Document/Exhibit Description Pages Size
1: 10-K Annual Report 31 178K
2: EX-3.1 Restated Cert. of Incorp. 18 36K
7: EX-10.10 02/22/94 Drct Mrktng Agmt 38 194K
8: EX-10.11 02/22/94 Drct Mrktng Agmt 32 153K
9: EX-10.12A 02/10/95 Credit Agreement 65 279K
10: EX-10.12B 02/10/95 Am.To Credit Agreement 22 66K
11: EX-10.15B 10/26/89 Am. to 4/7/88 L 8 34K
12: EX-10.15D 08/30/93 Am. to 4/7/88 Le 16 49K
13: EX-10.18A 07/11/93 Exec. Car Lease 2 14K
14: EX-10.18C 03/01/90 Exec. Protection 2 13K
15: EX-10.19A A Lewis V Playboy Indemif 1 9K
16: EX-10.19C 1989 Stock Option Agreem. 9 33K
17: EX-10.19D 07/18/90 Letter Re. 7/7/9 1 10K
18: EX-10.19J 09/12/94 Am. to Employment 1 12K
19: EX-10.19K 07/18/95 Am. to Employment 2± 13K
3: EX-10.3A 05/15/95 Print Agmt. 31 68K
4: EX-10.3B 04/11/90 Letter Agmt. 2 15K
5: EX-10.8 03/24/95 Dist Agmt. 13 58K
6: EX-10.9 01/12/95 Agreement 237 618K
20: EX-11 Net Income/Share Coumpta 2 16K
21: EX-13 Annual Report 42± 200K
22: EX-21 Parent & Subsidiaries 1 12K
23: EX-23 Coopers & Lybrand Consel 1 9K
24: EX-27 Financial Data Schedule 2 10K
SELECTED FINANCIAL AND OPERATING DATA
FOR THE YEARS ENDED JUNE 30
[Download Table]
(in thousands) 1995 1994* 1993*
------------------------------------------------------------------------
Net Revenues
Publishing
Playboy magazine
Subscription $ 48,556 $ 46,389 $ 44,919
Newsstand 24,876 25,946 23,470
Advertising 27,588 27,978 30,406
Other 3,362 3,654 4,078
------------------------------------------------------------------------
Total Playboy magazine 104,382 103,967 102,873
Playboy-related businesses 22,891 19,401 22,008
Other -- -- 163
------------------------------------------------------------------------
Total Publishing 127,273 123,368 125,044
------------------------------------------------------------------------
Catalog 61,435 48,556 39,411
------------------------------------------------------------------------
Entertainment
Playboy Television
Pay-per-view 11,934 8,989 8,006
Monthly subscription 7,004 7,397 8,575
Satellite direct-to-home
and other 10,022 6,511 4,732
------------------------------------------------------------------------
Total Playboy Television 28,960 22,897 21,313
Domestic home video 9,517 7,019 10,133
International television
and home video 11,160 9,891 9,822
Movies and other 2,060 282 1,329
------------------------------------------------------------------------
Total Entertainment 51,697 40,089 42,597
------------------------------------------------------------------------
Product Marketing 6,844 6,974 7,823
------------------------------------------------------------------------
Total Net Revenues $247,249 $218,987 $214,875
========================================================================
Operating Income (Loss)
Publishing
Playboy magazine $ 7,168 $ 3,546 $ 7,559
Playboy-related businesses 7,572 5,188 8,426
Administrative expenses, new
magazine development and other (4,031) (5,041) (5,573)
------------------------------------------------------------------------
Total Publishing 10,709 3,693 10,412
------------------------------------------------------------------------
Catalog 5,209 4,148 4,064
------------------------------------------------------------------------
Entertainment
Before programming
expense 21,097 10,870 15,887
Programming expense (20,130) (18,174) (14,076)
------------------------------------------------------------------------
Total Entertainment 967 (7,304) 1,811
------------------------------------------------------------------------
Product Marketing 3,428 2,518 1,732
------------------------------------------------------------------------
Corporate Administration
and Promotion (17,256) (17,278) (16,993)
------------------------------------------------------------------------
Total Operating Income (Loss) $ 3,057 $(14,223) $ 1,026
========================================================================
*Certain reclassifications have been made to conform to the fiscal 1995
presentation.
22
SELECTED FINANCIAL AND OPERATING DATA
FOR THE YEARS ENDED JUNE 30
[Enlarge/Download Table]
(in thousands, except per share amounts,
number of employees and ad pages) 1995 1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------------------------------------------------
Selected Financial Data
Net revenues $247,249 $218,987 $214,875 $193,749 $174,042 $167,697
Interest income (expense), net (569) (779) (131) 1,828 3,224 2,410
Income (loss) from continuing operations
before extraordinary item and cumulative
effect of change in accounting principle 629 (16,364) 365 1,822 2,411 3,596
Net income (loss) 629 (9,484) 365 3,510 4,510 6,228
Per common share
Income (loss) from continuing operations
before extraordinary item and cumulative
effect of change in accounting principle .03 (.83) .02 .10 .13 .19
Net income (loss) .03 (.48) .02 .19 .24 .33
Cash dividends declared -- -- -- -- -- --
Before one-time and unusual items and
nonrecurring expenses/(1)/
Operating income (loss) 3,057 (9,610) 3,291 3,548 2,290 265
Net income (loss) 629 (12,371) 925 4,069 3,147 2,350
Net income (loss) per common share .03 (.62) .05 .22 .17 .12
Adjusted EBITDA/(2)/ $ 5,603 $ (9,984) $ (4,114) $ 58 $ 665 $ 8,219
-------------------------------------------------------------------------------------------------------------------------------
At Year End
Total assets $137,835 $131,921 $127,767 $121,211 $115,464 $110,118
Long-term financing obligations $ 687 $ 1,020 $ 1,347 $ 1,669 $ 1,987 $ 2,300
Shareholders' equity $ 47,090 $ 46,311 $ 55,381 $ 43,256 $ 39,588 $ 36,230
Long-term financing obligations as a
percentage of total capitalization 1.4% 2.2% 2.4% 3.7% 4.8% 6.0%
Number of shares outstanding
Class A 4,714 4,709 4,701 4,701 4,697 4,697
Class B 15,276 15,255 15,192 13,830 13,813 14,090
Number of employees 600 578 624 637 599 595
-------------------------------------------------------------------------------------------------------------------------------
Operating Data
Playboy magazine ad pages 595 595 660 648 724 674
Investments in Company-produced and
licensed entertainment programming $ 21,313 $ 17,185 $ 23,033 $ 16,615 $ 15,876 $ 11,411
Amortization of investments in Company-
produced and licensed entertainment
programming $ 20,130 $ 18,174 $ 14,076 $ 8,972 $ 7,931 $ 10,239
Playboy Television (at year end)
Pay-per-view homes 10,600 9,600 9,100 7,300 4,700 3,200
Monthly subscribing households 201 205 232 281 314 358
Satellite direct-to-home households 3,282 1,926 197 106 N/A/(3)/ N/A/(3)/
Percentage of total U.S. pay-per-view
homes with access to Playboy Television 45.2% 43.2% 50.1% 43.6% 31.1% 26.1%
-------------------------------------------------------------------------------------------------------------------------------
For a more detailed description of the Company's financial position, results of
operations and accounting policies, please refer to Management's Discussion and
Analysis of Financial Condition and Results of Operations and the Consolidated
Financial Statements and notes thereto, beginning on page 25.
Notes to Selected Financial and Operating Data
/(1)/ One-time and unusual items and nonrecurring expenses consist of the
following: 1994: Restructuring expenses of $2,875, unusual items of
$1,676, primarily due to write-offs of entertainment programming, and
nonrecurring expenses of $62. Fiscal 1994 results also included a one-time
tax benefit of $7,500 that resulted from the adoption of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, which
required a change in the method of accounting for income taxes. 1993:
Expenses of $1,379 incurred in connection with the relocations of the
Entertainment Group's headquarters, the Publishing Group's headquarters
and the Catalog Group's operations facility, a $1,000 tax benefit
resulting from the settlement of a tax dispute for an amount less than the
related reserve and a gain of $665 resulting from the sale of the Catalog
Group's former operations facility. Fiscal 1993 results also included
nonrecurring expenses of $886, consisting primarily of operating losses
and restructuring charges related to the events business. 1992: Expenses
of $1,064 incurred in connection with the relocation of the Entertainment
Group's headquarters and a gain of $505 resulting from the sale of a note
related to the disposition of one of the Company's former properties.
1991: Interest income of $1,363, which resulted from a state income tax
refund pursuant to a settlement agreement with the state of Illinois.
1990: A gain of $4,806 resulting from the sale of the assets of Boarts
International, Inc. and expenses of $928 related to the Company's
recapitalization in June 1990.
/(2)/ Represents earnings before income taxes plus depreciation and amortization
less cash investments in programming.
/(3)/ The Company began to focus on the emerging satellite direct-to-home market
in fiscal 1992.
23
FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS
FOR THE YEARS ENDED JUNE 30
[Enlarge/Download Table]
(in thousands) 1995/(1)/ 1994/(1)/ 1993/(1)/
---------------------------------------------------------------------------------------------------
Net Revenues/(2)/ /(3)/
Publishing $127,273 $123,368 $125,044
Catalog 61,435 48,556 39,411
Entertainment 51,697 40,089 42,597
Product Marketing 6,844 6,974 7,823
---------------------------------------------------------------------------------------------------
Total $247,249 $218,987 $214,875
===================================================================================================
Income (Loss) from Continuing Operations Before Income Taxes
and Cumulative Effect of Change in Accounting Principle/(3)/
Publishing $ 10,709 $ 3,693 $ 10,412
Catalog 5,209 4,148 4,064
Entertainment 967 (7,304) 1,811
Product Marketing 3,428 2,518 1,732
Corporate Administration and Promotion/(4)/ (17,256) (17,278) (16,993)
Investment income (expense), net 139 (128) 274
Interest expense (708) (651) (405)
Minority interest expense -- -- (860)
Other, net (52) (239) 444
---------------------------------------------------------------------------------------------------
Total $ 2,436 $(15,241) $ 479
===================================================================================================
Identifiable Assets
Publishing $ 38,433 $ 39,645 $ 37,658
Catalog 14,807 12,184 12,175
Entertainment 53,229 49,737 50,858
Product Marketing 5,964 6,133 8,506
Corporate Administration and Promotion/(5)/ 25,402 24,222 18,570
---------------------------------------------------------------------------------------------------
Total $137,835 $131,921 $127,767
===================================================================================================
Depreciation and Amortization/(6)/
Publishing $ 909 $ 1,024 $ 1,060
Catalog 673 792 1,061
Entertainment 20,606 18,573 14,418
Product Marketing 194 182 195
Corporate Administration and Promotion 2,098 1,871 1,706
---------------------------------------------------------------------------------------------------
Total $ 24,480 $ 22,442 $ 18,440
===================================================================================================
Capital Expenditures/(7)/
Publishing $ 101 $ 367 $ 2,079
Catalog 10 21 491
Entertainment 22 151 1,646
Product Marketing 2 7 248
Corporate Administration and Promotion 247 275 886
---------------------------------------------------------------------------------------------------
Total $ 382 $ 821 $ 5,350
===================================================================================================
The accompanying notes are an integral part of these tables.
Notes to Financial Information Relating to Industry Segments
/(1)/ In fiscal 1995, the Company revised its segment presentation. Catalog
operations, formerly included in Publishing, are now reported separately.
