Exhibit 13
SELECTED FINANCIAL AND OPERATING DATA
FOR THE YEARS ENDED JUNE 30
(in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
Net Revenues
Publishing
Playboy magazine
Subscription $ 49,379 $ 48,556 $ 46,389
Newsstand 24,408 24,876 25,946
Advertising 27,431 27,588 27,978
Other 4,111 3,362 3,654
- ---------------------------------------------------------------------------------------------------
Total Playboy magazine 105,329 104,382 103,967
Playboy-related businesses 27,591 22,891 19,401
- ---------------------------------------------------------------------------------------------------
Total Publishing 132,920 127,273 123,368
- ---------------------------------------------------------------------------------------------------
Entertainment
Playboy Television
Cable pay-per-view 14,293 11,934 8,989
Cable monthly subscription 6,856 7,004 7,397
Satellite direct-to-home and other 18,129 10,022 6,511
- ---------------------------------------------------------------------------------------------------
Total Playboy Television 39,278 28,960 22,897
Domestic home video 9,370 9,517 7,019
International television and home video 11,955 11,160 9,891
- ---------------------------------------------------------------------------------------------------
Total Playboy Businesses 60,603 49,637 39,807
AdulTVision 1,907 -- --
Movies and other 2,316 2,060 282
- ---------------------------------------------------------------------------------------------------
Total Entertainment 64,826 51,697 40,089
- ---------------------------------------------------------------------------------------------------
Product Marketing 7,125 6,844 6,974
- ---------------------------------------------------------------------------------------------------
Catalog 71,716 61,435 48,556
- ---------------------------------------------------------------------------------------------------
Total Net Revenues $276,587 $247,249 $218,987
- ---------------------------------------------------------------------------------------------------
Operating Income (Loss)
Publishing
Playboy magazine $ 3,558 $ 7,168 $ 3,546
Playboy-related businesses 10,356 7,572 5,188
Administrative expenses and other (4,679) (4,031) (5,041)
- ---------------------------------------------------------------------------------------------------
Total Publishing 9,235 10,709 3,693
- ---------------------------------------------------------------------------------------------------
Entertainment
Before programming expense 30,467 21,097 10,870
Programming expense (21,263) (20,130) (18,174)
- ---------------------------------------------------------------------------------------------------
Total Entertainment 9,204 967 (7,304)
- ---------------------------------------------------------------------------------------------------
Product Marketing 3,692 3,428 2,518
- ---------------------------------------------------------------------------------------------------
Catalog 5,244 5,209 4,148
- ---------------------------------------------------------------------------------------------------
Corporate Administration and Promotion (17,882) (17,256) (17,278)
- ---------------------------------------------------------------------------------------------------
Total Operating Income (Loss) $ 9,493 $ 3,057 $(14,223)
- ---------------------------------------------------------------------------------------------------
22
SELECTED FINANCIAL AND OPERATING DATA
FOR THE YEARS ENDED JUNE 30
(in thousands, except per share amounts, number of
employees and ad pages) 1996 1995* 1994* 1993* 1992* 1991*
- -------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
Net revenues $276,587 $247,249 $218,987 $214,875 $193,749 $174,042
Interest income (expense), net (592) (569) (779) (131) 1,828 3,224
Income (loss) from continuing operations before
extraordinary item and cumulative effect of change in
accounting principle 4,252 629 (16,364) 365 1,822 2,411
Net income (loss) 4,252 629 (9,484) 365 3,510 4,510
Per common share
Income (loss) from continuing operations before
extraordinary item and cumulative effect of change
in accounting principle 0.21 0.03 (0.83) 0.02 0.10 0.13
Net income (loss) 0.21 0.03 (0.48) 0.02 0.19 0.24
Cash dividends declared -- -- -- -- -- --
Before one-time and unusual items and nonrecurring
expenses/(1)/
Operating income (loss) 9,493 3,057 (9,610) 3,291 3,548 2,290
Net income (loss) 4,252 629 (12,371) 925 4,069 3,147
Net income (loss) per common share 0.21 0.03 (0.62) 0.05 0.22 0.17
Adjusted EBITDA/(2)/ $ 9,921 $ 6,311 $ (9,333) $ (3,709) $ 316 $ 963
- -------------------------------------------------------------------------------------------------------------------------------
AT YEAR END
Total assets $150,869 $137,835 $131,921 $127,767 $121,211 $115,464
Long-term financing obligations $ 347 $ 687 $ 1,020 $ 1,347 $ 1,669 $ 1,987
Shareholders' equity $ 52,283 $ 47,090 $ 46,311 $ 55,381 $ 43,256 $ 39,588
Long-term financing obligations as a percentage of total
capitalization 0.7% 1.4% 2.2% 2.4% 3.7% 4.8%
Number of shares outstanding
Class A 4,749 4,714 4,709 4,701 4,701 4,697
Class B 15,437 15,276 15,255 15,192 13,830 13,813
Number of employees 621 600 578 624 637 599
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA
Playboy magazine ad pages 569 595 595 660 648 724
Investments in Company-produced and licensed entertainment
programming $ 25,549 $ 21,313 $ 17,185 $ 23,033 $ 16,615 $ 15,876
Amortization of investments in Company-produced and
licensed entertainment programming $ 21,263 $ 20,130 $ 18,174 $ 14,076 $ 8,972 $ 7,931
Playboy Television (at year end)
Cable pay-per-view homes 11,300 10,600 9,600 9,100 7,300 4,700
Cable monthly subscribing households 192 201 205 232 281 314
Satellite direct-to-home households 4,867 3,282 1,926 197 106 N/A/(3)/
Percentage of total U.S. cable pay-per-view homes with
access to Playboy Television/(4)/ 42.8% 45.2% 43.2% 50.1% 43.6% 31.1%
- -------------------------------------------------------------------------------------------------------------------------------
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.
* Certain reclassifications have been made to conform to the fiscal 1996
presentation.
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.
/(2)/ Represents earnings before income taxes plus interest expense,
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.
/(4)/ Based on projections by Paul Kagan Associates, Inc.
23
FINANCIAL INFORMATION RELATING TO
INDUSTRY SEGMENTS
FOR THE YEARS ENDED JUNE 30
(in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
Net Revenues/(1)(2)/
Publishing $132,920 $127,273 $123,368
Entertainment 64,826 51,697 40,089
Product Marketing 7,125 6,844 6,974
Catalog 71,716 61,435 48,556
- ----------------------------------------------------------------------------------------------------
Total $276,587 $247,249 $218,987
====================================================================================================
Income (Loss) from Continuing Operations Before Income Taxes
and Cumulative Effect of Change in Accounting Principle/(2)/
Publishing $ 9,235 $ 10,709 $ 3,693
Entertainment 9,204 967 (7,304)
Product Marketing 3,692 3,428 2,518
Catalog 5,244 5,209 4,148
Corporate Administration and Promotion/(3)/ (17,882) (17,256) (17,278)
Investment income (expense), net 88 139 (128)
Interest expense (680) (708) (651)
Other, net (452) (52) (239)
- ----------------------------------------------------------------------------------------------------
Total $ 8,449 $ 2,436 $(15,241)
====================================================================================================
Identifiable Assets
Publishing $ 45,661 $ 38,433 $ 39,645
Entertainment 60,336 53,229 49,737
Product Marketing 5,484 5,964 6,133
Catalog 12,966 14,807 12,184
Corporate Administration and Promotion/(4)/ 26,422 25,402 24,222
- ----------------------------------------------------------------------------------------------------
Total $150,869 $137,835 $131,921
====================================================================================================
Depreciation and Amortization/(5)/
Publishing $ 967 $ 909 $ 1,024
Entertainment 21,836 20,606 18,573
Product Marketing 217 194 182
Catalog 639 673 792
Corporate Administration and Promotion 2,682 2,098 1,871
- ----------------------------------------------------------------------------------------------------
Total $ 26,341 $ 24,480 $ 22,442
====================================================================================================
Capital Expenditures
Publishing $ 213 $ 101 $ 367
Entertainment 74 22 151
Product Marketing 20 2 7
Catalog 77 10 21
Corporate Administration and Promotion 376 247 275
- ----------------------------------------------------------------------------------------------------
Total $ 760 $ 382 $ 821
====================================================================================================
The accompanying notes are an integral part of these tables.
