10-Q 1 d74229_10q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2008 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 001-14790 Playboy Enterprises, Inc. (Exact name of registrant as specified in its charter) Delaware 36-4249478 (State of incorporation) (I.R.S. Employer Identification Number) 680 North Lake Shore Drive Chicago, IL 60611 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (312) 751-8000 -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_| Smaller reporting company |_| (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes |_| No |X| At April 30, 2008, there were 4,864,102 shares of Class A common stock and 28,435,513 shares of Class B common stock outstanding. FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains "forward-looking statements," including statements in Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations," as to expectations, beliefs, plans, objectives and future financial performance, and assumptions underlying or concerning the foregoing. We use words such as "may," "will," "would," "could," "should," "believes," "estimates," "projects," "potential," "expects," "plans," "anticipates," "intends," "continues" and other similar terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which could cause our actual results, performance or outcomes to differ materially from those expressed or implied in the forward-looking statements. We want to caution you not to place undue reliance on any forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. The following are some of the important factors that could cause our actual results, performance or outcomes to differ materially from those discussed in the forward-looking statements: (1) Foreign, national, state and local government regulations, actions or initiatives, including: (a) attempts to limit or otherwise regulate the sale, distribution or transmission of adult-oriented materials, including print, television, video, Internet and wireless materials; (b) limitations on the advertisement of tobacco, alcohol and other products which are important sources of advertising revenue for us; or (c) substantive changes in postal regulations which could increase our postage and distribution costs; (2) Risks associated with our foreign operations, including market acceptance and demand for our products and the products of our licensees and partners; (3) Our ability to manage the risk associated with our exposure to foreign currency exchange rate fluctuations; (4) Changes in general economic conditions, consumer spending habits, viewing patterns, fashion trends or the retail sales environment which, in each case, could reduce demand for our programming and products and impact our advertising revenues; (5) Our ability to protect our trademarks, copyrights and other intellectual property; (6) Risks as a distributor of media content, including our becoming subject to claims for defamation, invasion of privacy, negligence, copyright, patent or trademark infringement and other claims based on the nature and content of the materials we distribute; (7) The risk our outstanding litigation could result in settlements or judgments which are material to us; (8) Dilution from any potential issuance of common stock or convertible debt in connection with financings or acquisition activities; (9) Competition for advertisers from other publications, media or online providers or any decrease in spending by advertisers, either generally or with respect to the adult male market; (10) Competition in the television, men's magazine, Internet, wireless, new electronic media and product licensing markets; (11) Attempts by consumers, distributors, merchants or private advocacy groups to exclude our programming or other products from distribution; (12) Our television, Internet and wireless businesses' reliance on third parties for technology and distribution, and any changes in that technology and/or unforeseen delays in implementation which might affect our plans and assumptions; (13) Risks associated with losing access to transponders or technical failure of transponders or other transmitting or playback equipment that is beyond our control and competition for channel space on linear television platforms or video-on-demand platforms; (14) Failure to maintain our agreements with multiple system operators, or MSOs, and direct-to-home, or DTH, operators on favorable terms, as well as any decline in our access to, and acceptance by, DTH and/or cable systems and the possible resulting deterioration in the terms, cancellation of fee arrangements, pressure on splits or adverse changes in certain minimum revenue amounts with operators of these systems; (15) Risks that we may not realize the expected increased sales and profits and other benefits from acquisitions; (16) Any charges or costs we incur in connection with restructuring measures we may take in the future; (17) Risks associated with the financial condition of Claxson Interactive Group, Inc., our Playboy TV-Latin America, LLC, joint venture partner; (18) Increases in paper, printing or postage costs; (19) Effects of the national consolidation of the single-copy magazine distribution system and risks associated 2 with the financial stability of major magazine wholesalers; (20) Effects of the national consolidation of television distribution companies (e.g., cable MSOs, satellite platforms and telecommunications companies); and (21) Risks associated with the viability of our subscription, on-demand, e-commerce and ad-supported Internet models. For a detailed discussion of these and other factors that may affect our performance, see Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. 3 PLAYBOY ENTERPRISES, INC. FORM 10-Q TABLE OF CONTENTS Page ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Operations and Comprehensive Income (Loss) for the Quarters Ended March 31, 2008 and 2007 (Unaudited) 5 Consolidated Balance Sheets at March 31, 2008 (Unaudited) and December 31, 2007 6 Condensed Consolidated Statements of Cash Flows for the Quarters Ended March 31, 2008 and 2007 (Unaudited) 7 Notes to Condensed Consolidated Financial Statements (Unaudited) 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Item 4. Controls and Procedures 19 PART II OTHER INFORMATION Item 1. Legal Proceedings 21 Item 1A. Risk Factors 22 Item 6. Exhibits 22 4 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PLAYBOY ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) for the Quarters Ended March 31 (Unaudited) (In thousands, except per share amounts) 2008 2007 ------------------------------------------------------------------------------- Net revenues $ 78,536 $ 85,415 ------------------------------------------------------------------------------- Costs and expenses Cost of sales (63,756) (67,900) Selling and administrative expenses (14,705) (13,630) Restructuring expense (594) -- ------------------------------------------------------------------------------- Total costs and expenses (79,055) (81,530) ------------------------------------------------------------------------------- Operating income (loss) (519) 3,885 ------------------------------------------------------------------------------- Nonoperating income (expense) Investment income 360 475 Interest expense (1,133) (1,362) Amortization of deferred financing fees (89) (134) Other, net (517) (139) ------------------------------------------------------------------------------- Total