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, 2009





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
      of incorporation)
            
            (I.R.S.
      Employer Identification Number)680
      North Lake Shore Drive
              Chicago,
      IL
            
            60611(Address
      of principal executive offices)
            
            (Zip
      Code)





Registrant’s
telephone number, including area code: (312) 751-8000


Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


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 Act).


YesoNoþ





At
October 31, 2009, there were 4,864,102 shares of Class A Common Stock and
28,624,182 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; or


(b)
            limitations
      on the advertisement of tobacco, alcohol and other products which are
      important sources of advertising revenue for
us;


(2)
            Risks
      associated with our foreign operations, including market acceptance and
      demand for our products and the products of our licensees and other
      business partners;


(3)
            Our
      ability to effectively manage our exposure to foreign currency exchange
      rate fluctuations;


(4)
            Further
      changes in general economic conditions, consumer spending habits, viewing
      patterns, fashion trends or the retail sales environment, which, in each
      case, could reduce demand for our programming and products and impact our
      advertising and licensing revenues;


(5)
            Our
      ability to protect our trademarks, copyrights and other intellectual
      property;


(6)
            Risks
      as a distributor of media content, including our becoming subject to
      claims for defamation, invasion of privacy, negligence, copyright, patent
      or trademark infringement and other claims based on the nature and content
      of the materials we distribute;


(7)
            The
      risk our outstanding litigation could result in settlements or judgments
      which are material to us;


(8)
            Dilution
      from any potential issuance of common stock or convertible debt in
      connection with financings or acquisition
  activities;


(9)
            Further
      competition for advertisers from other publications, media or online
      providers or decreases in spending by advertisers, either generally or
      with respect to the men’s market;


(10)
            Competition
      in the television, men’s magazine, Internet, mobile and product licensing
      markets;


(11)
            Attempts
      by consumers, distributors, merchants or private advocacy groups to
      exclude our programming or other products from
    distribution;


(12)
            Our
      television, Internet and mobile businesses’ reliance on third parties for
      technology and distribution, and any changes in that technology,
      distribution and/or delays in implementation which might affect our plans,
      assumptions and financial results;


(13)
            Risks
      associated with losing access to transponders or technical failure of
      transponders or other transmitting or playback equipment that is beyond
      our control;


(14)
            Competition
      for channel space on linear or video-on-demand television
      platforms;


(15)
            Failure
      to maintain our agreements with multiple system operators and
      direct-to-home, or DTH, operators on favorable terms, as well as any
      decline in our access to households or acceptance by DTH, cable and/or
      telephone company systems and the possible resulting cancellation of fee
      arrangements, pressure on splits or other deterioration of contract terms
      with operators of these systems;


(16)
            Risks
      that we may not realize the expected sales and profits and other benefits
      from acquisitions;


(17)
            Any
      charges or costs we incur in connection with restructuring measures we
      have taken or may take in the
future;


(18)
            Increases
      in paper, printing, postage or other manufacturing
  costs;


(19)
            Effects
      of the consolidation of the single-copy magazine distribution system in
      the U.S. and risks associated with the financial stability of major
      magazine wholesalers;


(20)
            Effects
      of the consolidation and/or bankruptcies of television distribution
      companies;


(21)
            Risks
      associated with the viability of our subscription, ad-supported and
      e-commerce Internet models;





2





(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 refinance our convertible notes at significantly higher interest
      rates if credit markets do not improve prior to the first put date of
      March 15, 2012;


(26)
            The
      risk that we are unable to either extend the maturity date of our existing
      credit facility beyond the current expiration date of January 31, 2011 or
      establish a new facility with a later maturity date and acceptable terms;
      and


(27)
            Further
      downward pressure on our operating results and/or further deterioration of
      economic conditions could result in further impairments of our long-lived
      assets including goodwill.





For a
detailed discussion of these and other factors that may affect our performance,
see Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2008, as updated by Part II, Item 1A. “Risk
Factors” of our Quarterly Reports on Form 10-Q for the quarters ended March 31,
2009 and June 30, 2009.





3




PLAYBOY
      ENTERPRISES, INC.FORM
      10-QTABLE OF CONTENTSPagePART
      IFINANCIAL
      INFORMATIONItem
      1.
            Financial StatementsConsolidated Statements of Operations and Comprehensive Loss
      for the Quarters Ended September 30, 2009 and 2008
      (Unaudited)
            5Consolidated Statements of Operations and Comprehensive Loss
      for the Nine Months Ended September 30, 2009 and 2008
      (Unaudited)
            6Consolidated Balance Sheets at September 30, 2009 (Unaudited)
      and December 31, 2008
            7Condensed Consolidated Statements of Cash Flows for the Nine
      Months Ended September 30, 2009 and 2008
    (Unaudited)
            8Notes to Condensed Consolidated Financial Statements
      (Unaudited)
            9Item
      2.
            Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
            18Item
      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
            28





4
 Table of Contents





PART
I


FINANCIAL
INFORMATION





ITEM1.   FINANCIAL STATEMENTS





PLAYBOYENTERPRISES, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


AND
COMPREHENSIVE LOSS


for
the Quarters Ended September 30 (Unaudited)


(In
thousands, except per share amounts)





2009
            
            
            2008Net
      revenues
            
            $
            56,005
            
            
            $
            70,342Costs
      and expensesCost
      of sales
            
            
            (42,234
            )
            
            
            (56,153
            )Selling
      and administrative expenses
            
            
            (11,070
            )
            
            
            (10,649
            )Restructuring
      expense
            
            
            (469
            )
            
            
            (2,203
            )Impairment
      charge
            
            
            -
            
            
            
            45Provisions
      for reserves
            
            
            -
            
            
            
            (4,121
            )Total
      costs and expenses
            
            
            (53,773
            )
            
            
            (73,081
            )Operating
      income (loss)
            
            
            2,232
            
            
            
            (2,739
            )Nonoperating
      income (expense)Investment
      income
            
            
            10
            
            
            
            201Interest
      expense
            
            
            (2,194
            )
            
            
            (2,118
            )Amortization
      of deferred financing fees
            
            
            (164
            )
            
            
            (155
            )Other,
      net
            
            
            227
            
            
            
            (90
            )Total
      nonoperating expense
            
            
            (2,121
            )
            
            
            (2,162
            )Income
      (loss) before income taxes
            
            
            111
            
            
            
            (4,901
            )Income
      tax expense
            
            
            (1,195
            )
            
            
            (1,330
            )Net
      loss
            
            $
            (1,084
            )
            
            $
            (6,231
            )Other
      comprehensive income (loss)Unrealized
      gain (loss) on marketable securities
            
            
            12
            
            
            
            (586
            )Foreign
      currency translation loss
            
            
            (129
            )
            
            
            (1,100
            )Total
      other comprehensive loss
            
            
            (117
            )
            
            
            (1,686
            )Comprehensive
      loss
            
            $
            (1,201
            )
            
            $
            (7,917
            )Weighted
      average number of common shares outstandingBasic
      and diluted
            
            
            33,468
            
            
            
            33,317Basic
      and diluted loss per common share
            
            $
            (0.03
            )
            
            $
            (0.19
            )





The
accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
 5
 Table of Contents


PLAYBOYENTERPRISES, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


AND
COMPREHENSIVE LOSS


for
the Nine Months Ended September 30 (Unaudited)


(In
thousands, except per share amounts)





2009
            
            
            2008Net
      revenues
            
            $
            179,829
            
            
            $
            222,256Costs
      and expensesCost
      of sales
            
            
            (139,883
            )
            
            
            (180,034
            )Selling
      and administrative expenses
            
            
            (34,980
            )
            
            
            (38,876
            )Restructuring
      expense
            
            
            (12,744
            )
            
            
            (2,761
            )Impairment
      charges
            
            
            (5,518
            )
            
            
            (58
            )Recoveries
      from (provisions for) reserves
            
            
            39
            
            
            
            (4,121
            )Total
      costs and expenses
            
            
            (193,086
            )
            
            
            (225,850
            )Operating
      loss
            
            
            (13,257
            )
            
            
            (3,594
            )Nonoperating
      income (expense)Investment
      income
            
            
            742
            
            
            
            857Interest
      expense
            
            
            (6,516
            )
            
            
            (6,358
            )Amortization
      of deferred financing fees
            
            
            (553
            )
            
            
            (466
            )Other,
      net
            
            
            (329
            )
            
            
            (432
            )Total
      nonoperating expense
            
            
            (6,656
            )
            
            
            (6,399
            )Loss
      before income taxes
            
            
            (19,913
            )
            
            
            (9,993
            )Income
      tax expense
            
            
            (3,593
            )
            
            
            (3,598
            )Net
      loss
            
            $
            (23,506
            )
            
            $
            (13,591
            )Other
      comprehensive income (loss)Unrealized
      loss on marketable securities
            
            
            (11
            )
            
            
            (1,128
            )Unrealized
      gain on derivatives
            
            
            -
            
            
            
            78Foreign
      currency translation gain (loss)
            
            
            291
            
            
            
            (918
            )Total
      other comprehensive income (loss)
            
            
            280
            
            
            
            (1,968
            )Comprehensive
      loss
            
            $
            (23,226
            )
            
            $
            (15,559
            )Weighted
      average number of common shares outstandingBasic
      and diluted
            
            
            33,433
            
            
            
            33,297Basic
      and diluted loss per common share
            
            $
            (0.70
            )
            
            $
            (0.41
            )




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





6
 Table of Contents





PLAYBOYENTERPRISES, INC.