In addition, certain marketing activities previously reported in Product
Marketing are now included in Corporate Administration and Promotion. The
prior years' segment information has been restated to conform to the
fiscal 1995 presentation.
/(2)/ Net revenues include export sales of $30,858, $26,709 and $28,725 in
fiscal 1995, 1994 and 1993, respectively.
/(3)/ Intercompany transactions have been eliminated.
/(4)/ Corporate Administration and Promotion expenses together with segment
selling and administrative expenses make up the Company's selling and
administrative expenses.
/(5)/ Corporate assets consist principally of property and equipment,
trademarks and net deferred tax assets.
/(6)/ Amounts include depreciation of property and equipment, amortization of
intangible assets, expenses related to the 1995 Stock Incentive Plan and
amortization of investments in entertainment programming.
/(7)/ Capital expenditures for fiscal 1993 were higher than fiscal 1994 and
1995 due to the relocations of the Publishing Group's headquarters in New
York, the Catalog Group's operations facility in suburban Chicago and the
Entertainment Group's headquarters in Los Angeles.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED JUNE 30, 1995
COMPARED TO FISCAL YEAR ENDED JUNE 30, 1994
The Company's revenues were $247.2 for the fiscal year ended June 30, 1995, a
13% increase over revenues of $219.0 for the fiscal year ended June 30, 1994.
This increase was primarily due to higher revenues from the Catalog and
Entertainment Groups, and the Company's Playboy-related businesses.
The Company reported operating income of $3.1 for the year ended June 30, 1995
compared to an operating loss of $14.2 for the year ended June 30, 1994 largely
due to a significant improvement in operating income of the Publishing Group
combined with operating income reported for the Entertainment Group in the
current year compared to an operating loss in the prior year. In addition, the
prior year included a $2.9 restructuring charge, a $1.7 net charge for unusual
items, the establishment of various reserves totaling $1.5, and a $1.0 reduction
in carrying value of inventories.
Net income for the year ended June 30, 1995 was $.6, or $.03 per share,
compared to a net loss of $9.5, or $.48 per share, for the prior year. A $.6
loss on disposal of discontinued operations in the prior year resulted from
increasing the reserve related to the environmental cleanup of a site in Lake
Geneva, Wisconsin, formerly owned by a subsidiary of the Company. The net loss
for the year ended June 30, 1994 also included a one-time tax benefit of $7.5
that resulted from the adoption of Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes, which required a change in the method of
accounting for income taxes.
The Company's operating income of $3.1 and net income of $.6, or $.03 per
share, for the year ended June 30, 1995 compared to an operating loss of $9.6
and a net loss of $12.4, or $.62 per share, for the year ended June 30, 1994,
excluding the impact of the $2.9 restructuring charge, the $1.7 net charge
related to unusual items and the $7.5 one-time tax benefit in the prior year.
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
Fiscal 1995 Publishing Group revenues of $127.3 increased $3.9, or 3%, compared
to fiscal 1994. Operating income of $10.7 increased $7.0 compared to prior year
operating income of $3.7, which was impacted by restructuring expenses of $1.1,
a charge for unusual items of $.4, and charges totaling $1.5 related to the
establishment of reserves and reductions in carrying value of inventories.
Playboy Magazine
Playboy magazine circulation revenues increased 2%, or $1.1, for the year ended
June 30, 1995 primarily due to 5% higher subscription revenues and favorable
newsstand sales adjustments related to prior issues in the current year,
partially offset by 9% fewer U.S. and Canadian newsstand copies sold in the
current year. Advertising revenues declined 1%, or $.4, for the year ended June
30, 1995 compared to the prior year as a result of slightly lower average net
revenue per page, despite a 5% rate increase effective with the January 1995
issue, as a result of higher frequency discounts and special pricing in the
current year and a change in the mix of advertising pages sold. Advertising
pages for fiscal 1995 were flat compared to fiscal 1994, which included the
January 1994 40th anniversary issue that contained a higher than normal number
of advertising pages. Advertising sales for the first quarter fiscal 1996 issues
of the magazine are closed, and the Company will report a 4% increase in the
number of advertising pages compared to the fiscal 1995 first quarter.
Playboy magazine operating income more than doubled for the year ended June
30, 1995 compared to the prior year principally due to decreases in
manufacturing costs and direct costs and operating expenses. Manufacturing
costs for the year ended June 30, 1995 decreased 5% compared to the prior year
principally due to the increased size of the January 1994 40th anniversary issue
of the magazine in the prior year, partially offset by slightly higher paper
prices in the current year. These higher paper prices began impacting the
Company in the second half of fiscal 1995, though most dramatically in the
fourth quarter as average paper prices increased 18% compared to the fourth
quarter of the prior year. For the year ended June 30, 1995 average paper prices
were 1% higher than the prior year. Direct costs and operating expenses
decreased 2% for the year ended June 30, 1995 largely due to prior year charges
totaling $2.1 related to the establishment of reserves, reduction in carrying
value and write-off of editorial inventory and restructuring. Also contributing
to the decrease in direct costs and operating expenses were lower advertising
promotion expenses and lower costs related to the new photo studio in California
in the current year and expenses in the prior year associated with the 40th
anniversary issue, partially offset by an increase in subscription acquisition
amortization expense and higher costs related to a postal rate increase that was
effective on January 1, 1995.
Direct costs and operating expenses are expected to be impacted approximately
$8.7 in fiscal 1996 compared to fiscal 1995 due to paper price and postal rate
increases. The Company plans to implement cost-saving strategies such as
reducing promotional spending and improving efficiencies by lowering the
advertising rate base from 3.40 million to 3.15 million to help offset the
higher paper and postage costs.
25
Playboy-related Businesses
Operating income from the Company's Playboy-related businesses increased $2.4,
or 46%, on a $3.5, or 18%, increase in revenues for the year ended June 30, 1995
compared to the prior year. These increases were largely due to higher revenues
from newsstand specials as a result of the publication of two additional
newsstand specials in the current year and higher royalties from Playboy foreign
editions.
Administrative Expenses and Other
The Publishing Group's administrative expenses and other costs decreased 20% for
the year ended June 30, 1995 compared to the prior year. The decrease was
primarily due to lower salary expenses and lower employee medical benefit
expenses in the current year, partially offset by higher incentive compensation
costs in the current year and the receipt of a management fee from duPont
Publishing, Inc. in the prior year.
CATALOG GROUP
Fiscal 1995 Catalog Group revenues, which were formerly included in the
Publishing Group, of $61.4 increased $12.9, or 27%, compared to fiscal 1994. The
revenue increase was a result of higher sales volume from all of the Company's
catalogs, Critics' Choice Video, Collectors' Choice Music, which was first
mailed to prospective customers in October 1993, and Playboy. Fiscal 1995
Catalog Group operating income of $5.2 increased $1.1, or 26%, compared to
fiscal 1994 due to higher operating income from all three of the catalogs. The
Critics' Choice Video catalog reported higher operating income partially
attributable to a licensing agreement entered into in February 1994 that allows
the Company to purchase inventory at a lower cost. However, expenses were higher
due to increased mailings to prospective customers, and paper price and postal
rate increases. The Collectors' Choice Music catalog generated a meaningful
profit in fiscal 1995, its first full year of operation, despite higher expenses
related to significantly expanding circulation, and paper price and postal rate
increases. In fiscal 1996, the Company plans to increase the circulation for all
three catalogs, despite expected higher costs compared to fiscal 1995 related to
the previously discussed paper price and postal rate increases of approximately
$2.0.
ENTERTAINMENT GROUP
Fiscal 1995 Entertainment Group revenues of $51.7 increased $11.6, or 29%,
compared to fiscal 1994. The Entertainment Group reported fiscal 1995 operating
income of $1.0 compared to a prior year operating loss of $7.3, which included
restructuring expenses of $.6 and a charge for unusual items of $1.6.
The following discussion focuses on the profit contribution of each business
before programming expense ("profit contribution").
Playboy Television
For the year ended June 30, 1995, revenues of the Company's domestic pay
television service, Playboy Television, were 26% higher compared to the prior
year. Pay-per-view revenues increased 33%, attributable to higher buy rates, an
increase in the number of addressable homes to which Playboy Television was
available, and higher average revenue per buy in the current year. At June 30,
1995, Playboy Television was available to 10.6 million addressable homes, a 10%
increase compared to June 30, 1994. The average annual increase in the number of
addressable homes to which Playboy Television was available over the previous
five years was 34%. 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. Monthly subscription
revenues declined 5% for the year ended June 30, 1995 compared to the prior year
due to a decline in the average number of subscribing households. The number of
monthly subscribers at June 30, 1995 was relatively flat compared to June 30,
1994.
Satellite direct-to-home and other revenues were 54% higher for the year ended
June 30, 1995 compared to the prior year. The increase was primarily due to a
64% increase in revenues from sales of Playboy Television to home satellite dish
viewers, due to new revenues from the launch of Playboy Television on DirecTV
and PrimeStar, digital broadcast satellite services, and growth in selling
directly to the backyard dish market, distribution by commercial retailers of
satellite programming and increased emphasis on consumer marketing.
Profit contribution for Playboy Television increased $3.9, or 46%, compared to
the prior year as the net increase in revenues more than offset higher expenses
in the current year related to selling directly to the backyard satellite dish
market and the absence of sublease income from the Company's satellite
transponder in the current year. As a result of the Company's move in May 1994
to 24-hour availability for Playboy Television, it no longer receives monthly
sublease income of approximately $.1, the cumulative loss of which was more than
offset in fiscal 1995 by the higher profit contribution resulting from increased
revenues due to 24-hour availability in additional homes. At June 30, 1995,
Playboy Television was available in 3.0 million homes on a 24-hour basis
compared to 1.2 million homes at June 30, 1994.
AdulTVision
In July 1995, the Company launched a second domestic pay television channel,
AdulTVision, to complement the Playboy Television service and to protect the
Company against competitive pressures from other adult channels. 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. The
channel is expected to be at least break even in fiscal 1996, its first year of
operation.
Domestic Home Video
Domestic home video revenues rebounded $2.5 for the year ended June 30, 1995
compared to the prior year primarily due to revenues in the
26
current year related to a guarantee from a new licensing agreement with the
Company's distributor related to catalog titles. Additionally, domestic home
video launched two new product lines, a direct-response continuity series with
Warner Music Enterprises, Inc. to sell Playboy titles, and The Eros Collection,
a small-budget Playboy-produced line of movies. Also contributing to the
increase in revenues were adjustments in the prior year attributable to weak
sales of fiscal 1993 titles, partially offset by sales in the prior year of
higher-priced rental titles. Profit contribution increased $3.7 for the year
ended June 30, 1995 compared to the prior year primarily due to the increase in
revenues in the current year combined with higher marketing expenses in the
prior year largely attributable to fiscal 1993 releases.
International Television and Home Video
For the year ended June 30, 1995, revenues and profit contribution from the
international television and home video businesses increased $1.3 and $.1,
respectively, compared to the prior year. Profit contribution from the
international home video business increased $.7 on a $.6 increase in revenues. A
decrease in the profit contribution of the international television business of
$.6 is primarily due to bad debt expense of $1.3 in the current year related to
sales to an international television distributor in the prior year, partially
offset by an increase in revenues of $.7, in part due to the recent launch of a
Playboy Television channel in the United Kingdom. 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 $2.0 for the year ended June 30, 1995
compared to the prior year. The increase was principally due to increased
investments in entertainment programming combined with the higher international
television and home video revenues. Partially offsetting the increase was a $.4
unusual charge in the prior year related to the establishment of a reserve for
programming of O.J. Simpson: Minimum Maintenance Fitness for Men ("Minimum
Maintenance"), and a $.9 favorable effect of a change in accounting estimate. In
the second quarter of fiscal 1995, the distribution rights and the remaining
inventory of Minimum Maintenance were sold, which resulted in an immaterial
profit contribution.