nonoperating expense (1,379) (1,160) ------------------------------------------------------------------------------- Income (loss) before income taxes (1,898) 2,725 Income tax expense (1,237) (1,251) ------------------------------------------------------------------------------- Net income (loss) $ (3,135) $ 1,474 =============================================================================== Other comprehensive income (loss) Unrealized gain (loss) on marketable securities (470) 57 Unrealized gain (loss) on derivatives 78 (11) Foreign currency translation gain (loss) 383 (177) ------------------------------------------------------------------------------- Total other comprehensive loss (9) (131) ------------------------------------------------------------------------------- Comprehensive income (loss) $ (3,144) $ 1,343 =============================================================================== Weighted average number of common shares outstanding Basic 33,275 33,230 =============================================================================== Diluted 33,275 33,269 =============================================================================== Basic and diluted earnings (loss) per common share $ (0.09) $ 0.04 =============================================================================== The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 5 PLAYBOY ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
(Unaudited) Mar. 31, Dec. 31, 2008 2007 ------------------------------------------------------------------------------------------------ Assets Cash and cash equivalents $ 17,670 $ 20,603 Marketable securities and short-term investments 4,505 12,952 Receivables, net of allowance for doubtful accounts of $3,800 and $3,627, respectively 47,827 51,139 Receivables from related parties 2,656 1,704 Inventories 9,212 11,363 Deferred subscription acquisition costs 9,165 8,686 Deferred tax asset 1,320 1,320 Assets held for sale 11,538 4,706 Prepaid expenses and other current assets 9,943 13,402 ------------------------------------------------------------------------------------------------ Total current assets 113,836 125,875 ------------------------------------------------------------------------------------------------ Long-term investments 6,393 6,556 Property and equipment, net 16,367 14,665 Long-term receivables 2,795 2,795 Programming costs, net 54,836 54,926 Goodwill 133,572 133,570 Trademarks 65,852 65,437 Distribution agreements, net of accumulated amortization of $5,134 and $4,803, respectively 28,006 28,337 Deferred tax asset 1,206 1,206 Other noncurrent assets 11,494 11,789 ------------------------------------------------------------------------------------------------ Total assets $ 434,357 $ 445,156 ================================================================================================ Liabilities Acquisition liabilities $ 2,181 $ 2,134 Accounts payable 32,305 37,842 Accrued salaries, wages and employee benefits 6,364 8,304 Deferred revenues 43,090 43,955 Deferred tax liability 1,490 1,490 Other liabilities and accrued expenses 13,872 14,269 ------------------------------------------------------------------------------------------------ Total current liabilities 99,302 107,994 ------------------------------------------------------------------------------------------------ Financing obligations 115,000 115,000 Acquisition liabilities 7,872 7,936 Deferred tax liability 19,035 18,604 Other noncurrent liabilities 24,216 24,305 ------------------------------------------------------------------------------------------------ Total liabilities 265,425 273,839 ------------------------------------------------------------------------------------------------ Shareholders' equity Common stock, $0.01 par value Class A voting - 7,500,000 shares authorized; 4,864,102 issued 49 49 Class B nonvoting - 75,000,000 shares authorized; 28,812,528 and 28,784,079 issued, respectively 288 288 Capital in excess of par value 230,592 229,833 Accumulated deficit (55,901) (52,766) Treasury stock, at cost - 381,971 shares (5,000) (5,000) Accumulated other comprehensive loss (1,096) (1,087) ------------------------------------------------------------------------------------------------ Total shareholders' equity 168,932 171,317 ------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 434,357 $ 445,156 ================================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 6 PLAYBOY ENTERPRISES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS for the Quarters Ended March 31 (Unaudited) (In thousands)
2008 2007 ------------------------------------------------------------------------------------------------- Cash flows from operating activities Net income (loss) $ (3,135) $ 1,474 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation of property and equipment 1,044 1,115 Amortization of intangible assets 565 600 Amortization of investments in entertainment programming 8,210 8,581 Amortization of deferred financing fees 89 134 Stock-based compensation 584 (234) Deferred income taxes 431 419 Net change in operating assets and liabilities (1,232) 5,351 Investments in entertainment programming (8,258) (9,813) Other, net 215 (184) ------------------------------------------------------------------------------------------------ Net cash provided by (used for) operating activities (1,487) 7,443 ------------------------------------------------------------------------------------------------ Cash flows from investing activities Purchases of investments (397) (6,155) Proceeds from sales of investments 8,513 -- Additions to assets held for sale (6,832) -- Additions to property and equipment (2,759) (2,576) ------------------------------------------------------------------------------------------------ Net cash used for investing activities (1,475) (8,731) ------------------------------------------------------------------------------------------------ Cash flows from financing activities Payments of acquisition liabilities (250) (319) Proceeds from stock-based compensation 36 39 ------------------------------------------------------------------------------------------------ Net cash used for financing activities (214) (280) ------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash and cash equivalents 243 54 ------------------------------------------------------------------------------------------------ Net decrease in cash and cash equivalents (2,933) (1,514) Cash and cash equivalents at beginning of period 20,603 26,748 ------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 17,670 $ 25,234 ================================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 7 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (A) BASIS OF PREPARATION The financial information included in these financial statements is unaudited but, in the opinion of management, reflects all normal recurring and other adjustments necessary for a fair presentation of the results for the interim periods. The interim results of operations and cash flows are not necessarily indicative of those results and cash flows for the entire year. These financial statements should be read in conjunction with the financial statements and notes to the financial statements contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. Certain amounts reported for the prior periods have been reclassified to conform to the current year's presentation. (B) RECENTLY ISSUED ACCOUNTING STANDARDS In March 2008, the Financial Accounting Standards Board, or the FASB, issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133, or Statement 161. Statement 161 requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations, and how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. We are required to adopt Statement 161 at the beginning of 2009. Since Statement 161 impacts our disclosure but not our accounting treatment for derivative instruments and related hedged items, our adoption of Statement 161 will not impact our results of operations or financial condition. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51, or Statement 160. Statement 160 clarifies that a noncontrolling interest (previously referred to as minority interest) in a subsidiary is an ownership interest in a consolidated entity that should be reported as equity in the consolidated financial statements. It also requires consolidated net income to include the amounts attributable to both the parent and the noncontrolling interest. We are required to adopt Statement 160 at the beginning of 2009. We are currently evaluating the impact, if any, of adopting Statement 160 on our future results of operations and financial condition. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations, or Statement 141(R). Statement 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations. Statement 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest at their fair values as of the acquisition date. Statement 141(R) also requires, among other things, that acquisition-related costs be recognized separately from the acquisition. We are required to adopt Statement 141(R) prospectively for business combinations on or after January 1, 2009. Assets and liabilities that arose from business combinations prior to January 1, 2009 are not affected by the adoption of Statement 141(R). In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106, and 132(R), or Statement 158. Statement 158 requires an entity to (a) recognize in its statement of financial position an asset or an obligation for a defined benefit postretirement plan's funded status, (b) measure a defined benefit postretirement plan's assets and obligations that determine its funded status as of the end of the employer's fiscal year and (c) recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the years in which the changes occur. We adopted the recognition and related disclosure provisions of Statement 158 effective December 31, 2006. The measurement date provision of Statement 158 is effective at the end of 2008. Since we use a December 31 measurement date, this provision of Statement 158 will not have an impact on our results of operations or financial condition. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or Statement 157. Statement 157 provides enhanced guidance for using fair value to measure assets and liabilities. We adopted Statement 157 on January 1, 2008, as required for our financial assets and financial 8 liabilities. However, FASB Staff Position FAS 157-2 delayed the effective date of Statement 157 to the beginning of 2009 for all nonfinancial assets and 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 for our nonfinancial assets and nonfinancial liabilities to have a significant impact on our future results of operations or financial condition. (C) RESTRUCTURING EXPENSE In 2007, we implemented a plan to outsource our remaining e-commerce and catalog businesses, to sell the assets related to our Los Angeles production facility and to eliminate office space obtained as part of the acquisition of Club Jenna, Inc. and related companies, or Club Jenna. As a result of this restructuring plan, we recorded a reserve of $0.4 million for costs associated with a workforce reduction of 28 employees. During the quarter ended March 31, 2008, as part of this restructuring plan, we recorded an additional reserve of $0.6 million for contract termination fees and expenses related to the 2007 workforce reduction. During the quarter ended March 31, 2008, we made cash payments of $0.4 million related to prior years' restructuring plans. Approximately $12.9 million of the total costs of our prior years' restructuring plans was paid through March 31, 2008, with the remaining $0.7 million to be paid during 2008. The following table sets forth the activity and balances of our restructuring reserves, which are included in "Accrued salaries, wages and employee benefits" and "Other liabilities and accrued expenses" on our Consolidated Balance Sheets (in thousands): Consolidation of Facilities Workforce and Reduction Operations Total ------------------------------------------------------------------------------- Balance at December 31, 2006 $ 430 $ 268 $ 698 Reserve recorded 429 -- 429 Adjustments to previous estimates 43 (27) 16 Cash payments (473) (127) (600) ------------------------------------------------------------------------------- Balance at December 31, 2007 429 114 543 Additional reserve recorded 149 445 594 Cash payments (294) (154) (448) ------------------------------------------------------------------------------- Balance at March 31, 2008 $ 284 $ 405 $ 689 =============================================================================== (D) EARNINGS (LOSS) PER COMMON SHARE The following table sets forth the computations of basic and diluted earnings (loss) per share, or EPS (in thousands, except per share amounts): Quarters Ended March 31, ------------------- 2008 2007 ------------------------------------------------------------------------------- Numerator: For basic and diluted EPS - net income (loss) $ (3,135) $ 1,474 =============================================================================== Denominator: For basic EPS - weighted average shares 33,275 33,230 Effect of dilutive potential common shares: Employee stock options and other -- 39 ------------------------------------------------------------------------------- Dilutive potential common shares -- 39 ------------------------------------------------------------------------------- For diluted EPS - weighted average shares 33,275 33,269 =============================================================================== Basic and diluted earnings (loss) per common share $ (0.09) $ 0.04 =============================================================================== 9 The following table sets forth the number of shares related to outstanding options to purchase our Class B common stock, or Class B stock, and the potential number of shares of Class B stock contingently issuable under our 3.00% convertible senior subordinated notes due 2025, or convertible notes. These shares were not included in the computations of diluted EPS for the quarters presented, as their inclusion would have been antidilutive (in thousands): Quarters Ended March 31, ------------------- 2008 2007 ------------------------------------------------------------------------------- Stock options 3,546 3,166 Convertible notes 6,758 6,758 ------------------------------------------------------------------------------- Total 10,304 9,924 =============================================================================== (E) INVENTORIES On January 15, 2008, we signed an agreement to outsource our Playboy and BUNNYshop e-commerce and catalog businesses to eFashion Solutions, LLC, or eFashion. As part of this agreement, we sold