CONSOLIDATED
BALANCE SHEETS


(In
thousands, except share data)





(Unaudited)Sept.
      30,
            
            
            Dec.
      31,2009
            
            
            2008AssetsCash
      and cash equivalents
            
            $
            26,800
            
            
            $
            25,192Marketable
      securities and short-term investments
            
            
            108
            
            
            
            6,139Receivables,
      net of allowance for doubtful accounts of $3,549 and $4,084,
      respectively
            
            
            31,939
            
            
            
            40,428Receivables
      from related parties
            
            
            2,673
            
            
            
            2,061Inventories
            
            
            5,401
            
            
            
            7,341Deferred
      tax asset
            
            
            1,492
            
            
            
            2,268Prepaid
      expenses and other current assets
            
            
            5,709
            
            
            
            9,127Total
      current assets
            
            
            74,122
            
            
            
            92,556Property
      and equipment, net
            
            
            19,433
            
            
            
            20,319Programming
      costs, net
            
            
            48,316
            
            
            
            52,056Goodwill
            
            
            22,206
            
            
            
            27,758Trademarks
            
            
            43,348
            
            
            
            42,503Distribution
      agreements, net of accumulated amortization of $6,608 and $6,126,
      respectively
            
            
            11,656
            
            
            
            12,138Deferred
      tax asset
            
            
            197
            
            
            
            180Other
      noncurrent assets
            
            
            5,381
            
            
            
            6,078Total
      assets
            
            $
            224,659
            
            
            $
            253,588LiabilitiesAcquisition
      liabilities
            
            $
            4,711
            
            
            $
            2,785Accounts
      payable
            
            
            21,068
            
            
            
            24,816Accrued
      salaries, wages and employee benefits
            
            
            7,342
            
            
            
            9,159Deferred
      revenues
            
            
            32,620
            
            
            
            36,402Other
      current liabilities and accrued expenses
            
            
            17,689
            
            
            
            19,557Total
      current liabilities
            
            
            83,430
            
            
            
            92,719Financing
      obligations
            
            
            102,999
            
            
            
            99,763Acquisition
      liabilities
            
            
            922
            
            
            
            5,419Deferred
      tax liability
            
            
            8,576
            
            
            
            7,783Other
      noncurrent liabilities
            
            
            23,028
            
            
            
            19,785Total
      liabilities
            
            
            218,955
            
            
            
            225,469Shareholders’
      equityCommon
      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; 28,992,650 and 28,868,900
      issued, respectively
            
            
            289
            
            
            
            288Capital
      in excess of par value
            
            
            260,050
            
            
            
            259,240Accumulated
      deficit
            
            
            (247,192
            )
            
            
            (223,686
            )Treasury
      stock, at cost – 381,971 shares
            
            
            (5,000
            )
            
            
            (5,000
            )Accumulated
      other comprehensive loss
            
            
            (2,492
            )
            
            
            (2,772
            )Total
      shareholders’ equity
            
            
            5,704
            
            
            
            28,119Total
      liabilities and shareholders’ equity
            
            $
            224,659
            
            
            $
            253,588




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


7
 Table of Contents





PLAYBOYENTERPRISES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


for
the Nine Months Ended September 30 (Unaudited)


(In
thousands)





2009
            
            
            2008Cash
      flows from operating activitiesNet
      loss
            
            $
            (23,506
            )
            
            $
            (13,591
            )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation
      of property and equipment
            
            
            3,856
            
            
            
            3,407Amortization
      of intangible assets
            
            
            1,287
            
            
            
            1,693Amortization
      of investments in entertainment programming
            
            
            22,353
            
            
            
            24,339Amortization
      of deferred financing fees
            
            
            553
            
            
            
            466Stock-based
      compensation
            
            
            753
            
            
            
            1,031Noncash
      interest expense
            
            
            3,236
            
            
            
            2,999Impairment
      charges
            
            
            5,518
            
            
            
            58Provisions
      for (recoveries from) reserves
            
            
            (39
            )
            
            
            4,121Deferred
      income taxes
            
            
            1,552
            
            
            
            1,294Payment
      of deferred compensation plan
            
            
            (5,193
            )
            
            
            (128
            )Net
      change in operating assets and liabilities
            
            
            9,516
            
            
            
            (1,350
            )Investments
      in entertainment programming
            
            
            (18,397
            )
            
            
            (23,723
            )Other,
      net
            
            
            (617
            )
            
            
            132Net
      cash provided by operating activities
            
            
            872
            
            
            
            748Cash
      flows from investing activitiesPayments
      for acquisitions
            
            
            -
            
            
            
            (60
            )Purchases
      of investments
            
            
            (94
            )
            
            
            (723
            )Proceeds
      from sales of investments
            
            
            6,762
            
            
            
            10,589Additions
      to assets held for sale
            
            
            -
            
            
            
            (6,895
            )Proceeds
      from assets held for sale
            
            
            -
            
            
            
            12,000Additions
      to property and equipment
            
            
            (3,092
            )
            
            
            (7,801
            )Net
      cash provided by investing activities
            
            
            3,576
            
            
            
            7,110Cash
      flows from financing activitiesPayments
      of deferred financing fees
            
            
            (174
            )
            
            
            -Payments
      of acquisition liabilities
            
            
            (3,050
            )
            
            
            (2,450
            )Proceeds
      from stock-based compensation
            
            
            60
            
            
            
            95Net
      cash used for financing activities
            
            
            (3,164
            )
            
            
            (2,355
            )Effect
      of exchange rate changes on cash and cash equivalents
            
            
            324
            
            
            
            (657
            )Net
      increase in cash and cash equivalents
            
            
            1,608
            
            
            
            4,846Cash
      and cash equivalents at beginning of period
            
            
            25,192
            
            
            
            20,603Cash
      and cash equivalents at end of period
            
            $
            26,800
            
            
            $
            25,449




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


8
 Table of Contents





NOTESTO 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, 2008. Certain amounts reported for the prior periods have been reclassified
to conform to the current year’s presentation.





In concert with the integration of our
publishing and online businesses in the first quarter of 2009, we moved the
reporting of our online/mobile business from the Entertainment Group into the
Print/Digital Group, which we formerly called the Publishing Group. These
businesses were combined in order to better focus on creating brand-consistent
content that extends across print and digital platforms. Amounts reported for
prior periods have been reclassified to conform to the revised segment
reporting.





(B)      Recently Issued Accounting
Standards





In June 2009, the Financial
Accounting Standards Board, or FASB, issued Statement of Financial Accounting
Standards No. 168, TheFASB Accounting Standards CodificationTM and the Hierarchy of Generally
Accepted Accounting Principles, or Statement 168.Statement 168, which is
incorporated in FASB Accounting Standards Codification, or ASC, Topic 105, Generally Accepted Accounting
Principles, establishes only two levels of U.S. generally accepted
accounting principles, or GAAP, authoritative and nonauthoritative. The FASB
Accounting Standards CodificationTM, or the Codification, is now the source of
authoritative, nongovernmental GAAP, except for rules and interpretive releases
of the Securities and Exchange Commission, or SEC, which are sources of
authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC
accounting literature not included in the Codification is nonauthoritative. We
adopted Statement 168 beginning with the current year quarter. As the
Codification does not change or alter existing GAAP, the adoption of Statement
168 did not impact our results of operations or financial
condition.





In June 2009, the FASB issued
Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation
No. 46(R), or Statement 167. Statement 167, which is incorporated in
ASC Topic 810, Consolidation,changes the approach to determining the primary beneficiary of a variable
interest entity, or VIE, and requires companies to more frequently assess
whether they must consolidate VIEs. We are required to adopt Statement 167 at
the beginning of 2010. We are currently evaluating the impact, if any, of
adopting Statement 167 on our future results of operations and financial
condition.





In April 2009, the FASB issued Staff
Position No. FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies, or FSP FAS 141(R)-1.FSP FAS 141(R)-1, which is
incorporated in ASC Topic 805, Business Combinations, amends
and clarifies existing guidance to address application issues raised on initial
recognition and measurement, subsequent measurement and accounting and
disclosure of assets and liabilities arising from contingencies in a business
combination. FSP FAS 141(R)-1 is effective for assets and liabilities arising
from contingencies in business combinations for which the acquisition date is on
or after the beginning of the first annual reporting period beginning after
December 15, 2008. In the second quarter of 2009, we adopted the provisions of
FSP FAS 141(R)-1 effective January 1, 2009. The adoption of FSP FAS 141(R)-1 did
not have an impact on our results of operations or financial
condition.