The Company revised its amortization method for licensed film costs during the
fourth quarter of fiscal 1994 because of its decision to offer Playboy
Television on a 24-hour basis, which resulted in a change in the scheduling of
licensed films. Licensed films are being aired throughout the term of the
license period, and related costs are being amortized over such period,
generally three years.
Cash investments in entertainment programming for all of the Entertainment
Group's businesses, including those related to Movies and Other as discussed
below, were $17.2 in fiscal 1994 and $21.3 in fiscal 1995, and are planned for
$27.0 in fiscal 1996. As a result of these higher levels of cash investments,
management anticipates that programming amortization expense in fiscal 1996 will
be approximately $25.0, or approximately $5.0 higher than in fiscal 1995.
Movies and Other
For the year ended June 30, 1995, revenues from the Entertainment Group's movies
and other businesses increased $1.8 compared to the prior year primarily due to
revenues in the current year related to three new feature-length films produced
in conjunction with Motion Picture Corporation of America, combined with
adjustments in the prior year related to the fiscal 1993 home video release of
the documentary film Hugh Hefner: Once Upon a Time. Operating performance for
the year ended June 30, 1995 increased $2.1 primarily due to the increase in
revenues combined with the favorable impact in the current year of a $1.2 market
value adjustment for the documentary film in the prior year, partially offset by
current year programming amortization expense related to the feature-length
films.
The Entertainment Group's administrative expenses and other costs for the year
ended June 30, 1995 decreased $.6 compared to the prior year. This decrease was
primarily due to costs in the prior year of $.6 associated with restructuring.
Additionally, higher incentive compensation costs were mostly offset by lower
employee medical benefit expenses in the current year.
PRODUCT MARKETING GROUP
Product Marketing Group revenues of $6.8 for the year ended June 30, 1995
decreased $.1, or 2%, compared to the prior year primarily due to lower
royalties from a principal Sarah Coventry licensee that experienced financial
difficulties and was terminated, combined with lower revenues from Special
Editions, Ltd., as the Company's art publishing and art products business moves
from direct sales to licensing. Mitigating the above were 16% higher
international product licensing royalties in the current year primarily due to
strong sales in Hong Kong and China. Operating income of $3.4 increased $.9, or
36%, for the year ended June 30, 1995 compared to the prior year principally due
to increases in the operating performances of international product licensing,
primarily due to the higher revenues, and Special Editions, Ltd., principally
due to a $.5 reduction in carrying value of art publishing inventory in the
prior year, partially offset by the lower revenues. Partially offsetting the
above was a decrease in Sarah Coventry operating income primarily due to the
decrease in revenues partially offset by lower bad debt expense in the current
year.
CORPORATE ADMINISTRATION AND PROMOTION
Corporate administration and promotion expense of $17.3 for the year ended June
30, 1995 was stable compared to the prior year. Higher incentive compensation
costs in the current year were offset by net one-time expenses in the prior year
associated with charges related to restructuring and a real estate tax
obligation related to the Company's former office space in Los Angeles,
California, partially offset by a benefit related to an insurance settlement.
FISCAL YEAR ENDED JUNE 30, 1994
COMPARED TO FISCAL YEAR ENDED JUNE 30, 1993
The Company's revenues were $219.0 for the fiscal year ended June 30, 1994, a 2%
increase over revenues of $214.9 for the fiscal year ended June 30, 1993. This
increase was primarily due to higher revenues from the Catalog Group and the pay
television business, partially offset by lower revenues from the domestic home
video and Playboy-related businesses.
27
The Company reported an operating loss of $14.2 for the year ended June 30,
1994 compared to operating income of $1.0 for the year ended June 30, 1993. This
decrease was primarily due to an operating loss for the Entertainment Group in
fiscal 1994, coupled with declines in operating income for Playboy-related
businesses and Playboy magazine. In addition, the year-to-year comparison was
unfavorably impacted by $7.1 of charges in fiscal 1994 related to restructuring,
unusual items, the establishment of various reserves and a reduction in carrying
value of inventories. Partially offsetting the year-to-year decline in operating
performance was the impact in fiscal 1993 of move-related expenses of $1.4 and
nonrecurring expenses of $.9, which consisted primarily of operating losses and
restructuring charges related to the events business.
For the year ended June 30, 1994, the Company reported nonoperating expense of
$1.0 compared to $.5 in the prior year primarily due to a $.7 gain in the prior
year related to the sale of the Company's former suburban Chicago Catalog Group
operations facility and a $.4 decrease in investment income, partially offset by
$.9 of minority interest expense in the prior year related to the Company's 80%
ownership of Critics' Choice Video, Inc. There was no such expense in fiscal
1994, as a result of the Company's purchase for $3.0 of the remaining 20% of
Critics' Choice Video, Inc. common stock effective July 1, 1993.
The net loss for the year ended June 30, 1994 was $9.5, or $.48 per share,
compared to net income of $.4, or $.02 per share, for the prior year. A $.6 loss
on disposal of discontinued operations in fiscal 1994 resulted from increasing
the reserve related to the environmental cleanup of a site in Lake Geneva,
Wisconsin, formerly owned by a subsidiary of the Company. The net loss for the
year ended June 30, 1994 also included a one-time tax benefit of $7.5 that
resulted from the adoption of Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes, which required a change in the method of
accounting for income taxes. Net income for the year ended June 30, 1993
included a one-time tax benefit of $1.0 that resulted from the settlement of a
tax dispute with the state of California in December 1992 for an amount less
than the related reserve.
Excluding the impact of the $2.9 restructuring charge, the $1.7 net charge
related to unusual items and the $7.5 one-time tax benefit in the year ended
June 30, 1994, and the one-time move-related and nonrecurring expenses of $2.3,
the one-time tax benefit of $1.0 and the $.7 gain resulting from the sale of the
former Catalog Group operations facility in the year ended June 30, 1993, the
operating loss would have been $9.6 in fiscal 1994 compared to operating income
of $3.3 in fiscal 1993. The net loss would have been $12.4, or $.62 per share,
for the year ended June 30, 1994 compared to net income of $.9, or $.05 per
share, for the year ended June 30, 1993.
PUBLISHING GROUP
Fiscal 1994 Publishing Group revenues of $123.4 decreased $1.7, or 1%, compared
to fiscal 1993. Operating income of $3.7, which was impacted by restructuring
expenses of $1.1, a charge for unusual items of $.4, and charges totaling $1.5
related to the establishment of reserves and reductions in carrying value of
inventories, decreased $6.7, or 65%, compared to the prior year, which was
impacted by one-time move-related expenses of $.4.
Playboy Magazine
Playboy magazine circulation revenues increased 6%, or $3.9, for the year ended
June 30, 1994 primarily due to the impact of 14% more U.S. and Canadian
newsstand copies sold in fiscal 1994 and higher subscription revenues primarily
resulting from price increases. Advertising revenues declined 8%, or $2.4, for
the year ended June 30, 1994 compared to the prior year primarily as a result of
10% fewer advertising pages, partially mitigated by slightly higher average net
revenue per page due to a 5% rate increase effective with the January 1994
issue. Revenues of $.5 resulting from the settlement of a copyright
infringement lawsuit favorably impacted fiscal 1993.
Playboy magazine operating income declined 53%, or $4.0, for the year ended
June 30, 1994 compared to the prior year principally due to an increase in
direct costs and operating expenses combined with the decline in advertising
revenues, which more than offset the circulation revenue increase discussed
above. Direct costs and operating expenses increased 6% for the year ended June
30, 1994, in part due to charges totaling $1.4 related to the establishment of
reserves and reduction in carrying value and write-off of editorial inventory.
Excluding the charges of $1.4, direct costs and operating expenses would have
increased 4% for fiscal 1994. Restructuring expenses of $.7 in fiscal 1994
related to Playboy magazine were largely offset by resulting savings in the
fiscal year. Manufacturing costs for the year ended June 30, 1994 increased 4%
compared to the prior year principally due to higher paper prices, which began
impacting the Company late in the third quarter of fiscal 1993. For the year
ended June 30, 1994, average paper prices were 7% higher than in the prior year.
However, fourth quarter fiscal 1994 issues of the magazine benefited from
negotiated paper prices that were lower than prior quarters, although still
higher than fiscal 1993 levels.
Playboy-related Businesses
Revenues from the Company's Playboy-related businesses decreased 12% for the
year ended June 30, 1994 compared to the prior year primarily due to revenues in
fiscal 1993 related to an agreement for the use of images from the Company's
photo library for trading cards. Also contributing to the decrease were lower
revenues from the sale of newsstand specials, primarily due to lower average
copy sales in fiscal 1994, and lower royalties from foreign editions of Playboy
magazine, primarily in countries suffering from weak economies. Operating income
declined 38% for the year ended June 30, 1994 compared to the prior year
primarily due to the decrease in revenues previously discussed.
Administrative Expenses, New Magazine Development and Other
The Publishing Group's administrative expenses, new magazine development and
other costs decreased 10% for the year ended June 30, 1994 compared to the prior
year. The decrease was primarily due to expenses incurred in connection with the
relocation of the Publishing Group's headquarters in New York City in fiscal
1993, coupled with the receipt of a management fee from duPont Publishing, Inc.
in fiscal 1994. These improvements were partially offset by $.2 of costs
associated with restructuring in fiscal 1994.
CATALOG GROUP
Fiscal 1994 Catalog Group revenues of $48.5 increased $9.1, or 23%, compared to
fiscal 1993. The revenue increase was primarily a result of higher sales volume
from both the Critics' Choice Video and Playboy
28
catalogs, combined with the launch of the Collectors' Choice Music catalog,
which was first mailed to prospective customers in October 1993. Fiscal 1994
Catalog Group operating income of $4.2 was relatively stable as higher operating
income from the Playboy catalog due to the higher sales volume, and expenses
incurred in fiscal 1993 in connection with the relocation of the suburban
Chicago operations facility, were mostly offset by lower operating income from
the Critics' Choice Video catalog. Additionally, the revenues from the launch of
the Collectors' Choice Music catalog resulted in a small profit in fiscal 1994.
The decline in operating income from the Critics' Choice Video catalog was
primarily the result of a higher operating margin in fiscal 1993 partially
attributable to a licensing agreement that allowed the Company to purchase
inventory at a lower cost. Although the operating margin of the Catalog Group in
fiscal 1994 was below that of the prior year, it was still higher than the
margin averaged prior to the Postings acquisition in April 1992, even with
higher expenses due to increased mailings to prospective Critics' Choice Video
customers in fiscal 1994.
ENTERTAINMENT GROUP
Fiscal 1994 Entertainment Group revenues of $40.1 decreased $2.5, or 6%,
compared to fiscal 1993. The Entertainment Group reported a fiscal 1994
operating loss of $7.3, which included restructuring expenses of $.6 and a
charge for unusual items of $1.6, compared to prior year operating income of
$1.8, which was impacted by one-time move-related expenses of $.8.
The following discussion focuses on the profit contribution of each business
before programming expense ("profit contribution").
