-----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, MbrErxKZ1DnQljLIK6e50STN9pySpq6dgwgX4zgkuUI+3Tv1IURuCeBp2dFfNerL YWOOf113oihYvVKb5rcmzA== 0000950131-95-003163.txt : 19951119 0000950131-95-003163.hdr.sgml : 19951119 ACCESSION NUMBER: 0000950131-95-003163 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951113 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: 95590137 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 September 30, 1995 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 October 31, 1995, there were 4,713,954 shares of Class A Common Stock, par value $.01 per share and 15,276,189 shares of Class B Common Stock, par value $.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 September 30, 1995 and 1994 3 Condensed Consolidated Balance Sheets at September 30, 1995 and June 30, 1995 4 Condensed Consolidated Statements of Cash Flows for the Quarters Ended September 30, 1995 and 1994 5 Notes to Condensed Consolidated Financial Statements 6-7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8-13 Part II. Other Information 14 2 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS for the Quarters Ended September 30 (Unaudited) (In thousands, except per share amounts)
1995 1994* --------- --------- Net revenues $ 62,263 $ 57,218 -------- -------- Costs and expenses: Cost of sales (53,684) (50,729) Selling and administrative expenses (7,139) (7,353) -------- -------- Total costs and expenses (60,823) (58,082) -------- -------- Operating income (loss) 1,440 (864) -------- -------- Nonoperating income (expense): Investment income 16 11 Interest expense (156) (165) Other, net (26) (13) -------- -------- Total nonoperating expense (166) (167) -------- -------- Income (loss) before income taxes 1,274 (1,031) Income tax expense (262) (197) -------- -------- Net income (loss) $ 1,012 $ (1,228) ======== ======== Weighted average number of common shares outstanding 19,990 19,971 ======== ======== Net income (loss) per common share $ .05 $ (.06) ======== ========
* 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 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
(Unaudited) Sept. 30, June 30, 1995 1995 ----------- --------- Assets - ------ Cash and cash equivalents $ 1,054 $ 1,471 Receivables, net of allowance for doubtful accounts of $4,961 and $4,837, respectively 23,153 24,151 Inventories 22,704 21,428 Programming costs 28,267 29,740 Deferred subscription acquisition costs 9,802 9,176 Other current assets 10,365 10,190 -------- -------- Total current assets 95,345 96,156 -------- -------- Property and equipment, at cost 36,673 36,576 Accumulated depreciation (23,698) (23,100) -------- -------- Property and equipment, net 12,975 13,476 -------- -------- Programming costs - noncurrent 5,170 3,209 Trademarks 11,160 11,046 Net deferred tax assets 6,493 6,493 Other noncurrent assets 7,436 7,455 -------- -------- Total assets $138,579 $137,835 ======== ======== Liabilities - ----------- Short-term borrowings $ 6,000 $ 5,000 Current financing obligations 335 333 Accounts payable 20,085 19,549 Accrued salaries, wages and employee benefits 3,367 4,088 Reserves for losses on disposals of discontinued operations 756 766 Income taxes payable 776 875 Deferred revenues 41,660 42,905 Other liabilities and accrued expenses 8,699 8,621 -------- -------- Total current liabilities 81,678 82,137 Long-term financing obligations 691 687 Other noncurrent liabilities 8,108 7,921 -------- -------- Total liabilities 90,477 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 36,398 36,398 Retained earnings 19,558 18,546 Less cost of treasury stock (8,069) (8,069) -------- -------- Total shareholders' equity 48,102 47,090 -------- -------- Total liabilities and shareholders' equity $138,579 $137,835 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 4 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS for the Quarters Ended September 30 (Unaudited) (In thousands)
1995 1994 -------- -------- Cash Flows From Operating Activities - ------------------------------------- Net income (loss) $ 1,012 $(1,228) Adjustments to reconcile net income (loss) to net cash used for operating activities: Depreciation of property and equipment 598 634 Amortization of intangible assets 437 373 Amortization of investments in entertainment programming 4,710 4,256 Investments in entertainment programming (5,198) (5,812) Net change in operating assets and liabilities (2,905) 374 Net cash used for discontinued operations (10) (93) Other, net 6 14 ------- ------- Net cash used for operating activities (1,350) (1,482) ------- ------- Cash Flows From Investing Activities - ------------------------------------- Additions to property and equipment (97) (124) Other, net 30 - ------- ------- Net cash used for investing activities (67) (124) ------- ------- Cash Flows From Financing Activities - ------------------------------------- Increase in short-term borrowings 1,000 3,000 Repayment of debt - (1,500) Proceeds from exercise of stock options - 138 ------- ------- Net cash provided by financing activities 1,000 1,638 ------- ------- Net increase (decrease) in cash and cash equivalents (417) 32 Cash and cash equivalents at beginning of period 1,471 1,258 ------- ------- Cash and cash equivalents at end of period $ 1,054 $ 1,290 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 5 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS for the Quarters Ended September 30, 1995 and 1994 (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 at September 30, 1995 remained at $6.9 million. 