WARNING

Rating: 18+
All images courtesy of
Beate Uhse Annual Report

CONFIDENTIAL
 Accounting
issues for a
high growth
German sex
Company
Final Project
Financial Statement Analysis
Insead 2004 – Professor Jake Cohen
Nagendra Bommadevara; Keisuke
Kirimoto; Pascal Rodel; Rolfe Swinton;
Bas Becks
.

CONFIDENTIAL
 Beate Uhse: German Financial Acquisition of
The Company International Ratios Penthouse
GAAP

Financial Statement Analysis – INSEAD 2004 3

 Company History

Founder
arrested for
distributing
pamphlet
about
condoms and First sex- Beate Uhse
sex (2000 shop in acquires
world
Beate Uhse two Euro
counts of Germany
indecency) opened Goes Public internet
legalises
25 Stores pornography May 27 companies
.
1946 1947 1952 1956 1962 1966 1971 1975 1990 1999 2000 2001 2002

Founding of 32-page First self- First Shop Takeover of sex US

mail order catalogue service in eastern magazines, expansion
house 50 products shop Germany, and store begins…
200.000+ in Berlin DM 115 mln expansion into
customers in sales Norway &
Sweden

Organic Growth Through

Growth
Financial Statement Analysis – INSEAD 2004 4
Acquisitions
 Business Units & Revenues

Retail Mail Order Wholesale Entertainment Holding

 220 Stores  25 million  Services to 3rd  Internet,  Provides

 Present in catalogues sent Parties and In- telephone and services to the
Germany,  1.9 million house logistics, TV activities group
Austria, orders annually sourcing, and companies
Switzerland, Italy,  4 Million manufacturing
the Netherlands, customers on capabilities
Belgium, France, database
Great Britain,  Germany,
Norway and Austria,
Poland Switzerland, the
Netherlands,
Belgium, France,
Great Britain
and the USA.

Financial Statement Analysis – INSEAD 2004 5

 Firm Strategy
Long-Term Vision

“Become the Universal Provider of Erotica and Sex Products for the Whole World”

Where to Play How to Win / Capabilities

 Mail Order and Retail  Expand retail reach through new store concepts that
Grow Core expand reach to women and couples
 Make erotica and sex products
B2C mainstream through more  Reinforce design & manufacturing competencies
Business accessible channels  Leverage capabilities through B2B opportunities
 Mail-order logistics capabilities are core to all growth –
enables rapid, cost-effective expansion and ID of
customers for new stores
 Geographic:
Expand – Europe
 Leverage content across markets and across platforms
International  Accelerate international business growth through
– North America
acquisition of well-known brands
Through – Asia?
 Invest a little, try a little conservative expansion
Acquisition  0Markets: approach to not over extend
& Organic – Magazine / DVD / Phone  Continue to expand international sales (now almost
Growth – Retail / Mail-order 50%) to hedge economic risk
– On-line

 Provide manufacturing,  Maximise scale economies in design and

logistics, and transport to 3rd manufacturing
B2B parties  Build up potential acquisition targets relatively risk-free
 Repurpose and resell content

Financial Statement Analysis – INSEAD 2004 6

 Industry and Competitive Position
Beate Uhse Annual Revenues by Division
250
$ mln -5%
Growth and Attractiveness of
CAGR Beate Uhse Markets by Segment
200 Entertainment
77%
Whole-
sale H
150 i
Low
g
77% h
100 Mail
Order

50 Whole- Mail
Retail
9% sale Order
0 On
-
1999 2000 2001 2002 lin
Growth e

Industry Growth Rate Europe 1999-2003 TV /

600 On-Line Cable Retail

49%
$ bn
500 CAGR
Retail 2.4%
400 Maga
Low -zines
300
Publish-
ing
0.10% Low
200 Attractiveness High
Mail
100 Order 4.6%
TV / Cable $Value of
2.6%
0 Opportunity Now
1999 2000 2001 2002

Beate Uhse is focusing on core growth businesses and is placing careful bets on high
growth opportunities. Synergy opportunities by using content in multiple platforms
Financial Statement Analysis – INSEAD 2004 7
 Beate Uhse: German Financial Acquisition of
The Company International Ratios Penthouse
GAAP