Notes to Financial Information Relating to Industry Segments
/(1)/ Net revenues include export sales of $36,571, $30,858 and $26,709 in
fiscal 1996, 1995 and 1994, respectively.
/(2)/ Intercompany transactions have been eliminated.
/(3)/ Corporate Administration and Promotion expenses together with segment
selling and administrative expenses make up the Company's selling and
administrative expenses.
/(4)/ Corporate assets consist principally of property and equipment,
trademarks and net deferred tax assets.
/(5)/ 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.
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, 1996
COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995
The Company's revenues were $276.6 for the fiscal year ended June 30, 1996, a
12% increase over revenues of $247.2 for the fiscal year ended June 30, 1995.
This increase was due to higher revenues from all of the Company's Groups,
primarily driven by increases from Playboy Television, the Critics' Choice Video
and Collectors' Choice Music catalogs and Playboy-related publishing businesses.
The Company reported operating income of $9.5 for the year ended June 30, 1996
compared to $3.1 for the year ended June 30, 1995. This increase was primarily
due to significant growth in operating income of the Entertainment Group,
principally as a result of substantial growth of Playboy Television.
Net income for the year ended June 30, 1996 was $4.3, or $0.21 per share,
compared to $0.6, or $0.03 per share, for the prior year.
Several of the Company's businesses can experience variations in quarterly
performance. As a result, the Company's performance in any quarterly period is
not necessarily reflective of full-year or longer-term trends. For example,
Playboy magazine newsstand revenues vary from issue to issue, with revenues
generally higher for holiday issues and any issues including editorial or
pictorial features that generate unusual public interest. Advertising revenues
also vary from quarter to quarter, depending on product introductions by
advertising customers, changes in advertising buying patterns and economic
conditions. In addition, Entertainment Group revenues vary with the timing of
sales to international customers, particularly the timing of new multiyear
agreements to both program and supply programming for exclusive Playboy-branded
time slots on overseas pay television services. To allow greater flexibility the
Company modified how it programs its international networks effective with the
fourth quarter of fiscal 1996. This modification results in the revenues from
these networks now being recorded on a quarterly basis, which has the effect of
smoothing out the fluctuations caused by recording a year's worth of programming
sales in one quarter. Previously, the Company scheduled programming for a full
year in the quarter during which the network was launched or an agreement was
renewed, and recognized the full year of revenues in that quarter.
PUBLISHING GROUP
Fiscal 1996 Publishing Group revenues of $132.9 increased $5.6, or 4%, compared
to fiscal 1995. Operating income of $9.2 declined $1.5, or 14%, compared to
prior year operating income of $10.7.
Playboy Magazine
Playboy magazine circulation revenues increased $0.4 for the year ended June 30,
1996 compared to the prior year. Subscription revenues were 2% higher. Newsstand
revenues were down slightly as favorable newsstand sales adjustments in the
prior year related to fiscal 1994 issues and 1% fewer U.S. and Canadian
newsstand copies sold in the current year were mostly offset by a higher average
newsstand price in the current year primarily due to especially strong sales of
the December issue, which featured Farrah Fawcett, at a higher cover price.
Although the Company is always looking for celebrity pictorials, there is no
certainty that they will occur in any fiscal year. Additionally, the current
year benefited from higher revenues from the rental of Playboy magazine's
subscriber list. Advertising revenues declined 1%, or $0.2, for the year ended
June 30, 1996 compared to the prior year primarily as a result of 4% fewer
advertising pages in the current year, mostly offset by higher average net
revenue per page, principally due to rate increases effective with the January
1996 and 1995 issues. Advertising sales for the fiscal 1997 first quarter issues
of the magazine are closed, and the Company expects to report an 18% decrease in
the number of advertising pages compared to the fiscal 1996 first quarter.
Playboy magazine operating income decreased $3.6, or 50%, for the year ended
June 30, 1996 compared to the prior year due to a significant increase in paper
costs partially offset by a decrease in direct costs and operating expenses and
the net increase in revenues discussed above. Manufacturing costs for the year
ended June 30, 1996 increased 26% compared to the prior year principally due to
higher paper prices which began impacting the Company in the second half of
fiscal 1995. For the year ended June 30, 1996, average paper prices were 46%, or
$7.9, higher than the prior year. Paper prices have begun to decline, and the
Company expects average paper prices to be lower in fiscal 1997 beginning in the
second quarter compared to fiscal 1996. Direct costs and operating expenses
decreased 5% for the year ended June 30, 1996 largely due to lower subscription
acquisition amortization, primarily as a result of improving efficiencies by
lowering the advertising rate base in the current year, and advertising sales
expenses in the current year combined with a legal settlement in the prior year
with the Company's former distributor of Playboy magazine. Partially offsetting
the above were expenses in the current year related to a new advertising
campaign.
Playboy-related Businesses
Operating income from Playboy-related businesses increased $2.8, or 37%, on a
$4.7, or 21%, increase in revenues for the year ended June 30, 1996 compared to
the prior year. These increases were primarily due to higher revenues from
newsstand specials and Playboy foreign editions. The higher revenues related to
newsstand specials were primarily a result of the favorable impact of a $1.00
increase in the cover price to $6.95 in most of the country in the fourth
quarter of fiscal 1995, combined with the publication of three additional
newsstand specials in fiscal 1996. Also contributing to the favorable variances
was a significant increase in revenues related to developing new media
businesses due in part to the Company's free Web site on the Internet which
generated advertising revenues in fiscal 1996. Partially offsetting the above
were lower revenues from ancillary businesses.
Administrative Expenses
The Publishing Group's administrative expenses increased 16% for the year ended
June 30, 1996 compared to the prior year. The increase was primarily due to
higher variable compensation expense related to performance combined with higher
employee medical benefit expenses in the current year.
ENTERTAINMENT GROUP
Fiscal 1996 Entertainment Group revenues of $64.8 increased $13.1, or 25%,
compared to fiscal 1995. Operating income of $9.2 increased $8.2 compared to
prior year operating income of $1.0.
The following discussion focuses on the profit contribution of each business
before programming expense ("profit contribution").
25
Playboy Television
For the year ended June 30, 1996, revenues of the Company's branded domestic pay
television service, Playboy Television, were $10.3, or 36%, higher compared to
the prior year. Cable pay-per-view revenues increased 20%, attributable to an
increase in the number of cable addressable homes to which Playboy Television
was available, higher average buy rates, and higher average revenue per buy in
the current year. At June 30, 1996, Playboy Television was available to 11.3
million cable addressable homes, a 7% increase compared to June 30, 1995. Of the
11.3 million cable addressable homes, 3.9 million could receive Playboy
Television on a 24-hour basis, a 30% increase compared to June 30, 1995. The
average annual increase in the number of total cable addressable homes to which
Playboy Television was available over the last five complete fiscal years was
20%. Cable monthly subscription revenues declined 2% for the year ended June 30,
1996 compared to the prior year due in part to a decline in the average number
of subscribing households.
Management believes that the growth in cable access for the Company's domestic
pay television business has slowed in recent years due to the effects of cable
reregulation by the Federal Communications Commission ("FCC"), including the
"going-forward rules" announced in fiscal 1995 which provide cable operators
with incentives to add basic services. Competition for channel space has been
the primary factor in the slower growth as cable operators have utilized
available channel space to comply with "must-carry" provisions, mandated
retransmission consent agreements and "leased access" provisions. Additionally,
the delay of new technology, primarily digital set-top converters which would
dramatically increase channel capacity, has contributed to the problem.
Management believes that growth will continue to be affected in the near term as
the cable television industry responds to the FCC's rules and subsequent
modifications, and develops new technology. Management believes that the slower
growth in cable access has also been impacted by the Telecommunications Act of
1996 (the "Act") discussed below. However, as addressable technology becomes
more widely available, the Company believes that ultimately its pay television
networks will be available to the vast majority of cable homes.
