UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




FORM 10-Q




(Mark One)




þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the quarterly period ended September 30, 2010




OR




o
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 or other jurisdiction of  incorporation or organization)

(I.R.S. Employer Identification Number)680 North Lake Shore DriveChicago, 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.


YesþNoo





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). YesoNoo





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 o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


YesoNoþ




At October 29, 2010, there were 4,864,102 shares of Class A Common Stock and 28,848,232 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 mobile materials;


(b)
attempts to limit or otherwise regulate the sale or distribution of certain consumer products sold by our licensees; 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;


2


(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;


(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 impairments of our long-lived assets, including intangible assets.





For a detailed discussion of these and other factors that may affect our performance, see Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q and Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.




3


PLAYBOY ENTERPRISES, INC.


FORM 10-Q








TABLE OF CONTENTS








Page


PART I


FINANCIAL INFORMATION





Item 1.

Financial StatementsConsolidated Statements of Operations and Comprehensive Loss for the Quarters Ended September 30, 2010 and 2009 (Unaudited)
5Consolidated Statements of Operations and Comprehensive Loss for the Nine Months Ended September 30, 2010 and 2009 (Unaudited)
6Consolidated Balance Sheets at September 30, 2010 (Unaudited) and December 31, 2009
7Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009 (Unaudited)
8Notes to Condensed Consolidated Financial Statements (Unaudited)
9Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations
17Item 3.

Quantitative and Qualitative Disclosures About Market Risk
25Item 4.

Controls and Procedures
25PART IIOTHER INFORMATIONItem 1.

Legal Proceedings
26Item 1A.

Risk Factors
27Item 6.

Exhibits
29


4
 Table of Contents


PART I


FINANCIAL INFORMATION




ITEM 1.FINANCIAL STATEMENTS




PLAYBOY ENTERPRISES, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


AND COMPREHENSIVE LOSS


for the Quarters Ended September 30 (Unaudited)


(In thousands, except per share amounts)




2010


2009Net revenues

$
52,044


$
56,005Costs and expensesCost of sales


(37,881
)


(42,234
)Selling and administrative expenses


(13,457
)


(11,070
)Restructuring expense


(418
)


(469
)Impairment charges


(25,372
)


-Total costs and expenses


(77,128
)


(53,773
)Operating income (loss)


(25,084
)


2,232Nonoperating income (expense)Investment income


12



10Interest expense


(2,123
)


(2,194
)Amortization of deferred financing fees


(165
)


(164
)Other, net


1,056



227Total nonoperating expense


(1,220
)


(2,121
)Income (loss) before income taxes


(26,304
)


111Income tax expense


(1,131
)


(1,195
)Net loss

$
(27,435
)

$
(1,084
)Other comprehensive income (loss)Unrealized gain on marketable securities


-



12Foreign currency translation gain (loss)


176



(129
)Total other comprehensive income (loss)


176



(117
)Comprehensive loss

$
(27,259
)

$
(1,201
)Weighted average number of common shares outstandingBasic and diluted


33,696



33,468Basic and diluted loss per common share

$
(0.81
)

$
(0.03
)








The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


5
 Table of Contents


PLAYBOY ENTERPRISES, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


AND COMPREHENSIVE LOSS


for the Nine Months Ended September 30 (Unaudited)


(In thousands, except per share amounts)





2010


2009Net revenues

$
160,155


$
179,829Costs and expensesCost of sales


(118,976
)


(139,844
)Selling and administrative expenses


(36,865
)


(34,980
)Restructuring expense


(2,676
)


(12,744
)Impairment charges


(25,819
)


(5,518
)Total costs and expenses


(184,336
)


(193,086
)Operating loss


(24,181
)


(13,257
)Nonoperating income (expense)Investment income


23



742Interest expense


(6,485
)


(6,516
)Amortization of deferred financing fees


(493
)


(553
)Other, net


69



(329
)Total nonoperating expense


(6,886
)


(6,656
)Loss before income taxes


(31,067
)


(19,913
)Income tax expense


(2,734
)


(3,593
)Net loss

$
(33,801
)

$
(23,506
)Other comprehensive income (loss)Unrealized loss on marketable securities


-



(11
)Foreign currency translation gain


672



291Total other comprehensive income


672



280Comprehensive loss

$
(33,129
)

$
(23,226
)Weighted average number of common shares outstandingBasic and diluted


33,623



33,433Basic and diluted loss per common share

$
(1.01
)

$
(0.70
)








The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


6
 Table of Contents


PLAYBOY ENTERPRISES, INC.


CONSOLIDATED BALANCE SHEETS


(In thousands, except share data)




(Unaudited)

Sept. 30,

2010


Dec. 31,

2009AssetsCash and cash equivalents

$
26,565


$
24,569Marketable securities and short-term investments


1,039



-Receivables, net of allowance for doubtful accounts of $7,031 and $3,834, respectively


25,476



31,942Receivables from related parties


1,076



2,897Inventories


3,909



3,951Deferred tax asset


1,426



1,487Prepaid expenses and other current assets


6,789



5,048Total current assets


66,280



69,894Property and equipment, net


15,780



18,438Programming costs, net


26,280



47,516Trademarks, net


44,854



43,964Distribution agreements, net of accumulated amortization of $7,183 and $6,751, respectively


8,042



11,513Deferred tax asset


228



-Other noncurrent assets


4,369



5,507Total assets

$
165,833


$
196,832LiabilitiesAcquisition liabilities

$
703


$
4,802Accounts payable


22,208



21,138Accrued salaries, wages and employee benefits


9,143



10,123Deferred revenues


34,700



27,417Other current liabilities and accrued expenses


16,422



17,519Total current liabilities


83,176



80,999Financing obligations


107,611



104,128Acquisition liabilities


-



703Deferred tax liability


8,508



7,706Other noncurrent liabilities


20,965



25,592Total liabilities


220,260



219,128Shareholders’ deficitCommon stock, $0.01 par valueClass A voting – 7,500,000 shares authorized; 4,864,102 issued


49



49Class B nonvoting – 75,000,000 shares authorized; 29,219,228 and 29,014,343 issued, respectively


292



289Capital in excess of par value


261,374



260,379Accumulated deficit


(308,765
)


(274,964
)Treasury stock, at cost – 381,971 shares


(5,000
)


(5,000
)Accumulated other comprehensive loss


(2,377
)


(3,049
)Total shareholders’ deficit


(54,427
)


(22,296
)Total liabilities and shareholders’ deficit

$
165,833


$
196,832








The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


7
 Table of Contents


PLAYBOY ENTERPRISES, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


for the Nine Months Ended September 30 (Unaudited)


(In thousands)




2010


2009Cash flows from operating activitiesNet loss

$
(33,801
)

$
(23,506
)Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation of property and equipment