In May 2008, the FASB issued Staff
Position No. APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement), or FSP APB 14-1. FSP APB 14-1, which is incorporated in ASC
Topic 470, Debt,
specifies that issuers of convertible debt instruments that may be settled in
cash upon conversion should separately account for the liability and equity
components in a manner that will reflect the entity’s nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. We
adopted FSP APB 14-1 at the beginning of 2009 and applied FSP APB 14-1
retrospectively to all applicable prior periods. In applying FSP APB 14-1, we
reclassified $29.1 million of the carrying value of our 3.00% convertible senior
subordinated notes due 2025, or convertible notes, and $1.2 million of the
issuance costs related to the convertible notes to equity retroactive to the
March 2005 issuance date. These amounts represent the





9
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equity
component of the proceeds from the convertible notes calculated assuming a 7.75%
nonconvertible borrowing rate. The discount is being accreted to “Interest
expense” and the debt issuance costs are being amortized to “Amortization of
deferred financing fees” over a seven-year term, which represents the period
beginning on the March 15, 2005 issuance date of the convertible notes and
ending on the first put date of March 15, 2012. Accordingly, in 2008, 2007, 2006
and 2005, we recorded $4.0 million, $3.8 million, $3.5 million and $2.6 million
of additional noncash interest expense and $0.3 million, $0.2 million, $0.3
million and $0.2 million of additional amortization of deferred financing fees,
or $0.13, $0.12, $0.11 and $0.08 per basic and diluted share on a combined
basis, respectively. We will recognize additional noncash interest expense of
$4.4 million and additional amortization of deferred financing fees of $0.3
million for the year ended December 31, 2009, of which $1.1 million of interest
expense and $0.1 million of amortization of deferred financing fees, or $0.03
per basic and diluted share on a combined basis, were recognized for the current
year quarter and $3.2 million of interest expense and $0.2 million of
amortization of deferred financing fees, or $0.10 per basic and diluted share on
a combined basis, were recognized for the current year nine-month period. On
January 1, 2009, as a result of adopting FSP APB 14-1, we reduced the carrying
value of the debt in “Financing obligations” by $15.2 million, decreased “Other
noncurrent assets” by $2.2 million, increased “Capital in excess of par value”
by $27.9 million and increased “Accumulated deficit” by $14.9 million on our
Consolidated Balance Sheet.





(C)      Restructuring
Expense





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 reflects the
discounted value of our remaining lease obligation net of estimated sublease
income. We expect to record additional annual restructuring charges of $1.0
million on average, of which $0.4 million was recorded during the current year
quarter, with $9.1 million in total over the remaining approximate 10-year term
of the lease. These charges represent depreciation of leasehold improvements and
furniture and equipment as well as accretion of the difference between the
nominal and discounted remaining lease obligation net of estimated sublease
income.





In the first quarter of 2009, we
implemented a restructuring plan to integrate our print and digital businesses
in our Chicago office as well as to streamline operations across the Company,
including the elimination of positions.As
a result of this plan, we recorded a charge of $2.6 million related to the
workforce reduction of 107 employees, whose positions were eliminated by the end
of the second quarter of 2009. Severance payments under this plan began in the
first quarter of 2009 and will be substantially completed by the end of the year
with some payments continuing into 2010. We recorded an unfavorable adjustment
of $0.1 million during the current year quarter and nine-month period as a
result of changes in assumptions for this plan.





In the fourth quarter of 2008, we
implemented a restructuring plan to lower overhead costs, primarily related to
senior Corporate and Entertainment Group positions. As a result of this plan, we
recorded a charge of $4.0 million related to 21 employees, most of whose
positions were eliminated in the first quarter of 2009. Payments under this plan
began in the fourth quarter of 2008 and will be largely completed by the end of
2009 with some payments continuing into 2011. We recorded an unfavorable
adjustment of $0.8 million during the current year 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 will be substantially completed by the end of 2009 with some
payments continuing into 2010. We recorded a favorable adjustment of $0.4
million during the current year nine-month period as a result of changes in
assumptions for this plan.





10
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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).





Workforce
              Reduction
            
            
            Consolidationof
      FacilitiesandOperations
            
            
            TotalBalance
      at December 31, 2007
            
            $
            429
            
            
            $
            114
            
            
            $
            543Reserve
      recorded
            
            
            6,357
            
            
            
            -
            
            
            
            6,357Additional
      reserve recorded
            
            
            150
            
            
            
            445
            
            
            
            595Adjustments
      to previous estimates
            
            
            (128
            )
            
            
            (41
            )
            
            
            (169
            )Cash
      payments
            
            
            (1,633
            )
            
            
            (518
            )
            
            
            (2,151
            )Balance
      at December 31, 2008
            
            
            5,175
            
            
            
            -
            
            
            
            5,175Reserve
      recorded
            
            
            2,555
            
            
            
            9,083
            
            
            
            11,638Accretion
      of discount on net lease obligation
            
            
            -
            
            
            
            382
            
            
            
            382Adjustments
      to previous estimates
            
            
            509
            
            
            
            -
            
            
            
            509Cash
      payments
            
            
            (5,273
            )
            
            
            (1,400
            )
            
            
            (6,673
            )Balance
      at September 30, 2009
            
            $
            2,966
            
            
            $
            8,065
            
            
            $
            11,031





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





(D)     
Impairment





In accordance with ASC Topic 350, Intangibles–Goodwill and
Other, or ASC Topic 350, we conduct annual impairment testing of goodwill
and other indefinite-lived intangible assets as of October 1st of
each year, or in between annual tests if events occur or circumstances change
that would indicate impairment of our goodwill and/or other indefinite-lived
intangible assets. In concert with the integration of our publishing and online
businesses in the first quarter of 2009, we moved the reporting of our
online/mobile business from the Entertainment Group into the Print/Digital
Group, which we formerly called the Publishing Group. These businesses were
combined in order to better focus on creating brand-consistent content that
extends across print and digital platforms. Due to this realignment of our
operating segments, which are also our reporting units as defined in ASC Topic
350, we conducted interim impairment testing of goodwill in accordance with ASC
Topic 350. Interim testing of goodwill was also necessitated by lower expected
financial results in the new Print/Digital Group than that of the former
Entertainment Group, which contained the digital business’ assets prior to the
realignment of our operating segments. We estimated the implied fair value of
the goodwill using a combined weighted forecasted-discounted cash flow method
and a market multiple approach based in part on our financial results during the
current year and our expectation of future performance, which are Level 3 inputs
within the fair value hierarchy under ASC Topic 820, Fair Value Measurements and
Disclosure,or ASC Topic 820, as described in Note (H), Fair Value
Measurement. As a result of this testing, the implied fair value of goodwill of
the new Print/Digital operating segment was lower than its carrying value, and
we recorded an impairment charge on the entire balance of the Print/Digital
Group’s goodwill of $5.5 million in the first quarter of 2009.





Further downward pressure on our
operating results and/or further deterioration of economic conditions could
result in additional future impairments of our long-lived assets including
remaining goodwill, which is reflected entirely in the Entertainment
Group.





11
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(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 EndedSept.
      30,
            
            
            Sept.
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Numerator:For
      basic and diluted EPS – net loss
            
            $
            (1,084
            )
            
            $
            (6,231
            )
            
            $
            (23,506
            )
            
            $
            (13,591
            )Denominator:For
      basic and diluted EPS – weighted average shares
            
            
            33,468
            
            
            
            33,317
            
            
            
            33,433
            
            
            
            33,297Basic
      and diluted loss per common share
            
            $
            (0.03
            )
            
            $
            (0.19
            )
            
            $
            (0.70
            )
            
            $
            (0.41
            )





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 our Class B stock and the potential number of shares
of Class B stock contingently issuable under our convertible notes. These shares
were not included in the computations of diluted EPS for the quarters and
nine-month periods ended September 30, 2009 and 2008, as their inclusion would
have been antidilutive (in thousands):





Quarters
      Ended
            
            
            Nine
      Months EndedSept.
      30,
            
            
            Sept.
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Stock
      options
            
            
            4,026
            
            
            
            3,638
            
            
            
            3,929
            
            
            
            3,629RSUs
            
            
            617
            
            
            
            -
            
            
            
            541
            
            
            
            -Convertible
      notes
            
            
            6,758
            
            
            
            6,758
            
            
            
            6,758
            
            
            
            6,758Total
            
            
            11,401
            
            
            
            10,396
            
            
            
            11,228
            
            
            
            10,387





(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,
            
            
            Dec.
      31,2009
            
            
            2008Paper
            
            $
            1,162
            
            
            $
            2,371Editorial
      and other prepublication costs
            
            
            3,947
            
            
            
            4,759Merchandise
      finished goods
            
            
            292
            
            
            
            211Total
            
            $
            5,401
            
            
            $
            7,341





(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. We record net
deferred tax assets to the extent we believe these assets will more likely than
not be realized. In making such determination, we consider all available
positive and negative evidence, including scheduled reversals of deferred tax
liabilities, projected future taxable income, tax planning strategies and recent
financial performance. As a result of our cumulative losses in the U.S. and
certain foreign jurisdictions, we have concluded that a full valuation allowance
should be recorded for such jurisdictions.





12
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At September 30, 2009 and December 31,
2008, 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 2005
through 2008 tax years generally remain subject to examination by federal and
most state taxing authorities. In addition, for all tax years prior to 2005
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)     
Fair Value
Measurement





We adopted FASB Statement of Financial
Accounting Standards No. 157, Fair Value Measurements,
which is incorporated in ASC Topic 820, for our financial assets and liabilities
on January 1, 2008 and for our nonfinancial assets and liabilities on January 1,
2009. Our financial assets 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, while our financial liabilities
relate to derivative instruments used to hedge the variability of forecasted
cash receipts related to royalty payments denominated in euro. Derivative
instruments in asset positions are included in “Prepaid expenses and other
current assets” on our Consolidated Balance Sheets, and derivative instruments
in liability positions are included in “Other current liabilities and accrued
expenses” on our Consolidated Balance Sheets.





