AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 10, 2000.
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PLAYBOY.COM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 7375 36-4276278
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification number)
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680 NORTH LAKE SHORE DRIVE
CHICAGO, IL 60611
TELEPHONE: (312) 751-8015
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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CHRISTIE HEFNER
ACTING CHIEF EXECUTIVE OFFICER
PLAYBOY.COM, INC.
680 NORTH LAKE SHORE DRIVE
CHICAGO, IL 60611
TELEPHONE: (312) 751-8015
FACSIMILE: (312) 751-8073
(Name, address, including zip code, and telephone number, including area code of
agent for service)
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COPIES TO:
ALEXANDER D. LYNCH, ESQ. JAY K. HACHIGIAN, ESQ.
KENNETH R. MCVAY, ESQ. GUNDERSON DETTMER STOUGH VILLENEUVE
BROBECK, PHLEGER & HARRISON LLP FRANKLIN & HACHIGIAN, LLP
1633 BROADWAY, 47TH FLOOR 155 CONSTITUTION DRIVE
NEW YORK, NY 10019 MENLO PARK, CA 94025
(212) 581-1600 (650) 321-2400
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / / _________
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
Common stock, par value $0.01 per share..................... $50,000,000 $13,200
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o).
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JANUARY 10, 2000
Shares
[LOGO]
Playboy.com, Inc.
Common Stock
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Prior to this offering, there has been no public market for our common
stock. The initial public offering price of the common stock is expected to be
between $ and $ per share. We will make application to list our common
stock on The Nasdaq Stock Market's National Market under the symbol "PBOY."
The underwriters have an option to purchase a maximum of
additional shares to cover over-allotments of shares.
Investing in the common stock involves risks. See "Risk Factors" on page 5.
Underwriting
Price to Discounts and Proceeds to
Public Commissions Playboy.com
------------- ------------- -------------
Per
Share... $ $ $
Total... $ $ $
Delivery of the shares of common stock will be made on or about
, .
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Credit Suisse First Boston
Bear, Stearns & Co. Inc.
Banc of America Securities LLC
The date of this prospectus is , .
[INSIDE FRONT COVER]
[COLOR ARTWORK TO FOLLOW]
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TABLE OF CONTENTS
Page
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PROSPECTUS SUMMARY................... 1
RISK FACTORS......................... 5
FORWARD-LOOKING STATEMENTS........... 20
USE OF PROCEEDS...................... 21
DIVIDEND POLICY...................... 21
CAPITALIZATION....................... 22
DILUTION............................. 23
SELECTED FINANCIAL DATA.............. 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...................... 25
BUSINESS............................. 32
Page
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MANAGEMENT........................... 47
TRANSACTIONS WITH PLAYBOY
ENTERPRISES........................ 51
PRINCIPAL STOCKHOLDERS............... 55
DESCRIPTION OF CAPITAL STOCK......... 56
SHARES ELIGIBLE FOR FUTURE SALE...... 59
UNDERWRITING......................... 61
NOTICE TO CANADIAN RESIDENTS......... 63
LEGAL MATTERS........................ 64
EXPERTS.............................. 64
WHERE YOU CAN FIND ADDITIONAL
INFORMATION........................ 64
INDEX TO FINANCIAL STATEMENTS........ F-1
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
i
PROSPECTUS SUMMARY
BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION
THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING
"RISK FACTORS" AND THE FINANCIAL STATEMENTS AND THE NOTES TO THE FINANCIAL
STATEMENTS, BEFORE DECIDING TO INVEST IN OUR COMMON STOCK. INFORMATION CONTAINED
ON OUR ONLINE SITES DOES NOT CONSTITUTE PART OF THIS PROSPECTUS. REFERENCES IN
THIS PROSPECTUS TO "PLAYBOY.COM," "WE," "OUR" AND "US" REFER TO
PLAYBOY.COM, INC. REFERENCES IN THIS PROSPECTUS TO "PLAYBOY ENTERPRISES" REFER
TO PLAYBOY ENTERPRISES, INC. AND ITS SUBSIDIARIES, OTHER THAN PLAYBOY.COM, INC.
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
PLAYBOY.COM, INC.
OUR BUSINESS
We are a leading Internet company dedicated to the lifestyle and
entertainment interests of young men around the world. We are uniquely
positioned to capitalize on the Playboy brand, which is one of the most
recognized in the world, to provide a compelling Playboy online entertainment
experience. Our online destinations combine Playboy's distinct attitude with
extensive and original content, a large community of loyal users and a wealth of
e-commerce offerings. Our business model is based on monetizing the growing
traffic on our sites through multiple revenue streams, including advertising and
sponsorships, e-commerce and fees for subscription services and pay-per-view
events.
Through our PLAYBOY.COM Web site, we offer original content focusing on
areas of interest to our target audience, including sex and relationships, pop
culture, campus life, travel and nightlife, gaming, sports, Playboy Playmates
and celebrities. We also offer pay-per-view events such as lingerie fashion
shows and holiday parties at the Playboy Mansion. In order to accommodate our
users seeking premium Playboy content, we offer the Playboy Cyber Club, a
subscription-based Web site offering services such as VIP access to over 45,000
photos, every interview from PLAYBOY magazine, individual home pages for Playboy
Playmates, live Playmate chats and video clips from Playboy home videos and
television programming. Subscribers also have free access to some of our
pay-per-view specials. As of November 30, 1999, we had 37,379 subscribers to the
Playboy Cyber Club.
Our e-commerce offerings include the Playboy Store, which is the primary
destination for purchasing over 2,700 different Playboy-branded fashions,
videos, jewelry and collectibles, and the Playboy Marketplace, which allows
consumer goods companies to sell products tailored to the Playboy user such as
movies, music, books, software, games, cigars, wine, consumer electronics and
travel packages. We currently have arrangements with merchants such as
Amazon.com, CNET, Gourmet Market, Sharper Image and College Club to sell
products through the Playboy Marketplace. In addition, in December 1999, we
launched Playboy Auctions to capitalize on the thriving market for Playboy
collectibles.
We also offer a separately branded online adult entertainment site located
at CYBERSPICE.COM. This site capitalizes on Playboy Enterprises' recent
acquisition of Spice Entertainment Companies, a leading provider of adult
television entertainment throughout the world. We currently generate revenues
from the sale of over 3,100 items in the Spice Store, including adult videos,
lingerie and sensual products. During 2000, we plan to launch a subscription
service on CYBERSPICE.COM that will feature pictorials, videos, adult-oriented
news and articles and chats with adult film stars.
For the month of November 1999, we had over 100 million page views and over
16 million visits to our Web sites, as audited by ABC Interactive. Our Web sites
also generate significant international traffic and, in November 1999,
approximately 25% of our traffic originated outside of the United States.
1
OUR OPPORTUNITY
We believe that we are uniquely positioned to provide the leading online
destination addressing the entertainment and lifestyle needs of young men around
the world. By using the power of the Playboy brand and leveraging the other
assets of Playboy Enterprises, we believe we will be able to grow our online
businesses more aggressively than our competitors, many of which must incur
significant expenses to build brand awareness. Our relationship with Playboy
Enterprises provides us the following key competitive advantages:
- online use of leading trademarks, including Playboy, Playmate and the
Rabbit Head Design;
- an extensive array of articles, interviews and cartoons from PLAYBOY
magazine, as well as a photo library of more than nine million images;
- access to over 1,300 hours of Playboy television and video programming;
- millions of subscribers and customers; and
- promotional space in PLAYBOY magazine and on the Playboy television
networks and the ability to cross-promote the Playboy brand through
multiple media.
OUR STRATEGY
To be the leading online destination for young men around the world, we
intend to:
- leverage our strong brand recognition;
- maximize revenues from multiple revenue streams;
- enhance and expand content offerings and services; and
- expand our international presence.
OUR ADDRESS
Our principal executive offices are located at 680 North Lake Shore Drive,
Chicago, IL 60611. Our telephone number at that location is (312) 751-8015. Our
Web sites are located at WWW.PLAYBOY.COM and WWW.CYBERSPICE.COM.
2
THE OFFERING
Common stock offered by us................... shares
Common stock to be outstanding after this
offering................................... shares
Use of proceeds.............................. We intend to use the net proceeds of this
offering to develop, enhance and expand our
Web sites, including the creation of original
content, to pursue e-commerce opportunities,
to increase our sales and marketing
activities, to explore potential acquisitions
and for other purposes.
Proposed Nasdaq National Market symbol....... PBOY
The outstanding share information is based on our shares outstanding as of
January 7, 2000, all of which are owned by Playboy Enterprises. As of
January 7, 2000, we had no stock options outstanding.
3
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
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1996 1997 1998 1998 1999
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(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Total net revenues................. $ 1,566 $ 3,391 $ 5,561 $ 3,839 $ 6,669
Total cost of revenues, related
party............................ 393 1,407 2,597 1,910 2,380
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Gross profit....................... 1,173 1,984 2,964 1,929 4,289
Total operating expenses, related
party............................ 2,252 4,663 8,652 5,679 9,911
---------- ---------- ---------- ---------- ----------
Operating loss..................... (1,079) (2,679) (5,688) (3,750) (5,622)
---------- ---------- ---------- ---------- ----------
Net loss........................... $ (1,417) $ (3,286) $ (6,880) $ (4,561) $ (7,195)
========== ========== ========== ========== ==========
Basic and diluted net loss per
share............................ $ (0.06) $ (0.13) $ (0.28) $ (0.18) $ (0.29)
========== ========== ========== ========== ==========
Weighted average shares used in
computing basic and diluted net
loss per share................... 25,000,000 25,000,000 25,000,000 25,000,000 25,000,000
SEPTEMBER 30, 1999
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ACTUAL AS ADJUSTED
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ -- $
Working capital............................................. 148
Total assets................................................ 2,262
Due to related party........................................ (21,591)
Total stockholders' equity (deficit)........................ (20,462)
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As adjusted amounts reflect the sale of shares of common stock in
this offering, assuming an initial public offering price of $ and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
4
RISK FACTORS
ANY INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CONSIDER CAREFULLY THE FOLLOWING INFORMATION ABOUT THESE RISKS, TOGETHER
WITH THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE YOU DECIDE TO
BUY OUR COMMON STOCK. IF ANY OF THE FOLLOWING EVENTS ACTUALLY OCCURS, OUR
BUSINESS AND FINANCIAL RESULTS MAY SUFFER. IN THIS CASE, THE MARKET PRICE OF OUR
COMMON STOCK COULD DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT IN
OUR COMMON STOCK.
RISKS RELATED TO OUR BUSINESS
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, IT WILL BE DIFFICULT FOR YOU TO
EVALUATE OUR BUSINESS AND PROSPECTS.
We launched a free site on the Internet at WWW.PLAYBOY.COM in 1994 and
launched the Playboy Cyber Club in 1997. We began generating revenues from the
sale of advertising on PLAYBOY.COM in 1995, and first offered an extensive array
of Playboy-branded products in 1996. In early 1999, we began operating
WWW.CYBERSPICE.COM, which provides adult-oriented content and products. As a
result, we have a limited operating history and it is difficult to evaluate our
business and our prospects.
You should also consider the risks and uncertainties we will encounter in
the new and rapidly evolving Internet, online advertising and e-commerce
markets. Some of these risks and uncertainties relate to our ability to:
- increase traffic to our Web sites;
- introduce new and enhanced Web pages, services, products and alliances;
- generate original content that our users find compelling and entertaining;
- attract and retain a large number of advertisers and sponsors from a
variety of industries;
- generate substantial e-commerce revenues from the sale of products;
- attract and retain subscribers to the Playboy Cyber Club, our pay-per-view
events and a subscription service on CYBERSPICE.COM, which we intend to
launch during 2000;
- employ and retain a growing number of qualified personnel, including
executive management;
- respond to actions taken by our competitors;
- continue to upgrade our technology;
- respond to changes in government regulation; and
- integrate acquired businesses and services.
We cannot assure you that we will be successful in addressing these risks
and uncertainties. Our failure to do so could cause our business, financial
condition and operating results to suffer.
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT TO INCUR SIGNIFICANT LOSSES FOR
THE FORESEEABLE FUTURE.
We have not achieved profitability and expect to continue to incur
significant losses and negative cash flow from operations for the foreseeable
future. We incurred net losses of approximately $6.9 million in 1998 and
$7.2 million for the nine months ended September 30, 1999. As of September 30,
1999, our accumulated net losses totaled approximately $20.7 million.
We intend to invest heavily to further develop our Web sites and technology
infrastructure, develop original content and increase our level of marketing and
promotional expenditures. In addition, we expect to incur increased expenses in
connection with licensing and other fees payable to Playboy Enterprises pursuant
to intercompany agreements to be entered into between us and Playboy
5
Enterprises prior to the closing of this offering. As a result, we will need to
achieve significant revenue increases to become profitable. In addition, even if
we become profitable, we may not sustain or increase our profits on a quarterly
or annual basis in the future. Failure to achieve or maintain profitability may
negatively affect the market price of our common stock.
OUR QUARTERLY REVENUES AND OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS
WHICH MAY CAUSE VOLATILITY OR A DECLINE IN THE PRICE OF OUR STOCK.
Our revenues, expenses and operating results have varied from period to
period and may fluctuate significantly in the future due to a variety of
factors, many of which are outside of our control. These factors include, among
others:
- the number of Internet users on, and the frequency of their use of, our
Web sites, since our advertising, e-commerce and subscription revenues are
typically related to user traffic;
- our ability to attract and retain advertisers, sponsors and e-commerce
partners;
- our ability to retain subscribers to any of our subscription services and
our pay-per-view events;
- the extent to which we experience increased competition;
- seasonal trends relating to the number of visitors to our Web sites or the
demand for our products;
- the impact of possible acquisitions both on our operations and on our
operating results; and
- the timing and effectiveness of any e-commerce arrangements or other
strategic alliances into which we enter.
Due to all the factors listed above and the other risks discussed in this
section, you should not rely on quarter-to-quarter comparisons of our revenues
and results of operations as an indication of future performance. In addition,
it is possible that in some future periods our revenues and results of
operations may be below the expectations of public market analysts and
investors. In this event, the price of our common stock is likely to fall.
WE FACE INTENSE COMPETITION FOR USERS AND SUBSCRIBERS, AND SUCH COMPETITION IS
LIKELY TO INCREASE IN THE FUTURE.
We currently face intense competition for users and subscribers from
numerous types of Web sites, including sites targeted at men, and from
publishers and distributors of traditional media. Competition could result in
less traffic to PLAYBOY.COM and CYBERSPICE.COM, price reductions for advertising
and sponsorships on our Web sites and decreased revenues from the sale of
products, subscription services and pay-per-view events. Any of these results
could harm our business, financial condition and operating results.
We compete for users and subscribers with the following:
- Web sites focused on sports, music, entertainment and leisure activities;
- Web sites containing adult-oriented content, many of which offer all or a
portion of their content on a subscription basis; and
- domestic and international publishers and distributors of traditional
media, such as television, home video, radio and print.
To a limited extent, we compete for users and subscribers with PLAYBOY magazine
and the television networks operated by Playboy Enterprises.
6
Our ability to compete for users and subscribers depends on many factors,
some of which are outside of our control. These factors include the quality and
appeal of our competitors' content, the technology utilized by our competitors,
the effectiveness of their sales and marketing efforts and the attractiveness of
their product offerings.
Our existing competitors, as well as potential new competitors, may have
significantly greater financial, technical and marketing resources than we do.
This may allow them to devote greater resources than we can to the development
and promotion of their free Web sites and/or subscription and pay-per-view
services. These competitors may also engage in more extensive technology
research and development and adopt more aggressive pricing policies for their
subscription based content. As we expand internationally, we may face additional
competition. In addition, current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to promote their Web sites and/or services or better serve the needs of their
users or subscribers. As a result, it is possible that we may have difficulty
competing for users and subscribers. Additionally, increased competition could
result in price reductions, lower margins and negatively impact our financial
results.
IF WE ARE UNABLE TO GENERATE SIGNIFICANT REVENUES FROM ADVERTISING AND
SPONSORSHIPS, OR IF WE WERE TO LOSE ONE OF OUR LARGE ADVERTISERS OR SPONSORS,
OUR BUSINESS WOULD BE HARMED.
We derive, and expect to continue to derive in the foreseeable future, a
substantial portion of our revenues from the sale of advertising and
sponsorships on PLAYBOY.COM. For example, approximately 43% of our revenues in
1998 and approximately 54% of our revenues during the nine months ended
September 30, 1999 were from advertising and sponsorships. In addition, we
depend on a limited number of companies for a significant part of our total
advertising and sponsorship revenues. Consequently, the loss of any of our large
advertisers or sponsors could cause our revenues to decline. For example, for
the nine months ended September 30, 1999, GalaxiWorld, an online gaming
provider, was our largest sponsor, accounting for approximately 12% of our total
revenues.
Our ability to generate significant advertising and sponsorship revenues and
to attract a large number of advertisers and sponsors depends upon several
factors, including, among others, the following:
- the continued development of a large, demographically attractive user base
on PLAYBOY.COM;
- our ability to maintain and increase our advertising rates given the
growing number of advertising outlets on the Internet;
- our ability to attract advertisers and sponsors from traditional media;
and
- our ability to provide effective advertising delivery and measurement
systems.
If companies perceive PLAYBOY.COM to be a limited or ineffective advertising
medium, they may be reluctant to advertise or be a sponsor on this Web site.
We compete with other Web sites, television, radio and print media for a
share of advertisers' total advertising budgets. We also compete for advertisers
with various online advertising networks and agencies. To a limited extent, we
compete with PLAYBOY magazine and the television networks operated by Playboy
Enterprises. Our existing competitors, as well as potential new competitors, may
have significantly greater financial, technical and marketing resources than we
do. These companies may be able to undertake more extensive marketing campaigns,
adopt aggressive advertising pricing policies and devote substantially more
resources to attracting advertising customers.
7
WE FACE INTENSE COMPETITION FROM INTERNET AND RETAIL BUSINESSES IN SELLING
PRODUCTS DIRECTLY TO CONSUMERS.
Since the introduction of e-commerce, the number of Web sites that sell
products directly to consumers has increased rapidly. We expect this number to
increase in the future given the relative ease with which new Web sites can be
developed. The nature of the Internet as an electronic marketplace may make it
more competitive than traditional retailing environments, and increased online
competition may result in reduced operating margins and loss of market share. We
believe that the primary competitive factors for e-commerce are brand
recognition, Web site content, ease of use, price, fulfillment speed, customer
service and support and reliability. We believe that our success will depend
heavily on our ability to provide a compelling and satisfying shopping
experience.
On our Web sites, we sell Playboy-branded and Spice-branded products, such
as videos, clothing, jewelry and collectibles. Our success depends, in part, on
our ability to offer merchandise that appeals to our customers' preferences. If
we misjudge the selection of our merchandise, our image and reputation with our
customers could be harmed. As a result, our sales growth could be harmed and our
business, financial condition and operating results could suffer.
We also sell numerous other third-party products on PLAYBOY.COM, including
books, music, computer software and electronics equipment. With respect to these
products, we compete with numerous e-commerce merchants and the Web sites of
companies that manufacture the gifts we offer. In selling products over the
Internet, we also compete with stores and companies that do not distribute their
products through the Internet. Many of our Internet and non-Internet competitors
are larger than we are, enjoy greater economies of scale than are available to
us, have substantially greater resources than we have and may be able to offer
more products or more attractive prices than we can.
OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO MAINTAIN OR ENHANCE AWARENESS OF THE
PLAYBOY AND SPICE BRANDS ONLINE OR IF WE INCUR EXCESSIVE EXPENSES ATTEMPTING TO
PROMOTE THESE BRANDS.
Although we will depend heavily on the Playboy brand developed by Playboy
Enterprises, we will need to devote significant resources following this
offering to promoting and strengthening Playboy's reputation on the Internet.