3,520



3,856Amortization of intangible assets


1,168



1,287Amortization of investments in entertainment programming


17,638



22,353Amortization of deferred financing fees


493



553Stock-based compensation


1,091



753Noncash interest expense


3,483



3,236Impairment charges


25,819



5,518Deferred income taxes


635



1,552Payments of deferred compensation plan


-



(5,193
)Net change in operating assets and liabilities


6,434



9,477Investments in entertainment programming


(18,226
)


(18,397
)Other, net


1,640



(617
)Net cash provided by operating activities


9,894



872Cash flows from investing activitiesPurchases of investments


(1,039
)


(94
)Proceeds from sales of investments


-



6,762Additions to property and equipment


(1,770
)


(3,092
)Other, net


3



-Net cash provided by (used for) investing activities


(2,806
)


3,576Cash flows from financing activitiesPayments of deferred financing fees


-



(174
)Payments of acquisition liabilities


(5,050
)


(3,050
)Proceeds from stock-based compensation


93



60Net cash used for financing activities


(4,957
)


(3,164
)Effect of exchange rate changes on cash and cash equivalents


(135
)


324Net increase in cash and cash equivalents


1,996



1,608Cash and cash equivalents at beginning of period


24,569



25,192Cash and cash equivalents at end of period

$
26,565


$
26,800








The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


8
 Table of Contents


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, 2009. Certain amounts reported for the prior periods have been reclassified to conform to the current year’s presentation.




(B)
Recently Issued Accounting Standards




In January 2010, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements, or ASU No. 2010-06. ASU No. 2010-06 requires additional disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers between levels of the fair value hierarchy as defined in FASB Accounting Standard Codification, or ASC, Topic 820, Fair Value Measurements and Disclosures, or ASC Topic 820. We adopted the provisions of ASU No. 2010-06 beginning with the first quarter of 2010, except for the disclosure presenting disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3), which we are required to adopt in the first quarter of 2011. As ASU No. 2010-06 affects disclosures only, the adoption of ASU No. 2010-06 does not affect our results of operations or financial condition.




(C)
Restructuring Expense




In the second quarter of 2010, we implemented a plan to downsize our organizational structure and reduce overhead costs. As a result of this plan, we recorded a charge of $1.2 million related to a workforce reduction of 18 employees, most of whose positions were eliminated by the end of the third quarter of 2010. Severance payments under this plan began in the third quarter of 2010 and will be completed in 2011.




In the first quarter of 2010, we implemented a plan to further reduce headcount and real estate lease obligations. As a result of this plan, we recorded a charge of $0.4 million related to a lease termination fee and a workforce reduction of 10 employees, whose positions will be eliminated in the first quarter of 2011. Severance payments under this plan will begin in the first quarter of 2011 and will be completed in 2011.




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 were 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 in 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. We recorded additional restructuring charges related to this plan in 2009 representing 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 expect to record additional restructuring charges, representing depreciation and accretion, of $8.0 million over the remaining approximate nine-year term of the lease, or approximately $1.0 million on average annually. We recorded $0.3 million and $1.0 million of these restructuring charges representing depreciation and accretion during the current year quarter and nine-month period, respectively. We also recorded an unfavorable adjustment of $0.1 million during the current year quarter as a result of changes in assumptions for this plan.




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.




9
 Table of Contents










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 prior year nine-month period 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 completed in the current year quarter. We recorded a favorable adjustment of $0.4 million during the prior year nine-month period as a result of changes in assumptions for this plan.




The following table sets forth the activity and balances of our restructuring reserves, which are included in “Accrued salaries, wages and employee benefits,” “Other current liabilities and accrued expenses” and “Other noncurrent liabilities” on our Consolidated Balance Sheets (in thousands):




WorkforceReduction


Consolidation of Facilities andOperations


TotalBalance at December 31, 2009

$
4,689


$
10,667


$
15,356Reserve recorded


1,352



285



1,637Accretion of discount on net lease obligation


-



606



606Adjustments to previous estimates


(15
)


64



49Cash payments


(2,114
)


(3,222
)


(5,336
)Balance at September 30, 2010

$
3,912


$
8,400


$
12,312





The above table excludes depreciation of leasehold improvements and furniture and equipment related to our leased New York office space.




(D)
Impairment Charges




In accordance with ASC Topic 360, Property, Plant, and Equipment, we conduct impairment testing on long-lived assets, or asset groups, whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.




During the current year quarter, we conducted impairment testing on certain finite-lived assets reported in our Entertainment Group, including programming costs and distribution agreements. We conducted impairment testing on these assets as a result of continued overall weakness in our domestic and international TV businesses, a reevaluation of programming utilization and a dispute with DirecTV, Inc. We determined the carrying amounts of these assets were not fully recoverable, and in the current year quarter, we recorded total impairment charges of $25.4 million, representing the difference between the estimated fair values and net book values of these assets. We also determined the life of programming costs to be generally either 12 or 24 months. We estimated the fair value of the assets using a forecasted-discounted cash flow method based in part on our financial results 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. Of the total impairment charges, $22.3 million related to programming costs and $3.1 million related to distribution agreements. For further discussion of our impairment testing, see Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.




10
 Table of Contents


During the first quarter of 2010, we implemented a plan to further reduce our headcount and real estate lease obligations. As a result, we evaluated the related long-lived assets for recoverability. We determined the carrying amount of this asset group was not recoverable and we recorded an impairment charge of $0.4 million in the first quarter of 2010 representing the entire net book value of these long-lived assets.




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, Intangibles–Goodwill and Other, or 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 and our expectation of future performance at the time of our impairment testing, 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 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 intangible assets.




(E)
Earnings Per Common Share




The following table sets forth the computations of basic and diluted earnings per share, or EPS (in thousands, except per share amounts):




Quarters Ended


Nine Months EndedSeptember 30,


September 30,2010


2009


2010


2009Numerator:For basic and diluted EPS – net loss

$
(27,435
)

$
(1,084
)

$
(33,801
)

$
(23,506
)Denominator:For basic and diluted EPS – weighted average shares


33,696



33,468



33,623



33,433Basic and diluted loss per common share

$
(0.81
)

$
(0.03
)

$
(1.01
)

$
(0.70
)





The following table sets forth the number of shares related to outstanding options to purchase our Class B common stock, or Class 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 quarters and nine-month periods ended September 30, 2010 and 2009, as their inclusion would have been antidilutive (in thousands):




Quarters Ended


Nine Months EndedSeptember 30,


September 30,2010


2009


2010


2009Stock options


3,624



4,026



3,598



3,929RSUs


362



617



422



541Convertible notes


6,758



6,758



6,758



6,758Total


10,744



11,401



10,778



11,228


11
 Table of Contents


(F)
Inventories




The following table sets forth inventories, which are stated at the lower of cost (specific cost and average cost) or fair value (in thousands):




Sept. 30,

2010


Dec. 31,

2009Paper

$
921


$
1,191Editorial and other prepublication costs


2,767



2,230Merchandise finished goods


221



530Total

$
3,909


$
3,951





(G)
Income Taxes




Our income tax provision consists primarily of foreign income tax, which relates to our international television networks and withholding tax on licensing income, for which we do not receive a current U.S. income tax benefit due to our net operating loss, or NOL, position in the U.S. 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 ASC Topic 740, Income Taxes. Additionally, NOL and tax credit carryforwards are reported as deferred income tax assets. The realization of deferred income tax assets is dependent upon future earnings. A valuation allowance is required against deferred income tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred income tax assets may 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 September 30, 2010 and December 31, 2009, we had unrecognized tax benefits of $8.0 million and do not expect this amount to change significantly over the next 12 months. Due to the impact of deferred income tax accounting, the disallowance of these benefits would not affect our effective income tax rate nor would it accelerate the payment of cash to the taxing authorities 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 2006 through 2009 tax years generally remain subject to examination by federal and most state taxing authorities. In addition, for all tax years prior to 2006 generating an NOL, taxing authorities can adjust the NOL amount. In our international tax jurisdictions, numerous tax years remain subject to examination by taxing authorities, including tax returns for 2003 and subsequent years.




