<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________
COMMISSION FILE NUMBER 1-6813
PLAYBOY ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-2258830
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
680 NORTH LAKE SHORE DRIVE, CHICAGO, IL 60611
(Address of principal executive offices) (Zip Code)
(312) 751-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
---- ----
As of January 31, 1995, there were 4,713,954 shares of Class A Common Stock,
par value $.01 per share and 15,275,349 shares of Class B Common Stock, par
value $.01 per share, outstanding.
<PAGE> 2
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
____________
Page Number
-----------
Part I. Financial Information
Condensed Consolidated Statements of Operations
for the Quarters Ended December 31, 1994 and 1993 3
Condensed Consolidated Statements of Operations
for the Six Months Ended December 31, 1994 and 1993 4
Condensed Consolidated Balance Sheets
at December 31, 1994 and June 30, 1994 5
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended December 31, 1994 and 1993 6
Notes to Condensed Consolidated Financial
Statements 7-9
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-16
Part II. Other Information 17-18
2
<PAGE> 3
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the Quarters Ended December 31 (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Net revenues $ 64,663 $ 59,636
-------- --------
Costs and expenses:
Cost of sales (56,345) (52,791)
Selling and administrative expenses (7,027) (8,230)
-------- --------
Total costs and expenses (63,372) (61,021)
-------- --------
Operating income (loss) 1,291 (1,385)
-------- --------
Nonoperating income (expense):
Investment income 20 8
Interest expense (178) (165)
Other, net 52 92
-------- --------
Total nonoperating expense (106) (65)
-------- --------
Income (loss) before income taxes 1,185 (1,450)
Income tax expense (184) (320)
-------- --------
Net income (loss) $ 1,001 $ (1,770)
======== ========
Weighted average number of common shares outstanding 19,986 19,913
======== ========
Net income (loss) per common share $ .05 $ (.09)
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the Six Months Ended December 31 (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Net revenues $ 121,881 $ 107,222
--------- ---------
Costs and expenses:
Cost of sales (106,970) (96,876)
Selling and administrative expenses (14,484) (16,222)
Restructuring expenses - (2,450)
--------- ---------
Total costs and expenses (121,454) (115,548)
--------- ---------
Operating income (loss) 427 (8,326)
--------- ---------
Nonoperating income (expense):
Investment income (expense), net 31 (136)
Interest expense (343) (298)
Other, net 39 58
--------- ---------
Total nonoperating expense (273) (376)
--------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 154 (8,702)
Income tax expense (381) (491)
--------- ---------
Loss before cumulative effect of change
in accounting principle (227) (9,193)
Cumulative effect of change in accounting principle - 7,500
--------- ---------
Net loss $ (227) $ (1,693)
========= =========
Weighted average number of common shares outstanding 19,979 19,903
========= =========
Income (loss) per common share:
Loss before cumulative effect of change
in accounting principle $ (.01) $ (.47)
Cumulative effect of change in accounting principle - .38
--------- ---------
Net loss $ (.01) $ (.09)
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
(Unaudited)
Dec. 31, June 30,
1994 1994
--------- ---------
<S> <C> <C>
Assets
- - - ------
Cash and cash equivalents $ 1,025 $ 1,258
Receivables, net of allowances for doubtful accounts of
$3,561 and $3,155, respectively 24,227 20,590
Inventories 19,439 19,268
Programming costs 27,848 27,658
Deferred subscription acquisition costs 9,703 10,086
Other current assets 11,666 8,808
-------- --------
Total current assets 93,908 87,668
-------- --------
Property and equipment, at cost 36,374 36,521
Accumulated depreciation (21,845) (20,867)
-------- --------
Property and equipment, net 14,529 15,654
-------- --------
Programming costs - noncurrent 5,631 4,108
Trademarks 10,809 10,106
Net deferred tax assets 7,276 7,153
Other noncurrent assets 7,013 7,232
-------- --------
Total assets $139,166 $131,921
======== ========
Liabilities
- - - -----------
Short-term borrowings $ 10,000 $ 6,000
Current financing obligations 330 1,827
Accounts payable 17,463 13,680
Accrued salaries, wages and employee benefits 2,413 3,811
Reserves for losses on disposals of discontinued operations 794 890
Income taxes payable 740 780
Deferred revenues 43,157 41,734
Other liabilities and accrued expenses 9,417 8,040
-------- --------
Total current liabilities 84,314 76,762
Long-term financing obligations 680 1,020
Other noncurrent liabilities 7,943 7,828
-------- --------
Total liabilities 92,937 85,610
-------- --------
Shareholders' Equity
- - - --------------------
Common stock, $.01 par value
Class A - 7,500,000 shares authorized; 5,042,381 issued 50 50
Class B - 30,000,000 shares authorized; 16,477,143 issued 165 165
Capital in excess of par value 36,396 36,381
Retained earnings 17,690 17,917
Less cost of treasury stock (8,072) (8,202)
-------- --------
Total shareholders' equity 46,229 46,311
-------- --------
Total liabilities and shareholders' equity $139,166 $131,921
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Six Months Ended December 31 (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Cash Flows From Operating Activities
- - - ------------------------------------
Net loss $ (227) $ (1,693)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation of property and equipment 1,267 1,448
Amortization of intangible assets 746 768
Amortization of investments in entertainment programming 9,125 7,754
Investments in entertainment programming (10,838) (10,250)
Cumulative effect of change in accounting principle - (7,500)
Net change in operating assets and liabilities (2,433) (1,346)
Net cash provided by (used for) discontinued operations (96) 578
Other, net 30 21
-------- --------
Net cash used for operating activities (2,426) (10,220)
-------- --------
Cash Flows From Investing Activities
- - - ------------------------------------
Additions to property and equipment (171) (352)
Acquisition of Critics' Choice Video, Inc. minority interest - (1,510)
Net decrease in short-term investments - 50
Other, net 16 2
-------- --------
Net cash used for investing activities (155) (1,810)
-------- --------
Cash Flows From Financing Activities
- - - ------------------------------------
Short-term borrowings 4,000 11,500
Repayment of debt (1,850) (350)
Proceeds from exercise of stock options 198 243
-------- --------
Net cash provided by financing activities 2,348 11,393
-------- --------
Net decrease in cash and cash equivalents (233) (637)
Cash and cash equivalents at beginning of period 1,258 1,903
-------- --------
Cash and cash equivalents at end of period $ 1,025 $ 1,266
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 7
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the Quarters and Six Months Ended December 31, 1994 and 1993
(A) BASIS OF PREPARATION
The financial information included herein is unaudited, but in the opinion
of management, reflects all adjustments (which include only normal
recurring adjustments, except for the restructuring expenses described
below) 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 such results and cash flows for the entire year.
These financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Annual Report on
Form 10-K for the fiscal year ended June 30, 1994 of Playboy Enterprises,
Inc. and Subsidiaries (the "Company").
(B) RESTRUCTURING EXPENSES
A $2.5 million charge was recorded in the six months ended December 31,
1993 related to a reduction in the Company's work force of approximately
10%. This charge, which was recorded in the first quarter of fiscal 1994,
primarily related to employee termination payments associated with
approximately 60 positions that were eliminated through a combination of
early retirement, attrition and layoffs. Employee termination payments of
$0.2 million and $0.4 million, respectively, were made in the quarter and
six months ended December 31, 1994 related to restructurings in the prior
year.
(C) INVESTMENT INCOME (EXPENSE), NET
The Company realized a net loss of $150,000 in the six months ended
December 31, 1993 related to the maturity of offsetting options on
interest rate swap agreements entered into late in fiscal 1993.
(D) INCOME TAXES
The adoption of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, in fiscal 1994 resulted in the recognition of
$7.5 million, or $0.38 per share, of deferred federal tax benefits. This
amount is included in the net loss for the six months ended December 31,
1993 as "Cumulative effect of change in accounting principle." The
Company's net deferred tax asset at December 31, 1994 remained at $7.5
million. As reported in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994, the significant components of the net
deferred tax asset include net operating loss, capital loss and tax credit
carryforwards. Of the $7.5 million net deferred tax asset included in the
Condensed Consolidated Balance Sheet at December 31, 1994 and June 30,
1994, $0.2 million and $0.3 million, respectively, are included in "Other
current assets" with the remainder segregated as "Net deferred tax
assets".
Realization of deferred tax benefits is dependent upon the Company's
ability to generate taxable income in future years. The recognition of
benefits in the financial statements is based upon projections by
management of future operating income and the anticipated reversal of
temporary differences that will result in taxable income. Projections of
future earnings were based on adjusted historical earnings.
In order to fully realize the net deferred tax asset of $7.5 million, the
Company will need to generate future taxable income of approximately $22.1
million. Management believes that it is more likely than not that the
required amount of taxable income will be realized. Management will
periodically reconsider the assumptions utilized in the projection of
future earnings and, if warranted, increase or decrease the amount of
deferred tax benefits recognized through an adjustment to the valuation
allowance.
7
<PAGE> 8
(E) INVENTORIES
Inventories, which are stated at the lower of cost (average cost, specific
cost and first-in, first-out) or market, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
Dec. 31, June 30,
1994 1994
--------- ---------
<S> <C> <C>
Paper $ 4,778 $ 4,471
Editorial and other prepublication costs 5,831 7,252
Merchandise finished goods 8,830 7,545
-------- --------
Total inventories $ 19,439 $ 19,268
======== ========
</TABLE>
(F) PROGRAMMING COSTS
Effective with the fourth quarter of fiscal 1994, the Company revised its
amortization method for licensed film costs as a result of its decision to
offer Playboy Television on a 24-hour basis, which resulted in a change in
the scheduling of licensed films. Licensed films will be aired throughout
the term of the license period, and related costs will be amortized over
such period, generally three years. This change in accounting estimate
resulted in a decrease in programming expense (and an increase in the
Company's net income) of $0.3 million, or $0.01 per share, for the quarter
ended December 31, 1994. This change in estimate resulted in a decrease
in programming expense (and a decrease in the Company's net loss) of $0.5
million, or $0.03 per share, for the six months ended December 31, 1994.
There was no related net income tax effect as the additional income tax
expense resulting from the lower programming expense was offset by a
corresponding change in the valuation allowance related to the deferred
tax asset established with the adoption of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes.
