-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N83A/xdy4qCJi6XuLF+ZWS5dd2mkReSPquQodx08SYAsQZUBW7GTXBtj9ZdeQenF bvWDHPmelLKN5ArUR0YuFQ== 0000950131-97-000823.txt : 19970222 0000950131-97-000823.hdr.sgml : 19970222 ACCESSION NUMBER: 0000950131-97-000823 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970213 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLAYBOY ENTERPRISES INC CENTRAL INDEX KEY: 0000079114 STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721] IRS NUMBER: 362258830 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06813 FILM NUMBER: 97529692 BUSINESS ADDRESS: STREET 1: 680 N LAKE SHORE DR CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3127518000 10-Q 1 FORM 10-Q 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, 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 January 31, 1997, there were 4,748,954 shares of Class A Common Stock, par value $0.01 per share, and 15,580,306 shares of Class B Common Stock, par value $0.01 per share, outstanding. 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, 1996 and 1995 (unaudited) 3 Condensed Consolidated Statements of Operations for the Six Months Ended December 31, 1996 and 1995 (unaudited) 4 Condensed Consolidated Balance Sheets at December 31, 1996 (unaudited) and June 30, 1996 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 1996 and 1995 (unaudited) 6 Notes to Condensed Consolidated Financial Statements 7-8 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-15 Part II. Other Information 16
2 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS for the Quarters Ended December 31 (Unaudited) (In thousands, except per share amounts)
1996 1995 -------- -------- Net revenues $ 79,779 $ 71,618 -------- -------- Costs and expenses: Cost of sales (65,801) (60,498) Selling and administrative expenses (8,713) (8,266) -------- -------- Total costs and expenses (74,514) (68,764) -------- -------- Operating income 5,265 2,854 -------- -------- Nonoperating income (expense): Investment income 15 13 Interest expense (165) (150) Other, net (23) (8) -------- -------- Total nonoperating expense (173) (145) -------- -------- Income before income taxes 5,092 2,709 Income tax expense (2,267) (1,571) -------- -------- Net income $ 2,825 $ 1,138 ======== ======== Weighted average number of common shares outstanding 20,321 19,990 ======== ======== Net income per common share $ 0.14 $ 0.06 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 3 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS for the Six Months Ended December 31 (Unaudited) (In thousands, except per share amounts)
1996 1995 --------- --------- Net revenues $ 146,003 $ 133,881 --------- --------- Costs and expenses: Cost of sales (122,062) (114,182) Selling and administrative expenses (16,247) (15,405) --------- --------- Total costs and expenses (138,309) (129,587) --------- --------- Operating income 7,694 4,294 --------- --------- Nonoperating income (expense): Investment income 35 29 Interest expense (299) (306) Other, net (98) (34) --------- --------- Total nonoperating expense (362) (311) --------- --------- Income before income taxes 7,332 3,983 Income tax expense (3,470) (1,833) --------- --------- Net income $ 3,862 $ 2,150 ========= ========= Weighted average number of common shares outstanding 20,291 19,990 ========= ========= Net income per common share $ 0.19 $ 0.11 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 4 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
(Unaudited) Dec. 31, June 30, 1996 1996 ----------- --------- Assets - ------ Cash and cash equivalents $ 1,061 $ 2,438 Receivables, net of allowance for doubtful accounts of $3,490 and $3,009, respectively 34,956 29,110 Inventories 22,476 23,499 Programming costs 33,524 33,873 Deferred subscription acquisition costs 10,987 9,569 Other current assets 12,770 10,420 -------- -------- Total current assets 115,774 108,909 -------- -------- Property and equipment, at cost 37,826 37,404 Accumulated depreciation (26,639) (25,510) -------- -------- Property and equipment, net 11,187 11,894 -------- -------- Programming costs - noncurrent 9,610 3,362 Trademarks 12,468 11,887 Net deferred tax assets 1,975 4,191 Other noncurrent assets 11,201 10,626 -------- -------- Total assets $162,215 $150,869 ======== ======== Liabilities - ----------- Short-term borrowings $ 12,000 $ 5,000 Current financing obligations 344 340 Accounts payable 25,214 22,745 Accrued salaries, wages and employee benefits 4,126 6,941 Reserves for losses on disposals of discontinued operations 689 707 Income taxes payable 1,170 970 Deferred revenues 44,773 44,378 Other liabilities and accrued expenses 8,108 8,940 -------- -------- Total current liabilities 96,424 90,021 Long-term financing obligations - 347 