<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1996
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 April 30, 1996, there were 4,713,954 shares of Class A Common Stock, par
value $.01 per share and 15,302,082 shares of Class B Common Stock, par value
$.01 per share, outstanding.
<PAGE>
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 March 31, 1996 and 1995 3
Condensed Consolidated Statements of Operations
for the Nine Months Ended March 31, 1996 and 1995 4
Condensed Consolidated Balance Sheets
at March 31, 1996 and June 30, 1995 5
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended March 31, 1996 and 1995 6
Notes to Condensed Consolidated Financial
Statements 7-8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-16
Part II. Other Information 17-18
2
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the Quarters Ended March 31 (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995*
--------- --------
<S> <C> <C>
Net revenues $ 66,257 $ 58,025
-------- --------
Costs and expenses:
Cost of sales (56,702) (51,113)
Selling and administrative expenses (7,720) (6,676)
-------- --------
Total costs and expenses (64,422) (57,789)
-------- --------
Operating income 1,835 236
-------- --------
Nonoperating income (expense):
Investment income 12 62
Interest expense (202) (221)
Other, net (103) (95)
-------- --------
Total nonoperating expense (293) (254)
-------- --------
Income (loss) before income taxes 1,542 (18)
Income tax expense (866) (329)
-------- --------
Net income (loss) $ 676 $ (347)
======== ========
Weighted average number of common shares
outstanding 20,007 19,989
======== ========
Net income (loss) per common share $ .03 $ (.02)
======== ========
</TABLE>
* Certain reclassifications have been made to conform to the current year
presentation.
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the Nine Months Ended March 31 (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995*
---------- ---------
<S> <C> <C>
Net revenues $ 200,138 $ 179,906
--------- ---------
Costs and expenses:
Cost of sales (170,884) (158,278)
Selling and administrative expenses (23,125) (20,965)
--------- ---------
Total costs and expenses (194,009) (179,243)
--------- ---------
Operating income 6,129 663
--------- ---------
Nonoperating income (expense):
Investment income 41 93
Interest expense (508) (564)
Other, net (137) (56)
--------- ---------
Total nonoperating expense (604) (527)
--------- ---------
Income before income taxes 5,525 136
Income tax expense (2,699) (710)
--------- ---------
Net income (loss) $ 2,826 $ (574)
========= =========
Weighted average number of common shares outstanding 19,996 19,982
========= =========
Net income (loss) per common share $ .14 $ (.03)
========= =========
</TABLE>
* Certain reclassifications have been made to conform to the current year
presentation.
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
(Unaudited)
March 31, June 30,
1996 1995
----------- --------
<S> <C> <C>
Assets
- ------
Cash and cash equivalents $ 214 $ 1,471
Receivables, net of allowance for doubtful accounts of
$4,012 and $4,837, respectively 27,881 24,151
Inventories 27,093 21,428
Programming costs 29,415 29,740
Deferred subscription acquisition costs 11,443 9,176
Other current assets 11,566 10,190
-------- --------
Total current assets 107,612 96,156
-------- --------
Property and equipment, at cost 37,152 36,576
Accumulated depreciation (24,956) (23,100)
-------- --------
Property and equipment, net 12,196 13,476
-------- --------
Programming costs - noncurrent 8,679 3,209
Trademarks 11,576 11,046
Net deferred tax assets 4,940 6,493
Other noncurrent assets 10,371 7,455
-------- --------
Total assets $155,374 $137,835
======== ========
Liabilities
- -----------
Short-term borrowings $ 10,500 $ 5,000
Current financing obligations 338 333
Accounts payable 21,587 19,549
Accrued salaries, wages and employee benefits 4,370 4,088
Reserves for losses on disposals of discontinued operations 725 766
Income taxes payable 952 875
Deferred revenues 48,646 42,905
Other liabilities and accrued expenses 9,726 8,621
-------- --------
Total current liabilities 96,844 82,137
Long-term financing obligations 345 687
Other noncurrent liabilities 8,099 7,921
-------- --------
Total liabilities 105,288 90,745
-------- --------
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 36,432 36,398
Retained earnings 21,372 18,546
Less cost of treasury stock (7,933) (8,069)
-------- --------
Total shareholders' equity 50,086 47,090
-------- --------
Total liabilities and shareholders' equity $155,374 $137,835
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Nine Months Ended March 31 (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1996 1995*
--------- --------
<S> <C> <C>
Cash Flows From Operating Activities
- ------------------------------------
Net income (loss) $ 2,826 $ (574)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation of property and equipment 1,794 1,900
Amortization of intangible assets 1,323 1,173
Amortization of investments in entertainment programming 13,857 13,674
Investments in entertainment programming (19,002) (16,707)
Net change in operating assets and liabilities (3,846) 849
Net cash used for discontinued operations (41) (102)
Other, net 22 38
-------- --------
Net cash provided by (used for) operating activities (3,067) 251
-------- --------
Cash Flows From Investing Activities
- -------------------------------------
Additions to property and equipment (471) (281)
Acquisitions of equity interests in international ventures (3,180) -
Other, net 150 36
-------- --------
Net cash used for investing activities (3,501) (245)
-------- --------
Cash Flows From Financing Activities
- ------------------------------------
Increase in short-term borrowings 5,500 1,700
Repayment of debt (350) (1,850)
Proceeds from exercise of stock options 161 198
-------- --------
Net cash provided by financing activities 5,311 48
-------- --------
Net increase (decrease) in cash and cash equivalents (1,257) 54
Cash and cash equivalents at beginning of period 1,471 1,258
-------- --------
Cash and cash equivalents at end of period $ 214 $ 1,312
======== ========
</TABLE>
* Certain reclassifications have been made to conform to the current year
presentation.