We utilize the market approach to
measure fair value for our 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 our
assets and liabilities measured at fair value on a recurring basis and the basis
of measurement at September 30, 2009 (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
            
            $
            108
            
            
            $
            108
            
            
            $
            -
            
            $
            -Derivative
      assets
            
            
            1
            
            
            
            -
            
            
            
            1
            
            
            
            -Derivative
      liabilities
            
            $
            (14
            )
            
            $
            -
            
            
            $
            (14
            )
            
            $
            -





At December 31, 2008, we had $0.9
million in an enhanced cash portfolio included in “Marketable securities and
short-term investments” on our Consolidated Balance Sheet. Due to adverse market
conditions, we determined that the market value of this investment was
other-than-temporarily impaired, and through December 31, 2008, we recorded
cumulative impairment charges of $0.9 million. During the second quarter of
2009, our holdings in this





13
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enhanced
cash portfolio were liquidated in their entirety and we recorded a realized gain
of $0.7 million due to increases in market value of the investment subsequent to
the recording of the impairment charges.





(I)       
Financing
Obligations





Our financing obligations consisted of
the $115.0 million principal amount of convertible notes with a carrying value
of $103.0 million at September 30, 2009 and $99.8 million at December 31,
2008.





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, 2009, the convertible notes had
an estimated fair value of $93.2 million. This fair value was estimated using
quoted market prices which are similar to Level 2 inputs within the ASC Topic
820 fair value hierarchy.





(J)       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 and $2.3 million in 2009 with one
additional deferred purchase price payment of $4.3 million due in 2010. Pursuant
to the acquisition agreement, we are also obligated to make future contingent
earnout payments based primarily on DVD sales of existing content of the
acquired business over a 10-year period and on content produced by the acquired
business during the five-year period after the closing of the acquisition. No
earnout payments have been made through September 30, 2009 and no future earnout
payments are expected as a result of our exiting the DVD business in
2008.





In 2005, we acquired an affiliate
network of websites. We paid $8.0 million at closing and $2.0 million in each of
2006 and 2007. Pursuant to the acquisition agreement, we are also obligated to
make future contingent earnout payments over the five-year period commencing
January 1, 2005 based primarily on the financial performance of the acquired
business. If the required performance benchmarks are achieved, any contingent
earnout payments will be recorded as compensation expense. No earnout payments
were made during the nine-month period ended September 30, 2009. During 2008,
$0.1 million of earnout payments were made and recorded as additional purchase
price.





(K)      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 $0.3 million and $0.8 million during the quarter
and nine-month period ended September 30, 2009, respectively, and $0.2 million
and $0.5 million during the quarter and nine-month period ended September 30,
2008, respectively.





(L)      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 EndedSept.
      30,
            
            
            Sept.
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Stock
      options
            
            $
            261
            
            
            $
            413
            
            
            $
            471
            
            
            $
            1,257RSUs
            
            
            68
            
            
            
            117
            
            
            
            84
            
            
            
            (385
            )Other
      equity awards
            
            
            44
            
            
            
            46
            
            
            
            187
            
            
            
            142ESPP
            
            
            4
            
            
            
            5
            
            
            
            11
            
            
            
            17Total
            
            $
            377
            
            
            $
            581
            
            
            $
            753
            
            
            $
            1,031





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 favorable adjustments
of $0.1 million and $0.2 million during the quarter and nine-month period ended
September 30, 2009, respectively, and an unfavorable adjustment of $0.2 million
during the nine-month period ended September 30, 2008





14
 Table of Contents





to
reflect actual forfeitures for vested stock option grants. During the nine-month
period ended September 30, 2008, we determined that it was unlikely that the
minimum performance threshold associated with RSUs granted in 2007 would be met,
and we reversed $0.5 million of stock based compensation that was recorded in
2007 related to these RSUs.





Stock
Options





We estimate the value of 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 option exercises and
cancellations.





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





Quarters
      Ended
            
            
            Nine
      Months EndedSept.
      30,
            
            
            Sept.
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Expected
      volatility
            
            
            47%
      – 99
            %
            
            
            N/A
            
            
            
            43%
      – 104
            %
            
            
            31%
      – 41
            %Weighted
      average volatility
            
            
            63
            %
            
            
            N/A
            
            
            
            60
            %
            
            
            35
            %Risk-free
      interest rate
            
            
            0.04%
      – 4.74
            %
            
            
            N/A
            
            
            
            0.04%
      – 4.74
            %
            
            
            1.95%
      – 5.10
            %Expected
      dividends
            
            
            -
            
            
            
            N/A
            
            
            
            -
            
            
            
            -





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





During the quarter ended September 30,
2009, we granted 1,200,000 stock options to Scott N. Flanders, our Chief
Executive Officer and Director, or Mr. Flanders, exercisable for shares of our
Class B stock. These stock options vest ratably over a four-year period from the
grant date and expire 10 years from the grant date. During the nine-month period
ended September 30, 2009, we granted 2,205,000 stock options exercisable for
shares of our Class B stock. These stock options vest ratably over a three-year
period from the grant date and expire 10 years from the grant date except for
the options granted during the current year quarter to Mr. Flanders that vest
ratably over a four-year period. During the nine-month period ended September
30, 2008, we granted 171,000 stock options. These stock options vest ratably
over a three-year period from the grant date and expire 10 years from the grant
date. No stock options were granted during the quarter ended September 30, 2008.
The weighted average expected life was 6.6 years for options granted during the
current year quarter and 6.7 years for options granted during the current and
prior year nine-month periods. The weighted average fair value per share was
$1.68 for options granted during the current year quarter, $1.25 for options
granted during the current year nine-month period and $2.45 for options granted
during the prior year nine-month period.





The following table sets forth the
activity and balances of our stock options for the nine-month period ended
September 30, 2009:





WeightedAverageNumber
      of
            
            ExerciseShares
            
            PriceOutstanding
      at December 31, 2008
            
            
            3,578,584
            
            
            $
            15.22Granted
            
            
            2,205,000
            
            
            
            2.05Forfeited
            
            
            (751,000
            )
            
            
            24.59Canceled
            
            
            (1,025,334
            )
            
            
            10.94Outstanding
      at September 30, 2009
            
            
            4,007,250
            
            
            $
            7.31





At September 30, 2009, we had $2.7
million of unrecognized stock-based compensation expense related to nonvested
stock options, which will be recognized over a weighted average period of 3.2
years.





15
 Table of Contents





Restricted
Stock Units





During the quarter ended September 30,
2009, we awarded 150,000 RSUs to Mr. Flanders with a grant-date fair value of
$2.71, which provide for the issuance of our Class B stock vesting ratably over
a four-year period from the grant date. During the nine-month period ended
September 30, 2009, we awarded 485,000 RSUs with a weighted average grant-date
fair value of $1.71, which provide for the issuance of our Class B stock vesting
ratably over a three-year period from the grant date except for the RSUs granted
during the current year quarter to Mr. Flanders that vest ratably over a
four-year period.





In May 2008, we awarded 270,625 RSUs,
which provided for the issuance of our Class B stock if certain performance
goals were met. In March 2009, the Board of Directors modified the 2008 grants
by replacing the performance-based criteria for the vesting of the grants with a
service-based vesting schedule. Pursuant to the requirements of ASC Topic 718,
Compensation–Stock
Compensation, the fair value of the grants was remeasured at the
modification date to a fair value of $1.25 per share. Accordingly, we recorded a
cumulative adjustment credit of $0.1 million related to this modification. The
modification did not affect the number of shares expected to vest and no
incremental compensation cost was associated with the modification.





During the nine-month period ended
September 30, 2009, we determined that the minimum performance thresholds
associated with RSUs granted in 2006 and 2007 were not achieved. Accordingly,
these grants were forfeited.





The following table sets forth the
activity and balances of our RSUs for the nine-month period ended September 30,
2009:





WeightedAverageNumber
      of
            
            Grant-DateShares
            
            Fair
      ValueOutstanding
      at December 31, 2008
            
            
            632,750
            
            
            $
            8.02Granted
            
            
            485,000
            
            
            
            1.71Forfeited
            
            
            (385,875
            )
            
            
            11.74Canceled
            
            
            (115,375
            )
            
            
            1.36Outstanding
      at September 30, 2009
            
            
            616,500
            
            
            $
            1.61





At September 30, 2009, we had $0.7
million of unrecognized stock-based compensation expense related to nonvested
RSUs, which will be recognized over a weighted average period of 3.0
years.