Financial Statement Analysis – INSEAD 2004 8

 German HGB vs. US GAAP/ IAS

German HGB US GAAP/ IAS

 Principle of caution and  Availability of shareholder

Philosophy
creditor protection decision making data

Basis of  Financials based on  Optional or compulsory

Accounting historical costs
revaluation of items

Legal  Based on legal  IFRS not limited by legal

Framework regulations framework

 Dependant upon size,  Same for all enterprises

Financial industry sector and stock regardless of their
Framework exchange of listing specifics

Financial Statement Analysis – INSEAD 2004 9

 German HGB vs. US GAAP
German HGB US GAAP

Inventories  Payments on accounts may be  Payments on accounts are

deducted recognised as liabilities

Depreciation
 Tax driven, not based on useful life  Independent from tax accounting
Amortization

Revenue  Payment terms have no impact on  Recognised when earned and

recognition revenue recognition realisable

 Allows for provisions for future gains  Provisions as potential future

Provisions
and losses liabilities

Marketable  Carried at lower of acquisition cost  Classified into trading, av. for sale or
Securities and market value held for maturity

 Considered marketable securities  Recorded at cost within

Treasury Stock shareholder’s equity
 Unrealised losses from share price
movements are charged under income  Share price movements not recorded

 Acquired goodwill can be netted  Required to capitalise excess

Goodwill purchase price as goodwill and
against revenue or capital reserves
(directly against shareholder’s value amortize useful life (pre-SFAS 142)

Employee Stock
 Discounts recorded as expenses  Discounts recorded as direct
Purchase
reduction in paid/in capital
Financial Statement Analysis – INSEAD 2004 10
 Balance Sheet Changes

Treasury Stock Assets: Decrease €3.4 m

OE: Decrease € 3.4 m
Amortization of goodwill Assets: Increase €3.2 m
and intangibles (€3.2 m) SE(RE): Increase €1.76 m
Liabilities: Increase €1.44 m
Accruals (€15.3 m) Independent section
 Move to Liabilities
Deferred Income (€0.05m) Independent section
 Move to Liabilities
Special items w/ equity Independent section
portion (€0.006 m)  Move to assets
(Accumulated Dep.)

Financial Statement Analysis – INSEAD 2004 11

 Income Statement Changes

Amortization of goodwill and Reduce amortization

intangibles (€3.2 m) (€9.93 m  €6.74 m)
Increase tax
(€7.74 m  €9.18 m)
Increase Net Income
(€9.03 m  €10.79 m)

Personnel expenses COGS  SG&A

(€42.3m)

Financial Statement Analysis – INSEAD 2004 12

 Beate Uhse: German Financial Acquisition of
The Company International Ratios Penthouse
GAAP

Financial Statement Analysis – INSEAD 2004 13

 Comparison to Porn Peers

2001 Net Income/Equity = Net Income/Revenue Revenue/Assets Assets/Equity

Beate Uhse 2.6% 0.70% 1.5 2.46
Play Boy -29.9% -10.10% 0.71 4.16
PentHouse N/A N/A N/A N/A
AdultShop 19.2% 4.90% 2.86 1.37

2002 Net Income/Equity = Net Income/Revenue Revenue/Assets Assets/Equity

Beate Uhse 14.9% 3.69% 1.47 2.76
Play Boy -20.3% -6.20% 0.70 4.70
PentHouse 1.0% -1.20% 2.61 -0.32
AdultShop -35.1% -11.44% 2.17 1.41

Financial Statement Analysis – INSEAD 2004 14

 Trend Analysis 1999-2002

Beate Uhse Net Income/Equity = Net Income/Revenue Revenue/Assets Assets/Equity

1999 7.6% 4.33% 1.06 1.67
2000 11.3% 5.86% 1.18 1.64
2001 2.6% 0.71% 1.50 2.46
2002 14.9% 3.69% 1.47 2.76
2002 Am 17.8% 4.41% 1.47 2.76

Size of company’s revenues and assets and market cap

Financial Statement Analysis – INSEAD 2004 15

 Outlasts Its Porn Peers

S&P
Beate Uhse

Playboy

Penthouse

Financial Statement Analysis – INSEAD 2004 16

 Beate Uhse: German Financial Acquisition of
The Company International Ratios Penthouse
GAAP