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the Quarters and Nine Months Ended March 31, 1996 and 1995
(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) 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, 1995 of Playboy Enterprises,
Inc. and Subsidiaries (the "Company").
(B) INCOME TAXES
------------
The Company's net deferred tax asset declined to $5.3 million at March 31,
1996 based on management's projection of fiscal 1996 taxable income. As
reported in the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1995, the significant components of the net deferred tax
asset include net operating loss, capital loss and tax credit
carryforwards. Of the $5.3 million and $6.9 million net deferred tax assets
included in the Condensed Consolidated Balance Sheets at March 31, 1996 and
June 30, 1995, respectively, $0.4 million is included in "Other current
assets" with the remainder segregated as "Net deferred tax assets".
Realization of the net deferred tax asset 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 $6.9 million
recorded at June 30, 1995, the Company will need to generate future taxable
income of approximately $20.2 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.
(C) 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>
March 31, June 30,
1996 1995
-------- -------
<S> <C> <C>
Paper $12,745 $ 7,342
Editorial and other prepublication costs 5,933 6,193
Merchandise finished goods 8,415 7,893
------- -------
Total inventories $27,093 $21,428
======= =======
</TABLE>
(D) TREASURY STOCK
--------------
Treasury stock consisted of 328,427 Class A common shares and 1,175,061
Class B common shares at March 31, 1996. At June 30, 1995, treasury stock
consisted of 328,427 Class A common shares and 1,201,294 Class B common
shares.
7
<PAGE>
(E) REVOLVING CREDIT AGREEMENT
--------------------------
In March 1996, the Company and its banks amended the Company's revolving
credit agreement. The amendment increased the line of credit from $19.5
million to $35.0 million and extended the maturity date of the line to
March 1999. The amended revolving credit agreement remains collateralized
by substantially all of the Company's assets and requires the Company to
maintain financial covenants pertaining to net worth, leverage and cash
flow.
(F) ACQUISITION
-----------
On March 29, 1996 the Company acquired an additional 45 percent interest in
VIPress Poland Sp. z o.o. ("VIPress") for approximately $300,000, including
approximately $80,000 in acquisition costs. Subsequent to this purchase,
the Company owns 90 percent of the capital stock of VIPress, which
publishes the Polish edition of Playboy magazine. The acquisition was
accounted for under the purchase method. The Company's Condensed
Consolidated Statements of Operations do not include the operating results
of VIPress as the acquisition occurred on the last business day of the
quarter and nine months ended March 31, 1996. Prior to acquiring the
additional 45 percent interest, the investment was accounted for under the
equity method and as such, the Company's proportionate share of net income
from VIPress is included in nonoperating income. The acquisition resulted
in goodwill of approximately $100,000 which will be amortized over five
years. The Company's 90 percent interest may be reduced to a minimum of 80
percent by the end of fiscal year 2000 as a result of shares that may be
sold to two managing minority partners generally pursuant to an incentive
plan that requires certain performance objectives to be met. Pro forma
results reflecting this acquisition, assuming it had been made at the
beginning of each period presented, would not be materially different from
the results reported.
(G) 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 $0.7 million at March 31, 1996, 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.
8
<PAGE>
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 14% to $66.3 for the quarter ended March
31, 1996 compared to $58.0 for the prior year quarter. Revenues were $200.1 for
the nine months ended March 31, 1996, an 11% increase over revenues of $179.9
for the nine months ended March 31, 1995. These increases were due to higher
revenues from all of the Company's Groups, primarily driven by increases in the
domestic pay television business and the Collectors' Choice Music and Critics'
Choice Video catalogs.