all remaining inventory related to these businesses to eFashion. The following table sets forth inventories, which are stated at the lower of cost (specific cost and average cost) or fair value (in thousands): Mar. 31, Dec. 31, 2008 2007 ------------------------------------------------------------------------------- Paper $ 3,185 $ 2,948 Editorial and other prepublication costs 5,484 5,518 Merchandise finished goods 543 2,897 ------------------------------------------------------------------------------- Total $ 9,212 $ 11,363 =============================================================================== (F) INCOME TAXES Our income tax provision consists primarily of foreign income tax, which relates to our international television networks and withholding tax on licensing income, for which we do not receive a current U.S. income tax benefit due to our net operating loss, or NOL, position. Our income tax provision also includes deferred federal and state income taxes related to the amortization of goodwill and other indefinite-lived intangibles, which cannot be offset against deferred tax assets due to the indefinite reversal period of the deferred tax liabilities. We utilize the liability method of accounting for income taxes as set forth in Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance. As a result of our cumulative losses in the U.S. and certain foreign jurisdictions, we have concluded that a full valuation allowance should be recorded for such jurisdictions. At March 31, 2008 and December 31, 2007, we had unrecognized tax benefits of $8.0 million; we do not expect this amount to change significantly over the next 12 months. Due to 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. Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2004 through 2007 tax years generally remain subject to examination by federal and most state tax authorities. In addition, for all tax years prior to 2004 generating an NOL, tax authorities can adjust the amount of the NOL. In our 10 international tax jurisdictions, numerous tax years remain subject to examination by tax authorities, including tax returns for 2002 and subsequent years. (G) FAIR VALUE MEASUREMENT As discussed in Note (B), Recently Issued Accounting Standards, we adopted Statement 157 on January 1, 2008 for our financial assets and financial liabilities. Statement 157 requires enhanced disclosures about assets and liabilities measured at fair value. Our financial assets primarily relate to our marketable securities and investments. Our financial liabilities primarily relate to our derivative instruments to hedge the variability of cash flows to be received related to forecasted royalty payments denominated in the yen and the euro. We utilize the market approach to measure fair value for our financial assets and financial liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Statement 157 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on observable or unobservable inputs to valuation techniques that are used to measure fair value. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity's pricing based upon its own market assumptions. The fair value hierarchy consists of the following three levels: o Level 1: Inputs are quoted prices in active markets for identical assets or liabilities. o Level 2: Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs, which are derived principally from or corroborated by observable market data. o Level 3: Inputs that are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. The following table sets forth our financial assets and financial liabilities measured at fair value on a recurring basis and the basis of measurement at March 31, 2008 (in thousands):
Quoted Prices in Significant Active Markets for Significant Other Unobservable Total Fair Value Identical Assets Observable Inputs Inputs Measurement (Level 1) (Level 2) (Level 3) ---------------------------------------------------------------------------------------------------------------------------------- Marketable securities and investments $ 10,898 $ 6,393 $ 4,505(1) $ -- Derivative liabilities $ (446) $ -- $ (446) $ -- ----------------------------------------------------------------------------------------------------------------------------------
(1) In December 2007, we purchased an investment in an enhanced cash portfolio as a marketable security for $7.7 million. At December 31, 2007, due to adverse market conditions, we determined that the market value of this investment was other-than-temporarily impaired, and we recorded a charge of $0.1 million in "Other, net" on our Consolidated Statements of Operations. Through March 31, 2008, we have received four distributions from the investment, which is being liquidated, at an average net asset value of 98.63%, resulting in a cumulative realized loss of $42 thousand. During the quarter ended March 31, 2008, we recorded an additional $0.1 million of unrealized losses. At March 31, 2008, our remaining balance in this investment was $4.5 million. (H) CONTINGENCIES In 2006, we acquired Club Jenna, a multimedia adult entertainment business, to complement our existing television, online and DVD businesses. We paid $7.7 million at closing and $1.6 million in 2007 with additional payments of $1.7 million, $2.3 million and $4.3 million required in 2008, 2009 and 2010, respectively. Pursuant to the acquisition agreement, we are also obligated to make future contingent earnout payments based primarily on 11 sales of existing content of the acquired business over a ten-year period and on content produced by the acquired business during the five-year period after the closing of the acquisition. If the required performance benchmarks are achieved, any contingent earnout payments will be recorded as additional purchase price. No earnout payments have been made through March 31, 2008. In 2005, we acquired an affiliate network of websites to complement our existing online business. We paid $8.0 million at closing and $2.0 million in each of 2006 and 2007. Pursuant to the acquisition agreement, we are also obligated to make future contingent earnout payments over the five-year period commencing January 1, 2005, based primarily on the financial performance of the acquired business. If the required performance benchmarks are achieved, any contingent earnout payments will be recorded as additional purchase price and/or compensation expense. No earnout payments were made during the quarter ended March 31, 2008. During 2007, $0.1 million of earnout payments were made and recorded as additional purchase price. In 2002, a $4.4 million verdict was entered against us by a state trial court in Texas in a lawsuit with a former publishing licensee. We terminated the license in 1998 due to the licensee's failure to pay royalties and other amounts due us under the license agreement. We appealed and the State Appellate Court reversed the judgment by the trial court, rendered judgment for us on the majority of plaintiffs' claims and remanded the remaining claims for a new trial. We filed a petition for review with the Texas Supreme Court. On January 25, 2008, the Texas Supreme Court denied our petition for review. On February 8, 2008, we filed a petition for rehearing with the Texas Supreme Court. We posted a bond in the amount of approximately $9.4 million, which represented the amount of the judgment, costs and estimated pre- and post-judgment