(H)
Marketable Securities and Short-term Investments




We account for available-for-sale marketable securities and short-term investments under the specific identification method. During the current year quarter and nine-month period, we purchased $1.0 million of investments, which are restricted, and had no sales of investments. During the prior year quarter, we received immaterial proceeds from sales of investments, recorded immaterial losses related to those sales and did not purchase any investments. During the prior year nine-month period, we purchased $0.1 million of investments, received proceeds of $6.8 million from sales of investments and recorded $0.7 million of gains related to those sales. We recorded no net unrealized holding gains or losses in “Other comprehensive income (loss)” during the current year quarter and nine-month period and recorded immaterial net unrealized holding gains and losses in “Other comprehensive income (loss)” during the prior year quarter and nine-month period, respectively.




12
 Table of Contents


(I)
Fair Value Measurement




We measure our financial assets and financial liabilities at fair value in accordance with ASC Topic 820. Our financial assets and financial liabilities relate to marketable securities and investments and derivative instruments used to hedge the variability of forecasted cash receipts related to royalty payments denominated in yen and euro. Derivative instruments in asset positions, if any, are included in “Prepaid expenses and other current assets” and derivative instruments in liability positions, if any, 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 assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.




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’s pricing based upon its own market assumptions. The fair value hierarchy consists of three levels: Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities; Level 2 – Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs, which are derived principally from or corroborated by observable market data; and Level 3 – Inputs that are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.




The following table sets forth financial assets and liabilities measured at fair value on a recurring basis and the basis of measurement at September 30, 2010 (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)Marketable securities and investments

$
1,039


$
1,039


$
-


$
-Derivative assets

$
7


$
-


$
7


$
-Derivative liabilities

$
(62
)

$
-


$
(62
)

$
-





We measure the fair value of our derivative instruments using broker prices, which use inputs that are readily available in public markets or can be derived from information readily available in public markets. These inputs include spot exchange rates and interest rates.




(J)
Financing Obligations




Our financing obligations consisted of the $115.0 million principal amount of convertible notes with a carrying value of $107.6 million at September 30, 2010 and $104.1 million at December 31, 2009.




The fair value of the convertible notes is influenced by changes in market interest rates, the share price of our Class B stock and our credit quality. At September 30, 2010, the convertible notes had an estimated fair value of $112.7 million. This fair value was estimated using quoted market prices that are Level 2 inputs within the ASC Topic 820 fair value hierarchy.




(K)
Contingencies




In 2006, we acquired Club Jenna, Inc. and related companies, for which we paid $7.7 million at closing, $1.6 million in 2007, $1.7 million in 2008, $2.3 million in 2009 and $4.3 million in 2010. Pursuant to the acquisition agreement, we are also obligated to make future contingent earnout payments based primarily on DVD sales of




13
 Table of Contents






(L)
Benefit Plans




We maintain a practice of paying a separation allowance, which is not funded, under our salary continuation policy to employees with at least five years of continuous service who voluntarily terminate employment with us and are at age 60 or thereafter. We made cash payments under this policy of $0.5 million during the current year quarter, $1.2 million during the current year nine-month period, $0.3 million during the prior year quarter and $0.8 million during the prior year nine-month period.




(M)
Stock-Based Compensation




The following table sets forth stock-based compensation expense related to stock options, RSUs, other equity awards and our employee stock purchase plan, or ESPP (in thousands):




Quarters Ended


Nine Months EndedSeptember 30,


September 30,2010


2009


2010


2009Stock options

$
237


$
261


$
708


$
471RSUs


78



68



242



84Other equity awards


43



44



128



187ESPP


4



4



13



11Total

$
362


$
377


$
1,091


$
753





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 adjust our stock-based compensation expense to reflect actual versus estimated forfeitures. We recorded immaterial adjustments during the current year quarter and nine-month period and favorable adjustments of $0.1 million and $0.2 million during the prior year quarter and nine-month period, respectively, to reflect actual forfeitures for vested stock-based awards.




Stock Options




We estimate the value of stock options on the date of grant using the Lattice Binomial model, or Lattice model. The Lattice model requires extensive analysis of actual exercise and cancellation data and involves a number of complex assumptions including expected volatility, risk-free interest rate, expected dividends and stock option exercises and cancellations.




We granted no stock options during the current year quarter and 346,241 stock options during the current year nine-month period, which are exercisable for shares of our Class B stock and expire 10 years from the grant date. Of the stock options granted during the current year nine-month period, 300,000 stock options vest ratably over a four-year period from the grant date and the remainder vest ratably over a one-year period from the grant date. We granted 1,200,000 stock options during the prior year quarter to Scott N. Flanders, our Chief Executive Officer and a member of our Board of Directors, which are exercisable for shares of Class B stock and expire 10 years from the grant date. These stock options vest ratably over a four-year period from the grant date. We granted 2,205,000 stock options during the prior year nine-month period, which are exercisable for shares of Class B stock and expire 10 years from the grant date. Of the stock options granted during the prior year nine-month period, the 1,200,000 stock options granted to Mr. Flanders vest ratably over a four-year period from the grant date and the remainder vest ratably over a three-year period from the grant date.




14
 Table of Contents


The following table sets forth the assumptions used for the Lattice model:




Quarters Ended


Nine Months EndedSeptember 30,


September 30,2010


2009


2010


2009Expected volatility


N/A



47% – 99
%


52% – 100
%


43% – 104
%Weighted average volatility


N/A



63
%


70
%


60
%Risk-free interest rate


N/A



0.04% – 4.74
%


0.02% – 5.58
%


0.04% – 4.74
%Expected dividends


N/A



-



-



-





The expected life of stock options represents the weighted average period the stock options are expected to remain outstanding and is a derived output of the Lattice model. The expected life of stock options is impacted by all of the underlying assumptions and calibration of the Lattice model. The Lattice model assumes that exercise behavior is a function of the stock option’s remaining contractual term, vesting schedule and the extent to which the stock option’s intrinsic value exceeds the exercise price.