In February 1996, Congress passed the Act, and President Clinton signed it
into law. Certain provisions of the Act are directed exclusively at cable
programming in general and adult cable programming in particular. In some cable
systems, audio or momentary bits of video of premium or pay-per-view channels
may accidentally become available to non-subscribing cable customers. This is
called "bleeding" and is not a widespread problem. Section 505 of the Act
requires cable systems to install technology in every household in every cable
system that offers adult programming, whether or not customers request it or
need it, to prevent any possibility of bleeding. Section 505 further provides
that until a cable operator complies with the Act, it must restrict the period
during which the programming is transmitted. Penalties for violation of the Act
are significant and include fines and imprisonment. The Company believes that
Section 505 is unconstitutional and unnecessary and fully supports Section 504
of the Act, which mandates that cable operators place full audio and video
blocks on any channel, at no charge, at a customer's request. On February 26,
1996, one of the Company's subsidiaries filed a civil suit challenging Section
505. Fifteen organizations representing a wide range of influential media, free
speech and entertainment organizations filed friend of the court briefs
supporting the Company's litigation. On March 7, 1996, the Company was granted a
Temporary Restraining Order ("TRO") staying the implementation and enforcement
of Section 505. In granting the TRO, the court found that the Company had
demonstrated it is likely to succeed on the merits of its claim that Section 505
is unconstitutional. The TRO will remain in place until a special three-judge
panel in the United States District Court for the District of Delaware decides
the Company's motion for a preliminary injunction. The Company believes that if
Section 505 were to be enforced, the Company's revenues attributable to its
domestic pay television services could be materially adversely affected due to
reduced cable carriage and/or reduced buy rates.
Satellite direct-to-home and other revenues were 81% higher for the year ended
June 30, 1996 compared to the prior year. The increase was primarily due to
higher DirecTV revenues, as a result of a 158% increase in the subscriber
universe and the Company's change to 24-hour programming in August 1995, and
higher revenues from PrimeStar, which launched Playboy Television in the fourth
quarter of fiscal 1995, slightly offset by lower revenues from TVRO, or the big-
dish market. Playboy Television was available to 16.2 million cable addressable
and satellite direct-to-home households, including 375,000 monthly subscribers,
at June 30, 1996. The current year also included revenues from licensing
episodes of one of the Company's series to Showtime Networks Inc.
Profit contribution for Playboy Television increased $8.1, or 65%, compared to
the prior year, in spite of higher marketing costs and expenses related to the
civil suit discussed above in the current year, due to the significant increase
in revenues.
Domestic Home Video
Domestic home video revenues decreased $0.1 for the year ended June 30, 1996
compared to the prior year primarily due to recording a higher net guarantee in
the prior year from a three-year distribution agreement with Uni Distribution
Corp. related to backlist titles effective in the fourth quarter of fiscal 1995,
and subject to certain earn-out provisions in the final year. The current year
included the second year of the guarantee as well as a reserve established
related to the first year of the guarantee recorded in the prior year in the
event that the earn-out provisions will not be met in the final year. The prior
year also included sales and returns of backlist titles prior to the inception
of the distribution agreement. Partially offsetting the above were higher sales
of new releases in the current year, in part due to extraordinary sales of The
Best of Pamela Anderson. Although the Company is always looking for releases
that feature celebrities, there is no certainty that they will occur in any
fiscal year. Additionally, there were higher revenues from a direct-response
continuity series deal with Time Life Inc. In fiscal 1996, Time Life Inc.
replaced Warner Music Enterprises, Inc., both divisions of Time Warner Inc., as
the distributor of this series.
Profit contribution increased $0.5 for the year ended June 30, 1996 compared
to the prior year principally due to the timing of costs related to an industry
convention.
International Television and Home Video
For the year ended June 30, 1996, revenues and profit contribution from the
international television and home video business increased $0.8 and $2.2,
respectively, compared to the prior year. Revenues and profit contribution from
the international home video business both increased $1.4 due in part to higher
sales to South Korea. An increase in the profit contribution of the
international television business of $0.8 is primarily due to a write-off of
$1.3 recorded in the prior year related to sales to a distributor in fiscal
1994, partially offset by lower revenues in the current year, primarily due to
revenues in the prior year associated with multiyear agreements. Variations in
26
quarterly performance are caused by revenues and profit contribution from
multiyear agreements being recognized depending upon the timing of program
delivery, license periods and other factors. To allow greater flexibility the
Company modified how it programs its international networks effective with the
fourth quarter of fiscal 1996. This modification results in the revenues from
these networks now being recorded on a quarterly basis, which has the effect of
smoothing out the fluctuations caused by recording a year's worth of programming
sales in one quarter. Previously, the Company scheduled programming for a full
year in the quarter during which the network was launched or an agreement was
renewed, and recognized the full year of revenues in that quarter.
Programming Expense
Programming amortization expense associated with the Entertainment Group's
Playboy businesses discussed above increased $1.1 for the year ended June 30,
1996 compared to the prior year. The increase was principally due to higher
international home video amortization combined with increased investments in
entertainment programming, partially offset by lower international television
amortization.
Cash investments in entertainment programming for all of the Entertainment
Group's businesses, including those businesses discussed below, were $21.3 in
fiscal 1995 and $25.5 in fiscal 1996, and are planned for approximately $29.0 in
fiscal 1997. These amounts include expenditures for Playboy-branded programming,
AdulTVision and feature-length films. As a result of these higher levels of cash
investments, management anticipates that programming amortization expense in
fiscal 1997 will be approximately $25.0, or approximately $3.8 higher than in
fiscal 1996.
AdulTVision
In July 1995, the Company launched a second pay television channel, AdulTVision,
as a flanker channel to Playboy Television to enhance the Company's position
against competitive pressures from adult movie channels and to drive cable
access for Playboy Television. AdulTVision is principally offered on a pay-per-
view basis and is primarily sold in combination with Playboy Television through
cable operators, and to the direct-to-home market. For the year ended June 30,
1996, revenues for the new channel were $1.9. The channel reported an operating
loss for fiscal 1996 but the Company expects that it will be profitable in
fiscal 1997.
Movies and Other
For the year ended June 30, 1996, revenues from the Entertainment Group's movies
and other businesses increased $0.3 primarily due to higher revenues related to
feature-length films in the current year. Operating income increased $0.2
compared to the prior year.
The Entertainment Group's administrative expenses for the year ended June 30,
1996 increased $0.9 compared to the prior year primarily due to higher variable
compensation expense related to performance and higher employee medical benefit
expenses in the current year.
PRODUCT MARKETING GROUP
Product Marketing Group revenues of $7.1 for the year ended June 30, 1996
increased $0.3, or 4%, compared to the prior year primarily due to 19% higher
international product licensing royalties, primarily due to strong sales from
Asia. Partially offsetting the above were lower revenues in the current year
from Special Editions, Ltd., as the Company's art publishing and art products
business continues to move from direct sales to licensing, combined with no
royalties in the current year from a Sarah Coventry licensee that experienced
financial difficulties and was terminated in the second quarter of the prior
year. Operating income of $3.7 increased $0.3, or 8%, for the year ended June
30, 1996 compared to the prior year principally due to an increase in operating
income of international product licensing, primarily due to the higher revenues.
Partially offsetting the favorable variance was lower operating income from
Sarah Coventry product licensing, principally due to the lower revenues,
combined with higher variable compensation expense related to performance and
higher employee medical benefit expenses in the current year.
CATALOG GROUP
Fiscal 1996 Catalog Group revenues of $71.7 increased $10.3, or 17%, compared to
fiscal 1995. The revenue increase was a result of higher sales volume from all
of the Company's catalogs, Critics' Choice Video, Collectors' Choice Music and
Playboy. The increase was primarily attributable to higher circulation for all
three catalogs combined with a strong response to the Critics' Choice Video
catalog's implementation of a competitive pricing strategy in the second quarter
of fiscal 1996. This strategy was in reaction to lower response rates in the two
prior quarters which the Company believes were due in part to competition from
mass marketers which offer popular videos at deeply-discounted prices.
Additionally, the higher Collectors' Choice Music revenues were also due in part
to a new promotion. Fiscal 1996 Catalog Group operating income of $5.2 remained
stable compared to fiscal 1995 as incremental profit generated from the higher
revenues was sufficient to absorb higher expenses related to paper price and
postal rate increases. There were also higher expenses in fiscal 1996 relative
to the higher revenues from expanded mailings to prospective customers of the
catalogs. In fiscal 1997, the Company plans to continue to increase the
circulation for all three catalogs. The Company anticipates that paper costs
will be lower in fiscal 1997 compared to fiscal 1996 as prices have begun to
decline, and the Critics' Choice Video and Collectors' Choice Music catalogs
have changed to a different type of paper, similar in quality, but lower in
price. In fiscal 1998, the catalog operations will move from its current
facility to a larger facility under terms of a build-to-suit lease. The new
facility will be built in fiscal 1997 in the same Chicago suburb.