interest. We, on advice of legal counsel, believe that it is not probable that a material judgment against us will be sustained and have not recorded a liability for this case in accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies. (I) BENEFIT PLANS 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. We made cash payments under this policy of $0.2 million and $0.1 million during the quarters ended March 31, 2008 and 2007, respectively. (J) STOCK-BASED COMPENSATION The following table sets forth stock-based compensation expense related to stock options, restricted stock units, other equity awards and our employee stock purchase plan, or ESPP (in thousands): Quarters Ended March 31, --------------------- 2008 2007 ------------------------------------------------------------------------------- Stock options $ 464 $ (283) Restricted stock units 61 -- Other equity awards 53 42 ESPP 6 7 ------------------------------------------------------------------------------- Total $ 584 $ (234) =============================================================================== No stock options or restricted stock units were granted during each of the quarters ended March 31, 2008 and 2007. FASB Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, requires that the total amount of compensation expense recognized reflects the number of stock-based awards that actually vest as of the completion of their respective vesting periods. Upon the vesting of certain stock-based awards, we adjusted our stock-based compensation expense to reflect actual versus estimated forfeitures. During the quarters ended March 31, 2008 and 2007, we recorded an unfavorable adjustment of $0.1 million and a favorable adjustment of $1.0 million, respectively, to reflect actual forfeitures for vested stock option grants. 12 (K) SEGMENT INFORMATION The following table sets forth financial information by reportable segment (in thousands): Quarters Ended March 31, --------------------- 2008 2007 ------------------------------------------------------------------------------- Net revenues Entertainment $ 47,914 $ 50,858 Publishing 20,131 23,345 Licensing 10,491 11,212 ------------------------------------------------------------------------------- Total $ 78,536 $ 85,415 =============================================================================== Income (loss) before income taxes Entertainment $ 2,699 $ 4,304 Publishing (3,168) (2,396) Licensing 6,643 7,677 Corporate Administration and Promotion (6,099) (5,700) Restructuring expense (594) -- Investment income 360 475 Interest expense (1,133) (1,362) Amortization of deferred financing fees (89) (134) Other, net (517) (139) ------------------------------------------------------------------------------- Total $ (1,898) $ 2,725 =============================================================================== Mar. 31, Dec. 31, 2008 2007 ------------------------------------------------------------------------------- Identifiable assets Entertainment $ 285,801 $ 287,940 Publishing 31,866 35,320 Licensing 11,388 11,560 Corporate Administration and Promotion 105,302 110,336 ------------------------------------------------------------------------------- Total $ 434,357 $ 445,156 =============================================================================== (L) SUBSEQUENT EVENT On April 1, 2008, we completed the sale of the assets related to our Los Angeles production facility to Broadcast Facilities, Inc., or BFI, for $12.0 million. Our need for the facility had significantly decreased since its inception, and we believe that the need for linear network transmission capacity will continue to decrease over the next several years. We recorded a $1.5 million charge on assets held for sale in 2007. In connection with the sale of these assets, we entered into an agreement to sublet the entirety of the leased production facility in Los Angeles to BFI for a period equal to the remaining term of our lease. BFI has agreed to assume all of our liabilities and obligations under the existing lease of the facility as a part of the sublease and has 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 have assigned our rights and obligations under our four domestic transponder agreements to BFI and entered into a services agreement under which BFI is providing us with certain satellite transmission and other related services (including compression, uplink and playback) for our standard definition cable channels. If we launch high definition cable channels during the term of the services agreement, BFI will also provide such services for these channels. BFI is also providing us with a dedicated radio studio, office space and, upon our request, certain optional services. 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 the initial term, we may renew the agreement for an additional three-year term on substantially the same terms and conditions. 13 The foregoing description of the terms of the sublease and services agreements is a summary and by its nature is incomplete. For further information regarding the terms and conditions of these agreements, reference is made to the text of the agreements, which will be filed as exhibits to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and accompanying notes in Item 1 of this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. RESULTS OF OPERATIONS The following table sets forth our results of operations (in millions, except per share amounts): Quarters Ended March 31, --------------------- 2008 2007 ------------------------------------------------------------------------------- Net revenues Entertainment Domestic TV $ 16.5 $ 19.7 International TV 14.7 13.8 Online/mobile 15.2 15.7 Other 1.5 1.7 ------------------------------------------------------------------------------- Total Entertainment 47.9 50.9 ------------------------------------------------------------------------------- Publishing Domestic magazine 16.1 19.1 International magazine 2.1 1.9 Special editions and other 1.9 2.3 ------------------------------------------------------------------------------- Total Publishing 20.1 23.3 ------------------------------------------------------------------------------- Licensing Consumer products 9.2 8.7 Location-based entertainment 0.9 0.9 Marketing events 0.2 0.3 Other 0.2 1.3 ------------------------------------------------------------------------------- Total Licensing 10.5 11.2 ------------------------------------------------------------------------------- Total net revenues $ 78.5 $ 85.4 =============================================================================== Net income (loss) Entertainment Before programming amortization and online content expenses $ 12.5 $ 14.5 Programming amortization and online content expenses (9.8) (10.2) ------------------------------------------------------------------------------- Total Entertainment 2.7 4.3 ------------------------------------------------------------------------------- Publishing (3.2) (2.4) ------------------------------------------------------------------------------- Licensing 6.7 7.7 ------------------------------------------------------------------------------- Corporate Administration and Promotion (6.1) (5.7) ------------------------------------------------------------------------------- Segment income 0.1 3.9 Restructuring expense (0.6) -- ------------------------------------------------------------------------------- Operating