<PAGE>
As filed with the Securities and Exchange Commission on April 9, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 15, 1999
Playboy Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 1-14790 36-4249478
(State or other (Commission File Number) (IRS Employer
jurisdiction Identification No.)
of incorporation)
680 North Lake Shore Drive, Chicago, 60611
Illinois (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (312) 751-8000
------------------------------------------
(Former name or former address, if changed since last report)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Item 2. Acquisition or Disposition of Assets
On March 15, 1999, the Registrant filed its original Form 8-K with respect
to its acquisition of Spice Entertainment Companies, Inc., a Delaware
corporation ("Spice"). This Form 8-K/A is filed to furnish audited consolidated
financial statements of Spice and unaudited pro forma financial information of
the Registrant giving effect to the Registrant's acquisition of Spice. The
original Form 8-K is also amended so that the information reported under Item 5
is deemed reported under Item 2.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired
The audited consolidated financial statements of Spice for the years ended
December 31, 1998, 1997 and 1996 are attached to this Form 8-K/A as Exhibit
99.1.
(b) Pro Forma Financial Information
The unaudited pro forma financial information of the Registrant for the
fiscal year ended December 31, 1998, giving effect to the Registrant's
acquisition of Spice, is attached to this Form 8-K/A as Exhibit 99.2.
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
23 Consent of Grant Thornton LLP
99.1 Audited Consolidated Financial Statements of Spice Entertainment
Companies, Inc. for the years ended December 31, 1998, 1997 and 1996
99.2 Unaudited Pro Forma Financial Information of Playboy Enterprises, Inc.
for the fiscal year ended December 31, 1998
</TABLE>
2
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Playboy Enterprises, Inc.
/s/ Howard Shapiro
By: _________________________________
Name: Howard Shapiro
Title: Executive Vice President,
Law and Administration,
General Counsel and
Secretary
Date: April 8, 1999
3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
------- ----------- ------
<C> <S> <C>
23 Consent of Grant Thornton LLP ................................ 5
99.1 Audited Consolidated Financial Statements of Spice
Entertainment Companies, Inc. for the years ended December 31,
1998, 1997 and 1996 .......................................... F-1
99.2 Unaudited Pro Forma Financial Information of Playboy
Enterprises, Inc. for the fiscal year ended December 31, 1998
.............................................................. F-27
</TABLE>
4
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 15, 1999, accompanying the
consolidated financial statements of Spice Entertainment Companies, Inc. and
Subsidiaries appearing in the current report on Form 8-K/A filed by Playboy
Enterprises, Inc. We consent to the incorporation by reference of said report
in the Registration Statement of Playboy Enterprises, Inc. on Form S-8 (File
No. 333-74451), effective March 16, 1999.
Grant Thornton LLP
New York, NY
April 7, 1999
<PAGE>
Exhibit 99.1
SPICE ENTERTAINMENT COMPANIES, INC.
and SUBSIDIARIES
Consolidated Financial Statements
for the years ended
December 31, 1998, 1997 and 1996
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number(s)
---------
<S> <C>
Spice Entertainment Companies, Inc. and Subsidiaries
Report of Independent Certified Public Accountants.................. F-3
Consolidated Balance Sheets at December 31, 1998 and 1997........... F-4
Consolidated Statements of Operations for the years ended December
31, 1998, 1997 and 1996............................................ F-5
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996................................... F-6
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996............................................ F-7--F-8
Notes to the Consolidated Financial Statements...................... F-9--F-26
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors Spice Entertainment Companies, Inc.
We have audited the accompanying consolidated balance sheets of Spice
Entertainment Companies, Inc. and Subsidiaries as of December 31, 1998 and
1997, and the related statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. 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 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 Spice
Entertainment Companies, Inc. and Subsidiaries as of December 31, 1998 and
1997, and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
Grant Thornton LLP
New York, New York
March 15, 1999
F-3
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents......................... $ 2,178,000 $ 2,810,000
Accounts receivable, less allowance for doubtful
accounts of $2,598,000 in 1998 and
$2,601,000 in 1997............................... 6,274,000 4,336,000
Income tax refunds receivable..................... 22,000 37,000
Reimbursable merger costs......................... 1,479,000 100,000
Prepaid expenses and other current assets......... 1,789,000 854,000
Deferred subscription costs....................... 13,000 131,000
Due from related parties and officers............. 344,000 365,000
------------ ------------
Total current assets............................ 12,099,000 8,633,000
Property and equipment, net........................ 4,508,000 6,602,000
Library of movies, net............................. 4,792,000 4,580,000
Cost in excess of net assets acquired, net of
accumulated amortization of $3,321,000 in 1998 and
$2,622,000 in 1997................................ 9,605,000 10,246,000
Deferred refinancing costs......................... 127,000 380,000
Other assets....................................... 524,000 697,000
------------ ------------
Total assets.................................... $ 31,655,000 $ 31,138,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of obligations under capital
leases........................................... $ 971,000 $ 855,000
Current portion of long-term debt................. 10,927,000 2,998,000
Accounts payable.................................. 2,819,000 1,928,000
Accrued interest expenses payable................. 186,000 176,000
Accrued legal and other settlement fees........... -- 928,000
Accrued expenses and other current liabilities.... 1,658,000 2,468,000
Current portion of accrued restructuring costs.... -- 700,000
Deferred subscription revenue..................... 893,000 604,000
------------ ------------
Total current liabilities....................... 17,454,000 10,657,000
Obligations under capital leases................... 36,000 780,000
Long-term debt..................................... -- 10,452,000
Deferred compensation.............................. 334,000 293,000
------------ ------------
Total liabilities............................... 17,824,000 22,182,000
------------ ------------
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value; authorized
10,000,000 shares; 24,250 issued and outstanding
at December 31, 1997 (Liquidation preference of
$2,617,000)...................................... -- --
Common stock, $.01 par value; authorized
25,000,000 shares; 12,245,743 and 10,659,181
shares issued and outstanding at December 31,
1998 and 1997.................................... 123,000 107,000
Additional paid-in capital........................ 29,282,000 25,362,000
Unearned compensation............................. (237,000) (414,000)
Accumulated deficit............................... (16,409,000) (17,088,000)
Accumulated other comprehensive income............ 1,072,000 989,000
------------ ------------
Total stockholders' equity...................... 13,831,000 8,956,000
------------ ------------
Total liabilities and stockholders' equity...... $ 31,655,000 $ 31,138,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues: $32,125,000 $33,596,000 $33,213,000
----------- ----------- -----------
Expenses:
Cost of goods sold.................... -- -- 94,000
Salaries, wages and benefits.......... 7,667,000 7,786,000 7,592,000
Producer royalties and library
amortization......................... 2,292,000 2,748,000 5,481,000
Satellite costs....................... 9,024,000 6,744,000 1,884,000
Selling, general and administrative
expenses............................. 6,694,000 10,240,000 11,354,000
Depreciation of fixed assets and
amortization of goodwill............. 2,826,000 3,654,000 7,499,000
Write down related to Operation
Facility............................. 632,000 -- --
----------- ----------- -----------
Total operating expenses.............. 29,135,000 31,172,000 33,904,000
----------- ----------- -----------
Total income (loss) from
operations......................... 2,990,000 2,424,000 (691,000)
Other (income) expense:
Interest expense...................... 2,280,000 3,609,000 6,418,000
Minority interest..................... -- (680,000) (1,062,000)
Gain from transponder lease
amendment............................ -- (2,348,000) --
Gain on sale of majority interest of
DSTV................................. -- (352,000) --
Gain on Nethold settlement............ -- (740,000) --
Gain related to disposition of AGN.... -- (1,712,000) (875,000)
----------- ----------- -----------
Income (loss) from continuing
operations before provision for income
taxes (benefit) and extraordinary
gain.................................. 710,000 4,647,000 (5,172,000)
Provision for income taxes (benefit)... (104,000) 348,000 192,000
----------- ----------- -----------
Income (loss) from continuing
operations before extraordinary
gain............................... 814,000 4,299,000 (5,364,000)
Discontinued operations, net of income
taxes
Income from discontinued operations of
SEG................................... -- -- 35,000
Loss on disposal of SEG............... -- -- (2,571,000)
----------- ----------- -----------
Loss from discontinued operations... -- -- (2,536,000)
----------- ----------- -----------
Extraordinary gain on debt
restructuring......................... -- 143,000 --
----------- ----------- -----------
Net income (loss)...................... 814,000 4,442,000 (7,900,000)
Dividends on preferred stock........... 135,000 192,000 --
----------- ----------- -----------
Net income (loss) attributable to
common stock.......................... $ 679,000 $ 4,250,000 $(7,900,000)
=========== =========== ===========