Likewise, while we will be able to rely on Playboy Enterprises' promotion of the
Spice brand, we will also need to independently develop and promote Spice's
Internet presence. In order to promote the Playboy and Spice brands online, we
may need to increase our marketing budget, hire additional marketing and public
relations personnel or otherwise increase our financial commitment to creating
and maintaining an online brand presence for Playboy and Spice. If we fail to
effectively promote and maintain the Playboy and Spice brands online, or incur
excessive expenses attempting to promote and maintain these brands, our
business, financial condition and operating results may suffer.
OUR BUSINESS MAY SUFFER IF WE HAVE DIFFICULTY ACQUIRING OR RETAINING SUBSCRIBERS
TO ANY OF OUR SUBSCRIPTION SERVICES AND OUR PAY-PER-VIEW EVENTS.
We may not succeed in attracting a significant subscriber base for the
Playboy Cyber Club, the subscription service on CYBERSPICE.COM, which we intend
to launch during 2000, and the various pay-per-view events that we intend to
offer. The Playboy Cyber Club, which contains a substantial amount of adult
targeted content including photographs of Playboy Playmates and video clips, is
currently offered to subscribers on a monthly, quarterly or annual basis. We
also intend to offer an increasing number of pay-per-view events, including
lingerie fashion shows and holiday parties at the Playboy Mansion in Holmby
Hills, California. We believe that there is intense competition on the Internet
for providing adult targeted materials and that this competition has caused, and
may continue to cause, some of our subscribers to switch to other services. In
addition, some individuals may decide to use our pay sites, or view one of our
pay-per-view events, out of curiosity and may later discontinue
8
such subscription, or decide not to view other pay-per-view events. Also, we
presently offer a substantial amount of content on our free Web site and this
may reduce our ability to acquire or retain subscribers to our subscription
sites and our pay-per-view events. If we are unable to acquire or retain
subscribers to the Playboy Cyber Club, the service we intend to launch on
CYBERSPICE.COM and our pay-per-view sites, our business, financial condition and
operating results may suffer.
WE DEPEND ON THIRD PARTIES FOR SOME OF THE CONTENT AND FEATURES ON PLAYBOY.COM,
AND OUR BUSINESS COULD SUFFER IF ANY OF THESE RELATIONSHIPS ARE TERMINATED OR IF
WE ARE UNABLE TO ENTER INTO ADDITIONAL RELATIONSHIPS.
We have entered into various agreements with third parties, such as
GalaxiWorld, Telescan and Hecklers, to provide original content and features
which can be displayed to visitors of PLAYBOY.COM. Our ability to continue to
offer compelling content on PLAYBOY.COM will depend, in part, on these
agreements with third parties, and we expect to continue to enter into such
agreements in the future. If any of these relationships are terminated, we
cannot assure you that we will be able to replace the terminated relationship
with an equally beneficial relationship, if at all. We also cannot assure you
that we will be able to renew any of our current agreements when they expire,
or, if we are, that we will be able to do so on acceptable terms. We also do not
know whether we will be successful in entering into additional relationships, or
that any additional relationships, if entered into, will be on terms favorable
to us. In addition, the success of these relationships may also be dependent on
factors which are beyond our control, such as the quality of the content or
services provided by third parties.
SOME OF OUR MANAGEMENT PERSONNEL WILL BE HIRED IN THE NEAR FUTURE, AND WE WILL
DEPEND ON THEM FOR OUR FUTURE SUCCESS.
Our success will depend in large part on the contributions of our senior
management team. Some members of our management team, including our chief
executive officer, chief financial officer and head of sales, will be hired in
the near future. Accordingly, we cannot assure you that our management team will
be able to work effectively or successfully to manage our operations. In
addition, the loss of the services of any of our management personnel,
particularly our chief executive officer, could harm our business, financial
condition and operating results. We do not carry key person life insurance on
any of our personnel.
WE COULD FACE ADDITIONAL RISKS AND CHALLENGES AS WE EXPAND INTERNATIONALLY AND
MAY FACE UNEXPECTED COSTS IN DEVELOPING INTERNATIONAL REVENUES.
We plan to focus on increasing the localized content and products we provide
to our international audiences. As part of this strategy, we intend to enter
into joint venture and licensing arrangements. Expansion into new geographical
territories will require considerable management and financial resources and may
harm our business, financial condition and operating results. Expanding
internationally could subject us to numerous challenges and risks, including,
but not limited to, the following:
- the availability of attractive joint venture and licensing partners;
- political and economic conditions in various jurisdictions;
- fluctuations in currency exchange rates;
- the potential need for opening and managing distribution centers abroad;
and
- difficulties in protecting intellectual property rights in foreign
countries.
We cannot assure you that one or more of these factors would not harm any
current or future international operations and our business as a whole.
9
WE MAY NOT EFFECTIVELY MANAGE OUR GROWTH, AND THIS COULD HARM OUR BUSINESS.
Our historical growth has placed, and any further growth is likely to place,
a significant strain on our resources. We expect that the number of our
employees, including management-level employees, content developers and sales
representatives, will continue to increase for the foreseeable future. As we
grow, we may need to implement new operational and financial systems and
managerial controls and procedures. In addition, we will need to continually
train and manage our growing workforce. If we do not manage our growth
effectively, our business, financial condition and operating results will be
harmed.
THERE IS INTENSE COMPETITION FOR HIRING PERSONNEL IN THE INTERNET INDUSTRY, AND
WE MAY NOT BE ABLE TO HIRE AND RETAIN QUALIFIED EMPLOYEES.
Our business, financial condition and operating results depend in part on
our ability to attract, retain and motivate highly skilled employees.
Competition for employees in the Internet industry is intense, and many other
Internet companies have substantially greater financial resources than we do to
attract and retain qualified personnel from this limited pool of attractive
candidates. We have from time to time in the past experienced, and we expect to
continue to experience in the future, difficulty in hiring and retaining highly
skilled employees with appropriate qualifications. In addition, some people that
we may attempt to hire could be subject to non-competition agreements which
could impede our recruitment efforts. As a result, we cannot be sure that we
will be able to hire and retain the appropriate personnel in the future.
IF WE FAIL TO EFFICIENTLY MANAGE OUR PRODUCT SALES, OUR BUSINESS, FINANCIAL
CONDITION AND OPERATING RESULTS COULD BE HARMED.
Our business depends in part on our continued ability to sell a variety of
products on our Web sites, including Playboy-branded and Spice-branded
merchandise. We currently fulfill, and provide customer service for, the
Playboy-branded and Spice-branded merchandise, as well as other products offered
on CYBERSPICE.COM, pursuant to an agreement with Playboy Enterprises. Playboy
Enterprises has recently announced that it is exploring strategic alternatives
for its facility in Itasca, Illinois, which currently provides us with various
product fulfillment and customer service functions. If this facility is sold,
and we are unable to provide for product fulfillment and customer service
through a third party, our business would be harmed. With respect to the sale of
other products, we depend on the willingness of other companies to allow us to
offer their products on our Web sites, as well as on the quality and
availability of these products. In addition, we depend upon a number of third
parties, including mail and shipping companies, to deliver goods purchased on
our Web sites. Strikes or other service interruptions affecting these vendors
could hinder our ability to deliver merchandise on a timely basis.
WE MAY NOT BE ABLE TO SUCCESSFULLY MAKE AND INTEGRATE ACQUISITIONS OF OTHER
BUSINESSES, PRODUCTS OR TECHNOLOGIES.
We may acquire new and complementary businesses, products or technologies
instead of developing them ourselves. We cannot assure you that we will be able
to complete future acquisitions successfully. Some of the risks attendant to
these acquisitions include the following:
- the difficulties of integrating the operations, content and personnel of
acquired companies into our operations;
- the additional financial resources that may be needed to fund the
operations of acquired companies;
- the potential disruption of our ongoing business;
10
- the potential loss of key employees of acquired companies;
- the difficulty of maintaining uniform standards, controls, procedures and
policies;
- expenses associated with the transactions;
- the impairment of relationships with employees and vendors as a result of
changes in management; and
- the potential unknown liabilities associated with acquired businesses.
Any of the above risks could prevent us from realizing significant benefits
from our acquisitions. In addition, the issuance of our common stock in
acquisitions will dilute our stockholder interests, while the use of cash or
debt will deplete or harm our cash reserves. In addition, we may incur
significant one-time write-offs and, if we are unable to account for our
acquisitions under the "pooling of interests" method of accounting, amortization
charges. These write-offs and charges could decrease our future earnings, if
any, or increase our future losses.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY, AND WE MAY BE LIABLE
FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
We cannot be certain that the steps we have taken to protect our
intellectual property rights will be adequate or that third parties will not
infringe or misappropriate our proprietary rights. In addition, we may need to
rely on Playboy Enterprises to take appropriate steps to protect our
intellectual property rights, and we cannot be sure that it will take all
necessary steps or take action in a timely manner. Effective trademark,
copyright and trade secret protection may not be available in every country in
which we operate to the extent available in the United States.
To protect our intellectual property, we rely on a combination of trademark
and copyright law, trade secret protections and confidentiality agreements and
other contractual arrangements with our employees and third parties. Pursuant to
an agreement with Playboy Enterprises, we have online rights to Playboy and
Spice content, a variety of trademarks, including the Playboy and Spice names
and the Rabbit Head Design, and numerous domain names. If this agreement were
terminated and, as a result, we lost the benefits of using the content,
trademarks, logos and domain names, our business would be harmed. We also may be
unable to detect the unauthorized use of our intellectual property or take
appropriate steps to enforce our intellectual property rights. Defending our
intellectual property rights could also result in the expenditure of significant
financial and managerial resources, which could harm our business, financial
condition and operating results.
We may license in the future some of our proprietary rights, such as
trademarked or copyrighted material, to third parties. Some of our licensees may
take or omit to take actions that would harm the value of our proprietary rights
or reputation, and this could negatively affect our business, financial
condition and operating results.
Other parties may assert claims against us that we have misappropriated a
trade secret or infringed a patent, copyright, trademark or other proprietary
right belonging to them. For example, we cannot be sure that we have the online
rights to all editorial and pictorial content that was developed many years ago
and is contained in the Playboy archives. Any infringement or related claims,
even if not meritorious, may be costly and time consuming to litigate, may
distract management from other tasks of operating the business and may result in
the loss of significant rights and the loss of our ability to operate our
business.
11
WE MAY BE LIABLE FOR THE CONTENT WE MAKE AVAILABLE ON THE INTERNET.
Because of the content on our Web sites, including adult-oriented material,
we may be subject to claims for defamation, obscenity, negligence, copyright or
trademark infringement or other legal claims. We could also be subjected to
claims based upon the content that is accessible from our Web sites through
links to other sites or through content and materials that may be posted in chat
rooms. It is possible that our business, financial condition and operating
results could be harmed if we were found liable for information that we make
available. Implementing measures to reduce our exposure to this liability may
require us to spend substantial resources or take steps that would limit the
attractiveness of our Web sites. Furthermore, our insurance may not adequately
protect us against all of these types of claims.
WORKPLACE AND OTHER RESTRICTIONS ON ACCESS TO THE INTERNET MAY LIMIT USER
TRAFFIC ON OUR WEB SITES.
Many offices, businesses and educational institutions restrict employee and
student access to the Internet. Since our revenues are dependent on user traffic
on our sites, an increase in these types of restrictions, or other similar
policies, could harm our business, financial condition and operating results. In
addition, access to our Web sites outside the United States may be restricted by
governmental authorities or Internet service providers. If these restrictions
become more prevalent, our growth could be hindered. Please see "Increased
government regulation in the United States and abroad could impede our ability
to deliver our content and expand our business."
WE MAY BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS BECAUSE OF PRODUCTS THAT WE
SELL.
Consumers may sue us if any of the products that we sell are defective, fail
to perform properly or injure the user. Although our agreements with
manufacturers typically contain provisions intended to limit our exposure to
liability claims, these limitations may not prevent all potential claims.
Liability claims could require us to spend significant time and money in
litigation and to pay damages if we fail to prevail.
DISRUPTION OF OUR INTERNET SERVICES DUE TO SECURITY BREACHES AND SYSTEM FAILURES
COULD RESULT IN FEWER VISITORS TO OUR WEB SITES AND SUBSCRIBER CANCELLATIONS.
The continuing and uninterrupted performance of our computer systems is
critical to our success. Our advertisers and sponsors, visitors and subscribers
may become dissatisfied by any systems disruption or failure that interrupts our
ability to provide our content, services and products. Substantial or repeated
system disruptions or failures could reduce the attractiveness of our Web sites
significantly. Our computer systems are vulnerable to fire, floods, earthquakes,
power loss, telecommunications failures and other similar events. In addition,
we may have to interrupt, delay or cease access to our Web sites to alleviate
problems caused by computer viruses, security breaches or other failures of
network security. Any network malfunction or security breach could also hinder
or prevent commercial transactions. Our customers or e-commerce partners may
assert liability claims against us as a result of this type of failure.
Our Web sites must accommodate a high volume of traffic and deliver
frequently updated information. Our sites have, on occasion, experienced slower
response times and network failures. These types of occurrences in the future
could cause users to perceive our Web sites as not functioning properly and
therefore cause them to use another online site for entertainment, information
or products. In addition, our users depend on Internet service providers, online
service providers and other site operators for access to our Web sites. Many of
them have experienced significant outages in the past, and could experience
outages, delays and other difficulties due to system disruptions or failures
unrelated to our systems.
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We currently rely primarily on Frontier Global Center for the hosting of our
Web sites. We recently entered into an additional Internet hosting agreement
with Level 3 Communications. If we experience disruptions in the Internet access
provided by Frontier Global Center or Level 3 Communications, our business,
financial condition and operating results could be harmed. We are also dependent
on various other third parties for software, systems and related services in
connection with our hosting software, data transmission and security systems.
Several of the third parties that provide software or services to us have a
limited operating history and have relatively new technology. These third
parties are also dependent on reliable delivery of services from others. To
date, we have not experienced significant problems with the services that these
third parties provide to us. If our current providers were to experience
prolonged systems failures or delays, we would need to pursue alternative
sources of services. Although alternative sources of these services are
currently available, we may be unable to secure such services on a timely basis
or on terms favorable to us.
Our insurance policies may not adequately compensate us for any losses that
may occur due to any failures in our or our service providers' systems or
interruptions in our Internet services.
OUR BUSINESS COULD BE DISRUPTED IF ANY OF THE COMPUTER SYSTEMS OR SOFTWARE WE
RELY ON EXPERIENCE YEAR 2000 PROBLEMS.
Although we have not experienced any Year 2000 problems, it is possible
that, even after January 1, 2000, Year 2000-related issues may cause problems or
disruptions. While we believe that all of our systems are Year 2000 compliant,
we cannot assure you that we will not discover a problem during 2000 that needs
to be upgraded, modified or replaced. In addition, we depend on a number of
third-party vendors to provide both information and non-information technology
systems and services. While we believe that our material third-party systems and
services are Year 2000 compliant, we cannot be sure that we will not experience
any problems during 2000. We also cannot provide any assurance that governmental
agencies, utility companies, Internet access companies and others outside of our
control will not experience any future Year 2000 problems.
RISKS RELATED TO OUR RELATIONSHIP WITH PLAYBOY ENTERPRISES
WE WILL CONTINUE TO BE CONTROLLED BY PLAYBOY ENTERPRISES, WHOSE INTERESTS MAY
DIFFER FROM OTHER STOCKHOLDERS.
Upon completion of this offering, Playboy Enterprises will own approximately
% of our common stock, or % if the underwriters' over-allotment option
is exercised in full. Accordingly, Playboy Enterprises will be able to control
matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other business combination
transactions. This concentration of ownership could have the effect of delaying
or preventing a change in our control or discouraging a potential acquiror from
attempting to obtain control of us, which could cause the market price of our
stock to fall or prevent you from receiving a premium in such a transaction.
OUR RELATIONSHIP WITH PLAYBOY ENTERPRISES, INCLUDING MUTUAL OFFICERS AND
DIRECTORS, MAY PRESENT POTENTIAL CONFLICTS OF INTEREST AND MAY CAUSE US TO TAKE
ACTIONS THAT DISPROPORTIONATELY BENEFIT PLAYBOY ENTERPRISES.
After this offering, three members of our board of directors will also serve
as officers or directors of Playboy Enterprises. Christie Hefner, our acting
chief executive officer and the chairman of our board of directors, also serves
as the chief executive officer of Playboy Enterprises and the chairman of its
board of directors. In addition, Linda Havard, our acting chief financial
officer and one of our directors, currently serves as chief financial officer of
Playboy Enterprises, and Donald Drapkin, one of our directors, also serves as a
member of the board of directors of Playboy Enterprises. Service as a director
or officer of both us and Playboy Enterprises would create conflicts of interest
if such directors
13
or officers are faced with decisions that could have materially different
implications for us and for Playboy Enterprises. These conflicts may arise in a
number of areas, including:
- tax matters;
- financial commitments;
- the election of new or additional directors;
- licensing and service arrangements;
- payment of dividends;
- incurrence of indebtedness;
- potential acquisitions;
- marketing activities;
- potential competitive business activities;
- issuances of our capital stock;
- sales or distributions by Playboy Enterprises of its remaining shares of
our common stock; and
- the exercise by Playboy Enterprises of control over our management and
affairs.
If and when such a conflict arises, we believe our directors and officers
intend to take all actions necessary to comply with their fiduciary duties to
our stockholders, including, where appropriate, abstaining from voting on
matters that present a conflict of interest. However, these conflicts of
interest, or the perception among investors that conflicts of interest could
arise, could harm our business and cause our stock price to fall.
WE HAVE NO HISTORY AS AN INDEPENDENT COMPANY AND, FOLLOWING THIS OFFERING, WE
WILL CONTINUE TO RELY ON PLAYBOY ENTERPRISES TO PROVIDE US WITH VARIOUS GOODS
AND SERVICES.
We have always operated as a wholly-owned subsidiary or unit of Playboy
Enterprises. As a result, we do not have an operating history as an independent
company. The historical financial statements contained in this prospectus
include allocations for administrative and other expenses incurred by Playboy
Enterprises for services rendered to us. While we believe such allocations to be
reasonable, they are not necessarily indicative of our expenses had we been
operating as an independent company.
Prior to the closing of this offering, we will enter into a series of
intercompany agreements with Playboy Enterprises. These agreements will be key
to the success of our business. If any of these intercompany agreements are
terminated or not renewed upon expiration, or if Playboy Enterprises fails to
perform its obligations under any of these agreements, our business, financial
condition and operating results would be harmed.
WE WILL DEPEND ON PLAYBOY ENTERPRISES AS A LICENSOR OF CONTENT AND
INTELLECTUAL PROPERTY. Pursuant to an agreement to be entered into between us
and Playboy Enterprises, we license a variety of trademarks, domain names and
content from Playboy Enterprises for Internet use. If this agreement were to be
terminated or not renewed, we would need to change much of the focus of our
business, including the domain names of most of our Web sites, and devote
substantial resources toward developing new content and building new brand
names.
WE WILL DEPEND ON PLAYBOY ENTERPRISES FOR A VARIETY OF SERVICES. Pursuant
to intercompany agreements to be entered into between us and Playboy
Enterprises, Playboy Enterprises will provide us with merchandising, technical,
marketing, cash management, human resources, tax and accounting, administrative,
investor relations, legal, facilities, security and other services. If these
agreements were
14
terminated or not renewed or if Playboy Enterprises fails to provide these
services satisfactorily, we would be required to perform these services
internally or obtain these services from another provider. In such case, we may
incur substantial costs in order to obtain these services and we may be unable
to obtain these services on favorable terms, if at all. If we decide to perform
any of these functions internally, we may not be able to perform them
adequately.
