Exhibit 99
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PLAYBOY TV INTERNATIONAL, LLC
AND SUBSIDIARIES
Consolidated Financial Statements as of December 31, 1999 and
for the Period from August 31, 1999 (Date of Commencement)
through December 31, 1999 and Independent Auditors' Report
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PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(in thousands)
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,436
Accounts receivable, net 7,689
Programming rights 11,232
Other current assets 252
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Total current assets 21,609
PROPERTY AND EQUIPMENT, net 1,258
PROGRAMMING RIGHTS, net 41,471
INVESTMENT IN UNCONSOLIDATED SUBSIDIARY, at cost 3,306
INTANGIBLE AND OTHER ASSETS, net 21,426
-------
TOTAL $89,070
=======
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, accrued expenses and other
current liabilities $ 4,634
Due to related parties 2,852
Current portion of rights acquisition fee payable 7,500
-------
Total current liabilities 14,986
RIGHTS ACQUISITION FEE PAYABLE, net of current portion 45,717
COMMITMENTS AND CONTINGENCIES (Note 8)
OWNERS' EQUITY 28,367
-------
TOTAL $89,070
=======
See notes to consolidated financial statements.
1
PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE PERIOD FROM AUGUST 31, 1999 (DATE OF COMMENCEMENT) THROUGH DECEMBER
31, 1999
(in thousands)
- --------------------------------------------------------------------------------
REVENUES:
Program licensing $ 5,893
Direct-to-home-subscriber fees 2,205
Cable subscriber fees 971
Advertising 113
Other 221
--------
Total revenues 9,403
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COSTS AND EXPENSES:
Programming, production and related 1,494
Selling, general and administrative 5,551
Amortization of programming rights 3,456
Other amortization and depreciation 646
Interest expense 1,285
--------
Total costs and expenses 12,432
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NET LOSS (3,029)
COMPREHENSIVE INCOME - Foreign currency translation 189
--------
COMPREHENSIVE LOSS $ (2,840)
========
See notes to consolidated financial statements.
2
PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OWNERS' EQUITY
FOR THE PERIOD FROM AUGUST 31, 1999 (DATE OF COMMENCEMENT) THROUGH DECEMBER
31, 1999
(in thousands)
- --------------------------------------------------------------------------------
Victoria Playboy Other
Springs Entertainment Comprehensive
Investments, Ltd. Group, Inc. Income Total
INITIAL CASH CAPITAL CONTRIBUTIONS $ 33,996 $ 8,446 $ -- $ 42,442
Adjustment for historical carryover basis (See Note 1) -- (11,235) -- (11,235)
Foreign currency transalation -- -- 189 189
Net loss (2,426) (603) -- (3,029)
-------- -------- -------- --------
BALANCE, DECEMBER 31, 1999 $ 31,570 $ (3,392) $ 189 $ 28,367
======== ======== ======== ========
See notes to consolidated financial statements.
3
PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM AUGUST 31, 1999 (DATE OF COMMENCEMENT) THROUGH DECEMBER
31, 1999
(in thousands)
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITES:
Net loss $ (3,029)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 4,102
Accretion of interest expense 1,285
Changes in operating assets and liabilities:
Accounts receivable (4,443)
Other assets (342)
Programming rights (8,644)
Accounts payable, accrued expenses and other current liabilities 1,748
Due to related parties (1,018)
--------
Net cash used in operating activities (10,341)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (1,164)
Net cash acquired in acquisition 1,310
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Net cash provided by investing activities 146
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CASH FLOWS FROM FINANCING ACTIVITIES:
Initial cash capital contributions 42,442
Payment of rights acquisition fee payable (30,000)
--------
Net cash provided by financing activities 12,442
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EFFECT OF FOREIGN CURRENCY TRANSLATION 189
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CASH AND CASH EQUIVALENTS, DECEMBER 31, 1999 $ 2,436
========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES - Acquisition of certain net assets
as described in Note 1
See notes to consolidated financial statements.
4
PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM AUGUST 31, 1999 (DATE OF COMMENCEMENT) THROUGH DECEMBER 31,
1999
- --------------------------------------------------------------------------------
1. GENERAL AND ORGANIZATION
General - Playboy TV International, LLC ("PTVI") and subsidiaries
(collectively the "Company") was created to own and operate on an
exclusive basis adult-oriented television services worldwide outside of
North America under the Playboy TV and Spice brand names. The Company
presently owns and operates an adult-oriented television service in the
United Kingdom. The Company also owns a minority interest (19.9%) in an
adult-oriented television service in Japan. The Company derives a majority
of its revenues from the licensing of programming rights. The Company also
generates a significant portion of its revenues from fees charged to cable
system and direct-to-home ("DTH") operators who distribute the Company's
branded television channels.
