Exhibit 99.2
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information are based on the
historical financial statements of Playboy Enterprises, Inc. ("Playboy"),
adjusted to give effect to the following transactions (the "Transactions"): (1)
the acquisition of Spice Entertainment Companies, Inc. ("Spice") by Playboy,
(2) the contribution of assets and liabilities of Spice immediately before the
Spice Acquisition to Directrix, Inc. ("Directrix"), a separate public company,
the shares of which were distributed to former Spice shareholders in connection
with the Spice Acquisition, and (3) the sale of assets of Spice to Califa
Entertainment Group, Inc. ("Califa") (see Note (B) to the Unaudited Pro Forma
Statement of Operations).
All unaudited pro forma financial information includes adjustments to
historical results (consisting only of normal recurring entries) necessary for
a fair presentation and, in our opinion, have been prepared on the same basis
as the audited financial statements. Some Spice financial information has been
reclassified to conform with the Playboy presentation. The unaudited pro forma
statement of operations gives effect to the Transactions as if they had
occurred as of January 1, 1998 and the unaudited pro forma balance sheet gives
effect to the Transactions as if they had occurred on December 31, 1998. The
unaudited pro forma financial information does not reflect the effects of any
anticipated changes to be made by us to the historical operations, is presented
for informational purposes only and does not purport (1) to represent what our
results of operations or financial condition would actually have been had the
Transactions occurred on the dates indicated or (2) to project our results of
operations or financial position for any future period or date.
The unaudited pro forma financial information reflects the Spice Acquisition
using the purchase method of accounting. The acquired assets and assumed
liabilities of Spice are stated at values representing an allocation of the
purchase price based upon the estimated fair market value at the date of the
Spice Acquisition. This allocation is subject to change as the valuation is
finalized.
In February 1996, we filed suit challenging Section 505 of the
Telecommunications Act of 1996, which, among other things, regulates the cable
transmission of adult programming, such as Playboy's and Spice's domestic pay
television programs. Fiscal 1998 revenues attributable to Playboy and Spice
domestic pay television cable services were affected by the enforcement of
Section 505. In December 1998, a federal district court unanimously declared
Section 505 unconstitutional. This ruling gives cable systems the right to
resume 24-hour broadcast. We believe that the effect of Section 505 on our
financial performance may continue until the case is finally decided.
F-27
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
(In thousands, except per share amounts)
Pro Forma Pro Forma
Playboy Spice(A) Adjustments Pro Forma
--------- --------- ----------- ---------
Net revenues............... $ 317,618 $ 27,709 $ (2,868)(B) $ 342,659
200 (C)
--------- -------- -------- ---------
Costs and expenses
Cost of sales............. (269,478) (16,182) 180 (D) (283,280)
2,200 (E)
Selling and
administrative
expenses................. (43,172) (4,494) (6,136)(F) (50,673)
3,129 (G)
--------- -------- -------- ---------
Total costs and
expenses............... (312,650) (20,676) (627) (333,953)
--------- -------- -------- ---------
Operating income (loss).... 4,968 7,033 (3,295) 8,706
--------- -------- -------- ---------
Nonoperating income
(expense)
Investment income......... 127 127
Interest income
(expense)................ (1,551) (2,141) (6,535)(H) (8,427)
1,800 (I)
Gain on sale of
investment............... 4,272 4,272
Other, net................ (791) (791)
--------- -------- -------- ---------
Total nonoperating income
(expense)................. 2,057 (2,141) (4,735) (4,819)
--------- -------- -------- ---------
Income (loss) before income
taxes..................... 7,025 4,892 (8,030) 3,887
Income tax benefit
(expense)................. (2,705) 104 (1,998)(J) (4,599)
--------- -------- -------- ---------
Net income (loss).......... 4,320 4,996 (10,028) (712)
Preferred dividend......... (135) 135 (K)
--------- -------- -------- ---------
Net income (loss)
applicable to common
stock..................... $ 4,320 $ 4,861 $ (9,893) $ (712)
========= ======== ======== =========
Net income (loss) per
common share
Basic..................... $ 0.21 $ (0.03)(L)
Diluted................... $ 0.21 $ (0.03)(L)
Weighted average number of
common shares outstanding
Basic..................... 20,548 22,499 (L)
Diluted................... 21,036 22,987 (L)
See accompanying notes to unaudited pro forma statement of operations.