WE WILL DEPEND ON PLAYBOY ENTERPRISES FOR ADVERTISING AND PROMOTIONAL
SERVICES. Pursuant to an agreement to be entered into between us and Playboy
Enterprises, Playboy Enterprises has agreed to provide us with advertising in
PLAYBOY magazine and its other media properties. Our success will depend, in
part, on our ability to promote our Web sites and products to the subscribers of
Playboy Enterprises' media properties, including PLAYBOY magazine and Playboy
TV. If we are unable to advertise our Internet products and services through
Playboy Enterprises' print and media properties, the growth of our company may
be hindered.
Please see "Transactions With Playboy Enterprises" for specific details
relating to the intercompany agreements between us and Playboy Enterprises.
WE MAY BECOME LIABLE FOR THE TAX OBLIGATIONS OF PLAYBOY ENTERPRISES, AND THIS
COULD HARM OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS.
So long as Playboy Enterprises continues to own 80% or more of the voting
power and economic value of our capital stock, we will be included in its
consolidated group for federal income tax purposes. If Playboy Enterprises or
other members of its consolidated group fails to make any federal income tax
payments required by law, we would be liable for the shortfall. Similar
principles apply for state income tax purposes in many states.
Under the tax allocation agreement to be entered into between us and Playboy
Enterprises, for so long as we are included in Playboy Enterprises' consolidated
group, we will pay our proportionate share of Playboy Enterprises' income tax
liability computed as if we were a separate taxpayer. Under the tax allocation
agreement, for so long as we are included in Playboy Enterprises' consolidated
group, it will have sole authority to respond to and conduct all tax
proceedings, including tax audits, relating to us, to file all income tax
returns on our behalf and to determine the amount of our liability to, or
entitlement to payment from, Playboy Enterprises. Notwithstanding the tax
allocation agreement, federal law provides that each member of a consolidated
group is liable for the group's entire tax obligation. Although the tax
allocation agreement provides that Playboy Enterprises will indemnify us for
various tax obligations resulting from our relationship with it, we cannot
assure you Playboy Enterprises will be able to fulfill its obligations under
such agreement.
Please see "Transactions With Playboy Enterprises" for more information
relating to the tax allocation agreement.
RISKS RELATED TO THE INTERNET INDUSTRY
IF USE OF THE INTERNET DOES NOT CONTINUE TO GROW, OUR BUSINESS WILL BE HARMED.
Our business would be harmed if Internet usage does not continue to grow.
Internet usage may be inhibited for any of the following reasons:
- inadequate Internet infrastructure;
- security and privacy concerns;
- the lack of compelling content; and
- the unavailability of cost-effective, high-speed service.
15
OUR BUSINESS MAY BE HARMED IF THE MARKET FOR INTERNET ADVERTISING DOES NOT
CONTINUE TO GROW.
We are dependent on the use of the Internet as an advertising medium.
Internet-based advertising still accounts for only a small fraction of all
advertising expenditures, and we cannot be sure that Internet-based advertising
will ever grow to account for a substantial percentage of total advertising
spending or when an increase might occur. Our business may suffer if the market
for Internet-based advertising does not continue to develop or develops more
slowly than expected.
Different pricing models are used to sell Internet-based advertising. Our
revenues could suffer if we are unable to adapt to new forms of, and new pricing
models for, Internet-based advertising. It is difficult to predict which, if
any, forms of Internet-based advertising will emerge as the industry standard.
This makes it difficult to predict our future advertising rates and revenues. In
addition, "filter" software programs that limit or prevent advertising from
being delivered to an Internet user's computer are available. Widespread
adoption of this type of software could harm the commercial viability of
Internet-based advertising and, as a result, harm our business, financial
condition and operating results.
COMPANIES MAY NOT ADVERTISE ON PLAYBOY.COM, OR MAY PAY LESS FOR ADVERTISING ON
PLAYBOY.COM, IF THEY CANNOT RELIABLY MEASURE THE DEMOGRAPHICS OF OUR USER BASE
AND THE DELIVERY OF ADVERTISEMENTS.
In order to measure the demographics of our user base and the delivery of
advertisements on PLAYBOY.COM, we use both internal and third party
measurements. If these third parties are unable to continue to provide these
services, we would have to perform them ourselves or obtain them from another
provider. This could cause us to incur additional costs or cause interruptions
in our business while we are replacing these services. If we do not successfully
implement our internal measurement systems or the measurement systems of third
parties, we may not be able to accurately evaluate the demographic
characteristics of our users.
WE DEPEND ON CONTINUED GROWTH OF E-COMMERCE.
The continued development and acceptance of e-commerce is uncertain. The
failure of the Internet to become a viable commercial marketplace would harm our
sales growth and our business, financial condition and operating results. A
number of factors could prevent such continued development and acceptance,
including the following:
- the unwillingness of companies and consumers to shift their purchasing
from traditional vendors to online vendors;
- concerns about transaction security;
- increased government regulation; and
- problems relating to the development of the necessary technological
infrastructure.
INCREASED GOVERNMENT REGULATION IN THE UNITED STATES AND ABROAD COULD IMPEDE OUR
ABILITY TO DELIVER OUR CONTENT AND EXPAND OUR BUSINESS.
There are an increasing number of laws and regulations in the United States
and abroad pertaining to communications and commerce on the Internet. In
addition, a number of legislative and regulatory proposals are under
consideration by federal, state, local and foreign governments. Laws or
regulations may be adopted with respect to the Internet relating to liability
for information retrieved from or transmitted over the Internet, user privacy,
taxation and the quality of products and services. Moreover, the application to
the Internet of existing laws governing issues such as intellectual property
ownership and infringement, pornography, obscenity, libel, gaming, employment
and personal privacy is uncertain and developing. Any such legislation or
regulation, or the application or interpretation of
16
existing laws, may decrease the growth in the use of the Internet in general,
prevent us from delivering our content in different parts of the world and
increase our costs of selling products or otherwise operating our business.
ONLINE CONTENT REGULATIONS. Several federal, state and foreign statutes
prohibit the transmission of pornographic, indecent, obscene or offensive
content over the Internet to particular groups or persons, and some private
legal actions have been brought or threatened against libraries and various
public facilities that offer unfiltered Internet access. If these statutes are
deemed to apply to us and our activities, if new laws or regulations are adopted
which are found to apply to our activities, or if caselaw establishes broad
limitations on distribution, we may be limited in the types of content and
advertisements we make available on our Web sites. In addition, some foreign
countries, such as Singapore and China, entirely restrict access to our Web
sites throughout their countries. If other countries decide to adopt similar
policies, our business, financial condition and operating results may be harmed.
Pending legislation in the United States seeks to ban Internet gaming and
federal and state officials have taken action against businesses that operate
Internet gaming activities. Other countries may also decide to adopt laws or
regulations that ban or curtail Internet gaming. As a result, our ability to
provide gaming services over the Internet may be limited or prohibited in
various jurisdictions. Furthermore, legislation regulating online content could
limit the growth in the use of the Internet generally and decrease the
acceptance of the Internet as an advertising and e-commerce medium.
PRIVACY CONCERNS. Web sites typically place identifying data, or cookies,
on a user's hard drive without the user's knowledge or consent. We and many
other Internet companies use cookies for a variety of different reasons,
including the collection of data derived from the user's Internet activity. Any
reduction or limitation in the use of cookies could limit the effectiveness of
our sales and marketing efforts. Most currently available Web browsers allow
users to remove cookies at any time or to prevent cookies from being stored on
their hard drive. Some privacy advocates and governmental bodies have suggested
limiting or eliminating the use of cookies. In addition, the European Union and
many countries within the EU have adopted privacy directives or laws that
strictly regulate the collection and use of information regarding Internet users
that is identifiable to particular individuals. Privacy legislation has been
proposed in the U.S. as well, and the U.S. Federal Trade Commission has taken
action against Web site operators that do not comply with state privacy
policies. These and other governmental efforts may limit our ability to target
advertising or collect and use information regarding the use of our Web sites.
Fears relating to a lack of privacy could also result in a reduction in the
number of our users and subscribers, which could harm our business, financial
condition and operating results.
INTERNET TAXATION. A number of legislative proposals have been made at the
federal, state and local levels, and by various foreign governments, that would
impose additional taxes on the sale of goods and services over the Internet, and
some states have taken measures to tax Internet-related activities. Although
Congress placed a three-year moratorium in 1998 on new state and local taxes on
Internet access or e-commerce, existing state and local laws were expressly
excluded from this moratorium. It is possible this moratorium may not be
renewed. As a result, some federal and/or state taxes may be imposed on
e-commerce. Legislation in this area, or other attempts at regulating commerce
over the Internet both in the United States and abroad, may impede the growth of
our product sales and harm our business.
DOMAIN NAMES. The acquisition and maintenance of domain names, or Internet
addresses, generally are regulated by governmental agencies and their designees.
Pursuant to an agreement with Playboy Enterprises, we have the right to use
various .com Web domain names that are important to the operation of our
business. We cannot assure you that third parties will not be able to acquire
domain names that are similar to, infringe upon or otherwise decrease the value
of our proprietary
17
rights. In addition, changes in the system for registering domain names may
result in the loss of or change in our domain names and a reduction in brand
awareness among our users.
WE MUST BE ABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGES IN OUR INDUSTRY OR
WE WILL NOT BE COMPETITIVE.
Our failure to respond in a timely and effective manner to new and evolving
technologies, including broadband and video technology, could harm our business,
financial condition and operating results. The Internet industry is
characterized by rapidly changing technology, evolving industry standards,
changes in consumer needs and frequent new service and product introductions.
Our business, financial condition and operating results will depend, in part, on
our ability to develop the technical expertise to address these rapid changes
and to use leading technologies effectively. We may experience difficulties that
could delay or prevent the successful development, introduction or
implementation of new features or services. We could also incur substantial
costs if we need to modify our Web sites or our infrastructure to adapt to
technological changes.
RISKS RELATED TO THIS OFFERING
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. After the closing of this offering, there will be approximately
shares of common stock outstanding. The shares of common stock sold
in this offering will be freely tradeable, except for any shares purchased by
our "affiliates," as defined in Rule 144 under the Securities Act of 1933. The
remaining shares will be held by Playboy Enterprises, and these shares
will be "restricted securities" under Rule 144 and will become eligible for sale
subject to the limitations of Rule 144 and the expiration of a lock-up agreement
with the underwriters.
THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK, AND OUR COMMON STOCK MAY
EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS.
The stock market has experienced extreme price and volume fluctuations. The
market prices of the securities of Internet-related companies have been
especially volatile. Prior to this offering, there has been no public market for
our capital stock. We cannot predict the extent to which investor interest in
Playboy.com will lead to the development of an active trading market or how
liquid that market might become. The market price of our common stock may
decline below the initial public offering price. In the past, companies that
have experienced volatility in the market price of their stock have been the
object of securities class action litigation. If we were the object of
securities class action litigation, it could result in substantial costs and a
diversion of our management's attention and resources.
WE WILL HAVE BROAD DISCRETION AS TO THE USE OF THE PROCEEDS OF THIS OFFERING,
WHICH WE MAY NOT USE EFFECTIVELY.
We intend to use the net proceeds of this offering to develop, enhance and
expand our Web sites, to pursue e-commerce opportunities, to increase our sales
and marketing activities, to explore potential acquisitions and for other
purposes. Our management will have broad discretion over the allocation of the
net proceeds from this offering as well as over the timing of our expenditures.
You may not agree with the way our management decides to spend these proceeds.
WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS, AND WE MAY NOT BE ABLE TO SECURE
ADDITIONAL FINANCING.
We may need to raise additional funds in the future to fund our operations,
to expand or enhance the range of products and services we offer or to respond
to competitive pressures and perceived
18
opportunities. We cannot be sure that additional financing will be available on
terms favorable to us, or at all. If adequate funds are not available when
required or on acceptable terms, we may be forced to scale back or cease our
operations, and even if we are able to continue our operations, our business and
financial results may suffer.
WE HAVE ANTI-TAKEOVER PROVISIONS WHICH MAY MAKE IT DIFFICULT FOR A THIRD PARTY
TO ACQUIRE US.
Provisions of our certificate of incorporation, our bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
might be beneficial to our stockholders. This could prevent you from receiving a
premium for your shares during an acquisition.
INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
Investors purchasing shares in this offering will suffer immediate and
substantial dilution in net tangible book value per share. To the extent that
options to purchase shares of common stock are exercised in the future, there
will be further dilution.
WE DO NOT PLAN TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE, AND, AS A RESULT,
STOCKHOLDERS WILL NEED TO SELL SHARES TO REALIZE A RETURN ON THEIR INVESTMENT.
We have not declared or paid any cash dividends on our capital stock since
inception. We intend to retain any future earnings to finance the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. As a result, stockholders will need to sell shares of common
stock in order to realize a return on their investment, if any.
19
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements relate
to future events or our future business or financial performance. In some cases,
you can identify forward-looking statements by terminology--for instance, may,
will, should, expect, plan, anticipate, believe, estimate, predict, potential or
continue, the negative of these terms, or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
In evaluating these statements, you should specifically consider various
factors, including the risks outlined in the risk factors section. These factors
may cause our actual results to differ materially from any forward-looking
statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assume responsibility for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform these statements to actual results
or to changes in our expectations.
20
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of the shares of
common stock in this offering of $ million, assuming an initial public
offering price of $ per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses. If the underwriters
exercise their over-allotment option in full, we estimate that our net proceeds
will be $ million.
The principal purposes of this offering are to obtain additional capital, to
create a public market for our common stock and to facilitate future access to
public equity markets. As of the date of this prospectus, we have no specific
plans to use the net proceeds from this offering other than as set forth below.
We intend to use the net proceeds of this offering to develop, enhance and
expand our Web sites, including the creation of original content, to pursue
e-commerce opportunities, to increase our sales and marketing activities, to
explore potential acquisitions and for other purposes. We have not determined
the amount of net proceeds to be used specifically for each of the foregoing
purposes. Pending any such uses, we intend to invest the net proceeds in
interest bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently anticipate that we will retain any future earnings for the development
and operation of our business. Accordingly, we do not anticipate declaring or
paying any cash dividends in the foreseeable future.
21
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999
on an actual basis and on an as adjusted basis to reflect the sale of
shares of common stock by us in this offering at an assumed initial public
offering price of $ per share, after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us. Please
see "Use of Proceeds."
The following table should be read in conjunction with our financial
statements and the notes to those statements included in this prospectus.
AS OF
SEPTEMBER 30, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS,
EXCEPT SHARE AND
PER SHARE DATA)
Cash and cash equivalents................................... $ -- $
Due to related party........................................ 21,591
Stockholders' equity:
Preferred stock $0.01 par value; authorized 5,000,000
shares; no shares issued and outstanding actual and as
adjusted................................................ --
Common stock, $0.01 par value; authorized 100,000,000
shares; 25,000,000 shares issued and outstanding actual
and shares outstanding as adjusted.................. 250
Additional paid-in capital................................ --
Accumulated deficit....................................... (20,712)
-------- --------
Total stockholders' equity (deficit)........................ (20,462)
-------- --------
Total capitalization.................................... $ 1,129 $
======== ========
As of September 30, 1999, no options to purchase shares of common stock were
outstanding.
22
DILUTION
Our net tangible book value as of September 30, 1999 was approximately
$ million, or $ per share of common stock. Pro forma net tangible
book value per share is determined by dividing the amount of our total tangible
assets less total liabilities by the pro forma number of shares of common stock
outstanding at that date. Dilution in net tangible book value per share
represents the difference between the assumed initial public offering price and
the net tangible book value per share of common stock immediately after the
completion of this offering.
After giving effect to the issuance and sale of the shares of common
stock offered by us at an assumed initial public offering price of $ per
share and after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us, and the application of the estimated
net proceeds from this offering, our pro forma net tangible book value as of
September 30, 1999 would have been $ million or $ per share. This
represents an immediate increase in pro forma net tangible book value to our
existing stockholder of $ per share and an immediate dilution to purchasers
in this offering of $ per share.
The following table illustrates this per share dilution:
Assumed initial public offering price per share............. $
Net tangible book value per share at September 30, 1999... $
Increase per share attributable to new investors..........
-------
Pro forma net tangible book value per share after this
offering..................................................
-------
Dilution per share to new investors......................... $
=======
The following table summarizes, on a pro forma basis, as of September 30,
1999, the differences between the number of shares of common stock purchased
from us, the aggregate cash consideration paid to us and the average price per
share paid by the existing stockholder and new investors purchasing shares of
common stock in this offering. The calculation below is based on an assumed
initial public offering price of $ per share, before deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us:
TOTAL
SHARES PURCHASED CONSIDERATION
------------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- -------- -------- -------- -------------
Existing stockholder............................ % $ % $
New investors...................................
------ ----- ------ ------
Total......................................... 100.0% $ 100.0%
====== ===== ====== ======
As of September 30, 1999, no options to purchase common stock were
outstanding.
23
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements and the notes to such statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus. The statement of operations data for the
years ended December 31, 1997 and 1998 and the nine months ended September 30,
1999, and the balance sheet data at December 31, 1998 and at September 30, 1999,
are derived from our financial statements, which have been audited by
PricewaterhouseCoopers LLP, independent accountants, and are included elsewhere
in this prospectus. The statement of operations data for the years ended
December 31, 1995 and 1996 and nine months ended September 30, 1998, and the
balance sheet data at December 31, 1995, 1996 and 1997 have been derived from
our unaudited financial statements not included in this prospectus. The
unaudited financial statements include all normal recurring adjustments that we
consider necessary for a fair presentation of our financial position and
operating results. Operating results for the nine months ended September 30,
1999 are not necessarily indicative of the results that may be expected for the
entire year or for any future period.
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------- -----------------------
1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenues:
Advertising and
sponsorships.............. $ 171 $ 1,178 $ 1,857 $ 2,371 $ 1,600 $ 3,580
E-commerce.................. 2 388 1,044 1,298 862 1,316
Subscriptions............... -- -- 490 1,892 1,377 1,773
---------- ---------- ---------- ---------- ---------- ----------
Total net revenues........ 173 1,566 3,391 5,561 3,839 6,669
Total cost of revenues,
related party............... 71 393 1,407 2,597 1,910 2,380
---------- ---------- ---------- ---------- ---------- ----------
Gross profit.................. 102 1,173 1,984 2,964 1,929 4,289
Operating expenses, related
party:
Sales and marketing......... 24 219 497 1,853 1,118 2,823
Content and product
development............... 1,010 1,009 1,797 3,939 2,500 5,149
General and
administrative............ 440 1,024 2,369 2,860 2,061 1,939
---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses................ 1,474 2,252 4,663 8,652 5,679 9,911
---------- ---------- ---------- ---------- ---------- ----------
Operating loss................ (1,372) (1,079) (2,679) (5,688) (3,750) (5,622)
Interest expense, related
party....................... 242 338 607 1,192 811 1,573
---------- ---------- ---------- ---------- ---------- ----------
Net loss...................... $ (1,614) $ (1,417) $ (3,286) $ (6,880) $ (4,561) $ (7,195)
========== ========== ========== ========== ========== ==========
Basic and diluted net loss per
share....................... $ (0.06) $ (0.06) $ (0.13) $ (0.28) $ (0.18) $ (0.29)
========== ========== ========== ========== ========== ==========
Weighted average shares used
in computing basic and
diluted net loss per
share....................... 25,000,000 25,000,000 25,000,000 25,000,000 25,000,000 25,000,000
========== ========== ========== ========== ========== ==========
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------- -------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- -------------
(IN THOUSANDS)
BALANCE SHEET DATA
Cash and cash equivalents............... $ -- $ -- $ -- $ -- $ --
Working capital (deficit)............... 82 158 (287) (579) 148
Total assets............................ 139 501 626 1,415 2,262
Due to related party.................... (2,017) (3,610) (6,499) (13,369) (21,591)
Total stockholder's deficit............. (1,935) (3,351) (6,637) (13,267) (20,462)
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF PLAYBOY.COM SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS
PROSPECTUS. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. PLAYBOY.COM'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, SUCH AS THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
We are a leading Internet company dedicated to the lifestyle and
entertainment interests of young men around the world. In August 1994, Playboy
Enterprises launched PLAYBOY.COM. In August 1995, we began generating revenues
from the sale of advertising on PLAYBOY.COM, and in April 1996, we began
offering an extensive array of Playboy-branded merchandise. In July 1997, we
launched a subscription service called the Playboy Cyber Club, which offers
premium content and community features for Playboy fans around the world. In
August 1999, we launched a re-designed PLAYBOY.COM Web site including the
Playboy Marketplace, which allows consumer goods companies to sell products
targeted at our visitors. In December 1999, we launched Playboy Auctions to
capitalize on the thriving market for Playboy collectibles.
