainment | $ | 98,064 | $ | 118,889 | $ | 139,019 | ||||||
| Print/Digital | 105,447 | 132,841 | 157,820 | |||||||||
| Licensing | 36,842 | 40,417 | 43,001 | |||||||||
| Total | $ | 240,353 | $ | 292,147 | $ | 339,840 | ||||||
Income (loss) before income taxes (2) | ||||||||||||
| Entertainment | $ | 9,876 | $ | 8,142 | $ | 11,250 | ||||||
| Print/Digital | 1,600 | (3,421 | ) | 2,473 | ||||||||
| Licensing | 20,972 | 23,676 | 26,432 | |||||||||
| Corporate | (25,390 | ) | (23,872 | ) | (28,159 | ) | ||||||
| Restructuring expense | (19,148 | ) | (6,783 | ) | (445 | ) | ||||||
| Impairment charges | (27,724 | ) | (146,536 | ) | (1,508 | ) | ||||||
| Deferred subscription cost write-off | - | (4,820 | ) | - | ||||||||
| Recoveries from (provisions for) reserves | 39 | (4,121 | ) | - | ||||||||
| Nonoperating expenses | (8,844 | ) | (12,482 | ) | (7,205 | ) | ||||||
| Total | $ | (48,619 | ) | $ | (170,217 | ) | $ | 2,838 | ||||
Depreciation and amortization (3), (4) | ||||||||||||
| Entertainment | $ | 31,574 | $ | 35,544 | $ | 37,802 | ||||||
| Print/Digital | 2,775 | 2,254 | 1,948 | |||||||||
| Licensing | 229 | 183 | 94 | |||||||||
| Corporate | 1,535 | 1,477 | 1,354 | |||||||||
| Total | $ | 36,113 | $ | 39,458 | $ | 41,198 | ||||||
| Dec. 31, | Dec. 31, | |||||||
| 2009 | 2008 | |||||||
Identifiable assets (3), (5) | ||||||||
| Entertainment | $ | 82,119 | $ | 115,230 | ||||
| Print/Digital | 21,468 | 36,874 | ||||||
| Licensing | 6,040 | 7,601 | ||||||
| Corporate | 87,205 | 93,883 | ||||||
| Total | $ | 196,832 | $ | 253,588 | ||||
| (1) | Net revenues include revenues attributable to foreign countries of approximately $87,034, $94,003 and $113,139 in 2009, 2008 and 2007, respectively. Revenues from the U.K. were $20,471, $26,373 and $39,066 in 2009, 2008 and 2007, 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 (loss) before income taxes includes income (loss) attributable to foreign countries of approximately ($1,119), $4,628 and $6,617 in 2009, 2008 and 2007, respectively. |
| (3) | The majority of our property and equipment and capital expenditures are reflected in Corporate; 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. |
| (T) | 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'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, 20082009 and 20072008 at a net book value, including all improvements and after accumulated depreciation, of $1.3$1.2 million and $1.4$1.3 million, respectively. The operating expenses of the Playboy Mansion, including depreciation and taxes, were $2.3 million, $1.9 million and $2.8 million for 2009, 2008 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 20082009 to be $0.7$0.8 million, and Mr. Hefner paid that amount during 2008.amount. The actual rent and other benefits paid for 2007 and 2006 were $0.7 million for each of 2008 and $0.8 million,
respectively.2007.
Crystal Harris, Holly Madison, Bridget Marquardt, Karissa Shannon, Kristina Shannon and Kendra Wilkinson, the stars of The Girls Next Door on E! Entertainment Television, resided in the mansion with Mr. Hefner at various times in 20082009 and 2007.2008. The value of rent, food and beverage and other personal benefits for thetheir 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 $0.3 million and $0.4 million in 2009 and 2008, respectively. In addition, each of 2008 and 2007.
In addition, Ms. Madison, Ms. Marquardt and Ms. Wilkinson each receivethese individuals receives or has received payments for services rendered on our behalf, including appearance fees.