16
 Table of Contents





(M)      Segment
Information





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





Quarters
      Ended
            
            
            Nine
      Months EndedSept.
      30,
            
            
            Sept.
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Net
      revenuesEntertainment
            
            $
            24,433
            
            
            $
            27,343
            
            
            $
            74,442
            
            
            $
            89,590Print/Digital
            
            
            22,844
            
            
            
            32,638
            
            
            
            77,286
            
            
            
            100,167Licensing
            
            
            8,728
            
            
            
            10,361
            
            
            
            28,101
            
            
            
            32,499Total
            
            $
            56,005
            
            
            $
            70,342
            
            
            $
            179,829
            
            
            $
            222,256Income
      (loss) before income taxesEntertainment
            
            $
            2,339
            
            
            $
            1,710
            
            
            $
            7,312
            
            
            $
            3,843Print/Digital
            
            
            358
            
            
            
            (218
            )
            
            
            (966
            )
            
            
            (2,964
            )Licensing
            
            
            5,553
            
            
            
            6,635
            
            
            
            15,920
            
            
            
            19,359Corporate
            
            
            (5,549
            )
            
            
            (4,587
            )
            
            
            (17,300
            )
            
            
            (16,892
            )Restructuring
      expense
            
            
            (469
            )
            
            
            (2,203
            )
            
            
            (12,744
            )
            
            
            (2,761
            )Impairment
      charges
            
            
            -
            
            
            
            45
            
            
            
            (5,518
            )
            
            
            (58
            )Recoveries
      from (provisions for) reserves
            
            
            -
            
            
            
            (4,121
            )
            
            
            39
            
            
            
            (4,121
            )Investment
      income
            
            
            10
            
            
            
            201
            
            
            
            742
            
            
            
            857Interest
      expense
            
            
            (2,194
            )
            
            
            (2,118
            )
            
            
            (6,516
            )
            
            
            (6,358
            )Amortization
      of deferred financing fees
            
            
            (164
            )
            
            
            (155
            )
            
            
            (553
            )
            
            
            (466
            )Other,
      net
            
            
            227
            
            
            
            (90
            )
            
            
            (329
            )
            
            
            (432
            )Total
            
            $
            111
            
            
            $
            (4,901
            )
            
            $
            (19,913
            )
            
            $
            (9,993
            )Sept.
      30,
            
            
            Dec.
      31,2009
            
            
            
            2008Identifiable
      assetsEntertainment
            
            
            
            
            
            
            
            
            
            $
            105,177
            
            
            $
            115,230Print/Digital
            
            
            
            
            
            
            
            
            
            
            22,122
            
            
            
            36,874Licensing
            
            
            
            
            
            
            
            
            
            
            7,482
            
            
            
            7,601Corporate
            
            
            
            
            
            
            
            
            
            
            89,878
            
            
            
            93,883Total
            
            
            
            
            
            
            
            
            
            $
            224,659
            
            
            $
            253,588





In concert with the integration of our
publishing and online businesses in the first quarter of 2009, we moved the
reporting of our online/mobile business from the Entertainment Group into the
Print/Digital Group, which we formerly called the Publishing Group. These
businesses were combined in order to better focus on creating brand-consistent
content that extends across print and digital platforms. These reporting changes
are in conformity with the requirements of ASC Topic 280, Segment Reporting, and better
reflect how management views the Company’s operations. The revised segment
reporting is reflected throughout this report for all periods presented. Amounts
reported for prior periods have been reclassified to conform to the revised
segment reporting.





(N)      Subsequent
Events





We evaluated all of our activity
through November 6, 2009, 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.





17
 Table of Contents





ITEM2.   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,
2008.





RESULTS
OF OPERATIONS (1)





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





Quarters
      Ended
            
            
            Nine
      Months EndedSept.
      30,
            
            
            Sept.
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Net
      revenuesEntertainmentDomestic
      TV
            
            $
            12.5
            
            
            $
            14.6
            
            
            $
            38.5
            
            
            $
            45.9International
      TV
            
            
            10.7
            
            
            
            11.8
            
            
            
            32.4
            
            
            
            39.9Other
            
            
            1.2
            
            
            
            0.9
            
            
            
            3.5
            
            
            
            3.8Total
      Entertainment
            
            
            24.4
            
            
            
            27.3
            
            
            
            74.4
            
            
            
            89.6Print/DigitalDomestic
      magazine
            
            
            9.4
            
            
            
            16.9
            
            
            
            39.3
            
            
            
            49.8International
      magazine
            
            
            1.5
            
            
            
            2.0
            
            
            
            4.8
            
            
            
            6.0Special
      editions and other
            
            
            2.4
            
            
            
            2.9
            
            
            
            5.4
            
            
            
            6.7Digital
            
            
            9.6
            
            
            
            10.9
            
            
            
            27.8
            
            
            
            37.7Total
      Print/Digital
            
            
            22.9
            
            
            
            32.7
            
            
            
            77.3
            
            
            
            100.2LicensingConsumer
      products
            
            
            7.2
            
            
            
            9.4
            
            
            
            21.9
            
            
            
            26.6Location-based
      entertainment
            
            
            1.2
            
            
            
            0.7
            
            
            
            3.5
            
            
            
            2.9Marketing
      events
            
            
            0.2
            
            
            
            0.2
            
            
            
            2.3
            
            
            
            2.7Other
            
            
            0.1
            
            
            
            0.1
            
            
            
            0.4
            
            
            
            0.3Total
      Licensing
            
            
            8.7
            
            
            
            10.4
            
            
            
            28.1
            
            
            
            32.5Total
      net revenues
            
            $
            56.0
            
            
            $
            70.4
            
            
            $
            179.8
            
            
            $
            222.3Net
      lossEntertainmentBefore
      programming amortization
            
            $
            9.5
            
            
            $
            9.7
            
            
            $
            29.7
            
            
            $
            28.2Programming
      amortization
            
            
            (7.2
            )
            
            
            (8.0
            )
            
            
            (22.4
            )
            
            
            (24.3
            )Total
      Entertainment
            
            
            2.3
            
            
            
            1.7
            
            
            
            7.3
            
            
            
            3.9Print/Digital
            
            
            0.4
            
            
            
            (0.2
            )
            
            
            (0.9
            )
            
            
            (3.0
            )Licensing
            
            
            5.5
            
            
            
            6.7
            
            
            
            15.9
            
            
            
            19.4Corporate
            
            
            (5.5
            )
            
            
            (4.6
            )
            
            
            (17.3
            )
            
            
            (16.9
            )Segment
      income
            
            
            2.7
            
            
            
            3.6
            
            
            
            5.0
            
            
            
            3.4Restructuring
      expense
            
            
            (0.5
            )
            
            
            (2.2
            )
            
            
            (12.8
            )
            
            
            (2.8
            )Impairment
      charges
            
            
            -
            
            
            
            -
            
            
            
            (5.5
            )
            
            
            (0.1
            )Provisions
      for reserves
            
            
            -
            
            
            
            (4.1
            )
            
            
            -
            
            
            
            (4.1
            )Operating
      income (loss)
            
            
            2.2
            
            
            
            (2.7
            )
            
            
            (13.3
            )
            
            
            (3.6
            )Nonoperating
      income (expense)Investment
      income
            
            
            -
            
            
            
            0.2
            
            
            
            0.7
            
            
            
            0.9Interest
      expense
            
            
            (2.2
            )
            
            
            (2.1
            )
            
            
            (6.5
            )
            
            
            (6.4
            )Amortization
      of deferred financing fees
            
            
            (0.1
            )
            
            
            (0.1
            )
            
            
            (0.5
            )
            
            
            (0.5
            )Other,
      net
            
            
            0.2
            
            
            
            (0.1
            )
            
            
            (0.3
            )
            
            
            (0.4
            )Total
      nonoperating expense
            
            
            (2.1
            )
            
            
            (2.1
            )
            
            
            (6.6
            )
            
            
            (6.4
            )Income
      (loss) before income taxes
            
            
            0.1
            
            
            
            (4.8
            )
            
            
            (19.9
            )
            
            
            (10.0
            )Income
      tax expense
            
            
            (1.2
            )
            
            
            (1.4
            )
            
            
            (3.6
            )
            
            
            (3.6
            )Net
      loss
            
            $
            (1.1
            )
            
            $
            (6.2
            )
            
            $
            (23.5
            )
            
            $
            (13.6
            )Basic
      and diluted loss per share
            
            $
            (0.03
            )
            
            $
            (0.19
            )
            
            $
            (0.70
            )
            
            $
            (0.41
            )





(1)
            Certain
      amounts reported for the prior periods have been reclassified to conform
      to the current year’s presentation.





18
 Table of Contents





Overview





Total revenues decreased $14.4 million,
or 20%, compared to the prior year quarter. The decrease was driven by our
Print/Digital Group, which was largely due to publishing one fewer issue of
Playboy magazine in the
current year quarter. Lower revenues in our Entertainment Group primarily due to
lower domestic and international TV revenues and our Licensing Group due to the
effects of the global economic slowdown also contributed. For the nine-month
period, revenues were down $42.5 million, or 19%, compared to the prior year
nine-month period due mainly to lower revenues from our mature television and
print businesses. Segment income decreased $0.9 million for the current year
quarter as improved results from our Entertainment and Print/Digital Groups were
more than offset by lower results from our Licensing Group and higher Corporate
expense. Segment income for the current year nine-month period increased $1.6
million due to our cost-savings initiatives despite the lower revenues discussed
above.





Current year quarter operating results
improved $4.9 million compared to the prior year quarter. The improvement was
due largely to $4.1 million of provisions for reserves and $1.7 million higher
restructuring charges in the prior year quarter. The nine-month period operating
loss increased $9.7 million reflecting $10.0 million higher restructuring
charges and a $5.5 million impairment charge on goodwill in the current year
period, partially offset by $4.1 million of provisions for reserves in the prior
year period. Net loss for the current year quarter decreased $5.1 million
compared to the prior year quarter while net loss increased $9.9 million
compared to the prior year nine-month period primarily due to the operating
results previously discussed.