The weighted average fair value per share was $2.10 for stock options granted during the current year nine-month period, $1.68 for stock options granted during the prior year quarter and $1.25 for stock options granted during the prior year nine-month period. The weighted average expected life was 5.0 years for stock options granted during the current year nine-month period, 6.6 years for stock options granted during the prior year quarter and 6.7 years for stock options granted during the prior year nine-month period.




The following table sets forth the activity and balances of our stock options for the current year nine-month period:




Number of Shares


Weighted Average Exercise PriceOutstanding at December 31, 2009


3,808,921


$
7.48Granted


346,241



3.59Exercised


(17,000
)


1.25Forfeited


(147,500
)


15.47Canceled


(415,669
)


9.74Outstanding at September 30, 2010


3,574,993


$
6.15





At September 30, 2010, we had $2.3 million of unrecognized stock-based compensation expense related to nonvested stock options, which will be recognized over a weighted average period of 2.8 years.




Restricted Stock Units




We granted no RSUs during the current year quarter and 26,080 RSUs with a weighted average grant-date fair value per share of $3.45 during the current year nine-month period, which provide for the issuance of our Class B stock and vest ratably over a one-year period from the grant date. During the prior year quarter, we granted 150,000 RSUs to Mr. Flanders with a grant-date fair value of $2.71, which provide for the issuance of Class B stock and vest ratably over a four-year period from the grant date. During the prior year nine-month period, we granted 485,000 RSUs with a weighted average grant-date fair value of $1.71, which provide for the issuance of Class B stock. Of the RSUs granted during the prior year nine-month period, the 150,000 RSUs granted to Mr. Flanders vest ratably over a four-year period from the grant date and the remainder vest ratably over a three-year period from the grant date.




15
 Table of Contents


The following table sets forth the activity and balances of our RSUs for the current year nine-month period:




Number of Shares


Weighted Average Grant-Date Fair ValueOutstanding at December 31, 2009


536,625


$
1.66Granted


26,080



3.45Vested


(189,005
)


1.54Canceled


(34,501
)


1.52Outstanding at September 30, 2010


339,199


$
1.88





At September 30, 2010, we had $0.5 million of unrecognized stock-based compensation expense related to nonvested RSUs, which will be recognized over a weighted average period of 2.1 years.




(N)
Segment Information




The following table sets forth financial information by reportable segment (in thousands):




Quarters Ended


Nine Months EndedSeptember 30,


September 30,2010


2009


2010


2009Net revenuesEntertainment

$
19,567


$
24,433


$
66,213


$
74,442Print/Digital


21,664



22,844



60,786



77,286Licensing


10,813



8,728



33,156



28,101Total

$
52,044


$
56,005


$
160,155


$
179,829Income (loss) before income taxesEntertainment

$
778


$
2,339


$
5,977


$
7,312Print/Digital


1,264



358



(1,013
)


(927
)Licensing


6,170



5,553



19,115



15,920Corporate


(7,506
)


(5,549
)


(19,765
)


(17,300
)Restructuring expense


(418
)


(469
)


(2,676
)


(12,744
)Impairment charges


(25,372
)


-



(25,819
)


(5,518
)Investment income


12



10



23



742Interest expense


(2,123
)


(2,194
)


(6,485
)


(6,516
)Amortization of deferred financing fees


(165
)


(164
)


(493
)


(553
)Other, net


1,056



227



69



(329
)Total

$
(26,304
)

$
111


$
(31,067
)

$
(19,913
)Sept. 30,

2010



Dec. 31,

2009Identifiable assetsEntertainment









$
53,614


$
82,119Print/Digital










17,761



21,468Licensing










5,962



6,040Corporate










88,496



87,205Total









$
165,833


$
196,832





(O)
SubsequentEvents




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 Condensed Consolidated Financial Statements.




16
 Table of Contents


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, 2009.




RESULTS OF OPERATIONS




The following table sets forth our results of operations (in millions, except per share amounts):




Quarters Ended


Nine Months EndedSeptember 30,


September 30,2010


2009


2010


2009Net revenuesEntertainmentDomestic TV

$
9.8


$
12.5


$
35.5


$
38.5International TV


9.0



10.7



28.4



32.4Other


0.7



1.2



2.3



3.5Total Entertainment


19.5



24.4



66.2



74.4Print/DigitalDomestic magazine


10.0



9.4



27.3



39.3International magazine


1.2



1.5



4.1



4.8Special editions and other


2.0



2.4



4.4



5.4Digital


8.5



9.6



25.0



27.8Total Print/Digital


21.7



22.9



60.8



77.3LicensingConsumer products


9.8



7.2



27.7



21.9Location-based entertainment


0.9



1.2



2.7



3.5Marketing events


0.2



0.2



2.2



2.3Other


-



0.1



0.6



0.4Total Licensing


10.9



8.7



33.2



28.1Total net revenues

$
52.1


$
56.0


$
160.2


$
179.8Net lossEntertainmentBefore programming amortization

$
4.7


$
9.5


$
23.6


$
29.7Programming amortization


(3.9
)


(7.2
)


(17.6
)


(22.4
)Total Entertainment


0.8



2.3



6.0



7.3Print/Digital


1.3



0.4



(1.0
)


(0.9
)Licensing


6.2



5.5



19.1



15.9Corporate


(7.6
)


(5.5
)


(19.8
)


(17.3
)Segment income


0.7



2.7



4.3



5.0Restructuring expense


(0.4
)


(0.5
)


(2.7
)


(12.8
)Impairment charges


(25.4
)


-



(25.8
)


(5.5
)Operating income (loss)


(25.1
)


2.2



(24.2
)


(13.3
)Nonoperating income (expense)Investment income


-



-



-



0.7Interest expense


(2.1
)


(2.2
)


(6.5
)


(6.5
)Amortization of deferred financing fees


(0.2
)


(0.1
)


(0.5
)


(0.5
)Other, net


1.1



0.2



0.1



(0.3
)Total nonoperating expense


(1.2
)


(2.1
)


(6.9
)


(6.6
)Income (loss) before income taxes


(26.3
)


0.1



(31.1
)


(19.9
)Income tax expense


(1.1
)


(1.2
)


(2.7
)


(3.6
)Net loss

$
(27.4
)

$
(1.1
)

$
(33.8
)

$
(23.5
)Basic and diluted loss per common share

$
(0.81
)

$
(0.03
)

$
(1.01
)

$
(0.70
)


17
 Table of Contents


Overview




Revenues decreased $3.9 million, or 7%, compared to the prior year quarter and $19.6 million, or 11%, compared to the prior year nine-month period. The current year quarter decrease was driven by lower revenues in our Entertainment Group, in part because we did not recognize revenues from DirecTV, Inc., or DirecTV, as a result of a dispute with the satellite TV provider, as well as continued overall weakness in our domestic and international TV businesses. These same factors also contributed to the decrease in Entertainment Group revenues for the current year nine-month period. Also contributing to the decrease for the current year nine-month period was lower Print/Digital Group revenues, which was largely due to a decrease in domestic magazine revenues. The decreases over both periods were partially offset by higher revenues from our Licensing Group, primarily due to higher consumer products royalties.