In March 1999, Playboy Enterprises completed the acquisition of Spice
Entertainment Companies, Inc., a leading provider of adult television
entertainment. This acquisition included CYBERSPICE.COM, an adult entertainment
Web site. Through the Spice Store located at CYBERSPICE.COM, we offer adult
videos, lingerie and sensual products. During 2000, we plan to launch a
subscription service on CYBERSPICE.COM that will feature pictorials,
adult-oriented news and articles, videos and chats with adult film stars.
Since inception, our business model has been based on monetizing the growing
traffic to our sites through multiple revenue streams. Our revenues consist of
revenues from sales of advertising and sponsorships, e-commerce and fees from
subscription services and pay-per-view events.
We derive advertising revenues principally from agreements with terms of
between one month and a year, under which advertisers generally receive a
guaranteed number of minimum impressions at a fixed rate. Advertisements
generally consist of banner advertisements, bottom advertisements or other
links. Advertising rates depend on the size and placement of the advertisement
and the number of guaranteed impressions, if any. Sponsorship revenues are
derived principally from sponsorship arrangements that allow companies to
sponsor PLAYBOY.COM, a content category on PLAYBOY.COM or an event featured on
the site in exchange for cash payments. The sponsorship arrangements for
PLAYBOY.COM or its content categories are currently either one year or two year
agreements.
Advertising revenues are recognized ratably in the period in which the
advertisement is displayed, provided that no significant obligations remain and
collection of the resulting receivable is probable. To the extent minimum
guaranteed impressions levels are not met, we defer recognition of the
corresponding revenues until the guaranteed levels are achieved. Payments
received from advertisers prior to displaying their advertisements are recorded
as deferred revenues. Revenues from sponsorship arrangements are recognized
ratably over the contract term provided that no significant obligations remain.
For the nine months ended September 30, 1999, GalaxiWorld, an online gaming
provider, was our largest sponsor, accounting for approximately 12% of our total
revenues.
To promote our brand on the Internet and to generate traffic to our sites,
we have entered into reciprocal advertising arrangements where we receive
advertising on third-party Web sites in exchange for advertising on our Web
sites. We do not recognize revenues with respect to these transactions and we do
not receive cash payments for these barter arrangements.
E-commerce revenues consist of the selling price of merchandise plus
shipping and handling charges, net of returns and credits, and commissions from
the sale of third-party products. E-commerce
25
revenues from the sale of Playboy-branded products through the Playboy Store and
all products on CYBERSPICE.COM are recognized upon shipment of the order.
Product fulfillment and customer service for these products is currently
conducted through our arrangement with Playboy Enterprises. Commissions from the
sale of third-party products through the Playboy Marketplace, which are
fulfilled by the sellers of the merchandise, are recognized upon notification of
sales by these third-party merchants. We also receive commissions from Playboy
Enterprises from the sale of non-Playboy branded videos and music through
PLAYBOY.COM. Playboy Enterprises has recently announced that it is exploring
strategic alternatives for these non-Playboy branded video and music businesses,
which may result in a sale of these businesses. In future periods, e-commerce
revenues will include auction revenues, which will consist of our sales of
Playboy-branded merchandise and access to Playboy events and commissions to us
from merchandise sold by third parties.
Subscription revenues are derived principally from monthly, quarterly and
annual subscriptions to the Playboy Cyber Club and fees for various pay-per-view
events offered on PLAYBOY.COM. In the case of subscriptions to the Playboy Cyber
Club, we recognize revenues ratably over the period of the subscription.
Revenues from our pay-per-view events are recognized in the month the event
occurs. Deferred revenues relate to subscription fees for which amounts have
been collected but for which revenue has not yet been recognized. Substantially
all our subscribers pay by credit card and subscriptions to the Playboy Cyber
Club are automatically renewed. During 2000, we expect to launch a subscription
service as part of CYBERSPICE.COM. We expect to record revenues for
subscriptions on CYBERSPICE.COM in the same manner as we record revenues for
subscriptions to the Playboy Cyber Club.
We have incurred significant net losses and negative cash flows from
operations since our inception. At September 30, 1999, we had an accumulated
deficit of $20.7 million. These losses have been funded by borrowings from
Playboy Enterprises. We intend to continue to invest heavily in the development
of our Web sites, including the creation of original content, and increased
marketing and product sales activities. As a result, we believe that we will
continue to incur net losses and negative cash flows from operations for the
foreseeable future. Moreover, the rate at which these losses will be incurred
may increase from current levels.
We are a subsidiary of Playboy Enterprises and, prior to the closing of this
offering, Playboy Enterprises will own all of our outstanding capital stock.
Historically, we have been dependent on Playboy Enterprises for working capital,
trademarks and content, advertising and promotion, product fulfillment and
administrative services. In connection with establishing ourselves as an
independent operating entity, we will enter into a series of agreements with
Playboy Enterprises prior to the closing of this offering relating to the
license of trademarks and content, the delivery of various administrative
service and other matters. Please see "Transactions With Playboy Enterprises"
for more information regarding the intercompany arrangements between us and
Playboy Enterprises.
We have only a limited operating history upon which you can evaluate our
business and prospects. Our limited operating history and the rapidly changing
nature of our business makes predicting our future operating results difficult.
As a result, we believe that period-to-period comparisons of our operating
results may not be good indications of our future performance, nor would our
results for any particular period be indicative of future operating results. In
addition, the financial information included herein may not necessarily be
indicative of the financial position, results of operation and cash flows had we
been operating as a separate stand-alone company during the periods presented.
26
RESULTS OF OPERATIONS
The following table sets forth our results of operations for the years ended
December 31, 1997 and 1998 and the nine months ended September 30, 1998 and
1999, expressed as a percentage of total net revenues:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- ----------------------
1997 1998 1998 1999
-------- -------- ----------- --------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Net revenues:
Advertising and sponsorships.......................... 54.7% 42.7% 41.6% 53.7%
E-commerce............................................ 30.8 23.3 22.5 19.7
Subscriptions......................................... 14.5 34.0 35.9 26.6
------ ------- ------- -------
Total net revenues.................................. 100.0 100.0 100.0 100.0
Total cost of revenues, related party................... 41.5 46.7 49.8 35.7
------ ------- ------- -------
Gross profit............................................ 58.5 53.3 50.2 64.3
Operating expenses, related party:
Sales and marketing................................... 14.7 33.3 29.1 42.3
Content and product development....................... 53.0 70.8 65.1 77.2
General and administrative............................ 69.9 51.4 53.7 29.1
------ ------- ------- -------
Total operating expenses............................ 137.5 155.6 147.9 148.6
------ ------- ------- -------
Operating loss.......................................... (79.0) (102.3) (97.7) (84.3)
Interest expense, related party......................... 17.9 21.4 21.1 23.6
------ ------- ------- -------
Net loss................................................ (96.9) (123.7) (118.8) (107.9)
====== ======= ======= =======
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
NET REVENUES
Total net revenues increased by $2.8 million, from $3.8 million for the nine
months ended September 30, 1998 to $6.7 million for the nine months ended
September 30, 1999, an increase of 73.7%.
ADVERTISING AND SPONSORSHIPS. Advertising and sponsorships revenues
increased by $2.0 million, from $1.6 million for the nine months ended
September 30, 1998 to $3.6 million for the nine months ended September 30, 1999,
an increase of 123.8%. This increase was due primarily to an increase in the
number of advertisers combined with revenues of $1.1 million from our initial
sale of sponsorships.
E-COMMERCE. E-commerce revenues increased by $0.5 million, from
$0.9 million for the nine months ended September 30, 1998 to $1.3 million for
the nine months ended September 30, 1999, an increase of 52.7%. This increase
was due primarily to higher sales volume from the Playboy Store.
SUBSCRIPTIONS. Subscriptions revenues increased by $0.4 million, from
$1.4 million for the nine months ended September 30, 1998 to $1.8 million for
the nine months ended September 30, 1999, an increase of 28.8%. This increase
was due primarily to a higher average number of subscribers to the Playboy Cyber
Club.
COST OF REVENUES
Cost of revenues consists primarily of the cost of merchandise sold and
delivery expenses; acquired content, editorial staff payroll and related
expenses for the Playboy Cyber Club; and the costs of technology infrastructure
and hosting services.
27
Cost of revenues increased by $0.5 million, from $1.9 million for the nine
months ended September 30, 1998 to $2.4 million for the nine months ended
September 30, 1999, an increase of 24.6%. This increase was primarily due to
increased editorial costs and expenses associated with customer service,
principally due to increased staffing, for the Playboy Cyber Club.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
payroll and related expenses for the advertising sales and marketing staffs and
expenditures for advertising and promotional activities. These expenses
increased by $1.7 million, from $1.1 million for the nine months ended
September 30, 1998 to $2.8 million for the nine months ended September 30, 1999,
an increase of 152.5%. This increase was due primarily to higher costs
associated with increased staffing levels in the advertising sales and marketing
departments.
We believe that additional sales and marketing personnel and programs are
required to remain competitive and to continue to build our brand both online
and offline. Therefore, we expect that our sales and marketing expenses will
continue to increase in absolute dollars for the foreseeable future.
CONTENT AND PRODUCT DEVELOPMENT. Content and product development expenses
consist primarily of payroll and related expenses for creative and information
technology personnel, acquired content and expenses for third-party software
developers. These expenses increased by $2.6 million, from $2.5 million for the
nine months ended September 30, 1998 to $5.1 million for the nine months ended
September 30, 1999, an increase of 106.0%. This increase was due primarily to
higher staffing levels in the current period combined with increased costs for
third party software developers and acquired editorial and graphic content in
1999.
We believe that significant investments in content and product development
are required to remain competitive. Therefore, we expect that our content and
product development expenses will continue to increase in absolute dollars for
the foreseeable future.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of payroll and related expenses for management, finance and
administrative personnel, legal, accounting, and consulting fees and facilities
costs. These expenses decreased by $0.1 million, from $2.1 million for the nine
months ended September 30, 1998 to $1.9 million for the nine months ended
September 30, 1999, a decrease of 5.9%. This decrease was due primarily to
higher consulting expenses in the prior period, which were primarily related to
business development activities.
We expect our general and administrative expenses to increase in absolute
dollars for the foreseeable future as we continue to hire personnel and incur
expenses to build our infrastructure to support the growth of our business and
our operations as a public company.
INTEREST EXPENSE
Interest expense consists of interest charges on our indebtedness to Playboy
Enterprises. This expense increased by $0.8 million, from $0.8 million for the
nine months ended September 30, 1998 to $1.6 million for the nine months ended
September 30, 1999, an increase of 94.0%. This increase was due primarily to an
increased level of indebtedness to Playboy Enterprises as a result of funding
our working capital requirements.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET REVENUES
Total net revenues increased by $2.2 million, from $3.4 million for the year
ended December 31, 1997 to $5.6 million for the year ended December 31, 1998, an
increase of 64.0%. This increase was due to increases in net revenues from all
three lines of our business.
28
ADVERTISING AND SPONSORSHIPS. Advertising and sponsorships revenues
increased by $0.5 million, from $1.9 million for the year ended December 31,
1997 to $2.4 million for the year ended December 31, 1998, an increase of 27.7%.
This increase was due primarily to increased sales of banner advertising.
E-COMMERCE. E-commerce revenues increased by $0.3 million, from
$1.0 million for the year ended December 31, 1997 to $1.3 million for the year
ended December 31, 1998, an increase of 24.3%. This increase was due primarily
to higher commissions from Playboy Enterprises from the increase in sales of
non-Playboy branded videos and music through PLAYBOY.COM.
SUBSCRIPTIONS. Subscriptions revenues increased by $1.4 million, from
$0.5 million for the year ended December 31, 1997 to $1.9 million for the year
ended December 31, 1998, an increase of 286.1%. This increase was due primarily
to a higher average number of subscribers to the Playboy Cyber Club, which was
launched in July 1997.
COST OF REVENUES
Cost of revenues increased by $1.2 million, from $1.4 million for the year
ended December 31, 1997 to $2.6 million for the year ended December 31, 1998, an
increase of 84.6%. This increase was primarily due to increased editorial costs
and expenses associated with customer service, primarily due to increased
staffing, for the Playboy Cyber Club, which was launched in July 1997.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased by
$1.4 million, from $0.5 million for the year ended December 31, 1997 to
$1.9 million for the year ended December 31, 1998, an increase of 272.8%. This
increase was due primarily to higher costs associated with increased staffing
levels in the advertising sales and marketing departments.
CONTENT AND PRODUCT DEVELOPMENT. Content and product development expenses
increased by $2.1 million, from $1.8 million for the year ended December 31,
1997 to $3.9 million for the year ended December 31, 1998, an increase of
119.2%. This increase was due primarily to higher staffing levels and increased
software amortization in 1998 related to the addition of new features on
PLAYBOY.COM.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by $0.5 million, from $2.4 million for the year ended December 31, 1997 to
$2.9 million for the year ended December 31, 1998, an increase of 20.7%. This
increase was due primarily to higher consulting expenses primarily related to
business development activities.
INTEREST EXPENSE
Interest expense increased by $0.6 million, from $0.6 million for the year
ended December 31, 1997 to $1.2 million for the year ended December 31, 1998, an
increase of 96.4%. This increase was due primarily to an increased level of
indebtedness to Playboy Enterprises as a result of funding our working capital
requirements.
QUARTERLY RESULTS OF OPERATIONS DATA
The following table sets forth certain unaudited quarterly statement of
operations data for each of the seven quarters ended September 30, 1999. In our
opinion, this unaudited information has been prepared substantially on the same
basis as the audited financial statements appearing elsewhere in this
prospectus, and all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
the unaudited quarterly results of operations data. The quarterly data should be
read in conjunction with the financial statements and the notes to
29
such statements appearing elsewhere in this prospectus. The operating results
for any quarter are not necessarily indicative of the operating results for any
future period.
QUARTERS ENDED
------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1998 1998 1999 1999 1999
--------- -------- ------------- ------------ --------- -------- -------------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net revenues:
Advertising and sponsorships....... $ 520 $ 526 $ 554 $ 771 $ 882 $ 1,249 $ 1,449
E-commerce......................... 292 243 327 436 409 397 510
Subscriptions...................... 436 457 484 515 549 595 629
------- ------- ------- ------- ------- ------- -------
Total net revenues............. 1,248 1,226 1,365 1,722 1,840 2,241 2,588
Total cost of revenues, related
party.............................. 618 614 678 687 748 750 882
------- ------- ------- ------- ------- ------- -------
Gross profit......................... 630 612 687 1,035 1,092 1,491 1,706
Operating expenses, related party:
Sales and marketing................ 203 353 562 735 739 1,008 1,076
Content and product development.... 525 773 1,202 1,439 1,752 1,605 1,792
General and administrative......... 524 756 781 799 634 589 716
------- ------- ------- ------- ------- ------- -------
Total operating expenses....... 1,252 1,882 2,545 2,973 3,125 3,202 3,584
------- ------- ------- ------- ------- ------- -------
Operating loss....................... (622) (1,270) (1,858) (1,938) (2,033) (1,711) (1,878)
Interest expense, related party...... 210 250 351 381 434 506 633
------- ------- ------- ------- ------- ------- -------
Net loss............................. $ (832) $(1,520) $(2,209) $(2,319) $(2,467) $(2,217) $(2,511)
======= ======= ======= ======= ======= ======= =======
Our quarterly results are subject to seasonal fluctuations. We believe that
our e-commerce sales are positively affected in the fourth calendar quarter due
to the year-end holiday buying season. In addition, we believe that we
experience decreased traffic during the summer months. We cannot assure you that
these seasonal trends will continue in the future.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our activities exclusively through funding
from Playboy Enterprises.
Net cash used in operating activities was $6.8 million for the nine months
ended September 30, 1999, $6.0 million for the year ended December 31, 1998 and
$2.7 million for the year ended December 31, 1997. Net cash used in operating
activities resulted primarily from our net operating losses.
Net cash used in investing was $1.4 million for the nine months ended
September 30, 1999, $1.2 million for the year ended December 31, 1998 and $0.2
million for the year ended December 31, 1997. Net cash used in investing
activities resulted primarily from increased costs related to purchased software
and related Web development costs.
Net cash provided by financing activities was $8.2 million for the nine
months ended September 30, 1999, $7.1 million for the year ended December 31,
1998 and $2.9 million for the year ended December 31, 1997. Net cash provided by
financing activities consisted of proceeds from Playboy Enterprises.
Our principal commitments consist of obligations outstanding under operating
leases. As of September 30, 1999, we have spent approximately $2.7 million on
capital expenditures.
We have experienced a substantial increase in our capital expenditures and
operating lease arrangements since our inception, which is consistent with the
growth in our operations and staffing. We expect our capital expenditures will
increase significantly in the future as we make technological improvements to
our systems and technical infrastructure. Additionally, we intend to continue to
evaluate possible investments in new businesses, products and technologies,
expand our sales and marketing programs and conduct more aggressive brand
promotions.
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We anticipate that our liquidity needs over the next 12 months will be met
with the net proceeds generated from this offering. If cash generated from
operations is insufficient to satisfy our liquidity requirements, we may seek to
sell additional equity or debt securities or obtain a credit facility. The sale
of additional equity or convertible debt securities could result in additional
dilution to our stockholders. The incurrence of indebtedness would result in
increased fixed obligations and could result in operating covenants that would
restrict our operations. We cannot assure you that financing will be available
in amounts or on terms acceptable to us, if at all.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept or recognize only two-digit entries in the date code field. These systems
and software products will need to accept four-digit entries to distinguish 21st
century dates from 20th century dates. As a result, computer systems and/or
software may need to be upgraded, redesigned or replaced to comply with such
Year 2000 requirements to avoid system failure or miscalculations causing
disruptions of normal business activities.
STATE OF READINESS
We are not currently aware of any Year 2000 compliance problems relating to
our systems that would have a material adverse effect on our business, financial
condition and operating results. In response to the Year 2000 problem, we have
implemented changes to our existing information technology systems through a
combination of modifications and upgrades to Year 2000 compliant software. We
have also evaluated our non-information technology systems and believe these
systems are Year 2000 compliant.
COSTS
To date, we have primarily relied on Playboy Enterprises for all costs
associated with identifying and addressing Year 2000 compliance issues.
RISKS
We believe that the Year 2000 issue will not have a material adverse effect
on our business, financial condition or operating results. However, despite all
of our efforts to-date towards insuring Year 2000 compliance, latent issues may
still surface in the future that require upgrades, modifications, or
replacement, all of which could be time-consuming and expensive. In addition,
there can be no assurance that utility companies, Internet access companies and
our third-party vendors will be Year 2000 compliant. The failure by such
entities to be Year 2000 compliant could result in a systemic failure such as a
prolonged Internet, telecommunications or electrical failure.
CONTINGENCY PLAN
Because no systems have been found to be non-compliant, we have determined
that a contingency plan is not required. We are unable to provide for
contingencies arising as a result of large scale or Internet-wide failure
because we are not aware of any adequate replacement service for the Internet.