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 $6.9 million net deferred tax asset included in the Condensed Consolidated Balance Sheets at September 30, 1995 and June 30, 1995, $0.4 million is included in "Other current assets" with the remainder segregated as "Net deferred tax assets". Realization of deferred tax benefits is dependent upon the Company's ability to generate taxable income in future years. The recognition of benefits in the financial statements is based upon projections by management of future operating income and the anticipated reversal of temporary differences that will result in taxable income. Projections of future earnings were based on adjusted historical earnings. In order to fully realize the net deferred tax asset of $6.9 million, 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):
Sept. 30, June 30, 1995 1995 --------- -------- Paper $ 8,241 $ 7,342 Editorial and other prepublication costs 6,795 6,193 Merchandise finished goods 7,668 7,893 ------- ------- Total inventories $22,704 $21,428 ======= =======
(D) TREASURY STOCK -------------- Treasury stock consisted of 328,427 Class A common shares and 1,201,294 Class B common shares at both September 30, 1995 and June 30, 1995. 6 (E) CONTINGENCIES ------------- In January 1993, the Company received a General Notice from the United States Environmental Protection Agency (the "EPA") as a "potentially responsible party" ("PRP") in connection with a site identified as the Southern Lakes Trap & Skeet Club, apparently located at the Resort-Hotel in Lake Geneva, Wisconsin (the "Resort"), formerly owned by a subsidiary of the Company. The Resort was sold by the Company's subsidiary to LG Americana-GKP Joint Venture in 1982. Two other entities were also identified as PRPs in the notice. The notice relates to actions that may be ordered taken by the EPA to sample for and remove contamination in soils and sediments, purportedly caused by skeet shooting activities at the Resort property. During fiscal 1994, the EPA advised the Company of its position that the area of land requiring remediation is approximately twice the size of the initial site. The Company believes that it has established adequate reserves, which totaled $0.8 million at September 30, 1995, 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. 7 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 9% to $62.3 for the quarter ended September 30, 1995 compared to $57.2 for the prior year quarter primarily due to higher revenues from the Entertainment Group, the Collectors' Choice Music catalog and Playboy-related businesses. The Company reported operating income of $1.4 for the quarter ended September 30, 1995 compared to an operating loss of $0.9 in the prior year quarter principally due to operating income reported for the Entertainment Group in the current year quarter compared to an operating loss in the prior year quarter, combined with higher operating income from Playboy-related businesses. Net income for the quarter ended September 30, 1995 was $1.0, or $.05 per share, compared to a net loss of $1.2, or $.06 per share, for the prior year quarter. 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:
QUARTERS ENDED SEPTEMBER 30, ---------------------------------- REVENUES OPERATING INCOME -------------- ------------------ 1995 1994 1995 1994 ------ ------ -------- -------- Playboy Magazine............ $24.9 $25.0 $ 0.6 $ 1.1 Playboy-Related Businesses.. 8.0 6.9 3.2 2.1 ----- ----- ----- ----- Subtotal................. 32.9 31.9 3.8 3.2 Administrative Expenses..... - - (1.0) (1.1) ----- ----- ----- ----- Total.................... $32.9 $31.9 $ 2.8 $ 2.1 ===== ===== ===== =====
Playboy Magazine Playboy magazine circulation revenues decreased 6%, or $1.1, for the quarter ended September 30, 1995 compared to the prior year. The decrease was primarily due to 17% fewer U.S. and Canadian newsstand copies sold in the current year quarter combined with favorable newsstand sales adjustments in the prior year quarter related to prior years' issues, partially offset by 2% higher subscription revenues in the current year quarter. Advertising revenues increased 14%, or $0.9, for the quarter ended September 30, 1995 compared to the prior year as a result of higher average net revenue per page, primarily due to a 5% rate increase effective with the January 1995 issue, combined with 4% more advertising pages. Advertising sales for the fiscal 1996 second quarter issues of the magazine are closed, and the Company expects to report 17% fewer advertising pages for the quarter compared to the prior year quarter. 