Segment income decreased $2.0 million compared to the prior year quarter and $0.7 million compared to the prior year nine-month period. Higher Corporate expense and lower Entertainment Group results were partially offset by improved results from our Licensing Group over both periods. Print/Digital Group results improved in the current year quarter and were flat in the current year nine-month period.




Operating results decreased $27.3 million compared to the prior year quarter and $10.9 million compared to the prior year nine-month period primarily due to $25.4 million of impairment charges in the current year quarter principally related to our Entertainment Group’s programming costs. The decrease in the current year nine-month period was partially offset by lower restructuring charges, primarily due to initial charges related to the closing of our New York office in the prior year period.




Net loss increased $26.3 million compared to the prior year quarter and $10.3 million compared to the prior year nine-month period primarily due to the operating results previously discussed.




Current Economic Conditions




We continue to experience many of the same challenges our partners and competitors in the media industry are facing, namely increased competition for consumers’ attention in the face of volatile overall spending in the television and print businesses, the migration of advertisers to other platforms and the uncertainty created by the state of the global economy. In spite of the strength of our brand and products, our licensing business continues to be challenged by trends in the retail environment as well as a difficult financial environment for potential location-based entertainment business partners to obtain project financing. We have made significant changes to many of our processes and business activities in order to address the current economic climate and industry challenges and will continue to do so. Our goal is to narrow our focus to management of the Playboy brand and lifestyle. We have made progress in building a new business model that will create a leaner organization, accelerate growth and operate more efficiently by finding partners with the size, scope and scale needed to 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. At September 30, 2010, we had $26.6 million in cash and cash equivalents. We also have a $30.0 million revolving credit facility, under which there were no borrowings and $1.0 million in letters of credit outstanding at September 30, 2010, resulting in $29.0 million of available borrowings under this facility. The credit facility will mature on January 31, 2011. We believe our cash generated from operating activities in addition to our cash and cash equivalents will be sufficient to meet our liquidity needs through 2011. See “Liquidity and Capital Resources” below.




Recent Events




On July 8, 2010, our Board of Directors, or the Board, received a proposal from Hugh M. Hefner to acquire all of the outstanding shares of our Class A common stock and Class B common stock not currently owned by Mr. Hefner for $5.50 per share in cash. Mr. Hefner owns 69.5% of our Class A common stock and 27.7% of our Class B common stock. According to the proposal letter, Mr. Hefner has had discussions with Rizvi Traverse Management LLC, or Rizvi Traverse, with whom Mr. Hefner expresses an intention to partner in connection with the transaction. The proposal letter also states that Rizvi Traverse informed Mr. Hefner that it had contacted major lenders regarding potential financing and that Rizvi Traverse is highly confident ample financial resources will be available to




18
 Table of Contents




Playboy




On March 26, 2010, DirecTV filed suit against Playboy Entertainment Group, Inc. and Spice Hot Entertainment, Inc., two of the Company’s wholly owned subsidiaries, in the Superior Court of the State of California for the County of Los Angeles. The suit alleges that the subsidiaries are in breach of the most-favored-nation provisions in the parties’ Amended and Restated Affiliation and Licensing Agreement, dated as of August 1, 2007, pursuant to which DirecTV distributes certain of our television programming. As a result of this dispute, DirecTV began withholding payments to us in the current year quarter and we suspended the recognition of revenue related to these payments. We believe we have meritorious defenses to the allegations and intend to defend this case vigorously. See Part II, Item 1. “Legal Proceedings” of this Quarterly Report on Form 10-Q.




Entertainment Group




Domestic TV revenues decreased $2.7 million, or 21%, compared to the prior year quarter and $3.0 million, or 8%, compared to the prior year nine-month period. As previously mentioned, we did not recognize revenues from DirecTV estimated to be over $3.0 million during the current year quarter due to DirecTV’s failure to make payments to us for TV programming, which contributed to the domestic TV revenue declines over both periods. In addition, increased competition from other suppliers and distribution outlets caused decreases in pay-per-view, or PPV, and video-on-demand, or VOD, revenues. We expect the PPV and VOD revenue trends to continue into the future. Partially offsetting these decreases were higher Playboy TV monthly subscription revenues from distributors other than DirecTV, which were in part due to payments received related to prior periods.




International TV revenues decreased $1.7 million, or 15%, compared to the prior year quarter and $4.0 million, or 12%, compared to the prior year nine-month period primarily due to lower sales in Europe and increased competition for customers, particularly in the U.K. We expect these challenges to continue into the future. The decrease in current year quarter revenues also reflects the impact of unfavorable foreign currency exchange rate fluctuations.




Revenues from other businesses decreased $0.5 million, or 49%, compared to the prior year quarter and $1.2 million, or 36%, compared to the prior year nine-month period primarily due to lower revenues related to television series produced by our production company, Alta Loma Entertainment, and the impact of our exiting the DVD business.




The group’s segment income decreased $1.5 million compared to the prior year quarter and $1.3 million compared to the prior year nine-month period. During the current year quarter, we recorded $1.2 million of bad debt expense related to existing receivables from DirecTV and incurred higher legal expense compared to the prior year quarter. These expenses, combined with the declines in revenues discussed above, were partially offset by lower programming amortization expense primarily resulting from the impairment charge recorded in the current year quarter, the results of our cost-savings initiatives and lower variable costs.




Print/Digital Group




Domestic magazine revenues increased $0.6 million, or 6%, compared to the prior year quarter and decreased $12.0 million, or 31%, compared to the prior year nine-month period. In response to industry dynamics, including lower overall spending by advertisers, fewer subscribers and decreasing newsstand sales, we lowered the guaranteed circulation rate base (the total newsstand and subscription circulation guaranteed to advertisers) of Playboy magazine to 1.5 million from 2.6 million effective with the January/February 2010 issue. The decrease in current year nine-month period revenues was largely a result of lowering the rate base. For the current year quarter, the




19
 Table of Contents








Subscription revenues increased $1.2 million, or 20%, compared to the prior year quarter and decreased $8.0 million, or 30%, compared to the prior year nine-month period. We published a combined July/August 2009 issue and recorded revenues reflecting both the July and August 2009 issues in the second quarter of 2009, resulting in recorded revenues for only two issues in the prior year quarter compared to three issues in the current year quarter. The increase in current year quarter subscription revenues was primarily due to the effect of the July/August 2009 issue and an increase in average revenue per subscription copy, partially offset by 25% fewer average paid copies served resulting from the rate base reduction. The decrease in current year nine-month period revenues was primarily due to 31% fewer paid copies served resulting from the rate base reduction.




