INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Owners
of Playboy TV International, LLC.:
We have audited the accompanying consolidated balance sheets of Playboy TV
International, LLC and subsidiaries (collectively, "Playboy TV International")
as of December 31, 2000 and 2001 and the related consolidated statements of
operations and comprehensive loss, of owners' equity and of cash flows for the
years then ended. These financial statements are the responsibility of Playboy
TV International's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Playboy TV International at
December 31, 2000 and 2001 and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that Playboy TV International will continue as a going concern. As described in
Note 1 to the consolidated financial statements, Playboy TV International's
recurring losses from operations, working capital deficiency and its dependency
on capital contributions from the majority owner raises substantial doubt about
its ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
February 22, 2002
1
PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2000 and 2001
(In thousands of U.S. dollars)
2000 2001
------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 5,549 $ 4,035
Accounts receivable, net ..................................... 4,860 4,387
Due from related parties ..................................... 3,791 4,579
Capital contribution receivable (collected in February 2002) . -- 919
Programming rights, net ...................................... 13,334 --
Other current assets ......................................... 1,179 1,813
------- -------
Total current assets ....................................... 28,713 15,733
PROPERTY AND EQUIPMENT, NET ..................................... 1,399 1,504
PROGRAMMING RIGHTS, NET ......................................... 37,724 44,014
INVESTMENT IN UNCONSOLIDATED AFFILIATE .......................... 3,306 3,306
TRADEMARKS, net ................................................. 10,396 9,196
GOODWILL, net ................................................... 8,939 8,443
OTHER ........................................................... 138 10
------- -------
TOTAL ASSETS .................................................... $90,615 $82,206
======= =======
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................. $ 1,258 $ 2,048
Accrued expenses and other current liabilities ............... 2,940 2,817
Accrued compensation ......................................... 334 1,843
Due to related parties ....................................... 2,789 4,398
. Current portion of rights acquisition fee payable ............ 5,000 7,500
Unearned revenues ............................................ 588 746
------- -------
Total current liabilities .................................. 12,909 19,352
------- -------
LONG-TERM LIABILITIES:
Rights acquisition fee payable, net of current portion ..... 45,039 41,668
Accrued compensation ....................................... -- 4,032
------- -------
Total long-term liabilities .............................. 45,039 45,700
------- -------
COMMITMENTS AND CONTINGENCIES (Note 8)
OWNERS' EQUITY .................................................. 32,667 17,154
------- -------
TOTAL LIABILITIES AND OWNERS' EQUITY ............................ $90,615 $82,206
======= =======
See notes to consolidated financial statements.
2
PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Years Ended December 31, 2000 and 2001
(In thousands of U.S. dollars)
2000 2001
-------- --------
REVENUES:
Subscriber-based fees .............................. $ 24,584 $ 29,842
Advertising ........................................ 459 510
Programming rights ................................. 2,516 2,246
Other .............................................. 741 1,071
-------- --------
Total revenues .................................... 28,300 33,669
-------- --------
OPERATING EXPENSES:
Product, content and technology .................... 18,534 26,021
Marketing and sales ................................ 3,323 4,181
Corporate and administration ....................... 9,813 16,464
Depreciation and amortization ...................... 2,148 2,141
-------- --------
Total operating expenses .......................... 33,818 48,807
-------- --------
OPERATING LOSS ....................................... (5,518) (15,138)
-------- --------
OTHER INCOME (EXPENSE):
Interest expense ................................... (4,322) (4,129)
Interest income .................................... 213 139
Other .............................................. (308) (327)
-------- --------
Other income (expense), net ....................... (4,417) (4,317)
-------- --------
NET LOSS ............................................. (9,935) (19,455)
OTHER COMPREHENSIVE INCOME (LOSS) - Foreign currency
translation ....................................... 32 (1,016)
-------- --------
COMPREHENSIVE LOSS ................................... $ (9,903) $(20,471)
======== ========
See notes to consolidated financial statements.