(W) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
| (U) | Subsequent Events |
We evaluated all of our activity through the issue date of these financial statements and concluded that no subsequent events have occurred that would require recognition in the financial statements or disclosure in the Notes to Consolidated Financial Statements.
| (V) | Quarterly Results of Operations (Unaudited) |
The following table sets forth a summary of the unaudited quarterly results of operations for 20082009 and 20072008 (in thousands, except share amounts):
| Quarters Ended | ||||||||||||||||
| 2009 | Mar. 31 | June 30 | Sept. 30 | Dec. 31 | ||||||||||||
| Net revenues | $ | 61,633 | $ | 62,191 | $ | 56,005 | $ | 60,524 | ||||||||
| Operating income (loss) | (10,032 | ) | (5,457 | ) | 2,232 | (26,518 | ) | |||||||||
| Net loss | (13,662 | ) | (8,760 | ) | (1,084 | ) | (27,772 | ) | ||||||||
Basic and diluted loss per common share (1) | (0.41 | ) | (0.26 | ) | (0.03 | ) | (0.83 | ) | ||||||||
| Common stock price: | ||||||||||||||||
| Class A high | 3.78 | 4.23 | 3.95 | 6.00 | ||||||||||||
| Class A low | 1.88 | 2.45 | 2.90 | 3.15 | ||||||||||||
| Class B high | 2.53 | 3.35 | 3.13 | 4.78 | ||||||||||||
| Class B low | $ | 1.15 | $ | 1.95 | $ | 2.35 | $ | 2.74 | ||||||||
| 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 | (4,179 | ) | (3,181 | ) | (6,231 | ) | (146,776 | ) | ||||||||
Basic and diluted loss per common share (1) | (0.13 | ) | (0.10 | ) | (0.19 | ) | (4.40 | ) | ||||||||
| 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 | ||||||||
| (1) | Quarterly and |
The quarters ended March 31, 2009, June 30, 2009, September 30, 2009, December 31, 2009, March 31, 2008, September 30, 2008 December 31, 2008,
June 30, 2007 and December 31, 20072008 included restructuring expense of $3.2 million, $9.1 million, $0.5 million, $6.4 million, $0.6 million, $2.2 million $4.0 million, $0.1 million and $0.4$4.0 million, respectively (see Note (D)(C), Restructuring Expense). The quarters ended March 31, 2009, December 31, 2008,2009, June 30, 2008 and December 31, 20072008 included $146.4impairment charges of $5.5 million, $22.2 million ($131.220.8 million after tax), $0.1 million and $1.5$146.4 million ($131.2
million after tax), respectively, of impairment charges
(see Note (C)(B), Sale of Assets, and Note (O)(M), 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)(D), Provision for Reserves). The quartersquarter ended December 31, 2008 and December
31, 2007 included an impairment chargescharge on investments of $2.0 million and $0.1
million, respectively.
68
million.
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, 20082009 and 2007,2008, and the related Consolidated Statements of Operations, Consolidated Statements of Shareholders'Shareholders’ Equity (Deficit), and Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2008.2009. 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'sCompany’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, 20082009 and 2007,2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008,2009, 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)(A) to the Notes to Consolidated Financial Statements, the Company adopted Financial Accounting Standards Board
Interpretation No. 48, FSP APB 14-1, Accounting for UncertaintyConvertible Debt Instruments That May be Settled in Income Taxes-an
interpretation of FASB Statement No. 109Cash upon Conversion (Including Partial Cash Settlements), orFSP APB 14-1 (incorporated in ASC Topic 470, Debt), effective January 1, 2007.
2009 and applied FSP APB 14-1 retrospectively to all applicable prior periods.
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, 2008,2009, based on criteria established in Internal Control-IntegratedControl–Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 12, 2009,11, 2010, expressed an unqualified opinion thereon.