(G) TREASURY STOCK
Treasury stock consisted of 328,427 Class A common shares and 1,201,988
Class B common shares at December 31, 1994. At June 30, 1994, treasury
stock consisted of 332,927 Class A common shares and 1,222,254 Class B
common shares.
(H) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
During the six months ended December 31, 1993, the Company had noncash
investing and financing activities related to its July 1988 purchase of an
80% interest in Critics' Choice Video, Inc. Effective July 1, 1993, the
Company acquired the remaining 20% interest in Critics' Choice Video, Inc.
for $3.0 million, which consisted of $1.5 million in cash and one-year
promissory notes totaling $1.5 million, which were paid July 1, 1994.
(I) REVOLVING LINE OF CREDIT
In January 1995, the Company and its banks negotiated an extension of the
existing $22.5 million revolving line of credit until February 1995. In
February 1995, the Company entered into a $30.0 million revolving line of
credit, collateralized by substantially all of the Company's assets, which
will mature on March 31, 1995. The Company and its banks expect to extend
the maturity date of the credit agreement to September 30, 1997, with a
decrease in the line to $19.5 million in December 1995. The extension is
subject to the successful negotiation of financial covenants, which
pertain to cash flow, net worth and the ratio of funded debt to total
capital.
8
<PAGE> 9
(J) ADVERTISING COSTS
The Company has adopted the provisions of Statement of Position 93-7,
Reporting on Advertising Costs ("SOP 93-7"), effective July 1, 1994. In
December 1994, a Practice Bulletin was issued which clarified the
provisions of SOP 93-7. The Company is currently determining the impact
on its financial condition and results of operations of adopting the
provisions of SOP 93-7 based on information set forth in the Practice
Bulletin.
(K) CONTINGENCIES
In January 1993, the Company received a General Notice from the United
States Environmental Protection Agency (the "EPA") as a "potentially
responsible party" ("PRP") in connection with a site identified as the
Southern Lakes Trap & Skeet Club, apparently located at the Resort-Hotel
in Lake Geneva, Wisconsin (the "Resort"), formerly owned by a subsidiary
of the Company. The Resort was sold by the Company's subsidiary to LG
Americana-GKP Joint Venture in 1982. Two other entities were also
identified as PRPs in the notice. The notice relates to actions that may
be ordered taken by the EPA to sample for and remove contamination in
soils and sediments, purportedly caused by skeet shooting activities at
the Resort property. During fiscal 1994, the EPA advised the Company of
its position that the area of land requiring remediation is approximately
twice the size of the initial site. The Company believes that it has
established adequate reserves, which totaled $0.8 million at December 31,
1994, to cover the eventual cost of its anticipated share (based on an
agreement with one of the other PRPs) of any remediation that may be
agreed upon. The Company is also reviewing available defenses, insurance
coverage and claims it may have against third parties.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In millions of dollars, except per share amounts)
RESULTS OF OPERATIONS
The Company's revenues increased 8% to $64.7 for the quarter ended
December 31, 1994 compared to $59.6 for the prior year quarter. Revenues were
$121.9 for the six months ended December 31, 1994, a 14% increase over revenues
of $107.2 for the six months ended December 31, 1993. These increases were
primarily due to higher revenues from the Publishing and Entertainment Groups.
The Company reported operating income of $1.3 for the quarter ended
December 31, 1994 compared to an operating loss of $1.4 in the prior year
quarter. For the six months ended December 31, 1994, the Company had operating
income of $0.4 compared to an operating loss of $8.3 in the prior year. These
increases were primarily due to significant improvements in the operating
performances of the Publishing and Entertainment Groups, partially offset by
lower operating income from the Product Marketing Group. Additionally, the
prior year six-month period included a $2.5 restructuring charge primarily
related to employee termination payments as a result of a reduction in the
Company's work force.
Net income for the quarter ended December 31, 1994 was $1.0, or $0.05 per
share, compared to a net loss of $1.8, or $0.09 per share, for the prior year
quarter. For the six months ended December 31, 1994, the net loss was $0.2, or
$0.01 per share, compared to a net loss of $1.7, or $0.09 per share, for the
six months ended December 31, 1993. The net loss for the six months ended
December 31, 1993 included a one-time tax benefit of $7.5 that resulted from
the adoption of Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes, which required a change in the method of accounting for
income taxes.
The Company's operating income of $0.4 and net loss of $0.2, or $0.01 per
share, for the six months ended December 31, 1994 compared to an operating loss
of $5.9 and a net loss of $6.7, or $0.34 per share, for the six months ended
December 31, 1993, excluding the impact of the $2.5 restructuring charge and
the $7.5 one-time tax benefit.
Several of the Company's businesses can experience variations in quarterly
performance. For example, Playboy magazine newsstand revenues vary from issue
to issue, with revenues generally higher for holiday issues and any issues
including editorial or pictorial features that generate unusual public
interest. Advertising revenues also vary from quarter to quarter, depending on
product introductions by advertising customers, changes in advertising buying
patterns and economic conditions. In addition, Entertainment Group revenues
vary with the timing of sales to international customers, including the timing
of new multiyear agreements to both program and supply programming for
exclusive Playboy-branded time slots on overseas pay television services. As a
result, the Company's performance in any quarterly period is not necessarily
reflective of full-year or longer-term trends.