3
PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OWNERS' EQUITY
Years Ended December 31, 2000 and 2001
(In thousands of U.S. dollars)
Accumulated
Claxson Playboy Other
Interactive Entertainment Comprehensive
Group, Inc. Group, Inc. Income (Loss) Total
----------- ------------- ------------- --------
BALANCE, JANUARY 1, 2000 .......... $ 31,570 $ (3,392) $ 189 $ 28,367
Capital contributions .......... 11,377 2,826 -- 14,203
Foreign currency translation ... -- -- 32 32
Net loss ....................... (7,958) (1,977) -- (9,935)
-------- -------- -------- --------
BALANCE, DECEMBER 31 2000 ......... 34,989 (2,543) 221 32,667
Capital contributions .......... 3,971 987 -- 4,958
Foreign currency translation ... -- -- (1,016) (1,016)
Net loss ....................... (15,583) (3,872) -- (19,455)
-------- -------- -------- --------
BALANCE, DECEMBER 31 2001 ......... $ 23,377 $ (5,428) $ (795) $ 17,154
======== ======== ======== ========
See notes to consolidated financial statements.
4
PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000 and 2001
(In thousands of U.S. dollars)
2000 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................. $ (9,935) $(19,455)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Amortization of programming rights ..................... 14,293 17,011
Reduction in the carrying value of programming rights .. -- 5,486
Depreciation and amortization .......................... 2,148 2,141
Accretion of interest expense .......................... 4,322 4,129
Changes in operating assets and liabilities:
Accounts receivable, net ............................... 471 473
Due from related parties ............................... (1,433) (788)
Acquisition of programming rights ..................... (12,648) (15,453)
Other assets ........................................... (907) (506)
Accounts payable ....................................... (142) 790
Accrued expenses and other current liabilities ......... (140) (123)
Accrued compensation ................................... 318 5,541
Due to related parties ................................. (63) 1,609
Unearned revenue ....................................... 450 158
-------- --------
Net cash (used in) provided by operating activities ....... (3,266) 1,013
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment .................. (634) (674)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions .................................. 14,203 4,039
Payment of rights acquisition fee payable .............. (7,500) (5,000)
-------- --------
Net cash provided by (used in) financing activities ....... 6,703 (961)
-------- --------
EFFECT OF FOREIGN CURRENCY TRANSLATION .................... 310 (892)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...... 3,113 (1,514)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............ 2,436 5,549
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................. $ 5,549 $ 4,035
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES -
Capital contribution receivable, collected in
February 2002 .......................................... $ -- $ 919
======== ========
See notes to consolidated financial statements.
5
PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2000 and 2001
(In thousands of U.S. dollars)
1. GENERAL AND ORGANIZATION
General -- Playboy TV International, LLC and subsidiaries (collectively,
"Playboy TV International"), a Delaware limited liability company, were
created to own and operate on an exclusive basis adult-oriented television
services worldwide outside of North America and Latin America under the
Playboy TV and Spice brand names. Playboy TV International presently owns
and operates an adult-oriented television service in the United Kingdom.
Playboy TV International also owns a minority interest (19.9%) in an
adult-oriented television service in Japan. Playboy TV International
generates a significant portion of its revenues from subscriber-based fees
charged to cable system and direct-to-home operators that distribute
Playboy TV International's branded television channels. Playboy TV
International also derives revenues from the licensing of programming
rights.
Playboy TV International'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 Playboy TV International is established annually
in connection with the approval of the business plan and annual budget.
There can be no assurance, however, that Playboy TV International's
business plan and cash flow projections will be met.
Going Concern - Playboy TV International has incurred net losses of $9,935
and $19,455 for the years ended December 31, 2000 and 2001, respectively,
and has a working capital deficiency of $3,619 as of December 31, 2001.
Playboy TV International is primarily dependent on capital contributions
from the majority owner to fund shortfalls. The potential inability of the
majority owner to fund the expected shortfalls for 2002 raises substantial
doubt as to the ability of Playboy TV International to continue as a going
concern.
Until Playboy TV International generates sufficient cash flow from
operations, it does not have the ability to fully meet its obligations
(including the rights acquisition fee payable and payments pursuant to the
program supply agreement, described in Notes 4 and 5, respectively)
without the capital contributions from the majority owner. The failure or
inability of the majority owner to make the necessary amount of capital
contributions could ultimately have a material adverse effect on the
financial position of Playboy TV International and its ability to meet its
obligations when due. Management has not explored any alternative means of
financing, if available, to meet the obligations of Playboy TV
International should the majority owner not make the necessary capital
contributions. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Organization -- Playboy TV International was established in June 1999.