The Company reported operating income of $1.8 for the quarter ended March
31, 1996 compared to $0.2 in the prior year quarter. For the nine months ended
March 31, 1996, the Company had operating income of $6.1 compared to $0.7 in the
prior year. These increases were primarily due to significantly higher operating
income for the domestic pay television business, partially offset by lower
operating income for Playboy magazine. Additionally, the current year quarter
reported a meaningful increase in operating performance for the international
television and home video business, whereas the current year nine-month period
reported a significant increase in operating income from the Playboy-related
businesses.
Net income for the quarter ended March 31, 1996 was $0.7, or $0.03 per
share, compared to a net loss of $0.3, or $0.02 per share, for the prior year
quarter. For the nine months ended March 31, 1996, net income was $2.8, or $0.14
per share, compared to a net loss of $0.6, or $0.03 per share, for the nine
months ended March 31, 1995.
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 NINE MONTHS QUARTERS NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
-------------- -------------- -------------- --------------
1996 1995 1996 1995 1996 1995 1996 1995
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Playboy Magazine............ $24.5 $23.7 $78.6 $77.9 $ 0.3 $ 1.3 $ 3.5 $ 5.8
Playboy-Related Businesses.. 5.9 5.6 19.4 17.4 2.2 2.0 7.3 5.8
----- ----- ----- ----- ----- ----- ----- -----
Subtotal................. 30.4 29.3 98.0 95.3 2.5 3.3 10.8 11.6
Administrative Expenses..... - - - - (1.0) (0.7) (3.1) (2.7)
----- ----- ----- ----- ----- ----- ----- -----
Total.................. $30.4 $29.3 $98.0 $95.3 $ 1.5 $ 2.6 $ 7.7 $ 8.9
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
9
<PAGE>
Playboy Magazine
Playboy magazine circulation revenues were stable for the quarter and nine
months ended March 31, 1996 compared to the prior year. For the quarter ended
March 31, 1996, a 2% increase in subscription revenues combined with higher
favorable newsstand sales adjustments related to prior issues were offset
primarily by a 17% decline in U.S. and Canadian newsstand copies sold in the
current year quarter. For the nine-month period, a 1% increase in subscription
revenues combined with a higher average newsstand price in the current year were
offset principally by favorable newsstand sales adjustments in the prior year
related to prior years' issues and 1% fewer U.S. and Canadian newsstand copies
sold in the current year. Advertising revenues increased 8% for the quarter
ended March 31, 1996 compared to the prior year primarily due to 6% more
advertising pages in the current year quarter. Advertising revenues remained
stable for the nine-month period as 4% fewer advertising pages in the current
year were mostly offset by an increase in average net revenue per page
principally due to rate increases effective with the January 1996 and 1995
issues. Advertising sales for the fiscal 1996 fourth quarter issues of the
magazine are closed, and the Company expects to report 5% fewer advertising
pages for the quarter compared to the prior year quarter, resulting in an
expected 4% decrease in advertising pages for fiscal 1996 compared to the prior
fiscal year. Additionally, both the current year quarter and nine-month period
benefited from higher revenues from the rental of Playboy magazine's subscriber
list.
For the quarter and nine months ended March 31, 1996, Playboy magazine
operating income decreased $1.0 and $2.3, respectively, compared to the prior
year primarily due to significant increases in paper costs partially offset by a
decrease in direct costs and operating expenses and the net increases in
revenues discussed above. Manufacturing costs for the quarter and nine months
ended March 31, 1996 increased 32% and 28%, respectively, compared to the prior
year principally due to higher paper prices which began impacting the Company in
the second half of fiscal 1995. For the quarter and nine months ended March 31,
1996, average paper prices were 49% and 52% higher, respectively, than the prior
year. Paper prices have begun to stabilize, however it is too early to know the
timing and amount of reductions except that the Company does not expect a
favorable impact for the fourth quarter of fiscal 1996 or the first quarter of
fiscal 1997 compared to the respective prior year quarters. Direct costs and
operating expenses decreased 4% and 7%, respectively, for the quarter and nine
months ended March 31, 1996 largely due to lower subscription acquisition
amortization, as a result of improving efficiencies by lowering the advertising
rate base in the current year, and advertising sales expenses in the current
year. Additionally, editorial costs increased for the quarter ended March 31,
1996 principally as a result of higher photo costs related to current year
quarter issues, and decreased for the nine-month period principally as the
result of an additional celebrity pictorial in the prior year. Also favorably
impacting the nine-month period was a legal settlement in the prior year with
the Company's former distributor of Playboy magazine.