Income (Loss) per common share,
Basic
From continuing operations............ $ 0.06 $ 0.39 $ (0.48)
Extraordinary item.................... -- 0.01 --
Discontinued operations............... -- -- (0.22)
----------- ----------- -----------
Income (loss) per common share...... $ 0.06 $ 0.40 $ (0.70)
=========== =========== ===========
Diluted
From continuing operations............ $ 0.06 $ 0.35 $ (0.48)
Extraordinary item.................... -- 0.01 --
Discontinued operations............... -- -- (0.22)
----------- ----------- -----------
Income (loss) per common share...... $ 0.06 $ 0.36 $ (0.70)
=========== =========== ===========
Weighted average number of shares
outstanding,
Basic................................. 11,759,000 10,706,000 11,351,000
=========== =========== ===========
Diluted............................... 14,401,000 12,237,000 11,351,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31, 1998, 1997 and 1996
-----------------------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-In Unearned Accumulated Comprehensive Stock in
Stock Capital Compensation Deficit Income Treasury Total
-------- ----------- ------------ ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1996................... $114,000 $22,506,000 $(1,323,000) $(13,438,000) $ 210,000 $ -- $ 8,069,000
Shares issued in
connection with the
exercise of employee
options................ 27,000 27,000
Pro rata share of
Restricted Stock
granted to executive
officers............... 178,000 178,000
Cancellation of
Restricted Stock issued
to an executive
officer................ (1,000) (379,000) 380,000 --
Shareholders' loans..... 491,000 491,000
Comprehensive Income:
Net loss............... (7,900,000) (7,900,000)
Foreign currency
translation
adjustment............ 1,429,000 1,429,000
-----------
(6,471,000)
-------- ----------- ----------- ------------ ---------- ----------- -----------
Balance at December 31,
1996................... 113,000 22,645,000 (765,000) (21,338,000) 1,639,000 -- 2,294,000
Issuance of Preferred
Stock and warrants in
connection with the
debt restructuring..... 3,528,000 3,528,000
Issuance of warrants in
connection with a
consulting agreement... 450,000 450,000
Shares issued in
connection with the
exercise of employee
options................ 1,000 129,000 130,000
Pro rata share of
Restricted Stock
granted to executive
officers............... 205,000 205,000
Cancellation of
Restricted Stock issued
to an executive
officer................ (259,000) 146,000 (113,000)
Treasury stock acquired
in connection with the
sale of SEG............ (1,138,000) (1,138,000)
Retirement of treasury
stock.................. (7,000) (1,131,000) 1,138,000 --
Dividend................ (192,000) (192,000)
Comprehensive Income:
Net income............. 4,442,000 4,442,000
Foreign currency
translation
adjustment............ (650,000) (650,000)
-----------
3,792,000
-------- ----------- ----------- ------------ ---------- ----------- -----------
Balance at December 31,
1997................... 107,000 25,362,000 (414,000) (17,088,000) 989,000 -- 8,956,000
Shares issued in
connection with the
exercise of employee
options & warrants..... 11,000 3,598,000 3,609,000
Conversion of preferred
stock.................. 5,000 322,000 327,000
Pro rata share of
Restricted Stock
granted to executive
officers............... 177,000 177,000
Dividend................ (135,000) (135,000)
Comprehensive Income:
Net income............. 814,000 814,000
Foreign currency
translation
adjustment............ 83,000 83,000
-----------
897,000
-------- ----------- ----------- ------------ ---------- ----------- -----------
Balance at December 31,
1998................... $123,000 $29,282,000 $ (237,000) $(16,409,000) $1,072,000 $ -- $13,831,000
======== =========== =========== ============ ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................... $ 814,000 $ 4,442,000 $(7,900,000)
----------- ----------- -----------
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Loss from discontinued operations...... -- -- 2,536,000
Provision for investment in American
Gaming Network........................ -- -- (775,000)
Depreciation and amortization of fixed
assets................................ 2,126,000 2,963,000 6,834,000
Writedown of Operations Center
Facility.............................. 632,000 -- --
Gain on sale of property and
equipment............................. -- -- (47,000)
Gain on transponder lease amendment.... -- (2,348,000) --
Extraordinary gain on debt
restructuring......................... -- (143,000) --
Gain on sale of majority interest of
DSTV.................................. -- (352,000) --
Amortization of goodwill and other
intangibles........................... 699,000 691,000 661,000
Amortization of films and CD-ROM cost.. -- -- 400,000
Amortization of library of movies...... 2,292,000 2,311,000 1,638,000
Provision for bad debts................ (3,000) 865,000 558,000
Amendment fees charged to Darla loan... -- 150,000 --
Decrease in income tax (benefit)
provision, net........................ -- -- 467,000
Amortization of debt discounts and
deferred financing costs.............. 253,000 243,000 --
Compensation satisfied through the
issuance of common stock.............. 177,000 205,000 178,000
Cancellation of restricted stock
granted to an executive officer....... -- (113,000) --
Consulting expense satisfied through
the issuance of warrants.............. -- 450,000 --
Deferred compensation expense.......... 41,000 24,000 71,000
Minority interest...................... -- (680,000) (1,062,000)
Other, net............................. -- -- 111,000
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable............................ (1,935,000) (301,000) 2,164,000
Decrease (increase) in tax refunds
receivable............................ 15,000 (9,000) --
(Increase) decrease in prepaid expenses
and other current assets.............. (835,000) 43,000 517,000
Decrease in deferred subscription
costs................................. 118,000 1,000 379,000
Decrease (increase) in other assets.... 172,000 (6,000) (4,000)
Decrease in royalties payable.......... -- (2,322,000) (289,000)
Payments of restructuring costs........ (700,000) (820,000) (2,135,000)
Increase (decrease) in deferred
subscription revenue.................. 289,000 (517,000) (1,216,000)
(Decrease) increase in accounts payable
and accrued expenses.................. (578,000) 725,000 (95,000)
----------- ----------- -----------
Total adjustments..................... 2,763,000 1,060,000 10,891,000
----------- ----------- -----------
Net cash provided by operating
activities from continuing
operations............................ 3,577,000 5,502,000 2,991,000
Net cash provided by operating
activities from discontinued
operations............................ -- -- 932,000
----------- ----------- -----------
Net cash provided by operating
activities............................ 3,577,000 5,502,000 3,923,000
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment..... (705,000) (848,000) (1,094,000)
Increase in reimbursable merger cost... (1,479,000) (100,000) --
Proceeds from sale of property and
equipment............................. -- -- 135,000
Proceeds from the sale of TeleSelect... -- -- 3,177,000
DSTV cash balance on date of sale of
majority interest..................... -- (227,000) --
Purchase of rights to libraries of
movies................................ (2,504,000) (2,624,000) (2,444,000)
----------- ----------- -----------
Net cash used in investing activities
from continuing operations............ (4,688,000) (3,799,000) (226,000)
Net cash used in investing activities
from discontinued operations.......... -- -- (473,000)
----------- ----------- -----------
Net cash used in investing activities.. (4,688,000) (3,799,000) (699,000)
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of common stock
and detachable warrants.............. $ 3,609,000 $ 130,000 $ 27,000
Proceeds from borrowing of long-term
debt, credit line and capital lease
obligations.......................... -- 1,015,000 1,377,000
Decrease (increase) in loans
receivable from related parties...... 21,000 (48,000) 523,000
Repayment of long-term debt and
capital leases obligations........... (3,151,000) (3,060,000) (4,321,000)
Deferred refinancing costs............ -- (623,000) --
Proceeds from capital contribution of
a third party........................ -- 1,030,000 1,000,000
----------- ------------ -----------
Net cash provided by (used in)
financing activities from continuing
operations........................... 479,000 (1,556,000) (1,394,000)
Net cash used in financing activities
from discontinued operations......... -- -- (459,000)
----------- ------------ -----------
Net cash provided by (used in)
financing activities................. 479,000 (1,556,000) (1,853,000)
----------- ------------ -----------
Net (decrease) increase in cash and
cash equivalents..................... (632,000) 147,000 1,371,000
Cash and cash equivalents, beginning
of the year.......................... 2,810,000 2,663,000 1,292,000
----------- ------------ -----------
Cash and cash equivalents, end of the
year................................. $ 2,178,000 $ 2,810,000 $ 2,663,000
=========== ============ ===========
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest.............................. $ 1,618,000 $ 2,902,000 $ 5,718,000
=========== ============ ===========
Income taxes.......................... $ 39,000 $ 13,000 $ 3,000
=========== ============ ===========
Supplemental schedule of non-cash
investing and financing activities:
Capital lease obligations............. $ -- $(52,342,000) $ 1,163,000
Issuance (cancellation) of common
shares to senior management.......... -- (258,000) (380,000)
Issuance of preferred stock and
warrants in connection with the debt
restructuring........................ -- 3,528,000 --
Conversion of preferred stock......... 327,000 -- --
Preferred stock dividends............. (135,000) (192,000) --
Foreign currency translation
adjustment........................... 83,000 (650,000) 1,429,000
Net assets distributed and treasury
stock acquired with the disposal of
SEG.................................. -- 1,138,000 --
Other assets acquired and liabilities
settled with a charge to the credit
line................................. -- (682,000) --
Net assets transferred with the sale
of the majority interest of DSTV..... -- 352,000 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