F-28
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(Dollars in thousands)
A. The Pro Forma Spice financial information reflects (1) the elimination of
Directrix, the results of which are included in the Spice historical financial
statements, and (2) the reversal of the elimination of intercompany
transactions between pro forma Spice and Directrix, as follows:
Less Intercompany Pro Forma
Spice Directrix Eliminations Spice
-------- --------- ------------ ---------
Net revenues.................. $ 32,125 $ 9,581 $ 5,165 $ 27,709
-------- -------- ------- --------
Costs and expenses
Cost of sales............... (22,441) (11,424) (5,165) (16,182)
Selling and administrative
expenses................... (6,694) (2,200) (4,494)
-------- -------- ------- --------
Total costs and expenses.. (29,135) (13,624) (5,165) (20,676)
-------- -------- ------- --------
Operating income (loss)....... 2,990 (4,043) 7,033
-------- -------- ------- --------
Interest income (expense)..... (2,280) (139) (2,141)
-------- -------- ------- --------
Income (loss) before income
taxes........................ 710 (4,182) 4,892
Income tax benefit............ 104 104
-------- -------- ------- --------
Net income (loss)............. 814 (4,182) 4,996
Preferred dividend............ (135) (135)
-------- -------- ------- --------
Net income (loss) applicable
to common stock.............. $ 679 $ (4,182) $ 4,861
======== ======== ======= ========
B. In connection with the Spice Acquisition, assets of Spice were sold to
Califa, which we refer to as the "Califa Transaction." In exchange for these
assets, Califa will pay Playboy $500 in cash in two installments in 1999 and
$10,000 under a promissory note due March 15, 2006, which accrues interest at
an annual rate of 18%, payable quarterly. In addition, in exchange for non-
competition covenants, Califa is contractually obligated to pay Playboy $13,300
in cash over the next nine years. The gains related to the Califa Transaction
have been deferred in accordance with Staff Accounting Bulletin 81 due to the
capitalization and leverage levels of Califa. The adjustment reflects the
elimination of revenues associated with the operations transferred to Califa in
connection with the Califa Transaction.
C. The adjustment reflects income that Califa is contractually obligated to
pay to Playboy pursuant to the non-competition agreement entered into in
connection with the Califa Transaction.
D. The adjustment reflects playback costs associated with operations
transferred to Califa in connection with the Califa Transaction.
E. The adjustment reflects the elimination of lease costs associated with
the operation of a transponder that is no longer needed due to the
consolidation of Playboy's television networks.
F. The adjustment reflects the incremental amortization expense related to
goodwill and other intangible assets, including the trade name, using recovery
periods of four to 40 years.
F-29
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
G. The adjustment reflects the reduction in salary expense resulting from
actual head count reductions, which will occur by April 1999, in connection
with the Spice Acquisition.
H. The adjustment reflects (1) additional interest expense of $10,100, at
the weighted average interest rate at December 31, 1998 of 9.19%, associated
with debt of $110,000 outstanding under our new credit agreement, (2)
elimination of the historical Playboy interest expense of $1,600 and (3)
elimination of the historical Spice interest expense of $2,000. A change in
interest rate of 1/4% will change annual interest expense by $275 and net
income (loss) by $106.
I. The adjustment reflects the interest income that Califa is contractually
obligated to pay to Playboy under a promissory note issued to Playboy in
connection with the Califa Transaction.
J. The adjustment reflects the income tax provision based on pre-tax income
plus nondeductible goodwill. The effective tax rate is higher than the
statutory federal income tax rate primarily due to state income taxes, net of a
federal benefit, foreign operating losses and the inability to deduct certain
amounts of intangible amortization for tax purposes.
K. The adjustment reflects the elimination of dividends on the Convertible
Series A Preferred Stock, par value $.01 per share, of Spice, which was
converted in connection with the Spice Acquisition.
L. The unaudited pro forma basic and diluted net income per share are based
upon 22,499,000 weighted average number of common shares outstanding (basic)
and 22,987,000 weighted average number of common shares outstanding (diluted),
including dilutive effect of options, of Playboy plus shares issued to former
Spice shareholders.