/s/
/s/ Ernst & Young LLP
Chicago, Illinois
March 12, 2009
69
11, 2010
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
| (a) | Evaluation of Disclosure Controls and Procedures |
Our management, under the supervision and with the participation of our Interim Chief Executive Officer and Interim 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, 2008.2009. Based on that evaluation, our Interim Chief Executive Officer and Interim Chief Financial Officer have concluded that, as of December 31, 2008,2009, our disclosure controls and procedures are effective.
(b) Management's Annual Report on Internal Control Over Financial Reporting
| (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 Interim Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2008.2009. In making this evaluation, management used the criteria set forth in Internal Control-IntegratedControl–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.
2009.
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
| (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’s internal control over financial reporting as of December 31, 2008,2009, based on criteria established in Internal Control-IntegratedControl–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Playboy Enterprises, Inc.'s’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'sManagement’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company'scompany’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'scompany’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'scompany’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 beingbe ing 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'scompany’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, 2008,2009, 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, 20082009 and 2007,2008, and the related Consolidated Statements of Operations, Consolidated Statements of Shareholders'Shareholders’ Equity (Deficit), and Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 20082009 of Playboy Enterprises, Inc. and our report dated March 12, 200911, 2010 expressed an unqualified opinion thereon.
/s/
/s/ Ernst & Young LLP
Chicago, Illinois
March 12, 2009
71
(d) Change in Internal Control Over Financial Reporting
11, 2010
| (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, 2008,2009, 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 2009,2010, which will be filed within 120 days after the close of our fiscal year ended December 31, 2008,2009, 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 2009,2010, which will be filed within 120 days after the close of our fiscal year ended December 31, 2008,2009, 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:
2009:
| Class B Common Stock | ||||||||||||
| Number of Options Outstanding | Weighted Average Exercise Price of Options Outstanding | Number of Shares Remaining for Future Issuance | ||||||||||
| Total equity compensation plans approved by security holders | 3,808,921 | $ | 7.48 | 4,870,025 | ||||||||
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 2009,2010, which will be filed within 120 days after the close of our fiscal year ended December 31, 2008,2009, 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 2009,2010, which will be filed within 120 days after the close of our fiscal year ended December 31, 2008,2009, 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 2009,2010, which will be filed within 120 days after the close of our fiscal year ended December 31, 2008,2009, 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 | 44 | |
| Consolidated Balance Sheets | 45 | |
| Consolidated Statements of | 46 | |
| Consolidated Statements of Cash Flows | 47 | |
| Notes to Consolidated Financial Statements | 48 | |
| Report of Independent Registered Public Accounting Firm | 70 | |
| (2) | Financial Statement Schedules | |
| Schedule II | 76 | |
| 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. | ||
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in
(in thousands)
| COLUMN A | COLUMN B | COLUMN C | COLUMN D | COLUMN E | ||||||||||||||||
| Additions | ||||||||||||||||||||
| Description | Balance at Beginning of Period | Charged to Costs and Expenses | Charged to Other Accounts | Deductions | Balance at End of Period | |||||||||||||||
| Allowance deducted in the balance sheet from the asset to which it applies: | ||||||||||||||||||||
| Fiscal Year Ended December 31, 2009: | ||||||||||||||||||||
| Allowance for doubtful accounts | $ | 4,084 | $ | 1,861 | $ | 583 | (1) | $ | 2,697 | (2) | $ | 3,834 | ||||||||