CORPORATE ADMINISTRATION AND PROMOTION
Corporate administration and promotion expense of $17.9 for the year ended June
30, 1996 increased $0.6, or 4%, compared to the prior year. Expenses were higher
in the current year primarily due to higher variable compensation expense
related to performance and higher employee medical benefit expenses, partially
offset by lower marketing expenses in the current year.
CASINO GAMING
In fiscal 1996 the Company announced plans to re-enter the casino gaming
business. The Company's image, international appeal and successful history in
gaming makes this a logical extension into the fast growing field of adult
entertainment. In June 1995 the Company, with a consortium of Greek investors,
bid for an exclusive gaming license on the island of Rhodes, Greece and in
November 1995 the Greek government officially notified the Company's consortium
that it had won the competitive bid for this license. The Company's consortium
expects to complete negotiations with the
27
government for its contract to operate the casino in calendar 1996 and expects
the casino to open in calendar 1997. The Company will receive licensing
royalties on revenues of the hotel/casino and owns less than 20% of its equity.
The Company is continuing to explore other gaming opportunities with a strategy
to enter into, with strong local partners, joint-venture agreements under which
the Company would receive license fees for the use of the Playboy name and
trademarks and consider taking equity positions.
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 Playboy-related publishing 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 fiscal
1995 compared to an operating loss in the prior year. In addition, fiscal 1994
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 $0.6, or $0.03 per share,
compared to a net loss of $9.5, or $0.48 per share, for the prior year. A $0.6
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.
The Company's operating income of $3.1 and net income of $0.6, or $0.03 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 $0.62 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 fiscal 1994.
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 $0.4, 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 years' issues in fiscal 1995,
partially offset by 9% fewer U.S. and Canadian newsstand copies sold in fiscal
1995. Advertising revenues declined 1%, or $0.4, 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 fiscal
1995 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.
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 fiscal 1995. 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 fiscal 1994 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, lower costs related to the new photo studio in California in fiscal
1995 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.
Playboy-related Businesses
Operating income from 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 primarily due to higher revenues from
newsstand specials as a result of the publication of two additional newsstand
specials in fiscal 1995 and higher revenues from Playboy foreign editions and
ancillary businesses. Partially offsetting these increases were higher expenses
in fiscal 1995 related to the anticipated growth of the new media business.
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 fiscal 1995, partially offset by higher variable compensation
expense related to performance in fiscal 1995 and the receipt of a management
fee from duPont Publishing, Inc. in fiscal 1994.
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 $0.6 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").
28
Playboy Television
For the year ended June 30, 1995, revenues of the Company's branded domestic pay
television service, Playboy Television, were 26% higher compared to the prior
year. Cable pay-per-view revenues increased 33%, attributable to an increase in
the number of cable addressable homes to which Playboy Television was available,
higher average buy rates, and higher average revenue per buy in fiscal 1995. At
June 30, 1995, Playboy Television was available to 10.6 million cable
addressable homes, a 10% increase compared to June 30, 1994. Cable 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 new
revenues from the launch of Playboy Television on DirecTV and PrimeStar, and
growth in selling directly to the backyard dish market, distribution by
commercial retailers of satellite programming and increased emphasis on consumer
marketing. Playboy Television was available to 13.9 million cable and satellite
direct-to-home households, including 337,000 monthly subscribers, at June 30,
1995.
Profit contribution for Playboy Television increased $3.9, or 46%, compared to
fiscal 1994 as the net increase in revenues more than offset higher expenses in
fiscal 1995 related to selling directly to the backyard satellite dish market
and the absence of sublease income from the Company's satellite transponder in
fiscal 1995. As a result of the Company's move in May 1994 to 24-hour
availability for Playboy Television, it no longer receives monthly sublease
income of approximately $0.1, the 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 cable homes on a 24-hour basis
compared to 1.2 million cable homes at June 30, 1994.
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 related to a guarantee from
a distribution agreement entered into in the fourth quarter of fiscal 1995 with
Uni related to backlist titles. Additionally, domestic home video launched two
new product lines, a direct-response continuity series 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 fiscal 1994
attributable to weak sales of fiscal 1993 titles, partially offset by sales in
fiscal 1994 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 fiscal 1995 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 business increased $1.3 and $0.1,
respectively, compared to the prior year. Profit contribution from the
international home video business increased $0.7 on a $0.6 increase in revenues.
A decrease in the profit contribution of the international television business
of $0.6 is primarily due to a write-off of $1.3 in fiscal 1995 related to sales
to a distributor in fiscal 1994, partially offset by an increase in revenues of
$0.7, in part due to the launch of a Playboy Television channel in the United
Kingdom late in fiscal 1995. 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's
Playboy 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 $0.4
unusual charge in fiscal 1994 related to the establishment of a reserve for
programming of O.J. Simpson: Minimum Maintenance Fitness for Men ("Minimum
Maintenance"), and a $0.9 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 primarily being amortized over such
period, generally three years.
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 fiscal 1995 related to three new feature-length films, combined with
adjustments in the prior year related to 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 fiscal 1995 of a $1.2 market value adjustment for the documentary film
in the prior year, partially offset by fiscal 1995 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 $0.6 compared to the prior year. This decrease was
primarily due to costs in fiscal 1994 of $0.6 associated with restructuring.
Additionally, higher variable compensation expense related to performance was
mostly offset by lower employee medical benefit expenses in fiscal 1995.
PRODUCT MARKETING GROUP
Product Marketing Group revenues of $6.8 for the year ended June 30, 1995
decreased $0.1, or 2%, compared to the prior year primarily due to lower
royalties from a 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 fiscal 1995 primarily due to strong sales from Asia.
Operating income of $3.4 increased $0.9, 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
29
due to a $0.5 reduction in carrying value of art publishing inventory in fiscal
1994, 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 fiscal 1995.
CATALOG GROUP
Fiscal 1995 Catalog Group revenues 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.
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 variable compensation
expense related to performance in fiscal 1995 was offset by net one-time
expenses in fiscal 1994 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.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had $2.4 in cash and cash equivalents and $5.0 in
short-term borrowings, compared to $1.5 in cash and cash equivalents and $5.0 in
short-term borrowings at June 30, 1995. The Company expects to meet its short-
term and long-term cash requirements through its revolving credit agreement and
cash generated from operations. See Cash Flows From Financing Activities below.
Cash Flows From Operating Activities
Net cash provided by operating activities was $4.5 for the year ended June 30,
1996 compared to $3.2 for the prior year. This increase was primarily due to the
Company's improved operating performance in the current year. Additionally,
there was an increase in cash provided by accrued salaries, wages and employee
benefits during fiscal 1996 primarily due to the timing of payrolls combined
with higher accruals at June 30, 1996 related to the 1995 Stock Incentive Plan
and employee benefits. Partially offsetting these increases was lower cash
provided by accounts payable in fiscal 1996, primarily due to the timing of
inventory purchases for the Critics' Choice Video catalog, principally as the
result of lower liabilities recorded at June 30, 1996 due to a later mailing
date for the July 1996 catalog combined with higher liabilities recorded at June
30, 1995 to support higher circulation for the July 1995 catalog. The Company
invested $25.5 in Company-produced and licensed entertainment programming during
fiscal 1996 compared to $21.3 in the prior year, and expects to invest
approximately $29.0 in such programming in fiscal 1997.
Net cash provided by operating activities was $3.2 for the year ended June 30,
1995 compared to net 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 fiscal 1995. 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. There also was
cash provided by deferred subscription acquisition costs in fiscal 1995 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 fiscal 1994, and a
higher use of cash in fiscal 1995 related to receivables, principally in the
Entertainment Group. Cash used for inventories in fiscal 1995 was primarily due
to higher paper inventory at June 30, 1995, 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. Net cash provided by discontinued
operations in fiscal 1994 of $0.5 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.