PUBLISHING GROUP
The revenues and operating income of the Publishing Group were as follows
for the periods indicated below:
<TABLE>
<CAPTION>
REVENUES OPERATING INCOME
------------------------------------ ----------------------------------
QUARTERS SIX MONTHS QUARTERS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
--------------- ---------------- --------------- ---------------
1994 1993 1994 1993 1994 1993 1994 1993
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Playboy Magazine . . . . . . . . $ 29.1 $ 29.1 $ 54.1 $ 52.5 $ 3.3 $ 1.6 $ 4.3 $ 1.8
Playboy-Related Businesses . . . 4.9 4.9 11.8 10.3 1.7 1.5 3.9 3.0
------ ------ ------ ------ ------ ------ ------ ------
Subtotal . . . . . . . . . . 34.0 34.0 65.9 62.8 5.0 3.1 8.2 4.8
Catalogs . . . . . . . . . . . . 17.4 13.8 30.7 22.9 1.9 1.2 3.5 2.0
Administrative Expenses
and Other . . . . . . . . . . - - - - (0.9) (1.2) (2.2) (2.9)
------ ------ ------ ------ ------ ------ ------ -----
Total . . . . . . . . . . . $ 51.4 $ 47.8 $ 96.6 $ 85.7 $ 6.0 $ 3.1 $ 9.5 $ 3.9
====== ====== ====== ====== ====== ======= ======= =======
</TABLE>
10
<PAGE> 11
Playboy Magazine
Playboy magazine circulation revenues increased 7%, or $1.3, and 8%, or
$2.7, for the quarter and six months ended December 31, 1994, respectively,
compared to the prior year. These increases for the quarter and six-month
period were primarily due to 6% and 5% higher subscription revenues,
respectively, in the current year combined with favorable newsstand sales
adjustments related to prior issues in the current year compared to unfavorable
adjustments related to prior issues in the prior year. Additionally,
benefiting the comparison for the six-month period was a 7% increase in U.S.
and Canadian newsstand copies sold in the current year. Advertising revenues
for the quarter and six months ended December 31, 1994 decreased 11% and 6%,
respectively, compared to the prior year. The decreases in the quarter and
six-month period were partially due to 6% and 2% more advertising pages,
respectively, in the prior year, which included the January 1994 40th
anniversary issue that contained a higher than normal number of advertising
pages. Additionally, average net revenue per page declined despite a 5% rate
increase effective with the last issue of the fiscal 1995 second quarter
principally as a result of higher frequency and special discounts in the
current year and a change in the mix of advertising pages sold. Advertising
sales for the third quarter fiscal 1995 issues of the magazine are closed, and
the Company expects to report 4% fewer advertising pages for the quarter
compared to the prior year.
For the quarter ended December 31, 1994, Playboy magazine operating income
more than doubled primarily due to a significant decrease in manufacturing
costs, slightly offset by an increase in direct costs and operating expenses.
Manufacturing costs for the quarter ended December 31, 1994 decreased 19%
compared to the prior year principally due to the increased size of the January
1994 40th anniversary issue of the magazine in the prior year quarter, combined
with lower paper prices, which began impacting the Company in the fourth
quarter of fiscal 1994 and were in effect for most of the current year.
However, paper price increases are expected in both the third and fourth
quarters, which will result in quarter-to-quarter higher average paper prices
of approximately 16% and 11%, respectively. For the quarter and six months
ended December 31, 1994, average paper prices were 10% and 7% lower,
respectively, than the prior year. Direct costs and operating expenses
increased 2% for the quarter compared to the prior year primarily due to an
increase in subscription acquisition amortization expense and a legal
settlement with the Company's former distributor of Playboy magazine, partially
offset by lower advertising promotion expenses in the current year and expenses
in the prior year associated with the 40th anniversary issue. For the six
months ended December 31, 1994, operating income more than doubled primarily
due to the increase in revenues and a 12% decrease in manufacturing costs,
principally due to the previously discussed increased size of the 40th
anniversary issue in the prior year and lower paper prices in the current year,
partially offset by an increase in direct costs and operating expenses. Direct
costs and operating expenses increased 4% for the six months ended December 31,
1994, principally due to an increase in subscription acquisition amortization
expense, higher editorial costs associated with celebrity pictorials and the
previously discussed legal settlement in the current year, partially offset by
lower advertising promotion expenses in the current year and expenses in the
prior year associated with restructuring and the 40th anniversary issue.
Direct costs and operating expenses will be impacted approximately $0.5 in the
second half of fiscal 1995 due to a 14% postal rate increase effective January
1, 1995.
Playboy-Related Businesses
For the quarter and six months ended December 31, 1994, revenues from the
Company's Playboy-related businesses increased 2% and 14%, respectively,
compared to the prior year primarily due to increased revenues from ancillary
businesses combined with higher royalties from foreign editions of Playboy
magazine. For the quarter ended December 31, 1994, the increases discussed
above were mostly offset by lower revenues from the sale of newsstand specials
as a result of the publication of an additional newsstand special in the prior
year quarter, partially offset by higher average copy sales in the current year
quarter.