Playboy-Related Businesses
For the quarter and nine months ended March 31, 1996, operating income from
the Company's Playboy-related businesses increased $0.2 and $1.5, respectively,
on $0.3 and $2.0 increases, respectively, in revenues. These increases were
primarily due to higher royalties from Playboy foreign editions in the current
year. Partially offsetting the increase for the quarter ended March 31, 1996
were lower revenues from the sale of newsstand specials principally as a result
of 26% fewer copies sold in the current year quarter due in part to the mix of
titles sold. Partially offsetting the above was the favorable impact of a $1.00
increase in the cover price to $6.95 in most of the country in the fourth
quarter of the prior year. Additionally, the nine-month period was favorably
impacted by higher revenues from the sale of newsstand specials largely due to
the $1.00 increase in the cover price.
Administrative Expenses
The Publishing Group's administrative expenses increased $0.3 and $0.4,
respectively, for the quarter and nine months ended March 31, 1996 primarily due
to higher employee medical benefit expenses and variable compensation expense
related to performance in the current year.
10
<PAGE>
CATALOG GROUP
The revenues and operating income of the Catalog Group were as follows for
the periods indicated below:
<TABLE>
<CAPTION>
QUARTERS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
------------ ------------
1996 1995 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
REVENUES.......... $18.6 $15.9 $53.5 $46.5
===== ===== ===== =====
OPERATING INCOME.. $ 1.6 $ 1.4 $ 4.2 $ 4.6
===== ===== ===== =====
</TABLE>
For the quarter and nine months ended March 31, 1996, revenues of the
Catalog Group increased 17% and 15%, respectively, compared to the prior year
primarily due to higher sales volume from all of the Company's catalogs,
primarily the Collectors' Choice Music and Critics' Choice Video catalogs. The
increased revenues related to the Critics' Choice Video catalog were primarily
attributable to increased circulation and a strong response to a competitive
pricing strategy implemented in the second quarter of the current year in
reaction to lower response rates in the two prior quarters which the Company
believes were due in part to competition from mass marketers which offer popular
videos at deeply-discounted prices. The higher revenues from the Collectors'
Choice Music and Playboy catalogs were primarily due to increased circulation,
combined with a strong response in the quarter to the Playboy catalog.
For the quarter ended March 31, 1996, operating income increased 12%
compared to the prior year quarter as the increase in revenues was sufficient to
absorb higher expenses due to paper price and postal rate increases and expanded
mailings to prospective customers. This was the second consecutive quarter in
fiscal 1996 where there was an increase in operating income compared to last
year and these favorable results brought down the nine-month comparative decline
in operating income, which was also impacted by the higher expenses, to 8%.
ENTERTAINMENT GROUP
The revenues and operating income (loss) of the Entertainment Group were as
follows for the periods indicated below:
<TABLE>
<CAPTION>
QUARTERS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
------------- ---------------
1996 1995 1996 1995
----- ----- ------ ------
<S> <C> <C> <C> <C>
REVENUES
Domestic Pay Television:
Playboy Television Pay-Per-View........................ $ 3.8 $ 3.1 $ 11.2 $ 8.7
Playboy Television Monthly Subscription................ 1.7 1.7 5.2 5.2
Playboy Television Satellite Direct-to-Home and Other.. 4.7 2.6 12.2 6.9
AdulTVision............................................ 0.5 - 1.3 -
----- ----- ------ ------
Total Domestic Pay Television........................ 10.7 7.4 29.9 20.8
Domestic Home Video..................................... 2.9 2.3 7.3 6.5
International Television and Home Video................. 1.0 1.2 4.2 5.2
Movies and Other........................................ 0.5 0.2 1.2 0.5
----- ----- ------ ------
Total Revenues....................................... $15.1 $11.1 $ 42.6 $ 33.0
===== ===== ====== ======
OPERATING INCOME (LOSS)
Profit Contribution Before Programming Expense.......... $ 6.5 $ 3.4 $ 17.2 $ 10.5
Programming Expense..................................... (4.7) (4.5) (13.5) (13.4)
----- ----- ------ ------
Total Operating Income (Loss)........................ $ 1.8 $(1.1) $ 3.7 $ (2.9)
===== ===== ====== ======
</TABLE>
The following discussion focuses on the profit contribution of each
business before programming expense ("profit contribution").