Cash Flows From Investing Activities
Net cash used for investing activities was $4.2 for the year ended June 30, 1996
compared to $0.3 for the prior year. The current year period included
investments in equity interests of $3.6 in the first overseas Playboy Television
channels in the United Kingdom and Japan, the casino gaming venture that was
awarded an exclusive license on the island of Rhodes, Greece, and an additional
equity interest in VIPress Poland Sp. z o.o., which publishes the Polish edition
of Playboy magazine. Capital expenditures for the year ended June 30, 1996 were
$0.4 higher than in the prior year. The Company also leased $1.7 of furniture
and equipment in fiscal 1996, compared to $1.4 in fiscal 1995. The Company
expects to make capital expenditures of approximately $0.7 and to lease assets
totaling approximately $3.5 in fiscal 1997. The expected increase in leased
assets in fiscal 1997 is largely related to the catalog operations move
previously discussed.
Net cash used for investing activities was $0.3 for the year ended June 30,
1995 compared to $2.3 for the prior year. 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. Capital expenditures for the year
ended June 30, 1995 were $0.4 lower than in the prior year. The Company also
leased $1.4 of furniture and equipment in fiscal 1995, compared to $0.9 in
fiscal 1994.
Cash Flows From Financing Activities
Net cash provided by financing activities was $0.6 for the year ended June 30,
1996 compared to net cash used for financing activities of $2.7 in the prior
year. This increase was principally due to the payment on July 1, 1994 of the
$1.5 promissory notes referred to above, combined with a reduction in short-term
borrowings under the Company's revolving line of credit of $1.0 in fiscal 1995.
30
In March 1996, the Company and its banks amended the Company's revolving
credit agreement. The amendment increased the line of credit from $19.5 to $35.0
and extended the maturity date of the line to March 1999. The credit agreement
remains collateralized by substantially all of the Company's assets and requires
the Company to maintain financial covenants pertaining to net worth, leverage
and cash flow.
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 was 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 promissory notes referred
to above.
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 1996, the Company realized $2.4 of the $6.9 net deferred tax
asset recorded at June 30, 1995 by utilizing a portion of the NOLs against
fiscal 1996 income. Management believes that the net deferred tax asset of $4.5
at June 30, 1996 is an amount that will more likely than not be realized in
future periods.
Based on current tax law, the Company must generate approximately $13.2 of
future taxable income prior to the expiration of the Company's NOLs for full
realization of the net deferred tax asset. At June 30, 1996, the Company had
NOLs of $37.5 for tax purposes, with $0.8 expiring in 2001, $8.9 expiring in
2003, $8.2 expiring in 2004, $2.1 expiring in 2007, $1.1 expiring in 2008 and
$16.4 expiring in 2009.
Management continues to believe that it is more likely than not that a
sufficient level of taxable income will be generated in years subsequent to
fiscal 1996 and prior to the expiration of the Company's NOLs to realize the
$4.5 net deferred tax asset recorded at June 30, 1996. Following is a summary of
the bases for management's belief that a valuation allowance of $28.0 is
adequate, and that it is more likely than not that the net deferred tax asset of
$4.5 will be realized:
. Management reviewed the components of the Company's NOLs and determined that
they primarily resulted from several nonrecurring events, which were not
indicative of the Company's ability to generate future earnings.
. The Publishing, Product Marketing and Catalog Groups continue to generate
earnings, while the Company's substantial investments in the Entertainment
Group resulted in significant earnings growth in fiscal 1996 and are
anticipated to lead to increased earnings potential in fiscal 1997 and future
years.
. The Company has several opportunities to accelerate taxable income into the
NOL carryforward period. Tax planning strategies would include the
capitalization and amortization versus immediate deduction of circulation
expenditures, the immediate inclusion versus deferred recognition of prepaid
subscription income, the revision of depreciation and amortization methods for
tax purposes and the sale-leaseback of certain property that would generate
taxable income in future years.
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:
1996 1995 1994
- -----------------------------------------------------------------------
Income (loss) before income taxes for
financial statement purposes $ 8.4 $ 2.4 $(15.9)
Exclusion of permanent differences 0.4 0.8 0.5
State taxes (0.1) (0.1) (0.1)
Temporary differences
Programming cost amortization (0.2) (1.3) (2.1)
Deferred subscription acquisition costs (1.0) 0.7 (3.6)
Other 4.0 2.9 4.8
- -----------------------------------------------------------------------
Taxable income (loss) $11.5 $ 5.4 $(16.4)
=======================================================================
OTHER
In January 1993, the Company received a General Notice from the United States
Environmental Protection Agency (the "EPA") as a "potentially responsible party"
("PRP") in connection with a site identified as the Southern Lakes Trap & Skeet
Club, apparently located at the Resort-Hotel in Lake Geneva, Wisconsin (the
"Resort"), formerly owned by a subsidiary of the Company. The Resort was sold by
the Company's subsidiary to LG Americana-GKP Joint Venture in 1982. Two other
entities were also identified as PRPs in the notice. The notice relates to
actions that may be ordered taken by the EPA to sample for and remove
contamination in soils and sediments, purportedly caused by skeet shooting
activities at the Resort property. During fiscal 1994, the EPA advised the
Company of its position that the area of land requiring remediation is
approximately twice the size of the initial site. The Company believes that it
has established adequate reserves, which totaled $0.7 at June 30, 1996, to cover
the eventual cost of its anticipated share (based on an agreement with one of
the other PRPs) of any remediation that may be agreed upon. The Company is also
reviewing available defenses, insurance coverage and claims it may have against
third parties.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of in fiscal 1996, which adoption had no effect
on the financial statements.
The Company will implement the provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123") in
fiscal 1997. It is the Company's intention to adopt only the disclosure
requirements of Statement 123.
31
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30
(in thousands, except per share amounts) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
Net revenues $ 276,587 $ 247,249 $ 218,987
- ----------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales (234,247) (214,327) (196,817)
Selling and administrative expenses (32,847) (29,865) (31,842)
Restructuring expenses -- -- (2,875)
Unusual items -- -- (1,676)
- ----------------------------------------------------------------------------------------------------------------------------
Total costs and expenses (267,094) (244,192) (233,210)
- ----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 9,493 3,057 (14,223)
- ----------------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income (expense), net 88 139 (128)
Interest expense (680) (708) (651)
Other, net (452) (52) (239)
- ----------------------------------------------------------------------------------------------------------------------------
Total nonoperating expense (1,044) (621) (1,018)
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes
and cumulative effect of change in accounting principle 8,449 2,436 (15,241)
Income tax expense (4,197) (1,807) (1,123)
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
cumulative effect of change in accounting principle 4,252 629 (16,364)
Loss on disposal of discontinued operations -- -- (620)
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect
of change in accounting principle 4,252 629 (16,984)
Cumulative effect of change in accounting principle -- -- 7,500
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 4,252 $ 629 $ (9,484)
============================================================================================================================
Weighted average number of common shares outstanding 20,014 19,984 19,928
============================================================================================================================
Income (loss) per common share
Income (loss) before cumulative effect
of change in accounting principle
From continuing operations $0.21 $0.03 $ (0.83)
From discontinued operations -- -- (0.03)
- ----------------------------------------------------------------------------------------------------------------------------
Total 0.21 0.03 (0.86)
Cumulative effect of change in accounting principle -- -- 0.38
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $0.21 $0.03 $ (0.48)
============================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
32
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30
(in thousands, except share data) 1996 1995
- ----------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 2,438 $ 1,471
Receivables, net of allowance for doubtful accounts of $3,009 and $4,837 29,110 24,151
Inventories 23,499 21,428
Programming costs 33,873 29,740
Deferred subscription acquisition costs 9,569 9,176
Other current assets 10,420 10,190
- ----------------------------------------------------------------------------------------------------------------
Total current assets 108,909 96,156
- ----------------------------------------------------------------------------------------------------------------
Property and equipment
Land 292 292
Buildings and improvements 8,333 8,245
Furniture and equipment 20,352 19,839
Leasehold improvements 8,427 8,200
- ----------------------------------------------------------------------------------------------------------------
Total property and equipment 37,404 36,576
Accumulated depreciation (25,510) (23,100)