1. Organization.
Spice Entertainment Companies, Inc. and its subsidiaries (collectively
"Spice" or the "Company") is a leading international provider of adult
television entertainment. On March 15, 1999, the Company merged (the "Merger")
into a wholly owned subsidiary of Playboy Enterprises, Inc. ("PEI") under the
terms of an Agreement and Plan of Merger, dated as of May 29, 1998, as amended
(the "Merger Agreement"). As a result of the Merger, the Company became a
wholly owned subsidiary of PEI. Prior to and in connection with the Merger, the
Company contributed certain assets to its wholly owned subsidiary, Directrix,
Inc., a Delaware corporation ("Directrix"). Simultaneous with the Merger, the
Company distributed the stock of Directrix to the Spice stockholders as part of
the Merger consideration. See Note 2.
Formed in 1987, the Company operates through four operating units: Spice
Networks--domestic adult pay-per-view networks; Spice International--
international adult networks and programming; Spice Direct--direct to the
consumer products and services; and Spice Productions--adult film production
and licensing.
Spice Networks operates three domestic adult pay-per-view television
networks, Spice, the Adam & Eve Channel and Spice Hot (which was launched in
October 1997) ("Spice Networks"). The Spice Networks were available to
approximately 23 million and 18 million addressable channel households on
December 31, 1998 and 1997, respectively. In addition, Spice and Spice Hot are
distributed by DirecTV to its direct to home digital direct broadcast satellite
system ("DBS") subscribers, reaching 3.9 million and 3.2 million subscribers on
December 31, 1998 and 1997, respectively.
Spice International is responsible for distributing the Company's adult
television networks and programming outside of the United States. In Europe,
the Company operates and distributes The Adult Channel, originated from the
United Kingdom. The Adult Channel is distributed in the United Kingdom and
European cable and the direct to home ("DTH") markets. The Company operates The
Home Video Channel ("HVC"), a subscription movie service distributed with The
Adult Channel in the United Kingdom cable market. The Company also distributes
the Spice and Spice Hot networks in Latin America and distributes Spice
programming in Japan.
Spice Direct is responsible for marketing the Company's products and
services directly to consumers. The Company, through agreements with third
parties, provides audiotext services promoted on the Spice Networks. Spice
Direct is also responsible for the productive utilization of the Company's
transponder capacity and provides network playback and programming services to
third parties. Spice Direct also operates Cyberspice, an adult Internet
website.
Spice Productions jointly produces and licenses adult films from the leading
producers of adult films both in this country and abroad. Spice Productions
produced a total of 13 adult films in 1997 and 1998. After execution of the
Merger Agreement, Spice Productions ceased production of new adult films. The
Company owns one of the world's largest adult film libraries which the Company
exhibits on the Spice Networks and The Adult Channel, and which the Company
licenses to third parties.
In 1998, 1997 and 1996, approximately 55%, 56% and 68% of total revenue was
from cable markets, approximately 22%, 14% and 19% of total revenue was from
the DBS and DTH markets, approximately 12%, 15% and 2% of total revenue was
from the sale of excess transponder capacity and other related services, and a
majority of the remaining 11%, 15% and 11% of total revenue was from audiotext
services and other worldwide programming distribution. Substantially all of the
cable, DBS and DTH revenue was from the United States and the United Kingdom.
During 1996 and 1997, the Company discontinued or phased out certain
business units and activities as a result of the Company's restructuring plan
developed in 1995 (Notes 2 and 4).
F-9
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
2. Acquisitions, Joint Ventures and Divestitures.
Playboy Enterprises Merger. As described briefly in Note 1 above, the
Company merged into a wholly owned subsidiary of PEI on March 15, 1999 (the
"Closing Date"), under the terms of the Merger Agreement. Under the terms of
the Merger Agreement, for each share of the Company's Common Stock ("Common
Stock"), Company stockholders received from PEI:
. $3.60 in cash; and
. 0.1133 shares of Playboy Class B Stock.
Under the Merger Agreement and related agreements, the Company transferred
certain of its assets to Directrix, including the Company's digital operations
center for video and Internet broadcasts, certain rights to a library of adult
films, the Company's option to acquire the outstanding stock or assets of
Emerald Media, Inc. ("EMI"), and approximately $0.8 million in cash and
accounts receivable. On the Closing Date, the Company distributed to its
stockholders as part of the Merger consideration, 0.125 shares of Directrix
common stock for each share of Common Stock. The Company also received 173,784
shares of Playboy Class B Common Stock in consideration of an approximately
$4.5 million promissory note and contributed these shares to Directrix.
On the Closing Date, the Company sold the assets comprising the Spice Hot
network business to Califa Entertainment Group, Inc., a California corporation
("Califa"), in exchange for $500,000 in cash in two installments in 1999 and a
$10 million promissory note due on the seventh anniversary of the Closing Date.
Califa also agreed to pay the Company $13.3 million over a period of 10 years
in consideration of the Company's agreement to be bound by certain non-
competition covenants during that period.
Playboy Entertainment Group, Inc. ("PEGI") entered into a two year services
agreement with Directrix under which Directrix will provide playback and uplink
services for two television networks. Califa entered into a similar services
agreement with Directrix for a single network. Under the two agreements, PEGI
is expected to pay approximately $0.6 million to Directrix in each of the years
ended December 31, 1999 and 2000.
Spector Entertainment Group. On August 31, 1995, the Company acquired
Spector Entertainment Group, Inc. ("SEG"), in exchange for 700,000 shares of
the Company's Common Stock. On February 7, 1997, the Company split off SEG to
its former shareholders in exchange for the 700,000 shares of the Company's
Common Stock that they previously received in the acquisition. SEG is accounted
for as a discontinued operation in the accompanying consolidated financial
statements (Note 4).
Adam & Eve Communications, Inc. On April 13, 1995, the Company acquired Adam
& Eve Communications, Inc. ("AEC") in exchange for 820,000 shares of Common
Stock. At the time, AEC owned and operated the Adam & Eve Channel, the third
largest adult pay-per-view network in the United States, available in
approximately 5.0 million addressable households.
CVS Partners. On March 6, 1996, the Company contributed the Cable Video
Store Network ("CVS"), a domestic pay-per-view hit movie service, which the
Company had operated since 1989, to a newly formed partnership, CVS Partners
("CVSP"). The other partner was Wiltech Cable Television Services, Inc.
("WCTV"), a subsidiary of The Williams Companies, Inc. The CVS network was
available via satellite until March 31, 1997, when satellite delivery was
terminated.
On June 3, 1997, the parties executed an agreement to dissolve the
partnership. Under the terms of the dissolution agreement, WCTV paid the
Company $580,000, for transponder services, and contributed an additional
$1,030,000 to the partnership to wind down its affairs.