8 For the quarter ended September 30, 1995, Playboy magazine operating income decreased $0.5 compared to the prior year due to the net decrease in revenues combined with an increase in manufacturing costs, partially offset by a decrease in direct costs and operating expenses. Manufacturing costs for the quarter ended September 30, 1995 increased 28% 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 ended September 30, 1995 average paper prices were 41% higher than the prior year quarter. Direct costs and operating expenses decreased 10% for the quarter ended September 30, 1995 principally due to lower editorial costs primarily as a result of a celebrity pictorial in the prior year quarter combined with a decrease in subscription acquisition amortization expense, partially offset by higher costs related to a postal rate increase that was effective on January 1, 1995. Playboy-Related Businesses For the quarter ended September 30, 1995, operating income from the Company's Playboy-related businesses increased $1.1, or 52%, on a $1.1, or 17%, increase in revenues. These increases were primarily due to higher revenues from newsstand specials principally as the result 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, combined with higher royalties from Playboy foreign editions. Administrative Expenses The Publishing Group's administrative expenses decreased $0.1, or 7%, for the quarter ended September 30, 1995 compared to the prior year quarter. CATALOG GROUP The revenues and operating income of the Catalog Group were as follows for the periods indicated below:
QUARTERS ENDED SEPTEMBER 30, -------------- 1995 1994 ------ ------ REVENUES.......... $14.2 $13.3 ===== ===== OPERATING INCOME.. $ 0.7 $ 1.4 ===== =====
For the quarter ended September 30, 1995, revenues of the Catalog Group increased 6% compared to the prior year primarily due to higher sales volume from both the Collectors' Choice Music and Playboy catalogs, partially offset by lower sales volume for the Critics' Choice Video catalog as a result of lower response rates. These lower response rates are partially attributable to an overall decrease in demand for the full-price video market, largely due to competition from mass marketers which offer popular videos at deeply-discounted prices. In spring 1995, the Company tested a competitive pricing strategy for Critics' Choice Video in order to compete more effectively with mass marketers and, based on favorable results, began rolling out the strategy in October 1995. Operating income for the quarter ended September 30, 1995 decreased 51% compared to the prior year principally due to lower operating income from the Critics' Choice Video and Playboy catalogs. These decreases were primarily the result of the lower response rates for the Critics' Choice Video catalog, partially offset by a higher gross profit margin, combined with higher expenses for both catalogs due to paper price and postal rate increases and expanded mailings to prospective customers. Slightly offsetting the above was an increase in operating income from the Collectors' Choice Music catalog despite higher expenses related to significantly expanding circulation and the paper price and postal rate increases. 9 ENTERTAINMENT GROUP The revenues and operating income (loss) of the Entertainment Group were as follows for the periods indicated below:
QUARTERS ENDED SEPTEMBER 30, ---------------- 1995 1994 ------- ------- REVENUES Domestic Pay Television: Playboy Television Pay-Per-View........................ $ 3.8 $ 2.7 Playboy Television Monthly Subscription................ 1.8 1.7 Playboy Television Satellite Direct-to-Home and Other.. 3.4 2.1 AdulTVision............................................ 0.4 - ----- ----- Total Domestic Pay Television......................... 9.4 6.5 Domestic Home Video..................................... 2.2 1.9 International Television and Home Video................. 1.9 1.8 Movies and Other........................................ 0.2 0.1 ----- ----- Total Revenues....................................... $13.7 $10.3 ===== ===== OPERATING INCOME (LOSS) Profit Contribution Before Programming Expense.......... $ 5.9 $ 3.1 Programming Expense..................................... (4.7) (4.1) ----- ----- Total Operating Income (Loss)........................ $ 1.2 $(1.0) ===== =====
The following discussion focuses on the profit contribution of each business before programming expense ("profit contribution"). Domestic Pay Television For the quarter ended September 30, 1995, pay-per-view revenues for the domestic pay television service, Playboy Television, were 43% higher compared to the prior year, primarily attributable to higher buy rates and an increase in the number of addressable homes to which Playboy Television was available. At September 30, 1995, Playboy Television was available to 10.9 million cable addressable homes, a 10% increase compared to September 30, 1994. Of the 10.9 million cable addressable homes, 3.1 million could receive Playboy Television on a 24-hour basis, a 63% increase compared to September 30, 1994. The number of addressable homes to which Playboy Television was available at September 30, 1995 increased 0.3 million, or 3%, from June 30, 1995, while homes with 24-hour availability increased 0.1 million, or 3%, over the same period. The average annual increase in the number of cable addressable homes to which Playboy Television was available over the last five fiscal years was 29%. Management believes that beginning in the fourth quarter of fiscal 1993, growth of the Company's domestic pay television business slowed due to the effects of cable reregulation by the Federal Communications Commission ("FCC"), which has resulted in a slowdown in the industry's rollout of addressability. Additionally, competition for channel space has contributed to the slower growth as cable operators have utilized available channel space for new cable networks in connection with mandated retransmission consent agreements and for other new services, including adult movie pay television