- ----------------------------------------------------------------------------------------------------------------
Property and equipment, net 11,894 13,476
- ----------------------------------------------------------------------------------------------------------------
Programming costs--noncurrent 3,362 3,209
Trademarks 11,887 11,046
Net deferred tax assets 4,191 6,493
Other noncurrent assets 10,626 7,455
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 150,869 $ 137,835
- ----------------------------------------------------------------------------------------------------------------
Liabilities
Short-term borrowings $ 5,000 $ 5,000
Current financing obligations 340 333
Accounts payable 22,745 19,549
Accrued salaries, wages and employee benefits 6,941 4,088
Reserves for losses on disposals of discontinued operations 707 766
Income taxes payable 970 875
Deferred revenues 44,378 42,905
Other liabilities and accrued expenses 8,940 8,621
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 90,021 82,137
- ----------------------------------------------------------------------------------------------------------------
Long-term financing obligations 347 687
Other noncurrent liabilities 8,218 7,921
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 98,586 90,745
- ----------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' Equity
Common stock, $0.01 par value
Class A--7,500,000 shares authorized; 5,042,381 issued 50 50
Class B--30,000,000 shares authorized; 16,477,143 issued 165 165
Capital in excess of par value 36,323 36,398
Retained earnings 22,798 18,546
Foreign currency translation adjustment (17) --
Less cost of 293,427 and 328,427 Class A common shares and 1,040,045
and 1,201,294 Class B common shares in treasury (7,036) (8,069)
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 52,283 47,090
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 150,869 $ 137,835
- ----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
33
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
Class A Class B Capital in
Common Common Excess of Retained Treasury
(in thousands of dollars) Stock Stock Par Value Earnings Other Stock Total
- ----------------------------------------------------------------------------------------------------------------------------------
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
Net income -- -- -- 4,252 -- -- 4,252
Exercise of 35,000 Class A and
159,750 Class B stock options -- -- (81) -- -- 1,025 944
Issuance of 1,499 Class B common
shares to employees as service awards -- -- 6 -- -- 8 14
Foreign currency translation
adjustment -- -- -- -- (17) -- (17)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 $ 50 $ 165 $36,323 $22,798 $ (17) $ (7,036) $ 52,283
================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
34
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30
(in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income (loss) $ 4,252 $ 629 $ (9,484)
Adjustments to reconcile net income (loss)
to net cash provided by (used for) operating activities
Depreciation of property and equipment 2,383 2,531 2,752
Amortization of intangible assets 1,783 1,590 1,516
Amortization of investments in entertainment programming 21,263 20,130 18,174
Investments in entertainment programming (25,549) (21,313) (17,185)
Cumulative effect of change in accounting principle -- -- (7,500)
Changes in current assets and liabilities
Receivables (4,574) (3,498) 1,609
Inventories (2,061) (2,160) 2,398
Deferred subscription acquisition costs (393) 910 (2,478)
Other current assets (426) (1,586) (683)
Accounts payable 2,931 5,869 (1,287)
Accrued salaries, wages and employee benefits 2,853 277 (327)
Income taxes payable 27 92 (36)
Deferred revenues 1,468 1,171 5,416
Other liabilities and accrued expenses 224 581 366
-------- -------- --------
Net change in current assets and liabilities 49 1,656 4,978
-------- -------- --------
Increase in trademarks (1,766) (1,856) (1,492)
Decrease in net deferred tax assets 2,399 629 --
(Increase) decrease in other noncurrent assets (487) (832) 318
Increase in other noncurrent liabilities 258 96 2,371
Net cash provided by (used for) discontinued operations (59) (124) 531
Increase in reserve for loss on disposal of discontinued operations -- -- 620
Other, net 15 44 33
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 4,541 3,180 (4,368)
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Additions to property and equipment (760) (382) (821)
Acquisitions of equity interests in international ventures (3,619) -- --
Acquisition of Critics' Choice Video, Inc. minority interest -- -- (1,510)
Other, net 211 67 54
- ---------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (4,168) (315) (2,277)
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Increase (decrease) in short-term borrowings -- (1,000) 6,000
Repayment of debt (350) (1,850) (350)
Proceeds from exercise of stock options 944 198 350
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 594 (2,652) 6,000
- ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 967 213 (645)
Cash and cash equivalents at beginning of year 1,471 1,258 1,903
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,438 $ 1,471 $ 1,258
=====================================================================================================================
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, 1996
(A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and all majority-owned 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. Domestic home
video revenues are recognized based on unit sales reported for new releases each
month by the Company's distributor and a distribution agreement for backlist
titles. International television revenues are recognized either upon
identification of programming scheduled for networks, 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 deferred and amortized 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 I.
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 principally 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, 1996,
substantially all unamortized programming costs applicable to released programs
are expected to be amortized during the next three years. See Note H.
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 generally over 40 years. Accumulated amortization of intangible assets
was $10,062,000 and $8,279,000 at June 30, 1996 and 1995, 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.
Foreign Exchange Forward Contracts: The Company utilizes forward contracts to
minimize the impact of currency movements on royalties received denominated in
Japanese yen and German marks. The terms of these contracts are generally one
year or less. Gains and losses related to these agreements are recorded in
income as part of, and concurrent with, the transaction. As of June 30, 1996 and
1995, the Company had approximately $2,300,000 and $2,450,000, respectively, in
outstanding contracts. The difference between these contracts' values and the
fair market value of these instruments at June 30, 1996 and 1995 in the
aggregate was not material.
Minority Interest: The Company owns a 90% interest in VIPress Poland Sp. z o.o.
("VIPress"), which publishes the Polish edition of Playboy magazine. The
financial statements of VIPress are included in the Company's financial
statements. The minority interest in the results of operations is included in
nonoperating expense in the Consolidated Statements of Operations and the
minority interest in the equity of VIPress is included in "Other noncurrent
liabilities" in the Consolidated Balance Sheets.
Foreign Currency Translation: Assets and liabilities in foreign currencies are
translated into U.S. dollars at the exchange rate existing at the balance sheet
date. The net exchange differences resulting from these translations are
recorded as a separate component of shareholders' equity. Revenues and expenses
are translated at average rates for the period.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's knowledge
of current events and actions it may undertake in the future, they may
ultimately differ from actual results.
(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
36
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 $50,000, $615,000 and $2,140,000, respectively, were
made in fiscal 1996, 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.
(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 options on four offsetting interest rate
swap agreements entered into late in fiscal 1993. These agreements each had a
notional principal amount of $200 million and expired on July 13, 1993.
(E) INCOME TAXES
The income tax provision consisted of the following for the years ended June 30
(in thousands):
1996 1995 1994
- -------------------------------------------------------------------------------
Current:
Federal $ 241 $ 115 $ --
State 67 65 68
Foreign 1,490 998 1,055
- -------------------------------------------------------------------------------
Total current 1,798 1,178 1,123
- -------------------------------------------------------------------------------
Deferred:
Federal 2,399 629 --
State -- -- --
Foreign -- -- --
- -------------------------------------------------------------------------------
Total deferred 2,399 629 --
- -------------------------------------------------------------------------------
Total income tax provision $4,197 $1,807 $1,123
===============================================================================
The income tax provision differed from a provision computed at the U.S.
statutory tax rate as follows for the years ended June 30 (in thousands):
1996 1995 1994
- -------------------------------------------------------------------------------
Statutory rate tax provision $2,871 $ 828 $(5,182)
Increase (decrease) in taxes resulting from:
Foreign withholding tax on licensing income 1,448 998 1,055
State income taxes 67 65 68
Nondeductible expenses 129 341 238
Tax benefit of domestic losses not recognized -- -- 4,944
Tax benefit of foreign taxes paid or accrued (356) (339) --
Other 38 (86) --
- -------------------------------------------------------------------------------
Total income tax provision $4,197 $1,807 $ 1,123
===============================================================================
The U.S. statutory tax rate for fiscal 1994 through 1996 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.