Claxson Interactive Group, Inc. ("Claxson") holds an 80.1% interest in
Playboy TV International and Playboy Entertainment Group, Inc. ("PEGI")
holds a 19.9% interest. The net income or loss of Playboy TV International
is allocated to the owners in accordance with their respective ownership
interests. PEGI has substantive participating rights, including the
approval of the annual budget, and has the option to increase its equity
interest in Playboy TV International up to 50% by purchasing a portion of
Claxson's interest in Playboy TV International at a price governed by the
terms of the operating agreement. This option may be exercised until the
earlier of September 15, 2009 and 30 days after the end of the second
consecutive quarter during which Playboy TV International has had positive
cash EBITDA. Until September 15, 2003, the exercise price for this
"buy-up" right increases over time and is based on the Founders Price of
the initial investment in Playboy TV International plus interest. Founders
price as of a specified date means, with respect to the price per one
percentage interest of PTVI, an amount equal to the sum of the capital
contributions to Playboy TV International by the owners through and
including that date, divided by 100. From September 15, 2003 through
September 15, 2009, the exercise price is based on the fair market value
of Playboy TV International at the time of exercise. The exercise price
may be paid in cash or Class B common shares of PEGI's parent company, at
PEGI's option.
6
PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2000 and 2001
(In thousands of U.S. dollars)
On August 31, 1999, Playboy TV International entered into several
agreements in which, among other things, Playboy TV International 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 and a 100% ownership interest in a subsidiary in
the United Kingdom ("U.K. Subsidiary"). The 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 remaining net
assets were recorded at their estimated fair value.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements of
Playboy TV International include the accounts of Playboy TV International,
LLC and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America 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. Significant assumptions and estimates were used in determining the
carrying values of programming rights and accounts receivable and to
determine compensation expense pursuant to the phantom stock plan. Actual
results could differ from those estimates.
Fair Value of Financial Instruments -- The fair value of financial
instruments held by Playboy TV International is based on a number of
factors and assumptions and may not necessarily be representative of the
actual gains or losses that may be realized upon settlement. The carrying
amount of cash equivalents, accounts receivable and payable, accrued
expenses, due to related parties and other current liabilities
approximates their fair value due to their short-term nature. The carrying
amount of the rights acquisition fee payable approximates fair value as
determined based on rates estimated by Playboy TV International to be
currently available from other lenders.
Foreign Currency Translation-- The accounts of the U.K. Subsidiary are
translated into U.S. 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 U.K. Subsidiary. Certain assets and liabilities
of the U.K. 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.
Risk Management -- Playboy TV International has international operations.
As a result, Playboy TV International's revenues may be adversely affected
by changes in international market conditions. Playboy TV International
does not have significant foreign currency risk because the majority of
its assets are non-monetary in nature and the majority of its liabilities
are denominated in U.S. dollars. In addition, Playboy TV International
does not have interest rate risk exposure. Accordingly, Playboy TV
International does not enter into derivative transactions to hedge against
these potential risks.
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 -- Playboy TV International
carries accounts receivable at the amount it deems to be collectible.
Accordingly, Playboy TV International 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 receivable that become uncollectible could
differ from the estimated amount. The activity for the allowance for
doubtful accounts receivable is as follows:
7
PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2000 and 2001
(In thousands of U.S. dollars)
Year Ended Year Ended
December 31, 2000 December 31, 2001
----------------- -----------------
Beginning balance ................. $ 144 $ 186
Provision ......................... 205 778
Write-offs, net of recoveries ..... (163) (676)
-------- --------
Ending balance .................... $ 186 $ 288
======== ========
Programming Rights -- Programming rights consist of the right to broadcast
and distribute acquired or licensed television content and related rights.