F-30
UNAUDITED PRO FORMA BALANCE SHEET
December 31, 1998
(In thousands)
Pro Forma Pro Forma Pro
Playboy Spice(M) Adjustments Forma
-------- --------- ----------- --------
ASSETS
Cash and cash equivalents.... $ 341 $ 2,178 $ 14,456 (N) $ 16,975
Marketable securities........ 505 505
Accounts receivable, net..... 49,879 5,519 (1,609)(O) 54,289
500 (P)
Inventories.................. 25,685 25,685
Programming costs............ 43,342 43,342
Deferred subscription
acquisition costs........... 11,570 13 11,583
Prepaid expenses and other
current assets.............. 21,097 2,640 23,737
Due from related parties and
officers.................... 344 344
-------- -------- -------- --------
Total current assets...... 152,419 10,694 13,347 176,460
Property and equipment, net.. 9,157 1,969 11,126
Programming costs............ 5,983 5,983
Library of movies............ 3,953 (839)(Q) 3,114
Net deferred tax assets...... 6,525 6,525
Deferred financing costs..... 127 4,423 (R) 4,550
Other noncurrent assets...... 20,729 473 21,202
Intangible and other assets.. 17,294 9,605 114,956 (S) 141,855
-------- -------- -------- --------
Total assets.............. $212,107 $ 26,821 $131,887 $370,815
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current portion of
obligations under capital
leases...................... $ 399 $ 399
Short-term borrowings/current
portion of long-term debt... $ 29,750 10,927 $(40,221)(T) 456
Accounts payable............. 30,834 2,746 33,580
Accrued salaries, wages and
employee benefits........... 6,024 6,024
Reserves for losses on
disposals of discontinued
operations.................. 68 68
Income taxes payable......... 819 819
Deferred
revenues/subscription
revenue..................... 41,647 893 42,540
Other liabilities and accrued
expenses.................... 9,851 1,741 11,592
Current portion of accrued
restructuring............... 23,000 (U) 23,000
-------- -------- -------- --------
Total current
liabilities.............. 118,993 16,706 (17,221) 118,478
Obligations under capital
leases--long-term........... 36 36
New long-term debt........... 110,500 (V) 110,500
Other noncurrent
liabilities................. 8,912 8,912
Deferred compensation/other.. 298 298
-------- -------- -------- --------
Total liabilities......... 127,905 17,040 93,279 238,224
Common stock................. 221 123 (103)(W) 241
Capital in excess of par
value....................... 44,860 29,282 19,087 (W) 93,229
Unearned compensation........ (3,716) (237) 237 (X) (3,716)
Retained
earnings/(accumulated
deficit).................... 49,577 (6,694) 9,142 (X) 49,577
(2,448)(O)(Q)
Accumulated other
comprehensive income........ 1,072 (1,072)(X)
Transfers from Spice......... (13,765) 13,765 (X)
Cumulative translation
adjustment.................. (137) (137)
Unrealized loss on marketable
securities.................. (32) (32)
Less cost of treasury stock.. (6,571) (6,571)
-------- -------- -------- --------
Total shareholders'
equity................... 84,202 9,781 38,608 132,591
-------- -------- -------- --------
Total liabilities and
shareholders' equity..... $212,107 $ 26,821 $131,887 $370,815
======== ======== ======== ========
See accompanying notes to unaudited pro forma balance sheet.