In concert with the integration of our
publishing and online businesses in the first quarter of 2009, we moved the
reporting of our online/mobile business from the Entertainment Group into the
Print/Digital Group, which we formerly called the Publishing Group. These
businesses were combined in order to better focus on creating brand-consistent
content that extends across print and digital platforms. Amounts reported for
prior periods have been reclassified to conform to the revised segment
reporting.





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 shrinking overall spending in the television and print
businesses, the migration of advertisers to other platforms, higher
manufacturing costs and the uncertainty created by the current state of the
global economy. Our licensing business is negatively impacted by trends in the
retail environment that result from lower consumer spending, in spite of the
strength of our brand and products. Additionally, our location-based
entertainment business is dependent largely on our partners’ ability to attract
consumers as well as obtain financing for projects. We have made significant
changes to many of our processes and business activities in order to address the
current economic climate and industry challenges. To that end, we have
implemented plans to reduce overhead costs, including both employees and
facilities, as well as integrated our print and digital businesses into one
group and focused our business development efforts on Playboy-branded licensing.
These cost-savings initiatives also resulted in our exiting or outsourcing
revenue-generating but unprofitable businesses, including our Los Angeles
production facility, our e-commerce and catalog business and our DVD business.
We will continue to make changes to the way we operate our businesses,
particularly in our mature print and television operations, in order to enhance
our profitability.





Entertainment
Group





Domestic TV revenues decreased $2.1
million, or 14%, compared to the prior year quarter reflecting continued
consumer migration to the video-on-demand, or VOD, platform as cable and
satellite providers eliminate linear channels in order to increase bandwidth. We
have less shelf space on VOD than we did when linear networks were the only way
consumers could buy our TV products. VOD has lowered barriers to entry for our
competitors, resulting in fewer opportunities for consumers to purchase our
products. Our results also reflect consumer migration to Internet-based adult
options. These factors have led to falling transactional pay-per-view and
relatively flat VOD revenues, trends we expect will continue into the
future.





International TV revenues decreased
$1.1 million, or 10%, compared to the prior year quarter and $7.5 million, or
19%, compared to the prior year nine-month period. While we recorded higher
revenues due to expansion into new territories in the current-year quarter, the
above decreases resulted from lower sales in Europe due to less favorable
contracts replacing several contracts lost in the current year periods and
unfavorable foreign





19
 Table of Contents





currency
exchange rate fluctuations in the current year nine-month period. The economic
recession and increased competition, particularly in the U.K., have made our
International TV business more challenging primarily because we derive the
majority of our revenues from the U.K. television market. We expect these
challenges to continue into the future.





Revenues from other businesses
increased $0.3 million, or 29%, compared to the prior year quarter primarily
reflecting higher license fees from new and recurring television series produced
by our production company, Alta Loma Entertainment. For the nine-month period,
revenues decreased $0.3 million, or 8%, compared to the prior year period. Both
periods reflect lower revenues due to our exiting the DVD business in the third
quarter of 2008 to focus on digital video distribution.





The group’s segment income improved
$0.6 million compared to the prior year quarter and $3.4 million compared to the
prior year nine-month period. A combination of exiting unprofitable businesses,
cost-savings initiatives, favorable foreign currency exchange rate fluctuations
and lower programming amortization expense contributed to the profitability
improvement.





Print/Digital
Group





Domestic magazine revenues decreased
$7.5 million, or 44%, compared to the prior year quarter and $10.5 million, or
21%, compared to the prior year nine-month period. Playboy magazine published
its first double issue and recorded revenues reflecting the combined July and
August issues in the second quarter of 2009. In the prior year, August was a
separate issue with revenues reflected in the third quarter. Our domestic
magazine revenue decline in the current year quarter was due in large part to
the one fewer issue; however, industry dynamics including decreasing newsstand
sales, fewer subscribers and lower overall spending by advertisers, exacerbated
by an uncertain economy, also contributed to the negative revenue trends in both
the quarter and nine-month period.





Subscription revenues decreased $4.3
million, or 43%, compared to the prior year quarter and $3.2 million, or 10%,
compared to the prior year nine-month period. Current year quarter subscription
revenues compared to the prior year quarter were negatively impacted by one
fewer issue of Playboy
magazine. The decreases in both the current year quarter and nine-month period
were also affected by 17% and 10% fewer average paid copies served,
respectively. Industry sources believe most magazine subscriptions are down due
to competition for readers, including from the Internet, as well as lower
consumer spending due to the weak economy.





Newsstand revenues decreased $0.7
million, or 47%, compared to the prior year quarter and $1.6 million, or 32%,
compared to the prior year nine-month period based on 43% and 32% fewer copies
sold compared to the respective prior year periods. The current year quarter and
nine-month period reflect continued overall weakness in the newsstand business
due to the clutter created by a large number of titles, fewer newsstand outlets
and competition from free content on the Internet. In addition, newsstand
revenues were negatively impacted by publishing one fewer issue compared to the
prior year quarter and nine-month period.





Advertising revenues decreased $2.5
million, or 46%, compared to the prior year quarter and $5.7 million, or 38%,
compared to the prior year nine-month period primarily due to 34% fewer
advertising pages compared to both prior year periods. Advertising sales for the
2009 fourth quarter magazine issues are closed, and we expect to report
approximately 43% lower advertising revenues and 38% fewer advertising pages
compared to the 2008 fourth quarter. The negative advertising sales comparison
for the current year quarter and nine-month period is due in part to the impact
of the double issue. On a combined basis, Playboy print and digital advertising
revenues decreased $2.4 million, or 36%, compared to the prior year quarter and
$6.1 million, or 34%, compared to the prior year nine-month period.





We will combine our January and
February 2010 issues and record revenues reflecting both the January and
February issues in the fourth quarter of 2009, and therefore we will publish
only two issues in the first quarter of 2010. This will result in lower
circulation and advertising revenues in the first quarter of 2010 but also
lower manufacturing and shipping costs. We are also adjusting Playboy magazine's rate base (the total
newsstand and subscription circulation guaranteed to advertisers) to 1.5 million
from 2.6 million, effective with the January/February 2010 issue.





International magazine revenues
decreased $0.5 million, or 21%, compared to the prior year quarter and $1.2
million, or 19%, compared to the prior year nine-month period due largely to
lower royalties from our European





20
 Table of Contents





editions.
Special editions and other revenues decreased $0.5 million, or 18%, compared to
the prior year quarter and $1.3 million, or 20%, compared to the prior year
nine-month period due mainly to 21% and 20% fewer newsstand copies sold compared
to the respective prior year periods. The same industry dynamics that are
impacting Playboy
magazine in the domestic market are also impacting our other print
businesses.





Digital revenues were $1.3 million, or
13%, lower than the prior year quarter and $9.9 million, or 26%, lower than the
prior year nine-month period. The decrease in revenues for the nine-month period
is in part a result of outsourcing our Playboy e-commerce and catalog business
during the prior year nine-month period. Also, paysites revenues in both the
current year quarter and nine-month period were lower due to increasing amounts
of free content available on the Internet. We improved the customer and
advertiser experience and our competitive position by completing a major
infrastructure overhaul, redesign and relaunch of the free portions of our
website. With the redesign completed, we are now turning our focus to our
paysites and increasing profitability by building traffic and
conversions.





Segment results improved $0.6 million
compared to the prior year quarter and $2.1 million compared to the prior year
nine-month period. Significant reductions in manufacturing and subscription
costs, attributable to the one fewer issue and other cost-savings initiatives
implemented in previous quarters, more than offset the lower revenues in the
current year quarter and nine-month period. In addition, outsourcing our
e-commerce business contributed to the improved segment results in the current
year nine-month period.





Licensing
Group





Licensing Group revenues decreased $1.7
million, or 16%, compared to the prior year quarter and $4.4 million, or 14%,
compared to the prior year nine-month period. Despite the strength of our brand
and our products and our expansion into new product lines and territories, the
continued overall weakness of the global economy translated into lower retail
sales for our licensees and in turn lower royalties to us. This is largely
reflected in lower international consumer products royalties, primarily from
Western Europe. We expect our international consumer products royalties to
increase as overall economic conditions improve.





The group’s segment income decreased
$1.2 million compared to the prior year quarter and $3.5 million compared to the
prior year nine-month period primarily due to the decreases in revenues
discussed above.





Corporate





Corporate expense increased $0.9
million for the current year quarter and $0.4 million for the current year
nine-month period. The effects of our cost-savings initiatives on the current
year periods were more than offset by favorable adjustments related to our
now-terminated deferred compensation plan in the prior year
periods.





Restructuring
Expense





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 reflects the
discounted value of our remaining lease obligation net of estimated sublease
income. We expect to record additional annual restructuring charges of $1.0
million on average, of which $0.4 million was recorded during the current year
quarter, with $9.1 million in total over the remaining approximate 10-year term
of the lease. These charges represent depreciation of leasehold improvements and
furniture and equipment as well as accretion of the difference between the
nominal and discounted remaining lease obligation net of estimated sublease
income.





In the first quarter of 2009, we
implemented a restructuring plan to integrate our print and digital businesses
in our Chicago office as well as to streamline operations across the Company,
including the elimination of positions.As
a result of this plan, we recorded a charge of $2.6 million related to the
workforce reduction of 107 employees, whose positions were eliminated by the end
of the second quarter of 2009. Severance payments under this plan began in the
first quarter of 2009 and will be substantially completed by the end of the year
with some payments continuing into 2010. We recorded an unfavorable adjustment
of $0.1 million during the current year quarter and nine-month period as a
result of changes in assumptions for this plan.