Playboy Television
For the year ended June 30, 1994, revenues of the Company's domestic pay
television service, Playboy Television, were 7% higher compared to the prior
year. Pay-per-view revenues increased 12%, partially attributable to higher buy
rates in the fourth quarter of fiscal 1994, in part due to Playboy Television's
rollout to 24-hour availability that began on May 1, 1994. At June 30, 1994,
Playboy Television was available to 9.6 million addressable homes, a 5% increase
compared to June 30, 1993. Monthly subscription revenues declined 14% for the
year ended June 30, 1994 compared to the prior year primarily due to a decline
in the average number of subscribing households. Fiscal 1994 revenues were
impacted by the effects of cable reregulation as previously discussed and by the
decision of certain cable operators to drop Playboy Television, but overall, net
access to addressable households increased in fiscal 1994.
Satellite direct-to-home and other revenues were 38% higher for the year ended
June 30, 1994 compared to the prior year. The increase was due to an 87%
increase in revenues from sales of Playboy Television to home satellite dish
viewers, as distribution by commercial retailers of satellite programming and
increased emphasis on consumer marketing improved Playboy Television's market
share in the home satellite dish industry. Partially offsetting the increase
were lower revenues from licensing the Company's anthology of short stories,
Inside Out, to Viewer's Choice in fiscal 1994 compared to licensing a PG-rated
version of the Company's dramatic series, Eden, to USA Network in fiscal 1993.
Profit contribution for Playboy Television decreased $1.0 for the year ended
June 30, 1994 compared to the prior year as the net increase in revenues was
more than offset by increased marketing activities, expenses related to selling
directly to the backyard satellite dish market and testing the increased
availability of Playboy Television from ten to 24 hours in fiscal 1994.
Domestic Home Video
Domestic home video revenues decreased $3.1 for the year ended June 30, 1994
compared to the prior year primarily due to a reduction in the number of titles
released on videocassette and laser disc, lower sales of titles in the higher-
priced rental market, and the effect of repricing selected titles from the
rental to the lower-priced sell-through market in fiscal 1994. Also contributing
to the decline in revenues were adjustments in fiscal 1994 attributable to weak
sales of fiscal 1993 titles and a favorable settlement in the prior year with
the Company's former distributor. Profit contribution decreased $2.9 for the
year ended June 30, 1994 compared to the prior year primarily due to the decline
in revenues combined with higher marketing expenses largely attributable to
fiscal 1993 releases, partially offset by lower related cost of sales expense.
Management believed that the cost of releasing 25 new titles, as in fiscal 1993,
was too high compared to total revenues generated, and as a result reduced the
number of new titles released in fiscal 1994 to 14.
International Television and Home Video
For the year ended June 30, 1994, profit contribution from the international
television business decreased $.4 compared to the prior year on a $.2 decline in
revenues. 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. Profit
contribution from the international home video business increased $.1 compared
to the prior year on a $.3 increase in revenues.
Programming Expense
Programming amortization expense associated with the Entertainment Group
businesses discussed above increased $3.4 for the year ended June 30, 1994
compared to the prior year, principally due to higher amortization resulting
from increased investments in entertainment programming, combined with a $.4
unusual charge in fiscal 1994 related to the establishment of a reserve for
programming of Minimum Maintenance.
Other
For the year ended June 30, 1994, revenues from the Entertainment Group's other
businesses declined $1.0 compared to the prior year primarily due to the fiscal
1993 home video release of the documentary film Hugh Hefner: Once Upon a Time,
and to adjustments in fiscal 1994 related to the release. Operating performance
for the year ended June 30, 1994 decreased $1.7 primarily due to the decline in
revenues and the $1.2 market value adjustment for the documentary film,
partially offset by lower related marketing and programming amortization
expenses in fiscal 1994.
The Entertainment Group's administrative expenses and other costs for the year
ended June 30, 1994 decreased $.2 compared to the prior year. This decrease was
primarily due to move-related expenses of $.8 related to subleasing vacant space
in the Entertainment Group's former headquarters in fiscal 1993, partially
offset by $.6 of costs associated with restructuring in fiscal 1994.
29
PRODUCT MARKETING GROUP
Product Marketing Group revenues of $7.0 for the year ended June 30, 1994
decreased $.8, or 11%, compared to fiscal 1993, largely due to lower revenues in
fiscal 1994 from the sale of wearable art products manufactured for the Company,
partially offset by a 4% increase in royalties from the international product
licensing business. Operating income of $2.5 increased $.8, or 45%, for the year
ended June 30, 1994 compared to the prior year primarily due to the impact of
operating losses in fiscal 1993 related to certain events activities that were
discontinued and a 21% increase in international product licensing operating
income. Partially offsetting this improvement were a $.5 reduction in carrying
value of art publishing inventory, higher administrative expenses and $.1 of
restructuring expense in fiscal 1994.
CORPORATE ADMINISTRATION AND PROMOTION
Corporate administration and promotion expense of $17.3 for the year ended June
30, 1994 was relatively stable compared to the prior year as costs associated
with restructuring and a charge for a real estate tax obligation related to the
Company's former office space in Los Angeles, California were offset by a
benefit related to an insurance settlement and savings resulting from
restructuring.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1995, the Company had $1.5 in cash and cash equivalents and $5.0 in
short-term borrowings, compared to $1.3 in cash and cash equivalents and $6.0 in
short-term borrowings at June 30, 1994. The Company expects to meet its short-
term and long-term cash requirements through its revolving line of credit, other
possible long-term financing and cash generated from operations.
Cash Flows From Operating Activities
Net cash provided by operating activities was $3.2 for the year ended June 30,
1995 compared to cash used for operating activities of $4.4 for the prior year.
This increase was primarily due to the Company's improved operating performance
in the current year. Additionally, there was cash provided by accounts payable
during fiscal 1995 compared to cash used for accounts payable in the prior year,
principally in the Entertainment and Catalog Groups, primarily as a result of
liabilities at June 30, 1995 related to profit participation agreements,
licensed programming costs and catalog inventory. There also was cash provided
by deferred subscription acquisition costs in the current year compared to cash
used in the prior year, primarily due to higher spending in fiscal 1994.
Partially offsetting these increases were lower cash provided from deferred
revenues, principally due to higher subscription mailings in the prior year, and
a higher use of cash in the current year related to accounts receivable,
principally in the Entertainment Group, primarily as a result of higher pay-per-
view, continuity series and feature-length film sales in the current year,
partially offset by a bad debt reserve established in the current year related
to an international television distributor. Cash used for inventories in fiscal
1995 was primarily due to higher paper inventory at June 30, 1995 as a result of
the timing of shipments, whereas cash provided by inventories in fiscal 1994 was
principally attributable to an increase of inventory related to the Critics'
Choice Video catalog in fiscal 1993. The Company invested $21.3 in Company-
produced and licensed entertainment programming during fiscal 1995 compared to
$17.2 in the prior year, and expects to invest approximately $27.0 in such
programming in fiscal 1996. Net cash provided by discontinued operations in
fiscal 1994 of $.5 primarily resulted from a United Kingdom tax refund in
connection with the settlement in fiscal 1993 of litigation related to the
Company's discontinued United Kingdom gaming operations.
Net cash used for operating activities was $4.4 for the year ended June 30,
1994 compared to $24.9 for the prior year. This was in part due to a decrease in
cash used for accounts receivable, primarily in the Publishing and Entertainment
Groups, principally due to lower advances from the Company's national
distributor of Playboy magazine for open issues at June 30, 1993 compared to the
prior year, and lower sales in fiscal 1994 of home videos and monthly
subscriptions to Playboy Television. Partially offsetting these decreases were
increased accounts receivable due to higher sales of the Company's entertainment
programming in international markets in the fourth quarter of fiscal 1994
compared to the prior year. Cash provided by deferred revenues increased due to
an overall increase in subscription mailings and an increased level of higher
margin direct-to-publisher subscription sales of Playboy magazine in fiscal 1994
compared to the prior year, partially offset by higher cash used for deferred
subscription acquisition costs in fiscal 1994. Additionally, cash used for
inventories decreased for fiscal 1994 primarily due to an increase of inventory
related to the Critics' Choice Video catalog in the prior year. The Company
invested $17.2 in Company-produced and licensed entertainment programming during
fiscal 1994 compared to $23.0 in the prior year. As previously discussed, net
cash provided by discontinued operations in fiscal 1994 of $.5 primarily
resulted from a United Kingdom tax refund. During fiscal 1993, $2.2 was paid at
the inception of the Company's approximately nine-year satellite transponder
lease, and the Company entered into a settlement agreement with the state of
California regarding tax years 1974 and 1976 through 1981, pursuant to which
$2.3 was paid by the Company.
Cash Flows From Investing Activities
Net cash used for investing activities was $.3 for the year ended June 30, 1995
compared to $2.3 for the prior year. Capital expenditures for the year ended
June 30, 1995 were $.4 lower than in the prior year. The Company also leased
$1.4 of furniture and equipment in fiscal 1995, compared to $.9 in fiscal 1994.
The Company expects to lease assets totaling approximately $1.7 and to make
capital expenditures of approximately $.5 in fiscal 1996. Under the terms of its
July 1988 purchase of an 80% interest in Critics' Choice Video, Inc., effective
July 1, 1993, the Company acquired the remaining 20% interest in Critics' Choice
Video, Inc. for $3.0, which consisted of $1.5 in cash and one-year promissory
notes totaling $1.5, which were paid July 1, 1994.
Net cash used for investing activities was $2.3 for the year ended June 30,
1994 compared to net cash provided by investing activities of $6.7 for the prior
year. The difference was primarily due to sales of short-term investments in
fiscal 1993 to fund increased investments in entertainment programming and
working capital requirements. Capital expenditures for the year ended June 30,
1994 were $4.5 lower than in the prior year primarily as a result of leasehold
improvements made in fiscal 1993 in connection with the relocations of the
Company's Los Angeles and New York offices and suburban Chicago Catalog Group
operations facility. The Company also leased $.9 of furniture and equipment in
fiscal 1994, compared to $2.7 in fiscal 1993, which was primarily related to the
relocation of the Publishing Group's headquarters.
30
In fiscal 1993, the Company sold the facility previously utilized by its Catalog
Group operations, for which it received net proceeds of $1.2. As previously
discussed, in fiscal 1994, the Company acquired the remaining 20% interest in
Critics' Choice Video, Inc. for $3.0, of which $1.5 was cash.
Cash Flows From Financing Activities
Net cash used for financing activities was $2.7 for the year ended June 30, 1995
compared to net cash provided by financing activities of $6.0 in the prior year.
The decrease is principally due to a reduction in short-term borrowings under
the Company's revolving line of credit of $1.0 in fiscal 1995 compared to an
increase in short-term borrowings of $6.0 in fiscal 1994. Also contributing to
the decrease was the payment on July 1, 1994 of the $1.5 promissory notes
referred to above.
Net cash provided by financing activities was $6.0 for the year ended June 30,
1994 principally due to an increase in short-term borrowings of $6.0 under the
Company's revolving line of credit in fiscal 1994. Net cash provided by
financing activities of $11.4 for the year ended June 30, 1993 was primarily the
result of the Company's completion of a public offering of its nonvoting Class B
stock, which resulted in net proceeds to the Company of $11.7. The Company's net
proceeds were used to repay short-term borrowings under its revolving line of
credit.
Income Taxes
Effective July 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes ("Statement 109").