Other noncurrent liabilities 8,386 8,218 -------- -------- Total liabilities 104,810 98,586 -------- -------- Shareholders' Equity - -------------------- Common stock, $0.01 par value Class A - 7,500,000 shares authorized; 5,042,381 issued 50 50 Class B - 30,000,000 shares authorized; 16,987,768 and 16,477,143 issued, respectively 166 165 Capital in excess of par value 37,478 36,323 Retained earnings 26,660 22,798 Foreign currency translation adjustment (25) (17) Less cost of treasury stock (6,924) (7,036) -------- -------- Total shareholders' equity 57,405 52,283 -------- -------- Total liabilities and shareholders' equity $162,215 $150,869 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS for the Six Months Ended December 31 (Unaudited) (In thousands)
1996 1995* --------- --------- Cash Flows From Operating Activities - ------------------------------------ Net income $ 3,862 $ 2,150 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation of property and equipment 1,135 1,196 Amortization of intangible assets 903 872 Amortization of investments in entertainment programming 9,619 9,023 Investments in entertainment programming (15,518) (10,250) Net change in operating assets and liabilities (7,115) (1,489) Net cash used for discontinued operations (18) (16) Other, net 6 15 -------- -------- Net cash provided by (used for) operating activities (7,126) 1,501 -------- -------- Cash Flows From Investing Activities - ------------------------------------- Additions to property and equipment (431) (234) Acquisitions and funding of equity interests in international ventures (731) (2,856) Other, net 105 100 -------- -------- Net cash used for investing activities (1,057) (2,990) -------- -------- Cash Flows From Financing Activities - ------------------------------------ Increase in short-term borrowings 7,000 1,500 Repayment of debt (350) (350) Proceeds from exercise of stock options 65 - Proceeds from sales under employee stock purchase plan 91 - -------- -------- Net cash provided by financing activities 6,806 1,150 -------- -------- Net decrease in cash and cash equivalents (1,377) (339) Cash and cash equivalents at beginning of period 2,438 1,471 -------- -------- Cash and cash equivalents at end of period $ 1,061 $ 1,132 ======== ========
* 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 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS for the Quarters and Six Months Ended December 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, 1996 of Playboy Enterprises, Inc. and Subsidiaries (the "Company"). (B) INCOME TAXES ------------ The Company's net deferred tax asset declined to $2.3 million at December 31, 1996 based on management's projection of fiscal 1997 taxable income. As reported in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996, the significant components of the gross deferred tax asset include net operating loss, capital loss and tax credit carryforwards. Of the $2.3 million and $4.5 million net deferred tax assets included in the Condensed Consolidated Balance Sheets at December 31, 1996 and June 30, 1996, respectively, $0.3 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 $4.5 million recorded at June 30, 1996, the Company will need to generate future taxable income of approximately $13.2 million prior to the expiration, beginning in 2001, of the Company's net operating loss carryforwards. Management believes that it is more likely than not that the required amount of such 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):
Dec. 31, June 30, 1996 1996 -------- -------- Paper $ 7,552 $10,771 Editorial and other prepublication costs 5,801 6,566 Merchandise finished goods 9,123 6,162 ------- ------- Total inventories $22,476 $23,499 ======= =======
(D) TREASURY STOCK -------------- Treasury stock consisted of 293,427 Class A common shares and 1,018,591 Class B common shares at December 31, 1996. At June 30, 1996, treasury stock consisted of 293,427 Class A common shares and 1,040,045 Class B common shares. 7 (E) ACCOUNTING STANDARDS -------------------- The Company will implement the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123") in fiscal 1997. It is the Company's intention to adopt only the disclosure requirements of Statement 123. (F) CONTINGENCIES ------------- In February 1996, the Company filed suit challenging Section 505 of the Telecommunications Act of 1996 (the "Act") which could, among other things, regulate the cable transmission of adult programming, such as the Company's domestic pay television programs. The Company believes that if Section 505 of the Act were ultimately to be enforced, the Company's revenues attributable to its domestic pay television cable services could be materially adversely affected due to reduced cable carriage and/or reduced buy rates. See Part II. Item 1. "Legal Proceedings." 