Financial Statement Analysis – INSEAD 2004 17

 Acquiring Penthouse

Financial Statement Analysis – INSEAD 2004 18

 Acquisition Rationale
• Accelerates US entrance
• Penthouse is strong brand. Acquisition of Penthouse international would
provide all property rights & ownership of Penthouse content (database)
• Large cross selling potential (use of content over multiple platforms and
expansion of mail order business)
• Penthouse operations currently crap (burning cash), significant opportunity for
operational improvements (leverage BU back-office platforms)
• Penthouse International probably filing bankruptcy within year ($43 mln of long
term debt due within 1 year, and total assets of only $15 mln) All time low
share price

• Bid for General Media (89% of total Penthouse

Revenues) of $62 mln  ~ $ 80 mln for whole
Beate Uhse should offer
of Penthouse
$80 mln for Penthouse
• Applying comparable Playboy EV/Sales International
multiple implies price of $94 mln (not taking
(or EUR 62 mln)
into account discount for Bankruptcy status)

Financial Statement Analysis – INSEAD 2004 19

 M&A example
Pooling
• Combine statements at book value, no
recognition of new goodwill
• Record value of issued shares at book
value of acquiring equity
Purchasing
• Combine statements, using fair market
value for assets & liabilities of target
• Record issued equity at market value
• Capitalize and amortize goodwill vs
impairment test goodwill (SFAS 142)

Acquirer Target Adjustments Newco

Tangible Assets 1,000 200 Stock price of acquirer 1,200 3.0
Working Capital 200 50 250
Goodwill Stock +price
260 of target 260 2.5
Net Assets 1,200 250 200 1,710
Net debt 300 150 Offered +price
60 to target 510 3.0 (20
New Equity + 300 300
Exchange Ratio 1.0 Ac
Equity 900 100 (100) 900
Total Liabilities & Equity 1,200 250 200 1,710

ASSETS AND
Number of shares 900 100 LIABILITIES 1,000
@ MARKET
VALUE
Financial Statement Analysis – INSEAD 2004 20
 M&A example - Stock
Purchase price of Target 300

+ Transaction fees (@ 3%) 9

= Total transaction value 309

- Target Book Equity 100

= Goodwill 209

100% Share Deal

Acquirer Target Adjustments
Adjustments
Adjustments Newco
Newco
Newco
Tangible Assets 1,000 200 1,200
1,200
1,200
Working Capital 200 50 250 250
250
Goodwill ++ 209
209 + 260 209 260
209
Net Assets 1,200 250 209 200
209 1,710
1,659
1,659
Net debt 300 150 ++ 99+ 60 459 510
459
New Equity ++ 300
300 + 300 300 300
300
Equity 900 100 (100)(100)
(100) 900 900
900
Total Liabilities & Equity 1,200 250 209 200
209 1,710
1,659
1,659

Number of shares 900 100 1,000

1,000
1,000

Financial Statement Analysis – INSEAD 2004 21

 M&A example - Cash
Purchase price of Target 300

+ Transaction fees (@ 3%) 9

= Total transaction value 309

- Target Book Equity 100

= Goodwill 209

100% Cash Deal

Acquirer Target Adjustments
Adjustments
Adjustments Newco
Newco
Newco
Tangible Assets 1,000 200 1,200
1,200
1,200
Working Capital 200 50 250 250
250
Goodwill ++209+ 260
209 209 260
209
Net Assets 1,200 250 209 200
209 1,710
1,659
1,659
Net debt 300 150 ++309+ 360
309 759 810
759
New Equity
Equity 900 100 (100)
(100)
(100) 900 900
900
Total Liabilities & Equity 1,200 250 209 200
209 1,710
1,659
1,659

Number of shares 900 100 900 900

900

Financial Statement Analysis – INSEAD 2004 22

 The Acquisition

Purchase price of Target 62

+ Transaction fees (@ 3%) 2

= Total transaction value 64

- Target Book Equity (50)

= Goodwill 114

Stock price of acquirer 12.18

Offered price to target 0.34 Does it make

Exchange Ratio 0.028 sense?