Newsstand revenues increased $0.2 million, or 23%, compared to the prior year quarter and decreased $0.4 million, or 12%, compared to the prior year nine-month period. Revenues for the current year quarter were favorably impacted by publishing one additional issue as compared to the prior year quarter, while both periods reflect continued overall weakness in the newsstand business due to a large number of titles and competition from free content on the Internet.




Advertising revenues decreased $0.8 million, or 25%, compared to the prior year quarter and $3.6 million, or 38%, compared to the prior year nine-month period. While advertising pages increased in the current year quarter and nine-month period, advertising revenues decreased primarily due to 43% and 49% lower average net revenue per page largely related to the rate base reduction. Advertising sales for the 2010 fourth quarter magazine issues are closed, and we expect to report advertising revenues to be approximately 35% lower and advertising pages to be approximately 7% higher compared to the fourth quarter of 2009.




International magazine revenues decreased $0.3 million, or 18%, compared to the prior year quarter and $0.7 million, or 15%, compared to the prior year nine-month period primarily due to lower royalties from our European editions. Special editions and other revenues decreased $0.4 million, or 19%, compared to the prior year quarter and $1.0 million, or 19%, compared to the prior year nine-month period primarily due to 18% and 20% fewer special editions newsstand copies sold, respectively, and lower revenues from calendar sales as a result of fewer copies sold in the current year periods. The same industry dynamics that are impacting Playboy magazine in the domestic market are also impacting our other print businesses.




Digital revenues decreased $1.1 million, or 11%, compared to the prior year quarter and $2.8 million, or 10%, compared to the prior year nine-month period primarily due to a decrease in paysites and advertising revenues. These decreases were primarily due to increasing amounts of competing free content available on the Internet and lower overall spending by advertisers. We continue our focus on efforts to increase profitability of our paysites by building traffic and conversions and improving the customer and advertiser experience and our competitive position. The current year quarter and nine-month period were also impacted by lower e-commerce revenues.




Segment income increased $0.9 million compared to the prior year quarter and segment loss was flat compared to the prior year nine-month period. The improvement in the current year quarter was primarily due to the increase in domestic magazine revenues coupled with the effects of our cost-savings initiatives, partially offset by the previously discussed revenue declines of the other businesses within the group. For the current year nine-month period, higher legal expense related to litigation, which resulted in a verdict in our favor, with a former international magazine licensee (see Part II, Item 1. “Legal Proceedings” of this Quarterly Report on Form 10-Q for additional information) coupled with the previously discussed revenue declines were offset by the effects of our cost-savings initiatives, including our decision to reduce Playboymagazine’s rate base effective with the January/February 2010 issue.




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 2009 and have completed the transition. We have begun to realize certain cost reductions as a result of our agreement with AMI and continue to work toward optimizing the benefits of our relationship.




20
 Table of Contents


Licensing Group




Licensing Group revenues increased $2.2 million, or 24%, compared to the prior year quarter and $5.1 million, or 18%, compared to the prior year nine-month period primarily due to higher consumer products royalties, largely from licensees in China, partially offset by lower location-based entertainment revenues. Royalties from the 50th Anniversary of the Playboy Club events also contributed to the increased revenues in the current year nine-month period.




The group’s segment income increased $0.7 million compared to the prior year quarter and $3.2 million compared to the prior year nine-month period primarily due to the increases in revenues discussed above combined with the impact of senior management costs in the prior year periods, which were transferred to Corporate late in the prior year due to a change in responsibilities. Partially offsetting these items were higher bad debt expense and agency fees in the current year periods.




Corporate




Corporate expense increased $2.1 million, or 35%, compared to the prior year quarter and $2.5 million, or 14%, compared to the prior year nine-month period primarily due to higher marketing, senior management transition and trademark defense expenses, as well as professional fees related to outstanding litigation, strategic initiatives and the previously mentioned transaction proposal from Mr. Hefner. Partially offsetting the unfavorable variance for the current year nine-month period was the impact of various cost-savings initiatives.




Restructuring Expense




In the second quarter of 2010, we implemented a plan to downsize our organizational structure and reduce overhead costs. As a result of this plan, we recorded a charge of $1.2 million related to a workforce reduction of 18 employees, most of whose positions were eliminated by the end of the third quarter of 2010. Severance payments under this plan began in the third quarter of 2010 and will be completed in 2011.




In the first quarter of 2010, we implemented a plan to further reduce headcount and real estate lease obligations. As a result of this plan, we recorded a charge of $0.4 million related to a lease termination fee and a workforce reduction of 10 employees, whose positions will be eliminated in the first quarter of 2011. Severance payments under this plan will begin in the first quarter of 2011 and will be completed in 2011.




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 were 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 in 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. We recorded additional restructuring charges related to this plan in 2009 representing 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 expect to record additional restructuring charges, representing depreciation and accretion, of $8.0 million over the remaining approximate nine-year term of the lease, or approximately $1.0 million on average annually. We recorded $0.3 million and $1.0 million of these restructuring charges representing depreciation and accretion during the current year quarter and nine-month period, respectively. We also recorded an unfavorable adjustment of $0.1 million during the current year quarter as a result of changes in assumptions for this plan.




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 a workforce reduction of 107 employees, whose positions were eliminated by the end of the second quarter of 2009. Severance payments under this plan




21
 Table of Contents








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 prior year nine-month period 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 completed in the current year quarter. We recorded a favorable adjustment of $0.4 million during the prior year nine-month period as a result of changes in assumptions for this plan.




Impairment Charges




In accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 360, Property, Plant, and Equipment, we conduct impairment testing on long-lived assets, or asset groups, whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.




During the current year quarter, we conducted impairment testing on certain finite-lived assets reported in our Entertainment Group, including programming costs and distribution agreements. We conducted impairment testing on these assets as a result of continued overall weakness in our domestic and international TV businesses, a reevaluation of programming utilization and a dispute with DirecTV. We determined the carrying amounts of these assets were not fully recoverable, and in the current year quarter, we recorded total impairment charges of $25.4 million, representing the difference between the estimated fair values and net book values of these assets. Of the total impairment charges, $22.3 million related to programming costs and $3.1 million related to distribution agreements. We also determined the life of programming costs to be generally either 12 or 24 months.




We estimated the fair value of the assets tested using a forecasted-discounted cash flow method based in part on our financial results and our expectation of future performance. We made assumptions to determine the estimated fair values of the assets tested. Management believes these assumptions are consistent with those that would be utilized by a market participant in performing similar valuations. The assumptions for our forecasted-discounted cash flow analyses include projections of operating cash flows directly associated with our programming costs and distribution agreements over their remaining useful lives. The valuation employs present value techniques to measure fair value and considers market factors. We assumed a discount rate of 13.0% for each analysis, which was based on weighted average costs 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 generally estimated that the current trends in revenues and cash flows will continue over the remaining useful lives of the assets tested. If the discount rate used in the forecasted-discounted cash flow analysis for our programming costs was 1.0% lower, the impairment charge would have been $0.5 million lower. If the discount rate used in the forecasted-discounted cash flow analysis for our programming costs was 1.0% higher, the impairment charge would have been $0.5 million higher. Similar changes in the discount rates used in our testing of distribution agreements would not have had a significant effect on the impairment charge.