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BUSINESS
OVERVIEW
We are a leading Internet company dedicated to the lifestyle and
entertainment interests of young men around the world. We are uniquely
positioned to capitalize on the Playboy brand, which is one of the most
recognized in the world, to provide a compelling Playboy online entertainment
experience. Our online destinations combine Playboy's distinct attitude with
extensive and original content, a large community of loyal users and a wealth of
e-commerce offerings. Our business model is based on monetizing the growing
traffic on our sites through multiple revenue streams, including advertising and
sponsorships, e-commerce and fees for subscription services and pay-per-view
events.
For the month of November 1999, we had over 100 million page views and over
16 million visits to our Web sites, as audited by ABC Interactive. Our Web sites
also generate significant international traffic and, in November 1999,
approximately 25% of our traffic originated outside of the United States.
INDUSTRY BACKGROUND
THE GROWTH OF THE INTERNET
The Internet has quickly emerged as a global medium that allows hundreds of
millions of people worldwide to obtain information, communicate and conduct
business electronically. In its June 1999 report, International Data
Corporation, or IDC, estimates that the number of Web users worldwide will grow
from approximately 142 million users in 1998 to 502 million by the end of 2003.
Additionally, IDC projects the number of Web users outside the U.S. to increase
from 79.4 million in 1998 to 325.4 million by 2003.
THE GROWTH OF E-COMMERCE AND ONLINE ADVERTISING
As the number of Internet users continues to expand, the value of the
Internet as a commerce channel will continue to increase as more merchants move
onto the Internet to market and sell an ever-increasing variety of products and
services. According to IDC, worldwide commerce revenues on the Web are expected
to grow from approximately $50 billion at the end of 1998 to approximately
$1.3 trillion by the end of 2003. As e-commerce continues to expand, vendors are
increasingly relying on extensive advertising campaigns to identify customers,
build online brand awareness and increase product sales online. Forrester
Research estimates that the dollar volume of online advertising will increase
from $2.8 billion in 1999 to over $17.2 billion in 2003. The interactive nature
of the Internet provides vendors, advertisers and content providers with the
ability to gather and evaluate valuable demographic, Web use and transactional
data on consumers. This data provides online marketers and businesses with a
significant new opportunity to increase the effectiveness of their direct
marketing campaigns by targeting their messages to specific groups of consumers,
as well as by frequently changing their advertisements in response to market
factors, current events and consumer feedback.
THE ECONOMIC IMPORTANCE OF MEN BETWEEN THE AGES OF 18 AND 34
Men between the ages of 18 and 34 represent a critical demographic group for
online advertisers and merchants. College students, in particular, are an
attractive demographic group for Internet advertisers and merchants. According
to Jupiter Communications, 90% of U.S. college students are currently online,
representing the highest Internet penetration rate of any age group. College
students are also expected to increasingly use the Internet to purchase goods
and services. According to Jupiter Communications, college students will spend
$2.5 billion in 2002 to purchase goods and services over the Internet.
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PREMIUM CONTENT ATTRACTS LOYAL USERS
Some premium online content providers have successfully attracted a loyal
base of customers by providing exclusive, high-quality content to individuals
that register and subscribe to their Web site. As a result, content providers
can generate revenues from subscription fees, gain valuable personal information
through the registration process and collect specific Web usage information as
users navigate through their Web site. This information enables content
providers to tailor content on the Web site to improve the entertainment value
of the user's experience. Additionally, we believe advertisers and online
merchants optimize the value of their marketing campaigns by designing
promotions to address the specific preferences of these registered users. As
broadband technology, which allows for faster access to the Internet, continues
to advance, content providers will be able to more easily offer a wider range of
premium content including live Web events, streaming audio and video and other
multimedia or interactive features.
THE ONLINE MARKET FOR ADULT ENTERTAINMENT
Adult entertainment in the United States is a $10 billion industry,
according to Forrester Research. The Internet has helped the adult entertainment
industry experience tremendous growth in usage and revenues. According to the
Spring 1999 Jupiter/NFO Consumer Survey, men spend, on average, 33% of their
time online viewing adult content. Forrester Research estimates that adult
e-commerce will generate between $750 million and $1 billion in revenues in
1998, with rapid growth in the years that follow. Adult content dominates the
paid online content market, which includes subscription and pay-on-demand
services, according to Datamonitor. Datamonitor estimates that $1.4 billion of
the $2.0 billion in paid online content in 1999 will be attributable to adult
content and $3.1 billion of the projected $5.4 billion of paid online content
projected for 2003 will be attributable to adult content.
OUR OPPORTUNITY
We believe that we are uniquely positioned to provide the leading online
destination addressing the entertainment and lifestyle needs of young men around
the world. By using the power of the Playboy brand and leveraging the other
assets of Playboy Enterprises, we believe we will be able to grow our online
businesses more aggressively than our competitors, many of which must incur
significant expenses to build brand awareness.
Since 1953, when Hugh M. Hefner published the first issue of PLAYBOY
magazine, Playboy Enterprises has successfully expanded from a domestic
publishing company into a global, brand-driven, multi-media company. Playboy
Enterprises, which launched Playboy TV in 1982, has grown to become a mainstream
distributor of Playboy-branded programming throughout the world through its
television networks, arrangements with international distributors and the sale
of videocassettes, laserdiscs and DVDs. In addition, Playboy-branded fashions,
gifts, jewelry, home accessories and collectibles, such as calendars, back
issues of PLAYBOY magazine and newsstand specials, are currently sold globally.
The popularity of Playboy as a worldwide brand is evidenced by the following:
- PLAYBOY magazine is currently the best-selling men's monthly magazine in
the world and worldwide monthly readership, including the 16 international
editions, is over 11 million. The U.S. edition of PLAYBOY magazine is read
by approximately one in every seven men in the United States aged 18 to
34, according to Fall 1999 data published by Mediamark Research, Inc.
- Playboy television programming is available in approximately 150 countries
and territories around the world. Playboy TV is currently available in
over 12.5 million U.S. cable addressable households.
- Many Playboy videos have been best-sellers and Playboy Home Video has been
named one of Billboard magazine's "Top Video Sales Labels" for each
calendar year since 1994.
33
- Playboy-branded products are sold in almost one hundred countries in more
than 100 different product categories.
We intend to leverage the powerful Playboy brand. Our relationship with
Playboy Enterprises provides us the following key competitive advantages:
- online use of leading trademarks, including Playboy, Playmate and the
Rabbit Head Design;
- an extensive array of articles, interviews and cartoons from PLAYBOY
magazine, as well as a photo library of more than nine million images;
- access to over 1,300 hours of Playboy television and video programming;
- millions of subscribers and customers; and
- promotional space in PLAYBOY magazine and on the Playboy television
networks and the ability to cross-promote the Playboy brand through
multiple media.
The Spice brand also offers us an excellent opportunity to create an online
destination featuring premium adult entertainment. Most of the Web sites
offering adult entertainment are not linked to an established brand identity and
do not have access to an already-established loyal base of subscribers and
customers. In addition, privacy is a major concern for Internet users of these
types of sites. Many Web sites cannot assure online privacy. CYBERSPICE.COM
offers the user or subscriber high-quality content from an established brand and
in a manner that is designed to address privacy concerns.
OUR STRATEGY
Our objective is to be the leading online destination for young men around
the world and to benefit from additional advertising and sponsorship
opportunities, expanded e-commerce offerings and a variety of subscription and
pay-per-view services. Key elements of our strategy include the following:
LEVERAGE OUR STRONG BRAND RECOGNITION. We intend to capitalize on the
worldwide recognition of the Playboy brand to continue developing a unique and
compelling online destination for men who appreciate the Playboy lifestyle and
attitude. We believe this will allow us to attract additional users and
customers for our Web sites, e-commerce offerings, subscription services and
pay-per-view events. In order to promote our products and services, we recently
initiated an extensive online, magazine, newspaper and outdoor advertising
campaign as well as select television and radio advertising. We also intend to
utilize Playboy Enterprises' extensive subscriber and customer lists to commence
direct marketing designed to increase our Web traffic and sales of
Playboy-branded merchandise. We plan to continue to advertise in Playboy
Enterprises' other media properties and to take advantage of the numerous
cross-promotional and marketing opportunities around the world. We also intend
to capitalize on the familiarity of the Spice brand to build the leading Web
site featuring premium adult entertainment and adult products.
MAXIMIZE REVENUES FROM MULTIPLE REVENUE STREAMS. We believe that leveraging
the power of the Playboy and Spice brands will allow us to generate increasing
revenues from advertising and sponsorships, e-commerce sales and subscription
and pay-per-view opportunities.
Advertising and Sponsorships. We intend to significantly increase our
revenues from advertising and sponsorships by capitalizing on the attractive
demographics of our expanding user base. We intend to increase the number of
sponsorship arrangements that enable companies to sponsor specific content
areas, special promotions or events. We also expect to increase our sales of
advertising, as we increase our Web traffic and expand our specific content
offerings. We also expect to offer companies attractive options to advertise
across a range of Playboy media, including magazines, television and online.
E-Commerce. We intend to significantly increase our revenues from online
product sales through increased marketing, including an extensive direct
mail campaign, expanding the range of
34
Playboy-branded and Spice-branded products that we offer and entering into
additional alliances with third parties. Our direct mail campaign, targeted
at Playboy Enterprises' current customer base, will position the Playboy
Store as the primary online source for purchasing over 2,700 different
Playboy-branded fashions, videos, gifts and collectibles. We intend to
continue expanding our product lines and e-commerce offerings, including
auctions, targeted at, and particularly appealing to, our customer base.
Subscription and Pay-Per-View. We intend to aggressively grow our number of
subscribers. We expect to offer an increasing array of content and events on
a subscription and pay-per-view basis. We also intend to offer premier
events, parties at the Playboy Mansion, lingerie fashion shows and Mardi
Gras and spring break specials on a more frequent pay-per-view basis. We
also plan to increase our marketing of the Playboy Cyber Club and our
pay-per-view events to the current Playboy audiences, including through
direct mail. We believe that these plans will convert current and new
visitors to PLAYBOY.COM into subscribers to the Playboy Cyber Club. In
addition, during 2000, we plan to launch a subscription service on
CYBERSPICE.COM which will offer premium adult entertainment. As broadband
technology advances, our online access to the extensive Playboy television
and video library will enable us to expand our pay-per-view offerings.
ENHANCE AND EXPAND CONTENT OFFERINGS AND SERVICES. We believe that we will
grow our loyal user base by providing compelling original content in many
different areas of interest to our target audience. While we currently offer
content on a wide range of topics, including sex and relationships, travel,
nightlife and sports, we intend to continue to expand our range of topics as
well as the depth of coverage on our current offerings. We will continue to
update content on a daily basis and, in the process, create an impressive online
content library. In addition, while we currently offer a variety of community
and interactive features, including Playmate chats and discussion groups, we
expect to expand these features in the future. To achieve these objectives, we
will continue to expand our ability to develop original content internally and
expect to hire additional writers and editors. We will also continue to enter
into arrangements with third parties to provide us with exciting content and
features and to utilize Playboy Enterprises' extensive archival materials and
video library.
EXPAND OUR INTERNATIONAL PRESENCE. We intend to enter into joint ventures
and/or licensing arrangements in foreign countries to provide compelling content
specifically tailored to those audiences, including content in other languages.
Playboy Enterprises' numerous international relationships, including its
partners for the international editions of PLAYBOY magazine, its international
partners for Playboy TV and its product licensees around the world, will enable
us to expand our promotional activities, original content and e-commerce
offerings that would appeal to foreign consumers. We intend to initially focus
our efforts on large markets where Playboy Enterprises already has significant
business operations, namely Germany, Japan, Brazil and Spanish-speaking Latin
America.
OUR SITES
We currently offer the following Web sites:
- Playboy-branded Web sites targeting the entertainment and lifestyle
interests of young men, including PLAYBOY.COM, the Playboy Store, Playboy
Auctions, the Playboy Marketplace and the Playboy Cyber Club; and
- CYBERSPICE.COM, a site featuring premium adult entertainment under the
Spice brand.
In the month of November 1999, we had over 100 million page views and over
16 million visits to our Web sites, as audited by ABC Interactive. In addition,
as of November 30, 1999, we had 37,379 subscribers to the Playboy Cyber Club.
Our Web sites also generate significant international traffic and, in
November 1999, approximately 25% of our traffic originated outside of the United
States.
35
PLAYBOY.COM
PLAYBOY.COM is a leading men's lifestyle and entertainment destination
featuring original content, live events programming, lifestyle information,
e-commerce opportunities, community interaction and user interactivity. Our home
page, located at WWW.PLAYBOY.COM, offers a guide to each of the content areas,
highlighting new original articles, links to the e-commerce and auction sites,
the Playboy Cyber Club and our special features and events. Our home page also
offers as well as a search function to allow users to easily navigate the site.
CONTENT OFFERINGS
Our goal is to continue the Playboy legacy and become the definitive online
source for information and advice about sex, a trendsetter in travel, nightlife
and pop culture, the reliable guide to lifestyle issues and the ultimate source
for fun on college campuses. PLAYBOY.COM, which currently includes over 60,000
pages, contains extensive original content developed by our growing staff of
writers and editors, content licensed from third-party providers for which we
maintain editorial and quality control and editorial and pictorial materials
created and/or developed by Playboy Enterprises. Our sites contain pictures of
beautiful women, some of which contain nudity which is clearly identified.
As of November 30, 1999, we employed a total of 35 editors, writers,
designers and producers to create and develop our original content for
PLAYBOY.COM. We also contract with free-lance writers who provide us with
specialized content for PLAYBOY.COM. We add new content and features to
PLAYBOY.COM on a daily basis and expect that we will continue to increase the
amount of content that we develop internally. We utilize a variety of methods,
including online surveys and input from our college representatives, to identify
and develop topics and features that will appeal to our target audience. Our
editors also contract with third parties that provide us with high-quality
content and special features which are appealing to PLAYBOY.COM visitors. For
example, we currently have arrangements with Telescan to provide comprehensive
financial information, with Internet Sports Network to offer sports fantasy/
rotisserie leagues and with Hecklers Online for comedy content and video game
reviews.
Additionally, our relationship with Playboy Enterprises will provide us with
online access to an extensive archive of editorial, pictorial and video content
targeted at adult males. We will continue to selectively utilize this content in
various areas on PLAYBOY.COM, including Playboy in Print, Playboy Live and
Playmates. As broadband technology advances, we expect that we will be able to
exploit Playboy Enterprises' television programming and pictorial libraries in a
variety of exciting new ways.
We currently divide the content on PLAYBOY.COM into the following content
categories:
SEX & RELATIONSHIPS Covers sex and sexuality, dating, romance and gender
politics. Features items from the Playboy Advisor and
Playboy TV's "Sexcetera."
TRAVEL AND NIGHTLIFE Covers travel, leisure activities and nightlife. Features
advice on dining, nightlife, hotel and adult entertainment
offerings.
DIGITAL CULTURE Covers technology and new media trends, gadgets and
personalities. Features include weekly video and computer
game reviews and "Editor's Picks" from PLAYBOY.COM.
ARTS & ENTERTAINMENT Covers popular culture and show business, ranging from
music and movies to books and TV. Features include music
and video reviews, celebrity interviews and profiles. Also
offers streaming video, audio clips and e-commerce
opportunities.
36
INTERNATIONAL PLAYBOY Covers the events and personalities associated with
Playboy's 16 international print editions. Highlights new
pictorials and content. Includes coverage of launch
parties, Playmate searches and other international events.
CASINO & GAMING Covers the world of casinos, gaming, games of chance and
the lifestyle that surrounds them. Features a "Play4Fun"
online casino. Offers articles on casino games, movies and
the
high-roller lifestyle.
LIVING IN STYLE Covers the "Playboy lifestyle," with topics ranging from
fashion and dining to grooming and cars. Weekly columns
review beers, wines and cigars. Also features "Guy 101," a
frequently updated primer on the basics of being a Playboy
man.
ON CAMPUS Covers campus life and entertainment. Contains features on
campus trends, nightlife and events, as well as pictorials
of college coeds.
SPORTS Covers sporting news and events from the Playboy point of
view. Includes articles, interviews and reviews, as well
as in-depth coverage of Playboy magazine's Pigskin Preview
Special and Playboy's All-America Team.
NEWS DESK Covers current events from a Playboy perspective. Columns
highlight daily news stories of interest to the Playboy
man.
PLAYBOY LIVE Hosts PLAYBOY.COM's live, real-time, interactive Webcasts.
Offers streaming video and audio, as well as photo
galleries, of events such as parties at the Playboy
Mansion, chats with celebrities, lingerie fashion shows
and an annual Mardi Gras special.
PLAYBOY IN PRINT Includes excerpts from the current issue of PLAYBOY
magazine and selected historical issues. Regular features
on the new centerfold and celebrity interviews. Also
includes a "Contributor Profile," which highlights an
author, editor or celebrity from the current issue.
PLAYBOY INVESTOR Offers a comprehensive financial information service.
Features news, stock quotes, market and business
commentary, graphs and reports. Also features a
personalized portfolio for daily financial management.
PLAYBOY TV Includes daily program information for Playboy TV. Also
highlights news and features about Playboy TV stars and
projects.
PLAYBOY HOME VIDEO Includes information on home video titles and upcoming
releases, as well as information on, and links for,
purchasing Playboy videos.
PLAYMATES Contains coverage of Playboy Playmates. Regular features
include pictorials of recent Playmates and links to
Playmate personal pages. Also includes information about
upcoming Playmate appearances, product releases and
events.
37
THE PLAYBOY STORE
The Playboy Store, which can be accessed through PLAYBOY.COM or directly at
WWW.PLAYBOYSTORE.COM, allows us to capitalize on Playboy Enterprises' strong
marketing experience and the worldwide recognition of the Playboy brand and
Rabbit Head Design. The Playboy Store is the largest source for Playboy-branded
apparel, jewelry, cigars and gifts, Playboy videos, DVDs and CD-ROMs, back
issues of PLAYBOY magazine and newsstand specials and collectibles such as
trading cards and posters. The home page of the Playboy Store highlights special
offers and seasonal gifts and offers a search function to find specific
merchandise quickly. Playboy Enterprises currently handles all of the
fulfillment and customer service functions relating to our products sold through
the Playboy Store.
Our affiliates program allows us to promote the Playboy Store on numerous
other Web sites. Our affiliate Web sites place Playboy logos and links to the
Playboy Store on their sites and earn commissions based on the revenues we
generate from any referred sales. We currently have affiliate relationships with
over 3,500 sites. In addition, our affiliates can earn discounts on products
sold in the Playboy Store as well as other incentives for driving traffic and
customers to our Web sites.
The Playboy Store is heavily promoted throughout PLAYBOY.COM, and many of
the pages on PLAYBOY.COM provide direct links to the Playboy Store. We are also
initiating an extensive direct mail campaign targeted at over one million recent
purchasers of Playboy-branded products and positioning the Playboy Store as the
sole online source for most Playboy-branded merchandise. We believe that this
direct mail campaign will serve as an effective way to drive traffic to the
Playboy Store and to increase our sales of Playboy-branded products.
We currently offer the following product categories in the Playboy Store:
FOR MEN Playboy-branded, high-quality men's apparel, jewelry, body
care products and Hugh M. Hefner loungewear.
FOR WOMEN Playboy-branded casual and sexy apparel and jewelry for
young women.
INTIMATES & LINGERIE Playboy-branded sexy lingerie.
COLLECTIBLES Playboy books, posters, bar ware, cigars, lighters, pool
cues and home accessories.
PLAYBOY VIDEOS & DVDS Playboy videos and DVDs featuring playmates and
celebrities.
MOVIES & MUSIC Movies and music targeted at 18-34 year old men.
PLAYBOY IN PRINT Current and back issues of PLAYBOY magazine as well as
newsstand specials and select foreign editions.
PLAYMATE PRODUCTS Products featuring Playboy Playmates including PLAYBOY
magazines, video features, collectors' cards and
calendars.