| Allowance for returns | $ | 19,833 | $ | - | $ | 21,645 | (3) | $ | 24,427 | (4) | $ | 17,051 | ||||||||
| Deferred tax asset valuation allowance | $ | 88,400 | $ | 21,023 | (5) | $ | - | $ | - | $ | 109,423 | |||||||||
| 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 | |||||||||
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 publications 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. |
EXHIBIT INDEX
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 for 3.00% Convertible Senior Subordinated Notes due 2025 | |
| a | 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) | |
| @ | Instrument of Resignation, Appointment and Acceptance, dated November 21, 2008, by and among Playboy Enterprises, Inc., Deutsche Bank National Trust Company and Bank of America, N.A. (as successor by merger to LaSalle Bank National Association) | |
| 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 | Publishing Services Agreement, dated November 17, 2009, by and between Playboy Enterprises, Inc. and American Media, Inc. through its wholly owned subsidiary, American Media Operations, Inc. | |
| 10.2 | 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) | |
| # | e | Fourth Amendment, dated April 7, 2009, to Printing and Binding Agreement between Playboy Enterprises, Inc. and Quad/Graphics, Inc. (incorporated by reference to Exhibit 10.5 from our quarterly report on Form 10-Q for the quarter ended June 30, 2009, or the June 30, 2009 Form 10-Q) |
| 10.3 | 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 our quarterly report on Form 10-Q for the quarter ended March 31, 2006, or 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. (incorporated by reference to Exhibit 10.2(b) from our annual report on Form 10-K for the year ended December 31, 2008, or the December 31, 2008 Form 10-K) |
| 10.4 | 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) | |
| 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 June 30, 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 June 30, 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 the March 31, 2006 Form 10-Q) |
| 10.5 | Playboy TV UK Limited and UK/Benelux Limited | |
| @# | Authority to Proceed Letter to provide Connectivity, uplink and satellite Services via the Eurobird 1 satellite currently under negotiation, dated October 16, 2009, between Arqiva Limited and Playboy TV UK/Benelux Limited | |
| @ | Extension Letter to Authority to Proceed Letter to provide Connectivity, uplink and satellite Services via the Eurobird 1 satellite currently under negotiation, dated December 17, 2009, between Arqiva Limited and Playboy TV UK/Benelux Limited | |
| @ | Extension Letter to Authority to Proceed Letter to provide Connectivity, uplink and satellite Services via the Eurobird 1 satellite currently under negotiation, dated January 7, 2010, between Arqiva Limited and Playboy TV UK/Benelux Limited | |
| @ | Extension Letter to Authority to Proceed Letter to provide Connectivity, uplink and satellite Services via the Eurobird 1 satellite currently under negotiation, dated January 20, 2010, between Arqiva Limited and Playboy TV UK/Benelux Limited | |
| @ | Extension Letter to Authority to Proceed Letter to provide Connectivity, uplink and satellite Services via the Eurobird 1 satellite currently under negotiation, dated February 17, 2010, between Arqiva Limited and Playboy TV UK/Benelux Limited | |
| @# | Authority to Proceed Letter to provide Connectivity, uplink and satellite Services via the Hotbird 8 satellite currently under negotiation, dated October 2, 2009, between Arqiva Limited and Playboy TV UK/Benelux Limited | |
| @ | Extension Letter to Authority to Proceed Letter to provide Connectivity, uplink and satellite Services via the Hotbird 8 satellite currently under negotiation, dated October 30, 2009, between Arqiva Limited and Playboy TV UK/Benelux Limited | |
| @ | Extension Letter to Authority to Proceed Letter to provide Connectivity, uplink and satellite Services via the Hotbird 8 satellite currently under negotiation, dated December 17, 2009, between Arqiva Limited and Playboy TV UK/Benelux Limited | |
| @ | Extension Letter to Authority to Proceed Letter to provide Connectivity, uplink and satellite Services via the Hotbird 8 satellite currently under negotiation, dated January 7, 2010, between Arqiva Limited and Playboy TV UK/Benelux Limited | |
| @ | Extension Letter to Authority to Proceed Letter to provide Connectivity, uplink and satellite Services via the Hotbird 8 satellite currently under negotiation, dated January 20, 2010, between Arqiva Limited and Playboy TV UK/Benelux Limited | |