Programming rights and the related obligations are recorded at gross
contract prices. The costs are amortized on varying bases related to the
license periods, anticipated usage and residual value of the programs and
the expected revenues to be derived from the licensing of rights to third
parties. Expected amortization for the year ending December 31, 2002 is
estimated to amount to $13,354. Individual titles older than seven years
are carried at a residual value of 5% of original cost. As of December 31,
2001, the residual value included in programming rights amounted to
$3,964. In the event that an acquired program is replaced and no longer
used or the unamortized cost exceeds fair value, Playboy TV International
reduces the carrying value of the related programming rights accordingly.
In the year ended December 31, 2001, Playboy TV International reduced the
carrying value of programming rights by $5,486 for programming no longer
used. Playboy TV International believes that these policies conform to
Statement of Position No. 00-2, Accounting by Producers or Distributors of
Films.
Property and Equipment -- Property and equipment is stated at cost less
accumulated depreciation and amortization. Property and equipment, other
than leasehold improvements, is depreciated using the straight-line method
over the estimated useful lives of the respective assets, which range from
3 to 5 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 Affiliate -- Investment in unconsolidated
affiliate consists of a 19.9% minority interest in an adult-oriented
television service in Japan. Playboy TV International accounts for this
investment under the cost method of accounting.
Trademarks and Goodwill -- Trademarks are amortized on a straight-line
basis over their contractual life of 10 years. As of December 31, 2000 and
2001, accumulated amortization of trademarks amounted to $1,599 and
$2,799, respectively. Goodwill was amortized on a straight-line basis over
an estimated life of 20 years. As of December 31, 2000 and 2001,
accumulated amortization of goodwill amounted to $622 and $1,066,
respectively. The carrying value of intangible assets is periodically
reviewed by management and impairments, if any, are recognized when the
expected future undiscounted cash flows related to such intangible assets
are less than their carrying value. Measurement of any impairment loss is
based on discounted operating cash flows, which represents management's
estimate of fair value.
Revenue Recognition -- Playboy TV International enters into network
license agreements with cable and direct-to-home distributors pursuant to
which it receives subscriber-based fees. Revenues from subscriber-based
fees are recorded as Playboy TV International provides the television
signal to the distributor or when the license period begins and a
contractual obligation exists. Advertising revenue is recognized at the
time the advertisement is aired. Revenues from programming rights are
recognized when the license period begins and a contractual obligation
exists. Playboy TV International believes that its revenue recognition
policies conform with Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements.
Revenues attributable to any one customer that exceeded 10% amounted to
$6,580 or 23% (representing one customer) $11,725 or 35% (representing two
customers with 21% and 14%) for the years ended December 31, 2000 and
2001, respectively.
8
PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2000 and 2001
(In thousands of U.S. dollars)
Advertising Expenses -- Playboy TV International records advertising
expenses as incurred. Advertising expenses amounted to $3,156 and $2,507,
for the years ended December 31, 2000 and 2001, respectively.
Income Taxes -- Playboy TV International's subsidiaries that are subject
to income taxes account for income taxes 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
financial statement 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
arises (subject to a valuation allowance with respect to any tax benefits
not expected to be realized). As of December 31, 2000 and 2001, Playboy TV
International did not have any significant deferred tax assets or
liabilities.
New Accounting Pronouncements -- In June 2001, the FASB issued SFAS No.
141, Business Combinations. SFAS No. 141 eliminates the pooling of
interest method and requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. SFAS No.
141 also establishes specific criteria regarding the allocation of the
purchase price between intangible assets and goodwill. The provisions of
this Statement apply to all business combinations initiated after June 30,
2001. This Statement also applies to all business combinations accounted
for using the purchase method for which the date of acquisition is July 1,
2001, or later. The adoption of SFAS No. 141 did not have a material
effect on Playboy TV International's results of operations or financial
position.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually on a basis set forth in SFAS No. 142.
Intangible assets with finite useful lives will continue to be amortized
over their respective useful lives and reviewed for impairment under
existing accounting literature. The provisions of this Statement are
required to be applied by Playboy TV International on January 1, 2002. The
Statement requires an initial impairment test for goodwill and intangible
assets with indefinite useful lives on the date of adoption. Playboy TV
International has not yet determined if any impairment charge will result
from the adoption of this Statement. Amortization of goodwill was $456 and
$444 for the years ended December 31, 2000 and 2001, respectively.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires the recognition of legal
obligations associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development, and/or normal
use of the asset, and the associated asset retirement costs in the period
in which it is incurred if a reasonable estimate of fair value can be
made. This Statement is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143
is not expected to have a material effect on Playboy TV International's
financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations -
Reporting the Effects of a Disposal of a Business and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions, for the
disposal of a segment of a business. This Statement also amends ARB No.