THE PLAYBOY MARKETPLACE
We created the Playboy Marketplace to offer our PLAYBOY.COM visitors a wide
selection of entertainment and apparel products from third-party vendors that
would appeal to the Playboy lifestyle. The Playboy Marketplace, which can be
accessed through PLAYBOY.COM, features thousands of products, including
electronics, books, music, posters, innovative gifts, clothing and accessories.
While we receive a commission for each of the items purchased through the
Playboy Marketplace, the merchants are directly responsible for shipping,
inventory and fulfillment services. The Playboy Marketplace is currently
sponsored by a number of popular merchants, including Amazon.com, Sharper Image,
38
Fashionmall.com, Gourmet Market and CNET. Through these sponsorship
arrangements, we generate commission revenues through the sale of all products
originated through the Playboy Marketplace. Like the Playboy Store, we heavily
promote the Playboy Marketplace throughout PLAYBOY.COM and many of the pages on
the site provide direct links to the Playboy Marketplace. We intend to increase
the quantity and range of products offered through the Playboy Marketplace by
creating further alliances with high-quality merchandisers and retailers.
PLAYBOY AUCTIONS
There is currently a thriving online auction market for Playboy
collectibles. A search of a leading auction site indicated that, during a recent
two week period, there were over 12,000 completed auctions for items containing
the word Playboy. In December 1999, we launched Playboy Auctions to capitalize
on this market and to allow people to auction their Playboy collectibles to
other Playboy fans. In addition, Playboy Auctions, which can be accessed through
PLAYBOY.COM or directly at AUCTIONS.PLAYBOY.COM, allows us to auction high-end,
autographed and limited edition products as well as overstocked or discontinued
items. We have retained FairMarket, a leading provider of private-label auction
solutions, to co-produce and host our auction services.
THE PLAYBOY CYBER CLUB
Playboy Cyber Club is a premium subscription service which is designed as an
online Playboy fan club and contains extensive Playboy and Playmate-related
editorial and pictorial content. The Playboy Cyber Club, which can be accessed
through PLAYBOY.COM or directly at CYBER.PLAYBOY.COM, capitalizes on our
relationship with Playboy Enterprises and provides us with access to a large
archive of editorial, pictorial and video content targeted at adult males. These
archives include articles and interviews from PLAYBOY magazine, which has been
published for over 45 years, and its international editions, a nine-million
image photo library and over 1,300 hours of Playboy television programming and
movies.
The Playboy Cyber Club offers our subscribers VIP access to over 45,000
photos of Playboy Playmates and models, many of which have never been published,
every Playboy interview published in the magazine, Playboy Advisor columns and
video clips from our home videos and Playboy TV shows. In addition, the Playboy
Cyber Club also offers erotic fiction and features subscriber chat rooms and
daily chats with Playmates. Subscribers to the Playboy Cyber Club also have free
access to some of our pay-per-view specials, such as the lingerie fashion show
we produced in November 1999 and the upcoming New Year's Eve bash at the Playboy
Mansion in Holmby Hills, California.
The Playboy Cyber Club is currently offered on a monthly basis for $6.95, a
quarterly basis for $17.95 and an annual basis for $59.95. As of November 30,
1999, we had 37,379 subscribers. The Playboy Cyber Club is promoted throughout
PLAYBOY.COM and there are extensive links to attract potential subscribers who
may be interested in the extensive archival materials available at the site.
PAY-PER-VIEW
We have the unique opportunity to showcase on PLAYBOY.COM a variety of
Playboy parties, events and videos which can be accessed exclusively online on a
pay-per-view basis. To date, we have offered two pay-per-view events, including
a "Midsummer Night's Dream" party at the Playboy Mansion and a lingerie fashion
show. Our goal is to offer quarterly and then monthly specials featuring Playboy
Playmates and celebrities, holiday parties at the Playboy Mansion, awards shows
and other live events. Our planned pay-per-view specials include Mardi Gras,
fashion shows and model searches. We expect our pay-per-view specials to attract
subscribers to the Playboy Cyber Club because we offer these subscribers free
access to some of our pay-per-view specials. As broadband technology advances
and more people become able to access the Internet at higher speeds, we will be
able to offer our visitors the opportunity to view thousands of Playboy movies
and specials on a pay-per-view basis.
39
CYBERSPICE.COM
In March 1999, Playboy Enterprises completed the acquisition of Spice
Entertainment Companies, Inc., a leading provider of adult television
entertainment throughout the world. Spice primarily obtains television rights to
adult movies from third parties and offers these movies on a pay-per-view basis
on television networks in the United States and abroad. Through an arrangement
with Playboy Enterprises, we have the online rights to the Spice brand, as well
as access to television content and the online rights to sell Spice-branded
merchandise.
The Spice Web site, located at WWW.CYBERSPICE.COM, currently consists of the
Spice Store and a section promoting the Spice television networks and
highlighting upcoming events, synopses of Spice movies and network schedules.
During 2000, we plan to launch a subscription service on CYBERSPICE.COM, which
will offer premium adult entertainment, including pictorials, adult-oriented
news and articles, videos and chat rooms with adult stars.
The Spice Store was launched in May 1999 and features a broad range of
high-quality
adult-oriented products, including over 3,100 videos and DVDs, lingerie and
sensual products. Like the Playboy Store, Playboy Enterprises currently handles
all of the fulfillment and customer service functions relating to the products
sold through the Spice Store. In order to further increase our online customer
base, we intend to initiate a direct mail campaign positioning the Spice Store
as a convenient source for purchasing a large number of adult-oriented products.
In the future, particularly as broadband technology advances, we may offer
videos and special events to our visitors on a pay-per-view basis.
ADVERTISING AND SPONSORSHIP
The demographics of our user base are highly concentrated among younger
upscale consumers. According to a Fall 1999 study by @Plan, 53.3% of the
PLAYBOY.COM visitors are between 18 and 34. Furthermore, according to @Plan,
61.6% of the PLAYBOY.COM users have a household income of $50,000 or more, and
18.8% of the PLAYBOY.COM users have a household income of $100,000 or more. In
addition, according to @Plan, 48.0% of the visitors to PLAYBOY.COM are college
graduates and 40.2% are professionals or hold managerial positions. As a result,
we believe that our network provides a highly-targeted platform for advertisers
and sponsors to reach our highly attractive demographic user base.
We currently derive, and expect to continue to derive, a substantial portion
of our revenues from advertising on our Web sites. Our advertisers typically
enter into agreements with terms of between one month and a year, under which
they generally receive a guaranteed number of impressions at a fixed rate. We
offer numerous sizes and types of advertising placement, including banner
advertisements, button advertisements and other links. Our advertisers include
large and small companies in the entertainment, media, travel, sports, consumer
products, retail, Internet and financial services industries.
The following is a select list of our advertisers during the first three
quarters of 1999:
CNET
theglobe.com
Columbia Tristar
BUY.COM
Xandria
Universal Studios
Seagrams
NewsEdge
FX Network
SportsLineUSA
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We also offer sponsorship opportunities that enable advertisers to promote
their corporate messages to the PLAYBOY.COM users. For example, GalaxiWorld
currently sponsors our Casino & Gaming area and K-Tel sponsors the PLAYBOY.COM
home page. We also offer sponsorships for our pay-per-view events and the other
special events that we produce. For example, Real Networks and Intervu sponsored
our recent lingerie fashion show. These sponsorship arrangements typically
generate higher revenues for us than individual advertising contracts. We intend
to aggressively promote sponsorships in other content areas on PLAYBOY.COM as
well as for all of the pay-per-view events that we offer.
Our relationship with Playboy Enterprises also allows us to offer
advertisers and sponsors the ability to promote themselves through a number of
different distribution channels, including online, print and television, as well
as through event sponsorships. Our sales representatives work very closely with
the sales and marketing personnel at Playboy Enterprises to structure attractive
packages across different media properties. We believe that the potential for
cross-marketing is very attractive to many of our advertisers and sponsors, and
we intend to continue to promote multimedia advertising packages in the future.
Our in-house sales force develops and implements our advertising and
sponsorship strategies, including identifying strategic accounts and developing
presentations and promotional materials. We currently have sales personnel
located in New York, Chicago, Los Angeles and San Francisco. We expect to
significantly increase our advertising sales capabilities, including the number
of sales representatives, in the future. In addition, we currently use online
advertising networks for the sale of some of our advertising inventory,
including 24/7 Media for advertising sales in foreign countries and 2Can for
domestic advertising sales.
MARKETING AND BRAND AWARENESS
We believe that our marketing and promotional efforts will increase traffic
on our Web sites, generate additional memberships to our subscription services
and pay-per-view events and attract a wide range of advertisers, sponsors and
e-commerce partners. To date, our marketing and promotional activities have
capitalized on the strong Playboy brand and the current customers and
subscribers to Playboy Enterprises' other media properties, including PLAYBOY
magazine, Playboy TV and the Spice networks. We recently began promoting
PLAYBOY.COM on the cover and in each issue of PLAYBOY magazine, which has a
worldwide monthly readership of over 11 million.
Our future marketing and promotional activities will continue to capitalize
on our relationship with Playboy Enterprises. For example, we intend to
implement an extensive direct mail campaign positioning the Playboy Store and
the Spice Store as the primary source for the great majority of Playboy-branded
and Spice-branded merchandise. This direct mail campaign will initially be
targeted at the recent purchasers of Playboy and Spice products. In addition, we
will continue to take advantage of the cross-promotional opportunities that we
have with Playboy Enterprises, such as Playboy Playmate events, parties at the
Playboy Mansion, conventions, awards shows, trade shows and other special
events. For example, the November 1999 lingerie fashion show, which had Playboy
Playmates and models wearing Playboy-branded products, was also broadcast on
Playboy TV. Visitors to PLAYBOY.COM could watch a live broadcast of the show,
obtain a behind the scenes view of the dressing room on a pay-per-view basis and
purchase the lingerie at the Playboy Store.
We also have recently initiated a variety of new marketing and promotional
activities designed to drive traffic to PLAYBOY.COM, generate increased product
sales and attract subscribers to the Playboy Cyber Club. These marketing and
promotional activities will include traditional and Internet advertising,
parties and special events and strategic alliances to build traffic and attract
customers and subscribers. We intend to pursue a wide-ranging advertising
campaign that will include television, radio, print and outdoor advertising. Our
print and outdoor advertising campaign will feature our unique
"RabbitHeadLogo.com" spots. We also intend to expand our online advertising to
promote our Web
41
sites and specific merchandising opportunities on sites targeted at our 18 to 34
male demographic. We plan to increase our efforts specifically targeted at
college campuses, including radio advertisements and events and parties
organized by our over 300 campus representatives around the country.
CUSTOMER SERVICE AND FULFILLMENT
Our customer service department, which currently consists of nine full-time
employees, handles e-mail and phone inquiries relating to content on PLAYBOY.COM
and CYBERSPICE.COM. In addition, our customer service department handles
customer support for Playboy Cyber Club subscribers, including questions
concerning billing, content and programming and technical support. We currently
rely on third party technology such as Internet Message Center for e-mail
management and LivePerson for online person-to-person chat.
We currently rely on Playboy Enterprises to provide fulfillment and customer
service for products purchased through the Playboy Store and the Spice Store.
Playboy Enterprises currently processes and fulfills our customer orders at a
facility in Itasca, Illinois. A shipping and handling fee is charged on each
customer order, based on the total price of the order. Playboy Enterprises'
customer service personnel are responsible for taking product orders, handling
general customer inquiries, answering customer questions about the ordering
process and investigating the status of orders, shipments and payments. Customer
orders are currently received via toll-free telephone calls, fax, e-mail and
regular mail. The call center operates 24 hours a day, seven days a week.
Playboy Enterprises has recently announced that it is exploring strategic
alternatives for its facility in Itasca, Illinois. If Playboy Enterprises
decides to sell this facility, we would seek to provide product fulfillment and
customer service through a third party.
TECHNOLOGY INFRASTRUCTURE
We believe we have an advanced technology platform which is built and
maintained for reliability, security and flexibility. In addition, our
infrastructure is scalable, allowing it to grow with our business.
We operate our Web sites through multiple Web server computing systems,
including a variety of models from Sun Microsystems. We primarily use Solaris
for our operating systems and Netscape and Apache for our Web server software.
Our internal programming is written using a broad spectrum of programming
languages depending on the intended application. We also utilize a variety of
technologies to provide the features on our Web sites, including chat technology
from Koz.com, search capabilities from Infoseek, streaming audio and video from
Real Networks and newsgroup functionality from Infopop. In addition, we utilize
the Transact System from Open Market for handling user authentication, customer
management, billing and renewals for the Playboy Cyber Club and our pay-per-view
events. Our advertising serving, management and reporting is conducted with the
Open AdStream system from Real Media. We also use Oracle databases for data
management and the Vignette StoryServer for content management on portions of
our Web sites.
Our Web sites are currently hosted at Frontier Global Center in Sunnyvale,
California. In August 1999, we also entered into an Internet-hosting agreement
with Level 3 Communications to maintain production servers at Level 3
Communications' center in Chicago, Illinois. Frontier Global Center and Level 3
Communications provide comprehensive facilities management services, including
human and technical monitoring of all production servers 24 hours a day, seven
days a week. Any disruption in the Internet access provided by Frontier Global
Center or Level 3 Communications could disrupt our business and cause our
revenues to fall. We also have entered into agreements with What'sHotNow.com for
some of our e-commerce programs, FairMarket for hosting auctions, LinkShare for
our e-commerce affiliate programs and Akamai Technologies for image caching. We
intend to continue to invest in technologies that will improve and expand our
e-commerce capabilities and the functionality of our Web sites.
42
We use several layers of security in order to protect the transmission of
data as well as to prevent unauthorized access to our systems. All critical
systems including our databases are behind firewalls for protection. Access to
all our systems is through special secure channels, and we follow strict
password management procedures. From time to time, we use third party expert
services to assess and improve our security. All e-commerce transactions and
browser-based system administration screens use secure socket layer encryption
to protect data transmissions. We do not share with third parties customer
credit card information which we obtain from e-commerce transactions,
subscription and pay per view payments. We also provide customers with the
ability to place orders via fax or toll-free number as alternatives to
completing a transaction online.
COMPETITION
Many Web sites compete with us for visitors, subscribers, advertisers and
e-commerce partners and we expect this competition to increase in the future. We
believe that the primary competitive factors in our markets include brand
recognition, the quality of content and products, technology, pricing, ease of
use, sales and marketing efforts and user demographics. We believe that we
compete favorably with respect to each of these factors. In addition, we believe
that we distinguish ourselves from our competitors as a result of our
relationship with Playboy Enterprises, which provides us with many advantages,
including the following:
- worldwide brand recognition;
- an extensive collection of editorial and pictorial content;
- marketing, promotions and merchandising expertise; and
- a loyal audience comprised of young, upscale professionals.
We currently face intense competition for users, subscribers, advertisers
and sponsors from numerous types of Web sites, as well as from publishers and
distributors of traditional media. Competition could result in less user traffic
to PLAYBOY.COM and CYBERSPICE.COM, price reductions for the advertising
inventory on our free Web sites and decreased revenues from our subscription
sites and pay-per-view events.
We compete for users, subscribers, advertisers and sponsors with the
following:
- Web sites focused on sports, entertainment and other leisure activities;
- Web sites containing adult-oriented content, many of which offer all or a
portion of their content on a subscription basis; and
- domestic and international publishers and distributors of traditional
media, such as television, home videos, radio and print.
Many of the sites we compete with focus on particular topics, such as sports
and music, and are unable to satisfy the wide variety of information and
entertainment needs of Internet users in our targeted male demographic. In
addition, many other sites, such as search engines and portals, offer limited
original content. As a result, we believe that PLAYBOY.COM is one of the few
sites that provides high-quality original content for young men across a wide
spectrum of entertainment and lifestyle categories.
While much of the merchandise offered in the Playboy Store and the Spice
Store is unavailable elsewhere online, there is intense competition on the
Internet with respect to the sale of products. We compete with numerous
Internet-based merchants, including companies selling books, music, clothing and
other gift items, as well as sites offering adult-oriented products. In
addition, we compete directly with the Web sites of companies that manufacture
the non-Playboy-branded gifts we offer, such as
43
cameras and other electronics equipment. Furthermore, we also compete with
stores and companies that do not distribute their products through the Internet.
Many of our competitors and potential new competitors may have greater
financial, technical, marketing and distribution resources. As a result, these
competitors may be able to:
- adopt more aggressive pricing policies;
- undertake more extensive marketing and promotional campaigns; and
- make more attractive offers to potential employees, e-commerce partners,
advertisers and
third-party content providers.
As a result, we cannot assure you that we will be able to compete
effectively against current and future competitors.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We cannot be certain that the steps we have taken to protect our
intellectual property rights will be adequate or that third parties will not
infringe or misappropriate our proprietary rights. In addition, we may need to
rely on Playboy Enterprises to take appropriate steps to protect our
intellectual property rights, and we cannot be sure that Playboy Enterprises
will take all necessary steps or take action in a timely manner. Effective
trademark, copyright and trade secret protection may not be available in every
country in which we operate to the extent available in the United States.
To protect our intellectual property, we rely on a combination of trademark
and copyright law, trade secret protections and confidentiality agreements and
other contractual arrangements with our employees and third parties. Pursuant to
an agreement with our parent company, we have online rights to Playboy and Spice
content, a variety of trademarks, including the Playboy and Spice names and the
Rabbit Head Design, and numerous domain names. If this agreement were terminated
and, as a result, we lost the benefits of using the content, trademarks, names
and logos, our business would be harmed. We also may be unable to detect the
unauthorized use of our intellectual property or take appropriate steps to
enforce our intellectual property rights. Defending our intellectual property
rights could also result in the expenditure of significant financial and
managerial resources, which could harm our financial results.
We may license in the future some of our proprietary rights, such as
trademarked or copyrighted material, to third parties. Some of our licensees may
take or omit to take actions that would adversely affect the value of our
proprietary rights or reputation, and this could have a material adverse effect
on our business and financial results.
Although we believe that our proprietary rights do not infringe on the
intellectual property rights of others, other parties may assert claims against
us that we have misappropriated a trade secret or infringed a patent, copyright,
trademark or other proprietary right belonging to them. For example, we cannot
be sure that we have the online rights to all editorial and pictorial content
that was developed many years ago and is contained in the Playboy archives. Any
infringement or related claims, even if not meritorious, could be costly and
time consuming to litigate, may distract management from other tasks of
operating the business and may result in the loss of significant rights and the
loss of our ability to operate our business.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
There are an increasing number of laws and regulations in the United States
and abroad pertaining to communications and commerce on the Internet. In
addition, a number of legislative and regulatory proposals are under
consideration by federal, state, local and foreign governments. Laws or
regulations may be adopted with respect to the Internet relating to liability
for information retrieved
44
from or transmitted over the Internet, user privacy, taxation and the quality of
products and services. Moreover, the application to the Internet of existing
laws governing issues such as intellectual property ownership and infringement,
pornography, obscenity, libel, gaming, employment and personal privacy is
uncertain and developing. Any such legislation or regulation, or the application
or interpretation of existing laws, may decrease the growth in the use of the
Internet in general, prevent us from delivering our content in different parts
of the world and increase our costs of selling products or otherwise operating
our business.
ONLINE CONTENT REGULATIONS. Several federal, state and foreign statutes
prohibit the transmission of indecent, pornographic, obscene or offensive
content over the Internet to particular groups or persons, and some private
legal actions have been brought or threatened against libraries and various
public facilities that offer unfiltered Internet access. If these statutes are
deemed to apply to us and our activities, if new laws or regulations are adopted
which are found to apply to our activities, or if caselaw establishes broad
limitations on distribution, we may be limited in the types of content and
advertisements we make available on our Web sites. In addition, some foreign
countries, such as Singapore and China, entirely restrict access to our Web
sites throughout their countries. If other countries decide to adopt similar
policies, our business and financial results may be harmed. Pending legislation
in the United States seeks to ban Internet gaming and federal and state
officials have taken action against businesses that operate Internet gaming
activities. Other countries may also decide to adopt laws or regulations that
ban or curtail Internet gaming. As a result, our ability to provide gaming
services over the Internet may be limited or prohibited in various
jurisdictions. Furthermore, legislation regulating online content could limit
the growth in use of the Internet generally and decrease the acceptance of the
Internet as an advertising and e-commerce medium.