| @ | Extension Letter to Authority to Proceed Letter to provide Connectivity, uplink and satellite Services via the Hotbird 8 satellite currently under negotiation, dated February 17, 2010, between Arqiva Limited and Playboy TV UK/Benelux Limited | |
| 10.6 | 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) | ||
| 10.7 | 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 the Current Report on Form 8-K dated December 23, 2002) | |
| 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 | Agreement by and between Playboy Entertainment Group, Inc. and Spice Hot Entertainment, Inc., and DirecTV, Inc. | |
| # | a | 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, filed with the SEC on February 20, 2009, or the September 30, 2007 Form 10-Q/A) |
| b | Amendment to the Agreement, dated October 12, 2009, by and between Playboy Entertainment Group, Inc. and Spice Hot Entertainment, Inc., and DirecTV, Inc. (incorporated by reference to Exhibit 10.5 from our quarterly report on Form 10-Q for the quarter ended September 30, 2009, or the September 30, 2009 Form 10-Q) | |
| @ | Amendment to the Agreement, dated November 13, 2009, by and between Playboy Entertainment Group, Inc. and Spice Hot Entertainment, Inc., and DirecTV, Inc. | |
| @ | Amendment to the Agreement, dated December 14, 2009, by and between Playboy Entertainment Group, Inc. and Spice Hot Entertainment, Inc., and DirecTV, Inc. | |
| @ | Amendment to the Agreement, dated January 14, 2010, by and between Playboy Entertainment Group, Inc. and Spice Hot Entertainment, Inc., and DirecTV, Inc. | |
| @ | Amendment to the Agreement, dated February 12, 2010, by and between Playboy Entertainment Group, Inc. and Spice Hot Entertainment, Inc., and DirecTV, Inc. | |
| #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 | Amended and Restated Satellite Capacity Lease, effective October 11, 2009, by and between Playboy Entertainment Group, Inc. and Transponder Encryption Services Corporation (incorporated by reference to Exhibit 10.4 from the September 30, 2009 Form 10-Q) | |
| 10.14 | 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 from 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 (incorporated by reference to Exhibit 10.13(b) from the December 31, 2008 Form 10-K) |
| c | Second Amendment to the Content License, Marketing and Sales Agreement, effective as of April 20, 2009, between Playboy.com, Inc. and eFashion Solutions, LLC (incorporated by reference to Exhibit 10.1 from the September 30, 2009 Form 10-Q) | |
| d | Third Amendment to the Content License, Marketing and Sales Agreement, effective as of May 26, 2009, between Playboy.com, Inc. and eFashion Solutions, LLC (incorporated by reference to Exhibit 10.2 from the September 30, 2009 Form 10-Q) | |
| # | e | Fourth Amendment to the Content License, Marketing and Sales Agreement, effective as of August 26, 2009, between Playboy.com, Inc. and eFashion Solutions, LLC (incorporated by reference to Exhibit 10.3 from the September 30, 2009 Form 10-Q) |
| #10.15 | 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) | |
| 10.16 | 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 from 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 Holdings, 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 our annual report on Form 10-K for the year ended December 31, 2005) | |
| 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 | |
| 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 December 31, 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, or the June 30, 2006 Form 10-Q) | ||
| 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 | |
| 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 our quarterly report on Form 10-Q for the quarter ended September 30, 2006) | ||
| 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) | |
| Seventh Amendment to the Credit Agreement, dated February 17, 2009 (incorporated by reference to Exhibit 10.15(qq) from the December 31, 2008 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 June 30, 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 December 31, 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 June 30, 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 June 30, 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 June 30, 1995 Form 10-K) | |
| e | Fourth Amendment to Office Lease, dated August 6, 1996 (incorporated by reference to Exhibit 10.20(e) from the June 30, 1996 Form 10-K) | |