During the first quarter of 2010, we implemented a plan to further reduce our headcount and real estate lease obligations. As a result, we evaluated the related long-lived assets for recoverability. We determined the carrying amount of this asset group was not recoverable and we recorded an impairment charge of $0.4 million in the first quarter of 2010 representing the entire net book value of these long-lived assets.




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, Intangibles–Goodwill and Other, or ASC Topic 350, we




22
 Table of Contents








We continue to have access to our credit facility after these 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 other intangible assets.




Nonoperating Income (Expense)




Nonoperating expense decreased $0.9 million for the current year quarter and increased $0.3 million for the current year nine-month period. The decrease in the current year quarter is primarily due to an insurance recovery. In the current year nine-month period, this recovery is more than offset by foreign currency exchange losses due to dividend distribution and settlement of intercompany balances resulting from the strengthening of the U.S. dollar against the pound sterling and euro.




Income Tax Expense




Income tax expense was flat for the current year quarter and decreased $0.9 million for the current year nine-month period. The decrease in the current year nine-month period was primarily due to a decrease in foreign income tax obligations.





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 September 30, 2010, we had $26.6 million in cash and cash equivalents compared to $24.6 million in cash and cash equivalents at December 31, 2009. At September 30, 2010 and December 31, 2009, 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 $107.6 million at September 30, 2010 and $104.1 million at December 31, 2009. The difference between the principal amount of $115.0 million and the carrying value of the financing obligation 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 expense 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.




At September 30, 2010, cash generated from our operating activities and existing cash and cash equivalents were fulfilling our liquidity requirements. At September 30, 2010, we also had a $30.0 million credit facility. This facility can be used for revolving borrowings, issuing letters of credit or a combination of both. As of October 29, 2010, there were no borrowings and $1.0 million in letters of credit outstanding under this facility, resulting in $29.0 million of available borrowings under this facility. The credit facility will mature on January 31, 2011. There can be no assurance that we will be able to either extend the maturity date of our existing credit facility or establish a new facility with a later maturity date and acceptable terms.




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 revenues within our 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




23
 Table of Contents








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 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.




Cash Flows from Operating Activities




Net cash provided by operating activities was $9.9 million in the current year nine-month period compared to $0.9 million in the prior year nine-month period. This favorable variance was primarily due to increases in deferred revenues primarily related to our Licensing Group in the current year period combined with the impact of the distribution of deferred compensation plan balances in the prior year period, partially offset by other changes in working capital and the operating and nonoperating results previously discussed.




Cash Flows from Investing Activities




Net cash used for investing activities was $2.8 million in the current year nine-month period compared to net cash provided by investing activities of $3.6 million in the prior year nine-month period. The current year nine-month period reflected additions of $1.8 million to property and equipment and $1.0 million of purchases of short-term investments that are restricted. The prior year nine-month period reflected net proceeds from sales of investments of $6.7 million related to the termination of our deferred compensation plan partially offset by additions of $3.1 million to property and equipment.




Cash Flows from Financing Activities




Net cash used for financing activities in the current year nine-month period was $5.0 million compared to $3.2 million in the prior year nine-month period. The change reflected payments of deferred acquisition liabilities of $5.1 million for the current year nine-month period compared to $3.1 million in the prior year nine-month period and $0.2 million of financing fees related to amending our credit facility during the prior year nine-month period.




Effect of Exchange Rate Changes on Cash and Cash Equivalents




Foreign currency exchange rate fluctuations did not have a significant effect on our cash and cash equivalents during the current year nine-month period. The $0.3 million positive effect of foreign currency exchange rates on our cash and cash equivalents during the prior year nine-month period was due to the weakening of the U.S. dollar against the pound sterling and euro.




RECENTLY ISSUED ACCOUNTING STANDARDS




In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements,or ASU No. 2010-06. ASU No. 2010-06 requires additional disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers between levels of the fair value hierarchy as defined in ASC Topic 820, Fair Value Measurements and Disclosures.We adopted the provisions of ASU No. 2010-06 beginning with the first quarter of 2010, except for the disclosure presenting disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3), which we are required to adopt in the first quarter of 2011. As ASU No. 2010-06 affects disclosures only, the adoption of ASU No. 2010-06 does not affect our results of operations or financial condition.




24
 Table of Contents


ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




We are exposed to certain market risks, including changes in foreign currency exchange rates. We experienced no material change in our exposure to such fluctuations during the quarter ended September 30, 2010. Information regarding market risks as of December 31, 2009 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, 2009.




At September 30, 2010, we did not have any floating interest rate exposure. As of that date, all of our outstanding debt consisted of the 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 September 30, 2010, the convertible notes had an estimated fair value of $112.7 million.




ITEM 4.CONTROLS AND PROCEDURES




Disclosure Controls and Procedures




Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this quarterly report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act.




Internal Control over Financial Reporting




There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




25
 Table of Contents


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 to 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 U.S. The basis of GSI’s cross-claim was that it was the assignee of EC’s right to distribute the Mexican Edition in the U.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’ claims and remanded the remaining claims for a new trial. On July 14, 2006, the plaintiffs filed a motion for rehearing and en banc reconsideration, which we opposed. On October 12, 2006, the State Appellate Court denied plaintiffs’ motion. On December 27, 2006, we filed a petition for review with the Texas Supreme Court. On January 25, 2008, the Texas Supreme Court denied our petition for review. On February 8, 2008, we filed a petition for rehearing with the Texas Supreme Court. On May 16, 2008, the Texas Supreme Court denied our motion for rehearing. The posted bond has been canceled and the remaining claims were retried. On April 23, 2010, a jury returned a verdict in our favor. On August 16, 2010, the plaintiffs filed a motion for a new trial and a motion to modify, correct and reform the judgment against them. The motion was denied and plaintiffs filed a notice of appeal on October 14, 2010.




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 connection with litigation that was settled in 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 a notice of appeal from the verdict. As a result of rulings by the California Court of Appeal and the California Supreme Court as recently as February 13, 2008, Logix’s recovery against Faherty has been reduced significantly, although certain portions of the case have been set for a retrial. In light of these rulings, however, when coupled with any offset as a result of the settlement of the Logix litigation, any ultimate net recovery by Logix against Faherty will be severely reduced and might be entirely eliminated. In consideration of this appeal, Faherty and Playboy have agreed to continue a temporary stay of the indemnification action filed in the United States District Court for the Southern District of New York through the end of December 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




26
 Table of Contents




Contingencies,




Eleven shareholder class action complaints have been filed against Playboy and certain officers and directors thereof in connection with Hugh M. Hefner’s July 8, 2010 proposal to acquire all of the outstanding shares of Class A common stock and Class B common stock not currently owned by Mr. Hefner for $5.50 per share in cash. In each complaint, the plaintiffs challenge Mr. Hefner’s proposal and allege, among other things, that the consideration to be paid in such proposal is unfair and grossly inadequate. The complaints seek, among other relief, to enjoin defendants from consummating Mr. Hefner’s proposal and to direct defendants to exercise their fiduciary duties to obtain a transaction that is in the best interests of our shareholders. Seven of these complaints were filed in the Chancery Division of the Circuit Court of Cook County, Illinois, and the remaining four complaints were filed in the Court of Chancery in Delaware. On October 6, 2010, all of the Illinois cases were dismissed with prejudice. We have reviewed the allegations contained in the various complaints and believe they are without merit. We intend to defend the litigation vigorously. 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 ASC Topic 450, no liability has been accrued.