For the quarter ended December 31, 1994, operating income increased 12%
primarily due to the net revenue increase combined with lower manufacturing
costs in the current year quarter due to the previously mentioned additional
special published in the prior year. For the six months ended December 31,
1994, operating income increased 33% compared to the prior year largely due to
the revenue increase.
11
<PAGE> 12
Catalogs
For the quarter and six months ended December 31, 1994, revenues of the
catalog business increased 25% and 34%, respectively, compared to the prior
year. These increases were due to higher sales volume from all of the
catalogs, encompassing the Critics' Choice Video, Collectors' Choice Music,
which was first mailed to prospective customers in October 1993, and Playboy
catalogs. For the quarter and six months ended December 31, 1994, operating
income increased 51% and 74%, respectively, compared to the prior year due to
higher operating income from all three of the Company's catalogs. The higher
operating income from the Critics' Choice Video catalog was primarily the
result of an improved operating margin in the current year, despite higher
expenses due to increased mailings to prospective customers, partially
attributable to a licensing agreement entered into in February 1994 that allows
the Company to purchase inventory at a lower cost. Since the launch of the
Collectors' Choice Music catalog in October 1993, it has continued to generate
increasing profits while expanding circulation. Catalog direct costs will be
impacted approximately $0.4 in the second half of fiscal 1995 due to the
previously discussed paper price and postal rate increases.
Administrative Expenses and Other
The Publishing Group's administrative expenses and other costs decreased
25% for both the quarter and six months ended December 31, 1994 compared to the
prior year primarily due to lower salary expense due in part to an unfilled
position in the current year, partially offset by the receipt of a management
fee from duPont Publishing, Inc. in the prior year.
ENTERTAINMENT GROUP
The revenues and operating loss of the Entertainment Group were as follows
for the periods indicated below:
<TABLE>
<CAPTION>
QUARTERS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
------------- -------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Domestic Pay Television:
Pay-Per-View . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.9 $ 2.2 $ 5.6 $ 4.3
Monthly Subscription . . . . . . . . . . . . . . . . . . . . . . . 1.7 1.9 3.5 3.9
Satellite Direct-to-Home and Other . . . . . . . . . . . . . . . . 2.2 1.5 4.3 2.9
----- ----- ----- -----
Total Domestic Pay Television . . . . . . . . . . . . . . . . . . 6.8 5.6 13.4 11.1
Domestic Home Video . . . . . . . . . . . . . . . . . . . . . . . . 2.3 2.0 4.2 3.5
International Television and Home Video . . . . . . . . . . . . . . 2.2 2.6 4.0 3.6
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2 (0.1) 0.3 (0.2)
----- ----- ----- -----
Total Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $11.5 $10.1 $21.9 $18.0
===== ===== ===== =====
OPERATING LOSS
Profit Contribution Before Programming Expense . . . . . . . . . . . $ 3.9 $ 2.9 $ 7.0 $ 3.1
Programming Expense . . . . . . . . . . . . . . . . . . . . . . . . (4.8) (4.1) (8.9) (7.6)
----- ----- ----- -----
Total Operating Loss . . . . . . . . . . . . . . . . . . . . . . $(0.9) $(1.2) $(1.9) $(4.5)
===== ===== ===== =====
</TABLE>
The following discussion focuses on the profit contribution of each
business before programming expense ("profit contribution"). Profit
contribution increased $1.0 and $3.9, respectively, for the quarter and six
months ended December 31, 1994, compared to the prior year.
12
<PAGE> 13
Domestic Pay Television
For the quarter and six months ended December 31, 1994, pay-per-view
revenues for the domestic pay television service, Playboy Television, were 33%
and 31% higher, respectively, compared to the prior year, primarily
attributable to higher buy rates, an increase in the number of addressable
homes to which Playboy Television was available, and higher average revenue per
buy in the current year. At December 31, 1994, Playboy Television was
available to 10.4 million addressable homes, an 8% increase compared to
December 31, 1993. The number of addressable homes to which Playboy Television
was available at December 31, 1994 increased 0.5 million, or 5%, from September
30, 1994. Management believes that beginning in the fourth quarter of fiscal
1993, growth of the Company's domestic pay television business slowed due to
the effects of cable reregulation by the Federal Communications Commission
("FCC"), which has resulted in a slowdown in the industry's rollout of
addressability. Additionally, competition for channel space has also
contributed to the slower growth as cable operators have utilized available
channel space for new cable networks in connection with mandated retransmission
consent agreements and for other new services, including adult movie pay
television services. Management believes that growth will continue to be
affected in the near term as the cable television industry responds to the
FCC's initial rules and to subsequent modifications, including the recently
announced "going-forward rules". Over the coming months, management expects to
incur some fallout in growth of addressable homes related to these
"going-forward rules," as a result of cable operators being provided with
incentives to add basic services. Nevertheless, management believes that
ultimately reregulation should benefit pay-per-view services as cable operators
seek unregulated sources of revenue. Monthly subscription revenues declined 7%
and 10%, respectively, for the quarter and six months ended December 31, 1994,
compared to the prior year primarily as a result of a decline in the average
number of subscribing households. The number of monthly subscribers at
December 31, 1994 was flat compared to June 30, 1994. Satellite direct-to-home
and other revenues were 41% and 46% higher for the quarter and six months ended
December 31, 1994, respectively, compared to the prior year. The increases
were primarily due to 52% and 55% increases in revenues, respectively, from
sales of Playboy Television to home satellite dish viewers, due to selling
directly to the backyard satellite dish market, distribution by commercial
retailers of satellite programming, increased emphasis on consumer marketing,
and new revenues from the launch of Playboy Television on DIRECTV, the first
commercial digital broadcast satellite service.