In the fourth quarter of 2008, we
implemented a restructuring plan to lower overhead costs, primarily related to
senior Corporate and Entertainment Group positions. As a result of this plan, we
recorded a charge of $4.0 million





21
 Table of Contents





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 will be
largely completed by the end of 2009 with some payments continuing into 2011. We
recorded an unfavorable adjustment of $0.8 million during the current year
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 will be substantially completed by the end of 2009 with some
payments continuing into 2010. We recorded a favorable adjustment of $0.4
million during the current year nine-month period as a result of changes in
assumptions for this plan.





Impairment
Charge





In accordance with the Financial
Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC,
Topic 350, Intangibles–Goodwill and
Other, or ASC Topic 350, we conduct annual impairment testing of goodwill
and other indefinite-lived intangible assets as of October 1st of
each year, or in between annual tests if events occur or circumstances change
that would indicate impairment of our goodwill and/or other indefinite-lived
intangible assets. In concert with the integration of our publishing and online
businesses in the first quarter of 2009, we moved the reporting of our
online/mobile business from the Entertainment Group into the Print/Digital
Group, which we formerly called the Publishing Group. These businesses were
combined in order to better focus on creating brand-consistent content that
extends across print and digital platforms. Due to this realignment of our
operating segments, which are also our reporting units as defined in ASC Topic
350, we conducted interim impairment testing of goodwill in accordance with ASC
Topic 350. Interim testing of goodwill was also necessitated by lower expected
financial results in the new Print/Digital Group than that of the former
Entertainment Group, which contained the digital business’ assets prior to the
realignment of our operating segments. We estimated the implied fair value of
the goodwill using a combined weighted forecasted-discounted cash flow method
and a market multiple approach based in part on our financial results during the
current year and our expectation of future performance, which are Level 3 inputs
within the fair value hierarchy under ASC Topic 820, Fair Value Measurements and
Disclosure,as described in Note (H), Fair Value Measurement, to the
Notes to Condensed Consolidated Financial Statements. As a result of this
testing, the implied fair value of goodwill of the new Print/Digital operating
segment was lower than its carrying value, and we recorded an impairment charge
on the entire balance of the Print/Digital Group’s goodwill of $5.5 million in
the first quarter of 2009.





Further downward pressure on our
operating results and/or further deterioration of economic conditions could
result in additional future impairments of our long-lived assets including
remaining goodwill, which is reflected entirely in the Entertainment
Group.





Income
Tax Expense





Income tax expense of $1.2 million
for the current year quarter and $3.6 million for the current year nine-month
period was flat compared to the respective prior year periods.





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, 2009, our cash and
cash equivalents totaled $26.8 million compared to $25.2 million at December 31,
2008. At September 30, 2009 and December 31, 2008, our outstanding debt
consisted solely of our $115.0 million principal amount 3.00% convertible senior
subordinated notes due 2025, or convertible notes. At the beginning of 2009, we
adopted FASB Staff Position No. APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement), or FSP APB 14-1, which is incorporated in ASC Topic 470,
Debt. Our financing
obligations had a carrying value of $103.0 million at September 30, 2009
and





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$99.8
million at December 31, 2008. The difference between the principal amount of
$115.0 million and the financing obligation carrying value reflects the discount
associated with applying the estimated 7.75% nonconvertible borrowing rate at
the time of issuance of our convertible notes. The total discount will be
amortized to interest 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. See “Recently Issued Accounting Standards” below.





At September 30, 2009, cash generated
from our operating activities and existing cash and cash equivalents were
fulfilling our liquidity requirements. We also have a $30.0 million credit
facility, which can be used for revolving borrowings, issuing letters of credit
or a combination of both. As of September 30, 2009, there were no borrowings and
$0.8 million in letters of credit outstanding under this facility, resulting in
$29.2 million of available borrowings. Our credit facility expires in January
2011.





Our future net cash flows from
operating activities are dependent on many factors, including industry specific
trends and overall economic conditions. As described above, market driven trends
are negatively impacting our revenues, primarily within our more mature
television and print businesses. We expect that these trends will continue for
the foreseeable future. In response to these market driven trends, we have taken
a number of significant actions designed to reduce our overall cost structure
and preserve cash flow, some of which are described in “Restructuring Expense”
above. As a result, we generated positive cash flows from operating activities
in the current year nine-month period. Despite the market trends described
above, we believe cash generated from operations, our existing cash and cash
equivalents and funds available under our credit facility will provide
sufficient liquidity to fund our operations and meet our expected capital
expenditure requirements and other contractual obligations as they become due
through 2010. A prolonged continuation of the economic and industry trends
described above could adversely affect our future net cash flows from operating
activities, which could require us to seek other sources of funds.





Holders of our convertible notes may
require us to purchase all or a portion of the convertible notes at a purchase
price in cash equal to 100% of the principal amount of the convertible notes
beginning on the first put date of March 15, 2012. We believe that this put
option will likely be exercised by holders of our convertible notes because the
trading price of the convertible notes is significantly below the put option
purchase price. As a result, we expect to be required to refinance this
obligation prior to the put date. We cannot be certain whether such refinancing
will take the form of debt, equity or a combination thereof. Issuance of debt
would likely increase our interest expense, and the issuance of equity could be
dilutive to our existing stockholders.





Derivative
Instruments





We hedge the variability of forecasted
cash receipts related to royalty payments denominated in yen and euro with
derivative instruments. These royalties are hedged with forward contracts for
periods not exceeding 12 months. The fair value and carrying value of our
forward contracts are not material. For the nine-month period ended September
30, 2009, hedges deemed to be ineffective due to our inability to exactly match
the settlement date of the forward contracts to the receipt of these royalty
payments resulted in immaterial losses.





Cash
Flows from Operating Activities





Net cash provided by operating
activities for the current year nine-month period was flat at $0.9 million
compared to the prior year period. The operating results discussed earlier
combined with the distribution of deferred compensation plan account balances
were offset by changes in other liabilities and accrued expenses.





Cash
Flows from Investing Activities





Net cash provided by investing
activities for the current year nine-month period was $3.6 million compared to
$7.1 million in the prior year period. The current year period reflected net
proceeds from sales of investments of $6.7 million primarily related to the
termination of our deferred compensation plan, partially offset by additions of
$3.1 million to property and equipment. The net cash provided during the prior
year nine-month period reflected net proceeds from sales of investments of $9.9
million, primarily reflecting the sale of auction rate securities and the
liquidation of a portion of our investment in an enhanced cash portfolio,
together with net proceeds of $5.1 million related to the sale of our Los
Angeles production facility assets, partially offset by additions of $7.8
million to property and equipment.





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Cash
Flows from Financing Activities





Net cash used for financing
activities for the current year nine-month period was $3.2 million compared to
$2.4 million in the prior year period, primarily reflecting deferred acquisition
liability payments of $3.1 million during the current year period compared to
$2.5 million in the prior year period. The current year nine-month period also
included $0.2 million of financing fees related to amending our credit
facility.





Effect
of Exchange Rate Changes on Cash and Cash Equivalents





The $0.3 million positive effect of
foreign currency exchange rates on cash and cash equivalents during the
nine-month period ended September 30, 2009 was due to the weakening of the U.S.
dollar against the pound sterling and euro; the $0.7 million negative effect of
foreign currency exchange rates on cash and cash equivalents during the
nine-month period ended September 30, 2008 was due to the strengthening of the
U.S. dollar against the pound sterling and euro.





RECENTLY
ISSUED ACCOUNTING STANDARDS





In June 2009, the FASB issued
Statement of Financial Accounting Standards No. 168, TheFASB Accounting Standards
CodificationTM and the
Hierarchy of Generally Accepted Accounting Principles, or Statement
168.Statement 168,
which is incorporated in ASC Topic 105, Generally Accepted Accounting
Principles, establishes only two levels of U.S. generally accepted
accounting principles, or GAAP, authoritative and nonauthoritative. The FASB
Accounting Standards CodificationTM, or the Codification, is now the source of
authoritative, nongovernmental GAAP, except for rules and interpretive releases
of the Securities and Exchange Commission, or SEC, which are sources of
authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC
accounting literature not included in the Codification is nonauthoritative. We
adopted Statement 168 beginning with the current year quarter. As the
Codification does not change or alter existing GAAP, the adoption of Statement
168 did not impact our results of operations or financial
condition.





In June 2009, the FASB issued
Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation
No. 46(R), or Statement 167.Statement 167, which is
incorporated in ASC Topic 810, Consolidation, changes the
approach to determining the primary beneficiary of a variable interest entity,
or VIE, and requires companies to more frequently assess whether they must
consolidate VIEs. We are required to adopt Statement 167 at the beginning of
2010. We are currently evaluating the impact, if any, of adopting Statement 167
on our future results of operations and financial condition.