F-10
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
CPV Productions, Inc. On May 27, 1994, the Company acquired all of the
outstanding common stock of CPV Productions, Inc. ("CPV") and its wholly-owned
subsidiary, Magic Hour Productions, Inc. ("MH") (which created, produced and
distributed movies and television programming), in exchange for 845,000 shares
of Common Stock. At the beginning of 1996, the Company had suspended production
of movies due to a shortage of capital requirements but had continued to
license and distribute the related film library. At the end of 1996, the
Company determined to shutdown the operations of CPV and in 1997 sold a portion
of the rights to the film library to the former owners of CPV for $170,000.
American Gaming Network, J.V. Under a Joint Venture Agreement dated June 28,
1995, the Company formed American Gaming Network, J.V. ("AGN") with TV Games,
Inc. ("TVG"), a wholly-owned subsidiary of Multimedia Games, Inc. ("MGAM"), to
jointly develop and promote high stakes proxy play Class II tribal bingo games.
The Company contributed approximately $1.4 million of intellectual property and
working capital to AGN's capital. The Company had acquired the intellectual
property from MGAM for cash and notes. In related transactions, the Company
acquired for cash and notes 275,000 shares of MGAM's outstanding stock and a
warrant to acquire an additional 175,000 shares at an exercise price of $3.50
per share (the "MGAM Warrant"). The parties were unable to agree on a business
plan or a strategy for the continued operation of AGN.
Under a Purchase Agreement dated June 28, 1996, the parties reached a
settlement with the Company giving up its interest in AGN and the 275,000
shares of MGAM stock in exchange for (i) the cancellation of an aggregate of
$775,000 of liabilities owed to MGAM and TVG, (ii) $100,000 under a note which
was paid in 1996, and (iii) $400,000 due under a note due in three years. The
Company retained the MGAM Warrant and the parties released each other. Due to
the likelihood that the parties would not proceed with AGN and as part of the
Company's restructuring at December 31, 1995, the Company wrote off its
investment in AGN and the MGAM stock. As a result of the foregoing transaction,
the Company recognized a non-recurring gain of $875,000 in the second quarter
of 1996.
The MGAM stock price increased significantly in 1997. In September 1997, the
Company exercised the MGAM Warrant and sold the 175,000 shares of MGAM stock it
received on exercise of the MGAM Warrant. The Company realized a gain on the
sale of approximately $1.3 million.
In December 1997, the Company realized a gain of $396,000 as a result of
AGN's election to pay the discounted value of the note receivable. The Company
had deferred the gain because collection of the note was less than probable at
the time of the June 1996 settlement.
Danish Satellite TV. In February 1995, the Company formed Danish Satellite
TV a/s ("DSTV"), a wholly owned subsidiary of HVC, and launched EUROTICA.
EUROTICA is a subscription network based in Denmark, which features explicit
adult movies. EUROTICA is distributed to the European DTH and cable markets.
Effective July 31, 1997, the Company sold 51% of its interest in DSTV to
Multimedia General Entertainment S.A. ("MGE"). As part of this transaction,
DSTV licensed the DTH distribution of EUROTICA to Rendezvous Television
International SA (Luxembourg) ("RTV") and entered into a Facilities Agreement
with RTV to provide broadcast services to RTV. RTV also entered into two
licensing agreements with the Company -- one for an existing library of adult
films and the other under which RTV agreed to license adult films from the
Company in the future. As a result of these transactions, the Company realized
a gain of $352,000, comprised of $45,000 in cash and the remainder as a result
of changing DSTV to the equity method of accounting.
F-11
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
TeleSelect B.V. The Company, Philips Media B.V. ("Philips") and Royal PTT
Netherlands NV ("KPN") established TeleSelect B.V., a Netherlands joint venture
("TeleSelect"), to create joint ventures with European cable operators to
enable them to provide conditional access services such as pay-per-view, near
video on demand and electronic retailing to their subscribers. On April 3,
1996, the Company received $3.2 million of proceeds from the sale of its
TeleSelect interest, of which $1 million was utilized to pay down long-term
debt and the remaining funds were utilized to pay trade payables.
3. Summary of Significant Accounting Policies.
Consolidation. The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries and majority-owned partnership.
All significant intercompany transactions have been eliminated.
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.
Fair Value of Financial Instruments. The carrying amounts for cash and cash
equivalents, accounts receivable, royalties payable, accounts payable, accrued
expenses and current portion of long term debt and capitalized lease obligation
approximate fair value because of the short term maturity of these items.
Cash and Cash Equivalents. The Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
Concentration of Credit Risk. The Company's financial instruments that are
exposed to concentrations of credit risk consist primarily of cash and trade
receivables. The Company's cash is deposited in major banks and the Company's
trade receivables are primarily with large domestic publicly traded
corporations with substantial assets thereby limiting the Company's credit
risk. At December 31, 1998 and 1997, the Company had trade receivables with two
large system operators which approximated 30% and 15%, respectively, of the
total trade receivables. In addition the Company had a net trade receivable
with EMI, which represented 12% and 17% of the net trade receivables at
December 31, 1998 and 1997, respectively.
For the years ended December 31, 1998, 1997 and 1996, the Company derived
approximately 56%, 54% and 40%, respectively, of its revenues from five
multiple systems operators, DirectTV and EMI. The loss of one or more of these
customers could have a material adverse impact on the Company's results of
operations. The 1998, 1997 and 1996 revenue from EMI represents approximately
12%, 14% and 1% of the total revenue for each respective year.
Valuation of Long-Lived Assets. The Company continually reviews long-lived
assets and certain identifiable intangibles held and used for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company has determined
that no provision is necessary for the impairment of long-lived assets at
December 31, 1998.
Cost in Excess of Net Assets Acquired (Goodwill). This represents the cost
over the fair value of net assets acquired in business combinations accounted
for as a purchase. This asset is being amortized on a straightline basis over a
period of 20 years.
F-12
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
Property and Equipment. Property and equipment, including major capital
improvements, are recorded at cost net of accumulated depreciation. The cost of
maintenance and repairs is charged against results of operations as incurred.
Depreciation is charged against results of operations using the straight-line
method over the estimated useful lives of the related assets. Equipment leased
under capital leases and leasehold improvements are amortized over the shorter
of the estimated useful life or the lease term. 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 reflected in results of operations.
Revenue Recognition. Pay-per-view revenues are recognized in the periods in
which the films or events are aired by the cable systems which have license
agreements with the Company.
Revenue from the sale of transponder, playback and other related services,
with the exception of revenue from EMI, is recognized in the period in which
the service is performed. In 1998, as a result of the uncertainty surrounding
EMI's ability to make timely payments, the Company started recording revenues
from EMI upon receipt.
Subscription revenues are deferred and amortized over the life of the
subscription. At December 31, 1998 and 1997, deferred subscription revenues
were $893,000 and $604,000, respectively.
Deferred subscription costs of $13,000 and $131,000 at December 31, 1998 and
1997, respectively, are deferred and amortized over the life of the
subscription.
CPV (which terminated operations at the end of 1996) recognized revenues in
accordance with Statement of Financial Accounting Standards No. 53, "Financial
Reporting by Producers and Distributors of Motion Picture Films". Revenue is
recognized when film rights are distributed.
Producer Royalties. The Company, through its CVS network, which terminated
in the second quarter of 1997, had entered into contractual agreements with
producers or film makers in order to obtain the rights to license films. The
producer agreements required that producer royalties be paid a percentage of
the revenues. The producer royalties were recorded in the period in which the
film or event was exhibited.
Amortization of Library of Movies. The Company capitalizes the acquisition
costs for the rights to movie titles purchased or licensed. The acquisition
costs are amortized on a straight-line basis over the shorter of the useful
life or the license period, ranging from one to five years.
Minority Interest. The Company owns a minority interest in DSTV resulting
from the sale of a majority interest in July 1997 (Note 2). Since July 1997,
the Company has carried its minority interest in DSTV at zero in the
consolidated balance sheet because of the uncertainty of realizing any profits
from its investment.
Income (Loss) per Share. The Company calculated income (loss) per share in
accordance with the provisions of Statement of Financial Accounting Standards
No. 128 ("SFAS No. 128"), "Earnings Per Share." Basic earnings per share
exclude dilution and are computed by dividing income attributable to common
shareholders by the weighted-average common shares outstanding for the period.
Diluted earnings per share reflect the weighted-average common shares
outstanding plus the potential dilutive effect of securities or contracts which
are convertible to common shares, such as options, warrants, and convertible
preferred stock.