11
<PAGE>
Domestic Pay Television
For the quarter and nine months ended March 31, 1996, pay-per-view revenues
for the domestic pay television service, Playboy Television, were 24% and 29%
higher, respectively, compared to the prior year, primarily attributable to
higher average buy rates, an increase in the number of cable addressable homes
to which Playboy Television was available, and higher average revenue per buy in
the current year. At March 31, 1996, Playboy Television was available to 11.3
million cable addressable homes, a 9% increase compared to March 31, 1995. Of
the 11.3 million cable addressable homes, 3.6 million could receive Playboy
Television on a 24-hour basis, a 38% increase compared to March 31, 1995. The
number of total cable addressable homes to which Playboy Television was
available at March 31, 1996 remained stable from December 31, 1995, while homes
with 24-hour availability increased 0.3 million, or 9%, over the same period.
The average annual increase in the number of total cable addressable homes to
which Playboy Television was available over the last five complete fiscal years
was 29%. Playboy Television monthly subscription revenues remained relatively
stable for both the quarter and nine months ended March 31, 1996, compared to
the prior year.
Management believes that growth in cable access for the Company's domestic
pay television business has slowed in recent years due to the effects of cable
reregulation by the Federal Communications Commission ("FCC"), including the
"going-forward rules" announced in fiscal 1995 which provide cable operators
with incentives to add basic services. Competition for channel space has been
the primary factor in the slower growth as cable operators have utilized
available channel space to comply with "must-carry" provisions, mandated
retransmission consent agreements and "leased access" provisions. Additionally,
the delay of new technology, primarily digital set-top converters which would
dramatically increase channel capacity, have contributed to the problem.
Management believes that growth will continue to be affected in the near term as
the cable television industry responds to the FCC's rules and subsequent
modifications, and develops new technology. However, as addressable technology
becomes more widely available, the Company believes that ultimately its pay
television networks will be available to the vast majority of cable homes.
In February 1996, Congress passed, and President Clinton signed into law,
The Telecommunications Act of 1996 (the "Act"). Certain provisions of the Act
are directed exclusively at cable programming in general and adult cable
programming in particular. In some cable systems, audio or momentary bits of
video of premium or pay-per-view channels may accidentally become available to
non-subscribing cable customers. This is called "bleeding" and is not a
widespread problem. Section 505 of the Act requires cable systems to install
technology in every household in every cable system that offers adult
programming, whether or not customers request it or need it, to prevent any
possibility of bleeding. Section 505 further provides that until a cable
operator complies with the Act, it must restrict the period during which the
programming is transmitted. Penalties for violation of the Act are significant
and include fines and imprisonment. The Company believes that Section 505 is
unconstitutional and on February 26, 1996, one of its subsidiaries filed a civil
suit challenging Section 505. On March 7, 1996, the Company was granted a
Temporary Restraining Order ("TRO") staying the implementation and enforcement
of Section 505. In granting the TRO, the court found that the Company had
demonstrated it is likely to succeed on the merits of its claim that Section 505
is unconstitutional. The TRO will remain in place until a judgement is rendered
at the conclusion of an evidentiary hearing for preliminary relief, which is
scheduled to commence on May 20, 1996. The Company believes that if Section 505
was to be enforced, a portion of the Company revenues attributable to its
domestic pay television services would be adversely affected due to reduced
carriage and/or reduced buy rates.
Playboy Television satellite direct-to-home and other revenues were 80% and
78% higher for the quarter and nine months ended March 31, 1996, respectively,
compared to the prior year. These increases were primarily due to higher DirecTV
revenues, as a result of a 166% increase in the subscriber universe and a change
to 24-hour programming in August 1995, and revenues in the current year from
PrimeStar, which launched Playboy Television in the fourth quarter of fiscal
1995, slightly offset by lower TVRO revenues. Playboy Television was available
to 15.9 million cable and satellite direct-to-home households, including 378,000
monthly subscribers, at March 31, 1996.
In July 1995, the Company launched a second pay television channel,
AdulTVision, as a flanker channel to Playboy Television to enhance the Company's
position against competitive pressures from adult movie channels and to drive
cable access for Playboy Television. AdulTVision is being offered on a pay-per-
view basis and is sold in combination with Playboy Television through cable
operators, and to the direct-to-home market. For the quarter and nine months
ended March 31, 1996, revenues for the new channel were $0.5 and $1.3,
respectively. The Company anticipates the channel will report a loss for fiscal
1996 but still expects that the channel will be at least break even in fiscal
1997.
12
<PAGE>
Profit contribution for domestic pay television increased $1.6 and $5.6,
respectively, for the quarter and nine months ended March 31, 1996 primarily due
to the significant increases in revenues combined with lower distribution costs
partially offset by transponder expenses related to the new channel, higher
sales and marketing costs and expenses related to the civil suit discussed above
in the current year.