In April 2009, the FASB issued Staff
Position No. FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies, or FSP FAS 141(R)-1.FSP FAS 141(R)-1, which is
incorporated in ASC Topic 805, Business Combinations, amends
and clarifies existing guidance to address application issues raised on initial
recognition and measurement, subsequent measurement and accounting and
disclosure of assets and liabilities arising from contingencies in a business
combination. FSP FAS 141(R)-1 is effective for assets and liabilities arising
from contingencies in business combinations for which the acquisition date is on
or after the beginning of the first annual reporting period beginning after
December 15, 2008. In the second quarter of 2009, we adopted the provisions of
FSP FAS 141(R)-1 effective January 1, 2009. The adoption of FSP FAS 141(R)-1 did
not have an impact on our results of operations or financial
condition.





In May 2008, the FASB issued FSP APB
14-1, which is incorporated in ASC Topic 470, Debt. FSP APB 14-1 specifies
that issuers of convertible debt instruments that may be settled in cash upon
conversion should separately account for the liability and equity components in
a manner that will reflect the entity’s nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. We adopted FSP APB 14-1 at
the beginning of 2009 and applied FSP APB 14-1 retrospectively to all applicable
prior periods. In applying FSP APB 14-1, we reclassified $29.1 million of the
carrying value of our convertible notes and $1.2 million of the issuance costs
related to the convertible notes to equity retroactive to the March 2005
issuance date. These amounts represent the equity component of the proceeds from
the convertible notes calculated assuming a 7.75% nonconvertible borrowing rate.
The discount is being accreted to “Interest expense” and the debt issuance costs
are being amortized to “Amortization of deferred financing fees” over a
seven-year term, which represents the period beginning on the March 15, 2005
issuance date of the convertible notes and ending on the first put date of March
15, 2012. Accordingly, in 2008, 2007, 2006 and 2005, we recorded $4.0 million,
$3.8 million, $3.5 million and $2.6 million of additional noncash interest
expense and $0.3 million, $0.2 million, $0.3 million and $0.2 million of
additional





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amortization
of deferred financing fees, or $0.13, $0.12, $0.11 and $0.08 per basic and
diluted share on a combined basis, respectively. We will recognize additional
noncash interest expense of $4.4 million and additional amortization of deferred
financing fees of $0.3 million for the year ended December 31, 2009, of which
$1.1 million of interest expense and $0.1 million of amortization of deferred
financing fees, or $0.03 per basic and diluted share on a combined basis, were
recognized for the current year quarter and $3.2 million of interest expense and
$0.2 million of amortization of deferred financing fees, or $0.10 per basic and
diluted share on a combined basis, were recognized for the current year
nine-month period. On January 1, 2009, as a result of adopting FSP APB 14-1, we
reduced the carrying value of the debt in “Financing obligations” by $15.2
million, decreased “Other noncurrent assets” by $2.2 million, increased “Capital
in excess of par value” by $27.9 million and increased “Accumulated deficit” by
$14.9 million on our Consolidated Balance Sheet.





ITEM3.   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, 2009. Information regarding market risks as of December 31, 2008 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,
2008.





At September 30, 2009, 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, 2009, the
convertible notes had an implied fair value of $93.2 million.





ITEM4.   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.





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PART
II


OTHER
INFORMATION





ITEM1.   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 United States. The basis of GSI’s
cross-claim was that it was the assignee of EC’s right to distribute the Mexican
Edition in the United States and other Spanish-speaking Latin American countries
outside of Mexico. On May 31, 2002, a jury returned a verdict against us in the
amount of $4.4 million. Under the verdict, Gongora was awarded no damages. GSI
and EC were awarded $4.1 million in out-of-pocket expenses and approximately
$0.3 million for lost profits, even though the jury found that EC had failed to
comply with the terms of the License Agreement. On October 24, 2002, the trial
court signed a judgment against us for $4.4 million plus pre- and post-judgment
interest and costs. On November 22, 2002, we filed post-judgment motions
challenging the judgment in the trial court. The trial court overruled those
motions and we vigorously pursued an appeal with the State Appellate Court
sitting in Corpus Christi challenging the verdict. We posted a bond in the
amount of approximately $9.4 million, which represented the amount of the
judgment, costs and estimated pre- and post-judgment interest, in connection
with the appeal. On May 25, 2006, the State Appellate Court reversed the
judgment by the trial court, rendered judgment for us on the majority of the
plaintiffs’ claims and remanded the remaining claims for a new trial. On July
14, 2006, the plaintiffs filed a motion for rehearing and en banc
reconsideration, which we opposed. On October 12, 2006, the State Appellate
Court denied plaintiffs’ motion. On December 27, 2006, we filed a petition for
review with the Texas Supreme Court. On January 25, 2008, the Texas Supreme
Court denied our petition for review. On February 8, 2008, we filed a petition
for rehearing with the Texas Supreme Court. On May 16, 2008, the Texas Supreme
Court denied our motion for rehearing. The posted bond has been canceled and the
remaining claims will be retried. We, on advice of legal counsel, believe that
it is not probable that a material judgment against us will be obtained. In
accordance with Financial Accounting Standards Board Accounting Standards
Codification Topic 450, Contingencies,or ASC Topic
450, no liability has been accrued.





On April 12, 2004, J. Roger Faherty, or
Faherty, filed suit in the United States District Court for the Southern
District of New York against Spice Entertainment Companies, or Spice, Playboy
Enterprises, Inc., or Playboy, Playboy Enterprises International, Inc., or PEII,
D. Keith Howington, Anne Howington and Logix Development Corporation, or Logix.
The complaint alleges that Faherty is entitled to statutory and contractual
indemnification from Playboy, PEII and Spice with respect to defense costs and
liabilities incurred by Faherty in the litigation described in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2008, or the Logix
litigation. The complaint further alleges that Playboy, PEII, Spice, D. Keith
Howington, Anne Howington and Logix conspired to deprive Faherty of his alleged
right to indemnification by excluding him from the settlement of the Logix
litigation. On June 18, 2004, a jury entered a special verdict finding Faherty
personally liable for $22.5 million in damages to the plaintiffs in the Logix
litigation. A judgment was entered on the verdict on or around August 2, 2004.
Faherty filed post-trial motions for a judgment notwithstanding the verdict and
a new trial, but these motions were both denied on or about September 21, 2004.
On October 20, 2004, Faherty filed a notice of appeal from the verdict. As a
result of rulings by the California Court of Appeal and the California Supreme
Court as recently as February 13, 2008, Logix’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
November 2009. 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 Emerald Media Inc. seeking to add Faherty
as a judgment debtor. In the event Faherty’s indemnification and conspiracy
claims go forward against us, we believe they are without merit and that we have
good defenses against them. As such, based on the information known to us to
date, we do not believe that it is probable that a material judgment against us
will result. In accordance with ASC Topic 450, no liability has been
accrued.





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ITEM1A.  RISK FACTORS





There have been no material changes to
the factors that may affect our performance set forth in Part I, Item 1A. “Risk
Factors” in our Annual Report on Form 10-K for the fiscal year ended December
31, 2008, as updated by Part II, Item 1A. “Risk Factors” of our Quarterly
Reports on Form 10-Q for the quarters ended March 31, 2009 and June 30,
2009.





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ITEM6.  EXHIBITS





Exhibit Number
            
            Description10.1
            
            Second
      Amendment, effective April 20, 2009, to the Content License, Marketing and
      Sales Agreement, dated January 15, 2008, between Playboy.com, Inc. and
      eFashion Solutions, LLC10.2
            
            Third
      Amendment, effective May 26, 2009, to the Content License, Marketing and
      Sales Agreement, dated January 15, 2008, between Playboy.com, Inc. and
      eFashion Solutions, LLC10.3*
            
            Fourth
      Amendment, effective August 26, 2009, to the Content License, Marketing
      and Sales Agreement, dated January 15, 2008, between Playboy.com, Inc. and
      eFashion Solutions, LLC10.4*
            
            Satellite
      Capacity Lease, effective October 11, 2009, by and among Playboy
      Entertainment Group, Inc. and Transponder Encryption Services
      Corporation10.5
            
            Amended
      and Restated Affiliation and License Agreement for DTH Satellite
      Exhibition of Programming, effective August 1, 2009, between DirecTV, Inc.
      and Playboy Entertainment Group, Inc. and Spice Hot Entertainment,
      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.





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 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 6,
      2009
            By
            /s/ Linda HavardExecutive
      Vice President
              and
      Chief Financial Officer
              (Authorized
      Officer and
              Principal
      Financial and
              Accounting
      Officer)





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EXHIBIT
INDEX





Exhibit Number
            
            Description10.1
            
            Second
      Amendment, effective April 20, 2009, to the Content License, Marketing and
      Sales Agreement, dated January 15, 2008, between Playboy.com, Inc. and
      eFashion Solutions, LLC10.2
            
            Third
      Amendment, effective May 26, 2009, to the Content License, Marketing and
      Sales Agreement, dated January 15, 2008, between Playboy.com, Inc. and
      eFashion Solutions, LLC10.3*
            
            Fourth
      Amendment, effective August 26, 2009, to the Content License, Marketing
      and Sales Agreement, dated January 15, 2008, between Playboy.com, Inc. and
      eFashion Solutions, LLC10.4*
            
            Satellite
      Capacity Lease, effective October 11, 2009, by and among Playboy
      Entertainment Group, Inc. and Transponder Encryption Services
      Corporation10.5
            
            Amended
      and Restated Affiliation and License Agreement for DTH Satellite
      Exhibition of Programming, effective August 1, 2009, between DirecTV, Inc.
      and Playboy Entertainment Group, Inc. and Spice Hot Entertainment,
      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.







30