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 December 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 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 11% to $79.8 for the quarter ended December 31, 1996 compared to $71.6 for the prior year quarter. Revenues were $146.0 for the six months ended December 31, 1996, a 9% increase over revenues of $133.9 for the six months ended December 31, 1995. These increases were primarily due to higher revenues from the Entertainment Group, principally driven by increases from Playboy TV, the Catalog Group and the international publishing and newsstand specials and other businesses. Partially offsetting the above were declines in Playboy magazine revenues. The Company reported operating income of $5.3 for the quarter ended December 31, 1996 compared to $2.9 in the prior year quarter. For the six months ended December 31, 1996, the Company had operating income of $7.7 compared to $4.3 in the prior year. These increases were principally due to increases in operating income for the Entertainment Group, primarily due to significantly higher operating income for Playboy TV, partially offset by declines in operating income for the Publishing Group. Net income for the quarter ended December 31, 1996 was $2.8, or $0.14 per share, compared to $1.1, or $0.06 per share, for the prior year quarter. For the six months ended December 31, 1996, net income was $3.9, or $0.19 per share, compared to $2.2, or $0.11 per share, for the six months ended December 31, 1995. Net income for the quarter ended December 31, 1996, adjusted to eliminate federal income tax expense that will not be paid due to the Company's net operating loss carryforwards ("tax-adjusted net income"), was $4.4, or $0.22 per share, compared to $2.2, or $0.11 per share, for the prior year quarter. For the six months ended December 31, 1996, tax-adjusted net income was $6.1, or $0.30 per share, compared to $3.2, or $0.16 per share, for the six months ended December 31, 1995. Several of the Company's businesses can experience variations in quarterly performance. As a result, the Company's performance in any quarterly period is not necessarily reflective of full-year or longer-term trends. 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, particularly the timing of new multiyear agreements to both program and supply programming for exclusive Playboy-branded time slots on overseas pay television services. To allow greater flexibility the Company modified how it programs its international networks effective with the fourth quarter of fiscal 1996. This modification results in the revenues from these networks now being recorded on a quarterly basis, which has the effect of smoothing out the fluctuations caused by recording a year's worth of programming sales in one quarter. Previously, the Company scheduled programming for a full year in the quarter during which the network was launched or an agreement was renewed, and recognized the full year of revenues in that quarter. 9 PUBLISHING GROUP The revenues and operating income of the Publishing Group were as follows for the periods indicated below:
QUARTERS SIX MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, ------------ ------------ 1996 1995 1996 1995 ---- ---- ---- ---- REVENUES Playboy Magazine.............. $27.7 $29.3 $51.8 $54.1 Newsstand Specials and Other.. 5.8 4.2 11.4 10.9 International Publishing...... 2.8 1.3 5.2 2.6 ----- ----- ----- ----- Total Revenues.............. $36.3 $34.8 $68.4 $67.6 ===== ===== ===== ===== OPERATING INCOME $ 2.6 $ 3.5 $ 3.7 $ 6.2 ===== ===== ===== =====
Publishing Group revenues increased 4%, or $1.5, and 1%, or $0.8, respectively, for the quarter and six months ended December 31, 1996 compared to the prior year. This was primarily due to strong revenue growth in international publishing and newsstand specials and other, including Playboy on-line, which more than offset Playboy magazine revenue declines principally due to both newsstand and advertising weakness. Playboy magazine circulation revenues for the quarter and six months ended December 31, 1996 decreased 5%, or $1.1, and 1%, or $0.4, respectively, compared to the prior year. These decreases were primarily due to 18% and 11% lower newsstand revenues, primarily due to 28% and 15% more U.S. and Canadian newsstand copies sold, respectively, in the prior year, when two exceptionally strong-selling issues were published. Partially offsetting the above were 7% and 6% higher subscription revenues, respectively, for the quarter and six-month periods. Playboy magazine advertising revenues for the quarter and six months ended December 31, 1996 decreased 6% and 12%, respectively, compared to the prior year