Domestic Home Video
Domestic home video revenues increased $0.6 and $0.8, respectively, for the
quarter and nine months ended March 31, 1996, compared to the prior year
primarily due to higher sales of new releases in the current year, in part due
to extraordinary sales of The Best of Pamela Anderson. Additionally, there were
higher revenues in the current year quarter and nine-month period from a direct-
response continuity series deal with Time Life Inc. Recently, Time Life Inc.
replaced Warner Music Enterprises, Inc., both divisions of Time Warner Inc., as
the distributor of this series. The current year periods were also favorably
impacted by revenues from a three-year distribution agreement with Uni related
to backlist titles effective in the fourth quarter of the prior year, which are
subject to certain earn-out provisions in the final year. The current year
included the second year of the guarantee as well as a reserve established
related to the first year of the guarantee recorded in fiscal 1995 in the event
that the earn-out provisions will not be met in the final year. The prior year
included sales and returns of backlist titles prior to the inception of the
distribution agreement. These net favorable revenue comparisons more than offset
the absence of sales that were in the prior year related to a small-budget
Playboy-produced line of movies, The Eros Collection.
Profit contribution increased $0.4 for the quarter ended March 31, 1996,
compared to the prior year quarter principally due to the higher net revenues.
For the nine-month period, profit contribution increased $1.3 compared to the
prior year principally due to the net increase in revenues in the current year
combined with the timing of costs related to an industry convention.
International Television and Home Video
For the quarter ended March 31, 1996, revenues and profit contribution from
the international television and home video business decreased and increased
$0.2 and $0.9, respectively, compared to the prior year. The increase in profit
contribution is primarily due to a write-off of $1.3 recorded in the prior year
quarter related to sales to an international television distributor in fiscal
1994, partially offset by lower international home video sales to various
countries in the current year quarter. For the nine months ended March 31, 1996,
revenues and profit contribution decreased $1.0 and remained stable,
respectively, compared to the prior year. Profit contribution remained stable
primarily due to the previously discussed write-off in the prior year, mostly
offset by lower international television revenues in the current year. The lower
international television revenues are primarily the result of revenues in the
prior year associated with multiyear agreements. Partially offsetting the above
were international television revenues in the current year as a result of the
recent launch of a Playboy Television channel in Japan combined with sales to
Mexico and Germany, and an unfavorable adjustment in the prior year related to
revenues associated with a multiyear agreement recorded in fiscal 1994.
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 $0.2 and $0.1, respectively, for the
quarter and nine months ended March 31, 1996, compared to the prior year.
Movies and Other
For the quarter and nine months ended March 31, 1996, operating income from
movies and other businesses increased $0.2 and $0.3, respectively. These
increases were primarily due to $0.3 and $0.7 increases in revenues,
respectively, partially offset by higher related programming costs. The
Entertainment Group's administrative expenses for the quarter and nine months
ended March 31, 1996 remained stable and increased $0.5, respectively, compared
to the prior year. There was variable compensation expense related to
performance and higher employee medical benefit expenses in the current year,
which, for the quarter only, were offset by lower consulting expenses in the
current year.
13
<PAGE>
PRODUCT MARKETING GROUP
The revenues and operating income of the Product Marketing Group were as
follows for the periods indicated below:
<TABLE>
<CAPTION>
QUARTERS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
------------ ------------
1996 1995 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
REVENUES.......... $ 2.2 $ 1.7 $ 6.0 $ 5.1
===== ===== ===== =====
OPERATING INCOME.. $ 1.4 $ 1.2 $ 3.3 $ 2.3
===== ===== ===== =====
</TABLE>
Revenues for the quarter and nine months ended March 31, 1996 increased
$0.5 and $0.9, respectively, compared to the prior year primarily due to
significantly higher international product licensing royalties, primarily from
Asia. Partially offsetting the favorable revenue variance for the nine-month
period were lower revenues in the current year from Special Editions, Ltd., as
the Company's art publishing and art products business moves from direct sales
to licensing, combined with no royalties in the current year from a Sarah
Coventry licensee that experienced financial difficulties and was terminated in
the second quarter of the prior year. Operating income for the quarter and nine-
month period increased $0.2 and $1.0, respectively, principally due to increases
in operating income of international product licensing, primarily due to the
higher revenues. Partially offsetting the favorable variance for the quarter was
lower operating income from Sarah Coventry product licensing.