The Company's business plan provides for operating losses in the initial
years, requires further capital contributions, and is ultimately expected
to result in positive cash flow. The funding of the capital requirements
of the Company are established annually in connection with the approval of
the business plan and annual budget, which under the operating agreement
has proportional voting and veto rights. There can be no assurance,
however, that the Company's business plan and cash flow projections will
be met.
Organization - PTVI was formed in June 1999 by Victoria Springs
Investments, Inc. ("VSI") and Playboy Entertainment Group, Inc. ("PEGI")
with initial cash capital contributions of $33.9 million and $8.4 million,
respectively. VSI acquired an 80.1% interest in the Company and PEGI
acquired a 19.9% interest. PEGI has the right to increase its interest in
the Company to 50% by buying such additional interest from VSI for cash.
The net income or loss of the Company is allocated to the owners in
accordance with their respective ownership interests.
On August 31, 1999 (Date of Commencement) the Company entered into several
agreements in which, among other things, PTVI acquired certain assets,
subject to certain liabilities, from PEGI and PEGI's parent company,
including the right to use certain trademarks for a specified number of
years (see Note 6) and a 100% ownership interest in a subsidiary in the
United Kingdom ("UK Subsidiary"). The following is a summary of the assets
acquired, liabilities assumed and consideration given (in thousands):
Cash $ 1,310
Accounts receivable 3,246
Programming rights 47,515
Property and equipment 174
Investment in unconsolidated subsidiary 3,306
Intangible assets 12,063
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Total assets acquired 67,614
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5
Accounts payable, accrued expenses
and other current liabilities - assumed 2,886
Due to related parties - assumed 3,870
Rights acquisition fee payable 81,932
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Total consideration 88,688
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Excess of consideration
Adjustment for historical carryover basis 21,074
(11,235)
--------
Excess cost over net assets acquired (goodwill) $ 9,839
========
The above transaction was recorded in the accompanying consolidated
financial statements by carrying over PEGI's historical basis in the net
assets sold to the extent that PEGI continues to have an interest in those
assets (i.e. 19.9%). The net assets attributable to VSI were recorded at
their estimated fair market value.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements of the
Company include the accounts of PTVI and its wholly-owned subsidiaries.
All significant intercompany balances and transactions have been
eliminated in consolidation.
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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Foreign Currency Translation - The accounts of the UK Subsidiary were
translated into United States dollars in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 52, Foreign
Currency Translation. Management has determined that the pound is the
functional currency of the UK Subsidiary. Certain assets and liabilities
of the UK Subsidiary are denominated in currencies other than the
functional currency; transaction gains and losses on these assets and
liabilities are included in the results of operations for the relevant
period.
6
Cash and Cash Equivalents - Cash and cash equivalents include cash and
interest-bearing deposits held in banks with an original maturity date of
three months or less when acquired.
Allowance for Doubtful Accounts Receivable - The Company carries accounts
receivable at the amount it deems to be collectible. Accordingly, the
Company provides allowances for accounts receivable deemed to be
uncollectible based on management's best estimates. Recoveries are
recognized in the period they are received. The ultimate amount of
accounts receivables that become uncollectible could differ from those
estimated. As of December 31, 1999 the allowance for doubtful accounts
receivable amounted to $0.1 million.
Programming Rights - Programming rights consists of the rights to
broadcast and distribute acquired programming. The programming rights are
amortized on varying bases related to the license periods, anticipated
usage and the expected revenues to be derived from the licensing of rights
to third parties. In the event that an acquired program is replaced and no
longer used or determined to have no future licensing value, the Company
will reduce the carrying value of programming rights accordingly. The
programming rights are segregated on the balance sheet between current and
non-current based on management's estimate of usage. As of December 31,
1999 accumulated amortization of programming rights amounted to $3.5
million.
Property and Equipment - Property and equipment is stated at cost and is
depreciated using the straight-line method over the estimated useful lives
of the respective assets, which range from three to five years. Leasehold
improvements are amortized over the lesser of the term of the lease or the
useful life of the respective improvement (from 4 to 5 years).
Investment in Unconsolidated Subsidiary - Investment in unconsolidated
subsidiary consists of a 19.9% minority interest in an adult-oriented
television service in Japan. The Company accounts for this investment
under the cost method of accounting.