services. Management believes that growth will continue to be affected in the near term as the cable television industry responds to the FCC's initial rules and to subsequent modifications, including the "going-forward rules" announced in fiscal 1995. Over the coming months, management expects to continue to be impacted by the slower growth of addressable homes related to these "going-forward rules," as a result of cable operators being provided with incentives to add basic services. Nevertheless, management believes that ultimately reregulation should benefit pay-per-view services as cable operators seek unregulated sources of revenue, such as pay-per-view. Playboy Television monthly subscription revenues increased 1% for the quarter ended September 30, 1995 compared to the prior year. Playboy Television satellite direct-to-home and other revenues were 66% higher for the quarter ended September 30, 1995 compared to the prior year. The increase was primarily due to a 66% increase in revenues from sales of Playboy Television to home satellite dish viewers principally due to higher DirecTV revenues, as a result of an increase in the subscriber universe, and revenues in the current year quarter from PrimeStar, which launched Playboy Television in the fourth quarter of fiscal 1995, slightly offset by lower 10 TVRO revenues. Playboy Television was available to 14.6 million cable and satellite direct-to-home households, including 340,000 monthly subscribers, at September 30, 1995. The combined equivalent average buy rate for this audience, converting monthly subscriptions to their equivalent pay-per-view buy rates, was 10% for the quarter ended September 30, 1995. In July 1995, the Company launched a second domestic pay television channel, AdulTVision, as a flanker channel to Playboy Television to protect the Company against competitive pressures from other adult channels and to drive cable access. 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 ended September 30, 1995, revenues for the new channel were $0.4. Profit contribution for domestic pay television increased $1.8 for the quarter ended September 30, 1995 primarily due to the increase in revenues, partially offset by transponder expenses related to the new channel and higher sales and marketing costs. Domestic Home Video Domestic home video revenues increased $0.3 for the quarter ended September 30, 1995 compared to the prior year primarily due to royalties in the current year quarter related to a direct-response continuity series with Warner Music Enterprises, Inc. ("Warner Music"), combined with revenues from the sale of inventory to Warner Music in connection with the continuity series. As a result of Time Warner Inc.'s recent decision to eliminate Warner Music, future royalties from the continuity series will likely be interrupted for a period of time as the Company explores alternative distribution methods. Also contributing to the increase in revenues were higher sales of new releases in the current year quarter, in part due to extraordinary sales of The Best of Pamela Anderson, partially offset by higher average revenue per unit for new releases in the prior year quarter principally attributable to the sale of higher-priced rental titles and multi-packs. Partially offsetting the above were revenues in the prior year quarter related to sales of catalog titles compared to no revenues in the current year quarter due to a new three-year licensing agreement with the Company's distributor related to catalog titles whereby the Company receives an annual guarantee in the second half of each year, subject to certain earn-out provisions in the final year. Profit contribution increased $0.8 for the quarter ended September 30, 1995 compared to the prior year primarily due to the increase in revenues combined with costs in the prior year quarter related to an annual industry convention which is now held in the spring. International Television and Home Video For the quarter ended September 30, 1995 revenues and profit contribution from the international television and home video business increased $0.1 and remained stable, respectively. 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 $0.6 for the quarter ended September 30, 1995 compared to the prior year. Movies and Other For the quarter ended September 30, 1995, revenues and operating performance of movies and other businesses both increased $0.1 compared to the prior year quarter. The Entertainment Group's administrative expenses for the quarter ended September 30, 1995 decreased $0.1, or 8%, compared to the prior year quarter. 11 PRODUCT MARKETING GROUP The revenues and operating income of the Product Marketing Group were as follows for the periods indicated below:
QUARTERS ENDED SEPTEMBER 30, -------------- 1995 1994 ------ ------ REVENUES............... $ 1.5 $ 1.7 ===== ===== OPERATING INCOME....... $ 0.7 $ 0.8 ===== =====