income (loss) (0.5) 3.9 ------------------------------------------------------------------------------- Nonoperating income (expense) Investment income 0.3 0.5 Interest expense (1.1) (1.4) Amortization of deferred financing fees (0.1) (0.1) Other, net (0.5) (0.2) ------------------------------------------------------------------------------- Total nonoperating expense (1.4) (1.2) ------------------------------------------------------------------------------- Income (loss) before income taxes (1.9) 2.7 Income tax expense (1.2) (1.2) ------------------------------------------------------------------------------- Net income (loss) $ (3.1) $ 1.5 ------------------------------------------------------------------------------- Basic and diluted earnings (loss) per common share $ (0.09) $ 0.04 =============================================================================== 15 Revenues decreased $6.9 million, or 8%, compared to the prior year quarter largely due to lower domestic TV and domestic magazine revenues combined with the impact of an opportunistic sale of original artwork in the prior year quarter. Segment income decreased $3.8 million, or 98%, compared to the prior year quarter due to lower results from each of our groups, primarily due to the lower revenues discussed above. Operating results decreased $4.4 million compared to the prior year quarter due to the lower segment income previously discussed, coupled with $0.6 million of restructuring expense in the current year quarter. Net loss for the current year quarter was $3.1 million compared to net income of $1.5 million in the prior year quarter. This decrease is primarily due to the lower operating results previously discussed. ENTERTAINMENT GROUP The following discussion focuses on the revenues and profit contribution before programming amortization and online content expenses of each of our Entertainment Group businesses. Revenues from our domestic TV networks decreased $3.2 million, or 16%, compared to the prior year quarter primarily due to the impact of an unfavorable variance related to previously estimated revenues in the current year quarter compared to a favorable variance in the prior year quarter. Additionally, Playboy TV monthly subscription revenues increased for the current year quarter, but were more than offset by lower pay-per-view revenues reflecting continued consumer migration from linear networks to the more competitive video-on-demand platform. Profit contribution decreased $2.3 million compared to the prior year quarter as lower expenses partially offset the revenue decline. International TV revenues increased $0.9 million, or 6%, and profit contribution increased $1.5 million compared to the prior year quarter primarily due to growth in our European networks. A decrease in costs from our U.K. networks also had a favorable impact on profit contribution in the current year quarter. Online/mobile revenues decreased $0.5 million, or 3%, and profit contribution decreased $1.8 million compared to the prior year quarter. This business is in transition and is expected to have lower revenues and profit contribution during this time. Additionally, our Playboy and BUNNYshop e-commerce and catalog businesses have been outsourced to eFashion Solutions, LLC, which will start negatively impacting revenues and positively impacting profit contribution. Revenues from other businesses decreased $0.2 million, or 7%. Profit contribution increased $0.9 million compared to the prior year quarter primarily due to a legal settlement recorded in the prior year quarter. The group's administrative expenses increased $0.3 million, or 7%, compared to the prior year quarter. Programming amortization and online content expenses decreased $0.4 million, or 4%, compared to the prior year quarter. Segment income for the group decreased $1.6 million, or 37%, compared to the prior year quarter due to the results previously discussed. PUBLISHING GROUP Domestic magazine revenues decreased $3.0 million, or 16%, compared to the prior year quarter. Subscription revenues decreased $0.8 million, or 7%, primarily due to 5% fewer copies served in the current year quarter. Newsstand revenues decreased $0.4 million, or 16%, primarily due to 20% fewer copies sold. As previously announced, advertising revenues decreased $1.9 million, or 32%, due to a 22% decrease in average net revenue per page, largely due to our lower rate base effective with the January 2008 issue, combined with 12% fewer advertising pages, due in part to the loss of a major advertiser. Advertising sales for the 2008 second quarter magazine issues are closed, and we expect to report approximately 10% lower advertising revenues and 5% fewer advertising pages compared to the 2007 second quarter. 16 On a combined basis, Playboy print and online advertising revenues decreased $1.9 million, or 30%, compared to the prior year quarter. International magazine revenues increased $0.2 million, or 11%, compared to the prior year quarter. Special editions and other revenues decreased $0.4 million, or 16%, compared to the prior year quarter due mainly to special editions, the result of 14% fewer newsstand copies sold, partially offset by the impact of a $1.00 cover price increase effective with the July 2007 issues. Segment loss for the group increased $0.8 million, or 32%, compared to the prior year quarter. Lower manufacturing costs due to printing fewer copies and pages per issue, lower editorial costs and lower post-employment benefit costs largely offset the revenue decline and severance expense in the current year quarter. LICENSING GROUP Licensing Group revenues decreased $0.7 million, or 6%, compared to the prior year quarter. International consumer products royalties were 10% higher but the prior year quarter was favorably impacted by a $1.3 million opportunistic sale of original art. The group's segment income decreased $1.0 million, or 13%, compared to the prior year quarter primarily due to these decreased revenues. CORPORATE ADMINISTRATION AND PROMOTION Corporate Administration and Promotion expenses increased $0.4 million, or 7%, compared to the prior year quarter. RESTRUCTURING EXPENSE In 2007, we implemented a plan to outsource our remaining e-commerce and catalog businesses, to sell the assets related to our Los Angeles production facility and to eliminate office space obtained as part of the acquisition of Club Jenna, Inc. and related companies. As a result of this restructuring plan, we recorded a reserve of $0.4 million for costs associated with a workforce reduction of 28 employees. During the quarter ended March 31, 2008, as part of this restructuring plan, we recorded an additional reserve of $0.6 million for contract termination fees and expenses related to the 2007 workforce reduction. During the quarter ended March 31, 2008, we made cash payments of $0.4 million related to prior years' restructuring plans. Approximately $12.9 million of the total costs of our prior years' restructuring plans was paid through March 31, 2008, with the remaining $0.7 million to be paid during 2008. INCOME TAX EXPENSE Income tax expense of $1.2 million for the current year quarter was flat compared to the prior year quarter. Our effective income tax rate differs from the U.S. statutory rate. Our income tax provision consists of foreign income tax, which relates to our international television networks and withholding tax on licensing income, for which we do not receive a current U.S. income tax benefit due to our net operating loss position. Our income tax provision also includes deferred federal and state income taxes related to the amortization of goodwill and other indefinite-lived intangibles, which cannot be offset against deferred tax assets due to the indefinite reversal period of the deferred tax liabilities. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2008, we had $17.7 million in cash and cash equivalents compared to $20.6 million in cash and cash equivalents at December 31, 2007. During the quarter ended March 31, 2008, we sold our $6.0 million of auction rate securities, or ARS, which were included in marketable securities and short-term investments at December 31, 2007. Total financing obligations were $115.0 million at both March 31, 2008 and December 31, 2007. 17 At March 31, 2008, cash generated from our operating activities, existing cash and cash equivalents and marketable securities and short-term investments were fulfilling our liquidity requirements. We also have a $50.0 million credit facility, which can be used for revolving borrowings, issuing letters of credit or a combination of both. At March 31, 2008, there were no borrowings under this facility and $10.6 million in letters of credit outstanding, resulting in $39.4 million of available borrowings. DERIVATIVE INSTRUMENTS We hedge the variability of cash flows we expect to receive related to royalty payments denominated in the yen and the euro with derivative instruments. These royalties are hedged with forward contracts for periods not exceeding 12 months. The fair value and carrying value of our forward contracts are not material. For the quarter ended March 31, 2008, hedges deemed to be ineffective due to us not being able to exactly match the settlement date of the hedges to the receipt of these royalty payments resulted in losses of $0.4 million, which were recorded as "Other, net" on the Consolidated Statements of Operations and Comprehensive Income (Loss). CASH FLOWS FROM OPERATING ACTIVITIES Net cash used for operating activities for the quarter ended March 31, 2008 was $1.5 million, compared to net cash provided by operating activities of $7.4 million in the prior year quarter. This decrease was primarily due to the previously discussed operating results combined with decreases in accounts payable and accrued salaries, wages and employee benefits, partially offset by decreases in prepaid expenses and other current assets and entertainment programming investments. CASH FLOWS FROM INVESTING ACTIVITIES Net cash used for investing activities for the quarter ended March 31, 2008 was $1.5 million, a decrease of $7.3 million compared to the prior year quarter. This decrease reflected net proceeds from sales of investments of $8.1 million, primarily reflecting the sale of our ARS and a portion of our investment in an enhanced cash portfolio, and additions of $6.8 million related to the April 1, 2008 sale of assets related to our Los Angeles production facility during the current year quarter, compared to net purchases of investments of $6.2 million in the prior year quarter. CASH FLOWS FROM FINANCING ACTIVITIES Net cash used for financing activities of $0.2 million for the quarter ended March 31, 2008 was flat compared to the prior year quarter. EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS The positive effects of foreign currency exchange rates on cash and cash equivalents during the current year and prior year quarter of $0.2 million and $0.1 million, respectively, were due to the weakening of the U.S. dollar against certain foreign currencies. RECENTLY ISSUED ACCOUNTING STANDARDS In March 2008, the Financial Accounting Standards Board, or the FASB, issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133, or Statement 161. Statement 161 requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations, and how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. We are required to adopt Statement 161 at the beginning of 2009. Since Statement 161 impacts our disclosure but not our accounting treatment for derivative instruments and related hedged items, our adoption of Statement 161 will not impact our results of operations or financial condition. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51, or Statement 160. Statement 160 clarifies that a noncontrolling interest (previously referred to as minority interest) in a subsidiary is an ownership 18 interest in a consolidated entity that should be reported as equity in the consolidated financial statements. It also requires consolidated net income to include the amounts attributable to both the parent and the noncontrolling interest. We are required to adopt Statement 160 at the beginning of 2009. We are currently evaluating the impact, if any, of adopting Statement 160 on our future results of operations and financial condition. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations, or Statement 141(R). Statement 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations. Statement 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest at their fair values as of the acquisition date. Statement 141(R) also requires, among other things, that acquisition-related costs be recognized separately from the acquisition. We are required to adopt Statement 141(R) prospectively for business combinations on or after January 1, 2009. Assets and liabilities that arose from business combinations prior to January 1, 2009 are not affected by the adoption of Statement 141(R). In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106, and 132(R), or Statement 158. Statement 158 requires an entity to (a) recognize in its statement of financial position an asset or an obligation for a defined benefit postretirement plan's funded status, (b) measure a defined benefit postretirement plan's assets and obligations that determine its funded status as of the end of the employer's fiscal year and (c) recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. We adopted the recognition and related disclosure provisions of Statement 158 effective December 31, 2006. The measurement date provision of Statement 158 is effective at the end of 2008. Since we use a December 31 measurement date, this provision of Statement 158 will not have an impact on our results of operations or financial condition. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or Statement 157. Statement 157 provides enhanced guidance for using fair value to measure assets and liabilities. We adopted Statement 157 on January 1, 2008, as required for our financial assets and financial liabilities. However, FASB Staff Position FAS 157-2 delayed the effective date of Statement 157 to the beginning of 2009 for all nonfinancial assets and 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 for our nonfinancial assets and nonfinancial liabilities to have a significant impact on our future results of operations or financial condition. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to certain market risks, including changes in foreign currency exchange rates. There was no material change in our exposure to such fluctuations during the quarter ended March 31, 2008. Information regarding market risks as of December 31, 2007 is contained in Item 7A. "Quantitative And Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. At March 31, 2008, we did not have any floating interest rate exposure. As of that date, all of our outstanding debt consisted of 3.00% convertible senior subordinated notes due 2025, or convertible notes, which are fixed-rate obligations. The fair value of the $115.0 million aggregate principal amount of the convertible notes is influenced by changes in market interest rates, the share price of our Class B common stock and our credit quality. At March 31, 2008, the convertible notes had an implied fair value of $99.1 million. ITEM 4. CONTROLS AND PROCEDURES Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this quarterly report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer 19 have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act. Internal Control over Financial Reporting There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 20 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On February 17, 1998, Eduardo Gongora, or Gongora, filed suit in state court in Hidalgo County, Texas, against Editorial Caballero SA de CV, or EC, Grupo Siete International, Inc., or GSI, collectively the Editorial Defendants, and us. In the complaint, Gongora alleged that he was injured as a result of the termination of a publishing license agreement, or the License Agreement, between us and EC for the publication of a Mexican edition of Playboy magazine, or the Mexican Edition. We terminated the License Agreement on or about January 29, 1998, due to EC's failure to pay royalties and other amounts due us under the License Agreement. On February 18, 1998, the Editorial Defendants filed a cross-claim against us. Gongora alleged that in December 1996 he entered into an oral agreement with the Editorial Defendants to solicit advertising for the Mexican Edition to be distributed in the United States. The basis of GSI's cross-claim was that it was the assignee of EC's right to distribute the Mexican Edition in the United States and other Spanish-speaking Latin American countries outside of Mexico. On May 31, 2002, a jury returned a verdict against us in the amount of approximately $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 have posted a bond in the amount of approximately $9.4 million, which represents the amount of the judgment, costs and estimated pre- and post-judgment interest, in connection with the appeal. On May 25, 2006, the State Appellate Court reversed the judgment by the trial court, rendered judgment for us on the majority of the plaintiffs' claims and remanded the remaining claims for a new trial. On July 14, 2006, the plaintiffs filed a motion for rehearing and en banc reconsideration, which we opposed. On October 12, 2006, the State Appellate Court denied plaintiffs' motion. On December 27, 2006, we filed a petition for review with the Texas Supreme Court. On January 25, 2008, the Texas Supreme Court denied our petition for review. On February 8, 2008, we filed a petition for rehearing with the Texas Supreme Court. We, on advice of legal counsel, believe that it is not probable that a material judgment against us will be obtained. In accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies, or Statement 5, no liability has been accrued. On April 12, 2004, J. Roger Faherty, or Faherty, filed suit in the United States District Court for the Southern District of New York against Spice Entertainment Companies, or Spice, Playboy Enterprises, Inc., or Playboy, Playboy Enterprises International, Inc., or PEII, D. Keith Howington, Anne Howington and Logix Development Corporation, or Logix. The complaint alleges that Faherty is entitled to statutory and contractual indemnification from Playboy, PEII and Spice with respect to defense costs and liabilities incurred by Faherty in the litigation described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, or the Logix litigation. The complaint further alleges that Playboy, PEII, Spice, D. Keith Howington, Anne Howington and Logix conspired to deprive Faherty of his alleged right to indemnification by excluding him from the settlement of the Logix litigation. On June 18, 2004, a jury entered a special verdict finding Faherty personally liable for $22.5 million in damages to the plaintiffs in the Logix litigation. A judgment was entered on the verdict on or around August 2, 2004. Faherty filed post-trial motions for a judgment notwithstanding the verdict and a new trial, but these motions were both denied on or about September 21, 2004. On October 20, 2004, Faherty filed a notice of appeal from the verdict. As a result of rulings by the California Court of Appeal and the California Supreme Court as recently as February 13, 2008, Logix' recovery against Faherty has been reduced significantly, although certain portions of the case have been set for a retrial. In light of these rulings, however, when coupled with any offset as a result of the settlement of the Logix litigation, any ultimate net recovery by Logix against Faherty will be severely reduced and might be entirely eliminated. In consideration of this appeal, Faherty and Playboy have agreed to continue a temporary stay of the indemnification action filed in the United States District Court for the Southern District of New York through the end of June 2008. In the event Faherty's indemnification and conspiracy claims go forward against us, we believe they are without merit and that we have good defenses against them. As such, based on the information known to us to date, we do not believe that it is probable that a material judgment against us will result. In accordance with Statement 5, no liability has been accrued. 21 ITEM 1A. RISK FACTORS There have been no material changes to our Risk Factors as contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. ITEM 6. EXHIBITS Exhibit Number Description -------------- ----------- 10.1* Amendment, effective March 31, 2008, to Affiliation Agreement, dated July 8, 2004, between Playboy Entertainment Group, Inc., Spice Entertainment, Inc., Spice Hot Entertainment, Inc., and Time Warner Cable Inc. 10.2* Content License, Marketing and Sales Agreement, dated January 15, 2008, between Playboy.com, Inc. and eFashion Solutions, LLC 10.3* First Amendment, effective February 2, 2008, to the Content License, Marketing and Sales Agreement, dated January 15, 2008, between Playboy.com, Inc. and eFashion Solutions, LLC 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities and Exchange Act of 1934. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PLAYBOY ENTERPRISES, INC. ------------------------- (Registrant) Date: May 9, 2008 By /s/ Linda Havard ---------------- Linda G. Havard Executive Vice President, Finance and Operations, and Chief Financial Officer (Authorized Officer and Principal Financial and Accounting Officer) 23 EXHIBIT INDEX Exhibit Number Description -------------- ----------- 10.1* Amendment, effective March 31, 2008, to Affiliation Agreement, dated July 8, 2004, between Playboy Entertainment Group, Inc., Spice Entertainment, Inc., Spice Hot Entertainment, Inc., and Time Warner Cable Inc. 10.2* Content License, Marketing and Sales Agreement, dated January 15, 2008, between Playboy.com, Inc. and eFashion Solutions, LLC 10.3* First Amendment, effective February 2, 2008, to the Content License, Marketing and Sales Agreement, dated January 15, 2008, between Playboy.com, Inc. and eFashion Solutions, LLC 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities and Exchange Act of 1934. 24