CORPORATE ADMINISTRATION AND PROMOTION
Corporate administration and promotion expenses of $4.5 and $12.8 for the
quarter and nine months ended March 31, 1996, respectively, increased 14% and
5%, respectively, compared to the prior year periods. These increases were
primarily due to variable compensation expense related to performance and higher
employee medical benefit expenses in the current year. Additionally, for the
nine-month period, higher legal and consulting expenses in the current year were
mostly offset by higher marketing project expenses in the prior year.
CASINO GAMING
The Company has announced plans to re-enter the casino gaming business. The
Company's image, international appeal and successful history in gaming makes
this a logical extension into a fast growing field of adult entertainment. The
Company, with a consortium of Greek investors, bid in June 1995 for an exclusive
gaming license on the island of Rhodes, Greece. In November 1995, the Greek
government officially notified the Company's consortium that it had won the
competitive bid for this license, and the Company expects the casino to open in
1997. The Company will receive licensing royalties on revenues of the
hotel/casino and owns less than 20% of its equity. The Company is also exploring
other gaming ventures. The Company's strategy is to enter into joint-venture
agreements with strong local partners in which it would receive license fees for
the use of the Playboy name and trademarks and consider taking equity positions.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At March 31, 1996, the Company had $0.2 in cash and cash equivalents and
$10.5 in short-term borrowings, compared to $1.5 in cash and cash equivalents
and $5.0 in short-term borrowings at June 30, 1995. The Company expects to meet
its short-term and long-term cash requirements through its revolving credit
agreement and cash generated from operations. See Cash Flows From Financing
Activities below.
14
<PAGE>
Cash Flows From Operating Activities
Net cash used for operating activities was $3.1 for the nine months ended
March 31, 1996 compared to net cash provided of $0.3 for the prior year period.
Cash used for operating assets and liabilities was $3.8 in the current year
period compared to cash provided by operating assets and liabilities of $0.8 in
the prior year. This decrease was primarily due to an increase in cash used for
inventories primarily due to additional purchases of paper related to Playboy
magazine in the current year period in part to take advantage of favorable
pricing. Also unfavorably impacting the year-to-year comparison was cash used
for accounts receivable in the current year period primarily due to domestic and
Canadian newsstand receivables due in part to lower advances from the Company's
national distributor of Playboy magazine combined with subscription receivables
as a result of lower cancellations in the current year period. Partially
offsetting the increased use of cash mentioned above was a decrease in cash used
for other current assets primarily related to the Critics' Choice Video and
Collectors' Choice Music catalogs largely as a result of the timing of prepaid
promotion costs in the prior year period. The Company invested $19.0 in Company-
produced and licensed entertainment programming during the first nine months of
fiscal 1996 compared to $16.7 in the prior year period, and expects to invest
approximately $7.2 in such programming during the remainder of fiscal 1996.
Cash Flows From Investing Activities
Net cash used for investing activities was $3.5 for the nine months ended
March 31, 1996 compared to $0.2 for the prior year period. The current year
period included investments in equity interests of $3.2 in the first overseas
Playboy television channels in the United Kingdom and Japan, the casino gaming
venture awarded an exclusive license on the island of Rhodes, Greece, and an
additional equity interest in VIPress Poland Sp. z o.o., which publishes the
Polish edition of Playboy magazine.
Cash Flows From Financing Activities
Net cash provided by financing activities was $5.3 higher for the nine
months ended March 31, 1996 compared to the prior year period. This increase was
principally due to a $3.8 higher increase in the level of short-term borrowings
under the Company's revolving line of credit in the current year combined with a
payment in the prior year related to the Company's acquisition effective July 1,
1993 of 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.
In March 1996, the Company and its banks amended the Company's revolving
credit agreement. The amendment increased the line of credit from $19.5 to $35.0
and extended the maturity date of the line to March 1999. The amended revolving
credit agreement remains collateralized by substantially all of the Company's
assets and requires the Company to maintain financial covenants pertaining to
net worth, leverage and cash flow.
Income Taxes
Based on current tax law, the Company must generate approximately $20.2 of
future taxable income prior to the expiration of the Company's net operating
loss carryforwards ("NOLs") for full realization of the $6.9 net deferred tax
asset recorded at June 30, 1995. At June 30, 1995, the Company had NOLs of $47.8
for tax purposes, with $12.1 expiring in 2001, $8.9 expiring in 2003, $8.2
expiring in 2004, $1.1 expiring in 2007, $1.1 expiring in 2008 and $16.4
expiring in 2009.
Management continues to believe 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 $6.9 net deferred tax asset recorded at June
30, 1995. The Company's net deferred tax asset declined to $5.3 at March 31,
1996 based on management's projection of fiscal 1996 taxable income. 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 $6.9 at June 30, 1995 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.