F-31
NOTES TO THE UNAUDITED PRO FORMA BALANCE SHEET
(Dollars in thousands)
M. The Pro Forma Spice information reflects the elimination of Directrix,
the results of which are included in the Spice historical financial statements,
as follows:
Less Pro Forma
Spice Directrix Spice
-------- --------- ---------
ASSETS
Cash and cash equivalents................. $ 2,178 $ 2,178
Accounts receivable, net.................. 6,274 $ 755 5,519
Deferred subscription acquisition costs... 13 13
Prepaid expenses and other current
assets................................... 3,290 650 2,640
Due from related parties and officers..... 344 344
-------- ------- --------
Total current assets................... 12,099 1,405 10,694
Property and equipment, net............... 4,508 2,539 1,969
Library of movies......................... 4,792 839 3,953
Deferred financing costs.................. 127 127
Other noncurrent assets................... 524 51 473
Intangible and other assets............... 9,605 9,605
-------- ------- --------
Total assets........................... $ 31,655 $ 4,834 $ 26,821
======== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of obligations under
capital leases........................... $ 971 $ 572 $ 399
Short-term borrowings/current portion of
long-term debt........................... 10,927 10,927
Accounts payable.......................... 2,819 73 2,746
Deferred revenues/subscription revenue.... 893 893
Other liabilities and accrued expenses.... 1,844 103 1,741
-------- ------- --------
Total current liabilities.............. 17,824 784 16,706
Obligations under capital leases--long-
term..................................... 36 36
Deferred compensation/other............... 334 36 298
-------- ------- --------
Total liabilities...................... 17,824 784 17,040
Common Stock.............................. 123 123
Capital in excess of par value............ 29,282 29,282
Unearned compensation..................... (237) (237)
Retained earnings/(accumulated deficit)... (16,409) (9,715) (6,694)
Accumulated other comprehensive income.... 1,072 1,072
Transfers from Spice...................... 13,765 (13,765)
-------- ------- --------
Total shareholders' equity............. 13,831 4,050 9,781
-------- ------- --------
Total liabilities and shareholders'
equity................................ $ 31,655 $ 4,834 $ 26,821
======== ======= ========
N. The adjustment reflects cash remaining after the Spice Acquisition
(including the borrowings under our new credit agreement as described in Note V
below) and payment of merger related expenses. The cash will be used to pay the
remaining merger related expenses given effect to in the unaudited pro forma
balance sheet.
O. The adjustment reflects the elimination of accounts receivable relating
to the operations of the assets transferred in the Califa Transaction.
P. The adjustment reflects $500 payable by Califa to Spice in connection
with the Califa Transaction.
F-32
NOTES TO THE UNAUDITED PRO FORMA BALANCE SHEET
Q. The adjustment reflects the elimination of certain rights associated with
the portion of the film library transferred in the Califa Transaction.
R. The adjustment reflects the incremental deferred financing costs
associated with our new credit agreement entered into in connection with the
Spice Acquisition.
S. The adjustment reflects the purchase price of the Spice Acquisition and
the allocation of the purchase price to the tangible and identifiable
intangible and other assets and liabilities of Pro Forma Spice based upon our
estimates of their fair value, with the remainder allocated to goodwill. We
estimate the fair value of the tangible assets to approximate historical book
value, and accordingly the purchase price has been allocated to deferred
financing costs and intangible and other assets.
Purchase price:
Shares issued................................................. $ 48,389
Cash paid..................................................... 47,450
Merger related expenses....................................... 31,000
Net liabilities assumed....................................... (7,333)
--------
119,506
Deferred financing costs........................................ (4,550)
--------
Intangible and other assets acquired............................ $114,956
========
The intangible and other assets acquired are comprised of film libraries,
non-competition agreements, trade names, goodwill, going concern and other
nonidentifiable intangible assets, with lives ranging from four to 40 years.
The estimated amounts allocated to each intangible and other asset, and the
respective amortization period for each are:
Estimated Amortization
Description of Asset Amount Allocated Period
-------------------- ---------------- ------------
Goodwill, going concern and other
nonidentifiable intangible assets....... $ 71,156 40 years
Trade name............................... 26,700 40 years
Non-competition agreements............... 11,700 5 years
Film library............................. 5,400 4 years
--------
Total................................ $114,956
========
The allocation of the purchase price of the Spice Acquisition is subject to
change as the valuation is finalized. In the opinion of Playboy's management,
the final purchase price allocation for the Spice Acquisition will not result
in any material changes in the pro forma financial information.
T. The adjustment reflects the repayment of Playboy's and Spice's
outstanding indebtedness in connection with the Spice Acquisition.
U. The adjustment reflects the accrual of $23,000 of merger related expenses
(including $20,100 of severance costs) incurred by Spice and to be paid by
Playboy.
V. The adjustment reflects (1) our new credit agreement of $110,000 and (2)
$500 due from Califa in 1999 in connection with the Califa Transaction.
W. The adjustment reflects (1) the elimination of Spice shares and (2) the
issuance of new Playboy shares in connection with the Spice Acquisition.
X. The adjustment reflects the elimination of Spice equity in connection
with the Spice Acquisition.
F-33