PRIVACY CONCERNS. Web sites typically place identifying data, or cookies,
on a user's hard drive without the user's knowledge or consent. Our company and
many other Internet companies use cookies for a variety of different reasons,
including the collection of data derived from the user's Internet activity. Any
reduction or limitation in the use of cookies could limit the effectiveness of
our sales and marketing efforts. Most currently available Web browsers allow
users to remove cookies at any time or to prevent cookies from being stored on
their hard drive. Some privacy advocates and governmental bodies have suggested
limiting or eliminating the use of cookies. In addition, the European Union and
many countries within the EU have adopted privacy directives or laws that
strictly regulate the collection and use of information regarding Internet users
that is identifiable to particular individuals. Privacy legislation has been
proposed in the U.S. as well, and the U.S. Federal Trade Commission has taken
action against Web site operators that do not comply with state privacy
policies. These and other governmental efforts may limit our ability to target
advertising or collect and use information regarding the use of our Web sites.
Fears relating to a lack of privacy could also result in a reduction in the
number of our users and subscribers which could harm our business and financial
results.
INTERNET TAXATION. A number of legislative proposals have been made at the
federal, state and local levels, and by various foreign governments, that would
impose additional taxes on the sale of goods and services over the Internet, and
some states have taken measures to tax Internet-related activities. Although
Congress placed a three-year moratorium in 1998 on new state and local taxes on
Internet access or e-commerce, existing state and local laws were expressly
excepted from this moratorium. It is possible this moratorium may not be
renewed. As a result, some federal and/or state taxes may be imposed on Internet
commerce. Legislation in this area, or other attempts at regulating commerce
over the Internet both in the United States and abroad may impede the growth of
our product sales and adversely affect our business.
DOMAIN NAMES. The acquisition and maintenance of domain names, or Internet
addresses, generally are regulated by governmental agencies and their designees.
Pursuant to an agreement with Playboy Enterprises, we have the right to use
various .com Web domain names that are important to
45
the operation of our business. We cannot assure you that third parties will not
be able to acquire domain names that are similar to, infringe upon or otherwise
decrease the value of our proprietary rights. In addition, changes in the system
for registering domain names may result in the loss of or change in our domain
names and a reduction in brand awareness among our users.
EMPLOYEES
We had 99 full-time employees as of November 30, 1999, of which we had 35 in
content development, 26 in product sales and customer service, 15 in sales,
marketing and business development, 14 in technology and operations and 9 in
management and administration. We also utilize the employees of Playboy
Enterprises on a limited basis and pay for these services pursuant to our
intercompany arrangements. Our employees are not represented by any collective
bargaining organization and we consider our relations with our employees to be
good. Competition for qualified personnel in our industry is intense. We believe
that we will need to continue to attract, hire and retain qualified personnel to
be successful in the future.
FACILITIES
Our principal executive office is located in Chicago, Illinois, where we
currently occupy approximately 32,140 square feet in space leased by Playboy
Enterprises. In addition, we occupy additional office space leased by Playboy
Enterprises in New York, New York and Los Angeles, California. We also lease
office space in San Francisco, California. We believe that our existing
facilities are adequate for our near term requirements. Please see "Transactions
With Playboy Enterprises" for more information regarding our offices in Chicago,
New York City, and Los Angeles.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
46
MANAGEMENT
OUR EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Our executive officers, directors and key employees, and their ages and
positions, are:
NAME AGE POSITION
- ---- -------- ------------------------------------------
Christie Hefner*.......................... 47 Acting Chief Executive Officer and
Chairman of the Board of Directors
Linda G. Havard*.......................... 44 Acting Chief Financial Officer and
Director
Paul D. Kallis*........................... 36 Executive Vice President and Acting
President
George E. Williams*....................... 36 Senior Vice President, Business
Development
Jay Boersma............................... 52 Creative Director
Rodger Brown.............................. 41 Editorial Director
Lisa Natale............................... 40 Vice President, Online Marketing Services
Donald G. Drapkin......................... 51 Director
- ------------------------
* Denotes executive officer
CHRISTIE HEFNER has served as our Acting Chief Executive Officer since
December 1999 and the Chairman of our Board of Directors since November 1998.
She has also served as Chairman of the Board and Chief Executive Officer of
Playboy Enterprises since November 1988. From September 1986 to November 1988,
she was Vice Chairman of the Board, President and Chief Operating Officer of
Playboy Enterprises. From February 1984 to September 1986, she was President and
Chief Operating Officer of Playboy Enterprises; she had been President since
April 1982. From January 1978 to April 1982, she was a Corporate Vice President
of Playboy Enterprises. She joined Playboy Enterprises in 1975 as Special
Assistant to the Chairman of the Board.
LINDA G. HAVARD has served as our Acting Chief Financial Officer and one of
our directors since December 1999. She has also served as Executive Vice
President, Finance and Operations and Chief Financial Officer of Playboy
Enterprises since May 1997. From October 1996 to May 1997, she served as
Atlantic Richfield Company's Senior Vice President in the Global Energy Ventures
division. From January 1994 to December 1996, she was Atlantic Richfield
Company's Vice President of Corporate Planning. From August 1982 to
January 1994, Ms. Havard held a variety of financial and management positions at
Atlantic Richfield Company.
PAUL D. KALLIS has served as our Acting President since April 1999 and was
named an Executive Vice President in September 1999. Between April 1998 and
August 1999, Mr. Kallis served as Senior Vice President and Chief Technology
Officer of Playboy Enterprises. From December 1996 to April 1998, he served as
Senior Vice President of Marvel Interactive, a division of Marvel Entertainment
Group, Inc. From April 1996 to December 1996, he served as Vice President,
Online Entertainment of Marvel Entertainment Group. Prior to working at Marvel
Entertainment Group, Mr. Kallis held a variety of computer science and new media
positions at Philips Media, a division of Philips Electronics, N.V., and AT&T
Bell Laboratories. Between January 1992 and May 1995, Mr. Kallis served as an
Adjunct Professor at Stevens Institute of Technology in Hoboken, New Jersey.
GEORGE E. WILLIAMS has been our Senior Vice President of Business
Development since October 1999. From March 1998 to October 1999, Mr. Williams
was the Senior Vice President and General Manager of Ameritrade Holdings
Corporation's OnMoney subsidiary. From April 1997 to March 1998, Mr. Williams
served as a Director in Prodigy Services Corporation's Money and Investment
Services Division. Mr. Williams served as a Manager in Prodigy's Money and
Investment Services Division from October 1996 to April 1997 and as a Product
Manager from November 1995 to October 1996. Mr. Williams was a Regional Manager
for Globalview Software, Inc. from February 1995
47
to November 1995. From March 1994 to February 1995, Mr. Williams served as a
Capital Markets Officer with Chemical Bank Corporation.
JAY BOERSMA has served as our Creative Director since May 1998. From
August 1996 to May 1998, he served as our Art Director. From September 1979 to
June 1996, Mr. Boersma was a Professor of Art at Governors State University in
University Park, Illinois. From January 1994 to August 1996, Mr. Boersma also
worked as an independent computer graphics consultant. From September 1977 to
June 1979, he was a Visiting Assistant Professor at University of Illinois at
Champaign.
RODGER BROWN has served as our Editorial Director since November 1999. From
April 1997 to November 1999, Mr. Brown served as an Editor for us. From
May 1994 to April 1997, he served as Associate Director of Online Services for
Eason Publications. Prior to joining Eason Publications, Mr. Brown was a
freelance writer with regular contributions to THE ATLANTA JOURNAL-CONSTITUTION,
THE NEW YORK TIMES MAGAZINE, THE VILLAGE VOICE and CREATIVE LOAFING NEWSPAPER.
LISA NATALE has served as our Vice President of Online Marketing Services
since January 1999. Ms. Natale served as our Vice President of Internet Sales
and Marketing from March 1998 to January 1999, and as our Vice President of
Corporate Research and Internet Sales from February 1997 to March 1998. From
August 1996 to February 1997, she served as our Director of Corporate Research
and Internet Sales. From August 1991 to August 1996, Ms. Natale was a Director
of Market Research for Playboy Enterprises. From August 1989 to August 1991, she
served as Playboy Enterprises' Research Director for PLAYBOY magazine. Prior to
joining Playboy Enterprises in 1989, Ms. Natale held various research positions
with Hearst Corporation.
DONALD G. DRAPKIN has served as one of our directors since December 1999. He
has also served as Vice Chairman and Director of MacAndrews & Forbes
Holdings Inc. and various of its affiliates since 1987. From 1977 to 1987,
Mr. Drapkin was a partner in the New York law firm of Skadden, Arps, Slate,
Meagher and Flom. In addition, Mr. Drapkin serves as Director of Algos
Pharmaceutical Corporation, Anthracite Capital, Inc., The Molson Companies
Limited, Nexell Thereapeutics Inc., Playboy Enterprises Inc., Revlon Consumer
Products Corporation, Revlon, Inc., The Warner Group, Inc., Wedcom, Inc. and
Weider Nutritional International, Inc.
COMPOSITION OF THE BOARD
Upon the completion of this offering, we intend to file an amended and
restated certificate of incorporation which will provide for a board of
directors consisting of between one and eleven directors. Each director is to be
elected for a period of one year at our annual meeting of stockholders and to
serve until the next annual meeting or until his or her successor is duly
elected.
BOARD COMMITTEES
The Audit Committee of the board of directors will be established prior to
the closing of this offering and will review, act on and report to the board of
directors with respect to various auditing and accounting matters, including the
recommendation of our auditors, the scope of the annual audits, fees to be paid
to the auditors, the performance of our independent auditors and our accounting
practices.
The Compensation Committee of the board of directors will be established
prior to the closing of this offering and will recommend, review and oversee the
salaries, benefits and stock option plans for our employees, consultants,
directors and other individuals compensated by us. The Compensation Committee
will also administer our compensation plans.
48
DIRECTOR COMPENSATION
Other than reimbursing directors for customary and reasonable expenses of
attending board of directors or committee meetings, we do not currently
compensate our directors. Under our 1999 Stock Incentive Plan, each individual
who first joins the Playboy.com board after the effective date of this offering
as a non-employee board member will automatically receive a grant of an option
on that date to purchase shares of common stock at the time of his or her
commencement of board service. In addition, on the date of each annual
stockholders' meeting beginning in 2001, each non-employee member of the board
of directors who is to continue to serve as a non-employee board member will
automatically be granted an option to purchase shares of common stock.
Please see "--2000 Stock Incentive Plan."
EMPLOYMENT AGREEMENTS
We do not currently have any employment agreements with any of our
employees.
EXECUTIVE COMPENSATION
We did not directly compensate any of our officers or employees for services
rendered to us during the year ended December 31, 1998. In addition, in the year
ended December 31, 1998, we did not grant any options to any of our officers or
employees.
2000 STOCK INCENTIVE PLAN
The 2000 Stock Incentive Plan will be adopted by the board of directors and
approved by our stockholder prior to the date of this offering. The 2000 Stock
Incentive Plan will be administered by our compensation committee.
shares of common stock have been authorized for issuance under the
2000 Stock Incentive Plan. The share reserve will automatically increase on the
first trading day in January of each calendar year, beginning January , 2001,
by an amount equal to % of the total number of shares of common stock
outstanding on the last trading day in December of the preceding calendar year,
but in no event will this annual increase exceed shares. In addition,
in no event may one participant in the 2000 Stock Incentive Plan receive option
grants or direct stock issuances for more than shares in the aggregate
per calendar year.
The 2000 Stock Incentive Plan will be divided into five separate programs:
- the discretionary option grant program under which eligible individuals in
the employ of Playboy.com or Playboy Enterprises may be granted options to
purchase shares of common stock at an exercise price determined by the
plan administrator;
- the stock issuance program under which eligible individuals may be issued
shares of common stock directly, through the purchase of these shares at a
price determined by the plan administrator or as a bonus tied to the
performance of services;
- the salary investment option grant program which may, at the plan
administrator's discretion, be activated for one or more calendar years
and, if so activated, will allow executive officers and other highly
compensated employees the opportunity to use a portion of their base
salary to acquire special below market stock option grants;
- the automatic option grant program under which option grants will
automatically be made at periodic intervals to eligible non-employee board
members to purchase shares of common stock at an exercise price equal to
100% of the fair market value of those shares on the grant date; and
49
- the director fee option grant program under which our non-employee board
members may be given the opportunity to use a portion of any retainer fee
otherwise payable to them in cash for the year to acquire special below
market stock option grants.
The 2000 Stock Incentive Plan will include the following features:
- The exercise price for any options granted under the plan may be paid in
cash or in shares of our common stock valued at fair market value on the
exercise date. The option may also be exercised through a same-day sale
program without any cash outlay by the optionee.
- The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program in return for the
grant of new options for the same or different number of option shares
with an exercise price per share based upon the fair market value of
common stock on the new grant date.
- Stock appreciation rights may be issued under the discretionary option
grant program. Such rights will provide the holders with the election to
surrender their outstanding options for an appreciation distribution from
Playboy.com equal to the fair market value of the vested shares of common
stock subject to the surrendered option less the exercise price payable
for those shares. Playboy.com may make the payment in cash or in shares of
common stock.
The 2000 Stock Incentive Plan will include change in control provisions that
may result in the accelerated vesting of outstanding option grants and stock
issuances:
- In the event that Playboy.com is acquired by merger or asset sale or a
board-approved sale of more than 50% of Playboy.com's capital stock, each
outstanding option under the discretionary option grant program that is
not assumed or continued by the successor corporation will immediately
become exercisable for all the option shares, and all unvested shares will
immediately vest, except to the extent our repurchase rights with respect
to those shares are to be assigned to the successor corporation.
- The plan administrator may grant options which vest immediately upon an
acquisition of Playboy.com or upon a hostile change of control or upon the
individual's termination of service following an acquisition that results
in a change in control.
The board will be able to amend or modify the 2000 Stock Incentive Plan at
any time, subject to any required stockholder approval. The 2000 Stock Incentive
Plan will terminate no later than , 2010.
50
TRANSACTIONS WITH PLAYBOY ENTERPRISES
HISTORICAL RELATIONSHIP
As a subsidiary of Playboy Enterprises, we have historically received
various services from Playboy Enterprises, including finance, accounting,
administrative, legal, technical, human resources, marketing, creative,
merchandising, fulfillment and customer service and facilities services. Playboy
Enterprises has also provided us with the services of a number of its executives
and employees. Prior to the closing of this offering, our financial statements
have reflected allocations for these services rendered to us by Playboy
Enterprises. We believe those allocations have been made on a reasonable and
consistent basis. However, they are not necessarily indicative of, nor is it
practical for us to estimate, the level of expenses we would have otherwise
incurred had we operated as a separate, stand-alone company.
We received commissions totaling $239,000 in 1998 and $276,000 for the nine
months ended September 30, 1999 from Playboy Enterprises for the sale of
non-Playboy branded videos and music through PLAYBOY.COM. We received $480,000
in 1999 and $360,000 for the nine months ended September 30, 1999 for
advertising these non-Playboy branded videos and music on PLAYBOY.COM.
Since 1995, we have paid Playboy Enterprises $1 million annually for access
to its editorial and pictorial libraries.
Since inception, Playboy Enterprises has provided the funds to finance our
operations. These funds have been advanced to us and bear an annual interest
rate of 12%. At September 30, 1999, we owed Playboy Enterprises approximately
$21.6 million.
INTERCOMPANY AGREEMENTS
We intend to enter into a series of intercompany agreements with Playboy
Enterprises prior to the closing of this offering. We have summarized below the
anticipated material terms of these agreements. These agreements will not have
been negotiated on an arms-length basis. However, we believe the terms of these
agreements are no less favorable to us than those that could have been obtained
from an unaffiliated third party. The material terms of the intercompany
agreements cannot be amended or waived without the approval of a majority of our
directors who are not affiliated with Playboy Enterprises. Our bylaws will also
provide that we will not enter into new material agreements with Playboy
Enterprises unless those agreements are no less favorable to us than those that
could have been obtained from an unaffiliated third party and are approved by a
majority of our directors who are not affiliated with Playboy Enterprises.
MASTER INTERCOMPANY AGREEMENT.
We will enter into a master intercompany agreement that provides for the
following:
- Indemnification by PLAYBOY.COM. We will indemnify Playboy Enterprises and
its officers, directors and employees from all losses on claims arising
out of our failure to pay or perform all liabilities or obligations
arising from or in connection with our business following the date of this
agreement or any breach by us of our agreements with Playboy Enterprises.
- Indemnification by Playboy Enterprises. Playboy Enterprises will
indemnify us and our officers, directors and employees from all losses or
claims arising out of Playboy Enterprises' failure to pay or perform all
liabilities or obligations arising from or in connection with its business
before the date of this agreement, other than our liabilities or
obligations, and any breach by Playboy Enterprises of their agreements
with us.
- Dispute Resolution. We will attempt to resolve disputes by referring
controversial matters to senior management representatives of the parties.
If these efforts are not successful, either party may submit the
disagreement or question to mediation. In the event either party is
dissatisfied
51
with the resolution determined by the mediator, either party may commence
binding arbitration proceedings. The agreement contains procedures that
are intended to expedite dispute resolution, including the selection of an
arbitrator and limitations on discovery.
ASSET TRANSFER AGREEMENT
Prior to the closing of this offering, we will enter into an asset transfer
agreement with Playboy Enterprises. Pursuant to this agreement, Playboy
Enterprises will transfer and assign to us various assets and contracts used in
connection with our business, or allocate costs associated with our use. These
assets and contracts shall include all computer files and data that constitute
our Web sites, computer hardware used in the operation of our Web sites, Web
site hosting and technology license agreements, other agreements having to do
with our business, physical assets and leases. Generally, where the agreement
only impacts our business and no other units of Playboy Enterprises, it is being
assigned to us. Playboy Enterprises will also transfer to us personnel that we
will need in the operation of our business.
TRADEMARK AND CONTENT LICENSE AGREEMENT
We will enter into a trademark and content license agreement with Playboy
Enterprises prior to the closing of this offering. Under this agreement, we will
have the right to use various Playboy and Spice trademarks in connection with
the sale of goods and services on the Internet. We will also obtain rights to
transmit, distribute and provide access to Playboy and Spice content. Finally,
we will receive worldwide rights to use Playboy and Spice trademarks and content
in connection with the sale of goods via direct mail.
ADVERTISING AND CO-PROMOTIONS AGREEMENT
We will enter into an advertising and co-promotions agreement with Playboy
Enterprises prior to the closing of this offering that will cover the
cross-promotional rights and responsibilities of each party. In general, this
agreement will grant us advertising space in PLAYBOY magazine and other media
properties of Playboy Enterprises in exchange for the promotion of Playboy
Enterprises on our Web sites. We and Playboy Enterprises will also offer links
to each other's Web site.
ADMINISTRATIVE SERVICES AGREEMENT
Following the closing of this offering, Playboy Enterprises shall continue
to provide administrative services to us, including legal, investor relations,
corporate communications, facilities, human resources, treasury and accounting.
We will pay Playboy Enterprises for their services under this agreement on
either an estimated or actual cost reimbursement. In the event we request
additional services from Playboy Enterprises, we may enter into an addendum
covering those services, and we will negotiate in good faith any fees payable to
Playboy Enterprises for these services.