Revenues for the quarter ended September 30, 1995 decreased $0.2, or 9%, compared to the prior year principally due to no royalties in the current year quarter from a Sarah Coventry licensee that experienced financial difficulties and was terminated in the second quarter of the prior year, combined with lower revenues from Special Editions, Ltd., as the Company's art publishing and art products business moves from direct sales to licensing. Partially offsetting the above were 13% higher international product licensing royalties in the current year quarter. Operating income for the quarter decreased $0.1, or 17%, principally due to a decrease in Sarah Coventry operating performance primarily due to the lower royalties. CORPORATE ADMINISTRATION AND PROMOTION Corporate administration and promotion expenses of $3.9 for the quarter ended September 30, 1995 decreased $0.3, or 6%, compared to the prior year quarter. GAMING The Company is exploring opportunities to re-enter the 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. The Greek government announced on Thursday, November 2, that the Company's consortium won the competitive bid for this license. On Friday, November 10, the Greek government officially notified the Company's consortium that it had won the competitive bid for this license. The Company will receive licensing royalties on revenues of the consortium and will own 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 consider taking equity positions as well as receiving license fees for the use of the Playboy name and trademarks. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At September 30, 1995, the Company had $1.1 in cash and cash equivalents and $6.0 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 existing or new revolving lines of credit, other possible long-term financing and cash generated from operations. Cash Flows From Operating Activities Net cash used for operating activities was $1.4 for the quarter ended September 30, 1995 compared to $1.5 for the prior year quarter. Cash used for operating assets and liabilities was $2.9 in the current year quarter compared to cash provided by operating assets and liabilities of $0.4 in the prior year quarter. This decrease was primarily due to the timing of receipts from the Company's national distributor for Playboy magazine. The Company invested $5.2 in Company-produced and licensed entertainment programming during the first quarter of fiscal 1996 compared to $5.8 in the prior year quarter, and expects to invest approximately $21.3 in such programming during the remainder of fiscal 1996. Cash Flows From Investing Activities Net cash used for investing activities was $0.1 for both quarters ended September 30, 1995 and 1994. 12 Cash Flows From Financing Activities Net cash provided by financing activities was $1.0 for the quarter ended September 30, 1995 compared to $1.6 for the prior year quarter. This decrease was principally due to a $2.0 lower increase in the level of short-term borrowings under the Company's revolving line of credit in the current year quarter, partially offset by a payment in the prior year quarter 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. 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. 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 September 30, 1995. 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 will be realized: . Management reviewed the components of the Company's NOLs and determined that they primarily resulted from several nonrecurring events, which were not indicative of the Company's ability to generate future earnings. . As a result of the restructurings implemented in fiscal 1994, operating expenses have been reduced. . 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 should lead to increased earnings in 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 $0.8 at September 30, 1995, 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. 13 PART II. OTHER INFORMATION ITEM 6(A) EXHIBITS - ------------------ PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES EXHIBIT 11 COMPUTATION OF EARNINGS PER COMMON SHARE FOR THE QUARTERS ENDED SEPTEMBER 30 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1994 ------- -------- Primary: - -------- Earnings: Net income (loss) $ 1,012 $(1,228) ======= ======= Shares: Weighted average number of common shares outstanding 19,990 19,971 Assuming exercise of options reduced by the number of shares which could have been purchased with the proceeds from exercise of such options 238 173 ------- ------- Weighted average number of common shares outstanding as adjusted 20,228 20,144 ======= ======= Primary earnings per common share: Net income (loss) $ 0.05/1/ $ (0.06)/1/ ======= ======= Fully Diluted: - -------------- Earnings: Net income (loss) $ 1,012 $(1,228) ======= ======= Shares: Weighted average number of common shares outstanding 19,990 19,971 Assuming exercise of options reduced by the number of shares which could have been purchased with the proceeds from exercise of such options 243 239 ------- ------- Weighted average number of common shares outstanding as adjusted 20,233 20,210 ======= ======= Earnings per common share assuming full dilution: Net income (loss) $ 0.05/1/ $ (0.06)/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%. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PLAYBOY ENTERPRISES, INC. ------------------------- (Registrant) Date November 13, 1995 By s/David I. Chemerow -------------------- ------------------------------ David I. Chemerow Executive Vice President, Finance and Operations and Chief Financial Officer 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS JUN-30-1996 JUL-01-1995 SEP-30-1995 1,054 0 28,114 4,961 22,704 95,345 36,673 23,698 138,579 81,678 691 215 0 0 47,887 138,579 62,263 62,263 53,684 60,823 0 0 156 1,274 262 1,012 0 0 0 1,012 .05 .05
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