Intangible Assets - Intangible assets primarily consist of trademarks and
goodwill resulting from the net assets acquired as described in Note 1.
The trademarks are amortized on a straight-line basis over their
contractual life of ten years. Goodwill is amortized on a straight-line
basis over an estimated life of twenty years. The carrying value of
intangible assets is periodically reviewed by the Company and impairments,
if any, are recognized when the expected future undiscounted cash flows
derived from such intangible assets are less than their carrying value.
Measurement of any impairment loss would be based on discounted operating
cash flows.
Revenue Recognition - Revenues from program licensing are recognized when
the license period begins and a contractual obligation exists. The Company
enters into distribution agreements with cable and DTH distributors
pursuant to which it receives a monthly license fee, typically based on
the number of subscribers. Revenues from this monthly license fee are
recorded as the Company provides the television signal to the distributor.
Advertising revenue is recognized at the time the advertisement is aired.
For the period from August 31, 1999 (Date of Commencement) through
December 31, 1999 revenues from any one customer exceeding ten percent of
total revenues amounted to $2.1 million (22%); $1.5 million (16%); and
$1.4 million (15%).
7
Income Taxes - PTVI is not subject to income taxes. The income or loss of
PTVI is passed directly to the owners for inclusion in their tax returns.
PTVI's subsidiaries that are subject to income taxes account for them in
accordance with the provisions of SFAS No. 109, Accounting for Income
Taxes. SFAS No. 109 requires an asset and liability approach for
differences in financial accounting and income tax purposes. Under this
method, a deferred tax asset or liability is recognized with respect to
all temporary differences between the carrying amounts and the tax bases
of assets and liabilities, and the benefit from utilizing tax loss
carryforwards and asset tax credits is recognized in the year in which the
loss or credit arise (subject to a valuation allowance with respect to any
tax benefits not expected to be realized). As of December 31, 1999 there
were no significant deferred tax assets or liabilities.
Advertising Costs - Advertising costs are expensed as incurred. For the
period from August 31, 1999 (Date of Commencement) through December 31,
1999, advertising expense amounted to $0.9 million.
Comprehensive Income (Loss) - The Company complies with the provisions of
SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes
standards for reporting comprehensive income (loss) and its components in
the financial statements. Comprehensive income (loss) as defined, includes
all changes in equity during a period from non-owner sources.
New Accounting Pronouncement - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133"). Among other provisions, SFAS No.
133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It also requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. In June
1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement
No. 137 ("SFAS No. 137"). SFAS No. 137 deferred the effective date of
adoption of SFAS No. 133 to fiscal years beginning after June 15, 2000.
Management has not determined what impact, if any, the adoption of SFAS
No. 133 will have on the Company's financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31, 1999
(in thousands):
Furniture and equipment $ 536
Leasehold improvements 802
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Total 1,338
Less accumulated depreciation and amortization (80)
----------
Property and equipment, net $ 1,258
==========
8
4. INTANGIBLE AND OTHER ASSETS
Intangible assets consists of the following as of December 31, 1999 (in
thousands):
Trademarks $ 11,995
Goodwill 9,839
Other 158
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Total 21,992
Less accumulated amortization (566)
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Intangible assets, net $ 21,426
==========
5. RIGHTS ACQUISITION FEE PAYABLE
The rights acquisition fee payable arose in connection with the net assets
acquired as described in Note 1. The rights acquisition fee is
non-interest bearing and has been recorded at its present value using an
imputed interest rate of 8.25%. The rights acquisition fee matures as
follows (in thousands):
2000 $ 7,500
2001 5,000
2002 7,500
2003 25,000
2004 25,000
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Total gross payments 70,000
Less amounts representing interest (16,783)
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Present value of net future rights
acquisition fee payments 53,217
Less current portion of rights acquisition fee (7,500)
--------
Rights acquisition fee, net of current portion $ 45,717
========
6. RELATED PARTY TRANSACTIONS
Program Supply Agreement - On August 31, 1999 the Company and PEGI entered
into a program supply agreement in which PEGI agreed to license to the
Company all of the programs to be produced by PEGI, or for which PEGI
obtains the rights, as specified by the agreement ("Annual Output"). In
exchange for the rights to the Annual Output, the Company will pay to PEGI
a license fee to be generally determined as a percentage of the cost of
the Annual Output. For the period from August 31, 1999 (Date of
Commencement) through December 31, 1999 the Company purchased $8.6 million
of Annual Output pursuant to this agreement.