F-13
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
The following table represents the required disclosure of the reconciliation
of the numerators and denominators of the basic and diluted EPS compilations:
<TABLE>
<CAPTION>
For the Year Ended December 31, For the Year Ended December 31,
1998 1997
-------------------------------- --------------------------------
Per- Per-
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before
extraordinary gain..... $814,000 $4,299,000
Less: Preferred stock
dividends.............. 135,000 192,000
-------- ----------
Basic EPS
Income before
extraordinary gain
attributable to common
Stockholders........... 679,000 11,759,000 $0.06 4,107,000 10,706,000 $0.39
===== =====
Effect of Dilutive
Securities
Securities assumed
converted
Options................. -- 3,457,000 -- 2,125,000
Warrants................ -- 1,052,000 -- 755,000
Preferred stock......... 135,000 325,000 192,000 863,000
Less securities assumed
repurchased............ -- 2,192,000 -- (2,212,000)
-------- ---------- ---------- ----------
Diluted EPS
Income before
extraordinary gain
attributable to common
stockholders and
assumed conversions.... $814,000 14,401,000 $0.06 $4,299,000 12,237,000 $0.35
======== ========== ===== ========== ========== =====
</TABLE>
At December 31, 1998, 31,000 options to purchase shares of Common Stock were
outstanding but excluded from the computation of diluted EPS because they would
have had an antidilutive effect. At December 31, 1997, 2,166,126 options and
220,000 warrants were excluded for the same reason. At December 31, 1996, all
options and warrants outstanding were excluded for the computation of diluted
EPS because they would have had an antidilutive effect. As a result, the 1996
basic and diluted EPS were the same.
Foreign Currency Translation. Assets and liabilities in foreign currencies
are translated into United States dollars at the exchange rate existing at the
balance sheet date. Revenues and expenses are translated at average rates for
the period. The net exchange difference resulting from these translations is
recorded as accumulated other comprehensive income of stockholders' equity. The
excess cost over the Company's share in the net book value in the foreign
investee has been considered as a foreign currency denominated asset in
applying Statement of Financial Accounting Standards No. 52, "Foreign Currency
Translation".
Income Tax. The Company uses the liability method of accounting for income
taxes, as set forth in Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". Under this method, deferred income taxes, when
required, are provided on the basis of the difference between the financial
reporting and income tax bases of assets and liabilities at the statutory rates
enacted for future periods.
Comprehensive Income. In 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting comprehensive income
and its components in a financial statement. Comprehensive income as defined
includes all changes in equity (net assets) during a period from non-owner
sources. An example of an item to be included in comprehensive income, which is
excluded from net income includes foreign currency translation adjustments.
Accumulated other comprehensive income, as presented on the accompanying
consolidated balance sheets, consists of the cumulative translation adjustment.
F-14
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
New Accounting Pronouncement. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133
("SFAS No. 133"), Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities and is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. The Company does not expect that
the adoption of SFAS No. 133 will have any impact on the Company's results of
operations.
4. Discontinued Operations and Activities.
As part of the Company's restructuring efforts, the Company determined
during the fourth quarter of 1996 that it would dispose of or sell certain non-
strategic operating units. In November 1996, the Board of Directors approved a
plan to split off SEG (which provides satellite simulcasting and television
production services to the pari-mutuel industry) to the former stockholders of
that wholly-owned subsidiary in exchange for the 700,000 shares of Common Stock
they received in the original merger between SEG and the Company. The Company
completed the split off SEG on February 7, 1997.
The results of operations for SEG were classified as discontinued operations
in the Consolidated Statement of Operations for the year ended December 31,
1996. The revenues of SEG for 1996 were $7,885,000. Included in the loss of
disposal on SEG recorded in 1996 was $403,000 of operating losses subsequent to
the measurement date.
In addition, the Company terminated the operations of CPV Productions, Inc.
at the end of 1996. The Company had suspended production of movies at the
beginning of 1996 due to a shortage of capital but continued to license and
distribute its existing film library in 1997.
Consistent with the plan developed in 1996 to focus on the Company's core
businesses, the Company continued to evaluate non-strategic operating units in
1997. This resulted in the termination of the CVS network and the subsequent
dissolving of the CVS partnership. In addition, the Company sold a majority
interest of DSTV in 1997.
5. Property and Equipment.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
Useful Lives in
Years 1998 1997
---------------- ----------- -----------
<S> <C> <C> <C>
Equipment......................... 5 $ 9,019,000 $ 8,538,000
Furniture and fixtures............ 7 493,000 491,000
Leasehold improvements............ Life of lease or 2,531,000 2,515,000
shorter
----------- -----------
12,043,000 11,544,000
Less accumulated depreciation and
amortization..................... 7,535,000 4,942,000
----------- -----------
$ 4,508,000 $ 6,602,000
=========== ===========
</TABLE>
During the fourth quarter of 1998, the Company enacted a plan to relocate
its operations facility to Northvale, New Jersey. As a result of the decision
to relocate, the Company recorded a non-recurring charge of $632,000 relating
to writedown of leasehold improvements and accrued rent associated with the
operations facility.
F-15
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
Certain of the aforementioned equipment having a net book value of $1.5
million and $2.2 million at December 31, 1998 and 1997, respectively, is held
as collateral for the equipment loans and capital leases.
6. Long-Term Debt.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Darla term loan..................................... $10,447,000 $11,011,000
Darla revolving credit line......................... -- 1,974,000
PNC term loan....................................... 480,000 440,000
10% note payable.................................... -- 25,000
----------- -----------
10,927,000 13,450,000
Less current portion................................ 10,927,000 2,998,000
----------- -----------
Long-term portion................................... $ -- $10,452,000
=========== ===========
</TABLE>
On January 15, 1997, the Company refinanced its credit facility from PNC,
N.A. ("PNC"), with a term loan and a revolving credit loan (collectively, the
"Credit Facility") from Darla L.L.C. ("Darla") under the terms of an Amended
and Restated Loan and Security Agreement (as amended, the "Loan Agreement").
The Loan Agreement provides a term loan of $10.5 million, of which $9.6 million
was used to satisfy the cash portion of the PNC credit facility and $0.9
million was used to finance loan acquisition fees. The term loan is scheduled
to mature on July 15, 1999. The loans bear interest at 5% over the Citibank
prime rate but not less than 13%. Additionally, the Credit Facility included a
revolving line of credit totaling $3.5 million of which approximately $1.9
million had been drawn down as of December 31, 1997. The revolving line of
credit had an outstanding balance of $750,000 on the Closing Date.
PNC settled the outstanding balance of its credit facility, totaling $14.6
million, for $9.6 million in cash, a new $400,000 term loan ("PNC Term Loan")
and 597,000 warrants exercisable at $2.06 per share. The PNC Term Loan canceled
the 100,000 warrants previously issued to PNC, which had an exercise price of
$3.88 per share. The new PNC Term Loan entered into on January 15, 1997, had a
principal balance of $400,000, accumulated interest at 10% and matured on
January 15, 1999. At December 31, 1998 and 1997, the principal and accrued
interest had a balance of $480,000 and $440,000, respectively. The Company paid
off the PNC term loan on January 16, 1999.
The Loan Agreement contains various financial covenants including minimum
levels of revenues and adjusted EBITDA for each quarter during the term of the
Credit Facility. The Company did not meet the revenue and EBITDA covenants for
the three months ended September 30, 1998. Darla agreed to waive the covenant
violations for the third quarter of 1998 under a Waiver Agreement dated
November 16, 1998. On December 15, 1998, Darla and the Company executed an
amendment to the Loan Agreement which revised the revenue and adjusted EBITDA
covenants for the balance of the term.
As required under the Merger Agreement, the Credit Facility was fully
satisfied on the Closing Date.
Under the Loan Agreement, the Company issued 24,250 shares of Convertible
Series A Preferred Stock (the "Darla Preferred") with a liquidation value of
$2,425,000. On August 20, 1998, the Company elected to convert the 27,515
outstanding shares of Darla Preferred with a liquidation value of $2,751,500
into 513,905 shares of Common Stock at a conversion rate of $5.3541 per share
of Common Stock. See Note 8.