Profit contribution for domestic pay television increased $0.2 and $0.5,
respectively, for the quarter and six months ended December 31, 1994 as the net
increases in revenues were partially offset by expenses in the current year
related to selling directly to the backyard satellite dish market and the
absence of sublease income from the Company's satellite transponder in the
current year. As a result of the Company's move in May 1994 to 24-hour
availability for Playboy Television, it no longer receives monthly sublease
income of approximately $0.1, the loss of which was completely offset for the
first time during the second quarter of fiscal year 1995. At December 31,
1994, Playboy Television was available in 2.4 million homes on a 24-hour basis.
Domestic Home Video
Domestic home video revenues increased $0.3 for the quarter ended December
31, 1994 compared to the prior year primarily due to adjustments in the prior
year quarter attributable to weak sales of fiscal 1993 titles combined with
revenues in the current year quarter related to the sale of the distribution
rights and the remaining inventory of O.J. Simpson: Minimum Maintenance
Fitness for Men ("Minimum Maintenance"). Partially offsetting these increases
were lower sales of new releases in the current year quarter and higher average
revenue per unit in the prior year quarter principally attributable to the
release of a higher-priced rental title. For the six-month period, revenues
increased $0.7 compared to the prior year primarily due to the adjustments in
the prior year attributable to the fiscal 1993 titles, higher sales of catalog
titles and the previously discussed sale of Minimum Maintenance in the current
year, partially offset by higher average revenue per unit in the prior year
principally attributable to the release of two higher-priced rental titles.
Profit contribution increased $0.8 and $1.8 for the quarter and six months
ended December 31, 1994, respectively, compared to the prior year principally
due to the increases in revenues in the current year combined with marketing
expenses in the prior year attributable to the fiscal 1993 titles. Partially
offsetting the increases in profit contribution were direct costs in the
current year related to the sale of Minimum Maintenance, which mostly offset
the previously discussed related revenues resulting in immaterial profit
contribution.
13
<PAGE> 14
International Television and Home Video
For the quarter and six months ended December 31, 1994, revenues and
profit contribution of the international television and home video businesses
both decreased $0.4 and increased $0.4, respectively, compared to the prior
year. These changes were primarily due to higher international television
revenues in the current year quarter and six-month period associated with
multiyear agreements, more than, and partially offset by, respectively, an
unfavorable adjustment in the current year related to revenues associated with
a multiyear agreement recorded in the prior year. Variations in quarterly
performance are caused by revenues and profit contribution from multiyear
agreements being recognized depending upon the timing of program delivery,
license periods and other factors.
Programming Expense
Programming amortization expense associated with the Entertainment Group
businesses discussed above increased $0.7 and $1.3 for the quarter and six
months ended December 31, 1994, respectively, compared to the prior year
primarily due to increased investments in entertainment programming and the
higher revenues from the international television multiyear agreements,
partially offset by the favorable effect of the previously mentioned change in
accounting estimate. For further discussion see Note F of Notes to Condensed
Consolidated Financial Statements.
Other
For the quarter and six months ended December 31, 1994, the operating
performance of the Entertainment Group's other businesses increased $0.4 and
$0.5, respectively, on $0.3 and $0.5 increases in revenues for the quarter and
six-month period, respectively. These increases were primarily due to
adjustments in the prior year related to the home video release of the
documentary film Hugh Hefner: Once Upon A Time.
The Entertainment Group's administrative expenses and other costs for the
quarter ended December 31, 1994 decreased $0.1 compared to the prior year
quarter. For the six months ended December 31, 1994, administrative expenses
and other costs decreased $0.8 compared to the prior year primarily due to
restructuring expenses of $0.6 in the prior year.
PRODUCT MARKETING GROUP
The revenues and operating income of the Product Marketing Group were as
follows for the periods indicated below:
<TABLE>
<CAPTION>
QUARTERS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
-------------- --------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES . . . . . . . . . . . . . . . . . . . . . . $ 1.8 $ 1.7 $ 3.4 $ 3.5
===== ===== ===== =====
OPERATING INCOME . . . . . . . . . . . . . . . . . . $ 0.1 $ 0.6 $ 0.5 $ 1.1
===== ===== ===== =====
</TABLE>
Revenues for the quarter ended December 31, 1994 increased $0.1 compared
to the prior year largely due to higher international product licensing
royalties, partially offset by lower royalties from a principal Sarah Coventry
licensee experiencing financial difficulties, resulting in the Company's
termination of the licensing agreement. Operating income for the quarter
decreased as the net increase in revenues was more than offset by higher
marketing expenses, and bad debt expense recorded in the current year quarter
related to the Sarah Coventry licensee previously discussed.