| f | Fifth Amendment to Office Lease, dated March 19, 1998 (incorporated by reference to Exhibit 10.3 from our quarterly report on Form 10-Q for the quarter ended March 31, 1998) | |
| 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 June 30, 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 December 31, 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 June 30, 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 (incorporated by reference to Exhibit 10.22(d) from the December 31, 2008 Form 10-K) | |
| e | Third Amendment to the Playboy Enterprises, Inc. Deferred Compensation Plan, as amended and restated January 1, 2005 (incorporated by reference to Exhibit 10.22(e) from the December 31, 2008 Form 10-K) | |
| 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 (incorporated by reference to Exhibit 10.22(h) from the December 31, 2008 Form 10-K) | |
| i | Third Amendment to the Playboy Enterprises, Inc. Board of Directors’ Deferred Compensation Plan, as amended and restated January 1, 2005 (incorporated by reference to Exhibit 10.22(i) from the December 31, 2008 Form 10-K) | |
| j | Amended and Restated Playboy Enterprises, Inc. Employee Investment Savings Plan (incorporated by reference to Exhibit 10.22(j) from the December 31, 2008 Form 10-K) | |
| *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 June 30, 1991 Form 10-K) | |
| *10.24 | 1995 Stock Incentive Plan | |
| a | Third Amended and Restated Playboy Enterprises, Inc. 1995 Stock Incentive Plan (incorporated by reference to Appendix A | |
| 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. (incorporated by reference to Appendix B | |
| b | Form of Restricted Stock Agreement for Restricted Stock issued under the Plan (incorporated by reference to | |
| c | First Amendment to | |
*@10.26 | Playboy Enterprises, Inc. Employee Stock Purchase Plan, as amended and restated | |
| *10.27 | Selected Employment, Termination and Other | |
| a | Form of | |
| b | Form of Severance Agreement, dated September 1, 2008, between Playboy Enterprises, Inc. and each of Martha Lindeman, Richard Rosenzweig and Howard Shapiro (incorporated by reference to Exhibit 10.27(b) from the December 31, | |
| c | Amended and Restated Employment Agreement, dated September 1, 2008, between Playboy Enterprises, Inc. and Robert Meyers (incorporated by reference to Exhibit 10.27(c) from the December 31, | |
| # | d | Separation Agreement, dated February 9, 2009, between Playboy Enterprises, Inc. and Christie Hefner (incorporated by reference to Exhibit 10.27(d) from the December 31, 2008 Form 10-K) |
| e | Employment Agreement, dated June 1, 2009, between Playboy Enterprises, Inc. and Scott Flanders (incorporated by reference to Exhibit 10.4 from the June 30, 2009 Form 10-Q) | |
| @ | Separation Agreement, dated November 30, 2009, between Playboy Enterprises, Inc. and Linda Havard | |
@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 | |
@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 |
| @ | Filed herewith |
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)
| PLAYBOY ENTERPRISES, INC. | ||||
| March 11, 2010 | By | /s/ Robert D. Campbell | ||
| Robert D. Campbell | ||||
| Senior Vice President, Treasurer and | ||||
| Strategic Planning, Assistant Secretary | ||||
| and Interim 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
| /s/ Scott N. Flanders | March 11, 2010 | |
| Scott N. Flanders | ||
| Chief Executive Officer and Director | ||
| (Principal Executive Officer) | ||
| /s/ David I. Chemerow | March 11, 2010 | |
| David I. Chemerow | ||
| Chairman of the Board and Director | ||
| /s/ Richard S. Rosenzweig | March 11, 2010 | |
| Richard S. Rosenzweig | ||
| Executive Vice President and Director | ||
| /s/ Dennis S. Bookshester | March 11, 2010 | |
| Dennis S. Bookshester | ||
| Director | ||
| /s/ Charles Hirschhorn | March 11, 2010 | |
| Charles Hirschhorn | ||
| Director | ||
| /s/ Russell I. Pillar | March 11, 2010 | |
| Russell I. Pillar | ||
| Director | ||
| /s/ Sol Rosenthal | March 11, 2010 | |
| Sol Rosenthal | ||
| Director | ||
| /s/ Robert D. Campbell | March 11, 2010 | |
| Robert D. Campbell | ||
| Senior Vice President, Treasurer and | ||
| Strategic Planning, Assistant Secretary | ||
| and Interim Chief Financial Officer | ||
| (Principal Financial Officer) | ||
| /s/ Michael S. Dannhauser | March 11, 2010 | |
| Michael S. Dannhauser | ||
| Senior Vice President and Corporate | ||
| Controller | ||
| (Principal Accounting Officer) |
87