When tax effected at the presently enacted tax rates, the Company's deductible
temporary differences, tax credit carryforwards and net operating loss
carryforwards ("NOLs") at July 1, 1993 resulted in a total potential gross
deferred tax asset for federal income tax purposes of $25.1. Management, after
analyzing available facts, concluded that it was prudent to establish a
valuation allowance of $12.1, which, combined with $5.5 of gross deferred tax
liabilities, resulted in the Company's recognition of a net deferred tax asset
of $7.5. In fiscal 1995, the Company realized $.6 of the $7.5 net deferred tax
asset by utilizing a portion of the NOLs against fiscal 1995 income. Management
believes that the net deferred tax asset of $6.9 at June 30, 1995 is an amount
that will more likely than not be realized in future periods.
Based on current tax law, the Company must generate approximately $20.2 of
future taxable income (net of $6.5 of taxable income that the Company will
report as a result of the automatic reversal of existing taxable temporary
differences between asset and liability values for financial reporting and
income tax purposes) prior to the expiration of the Company's NOLs for full
realization of the 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 in years subsequent to
fiscal 1995 and prior to the expiration of the Company's NOLs to realize the
$6.9 net deferred tax asset recorded at June 30, 1995. Following is a summary of
the bases for management's belief that a valuation allowance of $28.6 is
adequate, and 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 should continue to lead to increased earnings potential 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.
The reconciliation of the Company's income (loss) before income taxes for
financial statement purposes to taxable income (loss) for the years ended June
30 is as follows:
[Download Table]
1995 1994 1993
-------------------------------------------------------------------
Income (loss) before income taxes for
financial statement purposes $ 2.4 $(15.9) $ .2
Exclusion of permanent differences .8 .5 (1.0)
State taxes (.1) (.1) --
Temporary differences
Programming cost amortization (1.3) (2.1) (1.9)
Deferred subscription acquisition costs .7 (3.6) .4
Other 2.9 4.8 1.2
-------------------------------------------------------------------
Taxable income (loss) $ 5.4 $(16.4) $(1.1)
===================================================================
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. As a result, the Company
increased its reserve for this matter, which resulted in a $.6 loss on disposal
of discontinued operations in fiscal 1994. The Company believes that it has
established adequate reserves, which totaled $.8 at June 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.
31
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30
[Enlarge/Download Table]
(in thousands, except per share amounts) 1995 1994 1993
----------------------------------------------------------------------------------------------------------------------------
Net revenues $ 247,249 $ 218,987 $ 214,875
----------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales (214,327) (196,817) (180,700)
Selling and administrative expenses (29,865) (31,842) (33,149)
Restructuring expenses -- (2,875) --
Unusual items -- (1,676) --
----------------------------------------------------------------------------------------------------------------------------
Total costs and expenses (244,192) (233,210) (213,849)
----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 3,057 (14,223) 1,026
----------------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income (expense), net 139 (128) 274
Interest expense (708) (651) (405)
Minority interest expense -- -- (860)
Other, net (52) (239) 444
----------------------------------------------------------------------------------------------------------------------------
Total nonoperating expense (621) (1,018) (547)
----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes
and cumulative effect of change in accounting principle 2,436 (15,241) 479
Income tax expense (1,807) (1,123) (114)
----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
cumulative effect of change in accounting principle 629 (16,364) 365
Loss on disposal of discontinued operations -- (620) --
----------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect
of change in accounting principle 629 (16,984) 365
Cumulative effect of change in accounting principle -- 7,500 --
----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 629 $ (9,484) $ 365
============================================================================================================================
Weighted average number of common shares outstanding 19,984 19,928 18,871
============================================================================================================================
Income (loss) per common share
Income (loss) before cumulative effect
of change in accounting principle
From continuing operations $ .03 $ (.83) $ .02
From discontinued operations -- (.03) --
----------------------------------------------------------------------------------------------------------------------------
Total .03 (.86) .02
Cumulative effect of change in accounting principle -- .38 --
----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ .03 $ (.48) $ .02
============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
32
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30
[Enlarge/Download Table]
(in thousands, except share data) 1995 1994
----------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 1,471 $ 1,258
Receivables, net of allowance for doubtful accounts of $4,837 and $3,155 24,151 20,590
Inventories 21,428 19,268
Programming costs 29,740 27,658
Deferred subscription acquisition costs 9,176 10,086
Other current assets 10,190 8,808
----------------------------------------------------------------------------------------------------------------------------
Total current assets 96,156 87,668
----------------------------------------------------------------------------------------------------------------------------
Property and equipment
Land 292 292
Buildings and improvements 8,245 8,108
Furniture and equipment 19,839 20,047
Leasehold improvements 8,200 8,074
----------------------------------------------------------------------------------------------------------------------------
Total property and equipment 36,576 36,521
Accumulated depreciation (23,100) (20,867)
----------------------------------------------------------------------------------------------------------------------------
Property and equipment, net 13,476 15,654
----------------------------------------------------------------------------------------------------------------------------
Programming costs-noncurrent 3,209 4,108
Trademarks 11,046 10,106
Net deferred tax assets 6,493 7,153
Other noncurrent assets 7,455 7,232
----------------------------------------------------------------------------------------------------------------------------
Total assets $ 137,835 $ 131,921
============================================================================================================================
Liabilities
Short-term borrowings $ 5,000 $ 6,000
Current financing obligations 333 1,827
Accounts payable 19,549 13,680
Accrued salaries, wages and employee benefits 4,088 3,811
Reserves for losses on disposals of discontinued operations 766 890
Income taxes payable 875 780
Deferred revenues 42,905 41,734
Other liabilities and accrued expenses 8,621 8,040
----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 82,137 76,762
----------------------------------------------------------------------------------------------------------------------------
Long-term financing obligations 687 1,020
Other noncurrent liabilities 7,921 7,828
----------------------------------------------------------------------------------------------------------------------------
Total liabilities 90,745 85,610
----------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
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 36,381
Retained earnings 18,546 17,917
Less cost of 328,427 and 332,927 Class A common shares and 1,201,294
and 1,222,254 Class B common shares in treasury (8,069) (8,202)
----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 47,090 46,311
----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 137,835 $ 131,921
============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
33
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1995, 1994 AND 1993
[Enlarge/Download Table]
Class A Class B Capital in
Common Common Excess of Retained Treasury
(in thousands of dollars) Stock Stock Par Value Earnings Stock Total
----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1992 $50 $151 $24,655 $27,036 $(8,636) $43,256
Net income -- -- -- 365 -- 365
Issuance of 1,350,000 Class B common shares
in public offering -- 14 11,648 -- -- 11,662
Exercise of 10,000 Class B stock options -- -- 38 -- 52 90
Issuance of 1,024 Class B common shares to
employees as service awards -- -- 3 -- 5 8
----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1993 50 165 36,344 27,401 (8,579) 55,381
Net loss -- -- -- (9,484) -- (9,484)
Exercise of 8,400 Class A and
62,500 Class B stock options -- -- 35 -- 372 407
Issuance of 889 Class B common shares to
employees as service awards -- -- 2 -- 5 7
----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1994 50 165 36,381 17,917 (8,202) 46,311
Net income -- -- -- 629 -- 629
Exercise of 4,500 Class A and
20,000 Class B stock options -- -- 14 -- 128 142
Issuance of 960 Class B common shares to
employees as service awards -- -- 3 -- 5 8
----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 $50 $165 $36,398 $18,546 $(8,069) $47,090
==================================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
34
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30
[Enlarge/Download Table]
(in thousands) 1995 1994 1993
-------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income (loss) $ 629 $ (9,484) $ 365
Adjustments to reconcile net income (loss)
to net cash provided by (used for) operating activities
Depreciation of property and equipment 2,531 2,752 2,665
Amortization of intangible assets 1,590 1,516 1,699
Amortization of investments in entertainment programming 20,130 18,174 14,076
Investments in entertainment programming (21,313) (17,185) (23,033)
Cumulative effect of change in accounting principle -- (7,500) --
(Gain) loss on disposals of property and equipment 12 (2) (572)
Gain and payment related to settlement of tax case -- -- (3,296)
Payments related to transponder lease -- -- (2,241)
Changes in current assets and liabilities
Accounts receivable (3,498) 1,609 (7,423)
Inventories (2,160) 2,398 (3,645)
Deferred subscription acquisition costs 910 (2,478) 873
Other current assets (1,586) (683) (268)
Accounts payable 5,869 (1,287) 1,062
Accrued salaries, wages and employee benefits 277 (327) 461
Income taxes payable 92 (36) 165
Deferred revenues 1,171 5,416 (2,936)
Other liabilities and accrued expenses 581 366 (1,736)
-------- -------- --------
Net change in current assets and liabilities 1,656 4,978 (13,447)
-------- -------- --------
Increase in trademarks (1,856) (1,492) (1,599)
Decrease in net deferred tax assets 629 -- --
(Increase) decrease in other noncurrent assets (832) 318 (412)
Increase in other noncurrent liabilities 96 2,371 2,080
Net cash provided by (used for) discontinued operations (124) 531 (1,259)
Increase in reserve for loss on disposal of discontinued operations -- 620 524
Other, net 32 35 (478)
-------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 3,180 (4,368) (24,928)
-------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Additions to property and equipment (382) (821) (5,350)
Acquisition of Critics' Choice Video, Inc. minority interest -- (1,510) --
Proceeds from disposals of property and equipment 17 4 2,003
Net decrease in short-term investments -- 50 10,397
Other, net 50 -- (358)
-------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (315) (2,277) 6,692
-------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Increase (decrease) in short-term borrowings (1,000) 6,000 --
Net proceeds from issuance of common stock -- -- 11,662
Repayment of debt (1,850) (350) (350)
Proceeds from exercise of stock options 198 350 54
-------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (2,652) 6,000 11,366
-------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 213 (645) (6,870)
Cash and cash equivalents at beginning of year 1,258 1,903 8,773
-------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,471 $ 1,258 $ 1,903
=======================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED JUNE 30, 1995
(A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiaries. All material intercompany accounts
and transactions have been eliminated in consolidation.
Revenue Recognition: Revenues from the sale of magazine subscriptions are
recognized over the terms of the subscriptions. Sales of magazines and newsstand
specials (net of estimated returns), and revenues from the sale of
advertisements, are recorded when each issue goes on sale. Revenues from the
sale of catalog products are recognized when the items are shipped. Pay
television revenues are recognized based on pay-per-view buys and monthly
subscriber counts reported each month by the system operators carrying Playboy
Television. Domestic home video revenues are recognized based on a licensing
agreement for catalog titles and unit sales reported for new releases each month
by the Company's distributor. International television revenues are recognized
upon delivery of programming to customers and/or upon the commencement of the
license term.
Cash Equivalents: Cash equivalents are temporary cash investments with an
original maturity of three months or less at date of purchase and are stated at
cost, which approximates market value.
Inventories: Inventories are stated at the lower of cost (average cost, specific
cost and first-in, first-out) or market.
Property and Equipment: Property and equipment is stated at cost. Depreciation
is provided on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are depreciated on a straight-line basis over the
shorter of their estimated useful lives or the terms of the related leases.
Repair and maintenance costs are expensed as incurred, and major betterments are
capitalized. Sales and retirements of depreciable property and equipment are
recorded by removing the related cost and accumulated depreciation from the
accounts. Gains or losses on sales and retirements of property and equipment are
included in income.