14
<PAGE> 15
Revenues for the six months ended December 31, 1994 decreased $0.1 as
higher international product licensing royalties in the current year were more
than offset by revenues in the prior year related to certain businesses that
have been discontinued and lower royalties in the current year from the Sarah
Coventry licensee previously discussed. Operating income for the six months
ended December 31, 1994 decreased largely due to the net decrease in revenues
combined with higher marketing, bad debt, and brand development and research
expenses in the current year.
CORPORATE ADMINISTRATION AND PROMOTION
Corporate administration and promotion expenses of $3.9 and $7.7 for the
quarter and six months ended December 31, 1994, respectively, decreased $0.1,
or 2%, and $1.1, or 12%, respectively, compared to the prior year periods. The
decrease for the six-month period was primarily due to restructuring expenses
of $0.8 in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1994, the Company had $1.0 in cash and cash equivalents
and $10.0 in short-term borrowings, compared to $1.3 in cash and cash
equivalents and $6.0 in short-term borrowings at June 30, 1994. The Company
expects to meet its short-term and long-term cash requirements through its
revolving line of credit and cash generated from operations. See Cash Flows
From Financing Activities below.
Cash Flows from Operating Activities
Net cash used for operating activities was $2.4 for the six months ended
December 31, 1994 compared to $10.2 for the prior year period principally due
to the Company's improved operating performance in the current year. The
Company invested $10.8 in Company-produced and licensed entertainment
programming during the first six months of fiscal 1995 compared to $10.3 in the
prior year period, and expects to invest approximately $10.4 in such
programming during the remainder of fiscal 1995. Net cash provided by
discontinued operations in fiscal 1994 of $0.6 resulted from a United Kingdom
tax refund in connection with the settlement in fiscal 1993 of litigation
related to the Company's discontinued United Kingdom gaming operations.
Cash Flows from Investing Activities
Net cash used for investing activities was $0.2 for the six months ended
December 31, 1994 compared to $1.8 for the prior year period. Under the terms
of its July 1988 purchase of an 80% interest in Critics' Choice Video, Inc.,
effective July 1, 1993, the Company acquired the remaining 20% interest in
Critics' Choice Video, Inc. for $3.0, which consisted of $1.5 in cash and
one-year promissory notes totaling $1.5, which were paid July 1, 1994.
Cash Flows from Financing Activities
Net cash provided by financing activities was $2.3 for the six months
ended December 31, 1994 compared to $11.4 for the prior year period. This
decrease was principally due to a $7.5 lower increase in the level of
short-term borrowings under the Company's revolving line of credit in the
current year combined with the payment on July 1, 1994 of the $1.5 promissory
notes referred to above.
In January 1995, the Company and its banks negotiated an extension of the
existing $22.5 revolving line of credit until February 1995. In February 1995,
the Company entered into a $30.0 revolving line of credit, collateralized by
substantially all of the Company's assets, which will mature on March 31, 1995.
The Company and its banks expect to extend the maturity date of the credit
agreement to September 30, 1997, with a decrease in the line to $19.5 in
December 1995. The extension is subject to the successful negotiation of
financial covenants, which pertain to cash flow, net worth and the ratio of
funded debt to total capital.
15
<PAGE> 16
Income Taxes
Based on current tax law, the Company must generate approximately $22.1 of
future taxable income (net of $6.4 of taxable income that the Company will
report as a result of the automatic reversal of existing taxable temporary
differences between asset and liability values for financial reporting and
income tax purposes) prior to the expiration of the Company's net operating
loss carryforwards ("NOLs") for full realization of the net deferred tax asset.
At June 30, 1994, the Company had NOLs of $51.6 for tax purposes, with $3.2
expiring in 1998, $13.6 expiring in 2001, $8.9 expiring in 2003, $8.2 expiring
in 2004, $1.1 expiring in 2007, $1.1 expiring in 2008 and $15.5 expiring in
2009.
Although the Company reported a taxable loss in the first six months of
fiscal 1995 and in each of fiscal years 1994, 1993 and 1992, management
believes that it is more likely than not that a sufficient level of taxable
income will be generated prior to the expiration of the Company's NOLs to
realize the $7.5 net deferred tax asset recorded at December 31, 1994.
Following is a summary of the bases for management's belief that it is more
likely than not that the net deferred tax asset of $7.5 will be realized:
. Management reviewed the components of the Company's NOLs and determined
that they primarily resulted from several nonrecurring events, which were
not indicative of the Company's ability to generate future earnings.
. As a result of the restructurings implemented in fiscal 1994, management
expects operating expenses to be reduced by approximately $3.3 on an
annual basis.
. The Publishing and Product Marketing Groups continue to generate earnings,
while the Company's substantial investments in the Entertainment Group
should lead to increased earnings potential in future years.
. In assessing the Company's ability to generate future earnings, management
considered fiscal 1993 as a base year and adjusted for one-time items,
which indicated ongoing earnings potential, assuming no growth, more than
sufficient to fully utilize the Company's net deferred tax asset over the
life of the asset.
. The Company has several opportunities to accelerate taxable income into
the NOL carryforward period. Tax planning strategies would include the
capitalization and amortization versus immediate deduction of circulation
expenditures, the immediate inclusion versus deferred recognition of
prepaid subscription income, the revision of depreciation and amortization
methods for tax purposes and the sale-leaseback of certain property that
would generate taxable income in future years.