The adoption of Statement 109 resulted in the recognition of $7.5 million,
or $0.38 per share, of deferred federal tax benefits. This amount is included in
the net loss for the fiscal year ended June 30, 1994 as "Cumulative effect of
change in accounting principle." In the Consolidated Balance Sheet at June 30,
1995, $0.4 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." In the Consolidated Balance Sheet at June 30, 1996, $0.3 million of the
$4.5 million net deferred tax asset is included in "Other current assets" and
$4.2 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, 1995 and 1996 are presented below (in
thousands):
June 30, Net June 30,
1995 Change 1996
- -------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 16,248 $(3,514) $ 12,734
Capital loss carryforwards 10,512 -- 10,512
Tax credit carryforwards 6,310 (459) 5,851
Other deductible temporary differences 8,888 967 9,855
- -------------------------------------------------------------------------------
Total gross deferred tax assets 41,958 (3,006) 38,952
Valuation allowance (28,573) 602 (27,971)
- -------------------------------------------------------------------------------
Gross deferred tax assets 13,385 (2,404) 10,981
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred subscription acquisition costs (3,708) 23 (3,685)
Other taxable temporary differences (2,806) (18) (2,824)
- -------------------------------------------------------------------------------
Gross deferred tax liabilities (6,514) 5 (6,509)
- -------------------------------------------------------------------------------
Net deferred tax assets $ 6,871 $(2,399) $ 4,472
===============================================================================
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 are
reflected in the net deferred tax assets in the Consolidated Balance Sheets at
June 30, 1996 and 1995.
Realization of the net deferred tax asset is dependent upon the Company's
ability to generate taxable income in future years. The recognition of benefits
in the financial statements is based upon projections by management of future
operating income and the anticipated reversal of temporary differences that will
result in taxable income. Projections of future earnings were based on adjusted
historical earnings.
In order to fully realize the net deferred tax asset of $4.5 million at
June 30, 1996, the Company will need to generate future taxable income of
approximately $13.2 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, 1996, the Company had operating loss carryforwards of $37.5
million with $0.8 million expiring in 2001, $8.9 million expiring in 2003, $8.2
million expiring in 2004, $2.1 million expiring in 2007, $1.1 million expiring
in 2008 and $16.4 million expiring in 2009. The Company had capital loss
carryforwards of $30.9 million with $1.0 million expiring in
37
1998 and $29.9 million expiring in 1999. The Company had operating loss
carryforwards of $25.8 million for alternative minimum tax purposes, with $1.9
million expiring in 2003, $5.7 million expiring in 2004, $1.5 million expiring
in 2007, $0.7 million expiring in 2008 and $16.0 million expiring in 2009. In
addition, foreign tax credit carryforwards of $3.3 million and investment tax
credit carryforwards of $2.0 million are available to reduce future U.S. federal
income taxes. The foreign tax credit carryforwards expire in 1998 through 2001,
and the investment tax credit carryforwards expire in 1997 through 2001.
(F) 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, 1996 and 1995 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 $620,000 in fiscal 1994. There was no income tax effect 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 109.
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
$707,000 at June 30, 1996, to cover the eventual cost of its anticipated share
(based on an agreement with one of the other PRPs) of any remediation that may
be agreed upon. The Company is also reviewing available defenses, insurance
coverage and claims it may have against third parties.
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.
(G) INVENTORIES
Inventories consisted of the following at June 30 (in thousands):
1996 1995
- -------------------------------------------------------------------------------
Paper $10,771 $ 7,342
Editorial and other prepublication costs 6,566 6,193
Merchandise finished goods 6,162 7,893
- -------------------------------------------------------------------------------
Total inventories $23,499 $21,428
===============================================================================
(H) PROGRAMMING COSTS
Current programming costs consisted of the following at June 30 (in thousands):
1996 1995
- -------------------------------------------------------------------------------
Released, less amortization $24,040 $23,898
Completed, not yet released 9,833 5,842
- -------------------------------------------------------------------------------
Total current programming costs $33,873 $29,740
===============================================================================
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 are aired throughout the term of the license
period, and related costs are primarily 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, or $0.03 per share (net of related taxes of $296,000), for
the fiscal year ended June 30, 1995.
(I) 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 over the period during which the future benefits
are expected to be received, principally six to 12 months.
At June 30, 1996 and 1995, advertising costs of $6.9 million and $6.4
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, 1996, 1995 and 1994, the Company's
advertising expense was $44.4 million, $43.5 million and $43.2 million,
respectively.
(J) LONG-TERM FINANCING OBLIGATIONS
Long-term financing obligations consisted of the following at June 30
(in thousands):
1996 1995
- -------------------------------------------------------------------------------
10% note due in installments through 1997, net of
unamortized discount of $13 and $30, respectively,
based upon imputed interest rate of 13% $ 687 $1,020
Less current maturities, net of unamortized discount
of $10 and $17, respectively (340) (333)
- -------------------------------------------------------------------------------
Total long-term financing obligations $ 347 $ 687
===============================================================================
The amount of scheduled annual maturities of long-term debt for each of fiscal
1997 and 1998 is $350,000. The carrying value of this debt approximates the fair
market value.
38
Under the terms of the Company's revolving credit agreement with two
domestic banks, the line of credit decreased from $30.0 million to $19.5 million
in December 1995. In March 1996, the Company and its banks amended the agreement
which increased the line of credit from $19.5 million to $35.0 million and
extended the maturity date of the line to March 1999. The 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 cash balances. The credit agreement, which covers short-term
borrowings and the issuance of letters of credit, remains collateralized by
substantially all of the Company's assets and requires the Company to maintain
financial covenants pertaining to net worth, leverage and cash flow.
Additionally, there are limitations on other indebtedness and investments and
cash dividends are prohibited. The carrying value of these borrowings
approximates the fair market value of the debt.
At June 30, 1996, short-term borrowings of $5.0 million and letters of
credit of $5.4 million were outstanding compared to short-term borrowings and
letters of credit outstanding at June 30, 1995 of $5.0 million and $5.5 million,
respectively. The weighted average interest rates on the short-term borrowings
outstanding at June 30, 1996 and 1995 were 7.77% and 8.70%, respectively.
(K) STOCK PLANS
The Company has two plans under which stock options or shares may be granted:
the 1991 Non-Qualified Stock Option Plan for Non-Employee Directors (the
"Directors' Plan") and the 1995 Stock Incentive Plan, which was approved by
stockholders of the Company on November 14, 1995. Previously, stock options were
also granted under the 1989 Stock Option Plan (the "1989 Option Plan"). However,
at this time, there are no shares available for future grant under this plan.
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 was 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
and the remaining 175,100 Class A options were cancelled. The Directors' Plan
provides for the grant of nonqualified stock options to each nonemployee
director to purchase 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 currently provides for Non-Qualified Stock Option,
Incentive Stock Option and Restricted Stock Agreements, authorizes the issuance
of a total of 1,803,000 shares of Class B stock, which includes the previously
mentioned 103,000 shares that were transferred from the 1989 Option Plan and an
additional 600,000 shares authorized in June 1996, which are subject to
stockholder approval. The Non-Qualified and Incentive Stock Option Agreements
authorize the grant of options to key employees to purchase shares of Class B
stock at a price that is not less than 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 restrictions that lapse upon the
Company meeting specified operating income objectives pertaining to a fiscal
year. 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 restricted stock will vest on June 30, 2005.
The first operating income objective of $7.5 million was met in fiscal 1996, and
121,564 shares of restricted stock vested in August 1996. Compensation expense
recognized in fiscal 1996 and 1995 in connection with the 1995 Stock Incentive
Plan was $972,000 and $228,000, respectively.
At June 30, 1996, options to purchase 115,000 shares of Class A stock and
617,752 shares of Class B stock were exercisable under the 1989 Option Plan,
options to purchase 30,000 shares of Class B stock were exercisable under the
Directors' Plan, and options to purchase 99,375 shares of Class B stock 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, 1996, 906,750 shares of
Class B stock were available for future grants of options under the Directors'
Plan and the 1995 Stock Incentive Plan. Transactions under such plans are
summarized as follows:
- --------------------------------------------------------------------------------
Stock Options Outstanding
- --------------------------------------------------------------------------------
Shares Price Range
--------------------------------------------------
Class A Class B Class A Class B
- --------------------------------------------------------------------------------
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 - 8.25-10.04
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 4.00-10.04
Granted - 40,000 - 8.88-10.63
Exercised (35,000) (159,750) 4.88 4.00-9.13
Canceled - (42,500) - 9.13
- --------------------------------------------------
Outstanding at June 30, 1996 115,000 1,146,500 6.69-7.38 4.38-10.63
================================================================================
- --------------------------------------------------------------------------------
Restricted Stock Awards Outstanding
- --------------------------------------------------------------------------------
Class B
- --------------------------------------------------------------------------------
Outstanding at June 30, 1994 -
Awarded 516,250
Vested -
Canceled -
- --------------------------------------------------------------------------------
Outstanding at June 30, 1995 516,250
Awarded 20,000
Vested -
Canceled (50,000)
- --------------------------------------------------------------------------------
Outstanding at June 30, 1996 486,250
================================================================================
Certain incentive stock options granted in fiscal 1995 have been determined to
carry an option price of 110%, and not 100%, of the fair market value on the
date of grant.