primarily due to 12% and 15% fewer ad pages, respectively. Advertising sales for the fiscal 1997 third quarter issues of the magazine are closed, and the Company expects to report 8% more advertising pages for the quarter compared to the prior year quarter. Revenues from newsstand specials and other increased 37%, or $1.6, for the quarter ended December 31, 1996 primarily due to the mix of newsstand specials titles sold, combined with higher advertising revenues generated from Playboy on-line. For the six-month period, revenues from newsstand specials and other increased 5%, or $0.5, primarily due to higher advertising revenues generated from Playboy on- line, partially offset by lower revenues from newsstand specials primarily due to 8% fewer U.S. and Canadian newsstand copies sold in the current year. For the quarter and six months ended December 31, 1996, Publishing Group operating income decreased $0.9, or 24%, and $2.5, or 40%, compared to the prior year due to the net decreases in revenues for Playboy magazine discussed above combined with higher magazine manufacturing costs and operating expenses. For the quarter, the higher costs were largely due to an increase in the average book size. Partially offsetting the above were lower photo costs primarily as a result of a celebrity pictorial in the prior year quarter and 14% lower average paper prices in the current year quarter. For the six-month period, the higher costs were largely due to an increase in the average book size. Partially offsetting the above were lower advertising sales expense and 5% lower average paper prices in the current year. For the quarter and six-month periods, higher subscription expenses mostly offset the increases in subscription revenues referred to above. The higher revenues for newsstand specials and other for the second quarter, as discussed above, resulted in an increase in operating income and these favorable results partially reduced the first quarter comparative decline in operating income. International publishing operating income increased for both the quarter and six months ended December 31, 1996, respectively, compared to the prior year due to higher revenues. 10 ENTERTAINMENT GROUP The revenues and operating income of the Entertainment Group were as follows for the periods indicated below:
QUARTERS SIX MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, ---------------- ---------------- 1996 1995 1996 1995 ------ ------ ------ ------ REVENUES Playboy TV: Cable.................................... $ 5.4 $ 5.2 $10.4 $10.8 Satellite Direct-to-Home................. 4.9 4.0 9.9 7.2 Other.................................... 1.5 0.1 2.0 0.3 ----- ----- ----- ----- Total Playboy TV.......................... 11.8 9.3 22.3 18.3 Domestic Home Video....................... 2.3 2.2 3.9 4.4 International TV and Home Video........... 2.0 1.3 4.3 3.2 ----- ----- ----- ----- Total Playboy Businesses................ 16.1 12.8 30.5 25.9 AdulTVision............................... 1.2 0.5 2.4 0.9 Movies and Other.......................... 0.8 0.4 1.0 0.7 ----- ----- ----- ----- Total Revenues.......................... $18.1 $13.7 $33.9 $27.5 ===== ===== ===== ===== OPERATING INCOME Profit Contribution Before Playboy Businesses Programming Expense.. $ 8.8 $ 4.8 $16.7 $10.7 Playboy Businesses Programming Expense.... (4.6) (4.1) (9.0) (8.8) ----- ----- ----- ----- Total Operating Income................. $ 4.2 $ 0.7 $ 7.7 $ 1.9 ===== ===== ===== =====
The following discussion focuses on the profit contribution of each Playboy business before Playboy businesses programming expense ("profit contribution"). Playboy TV For the quarter ended December 31, 1996, cable pay-per-view revenues of the Company's branded domestic pay television service, Playboy TV, were 12% higher primarily due to higher average buy rates combined with larger favorable adjustments, as reported by cable systems, in the current year quarter. Cable pay-per-view revenues were 1% higher for the six months ended December 31, 1996 primarily due to higher average buy rates, mostly offset by lower favorable adjustments, as reported by cable systems, in the current year. At December 31, 1996, Playboy TV was available to 11.2 million cable addressable homes, of which 4.5 million could receive Playboy TV on a 24-hour basis. The number of homes with 24-hour availability increased 1.2 million, or 36%, from December 31, 1995. However, new launches in cable systems were not sufficient to offset some system drops leading to a 1% lower total number of cable addressable homes to which Playboy TV was available at December 31, 1996 compared to the prior year. Historically, buy rates in homes receiving Playboy TV on a 24-hour basis are higher than those receiving Playboy TV on only a ten-hour