51, Consolidated Financial Statements, to eliminate the exception to
consolidation for a subsidiary for which control is likely to be
temporary. The statement provides additional guidance on accounting for
discontinued operations and resolves other implementation issues related
to SFAS No. 142. The provisions of this Statement are effective for
financial statements issued for fiscal years beginning after December 15,
2001. The provisions of this statement generally are to be applied
prospectively. Playboy TV International is currently evaluating whether
9
PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2000 and 2001
(In thousands of U.S. dollars)
adoption of SFAS No. 144 will have a material effect on Playboy TV
International's financial position or results of operations.
In December 2001, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 01-6, Accounting by Certain Entities
(Including Entities With Trade Receivables) That Lend to or Finance the
Activities of Others. The provisions of this SOP are effective for
financial statements issued for fiscal years beginning after December 15,
2001 and should be applied prospectively. Playboy TV International is
currently evaluating whether the adoption of SOP 01-6 will have a material
effect on Playboy TV International's financial position or results of
operations.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31, December 31,
2000 2001
------------ ------------
Furniture and equipment.............................. $ 1,188 $ 1,744
Leasehold improvements............................... 784 804
-------- --------
Total.............................................. 1,972 2,548
Less accumulated depreciation and amortization....... (573) (1,044)
-------- ---------
Property and equipment, net.......................... $ 1,399 $ 1,504
======== ========
Depreciation expense for the years ended December 31, 2000 and 2001
amounted to $493 and $471, respectively.
4. 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%. For the years ended December 31, 2000 and
2001, imputed interest expense amounted to $4,322 and $4,129,
respectively. The rights acquisition fee matures as follows:
2002 ..................................................... $ 7,500
2003 ..................................................... 25,000
2004 ..................................................... 25,000
--------
Total gross payments ..................................... 57,500
Less amounts representing interest ....................... (8,332)
--------
Present value of rights acquisition fee payments ......... 49,168
Less current portion of rights acquisition fee ........... (7,500)
--------
Rights acquisition fee, net of current portion ........... $ 41,668
========
5. RELATED PARTY TRANSACTIONS
Program Supply Agreement -- On August 31, 1999, Playboy TV International
and PEGI entered into a program supply agreement pursuant to which Playboy
TV International was granted a license to all new programs produced by
PEGI as well as other programs for which PEGI acquires international
rights. In exchange for these rights, Playboy TV International agreed to
pay to PEGI a license fee that is generally
10
PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2000 and 2001
(In thousands of U.S. dollars)
determined as a percentage of PEGI's annual programming costs. For the
years ended December 31, 2000 and 2001, Playboy TV International acquired
$10,514 and $12,601, respectively, of programming pursuant to this
agreement.
Trademark License Agreement -- Playboy TV International entered into a
trademark license agreement with PEGI's parent company ("Licensor") under
which Playboy TV International received the exclusive right to use the
Playboy marks outside the United States, Canada and Latin America in
connection with the operation, distribution and promotion of the Playboy
TV channels and for the licensing of Playboy programming to third parties.
The license fee for the trademark license granted for years one through
ten was included in the purchase price as discussed in Note 1. Beginning
on the eleventh anniversary of the agreement and for each fiscal year
through the end of the 50-year term of the agreement, Playboy TV
International agreed to pay Licensor a license fee based on a percentage
of Playboy TV International's total revenues for that year.
Management and Other Services -- A subsidiary of Claxson performs certain
"back office" management and other services for Playboy TV International.
The fees for these services are determined based on the estimated value of
the services provided and are typically agreed upon by the owners annually
in connection with the approval of the business plan and annual budget.
For the years ended December 31, 2000 and 2001, Playboy TV International
incurred fees amounting to $295 and $429, respectively, for management and
other services provided by Claxson.