9
Trademark Agreement - The Company has entered into a trademark license
agreement with PEGI's parent company ("Licensor") in which the Company has
been granted the right to use certain trademarks. The license fee for the
trademark license granted for years one through ten were included in the
purchase price as discussed in Note 1. Beginning in year eleven and for
each fiscal year through the end of the agreement (year fifty) the Company
agrees to pay to the Licensor a license fee to be determined as a
percentage of the Company's total revenues as specified in the agreement.
Management Services - Cisneros Television Services, Inc. ("CTSI"), an
affiliated entity, performs certain "back office" management services for
the Company. Included in selling, general and administrative expense for
the period from August 31, 1999 (Date of Commencement) through December
31, 1999 is $30,000 for management services provided by CTSI. As of
December 31, 1999 this amount had not been paid and was included in the
balance of due to related parties.
Due to Related Parties - As of December 31, 1999, the Company had
liabilities to related parties amounting to approximately $2.9 million.
These liabilities are primarily due to PEGI and relate to amounts due for
the purchase of Annual Output, as described above, and a liability to PEGI
assumed as part of the acquisition of net assets described in Note 1.
These amounts do not bear interest and are expected to be paid within a
year.
Revenues - For the period from August 31, 1999 (Date of Commencement)
through December 31, 1999 the Company recognized program license revenues
in the amount of $2.6 million from two affiliates. Included in accounts
receivable as of December 31, 1999 is $2.3 million due from these
affiliates.
7. GEOGRAPHICAL INFORMATION
Revenues - The Company's sales were made to customers located in, or for
distribution in, the following countries for the period from August 31,
1999 (Date of Commencement) through December 31, 1999 (in thousands):
Direct-to
Home Cable
Program Subscriber Subscriber Advertising
Licensing Fees Fees and Other Total
--------- ---------- ------ ------------ ------
United Kingdom $ 95 $1,454 $ 768 $ 213 $2,530
Germany 1,455 -- -- -- 1,455
Latin America 1,573 -- -- -- 1,573
Spain and Portugal 530 -- -- -- 530
Turkey 425 -- -- -- 425
Japan 520 -- -- -- 520
Israel 340 -- -- -- 340
Scandinavia 367 -- -- -- 367
Poland 210 -- -- -- 210
Other 378 751 203 121 1,453
------ ------ ------ ------ ------
Total revenues $5,893 $2,205 $ 971 $ 334 $9,403
====== ====== ====== ====== ======
10
Foreign Assets - Identifiable assets are those assets which are identified
with operations of a particular geographic area. Corporate assets include
cash and cash equivalents and goodwill generated as a result of the
acquisition of net assets described in Note 1. As of December 31, 1999
identifiable assets and corporate assets of the UK Subsidiary amounted to
$3.4 million and $8.2 million, respectively.
8. COMMITMENTS AND CONTINGENCIES
Leases - The Company's headquarter offices are leased through an
affiliate. In addition, the Company leases transponders and office space
in the United Kingdom. Future minimum lease payments under these
noncancellable operating lease agreements are as follows for each of the
years (in thousands):
2000 $ 2,530
2001 1,159
2002 740
2003 743
2004 363
Thereafter --
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Total $ 5,535
=======
For the period from August 31, 1999 (Date of Commencement) through
December 31, 1999 total lease expense for transponder and office space
amounted to $0.9 million.
Contingent Acquisition Payment - As part of the acquisition of the UK
subsidiary, the Company assumed a contingent liability in the amount of
approximately $10 million payable to the predecessor stockholders (prior
to PEGI) of the UK subsidiary. This amount is payable from the profits of
the UK subsidiary and is therefore contingent upon the ability of the UK
subsidiary to make profits as defined in the applicable agreement. As of
December 31, 1999 the Company has not recorded any liability in connection
with this contingency as it has not concluded that it is probable that any
payments will ultimately need to be made.
* * * * * * *
11
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Owners of Playboy TV International, LLC.:
We have audited the accompanying consolidated balance sheet of Playboy TV
International, LLC. and subsidiaries (the "Company") as of December 31, 1999,
and the related consolidated statements of operations and comprehensive loss, of
owners' equity and of cash flows for the period from August 31, 1999 (date of
commencement) through December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1999
and the results of its operations and its cash flows for the period from August
31, 1999 (date of commencement) through December 31, 1999, in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
March 24, 2000