basis. The number of total cable addressable homes to which Playboy TV was available at December 31, 1996 increased 2% from September 30, 1996, while homes with 24-hour availability increased 0.4 million, or 10%, over the same period. The average annual increase in the number of total cable addressable homes to which Playboy TV was available over the last five complete fiscal years was 20%. For the quarter and six months ended December 31, 1996, cable monthly subscription revenues decreased 17% and 16%, respectively, compared to the prior year largely due to a decline in the average number of subscribing households. Management believes that the growth in cable access for the Company's domestic pay television businesses 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. As cable operators have utilized available channel space to comply with "must-carry" provisions, mandated retransmission consent agreements and "leased access" provisions, competition for channel space has increased. Additionally, the delay of new technology, primarily digital set-top converters which would dramatically increase channel capacity, has contributed to the slowdown. Management believes that 11 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. Management believes that the Telecommunications Act of 1996 (the "Act") as discussed in Part II. Item 1. "Legal Proceedings" has also slowed growth in cable access. In addition, the Company believes that if Section 505 of the Act were ultimately to be enforced, the Company's revenues attributable to its domestic pay television cable services could be materially adversely affected due to reduced cable carriage and/or reduced buy rates. However, as addressable and digital technology becomes more widely available, the Company believes that ultimately its pay television networks will be available to the vast majority of cable homes. Playboy TV satellite direct-to-home revenues were 22% and 37% higher for the quarter and six months ended December 31, 1996, respectively, compared to the prior year. These increases were primarily due to higher DirecTV and PrimeStar revenues, as a result of significant increases in their addressable universes, partially offset by lower revenues, as expected, from TVRO, or the big-dish market. Playboy TV was available to approximately 16.9 million cable addressable and satellite direct-to-home households, including approximately 380,000 monthly subscribers, at December 31, 1996, an increase of 10% compared to December 31, 1995. Other revenues increased $1.4 and $1.7 for the quarter and six months ended December 31, 1996, primarily due to licensing episodes of one of the Company's series to Showtime Networks Inc. ("Showtime") in the current year. Profit contribution for Playboy TV increased $2.7 and $5.1, respectively, for the quarter and six months ended December 31, 1996 primarily due to the net increases in revenues combined with no royalty expense related to the Company's former distributor in the current year. Royalty payments were discontinued April 30, 1996, when the agreement ended. Domestic Home Video Domestic home video revenues increased $0.1 and decreased $0.5, respectively, for the quarter and six months ended December 31, 1996, compared to the prior year primarily due to higher net sales of new releases, more than offset for the six-month period by anticipated lower revenues from a direct- response continuity series deal with Time Life Inc. A new continuity series with Sony Music Direct, a different distributor, featuring new products has recently been introduced. Profit contribution increased $0.1 and decreased $0.8, respectively, on the increase and decrease, respectively, in revenues for the quarter and six months ended December 31, 1996. Also unfavorably impacting the six-month comparison was the timing of promotion costs. International TV and Home Video For the quarter and six months ended December 31, 1996, profit contribution from the international TV and home video business increased $0.5 and $0.9, respectively, on $0.7 and $1.1 increases in revenues, respectively. These increases are primarily due to higher international TV revenues in the current year, largely from Playboy TV networks. 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. To allow greater flexibility the Company modified how it programs its international networks effective with the fourth quarter of fiscal 1996. See "Results of Operations." Playboy Businesses Programming Expense Programming amortization expense associated with the Entertainment Group's Playboy businesses discussed above increased $0.5 and $0.2, respectively, for the quarter and six months ended December 31, 1996, compared to the prior year primarily due to amortization in the current year related to the previously discussed licensing of episodes of one of the Company's series to Showtime. AdulTVision AdulTVision revenues increased $0.7 and $1.5, respectively, for the quarter and six months ended December 31, 1996, compared to the prior year primarily due to revenues in the current year related to the September 1996 launch of a new channel in Latin America. Also contributing to the increases were higher revenues from the domestic channel, which launched in July 1995, as a result of an increase in the addressable universe. 