15
<PAGE>
. The Publishing, Catalog and Product Marketing Groups continue to generate
earnings, while the Company's substantial investments in the Entertainment
Group resulted in earnings in fiscal 1995, and are anticipated to lead to
increased earnings in fiscal 1996 and future years.
. 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 $0.7 at March 31, 1996, 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.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
- ------------------------
On February 26, 1996, Playboy Entertainment Group, Inc., a subsidiary of
the Company, filed a civil suit challenging Section 505 of The
Telecommunications Act of 1996 (the "Act") which was passed by Congress and
signed into law in February 1996. The Company believes that Section 505 is
unconstitutional. Certain provisions of the Act are directed exclusively at
cable programming in general and adult cable programming in particular. In some
cable systems, audio or momentary bits of video of premium or pay-per-view
channels may accidentally become available to non-subscribing cable customers.
This is called "bleeding" and is not a widespread problem. Section 505 of the
Act requires cable systems to install technology in every household in every
cable system that offers adult programming, whether or not customers request it
or need it, to prevent any possibility of bleeding. Section 505 further provides
that until a cable operator complies with the Act, it must restrict the period
during which the programming is transmitted. Penalties for violation of the Act
are significant and include fines and imprisonment. The suit names as defendants
The United States of America, The United States Department of Justice, Attorney
General Janet Reno and The Federal Communications Commission. On March 7, 1996,
the Company was granted a Temporary Restraining Order ("TRO") staying the
implementation and enforcement of Section 505. In granting the TRO, the court
found that the Company had demonstrated it is likely to succeed on the merits of
its claim that Section 505 is unconstitutional. The TRO will remain in place
until a judgement is rendered at the conclusion of an evidentiary hearing for
preliminary relief, which is scheduled to commence on May 20, 1996 before a
special three-judge panel in the United States District Court for the District
of Delaware.
17
<PAGE>
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 Nine Months Ended
March 31, March 31,
----------------------------- ---------------------------
1996 1995 1996 1995
----------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Primary:
- --------
Earnings:
Net income (loss) $ 676 $ (347) $ 2,826 $ (574)
========= =========== ========= ===========
Shares:
Weighted average number of common
shares outstanding 20,007 19,989 19,996 19,982
Assuming exercise of options reduced
by the number of shares which could have
been purchased with the proceeds from
exercise of such options 284 268 250 229
--------- ----------- --------- -----------
Weighted average number of common shares
outstanding as adjusted 20,291 20,257 20,246 20,211
========= =========== ========= ===========
Primary earnings per common share:
Net income (loss) $ 0.03/1/ $ (0.02)/1/ $ 0.14/1/ $ (0.03)/1/
========= =========== ========= ===========
Fully Diluted:
- --------------
Earnings:
Net income (loss) $ 676 $ (347) $ 2,826 $ (574)
========= =========== ========= ===========
Shares:
Weighted average number of common
shares outstanding 20,007 19,989 19,996 19,982
Assuming exercise of options reduced
by the number of shares which could have
been purchased with the proceeds from
exercise of such options 346 268 273 295
--------- ----------- --------- -----------
Weighted average number of common shares
outstanding as adjusted 20,353 20,257 20,269 20,277
========= =========== ========= ===========
Earnings per common share assuming full dilution:
Net income (loss) $ 0.03 /1/ $ (0.02)/1/ $ 0.14/1/ $ (0.03)/1/
========= =========== ========= ===========
</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%.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PLAYBOY ENTERPRISES, INC.
-------------------------
(Registrant)
Date May 13, 1996 By s/Rebecca S. Maskey
--------------- ------------------------------
Rebecca S. Maskey
Senior Vice President,
Finance
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 214
<SECURITIES> 0
<RECEIVABLES> 31,893
<ALLOWANCES> 4,012
<INVENTORY> 27,093
<CURRENT-ASSETS> 107,612
<PP&E> 37,152
<DEPRECIATION> 24,956
<TOTAL-ASSETS> 155,374
<CURRENT-LIABILITIES> 96,844
<BONDS> 345
<COMMON> 215
0
0
<OTHER-SE> 49,871
<TOTAL-LIABILITY-AND-EQUITY> 155,374
<SALES> 200,138
<TOTAL-REVENUES> 200,138
<CGS> 170,884
<TOTAL-COSTS> 194,009
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 508
<INCOME-PRETAX> 5,525
<INCOME-TAX> 2,699
<INCOME-CONTINUING> 2,826
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,826
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