Other
In January 1993, the Company received a General Notice from the United
States Environmental Protection Agency (the "EPA") as a "potentially
responsible party" ("PRP") in connection with a site identified as the Southern
Lakes Trap & Skeet Club, apparently located at the Resort-Hotel in Lake Geneva,
Wisconsin (the "Resort"), formerly owned by a subsidiary of the Company. The
Resort was sold by the Company's subsidiary to LG Americana-GKP Joint Venture
in 1982. Two other entities were also identified as PRPs in the notice. The
notice relates to actions that may be ordered taken by the EPA to sample for
and remove contamination in soils and sediments, purportedly caused by skeet
shooting activities at the Resort property. During fiscal 1994, the EPA
advised the Company of its position that the area of land requiring remediation
is approximately twice the size of the initial site. The Company believes that
it has established adequate reserves, which totaled $0.8 at December 31, 1994,
to cover the eventual cost of its anticipated share (based on an agreement with
one of the other PRPs) of any remediation that may be agreed upon. The Company
is also reviewing available defenses, insurance coverage and claims it may have
against third parties.
The Company has adopted the provisions of Statement of Position 93-7,
Reporting on Advertising Costs ("SOP 93-7"), effective July 1, 1994. In
December 1994, a Practice Bulletin was issued which clarified the provisions of
SOP 93-7. The Company is currently determining the impact on its financial
condition and results of operations of adopting the provisions of SOP 93-7
based on information set forth in the Practice Bulletin.
16
<PAGE> 17
PART II. OTHER INFORMATION
Item 6(a) Exhibits
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF EARNINGS PER COMMON SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
December 31, December 31,
------------------- -------------------
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Primary:
- - - --------
Earnings:
Income (loss) before cumulative effect
of change in accounting principle $ 1,001 $(1,770) $ (227) $(9,193)
Cumulative effect of change in accounting principle - - - 7,500
-------- -------- -------- -------
Net income (loss) $ 1,001 $(1,770) $ (227) $(1,693)
======= ======= ======= =======
Shares:
Weighted average number of common
shares outstanding 19,986 19,913 19,979 19,903
Assuming exercise of options reduced
by the number of shares which could have
been purchased with the proceeds from
exercise of such options 245 392 208 338
------- ------- ------- -------
Weighted average number of common shares
outstanding as adjusted 20,231 20,305 20,187 20,241
======= ======= ======= =======
Primary earnings per common share:
Income (loss) before cumulative effect
of change in accounting principle $ 0.05 $ (0.09) $ (0.01) $ (0.45)
Cumulative effect of change in accounting principle - - - 0.37
-------- -------- -------- -------
Net income (loss) $ 0.05(1) $ (0.09)(2) $ (0.01)(2) $ (0.08)(2)
======= ======= ======= =======
</TABLE>
17
<PAGE> 18
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF EARNINGS PER COMMON SHARE (Continued)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
December 31, December 31,
------------------- -------------------
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Fully Diluted:
- - - --------------
Earnings:
Income (loss) before cumulative effect
of change in accounting principle $ 1,001 $(1,770) $ (227) $(9,193)
Cumulative effect of change in accounting principle - - - 7,500
------- ------- ------- -------
Net income (loss) $ 1,001 $(1,770) $ (227) $(1,693)
======= ======== ======= =======
Shares:
Weighted average number of common
shares outstanding 19,986 19,913 19,979 19,903
Assuming exercise of options reduced
by the number of shares which could have
been purchased with the proceeds from
exercise of such options 377 567 307 427
------- ------- ------- -------
Weighted average number of common shares
outstanding as adjusted 20,363 20,480 20,286 20,330
======= ======= ======= =======
Earnings per common share assuming full dilution:
Income (loss) before cumulative effect
of change in accounting principle $ 0.05 $ (0.09) $ (0.01) $ (0.45)
Cumulative effect of change in accounting principle - - - 0.37
------- ------- ------- -------
Net income (loss) $ 0.05(1) $ (0.09)(2) $ (0.01)(2) $ (0.08)(2)
======= ======= ======= =======
</TABLE>
(1) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
(2) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15
because it produces an anti-dilutive result.
18
<PAGE> 19
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 February 10, 1995 By s/David I. Chemerow
David I. Chemerow
Executive Vice President,
Finance and Operations and
Chief Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 1,025
<SECURITIES> 0
<RECEIVABLES> 24,227
<ALLOWANCES> 3,561
<INVENTORY> 19,439
<CURRENT-ASSETS> 93,908
<PP&E> 36,374
<DEPRECIATION> 21,845
<TOTAL-ASSETS> 139,116
<CURRENT-LIABILITIES> 84,314
<BONDS> 0
<COMMON> 215
0
0
<OTHER-SE> 46,014
<TOTAL-LIABILITY-AND-EQUITY> 139,166
<SALES> 121,881
<TOTAL-REVENUES> 121,881
<CGS> 106,970
<TOTAL-COSTS> 121,454
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 343
<INCOME-PRETAX> 154
<INCOME-TAX> 381
<INCOME-CONTINUING> (227)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (227)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