Financial Statement Analysis – INSEAD 2004 23

 The Acquisition - Stock
Beate
Beate
Beate Uhse
Uhse
Uhse Penthouse
Penthouse
Penthouse Adjustments
Adjustments
Adjustments New
New
New Co
Co
Co
Assets
Assets
Assets 2002
2002
2002 2002
2002
2002 2002
2002
2002 2002
2002
2002
Cash
Cash
Cash & Equivalents
&& Equivalents
Equivalents 1414
14 00 0 1414
14
Receivables
Receivables
Receivables Net
Net
Net 2424
24 33 3 2727
27
Inventories
Inventories
Inventories 3535
35 33 3 3939
39
Other
Other
Other Current
Current
Current Assets
Assets
Assets 2121
21 22 2 2222
22
Total
Total
Total Current
Current
Current Assets
Assets
Assets 9494
94 88 8 102
102
102
Property,
Property,
Property, Plant
Plant
Plant & Equipment
&& Equipment
Equipment - Net
-- Net
Net 2727
27 66 6 3333
33
Goodwill
Goodwill
Goodwill 1717
17 114
114
114 131
131
131
Other
Other
Other Assets
Assets
Assets 2828
28 44 4 3232
32
Total
Total
Total Assets
Assets
Assets 166
166
166 1818
18 114
114
114 298
298
298
Liabilities
Liabilities
Liabilities
Accounts
Accounts
Accounts Payable
Payable
Payable 2020
20 88 8 2828
28
STST
ST Debt
Debt
Debt & Current
&& Current
Current Portion
Portion
Portion Due
Due
Due LTLT
LT Debt
Debt
Debt 4545
45 3434
34 7979
79
Other
Other
Other Current
Current
Current Liabilities
Liabilities
Liabilities 1414
14 1616
16 3030
30
Total
Total
Total Current
Current
Current Liabilities
Liabilities
Liabilities 7979
79 5858
58 -- - 137
137
137
Long
Long
Long Term
Term
Term Debt
Debt
Debt 1010
10 99 9 22 2 2121
21
Provision
Provision
Provision For
For
For Risks
Risks
Risks And
And
And Charges
Charges
Charges 1515
15 -- - 1515
15
Other
Other
Other Liabilities
Liabilities
Liabilities 00 0 11 1 11 1
Total
Total
Total Liabilities
Liabilities
Liabilities 104
104
104 6868
68 22 2 174
174
174
Shareholders'
Shareholders'
Shareholders' Equity
Equity
Equity
Minority
Minority
Minority Interest
Interest
Interest 11 1 00 0 11 1
Common
Common
Common Equity
Equity
Equity 6060
60 (50)
(50)
(50) 5050
50 6060
60
New
New
New equity
equity
equity 6262
62 6262
62
Total
Total
Total Liabilities
Liabilities
Liabilities & & Shareholders'
& Shareholders'
Shareholders' Equity
Equity
Equity 166
166
166 1818
18 114
114
114 298
298
298

Common
Common
Common Shares
Shares
Shares Outstanding
Outstanding
Outstanding 47,324
47,324
47,324 184,690
184,690
184,690 (184,690)
(184,690)
(184,690) 52,453
52,453
52,453
New
New
New Shares
Shares
Shares 5,130
5,130
5,130