12 For the quarter and six months ended December 31, 1996, operating performance increased $0.3 and $0.8, respectively, primarily due to the increases in revenues, partially offset by higher distribution costs due to the launch in Latin America and an increase in domestic fees in the current year related to transferring to a new transponder. Movies and Other For the quarter and six months ended December 31, 1996, operating income from movies and other businesses increased $0.2 for both periods on $0.4 and $0.3 increases in revenues, respectively. The Entertainment Group's administrative expenses for the quarter and six months ended December 31, 1996 decreased and increased $0.1 and $0.2, respectively, compared to the prior year. PRODUCT MARKETING GROUP The revenues and operating income of the Product Marketing Group were as follows for the periods indicated below:
QUARTERS SIX MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, ------------ ------------ 1996 1995 1996 1995 ----- ----- ----- ----- REVENUES.......... $ 2.0 $ 2.3 $ 4.3 $ 3.8 ===== ===== ===== ===== OPERATING INCOME.. $ 0.9 $ 1.2 $ 2.3 $ 1.9 ===== ===== ===== =====
Revenues and operating income for the quarter ended December 31, 1996 both decreased $0.3 compared to the prior year quarter primarily due to lower international product licensing royalties, principally from Asia. For the six months ended December 31, 1996, revenues and operating income increased $0.5 and $0.4, respectively, primarily due to higher international product licensing royalties, principally from Asia. The timing of reporting of royalties from Asia contributed to the decreases for the quarter. Further, favorably impacting both the quarter and six-month period results were royalties in the current year related to the Company's new domestic line of cigars and lower international marketing costs. CATALOG GROUP The revenues and operating income of the Catalog Group were as follows for the periods indicated below:
QUARTERS SIX MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, ------------ ------------ 1996 1995 1996 1995 ----- ----- ----- ----- REVENUES.......... $23.3 $20.8 $39.4 $35.0 ===== ===== ===== ===== OPERATING INCOME.. $ 2.4 $ 1.9 $ 2.9 $ 2.6 ===== ===== ===== =====
For the quarter and six months ended December 31, 1996, revenues of the Catalog Group increased 12% and 13%, respectively, compared to the prior year due to higher sales volume from all of the Company's catalogs, principally attributable to increased circulation. Additional promotions also contributed to the higher revenues from the Collectors' Choice Music catalog. Revenues from the Playboy catalog were also favorably impacted by current year sales from the Playboy Store, a version of the catalog on Playboy on-line. For the quarter and six months ended December 31, 1996, operating income increased 25% and 11%, respectively, compared to the prior year primarily due to higher operating income from the Critics' Choice Video and Playboy catalogs, as the increased revenues were sufficient to absorb higher related costs. The Critics' Choice Video catalog was also favorably impacted by lower paper prices. Operating income for the Collectors' Choice 13 Music catalog remained relatively stable for the quarter and six months ended December 31, 1996, as the increased revenues combined with lower paper prices were offset by higher related costs, principally due to significantly expanded circulation. Administrative expenses were higher for the group largely due to higher salary and related expenses. The Company recently purchased from the trustee in bankruptcy the customer list of the Time Warner Viewer's Edge catalog and expects to begin using the list in the third quarter of fiscal 1997. CORPORATE ADMINISTRATION AND PROMOTION Corporate administration and promotion expenses of $4.9 and $8.9 for the quarter and six months ended December 31, 1996, respectively, both increased $0.5 compared to the prior year periods. These increases were primarily due to investment spending on corporate marketing, information resources and human resources. CASINO GAMING In fiscal 1996 the Company announced plans to re-enter the casino gaming business. The Company, with a consortium of Greek investors, bid for and won an exclusive casino gaming license on the island of Rhodes, Greece. The Company's consortium executed the contract with the government in October 1996 and is presently renovating the approximately 85,000-square-foot property that will be the Playboy hotel casino, which is expected to open in calendar 1997. The Company is continuing to explore other casino gaming opportunities with a strategy to form joint ventures with strong local partners, in which the Company would receive license fees for the use of the Playboy name and trademarks and would consider taking equity positions. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At December 31, 1996, the Company had $1.1 in cash and cash equivalents and $12.0 in short-term borrowings, compared to $2.4 in cash and cash equivalents and $5.0 in short-term borrowings at June 30, 1996. At January 31, 1997, the Company's short-term borrowings were $5.0 million. The Company expects to meet its short-term and long-term cash requirements through its revolving credit agreement and cash generated from operations. Cash Flows From Operating Activities Net cash used for operating activities was $7.1 for the six months ended December 31, 1996 compared to net cash provided of $1.5 for the prior year period. Cash used for operating assets and liabilities was $7.1 in the current year period compared to $1.5 in the prior year. This increased use of cash was primarily due to an increase in cash used for accounts receivable, primarily in the Entertainment Group, principally due to the higher revenues in the current year period as discussed throughout "Results of Operations." In addition, the current year period had a use of cash for other current assets primarily related to the timing of prepaid production and postage costs for the Critics' Choice Video and Collectors' Choice Music catalogs. Further, cash used for other accrued liabilities in the current year compared to cash provided in the prior year was largely due to the timing of tax payments. There was also lower cash provided by accounts payable in the current year period primarily due to additional purchases of paper related to Playboy magazine in the prior year period in part to take advantage of favorable pricing. Partially offsetting the unfavorable variances discussed above was cash provided by inventories in the current year compared to a use of cash in the prior year primarily as a result of the additional paper purchases in the prior year combined with usage of paper in the current year. The Company invested $15.5 in Company-produced and licensed entertainment programming during the first six months of fiscal 1997 compared to $10.3 in the prior year period, and expects to invest approximately $16.6 in such programming during the remainder of fiscal 1997. Cash Flows From Investing Activities Net cash used for investing activities was $1.1 for the six months ended December 31, 1996 compared to $3.0 for the prior year period. The prior year included investments in equity interests of $2.9 in the first overseas Playboy TV channels in the United Kingdom and Japan, and in the casino gaming venture that was awarded an exclusive license on the island of Rhodes, Greece. This compares to $0.7 of investments in the current year period related to additional funding of the channel in the United Kingdom and an equity interest in the new Playboy TV and AdulTVision channels in Latin America. 14 Cash Flows From Financing Activities Net cash provided by financing activities was $6.8 for the six months ended December 31, 1996 compared to $1.2 for the prior year period. This increase was principally due to a $5.5 higher increase in the level of short-term borrowings under the Company's revolving line of credit in the current year. Income Taxes Based on current tax law, the Company must generate approximately $13.2 of future taxable income prior to the expiration of the Company's net operating loss carryforwards ("NOLs") for full realization of the $4.5 net deferred tax asset recorded at June 30, 1996. At June 30, 1996, the Company had NOLs of $37.5 for tax purposes, with $0.8 expiring in 2001, $8.9 expiring in 2003, $8.2 expiring in 2004, $2.1 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 $4.5 net deferred tax asset recorded at June 30, 1996. The Company's net deferred tax asset declined to $2.3 at December 31, 1996 based on management's projection of fiscal 1997 taxable income. Following is a summary of the bases for management's belief that a valuation allowance of $28.0 at June 30, 1996 is adequate, and that it is more likely than not that the net deferred tax asset of $4.5 at June 30, 1996 will be realized: . In initially establishing the net deferred tax asset, 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. . The Publishing, Product Marketing and Catalog Groups continue to generate meaningful earnings, while the Company's substantial investments in the Entertainment Group resulted in significant earnings growth in fiscal 1996 and are anticipated to lead to increased earnings potential in fiscal 1997 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 December 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. The Company will implement the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123") in fiscal 1997. It is the Company's intention to adopt only the disclosure requirements of Statement 123. 