F-16
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
7. Obligation Under Capital Leases.
Minimum annual rentals under capital leases, in the aggregate, are as
follows:
<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------
<S> <C>
1999............................................................. $1,055,000
2000............................................................. 37,000
----------
Net minimum lease payments....................................... 1,092,000
Less amount representing interest................................ 85,000
----------
Present value of minimum lease obligations....................... 1,007,000
Current portion of lease obligations............................. 971,000
----------
Long-term portion of lease obligations........................... $ 36,000
==========
</TABLE>
(a) In 1995, the Company entered into a financing agreement, accounted for
as a capital lease, totaling $2,078,000 with IBM Credit Corporation ("ICC") to
construct a master control and digital playback center, at its New York
facility. As a result of certain delays, changes in equipment requirements and
other factors, the original lease agreement was superseded in the fourth
quarter of 1996 with a new lease which requires 36 payments of approximately
$37,000, commencing on February 1, 1997. The lease obligation at December 31,
1998 and 1997 was $439,000 and $794,000, respectively. On the Closing Date, the
ICC lease agreement was assigned to and assumed by Directrix.
(b) On August 14, 1996, the Company entered into an equipment lease
agreement for approximately $1.8 million of equipment from Vendor Capital
Group. The lease was accounted for as a capital lease. The equipment included a
Digicipher encoder and approximately 1,200 decoder boxes which were provided to
the Company's cable systems customers. This equipment enabled the Company to
digitally compress its domestic television networks onto one transponder,
significantly improving the operating results of the Spice Networks. The lease
obligation at December 31, 1998 and 1997 was $568,000 and $841,000,
respectively. On February 19, 1999, the Company acquired title to the equipment
by prepaying its obligations under the equipment lease and paying the purchase
option. The Company contributed the Digicipher encoder to Directrix as part of
the Merger.
8. Capital Transactions.
Common Stock. On February 7, 1997, the Company reacquired 700,000 shares of
its common stock in the transaction to spinoff SEG, the shares were
subsequently retired in 1997 (See Note 2).
During May 1995, the Company granted to several key executives 177,000
restricted shares of Common Stock ("Restricted Shares") the issuances of which
were approved at the 1996 annual stockholders' meeting. The Restricted Shares
are non-transferable with this restriction lapsing in five years. During 1997
and 1996, the Company canceled 30,000 and 44,000 Restricted Shares,
respectively, as part of a termination agreement with two of the Company's then
executive officers. The Company recorded unearned compensation for the portion
of shares not yet vested and will recognize that amount as an expense on a pro
rata basis over five years as the restriction lapses. The unamortized balance
of unearned compensation at December 31, 1998 of $237,000 has been included as
a reduction in stockholders' equity. The Restricted Shares held by three
executive officers vested on the Closing Date.
Preferred Stock. On January 15, 1997, as part of the Darla transaction, the
Company issued 24,250 shares of Darla Preferred, with a $100 face and
liquidation value per share and an 8.0% cumulative dividend,
F-17
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
payable in additional shares of Darla Preferred at the Company's discretion.
After two years, the Darla Preferred is convertible into Common Stock at a 10%
discount from the then current market price of the Common Stock.
On August 20, 1998, the Company elected to convert the 27,515 outstanding
shares of Preferred Stock with a liquidation value of $2,751,500 into 513,905
shares of Common Stock at a conversion rate of $5.3541 per share of Common
Stock.
Warrants. On January 15, 1997, in connection with the PNC Term Loan, the
Company granted PNC 597,000 warrants to acquire Common Stock at $2.06 per share
and canceled the 100,000 warrants, with an exercise price of $3.88 per share,
previously issued to PNC. The 597,000 warrants issued to PNC expire on March
25, 2002. On March 26, 1997, the Company granted to three consultants involved
in the debt restructuring, 200,000 warrants to acquire Common Stock exercisable
at a price of $3.50 per share. The warrants issued to the consultants expire on
March 25, 2002.
In 1997, the Company granted to consultants 250,000 warrants to acquire
Common Stock at exercise prices ranging from $2.25 to $2.63. These warrants
expire on March 25, 2002.
On April 1, 1996, the Company granted Imperial Bank 20,000 warrants with an
exercise price of $3.125 per share to purchase Common Stock in connection with
the SEG term loan. On June 18, 1998, Imperial Bank exercised its warrants on a
cashless basis and received 9,583 shares of Common Stock.
During 1997, the Company canceled 118,750 warrants, granted prior to 1997,
with exercise prices ranging from $3.33 to $6.50 per share.
Changes in warrants outstanding are summarized as follows:
<TABLE>
<CAPTION>
Warrants
----------------------
Exercise
Price
Shares Range
--------- -----------
<S> <C> <C>
Balance January 1, 1996............................... 118,750
Granted............................................... 20,000 $3.125
Exercised............................................. --
Canceled.............................................. --
---------
Balance December 31, 1996............................. 138,750
Granted............................................... 1,047,000 $2.25-$3.50
Exercised............................................. --
Canceled.............................................. (118,750)
---------
Balance December 31, 1997............................. 1,067,000
Granted............................................... --
Exercised............................................. (9,583) $3.125
Canceled.............................................. (10,417) $3.125
---------
Balance December 31, 1998............................. 1,047,000
=========
</TABLE>
F-18
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
At December 31, 1998, 1997 and 1996, all of the warrants outstanding on the
respective dates were exercisable.
On the Closing Date, all warrants became exercisable and were exercised by
all the holders.
Options. The Company has five stock option plans (the 1992, 1993, 1994, 1995
and the Director's Plan) (collectively the "Plans") for officers, employees,
directors and consultants of the Company or any of its subsidiaries. Options
granted to employees may be either incentive stock options ("ISO's") or non-
ISO's; ISO's may not have an exercise price less than 100% of fair market value
of the Company's common stock on the grant date and all options may not have an
exercise price of less than 110% of fair market value on the grant date in the
case of options granted to holders of 10% or more of the voting power of the
Company's stock on the grant date. The aggregate fair market value, as
determined on the grant date, of ISO's that may become exercisable in any one
year can not exceed $100,000. Options canceled subsequent to issuance are
returned to the Plan and are available for re-issuance as determined by the
Stock Option Committee.
The options are evidenced by a written agreement containing the above terms
and any other terms and conditions consistent with the Plans that the Board of
Directors of the Company (the "Board") or a committee of the Board (the
"Committee") may impose. Each option, unless sooner terminated, shall expire no
later than 10 years (five years in the case of ISO's granted to holders of 10%
of the voting power of the Company's common stock) from the date of grant, as
the Board or Committee may determine.
The Plans in effect on December 31, 1998, 1997 and 1996 authorize the
granting of stock options to purchase an aggregate of 4,000,000 shares of
Common Stock, respectively. At December 31, 1998, 1997 and 1996 there were a
total of 620,428, 617,410 and 126,588 shares, respectively, remaining for
future grants under the four plans.
The Directors' Plan authorizes the automatic annual issuance to each non-
employee director of options to acquire 10,000 shares of Common Stock on each
December 31, at an exercise price equal to the market price of the stock on
that date. The plan was adopted in 1994 and authorizes the granting of a total
of 100,000 stock options. At December 31, 1997, no options were available for
future grant under this plan.
On April 1, 1997, outside of the plans described above, the Company granted
600,000 options to acquire Common Stock exercisable at $2.13 per share. Mr. J.
Roger Faherty, the Chairman and Chief Executive Officer of the Company, was
granted 400,000 options under his employment agreement (Note 10) and the
remaining options were issued to the Company's senior management.
The Company adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, ("SFAS No. 123") "Accounting for Stock-Based
Compensation". It applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its plans and does not
recognize compensation expense for its stock-based compensation plans.
F-19
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
If the Company had elected to recognize compensation expense based upon the
fair value at the grant date for awards under these plans consistent with the
methodology prescribed by SFAS No. 123, the Company's net income (loss) and per
share amounts would be reduced to the pro forma amounts indicated below for the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ---------- -----------
<S> <C> <C> <C>
Net income (loss) attributable to Common
Stock
As reported............................ $679,000 $4,250,000 $(7,900,000)
Pro forma.............................. $505,000 $3,350,000 $(9,748,000)
Basic: income (loss) per share
As reported............................ $0.06 $0.40 $(0.70)
Pro forma.............................. $0.04 $0.31 $(0.86)
Diluted: income (loss) per share
As reported............................ $0.06 $0.36 $(0.70)
Pro forma.............................. $0.04 $0.29 $(0.86)
</TABLE>
These pro forma amounts may not be representative of future disclosure
because they do not take into effect pro forma compensation expense related to
grants made before 1995. The fair value of these options was estimated at the
date of grant using the Black-Scholes option valuation model and using
assumptions for the years ended December 31, 1998, 1997 and 1996 as follows:
expected volatility of 60%, 60% and 63%, respectively; risk-free interest rate
of 5.6%; and expected life of seven years. The weighted average fair value of
options granted during the years ended December 31, 1998, 1997 and 1996, for
which the exercise price equals the market price on the grant date, was $5.00,
$1.62 and $2.05, respectively.