Financial Statement Analysis – INSEAD 2004 24

 The Acquisition - Cash
BeateUhse
Beate Uhse Penthouse
Penthouse Adjustments
Adjustments
Adjustments NewCo
New
New CoCo
Assets
Assets
Assets 2,002
2,002 2,002
2,002 2,002
2,002
2,002 2,002
2,002
2,002
Cash&
Cash
Cash &&Equivalents
Equivalents
Equivalents 1414 00 14
14
14
ReceivablesNet
Receivables
Receivables Net
Net 2424 33 27
27
27
Inventories
Inventories
Inventories 3535 33 39
39
39
OtherCurrent
Other
Other CurrentAssets
Current Assets
Assets 2121 22 22
22
22
TotalCurrent
Total
Total CurrentAssets
Current Assets
Assets 9494 88 -- - 102
102
102
Property,Plant
Property,
Property, Plant&
Plant &&Equipment
Equipment-- Net
Equipment - Net
Net 2727 66 33
33
33
Goodwill
Goodwill
Goodwill 1717 -- 114
114
114 131
131
131
OtherAssets
Other
Other Assets
Assets 2828 44 32
32
32
TotalAssets
Total
Total Assets
Assets 166
166 1818 114
114
114 298
298
298
Liabilities
Liabilities
Liabilities
AccountsPayable
Accounts
Accounts Payable
Payable 2020 88 28
2828
STDebt
ST
ST Debt&
Debt &&Current
CurrentPortion
Current PortionDue
Portion DueLT
Due LTLTDebt
Debt
Debt 4545 3434 79
7979
OtherCurrent
Other
Other CurrentLiabilities
Current Liabilities
Liabilities 1414 1616 30
3030
TotalCurrent
Total
Total CurrentLiabilities
Current Liabilities
Liabilities 7979 5858 -- - 137
137
137
LongTerm
Long
Long TermDebt
Term Debt
Debt 1010 99 64
64 64 83
8383
ProvisionFor
Provision
Provision ForRisks
For RisksAnd
Risks AndCharges
And Charges
Charges 1515 -- 15
1515
OtherLiabilities
Other
Other Liabilities
Liabilities 00 11 111
TotalLiabilities
Total
Total Liabilities
Liabilities 104
104 6868 64
64
64 236
236
236
Shareholders'Equity
Shareholders'
Shareholders' Equity
Equity
MinorityInterest
Minority
Minority Interest
Interest 11 00 111
CommonEquity
Common
Common Equity
Equity 6060 (50)
(50) 50
50
50 60
60 60
New
New
New equity
equity
equity -- -- -- -
TotalLiabilities
Total
Total Liabilities&
Liabilities &&Shareholders'
Shareholders'Equity
Shareholders' Equity
Equity 166
166 1818 114
114
114 298
298
298

CommonShares
Common
Common SharesOutstanding
Shares Outstanding
Outstanding 47,324
47,324 184,690
184,690 (184,690)
(184,690)
(184,690) 47,324
47,324
47,324
NewShares
New
New Shares
Shares

Financial Statement Analysis – INSEAD 2004 25

 Accretion / Dilution
100% Share Deal 100% Cash Deal
100%
100%
100% Stock
Stock
Stock Deal
Deal
Deal 100%
100%
100% Cash
Cash
Cash Deal
Deal
Deal
2002
2002
2002 2003
2003
2003 2004
2004
2004 2002
2002
2002 2003
2003
2003 2004
2004
2004

Net
Net
Net Income
Income
Income Aquirer
Aquirer
Aquirer 10.8
10.8
10.8 11.9
11.9
11.9 13.1
13.1
13.1 10.8
10.8
10.8 11.9
11.9
11.9 13.1
13.1
13.1

+++ Net
Net
Net Income
Income
Income Target
Target
Target 1.1
1.1
1.1 1.2
1.2
1.2 1.1
1.1
1.1 1.2
1.2
1.2

+++ Synergies
Synergies
Synergies 4.6
4.6
4.6 7.0
7.0
7.0 4.6
4.6
4.6 7.0
7.0
7.0

--- Taxes
Taxes
Taxes onon
on Synergies
Synergies
Synergies (1.6)
(1.6)
(1.6) (2.4)
(2.4)
(2.4) (1.6)
(1.6)
(1.6) (2.4)
(2.4)
(2.4)

--- Goodwill
Goodwill
Goodwill Amortization
Amortization
Amortization (7.6)
(7.6)
(7.6) (7.6)
(7.6)
(7.6) (7.6)
(7.6)
(7.6) (7.6)
(7.6)
(7.6)

--- Interest
Interest
Interest Expense
Expense
Expense onon
on new
new
new debt
debt
debt (0.1)
(0.1)
(0.1) (0.1)
(0.1)
(0.1) (3.9)
(3.9)
(3.9) (3.9)
(3.9)
(3.9)

+++ Taxes
Taxes
Taxes on
on
on Interest
Interest
Interest Expense
Expense
Expense 0.0
0.0
0.0 0.0
0.0
0.0 1.4
1.4
1.4 1.4
1.4
1.4