The Company will implement the provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation
("Statement 123") in fiscal 1997. It is the Company's intention to adopt only
the disclosure requirements of Statement 123.
(L) ACQUISITIONS
On March 29, 1996 the Company acquired an additional 45% interest in VIPress for
approximately $315,000, including approximately $85,000 in acquisition costs.
Subsequent to this purchase, the Company owns 90% of the capital stock of
VIPress, which publishes the Polish edition of Playboy magazine.The acquisition
was accounted for under the purchase method and, accordingly, the results of
VIPress since the date of acquisition have been included in the Company's
Consolidated Statements of Operations.
39
Prior to acquiring the additional 45% interest, the investment was accounted for
under the equity method and as such, the Company's proportionate share of net
income from VIPress prior to the acquisition is included in nonoperating
expense. The acquisition resulted in goodwill of approximately $106,000 which
will be amortized over five years. The Company's 90% interest may be reduced to
a minimum of 80% by the end of fiscal year 2000 as a result of shares that may
be sold for a nominal amount to two managing minority partners generally
pursuant to an incentive plan that requires certain performance objectives to be
met. Pro forma results reflecting this acquisition, assuming it had been made at
the beginning of each period presented, would not be materially different from
the results reported.
The Company has an option to acquire the remaining 80% interest in duPont
Publishing, Inc. ("duPont") at a price based on fair market value as of December
31, 1999. duPont is the publisher of two magazines, duPont Registry, A Buyers
Gallery of Fine Automobiles and A Buyers Gallery of Fine Homes. 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 $125,000 and $295,000 at June 30, 1996 and 1995, 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.
(M) CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest and income taxes was as follows during the years ended
June 30 (in thousands):
1996 1995 1994
- --------------------------------------------------------------------------------
Interest $ 610 $ 774 $ 566
Income taxes 1,851 1,064 510
- --------------------------------------------------------------------------------
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 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 L.
(N) 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 at both June 30, 1996 and 1995,
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. Due to the growth of the catalog business,
in fiscal 1998 the Company will be leasing a larger facility in the same Chicago
suburb to replace the existing 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. This
letter of credit can be irrevocably released based upon achievement of certain
criteria related to annual financial data.
During fiscal 1993, the Company began to lease certain furniture and
equipment for use in its operations. The leases are for terms of two to five
years and include end-of-lease purchase options.
Rent expense was as follows for the years ended June 30 (in thousands):
1996 1995 1994
- --------------------------------------------------------------------------------
Minimum rent expense $9,177 $8,854 $8,841
Contingent rent expense - - 344
- --------------------------------------------------------------------------------
Total 9,177 8,854 9,185
Sublease income - - (1,364)
- --------------------------------------------------------------------------------
Net rent expense $9,177 $8,854 $7,821
================================================================================
The minimum commitment at June 30, 1996, under operating leases with
noncancelable terms in excess of one year, was as follows (in thousands):
Operating
Year ending June 30 Leases
- --------------------------------------------------------------------------------
1997 $ 8,825
1998 8,244
1999 7,195
2000 7,428
2001 7,656
Later years 13,237
- --------------------------------------------------------------------------------
Total minimum lease payments $52,585
================================================================================
(O) 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 was 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.
These royalty payments were discontinued April 30, 1996, when the agreement
ended. The agreement provided for noncompetition in the North American
distribution and production of an adult-oriented pay television service by
Rainbow as long as royalty payments were being made.
40
(P) SEGMENT INFORMATION
The four industry segments in which the Company currently operates are as
follows: Publishing, Entertainment, Product Marketing and Catalog. Publishing
Group operations include the publication of Playboy magazine; Playboy-related
businesses, including newsstand specials and calendars, foreign editions of
Playboy magazine, and new media and ancillary businesses; and the production of
the Playboy Jazz Festival. Entertainment Group operations include the production
and marketing of programming through Playboy Television, other domestic
television, international television and worldwide home video businesses as well
as the co-production of feature-length movies. 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. Catalog Group operations include the direct
marketing of three catalogs: Critics' Choice Video, Collectors' Choice Music and
Playboy. Financial information relating to industry segments for fiscal 1996,
1995 and 1994 is presented on page 24 and is an integral part of these
consolidated financial statements.
(Q) 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 1996 and 1995 contributions
were approximately $620,000 and $200,000, respectively. No such contribution was
made in fiscal 1994.
During fiscal 1996, 1995 and 1994, the Company matched employee
contributions to the Savings Plan to a maximum of 2 3/4% of each participating
employee's eligible compensation, subject to Internal Revenue Service
limitations. For fiscal 1997, the maximum match will be 3 1/2% of such
compensation. The Company's matching contributions in fiscal 1996, 1995 and 1994
related to this program were approximately $630,000, $630,000 and $670,000,
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 $1,186,000 and $797,000 at
June 30, 1996 and 1995, respectively, and are included in "Other noncurrent
liabilities" in the Consolidated Balance Sheets.
Effective July 1, 1996 the Company established an Employee Stock Purchase
Plan, which is subject to stockholder approval, to provide substantially all
regular full and part-time employees an opportunity to purchase shares of its
Class B common stock through payroll deductions up to the lower of 10% of base
salary, or $25,000 of fair market value of Class B common stock per calendar
year (as required by the Internal Revenue Service). The funds will be withheld
and then used to acquire stock on the last trading day of each quarter, based on
the closing price less a 15% discount.
(R) 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 if Section 505 of the Telecommunications Act of
1996 were to be enforced, the Company's revenues attributable to its domestic
pay television services could be materially adversely affected due to reduced
cable carriage and/or reduced buy rates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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 F.
(S) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
the years ended June 30, 1996 and 1995 (in thousands, except per share amounts):
Quarters Ended
------------------------------------------
1996 Sept. 30 Dec. 31 Mar. 31 June 30 Year
- --------------------------------------------------------------------------------
Net revenues $62,263 $71,618 $66,257 $76,449 $276,587
Gross profit 8,579 11,120 9,555 13,086 42,340
Operating income 1,440 2,854 1,835 3,364 9,493
Income before
extraordinary item and
cumulative effect
of change in ac-
counting principle 1,012 1,138 676 1,426 4,252
Net income 1,012 1,138 676 1,426 4,252
Income before
extraordinary item and
cumulative effect
of change in ac-
counting principle
per common share 0.05 0.06 0.03 0.07 0.21
Net income per
common share 0.05 0.06 0.03 0.07 0.21
Common stock price
Class A high 9 5/8 9 1/2 11 15 3/4
Class A low 7 7/8 8 5/8 8 3/8 10
Class B high 9 3/8 9 1/4 11 1/8 16 1/2
Class B low $ 7 3/8 $ 7 1/2 $ 7 1/2 $ 9 7/8
41
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
extraordinary item and
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
extraordinary item and
cumulative effect
of change in ac-
counting principle
per common share (0.06) 0.05 (0.02) 0.06 0.03
Net income (loss) per
common share (0.06) 0.05 (0.02) 0.06 0.03
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
*Amounts cannot be calculated from the Company's respective Quarterly Reports on
Form 10-Q filed in fiscal 1995 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 included reductions in
programming expense of $220,000, or $0.02 per share; $281,000, or $0.01 per
share; $200,000, or $0.01 per share; and $169,000, or $0.00 per share,
respectively, resulting from a change in accounting estimate. See Note H.
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, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended June 30, 1996. 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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1996, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Chicago, Illinois
August 1, 1996
- --------------------------------------------------------------------------------
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 L.L.P., 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 L.L.P., management
representatives and the Company's internal auditor to review internal accounting
control and auditing and financial reporting matters. Both Coopers & Lybrand
L.L.P. 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/ Rebecca S. Maskey
Rebecca S. Maskey
Senior Vice President, Finance
43