15 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 and unnecessary but fully supports Section 504 of the Act, which mandates that cable operators place full audio and video blocks on any channel, at no charge, at a customer's request. 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." The practical effect of Section 505 of the Act would be to require cable systems to employ additional blocking 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. In the alternative, Section 505 provides that a cable operator that does not employ additional blocking technology must restrict the period during which the programming is transmitted from 10:00 p.m. to 6:00 a.m. Penalties for violation of the Act are significant and include fines and imprisonment. Fifteen organizations representing a wide range of influential media, civil liberties and entertainment organizations filed friend of the court briefs supporting the Company's litigation. 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. On November 8, 1996, eight months after the TRO was granted, a three-judge panel in United States District Court in Wilmington, Delaware (the "Court"), denied the Company's request for a preliminary injunction against enforcement of Section 505 of the Act. The Company has appealed the panel's decision to the United States Supreme Court. The Court has granted the Company's motion for a stay that prohibits enforcement of the provision pending appeal. The Company believes that if Section 505 were ultimately to be enforced, the Company's revenues attributable to its domestic pay television cable services could be materially adversely affected due to reduced cable carriage and/or reduced buy rates. Item 6. Exhibits and Reports on Form 8-K - ---------------------------------------- (a) Exhibits 11 Computation of Earnings Per Common Share 27 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended December 31, 1996. 16 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 13, 1997 By /s/ Rebecca S. Maskey -------------------- ------------------------------ Rebecca S. Maskey Senior Vice President, Finance 17 EX-11 2 COMPUTATION OF EARNINGS PER SHARE PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES EXHIBIT 11 COMPUTATION OF EARNINGS PER COMMON SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Quarters Ended Six Months Ended December 31, December 31, ------------------------ ------------------------ 1996 1995 1996 1995 ----------- ----------- ----------- --------- Primary: Earnings: Net income $ 2,825 $ 1,138 $ 3,862 $ 2,150 ========= ========= ========= ========= Shares: Weighted average number of common shares outstanding 20,321 19,990 20,291 19,990 Assuming exercise of options reduced by the number of shares which could have been purchased with the proceeds from exercise of such options 410 229 462 233 --------- --------- --------- --------- Weighted average number of common shares outstanding as adjusted 20,731 20,219 20,753 20,223 ========= ========= ========= ========= Primary earnings per common share: Net income $ 0.14/1/ $ 0.06/1/ $ 0.19/1/ $ 0.11/1/ ========= ========= ========= ========= Fully Diluted: Earnings: Net income $ 2,825 $ 1,138 $ 3,862 $ 2,150 ========= ========= ========= ========= Shares: Weighted average number of common shares outstanding 20,321 19,990 20,291 19,990 Assuming exercise of options reduced by the number of shares which could have been purchased with the proceeds from exercise of such options 410 230 462 237 --------- --------- --------- --------- Weighted average number of common shares outstanding as adjusted 20,731 20,220 20,753 20,227 ========= ========= ========= ========= Earnings per common share assuming full dilution: Net income $ 0.14/1/ $ 0.06/1/ $ 0.19/1/ $ 0.11/1/ ========= ========= ========= =========
/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%. EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS JUN-30-1997 JUL-01-1996 DEC-31-1996 1,061 0 38,446 3,490 22,476 115,774 37,826 26,639 162,215 96,424 0 216 0 0 57,189 162,215 146,003 146,003 122,062 138,309 0 0 299 7,332 3,470 3,862 0 0 0 3,862 .19 .19
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