On March 26, 2010, DirecTV, Inc., or DirecTV, filed suit against Playboy Entertainment Group, Inc. and Spice Hot Entertainment, Inc., two of the Company’s wholly owned subsidiaries, in the Superior Court of the State of California for the County of Los Angeles. The suit alleges that the subsidiaries are in breach of the most-favored-nation provisions in the parties’ Amended and Restated Affiliation and Licensing Agreement, dated as of August 1, 2007, pursuant to which DirecTV distributes certain of our television programming. On May 21, 2010, we filed a motion to strike certain portions of DirecTV’s complaint. On July 21, 2010, DirecTV filed an amended complaint with the court, adding the allegation that DirecTV suffered damages of approximately $35.0 million. In light of the filing of the amended complaint, we withdrew the original motion to strike and filed a revised motion to strike portions of the amended complaint. The motion to strike was denied at a hearing held on October 21, 2010. Our answer to the amended complaint is due on or before November 10, 2010. We believe we have meritorious defenses to the allegations contained in the amended complaint and intend to defend this case vigorously. 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 ASC Topic 450, no liability has been accrued.




ITEM 1A.RISK FACTORS




For a detailed discussion of 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, 2009. Except as set forth below, there have been no material changes to these risk factors.




There can be no assurance that any definitive offer will be made with respect to Hugh M. Hefner’s proposal to acquire all of our outstanding common stock, that any agreement will be executed or that this or any other transaction will be approved or consummated. The absence of a proposal to acquire our common stock would likely have an adverse effect on the market price of our common stock.




On July 8, 2010, our Board of Directors, or the Board, received the proposal from Mr. Hefner described in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q. The Board has cautioned our shareholders and others considering trading in our securities that it has only received the proposal and that no decisions have been made by the Board or the special committee of the Board with respect to our response to Mr. Hefner’s proposal. The proposal submitted was not a definitive offer, and there can be no assurance that any definitive offer will be made, that any agreement will be executed or that a definitive offer, if made, with respect to the proposal or any other transaction will be approved or consummated. On the last trading day prior to the announcement of Mr. Hefner’s proposal, our Class A common stock and Class B common stock closed at $4.06 and $3.94 per share, respectively. After the announcement, the price for each class of stock rose to trade close to the $5.50 per share proposal price. If this proposal were rejected or withdrawn, or if no similar transaction presented itself, the stock price would likely fall below its current trading range.




27
 Table of Contents


If we fail to renew our carriage agreement with DirecTV, on favorable terms or at all, our business, financial condition and results of operations will be adversely affected.




We are in negotiations with DirecTV to renew the agreement pursuant to which DirecTV distributes certain of our television programming. The existing agreement is currently scheduled to expire on November 16, 2010. On March 26, 2010, DirecTV filed suit against two of our subsidiaries alleging that we are in breach of the most-favored-nation provisions in the parties’ existing agreement. See Part II, Item 1. “Legal Proceedings” of this Quarterly Report on Form 10-Q. As a result of this dispute, DirecTV began withholding payments to us in the current year quarter. We have suspended the recognition of revenue related to these payments, estimated to be over $3.0 million during the current year quarter, and recorded $1.2 million of bad debt expense related to existing receivables from DirecTV. If we are unable to renew our agreement with DirecTV, or do not renew it on favorable terms, our business, financial condition and results of operations will be adversely affected.




In addition, during the current year quarter, we conducted impairment testing on certain finite-lived assets reported in our Entertainment Group, including programming costs and distribution agreements, as a result of continued overall weakness in our domestic and international TV businesses, a reevaluation of programming utilization and a dispute with DirecTV. We determined the carrying amounts of these assets were not fully recoverable and in the current year quarter, we recorded total impairment charges of $25.4 million, representing the difference between the estimated fair values and net book values of these assets. See Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q. Additional future impairments of our finite-lived assets, including intangible assets, could result if we fail to renew our agreement with DirecTV, or do not renew it on favorable terms.




We are subject to litigation risk.




From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business, such as our dispute with DirecTV and the other matters described in Part II, Item 1. “Legal Proceedings” of this Quarterly Report on Form 10-Q. We could incur significant legal expenses defending claims, even those without merit. In addition, an adverse resolution of any lawsuit or claim against us could have a material adverse effect on our business.




28
 Table of Contents


ITEM 6.EXHIBITS




Exhibit Number

Description*10.1

Product and Trademark License Agreement, dated August 24, 2010, by and between Playboy Enterprises International, Inc. and Glory Rabbit International Investment Co., Limited10.2

Amendment to the Amended and Restated Agreement, dated September 1, 2010, by and among Playboy Entertainment Group, Inc., Spice Hot Entertainment, Inc. and DirecTV, Inc.10.3

Amended and Restated Employment Agreement, dated September 29, 2010, by and between Playboy Enterprises, Inc. and Scott Flanders10.4

Amendment to the Amended and Restated Agreement, dated October 27, 2010, by and among Playboy Entertainment Group, Inc., Spice Hot Entertainment, Inc. and DirecTV, Inc.31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232

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.




29
 Table of Contents


SIGNATURES




Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.







PLAYBOY ENTERPRISES, INC.(Registrant)Date:    November 9, 2010

By
/s/ Christoph PachlerExecutive Vice President and

Chief Financial Officer

(Authorized Officer and

Principal Financial and

Accounting Officer)


30
 Table of Contents


EXHIBIT INDEX




Exhibit Number

Description*10.1

Product and Trademark License Agreement, dated August 24, 2010, by and between Playboy Enterprises International, Inc. and Glory Rabbit International Investment Co., Limited10.2

Amendment to the Amended and Restated Agreement, dated September 1, 2010, by and among Playboy Entertainment Group, Inc., Spice Hot Entertainment, Inc. and DirecTV, Inc.10.3

Amended and Restated Employment Agreement, dated September 29, 2010, by and between Playboy Enterprises, Inc. and Scott Flanders10.4

Amendment to the Amended and Restated Agreement, dated October 27, 2010, by and among Playboy Entertainment Group, Inc., Spice Hot Entertainment, Inc. and DirecTV, Inc.31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232

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.






31