=== Total
Total
Total New
New
New Income
Income
Income 8.3
8.3
8.3 11.1
11.1
11.1 5.9
5.9
5.9 8.7
8.7
8.7

Nr ofofof
Nr
Nr Newco
Newco
Newco Shares
Shares
Shares 000)
('000)
('('000) 47,324
47,324
47,324 52,453
52,453
52,453 52,453
52,453
52,453 47,324
47,324
47,324 47,324
47,324
47,324 47,324
47,324
47,324

=== EPS
EPS
EPS Newco
Newco
Newco 0.23
0.23
0.23 0.16
0.16
0.16 0.21
0.21
0.21 0.23
0.23
0.23 0.12
0.12
0.12 0.18
0.18
0.18

Financial Statement Analysis – INSEAD 2004 26

 Impact on Ratios

100% Share Deal 100% Cash Deal

2002
2002 2003
2003 2004
2004 2002
2002 2003
2003 2004
2004
Profitability
ofitability
rofitability
EPS EPS Newco
EPSNewco
Newco 0.23
0.23 0.16
0.16 0.21
0.21 0.23
0.23 0.12
0.12 0.18
0.18

ReturnReturn
Returnon on Assets
onAssets
Assets 6%
6% 3%
3% 4%
4% 6%
6% 2%
2% 3%
3%
ReturnReturn
Returnon on Invested
onInvested
Invested Capital
Capital
Capital 12%
12% 5%
5% 7%
7% 12%
12% 4%
4% 5%
5%
ReturnReturn
Returnon on Equity
onEquity
Equity 18%
18% 7%
7% 9%
9% 18%
18% 10%
10% 14%
14%

Leverage
verage
everage
CurrentCurrent
Current Ratio Ratio
Ratio 1.19
1.19 0.74
0.74 1.19
1.19 0.74
0.74
Acid AcidRatio
AcidTest
Test Test Ratio
Ratio 0.48
0.48 0.30
0.30 0.48
0.48 0.30
0.30
DebttoDebt
Debt to Equity
toEquity
Equity RatioRatio
Ratio 1.80
1.80 0.81
0.81 1.80
1.80 2.69
2.69
Leverage
Leverage
Leverage 2.71
2.71 2.42
2.42 2.71
2.71 4.93
4.93
Debt Debt
Ratio Ratio
DebtRatio 33%
33% 34%
34% 33%
33% 55%
55%

Beate Uhse should acquire Penthouse

only in a 100% share deal

Financial Statement Analysis – INSEAD 2004 27

 Conclusion
• BU has very solid financials – especially when compared
to its (financially) naked peers

• BU has proven its ability to maximize true synergies

through its acquisitions

• Company is well positioned to list on U.S. exchange

without major negative changes to its financials

• Despite the dodgy connotation of the industry, BU

through its transparency, socially responsible
organization and high ethical standards is seeking to
claim a place in the mainstream business world

Financial Statement Analysis – INSEAD 2004 28

 The Woman – The Legend…

Financial Statement Analysis – INSEAD 2004 29

 QUESTIONS
Financial Statement Analysis – INSEAD 2004 30
 M&A example - Overview
100% Share Deal 100% Cash Deal
Acquirer
Newco Target Adjustments
Newco Newco
Tangible Assets 1,000
1,200 200 1,200 1,200
Working Capital 200250 50 250 250
Goodwill 209 + 260 209 260
Net Assets 1,200
1,659 250 2001,659 1,710
Net debt 300459 150 + 360 759 810
New Equity 300
Equity 900900 100 (100) 900 900
Total Liabilities & Equity 1,200
1,659 250 2001,659 1,710

Number of shares 900

1,000 100 900 900

Financial Statement Analysis – INSEAD 2004 31

 M&A example - EPS

Net Income Aquirer

+ Net Income Target

+ Synergies

- Taxes on Synergies

- Goodwill Amortization

- Interest Expense on new debt

+ Taxes on Interest Expense

= Total New Income

Nr of Newco Shares

= EPS Newco

Financial Statement Analysis – INSEAD 2004 32