Revenues -- For the years ended December 31, 2000 and 2001, Playboy TV
International recognized subscriber-based fees totaling $8,187 and $9,302,
from two and four affiliates, respectively. Included in due from related
parties as of December 31, 2000 and 2001 is $3,791 and $4,579 due from
these affiliates, respectively.
6. SUPPLEMENTAL REVENUE INFORMATION
The following presents, on a supplemental basis, Playboy TV
International's revenues based on revenue sources by country/region:
Year ended December 31, 2000:
Subscriber- Programming Advertising
- Based Fees Rights and Other Total
------------- ------------- ------------- -----------
United Kingdom ... $ 11,292 $ 1,069 $ 459 $ 12,820
Latin America .... 5,913 -- -- 5,913
Iberia ........... 1,675 -- -- 1,675
Japan ............ 1,607 -- -- 1,607
Turkey ........... 1,163 -- -- 1,163
Scandinavia ...... 1,516 100 -- 1,616
Taiwan ........... 750 -- -- 750
Poland ........... -- 426 -- 426
Israel ........... 410 -- -- 410
Netherlands ...... 93 355 -- 448
Other ............ 165 566 741 1,472
------------- ------------- ------------- -----------
Total ........ $ 24,584 $ 2,516 $ 1,200 $ 28,300
============= ============= ============= ===========
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PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2000 and 2001
(In thousands of U.S. dollars)
Year ended December 31, 2001:
Subscriber- Programming Advertising
Based Fees Rights and Other Total
----------- ----------- ---------- ----------
United Kingdom .. $ 14,764 $ 143 $ 510 $ 15,417
Latin America ... 5,519 696 -- 6,215
Iberia .......... 1,662 -- -- 1,662
Japan ........... 1,433 -- -- 1,433
Scandinavia ..... 1,341 194 -- 1,535
Taiwan .......... 1,536 -- -- 1,536
New Zealand ..... 781 -- -- 781
Poland .......... 24 388 -- 412
Israel .......... 702 -- -- 702
France .......... 353 65 -- 418
Other ........... 1,727 760 1,071 3,558
---------- ---------- ---------- ----------
Total ....... $ 29,842 $ 2,246 $ 1,581 $ 33,669
========== ========== ========== ==========
7. PHANTOM STOCK OPTION PLAN
Effective November 8, 2001, Playboy TV International adopted a phantom
equity plan (the "Plan"). The Plan is designed to attract, retain and
motivate officers, employees, directors and consultants. The Plan enables
Playboy TV International to award individual units representing a
hypothetical share of stock (the "Phantom Share"). Each Phantom Share is
assigned a strike value on the date of grant. The difference between the
fair market value and the strike value assigned to each Phantom Share
represents the cash award each grantee is entitled to receive on the
exercise date. For the year ended December 31, 2001, Playboy TV
International incurred compensation expense amounting to $5,198 in
connection with the Plan. As of December 31, 2001, Playboy TV
International had a liability amounting to $3,698 also in connection with
the Plan.
8. COMMITMENTS AND CONTINGENCIES
Leases -- Playboy TV International's headquarters offices are leased
through a subsidiary of Claxson. In addition, Playboy TV International
leases transponders and office space in the United Kingdom. Future minimum
lease payments under these noncancellable operating lease agreements are
as follows:
Year Ended December 31,
------------------------------
2002..................................... $ 512
2003..................................... 458
2004..................................... 305
---------
Total................................. $ 1,275
=========
For the years ended December 31, 2000 and 2001, lease expense under these
noncancellable operating lease agreements amounted to $428 and $434,
respectively.
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PLAYBOY TV INTERNATIONAL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2000 and 2001
(In thousands of U.S. dollars)
Contingent Acquisition Payment -- As part of the acquisition of the U.K.
Subsidiary, Playboy TV International assumed a contingent liability in the
amount of approximately $10,000 payable to the previous shareholders
(prior to PEGI) of the U.K. Subsidiary. This amount is payable from future
profits of the U.K. Subsidiary and is therefore contingent upon the
ability of the U.K. Subsidiary to make profits as defined in the
applicable agreement. As of December 31, 2001, Playboy TV International
recorded a liability amounting to $369 in connection with this contingent
acquisition payment. The remaining balance will be recorded as the
contingency is resolved.
13