Deferred Subscription Acquisition Costs: Costs associated with the promotion of
magazine subscriptions, which consist primarily of postage, costs to produce
direct mail solicitation materials and other costs to attract and renew
subscribers, are amortized on a cost-pool-by-cost-pool basis over the period
during which the future benefits are expected to be received. This is consistent
with the provisions of Statement of Position 93-7, Reporting on Advertising
Costs, which the Company adopted in fiscal 1995. See Note K.
Programming Costs and Amortization: Programming costs include original
programming and film acquisition costs, which are capitalized and amortized. The
portion of original programming costs assigned to the domestic pay television
market is amortized on the straight-line method over three years. The portion of
original programming costs assigned to each of the worldwide home video and
international television markets are amortized using the individual-film-
forecast-computation method. Film acquisition costs are assigned to the domestic
pay television market and are amortized on the straight-line method over the
license term, generally three years. Management believes that this method
provides a reasonable matching of expenses with total estimated revenues over
the periods that revenues associated with films and programs are expected to be
realized. Film and program amortization is adjusted periodically to reflect
changes in the estimates of amounts of related future revenues. Film and program
costs are stated at the lower of unamortized cost or estimated net realizable
value as determined on a specific identification basis. Based on management's
estimate of future total gross revenues as of June 30, 1995, substantially all
unamortized programming costs applicable to released programs are expected to be
amortized during the next three years. See Note J.
Intangible Assets: Trademark acquisition costs are capitalized and amortized on
the straight-line method over 40 years. Trademark defense, registration and
renewal costs are capitalized and amortized on the straight-line method over 15
years. Other intangible assets are comprised substantially of goodwill, which is
amortized over 40 years. Accumulated amortization of intangible assets was
$8,279,000 and $6,689,000 at June 30, 1995 and 1994, respectively.
Income (Loss) per Common Share: Income (loss) per common share was computed on
the basis of the weighted average number of shares of both Class A and Class B
common stock outstanding during each period.
(B) RESTRUCTURING EXPENSES
A $2,450,000 charge was recorded in the first quarter of fiscal 1994 related to
a reduction in the Company's workforce of approximately 10%. This charge
primarily related to employee termination payments associated with approximately
60 positions that were eliminated through a combination of early retirement,
attrition and layoffs. An additional $425,000 charge, primarily related to
employee termination payments, was recorded in the third quarter of fiscal 1994
due to further reductions in overhead costs. Employee termination payments of
approximately $615,000 and $2,140,000, respectively, were made in fiscal 1995
and 1994 related to the restructurings.
(C) UNUSUAL ITEMS
The $1,676,000 net charge for unusual items in fiscal 1994 consisted of a
$1,199,000 market value adjustment for a documentary film, Hugh Hefner: Once
Upon a Time; the establishment of a $372,000 reserve related to programming of
O.J. Simpson: Minimum Maintenance Fitness for Men; a $355,000 write-off of photo
inventory that would not be published in Playboy magazine; and a $200,000 real
estate tax obligation related to the Company's former office space in Los
Angeles, California; partially offset by a $450,000 benefit related to an
insurance settlement.
36
(D) INVESTMENT INCOME (EXPENSE), NET
Investment expense, net for the year ended June 30, 1994 included a net loss of
$150,000 related to the maturity of offsetting options on interest rate swap
agreements entered into late in fiscal 1993. See Note H. Investment income, net
for the year ended June 30, 1993, consisted primarily of $370,000 of gains
resulting from sales of the Company's short-term investments in the first
quarter and $185,000 of expenses incurred in connection with the previously
discussed options on interest rate swap agreements.
(E) OTHER ITEMS
A $665,000 gain on the sale of the Company's former suburban
Chicago Catalog Group operations facility was recognized in fiscal 1993.
(F) INCOME TAXES
The income tax provision (benefit) consisted of the following for the years
ended June 30 (in thousands):
[Download Table]
1995 1994 1993
-------------------------------------------------------------------------
Current:
Federal $ 115 $ -- $ --
State 65 68 (924)
Foreign 998 1,055 792
-------------------------------------------------------------------------
Total current 1,178 1,123 (132)
-------------------------------------------------------------------------
Deferred:
Federal 629 -- --
State -- -- --
Foreign -- -- --
-------------------------------------------------------------------------
Total deferred 629 -- --
-------------------------------------------------------------------------
Total income tax provision (benefit) $1,807 $1,123 $(132)
=========================================================================
Income tax provision (benefit) applicable to:
Continuing operations $1,807 $1,123 $ 114
Discontinued operations -- -- (246)
-------------------------------------------------------------------------
Total income tax provision (benefit) $1,807 $1,123 $(132)
=========================================================================
The fiscal 1993 net tax provision applicable to continuing operations of
$114,000 included a benefit of $1,000,000 resulting from the settlement of a
dispute with the state of California regarding tax years 1974 and 1976 through
1981 for an amount less than the related reserve. The fiscal 1993 net tax
benefit applicable to discontinued operations of $246,000 included a benefit of
$247,000 resulting from a claim for refund of United Kingdom income taxes
related to fiscal 1982.
The income tax provision applicable to continuing operations differed from a
provision computed at the U.S. statutory tax rate as follows for the years
ended June 30 (in thousands):
[Download Table]
1995 1994 1993
--------------------------------------------------------------------------
Statutory rate tax provision $ 828 $(5,182) $ 158
Increase (decrease) in taxes resulting from:
Foreign withholding tax on licensing income 998 1,055 1,039
State income taxes 65 68 (925)
Minority interest in earnings of subsidiaries -- -- 292
Nondeductible expenses 341 238 182
Payment of prior years' state income taxes -- -- (806)
Tax benefit of domestic losses not recognized -- 4,944 --
Tax benefit of foreign taxes paid or accrued (339) -- --
Other (86) -- 174
--------------------------------------------------------------------------
Total income tax provision $1,807 $ 1,123 $ 114
==========================================================================
The U.S. statutory tax rate for fiscal 1993 through 1995 was 34%.
Effective July 1, 1993, the Company changed its method of accounting for
income taxes by adopting the provisions of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes ("Statement 109"). Statement 109
required a change from the deferred method of accounting for income taxes under
APB Opinion No. 11 to the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the expected future tax consequences attributable to
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates expected to apply in the years in which the
temporary differences are expected to reverse. As permitted by Statement 109,
the Company elected not to restate the financial statements of prior years.
The adoption of Statement 109 resulted in the recognition of $7.5 million, or
$.38 per share, of deferred federal tax benefits. This amount is included in the
net loss for the fiscal year ended June 30, 1994 as "Cumulative effect of change
in accounting principle." In the Consolidated Balance Sheet at June 30, 1994,
$.3 million of the $7.5 million net deferred tax asset is included in "Other
current assets" and $7.2 million is segregated as "Net deferred tax assets." In
the Consolidated Balance Sheet at June 30, 1995, $.4 million of the $6.9 million
net deferred tax asset is included in "Other current assets" and $6.5 million is
segregated as "Net deferred tax assets."
The significant components of the Company's deferred tax assets and deferred
tax liabilities as of June 30, 1994 and 1995 are presented below (in thousands):
[Download Table]
June 30, Net June 30,
1994 Change 1995
---------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 17,546 $(1,298) $ 16,248
Capital loss carryforwards 10,459 53 10,512
Tax credit carryforwards 6,393 (83) 6,310
Other deductible temporary differences 8,257 631 8,888
---------------------------------------------------------------------------------
Total gross deferred tax assets 42,655 (697) 41,958
Valuation allowance (28,767) 194 (28,573)
---------------------------------------------------------------------------------
Gross deferred tax assets 13,888 (503) 13,385
---------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred subscription acquisition costs (3,922) 214 (3,708)
Other taxable temporary differences (2,466) (340) (2,806)
---------------------------------------------------------------------------------
Gross deferred tax liabilities (6,388) (126) (6,514)
---------------------------------------------------------------------------------
Net deferred tax assets $ 7,500 $ (629) $ 6,871
=================================================================================
In addition to the federal tax benefits in the table above, the Company has net
operating loss carryforwards available in various states, none of which have
been recognized for financial statement purposes.
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 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.
At June 30, 1995, the Company had operating loss carryforwards of $47.8
million with $12.1 million expiring in 2001, $8.9 million expiring in 2003, $8.2
million expiring in 2004, $1.1 million expiring in 2007, $1.1 million expiring
in 2008 and $16.4 million expiring in
37
2009. The Company had capital loss carryforwards of $30.9 million with $1.0
million expiring in 1998 and $29.9 million expiring in 1999. The Company had
operating loss carryforwards of $35.0 million for alternative minimum tax
purposes, with $8.2 million expiring in 2001, $3.4 million expiring in 2003,
$6.2 million expiring in 2004, $.5 million expiring in 2007, $.7 million
expiring in 2008 and $16.0 million expiring in 2009. In addition, foreign tax
credit carryforwards of $3.5 million and investment tax credit carryforwards of
$2.5 million are available to reduce future U.S. federal income taxes. The
foreign tax credit carryforwards expire in 1997 through 2000, and the investment
tax credit carryforwards expire in 1996 through 2001.
During fiscal 1993, the Company entered into a settlement agreement with the
state of California regarding tax years 1974 and 1976 through 1981. Under terms
of the agreement, $2.3 million was paid by the Company in February 1993, which
resulted in an income tax benefit and an increase in net income of $1.0 million
due to a previously established reserve exceeding the settlement amount.
(G) DISCONTINUED OPERATIONS
During fiscal 1982, the Company discontinued its resort hotel operations. The
net current liabilities related to these discontinued operations have been
segregated in the Consolidated Balance Sheets at June 30, 1995 and 1994 as
"Reserves for losses on disposals of discontinued operations." Changes in
management's estimates of the Company's remaining liabilities in connection with
these discontinued operations resulted in a loss on disposal of discontinued
operations of $246,000 in fiscal 1993, before an income tax benefit of $246,000,
and $620,000 in fiscal 1994. There was no income tax effect in fiscal 1994, as
the benefit was offset by a corresponding change in the valuation allowance
related to the net deferred tax asset established with the adoption of Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes.
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. As a result, the Company
increased its reserve for this matter, which resulted in the previously
discussed $620,000 loss on disposal of discontinued operations in fiscal 1994.
The Company believes that it has established adequate reserves, which totaled
$766,000 at June 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.
A claim had been made against the Company for indemnity arising out of the
contract under which the Company sold its United Kingdom gaming operations in
fiscal 1982. The extent of the indemnity was in dispute and was being litigated.
In May 1993, the Company settled the dispute for $1,173,000. The Company was
entitled to a United Kingdom tax refund equal to 30% of the amount paid, and, in
July 1993, received $630,000 representing such taxes and related interest. The
net settlement amount of $543,000 was previously reserved.
(H) CASH EQUIVALENTS
At June 30, 1993, the Company had outstanding options on four offsetting
interest rate swap agreements with a major commercial bank, each having a
notional principal amount of $200 million. The options expired on July 13, 1993,
and the Company realized a net loss of $150,000, which was included in
investment expense, net in fiscal 1994.
(I) INVENTORIES
Inventories consisted of the following at June 30 (in thousands):
[Download Table]
1995 1994
-------------------------------------------------------------------------------
Paper $ 7,342 $ 4,471
Editorial and other prepublication costs 6,193 7,252
Merchandise finished goods 7,893 7,545
-------------------------------------------------------------------------------
Total inventories $21,428 $19,268
===============================================================================
(J) PROGRAMMING COSTS
Current programming costs consisted of the following at June 30 (in thousands):
[Download Table]
1995 1994
-------------------------------------------------------------------------------
Released, less amortization $23,898 $25,565
Completed, not yet released 5,842 2,093
-------------------------------------------------------------------------------
Total current programming costs $29,740 $27,658
===============================================================================
Noncurrent programming costs consist of programs in the process of production.