Transactions involving stock options are summarized as follows:
<TABLE>
<CAPTION>
Options
-----------------------------
Stock
Options Weighted-Average
Outstanding Exercise Price
----------- ----------------
<S> <C> <C>
Balance at January 1, 1996..................... 2,866,013 $3.60
Granted........................................ 1,235,918 3.07
Exercised...................................... (26,000) 1.02
Cancelled...................................... (165,919) 4.23
----------
Balance at December 31, 1996................... 3,910,012 3.42
Granted........................................ 886,500 2.41
Exercised...................................... (49,270) 2.62
Cancelled...................................... (349,597) 3.34
----------
Balance at December 31, 1997................... 4,397,645 3.11
Granted........................................ 5,000 5.78
Exercised...................................... (1,063,074) 3.39
Cancelled...................................... (8,018) 2.53
----------
Balance at December 31, 1998................... 3,331,553 $3.01
==========
</TABLE>
F-20
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
The following table summarizes information concerning currently outstanding
and exercisable stock options at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Ranges of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$.83--$1.75....... 297,023 6.40 years $1.45 247,323 $1.39
$2.13--$2.75...... 1,603,539 6.14 years 2.40 1,219,766 2.47
$3.33--$3.88...... 1,184,970 6.20 years 3.86 1,147,507 3.86
$4.00--$5.78...... 220,021 7.55 years 4.25 215,021 4.21
$8.38--$9.25...... 26,000 6.47 years 8.71 26,000 8.71
</TABLE>
At December 31, 1998, 1997 and 1996, there were 2,855,617, 3,757,590 and
2,859,330 options that are exercisable, respectively.
On the Closing Date, all options became exercisable and all of the in-the-
money options were exercised by their holders.
Stockholders Rights Plan. During 1997, the Company adopted a Stockholders
Rights Plan. The Stockholders Rights Plan gives the Company time to analyze a
potential hostile take-over and to force a hostile acquirer to negotiate with
the Board. The Stockholders Rights Plan achieves these goals by providing for
the issuance of rights to each stockholder which are attached to the Common
Stock. If a person acquires a specified percentage of the Common Stock or
commences a tender offer for the Common Stock which has not been approved by
the Board, the Board can cause the rights to detach. The detached rights give
the Company's stockholders, other than the hostile acquirer, the right to
acquire stock at a price that will result in a substantial reduction in the
value of the hostile acquirer's Common Stock and make it much more expensive to
acquire control of the Company.
9. Income Taxes.
The components of income tax expense (benefit) follow:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Current
Federal...................................... $ -- $ (9,000) $ 89,000
State and Local.............................. 15,000 12,000 50,000
Foreign...................................... (119,000) 345,000 53,000
--------- -------- --------
(104,000) 348,000 192,000
--------- -------- --------
Deferred
Federal...................................... -- -- --
State and Local.............................. -- -- --
--------- -------- --------
-- -- --
--------- -------- --------
Total Income Taxes......................... $(104,000) $348,000 $192,000
========= ======== ========
</TABLE>
F-21
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
The following is a reconciliation between the statutory federal income tax
for each of the past three years and the Company's effective tax rate:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income tax provision (benefit) at
federal statutory rate................. 34 % 34 % (34)%
State and local income taxes net of
federal tax benefit.................... 1 -- 1
Foreign income taxes.................... (17) 1 1
Foreign income, excluded, net of federal
tax benefit............................ -- (1) --
Amortization of Goodwill................ 34 5 12
Non-deductible business meals and
entertainment.......................... 6 1 1
Officers life insurance................. (4) -- --
(Decrease) increase due to the change in
the valuation allowance................ (69) (37) 14
Other items............................. -- 1 1
-------- -------- --------
Effective tax rate...................... (15)% 4 % (4)%
======== ======== ========
</TABLE>
The Company's foreign subsidiaries have accumulated deficits. As such, no
U.S. Federal income taxes have been provided relating to the foreign
subsidiaries. The foreign income subject to foreign taxes was approximately
$930,000 in 1997 and $161,000 in 1996. In 1998, there was no foreign income
subject to foreign income taxes.
As of December 31, 1998, the Company has available, for Federal income tax
purposes, unused net operating loss carryforwards of $9,800,000 which may
provide future tax benefits, expiring 2005. Due to a change in control of the
Company that occurred in September 1990, approximately $1,118,000 of the net
operating loss carryforward is subject to an annual limitation of approximately
$27,000.
At December 31, 1998, the Company assessed its past earnings history, trends
and projections and, as a result of the uncertainty surrounding the use of the
NOL carryforwards, reserved through the valuation allowance all of the deferred
tax assets. The valuation allowance at December 31, 1998 and 1997 was
$4,109,000 and $4,320,000, respectively.
F-22
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
The components of the net deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets
Bad debts........................................ $ 825,000 $ 868,000
Deferred compensation expense.................... 134,000 117,000
Net operating loss carry-forwards................ 3,943,000 2,886,000
Foreign tax carry-forwards....................... 89,000 89,000
AMT credit carry-forward......................... 107,000 107,000
Deferred debt restructuring costs................ 346,000 947,000
Accrual for restructuring changes................ -- 280,000
Restricted stock not vested...................... 260,000 189,000
Valuation allowance.............................. (5,015,000) (4,320,000)
----------- -----------
Total deferred tax asset....................... 689,000 1,163,000
----------- -----------
Deferred tax liability
Tax depreciation in excess of book............... (689,000) (1,163,000)
----------- -----------
Total deferred tax liability................... (689,000) (1,163,000)
----------- -----------
Net deferred tax assets.......................... $ -- $ --
=========== ===========
</TABLE>
10. Commitment and Contingencies.
Employment Agreements. Spice and its subsidiaries entered into employment
agreements with several executive officers and a consulting agreement with the
Chief Financial Officer (collectively, the "Employment Agreements") in order to
retain senior management and sales personnel who Spice believed were critical
to the growth of the Spice Networks.
The Employment Agreements provide that the respective executive officers are
entitled to receive certain severance benefits described below if, within 18
months following a change in control of Spice, Spice terminates the employment
of the executive officer. In addition, the employment agreements with Messrs.
Faherty and Saril permit them to receive severance benefits if they terminate
their employment for any reason within 18 months following a change in control
of Spice. In each case, the amount of the parachute payment is equal to four
times the executive officer's annual salary (including any bonuses and other
cash compensation paid over the preceding 12 months) grossed up by the amount
equal to the excise tax on any incremental income taxes payable on the grossed
up amount.
If triggered, the aggregate amount of the severance payments (without regard
to any excise taxes or gross-ups) payable under the Employment Agreements would
be approximately $9,713,000.
Approximately $8,630,000 of the aggregate severance payments being made to
these Spice officers will not be deductible for Federal income tax purposes.
After the Merger, it is anticipated that none of the executive officers will
continue to be employed by the Company, and that all of the executive officers
will be entitled to the severance payments described above.
The Company entered into a deferred compensation agreement with Mr. Faherty
under which it is obligated to provide Mr. Faherty with retirement benefits
after he reaches the age of 65 and also provides for
F-23
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
early retirement benefits. The Company's obligations under this deferred
compensation agreement are funded, in part, by life insurance policies on Mr.
Faherty's life. As a result of the Merger, PEI will assume responsibility under
this agreement and will become the owner of the life insurance policies.
Effective December 31, 1995, Messrs. Graff and Nolan resigned as officers of
the Company. Under the terms of their resignation and termination agreements,
Messrs. Graff and Nolan received $350,000 per year through December 31, 1998.
These costs were accrued as restructuring costs as of December 31, 1995 (See
Note 13).