The Company revised its amortization method for licensed film costs during the
fourth quarter of fiscal 1994 as a result of its decision to offer Playboy
Television on a 24-hour basis, which resulted in a change in the scheduling of
licensed films. Licensed films will be aired throughout the term of the license
period, and related costs will be amortized over such period, generally three
years. This change in accounting estimate resulted in a decrease in programming
expense of $870,000 for the fiscal year ended June 30, 1995. This change in
accounting estimate resulted in a net increase in the Company's net income of
$574,000 (net of related taxes of $296,000), or $.03 per share, for the fiscal
year ended June 30, 1995.
(K) ADVERTISING COSTS
Effective July 1, 1994, the Company adopted the provisions of
Statement of Position 93-7, Reporting on Advertising Costs.
The Company expenses advertising costs as incurred, except for direct-response
advertising. Direct-response advertising consists primarily of costs associated
with the promotion of magazine subscriptions and the distribution of catalogs
for use in the Company's Catalog Group. The capitalized direct-response
advertising costs are amortized on a cost-pool-by-cost-pool basis over the
period during which the future benefits are expected to be received, principally
six to 12 months.
At June 30, 1995 and 1994, advertising costs of $6.4 million and $6.9 million,
respectively, were deferred and included in "Deferred subscription acquisition
costs" and "Other current assets" in the Consolidated Balance Sheets. For the
fiscal years ended June 30, 1995,
38
1994 and 1993, the Company's advertising expense was $43.5 million, $43.2
million and $37.5 million, respectively.
(L) LONG-TERM FINANCING OBLIGATIONS
Long-term financing obligations consisted of the following at June 30 (in
thousands):
[Download Table]
1995 1994
------------------------------------------------------------------------
10% note due in installments through 1997, net of
unamortized discount of $30 and $53, respectively,
based upon imputed interest rate of 13% $1,020 $ 1,347
6% promissory notes due July 1, 1994 -- 1,500
Less current maturities, net of unamortized discount
of $17 and $23, respectively (333) (1,827)
------------------------------------------------------------------------
Total long-term financing obligations $ 687 $ 1,020
========================================================================
The amount of scheduled annual maturities of long-term debt for each of fiscal
1996, 1997 and 1998 is $350,000.
The Company's original three-year line of credit with two domestic banks
expired in February 1995. At that time, the Company entered into a new $30.0
million revolving line of credit that covers short-term borrowings and the
issuance of letters of credit and is collateralized by substantially all of the
Company's assets. The $30.0 million revolving line of credit decreases to $19.5
million in December 1995 and expires in September 1997. The credit agreement
provides for interest based on fixed spreads over specified index rates and for
commitment fees based on a combination of the unused portion of the total line
of credit and compensating balances. The credit agreement contains two
restrictive covenants pertaining to net worth and leverage. Additionally, there
are limitations on other indebtedness, investments and dividends.
At June 30, 1995, short-term borrowings of $5.0 million and letters of credit
of $5.5 million were outstanding compared to short-term borrowings and letters
of credit outstanding at June 30, 1994 of $6.0 million and $5.6 million,
respectively. The weighted average interest rates on the short-term borrowings
outstanding at June 30, 1995 and 1994 were 8.70% and 5.39%, respectively.
(M) STOCK OPTIONS
The Company has three plans under which stock options or shares may be granted:
the 1989 Stock Option Plan (the "1989 Option Plan"), the 1991 Non-Qualified
Stock Option Plan for Non-Employee Directors (the "Directors' Plan"), and the
1995 Stock Incentive Plan, which was adopted by the Board of Directors in
February 1995 and is subject to stockholder approval.
The 1989 Option Plan authorized the grant of nonqualified stock options to key
employees to purchase up to 342,500 shares of Class A stock and 1,027,500 shares
of Class B stock at a price that is equal to the fair market value at date of
grant. The remaining 103,000 Class B options available for future grants under
the 1989 Option Plan were transferred into the 1995 Stock Incentive Plan. No
further grants of Class B options under the 1989 Option Plan will be made. The
Directors' Plan provides for the grant of nonqualified stock options to each
nonemployee director to purchase 10,000 shares of Class B stock at a price that
is equal to the fair market value at date of grant. Options to purchase an
aggregate of 80,000 shares of Class B stock may be granted under the Directors'
Plan. The 1995 Stock Incentive Plan, which consists of The Incentive Stock
Option Agreement and The Restricted Stock Agreement, authorizes the issuance of
a total of 1,203,000 shares of Class B stock, which includes the previously
mentioned 103,000 shares that were transferred from the 1989 Option Plan. The
Incentive Stock Option Agreement authorizes the grant of options to key
employees to purchase shares of Class B stock at a price that is equal to the
fair market value at date of grant. Options under the three plans are generally
for a term of ten years and are generally exercisable in cumulative annual
installments of 25% each year, beginning on the first anniversary of the date
such options were initially granted. The Restricted Stock Agreement provides for
the issuance of Class B stock to key employees subject to certain vesting
requirements. Such vesting can be accelerated if certain operating income
objectives pertaining to a fiscal year are met. Such operating income objectives
are set at $7.5 million, $10.0 million, $15.0 million and $20.0 million.
However, all vesting requirements will lapse automatically and any remaining
unvested stock will be issued on June 30, 2005. Compensation expense recognized
in fiscal 1995 in connection with the 1995 Stock Incentive Plan was $228,000. At
June 30, 1995, options to purchase 148,750 shares of Class A stock and 684,688
shares of Class B stock were exercisable under the 1989 Option Plan, and options
to purchase 40,000 shares of Class B stock were exercisable under the Directors'
Plan. No options were exercisable under the 1995 Stock Incentive Plan. The Board
of Directors has reserved treasury shares for issuance upon exercise of options
under the 1989 Option Plan. Shares issued upon exercise of options granted or
shares awarded under the Directors' Plan or the 1995 Stock Incentive Plan may be
either treasury shares or newly issued shares. At June 30, 1995, 175,100 shares
of Class A stock and 274,250 shares of Class B stock were available for future
grants of options under the 1989 Option Plan, the Directors' Plan and the 1995
Stock Incentive Plan. Transactions under such plans are summarized as follows:
[Download Table]
----------------------------------------------------------------------------
Stock Options Outstanding
----------------------------------------------------------------------------
Shares Price Range
--------------------------------------------
Class A Class B Class A Class B
----------------------------------------------------------------------------
Outstanding at June 30, 1992 185,000 995,000 4.88-7.38 4.00-8.50
Exercised -- (10,000) -- 5.38-5.50
Canceled -- (7,500) -- 5.38
-----------------------------------------------------
Outstanding at June 30, 1993 185,000 977,500 4.88-7.38 4.00-8.50
Granted -- 100,000 -- 6.88-9.38
Exercised (8,400) (62,500) 6.69 5.38-6.13
Canceled -- (21,250) -- 5.50-7.63
-----------------------------------------------------
Outstanding at June 30, 1994 176,600 993,750 4.88-7.38 4.00-9.38
Granted -- 496,250 -- 8.25-9.13
Exercised (4,500) (20,000) 6.69 5.38-6.13
Canceled (22,100) (161,250) 6.69 5.38-9.38
-----------------------------------------------------
Outstanding at June 30, 1995 150,000 1,308,750 4.88-7.38 4.00-9.13
============================================================================
----------------------------------------------------------------------------
Stock Awards Outstanding
----------------------------------------------------------------------------
Class B
----------------------------------------------------------------------------
Outstanding at June 30, 1994 --
Awarded 516,250
Vested --
Canceled --
----------------------------------------------------------------------------
Outstanding at June 30, 1995 516,250
============================================================================
(N) ISSUANCE OF COMMON STOCK
In fiscal 1993, the Company completed a public offering of 3,350,000 shares of
nonvoting Class B stock at $9-3/8 per share. Two million shares were sold by a
trust established by, and for the benefit of, Hugh M. Hefner, the Company's
founder and principal stockholder, and 1,350,000 shares were sold by the
Company, resulting in net proceeds
39
to the Company of $11,662,000. The Company's net proceeds were used to repay
short-term borrowings under its revolving line of credit.
(O) ACQUISITIONS
The Company has an option to acquire the remaining 80% interest in duPont
Publishing, Inc. ("duPont"), publisher of the duPont Registry, at a price based
on fair market value as of December 31, 1999. Previously, the Company was
required to make loans to duPont to fund its working capital requirements. These
loans, which bear interest at a rate of 1% over the prime rate, amounted to
$295,000 and $345,000 at June 30, 1995 and 1994, respectively.
In July 1988, the Company acquired 80% of the common stock of Critics' Choice
Video, Inc., a national direct marketer of theatrical and special-interest
videocassettes, for $125,000. The Company purchased the remaining 20% of
Critics' Choice Video, Inc. common stock effective July 1, 1993 for $3.0
million, which consisted of $1.5 million in cash and one-year promissory notes
totaling $1.5 million, which were paid July 1, 1994. The acquisition was
accounted for using the purchase method. The excess cost of $2.4 million is
being amortized over 40 years.
(P) CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest and income taxes was as follows during the years ended
June 30 (in thousands):
[Download Table]
1995 1994 1993
------------------------------------------------------------
Interest $ 774 $ 566 $ 329
Income taxes 1,064 510 3,246
------------------------------------------------------------
The Company was entitled to a United Kingdom tax refund equal to 30% of the
amount paid pursuant to the settlement in May 1993 of litigation related to its
discontinued United Kingdom gaming operations. Cash paid for income taxes in
fiscal 1994 was net of $630,000 representing such refund and related interest.
See Note G.
Cash paid for income taxes in fiscal 1993 included a $2,296,000 payment to the
state of California. See Note F.
During the fiscal year ended June 30, 1994, the Company had noncash investing
and financing activities related to its July 1988 purchase of an 80% interest in
Critics' Choice Video, Inc. See Note O.
(Q) LEASE COMMITMENTS
The Company's principal lease commitments are for office space, the satellite
transponder used in its pay television operations, and furniture and equipment.
The office leases provide for the Company's payment of its proportionate share
of operating expenses and real estate taxes in addition to monthly base rent.
The Company's corporate headquarters is under terms of a 15-year lease, which
commenced September 1, 1989. In fiscal 1992, the Entertainment Group relocated
its Los Angeles office under terms of a ten-year lease, which commenced April 1,
1992. In fiscal 1993, the Publishing Group relocated its New York office under a
lease with a term of approximately 11 years, which commenced April 1, 1993. In
fiscal 1994, the Publishing Group relocated its Los Angeles photo studio under
terms of a ten-year lease, which commenced January 1, 1994. These leases provide
for base rent abatements; however, rent expense is being charged to operations
on a straight-line basis over the terms of the leases. This resulted in
liabilities of $5.7 million and $5.6 million at June 30, 1995 and 1994,
respectively, which are included in "Other noncurrent liabilities" in the
Consolidated Balance Sheets. In addition, during fiscal 1993, the Company
entered into a five-year lease, which includes a purchase option, for the
Catalog Group's current suburban Chicago operations facility.
In December 1992, the Company executed a lease for its current satellite
transponder that became effective January 1, 1993. This operating lease is for a
term of approximately nine years and includes a purchase option. A $5.0 million
letter of credit was issued under the Company's revolving line of credit for the
benefit of the lessor to secure the Company's obligations under this lease.
During fiscal 1993, the Company began to lease certain furniture and equipment
for use in its operations. The leases are for terms of either three or five
years and include end-of-lease purchase options.
Rent expense was as follows for the years ended June 30 (in thousands):
[Download Table]
1995 1994 1993
-------------------------------------------------------------------------------
Minimum rent expense $8,854 $ 8,841 $ 7,678
Contingent rent expense -- 344 487
-------------------------------------------------------------------------------
Total 8,854 9,185 8,165
Sublease income -- (1,364) (1,669)
-------------------------------------------------------------------------------
Net rent expense $8,854 $ 7,821 $ 6,496
===============================================================================
The minimum commitment at June 30, 1995, under operating leases with
noncancelable terms in excess of one year, was as follows (in thousands):
[Download Table]
Operating
Year ending June 30 Leases
----------------------------------------------------------------------------
1996 $ 8,439
1997 8,130
1998 7,537
1999 6,808
2000 7,428
Later years 20,893
----------------------------------------------------------------------------
Total minimum lease payments $59,235
============================================================================
(R) CABLE TELEVISION
Effective April 1, 1986, the Company assumed marketing and distribution
responsibilities for The Playboy Channel and other North American Playboy pay
television products (the "Service") from its former distributor, Rainbow
Programming Services Company ("Rainbow"). The termination agreement provided for
the assignment to the Company of all distribution contracts with cable system
operators and others that carried the Service.
Under the termination agreement, Rainbow is to receive a monthly royalty of 5%
of revenues received by the Company for the Service, subject to a minimum
royalty based on number of subscribers, as long as the Service is in operation.
This royalty was to be payable until April 30, 1991, if Rainbow had received
payments by that date of $15,000,000 (which level was not reached), or April 30,
1996, if that level was not reached by April 30, 1991. The agreement provides
for noncompetition in the North American distribution and production of an
adult-oriented pay television service by Rainbow as long as royalty payments are
being made.
(S) SEGMENT INFORMATION
The four industry segments in which the Company currently operates are as
follows: Publishing, Catalog, Entertainment and Product Marketing. Publishing
Group operations include the publication of Playboy magazine; Playboy-related
businesses, including newsstand
40
specials and calendars, foreign editions of Playboy magazine and ancillary
businesses; and the production of the Playboy Jazz Festival. Catalog Group
operations include the direct marketing of three catalogs: Critics' Choice
Video, Collectors' Choice Music and Playboy. Entertainment Group operations
include the production and marketing of programming through Playboy Television,
other domestic television, international television and worldwide home video
businesses. Product Marketing Group operations include licensing the
manufacture, sale and distribution of consumer products carrying one or more of
the Company's trademarks and the licensing of artwork owned by the Company.
Financial information relating to industry segments for fiscal 1995, 1994 and
1993 is presented on page 24 and is an integral part of these consolidated
financial statements.
(T) EMPLOYEE BENEFIT PLAN
The Company's Employees Investment Savings Plan (the "Savings Plan"), a defined
contribution plan, covers all employees who have completed a full year of
service of at least 1,000 hours. The Company's discretionary contribution to the
Savings Plan is distributed to each eligible employee's account in an amount
equal to the ratio of each eligible employee's compensation to the total
compensation paid to all such employees. The fiscal 1995 and 1993 contributions
were $200,000 and $115,000, respectively. No such contribution was made in
fiscal 1994.
During fiscal 1995, 1994 and 1993, the Company matched employee contributions
to the Savings Plan to a maximum of 2-3/4%, 2-3/4% and 2-1/2%, respectively, of
each participating employee's eligible compensation, subject to Internal Revenue
Service limitations. For fiscal 1996, the maximum match will be 2-3/4% of such
compensation. The Company's matching contributions in fiscal 1995, 1994 and 1993
related to this program were $630,000, $670,000 and $590,000, respectively.
Effective October 1, 1992, the Company established a Deferred Compensation
Plan, which permits certain employees and directors to annually elect to defer a
portion of their compensation. The Deferred Compensation Plan is available to
approximately 60 of the Company's most highly compensated employees and all
nonemployee directors. Employee participants may defer between 5% and 15% (in 1%
increments) of salary, and up to 50% (in 10% increments) of payments due under
Executive Incentive Compensation Plans or sales commissions. Directors may defer
between 25% and 100% (in 25% increments) of their annual retainer and meeting
fees. Amounts deferred under this plan are credited with interest each quarter
at a rate equal to the preceding quarter's average composite yield on corporate
bonds as published by Moody's Investor's Service, Inc. All amounts deferred and
interest credited are 100% vested immediately and are general unsecured
obligations of the Company. Such obligations totaled $797,000 and $676,000 at
June 30, 1995 and 1994, respectively, and are included in "Other noncurrent
liabilities" in the Consolidated Balance Sheets.
(U) CONTINGENCIES
Playboy Television's programming is delivered primarily through a communications
satellite transponder. The Company's current transponder lease, effective
January 1, 1993, contains protections typical in the industry against
transponder failure, including access to spare transponders on the same
satellite as well as transponders on another satellite currently in operation.
Access to the transponder may be denied under certain narrowly defined
circumstances relating to violations of law or threats to revoke the license of
the satellite owner to operate the satellite based on programming content.
However, the Company has the right to challenge any such denial and believes
that the transponder will continue to be available to it through the end of the
expected life of the satellite (currently estimated to be in 2004).
The Company believes that it has established adequate reserves in connection
with the General Notice received from the EPA in January 1993 related to its
discontinued resort hotel operations. See Note G.
(V) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
the years ended June 30, 1995 and 1994 (in thousands, except per share amounts):
[Download Table]
Quarters Ended
-------------------------------------------
1995 Sept. 30 Dec. 31 Mar. 31 June 30 Year
------------------------------------------------------------------------------
Net revenues $57,218 $64,663 $58,025 $67,343 $247,249
Gross profit* 6,489 8,227 6,912 11,294 32,922
Operating income (loss) (864) 1,291 236 2,394 3,057
Income (loss) before
cumulative effect
of change in ac-
counting principle (1,228) 1,001 (347) 1,203 629
Net income (loss) (1,228) 1,001 (347) 1,203 629
Income (loss) before
cumulative effect
of change in ac-
counting principle
per common share (.06) .05 (.02) .06 .03
Net income (loss) per
common share (.06) .05 (.02) .06 .03
Common stock price
Class A high 8-7/8 9-7/8 9-1/2 8-3/8
Class A low 6-1/8 7-1/2 8-1/8 7-5/8
Class B high 9-1/8 10-3/4 10-5/8 8-1/4
Class B low $ 6-1/8 $ 7-1/4 $ 7-5/8 $ 7-3/8
[Download Table]
Quarters Ended
-------------------------------------------
1994 Sept. 30 Dec. 31 Mar. 31 June 30 Year
------------------------------------------------------------------------------
Net revenues $47,586 $59,636 $51,800 $59,965 $218,987
Gross profit 3,501 6,845 3,005 8,819 22,170
Operating income (loss) (6,941) (1,385) (7,129) 1,232 (14,223)
Income (loss) before
cumulative effect
of change in ac-
counting principle (7,423) (1,770) (8,385) 594 (16,984)
Net income (loss) 77 (1,770) (8,385) 594 (9,484)
Income (loss) before
cumulative effect
of change in ac-
counting principle
per common share (.38) (.09) (.42) .03 (.86)
Net income (loss) per
common share .00 (.09) (.42) .03 (.48)
Common stock price
Class A high 8-1/2 11 11 7-3/4
Class A low 6-3/4 6-5/8 7 6
Class B high 10 13 13 7-7/8
Class B low $ 7-7/8 $ 7-1/2 $ 6-7/8 $ 6
*Amounts cannot be calculated from the Company's respective Quarterly Reports on
Form 10-Q as a result of certain reclassifications between "Cost of sales" and
"Selling and administrative expenses" in the Consolidated Statements of
Operations.
The operating loss for the first quarter of fiscal 1995 and operating income for
the second, third and fourth quarters of fiscal 1995
41
included reductions in programming expense of $220,000, or $.02 per share;
$281,000, or $.01 per share; $200,000, or $.01 per share; and $169,000, or $.00
per share, respectively, resulting from a change in accounting estimate. See
Note J.
The operating loss for the first quarter of fiscal 1994 included $2,450,000 of
restructuring expenses related to a reduction in the Company's workforce of
approximately 10%.
The operating loss for the third quarter of fiscal 1994 included a charge of
$1,754,000 for unusual items and $425,000 of additional restructuring expenses
due to further reductions in overhead costs. The charge for unusual items
consisted of a $1,199,000 market value adjustment for a documentary film, Hugh
Hefner: Once Upon a Time, a $355,000 write-off of photo inventory that would not
be published in Playboy magazine and a $200,000 real estate tax obligation
related to the Company's former office space in Los Angeles, California. The
loss before cumulative effect of change in accounting principle also included a
$620,000 loss on disposal of discontinued operations resulting from increasing
the reserve related to the environmental cleanup of a site in Lake Geneva,
Wisconsin, formerly owned by a subsidiary of the Company.
Operating income for the fourth quarter of fiscal 1994 included a net benefit
from unusual items of $78,000, consisting of a $450,000 benefit related to an
insurance settlement and the establishment of a $372,000 reserve related to
programming of O.J. Simpson: Minimum Maintenance Fitness for Men.
Net income for the first quarter of fiscal 1994 included a $7,500,000 tax
benefit that resulted from the adoption of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, which required a change in the
method of accounting for income taxes.
42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Playboy Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Playboy
Enterprises, Inc. and its Subsidiaries as of June 30, 1995 and 1994, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended June 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Playboy
Enterprises, Inc. and its Subsidiaries as of June 30, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1995, in conformity with generally
accepted accounting principles.
/s/ Cooper & Lybrand LLP
Chicago, Illinois
August 2, 1995
--------------------------------------------------------------------------------
REPORT OF MANAGEMENT
The consolidated financial statements and all related financial information
herein are the responsibility of the Company. The financial statements, which
include amounts based on judgments, have been prepared in accordance with
generally accepted accounting principles. Other financial information in the
annual report is consistent with that in the financial statements.
The Company maintains a system of internal controls that it believes provides
reasonable assurance that transactions are executed in accordance with
management's authorization and are properly recorded, that assets are
safeguarded and that accountability for assets is maintained. The system of
internal controls is characterized by a control-oriented environment within the
Company, which includes written policies and procedures, careful selection and
training of personnel, and internal audits.
Coopers & Lybrand LLP, independent accountants, have audited and reported on
the Company's consolidated financial statements. Their audits were performed in
accordance with generally accepted auditing standards.
The Audit Committee of the Board of Directors, composed of four nonmanagement
directors, meets periodically with Coopers & Lybrand LLP, management
representatives and the Company's internal auditor to review internal accounting
control and auditing and financial reporting matters. Both Coopers & Lybrand LLP
and the internal auditor have unrestricted access to the Audit Committee and may
meet with it without management representatives being present.
/s/ Christie Hefner
Christie Hefner
Chairman and Chief Executive Officer
/s/ David I. Chemerow
David I. Chemerow
Executive Vice President, Finance and Operations,
and Chief Financial Officer
43
Dates Referenced Herein and Documents Incorporated by Reference
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