At December 31, 1998, Messrs. Faherty and Nolan had loans outstanding with
the Company in the amounts of $254,000 and $90,000, respectively, which will be
repaid following the Closing Date.
Deferred Compensation. The estimated present value of future benefits is
accrued over the period from the effective date of the agreements (October 1,
1992) until the expected retirement dates of the participant. The expense
incurred for the years ended December 31, 1998, 1997, and 1996 amounted to
$41,000, $24,000, and $71,000, respectively.
Leases and Service Contracts. The Company leases its office facilities,
satellite transponders and uplink and certain equipment. As of December 31,
1998, the aggregate minimum rental commitments under non-cancelable operating
leases were approximately as follows:
<TABLE>
<CAPTION>
Satellite
Years Ending Office Facilities Transponder
December 31, Total and Equipment and Uplink
------------ ----------- ----------------- -----------
<S> <C> <C> <C>
1999............................... $ 8,722,000 $ 526,000 $ 8,196,000
2000............................... 8,600,000 479,000 8,121,000
2001............................... 8,593,000 472,000 8,121,000
2002............................... 8,549,000 428,000 8,121,000
2003............................... 6,449,000 209,000 6,240,000
Thereafter......................... 5,359,000 159,000 5,200,000
----------- ---------- -----------
Total............................ $46,272,000 $2,273,000 $43,999,000
=========== ========== ===========
</TABLE>
Total expense under operating leases amounted to $8,285,000, $7,691,000 and
$3,220,000 for 1998, 1997 and 1996, respectively.
Effective as of December 1995, the Company entered into a non-cancelable
lease agreement for five transponders on the AT&T satellite Telstar 402R for a
monthly payment of $635,000. The original term of the agreement was for the
useful life of the satellite's geo-stationary orbit, estimated to be 12 years.
At December 31, 1996, included in property and equipment is an asset with an
original cost of $58,663,000 equal to the discounted lease payments using a
discount rate of 8%.
On January 11, 1997, as a result of AT&T losing contact with and declaring
Telstar 401 permanently out of service, AT&T pre-empted one of the Company's
unprotected transponders and transferred it to another AT&T customer. This
resulted in the reduction of the Company's satellite transponder payments from
$635,000 to $520,000 per month.
On March 31, 1997, the Company and Loral SpaceCom Corporation ("Loral"),
which acquired AT&T's satellite business, amended the Skynet Transponder
Services Agreement (the "Transponder Agreement"). The term of the Transponder
Agreement, which originally was to expire at the end of the satellite's useful
life, was
F-24
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
shortened to October 31, 2004. In consideration of the amendment, the Company
granted Loral the right to pre-empt one of the Company's transponders after
September 1, 1997. As a result of the amendment, the Transponder Agreement has
been classified as an operating lease commencing on March 31, 1997.
As a result of the two events described above, the Company realized a non-
recurring gain of approximately $2.3 million in 1997.
As a result of the Transponder Agreement being classified as a capital lease
until March 31, 1997 (Note 7), the transponder payments totaling $1,598,000 and
$7,620,000 for 1997 and 1996, respectively, were reported as a reduction of
capital lease obligations. Were the Transponder Agreement classified as an
operating lease from its inception, the Company would have reported additional
satellite expenses of approximately $1.6 million and $7.6 million in 1997 and
1996, respectively. In addition, the Company would have reported a decrease in
depreciation of $1.0 million and $5.3 million as well as a decrease in interest
expense of $0.9 million and $5.0 million, respectively. On the Closing Date,
the Transponder Agreement was terminated. Directrix entered into an Agreement
for Skynet Transponder Services on that date for transponder services on three
transponders.
On January 19, 1998, the Company, through its HVC subsidiary, secured long-
term transponder capacity on transponder 24 of the Sky Astra 1B Satellite. The
lease commenced on August 1, 1998 and expires on December 31, 2002 and calls
for monthly lease payments of (Pounds)75,000 or approximately $125,000.
Contracts with Producers. The Spice Networks, The Adult Channel and The Home
Video Channel have entered into contracts with producers with terms ranging
from one to two years which are on a flat fee basis. Also, the Company has
contracted with several major adult motion picture producers. These contracts
allow the Company to license worldwide pay-TV rights in perpetuity.
Contracts with Cable Systems. The Company has entered into affiliation
agreements with numerous cable systems in the United States. The contracts have
terms ranging from one to ten years with the fees to the cable systems based
upon a percentage of the subscriber gross revenues, as defined in those
respective agreements.
11. Significant Customer.
On September 1, 1996, under short-term agreements, the Company began
providing transponder services bundled with playback, programming and other
related services to EMI. EMI owns and operates EUROTICA, a premium television
network featuring explicit version adult movies which are distributed to the
domestic DTH market. EMI also granted the Company an option to acquire its
stock or business for $755,000 ("EMI Option"). EMI expanded its operations and,
at December 31, 1998, operated four explicit television networks in the DTH
market. The Company provided transponder services on three transponders and
playback and other services for four of EMI's networks from the Company's
master control and digital playback facility.
In 1998, 1997 and 1996, the Company recognized revenue of $3.8 million, $4.7
million and $0.6 million, respectively, from EMI.
12. Retirement Plan.
On January 13, 1993, the Company established a 401(k) tax deferred savings
plan (the "401(k) Plan") for all employees of the Company on March 1, 1993.
Employees are eligible to participate in the 401(k) Plan after completing one
year of service. Eligible employees may elect to contribute up to 15% of their
annual
F-25
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
compensation to the 401(k) Plan, up to the maximum allowed by law. The Company
declared for 1998 and 1997 discretionary matching contributions equal to 25% of
employees' contributions. For the years ended December 31, 1998 and 1997, the
Company incurred 401(k) contribution expenses of $48,000 and $26,000,
respectively. The Company made no matching discretionary contribution during
the year ended December 31, 1996.
13. Restructuring Reserve.
In December 1995, the Company entered into a restructuring plan for certain
operating units and its corporate management. Two executives, Mr. Mark Graff
and Mr. Leland H. Nolan also resigned as officers of the Company effective
December 31, 1995. Messrs. Graff and Nolan have signed separation agreements
which are in force through 1998 (Note 10). As a result of this restructuring,
the Company took a pretax charge of $3,655,000 in 1995, including the
separation costs for approximately 50 employees.
The accrued restructuring reserve is comprised of corporate level
restructuring and the suspension of production activities formerly conducted by
CPV. Each component involved contraction of the Company's workforce and
facilities and other miscellaneous costs associated with the restructuring. The
activity of each component for the years 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
Corporate CPV
----------------------- ---------------------
Facilities & Facilities &
Salaries Other Salaries Other
---------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Balance: January 1, 1996......... $2,750,000 $250,000 $464,000 $191,000
Less: Cash Outflows.............. 1,301,000 179,000 464,000 191,000
---------- -------- -------- --------
Balance: December 31, 1996....... 1,449,000 71,000 -- --
Less: Cash Outflows.............. 749,000 71,000 -- --
---------- -------- -------- --------
Balance December 31, 1997........ 700,000 -- -- --
Less: Cash Outflows.............. 700,000 -- -- --
---------- -------- -------- --------
Balance: December 31, 1998....... $ -- $ -- $ -- $ --
========== ======== ======== ========
</TABLE>
F-26
<PAGE>
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
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Playboy Spice(A) Adjustments Pro Forma
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
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)
</TABLE>
See accompanying notes to unaudited pro forma statement of operations.
F-28
<PAGE>
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:
<TABLE>
<CAPTION>
Less Intercompany Pro Forma
Spice Directrix Eliminations Spice
-------- --------- ------------ ---------
<S> <C> <C> <C> <C>
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
======== ======== ======= ========
</TABLE>
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
<PAGE>
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
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Forma Pro
Playboy Spice(M) Adjustments Forma
-------- --------- ----------- --------
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma balance sheet.
F-31
<PAGE>
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:
<TABLE>
<CAPTION>
Less Pro Forma
Spice Directrix Spice
-------- --------- ---------
<S> <C> <C> <C>
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
======== ======= ========
</TABLE>
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
<PAGE>
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.
<TABLE>
<S> <C>
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
========
</TABLE>
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:
<TABLE>
<CAPTION>
Estimated Amortization
Description of Asset Amount Allocated Period
-------------------- ---------------- ------------
<S> <C> <C>
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
========
</TABLE>
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