FULFILLMENT AND CUSTOMER SERVICE AGREEMENT
Playboy Enterprises has recently announced that it is exploring strategic
alternatives for its facility in Itasca, Illinois, which currently handles the
fulfillment and customer service responsibilities for the products we sell
through the Playboy Store and the Spice Store. If Playboy Enterprises does not
sell this facility prior to the closing of this offering, we will enter into a
fulfillment and customer service agreement with Playboy Enterprises relating to
the sale of products on the Playboy Store and Spice Store. If this facility is
sold, we expect to enter into an agreement with a third party for the provision
of product fulfillment and customer service functions.
52
PRODUCTION SERVICES AGREEMENT
Upon or prior to the completion of this offering, we will enter into a
production services agreement with Playboy Enterprises relating to the creation
of original content by Playboy Enterprises for us. These services shall include
custom photo shoots, film production, research and articles.
COMMON STOCK REGISTRATION RIGHTS AGREEMENT
We will enter into a registration rights agreement with Playboy Enterprises
prior to the closing of this offering that will cover our common stock owned by
Playboy Enterprises.
Under that agreement, at any time after 180 days following the date of this
prospectus, Playboy Enterprises may demand that we file a registration statement
under the Securities Act of 1933 covering all or a portion of our securities
held by Playboy Enterprises. However, the securities to be registered must have
a reasonably anticipated aggregate public offering price of at least
$10 million. Playboy Enterprises can effect no more than one demand registration
per year. If and when we become eligible to utilize a Form S-3 registration
statement to register an offering of our securities, Playboy Enterprises may
request that we file a registration statement on Form S-3 covering all or a
portion of our securities held by Playboy Enterprises, provided that the
aggregate public offering price is at least $2.5 million. In addition, pursuant
to the registration rights agreement, Playboy Enterprises will be entitled to
piggyback registration rights with respect to the registration of its shares
under the Securities Act of 1933.
These registration rights are subject to various conditions and limitations,
including, in the case of piggyback registration rights, the right of the
underwriters to restrict the number or shares of common stock held by Playboy
Enterprises to be included in a registration. We are generally required to bear
all of the expenses of these registrations, except underwriting discounts and
selling commissions.
The registration rights of Playboy Enterprises under the registration rights
agreement will terminate when Playboy Enterprises may sell all its shares in a
three-month period under Rule 144 under the Securities Act of 1933.
TAX ALLOCATION AGREEMENT
Upon or prior to the completion of this offering, we will enter into a tax
allocation agreement with Playboy Enterprises to allocate responsibilities,
liabilities and benefits relating to taxes. We will be required to pay our share
of income taxes shown as due on any consolidated, combined or unitary tax
returns filed by Playboy Enterprises for tax periods ending on or before or
including the date as of which we will no longer be a member of Playboy
Enterprises' group for federal, state or local tax purposes, as the case may be.
Playboy Enterprises will indemnify us against liability for all taxes in respect
of consolidated, combined or unitary tax returns for periods as to which Playboy
Enterprises is filing group returns that include us. Accordingly, any
redetermined tax liabilities for those periods will be the responsibility of
Playboy Enterprises, and any refunds or credits attributable to us in respect of
consolidated, combined or unitary tax returns for those periods will be for the
account of Playboy Enterprises. We will be responsible for filing any separate
tax returns for any taxable period and will be responsible for any tax
liabilities, and entitled to any refunds or credits of taxes, with respect to
any separately filed tax returns. We will indemnify Playboy Enterprises against
liability for any federal, state or local taxes for which we file separate tax
returns.
Tax payments will be made between us and Playboy Enterprises quarterly based
on pro forma consolidated, combined or unitary tax returns prepared by Playboy
Enterprises that reflect the methods and elections used by Playboy Enterprises
in filing such returns. Within a reasonable period of time following the filing
of any consolidated, combined or unitary tax return by Playboy Enterprises that
includes us, Playboy Enterprise shall pay to us or we shall pay to Playboy
Enterprises, as the case may
53
be, the difference between our allocated share of the tax liability shown on
such consolidated, combined or unitary tax return and the amount of the
estimated tax payments we made with respect to the period covered by such tax
returns.
Playboy Enterprises will have all the rights of a parent of a consolidated,
combined or unitary group, will be the sole and exclusive agent for us in any
and all matters relating to our taxes reported as part of Playboy Enterprises'
consolidated, combined or unitary group, will have the sole and exclusive
responsibility for the preparation and filing of such consolidated, combined or
unitary tax returns, and will have the power, in its sole discretion, to contest
or compromise any asserted tax adjustment or deficiency and to file, litigate or
compromise any claim for refund on our behalf related to such return. Any
dispute concerning the calculation or basis of determination of any payment
provided under the tax allocation agreement will be resolved by a law firm or
"big five" accounting firm selected and paid jointly by the parties.
We will be included in Playboy Enterprises' consolidated group for federal,
state and local income tax purposes for so long as Playboy Enterprises
beneficially owns at least 80% of the total voting power and value of our
outstanding common stock. Each member of a consolidated, combined or unitary
group generally is jointly and severally liable for the income tax liability of
each other member of the group. Accordingly, although the tax allocation
agreement will allocate tax liabilities between us and Playboy Enterprises,
during the period in which we are included in Playboy Enterprises' consolidated,
combined or unitary group, we could be liable for taxes of another member of the
group in the event that any tax liability is incurred, but not discharged, by
any other member of Playboy Enterprises' consolidated group.
54
PRINCIPAL STOCKHOLDERS
As of January 7, 2000, 25,000,000 shares of our common stock were
outstanding, all of which were owned by Playboy Enterprises. Upon completion of
this offering, Playboy Enterprises will own % of our outstanding common stock
and approximately % if the underwriters exercise their over-allotment option
in full. The address for Playboy Enterprises is 680 North Lake Shore Drive,
Chicago, Illinois 60611. For a description of certain transactions and
arrangements between us and Playboy Enterprises, please see "Transactions With
Playboy Enterprises."
Other than the shares held by Playboy Enterprises, none of our directors,
officers or employees beneficially own any of our outstanding common stock. The
following table set forth information as of January 7, 2000 with respect to the
outstanding securities of Playboy Enterprises beneficially owned by each of our
directors and executive officers, and all of our directors and executive
officers as a group. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and includes voting and
investment power with respect to shares. Unless otherwise indicated, the persons
named in the table below have sole voting and sole investment control with
respect to the shares beneficially owned.
PLAYBOY ENTERPRISES, INC.
NUMBER OF PERCENTAGE OF NUMBER OF PERCENTAGE OF
SHARES OF SHARES OF SHARES OF SHARES OF
CLASS A CLASS A CLASS B CLASS B
COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK
BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED BENEFICIALLY OWNED BENEFICIALLY OWNED
- ---------------- ------------------ ------------------ ------------------ ------------------
Christie Hefner(1)........... 72,274 1.5% 704,178 3.6%
Linda G. Havard(2)........... -- * 65,000 *
Donald G. Drapkin(3)......... -- * 10,000 *
Paul D. Kallis(4)............ -- * 11,875 *
George E. Williams........... -- * -- *
All directors and executive
officers as a group
(5 persons)................ 72,274 1.5% 791,053 4.0%
- ------------------------
* Less than 1%
(1) Includes options to purchase 435,329 shares of Class B common stock of
Playboy Enterprises. In addition, this number includes 37,500 restricted
shares of Class B common stock which have not vested.
(2) Includes options to purchase 45,000 shares of Class B common stock of
Playboy Enterprises. In addition, this number includes 20,000 restricted
shares of Class B common stock which have not vested.
(3) Includes options to purchase 5,000 shares of Class B common stock of Playboy
Enterprises. In addition, this number includes 5,000 restricted shares of
Class B common stock which have not vested.
(4) Includes options to purchase 6,875 shares of Class B common stock of Playboy
Enterprises. Includes 5,000 restricted shares of Class B common stock which
have not vested.
55
DESCRIPTION OF CAPITAL STOCK
GENERAL
The following description of our common stock and preferred stock and the
relevant provisions of our amended and restated certificate of incorporation and
amended and restated bylaws as will be in effect upon the closing of this
offering are summaries thereof and are qualified by reference to our amended and
restated certificate of incorporation and the amended and restated bylaws,
copies of which have been filed with the Securities and Exchange Commission as
exhibits to our registration statement, of which this prospectus forms a part.
Upon closing of this offering, our authorized capital stock will consist of
100,000,000 shares of common stock, par value $0.01 per share, and 5,000,000
shares of preferred stock, par value $0.01 per share.
COMMON STOCK
Upon closing of this offering, and giving effect to the issuance of
shares of common stock in this offering, there will be shares
of common stock outstanding. Holders of common stock are entitled to one vote
for each share held on all matters submitted to a vote of stockholders and do
not have cumulative voting rights. Accordingly, holders of a majority of the
shares of common stock entitled to vote in any election of directors may elect
all of the directors standing for election. Holders of common stock are entitled
to receive ratably those dividends, if any, as may be declared by the board of
directors out of funds legally available therefor, subject to any preferential
dividend rights of any outstanding preferred stock. Upon the liquidation,
dissolution or winding up of Playboy.com, the holders of common stock are
entitled to receive ratably the net assets of Playboy.com available after the
payment of all debts and other liabilities and subject to the prior rights of
any outstanding preferred stock. Holders of the common stock have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of common
stock are, and the shares offered by us in this offering will be, when issued in
consideration for payment thereof, fully paid and nonassessable. The rights,
preferences and privileges of holders of common stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
preferred stock which we may designate and issue in the future. Upon the closing
of this offering, there will be no shares of preferred stock outstanding.
PREFERRED STOCK
Upon the closing of this offering, there will be no shares of preferred
stock outstanding. Upon the closing of this offering, the board of directors
will be authorized, without further stockholder approval, to issue from time to
time up to an aggregate of 5,000,000 shares of preferred stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption, including sinking fund provisions,
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designation of series. We have no present plans to
issue any shares of preferred stock. See "--Anti-Takeover Effects of Provisions
of Delaware Law and Playboy.com's Certificate of Incorporation and Bylaws."
OPTIONS
Options to purchase a total of shares of common stock may be
granted under the 2000 Stock Incentive Plan. As of January 7, 2000, there were
no outstanding options under the 2000 Stock Incentive Plan. We intend to file a
registration statement on Form S-8 as soon as practicable following the closing
of this offering. As a result, any shares issued upon exercise of options
granted under the
56
2000 Stock Incentive Plan will be immediately available for sale in the public
market, subject to the terms of any lock-up agreements entered into with the
underwriters.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND PLAYBOY.COM'S
CERTIFICATE OF INCORPORATION AND BYLAWS
Playboy.com is subject to the provisions of Section 203 of the Delaware
General Corporation Law. Subject to some exceptions, Section 203 prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
interested stockholder attained that status with the approval of the board of
directors or unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
various exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
the corporation's voting stock. This statute could prohibit or delay the
accomplishment of mergers or other takeover or change in control attempts with
respect to Playboy.com and, accordingly, may discourage attempts to acquire
Playboy.com.
In addition, various provisions of our amended and restated certificate of
incorporation and our amended and restated bylaws, which provisions will be in
effect upon the closing of the offering and are summarized in the following
paragraphs, may be deemed to have an anti-takeover effect and may delay, defer
or prevent a tender offer or takeover attempt that a stockholder might consider
in its best interest, including those attempts that might result in a premium
over the market price for the shares held by stockholders.
BOARD OF DIRECTORS VACANCIES. Playboy.com's amended and restated
certificate of incorporation authorizes the board of directors to fill vacant
directorships or increase the size of the board of directors. This may deter a
stockholder from removing incumbent directors and simultaneously gaining control
of the board of directors by filling the vacancies created by this removal with
its own nominees.
STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS. Playboy.com's amended
and restated certificate of incorporation provides that stockholders may not
take action by written consent, but only at duly called annual or special
meetings of stockholders. The amended and restated certificate of incorporation
further provides that special meetings of stockholders of Playboy.com may be
called only by the chairman of the board of directors, the chief executive
officer or a majority of the board of directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTORS
NOMINATIONS. Playboy.com's amended and restated bylaws provide that stockholders
seeking to bring business before an annual meeting of stockholders, or to
nominate candidates for election as directors at an annual meeting of
stockholders, must provide timely notice thereof in writing. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of Playboy.com, not less than 120 days nor more than
150 days prior to the first anniversary of the date of Playboy.com's notice of
annual meeting provided with respect to the previous year's annual meeting of
stockholders; provided, that if no annual meeting of stockholders was held in
the previous year or the date of the annual meeting of stockholders has been
changed to be more than 30 calendar days earlier than or 60 calendar days after
this anniversary, notice by the stockholder, to be timely, must be so received
not more than 90 days nor later than the later of:
- 60 days prior to the annual meeting of stockholders; or
- the close of business on the 10th day following the date on which notice
of the date of the meeting is given to stockholders or made public,
whichever occurs first.
57
Our amended and restated bylaws also specify certain requirements as to the
form and content of a stockholder's notice. These provisions may preclude
stockholders from bringing matters before an annual meeting of stockholders or
from making nominations for directors at an annual meeting of stockholders.
AUTHORIZED BUT UNISSUED SHARES. The authorized but unissued shares of
common stock and preferred stock are available for future issuance without
stockholder approval, subject to various limitations imposed by the Nasdaq
National Market. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued shares of common stock and preferred stock could make
more difficult or discourage an attempt to obtain control of Playboy.com by
means of a proxy context, tender offer, merger or otherwise.
The Delaware General Corporation Law provides generally that the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's certificate of incorporation or bylaws, unless a
corporation's certificate of incorporation or bylaws, as the case may be,
requires a greater percentage.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Harris Trust and
Savings Bank, Chicago, Illinois.
58
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market could
adversely affect prevailing market prices of our common stock. Upon the closing
of this offering, we will have outstanding an aggregate of shares of
our common stock, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options. Of these shares, all shares sold
in this offering will be freely tradeable without restriction or further
registration under the Securities Act unless such shares are purchased by
"affiliates" as that term is defined in Rule 144 under the Securities Act.
The remaining shares outstanding, all of which are held by Playboy
Enterprises, are "restricted securities" within the meaning of Rule 144.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144 or Rule 701
promulgated under the Securities Act. As a result of the contractual
restrictions described below and the provisions of Rule 144, the shares of
common stock outstanding prior to this offering will be available for sale in
the public market 180 days following the closing of this offering, in accordance
with the volume limitations and other conditions of Rule 144.
LOCK-UP AGREEMENTS
Playboy Enterprises and our directors and officers signed lock-up agreements
under which they agreed not to transfer or dispose of, directly or indirectly,
any shares of our common stock or any securities convertible into or exercisable
or exchangeable for shares of our common stock for 180 days after the date of
this prospectus, without the prior written consent of Credit Suisse First Boston
Corporation. After the expiration of the lock-up agreements, Playboy Enterprises
will be allowed to sell shares of our common stock in accordance with Rule 144.
Sales of substantial amounts of common stock in the public market after this
restriction lapses could harm the prevailing market price and our ability to
raise equity capital in the future.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of 1% of
the number of shares of common stock then outstanding, which will equal
approximately shares immediately after the offering, or the average
weekly trading volume of the common stock on the Nasdaq National Market during
the four calendar weeks preceding the filing of a notice on Form 144 with
respect to such sale. Sales under Rule 144 are also subject to various
manner-of-sale provisions, notice requirements and the availability of current
public information about us.
RULE 144(K)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the 90 days preceding a sale and who has beneficially owned the shares
proposed to be sold for at least two years, including the holding period of any
prior owner other than an affiliate, is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
each of our employees, consultants or advisors who purchases shares from us in
connection with a compensatory stock plan or other written agreement is eligible
to resell such shares 90 days after the effective date of this offering
59
in reliance on Rule 144, but without compliance with certain restrictions,
including the holding period, contained in Rule 144.
REGISTRATION RIGHTS
Pursuant to an agreement between us and Playboy Enterprises, Playboy
Enterprises will be entitled to certain rights with respect to the registration
of our shares under the Securities Act. See "Transactions With Playboy
Enterprises." After such registration, these shares of our common stock will be
freely tradeable without restriction under the Securities Act. Any such sales
could cause the trading price of our common stock to fall.
STOCK OPTIONS
As of January 7, 2000, we had no outstanding stock options. As soon as
practicable following the closing of this offering, we intend to file a
registration statement under the Securities Act covering shares of
common stock reserved for issuance under our 2000 Stock Incentive Plan. Shares
issued under this plan will be eligible for sale in the public market from time
to time, subject to vesting provisions, Rule 144 volume limitations applicable
to our affiliates and, in the case of some options, the expiration of lock-up
agreements.
60
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, Bear, Stearns &
Co. Inc. and Banc of America Securities LLC are acting as representatives, the
following respective numbers of shares of common stock:
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------ ------------
Credit Suisse First Boston Corporation......................
Bear, Stearns & Co. Inc.....................................
Banc of America Securities LLC..............................
------------
Total...................................................
============
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that, if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the initial public offering price
less the underwriter discounts and commissions. The option may be exercised only
to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to dealers may be changed by the
representatives.
The following table summarizes the compensation and estimated expenses we
will pay:
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
Underwriting discounts and commissions
paid by us........................... $ $ $ $
Expenses payable by us................. $ $ $ $
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We, our officers and directors and Playboy Enterprises have agreed that we
and they will not offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, or file with the Securities and Exchange Commission a
registration statement under the Securities Act relating to, any additional
shares of our common stock or securities convertible into or exchangeable or
exercisable for any of our common stock, or publicly disclose the intention to
make any offer, sale, pledge, disposition or filing, without the prior written
consent of Credit Suisse First Boston Corporation for a period of 180 days after
the date of this prospectus, subject to limited exceptions.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of the common stock for some of our employees, friends
and other people and entities with whom we maintain business relationships who
have expressed an interest in purchasing common stock in the offering. The
number of shares available for sale to the general public in the offering will
be reduced
61
to the extent these persons purchase the reserved shares. Any reserved shares
not purchased will be offered by the underwriters to the general public on the
same terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
We have applied to have our shares of common stock approved for listing on
The Nasdaq National Market under the symbol "PBOY."
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined by negotiation between the
representatives and us. The principal factors to be considered in determining
the public offering price include:
- the information in this prospectus or available to the underwriters;
- the history and the prospects for the industry in which we will compete;
- the ability of our management;
- the prospects for our future earnings;
- the present state of our developments and our current financial condition;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for publicly traded common
stock of generally comparable companies.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids in compliance with
Regulation M under the Exchange Act.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed to cover
syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to cover
syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would be in the
absence of these transactions. These transactions may be effected on The Nasdaq
National Market or otherwise and, if commenced, may be discontinued at any time.
62
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. As result, any resale of the common stock
in Canada must comply with applicable securities laws, which will vary depending
on the relevant jurisdiction, and which may require resales to be made under
available statutory exemptions or under a discretionary exemption granted by the
applicable Canadian securities regulatory authority. Purchasers are advised to
seek legal advice before any resale of the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be considered to represent to us and the dealer from which the
purchase confirmation is received that (i) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under those securities laws, (ii) where
required by law, the purchaser is purchasing as principal and not as agent, and
(iii) the purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION--ONTARIO PURCHASERS
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer of these persons. All or a substantial portion of the assets of the
issuer and these persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the issuer or these persons in
Canada or to enforce a judgment obtained in Canadian courts against the issuer
or these persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the SECURITIES ACT (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser in this offering. The report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
for common stock acquired on the same date and under the same prospectus
exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchasers under relevant Canadian
legislation.
63
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Brobeck, Phleger & Harrison LLP, New York, New York. Certain legal matters in
connection with the offering will be passed upon for the underwriters by
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park,
California.
EXPERTS
The balance sheets of Playboy.com, Inc. as of September 30, 1999 and
December 31, 1998 and the related statements of operations, of cash flows and of
stockholder's deficit for the nine months ended September 30, 1999 and each of
the two years in the period ended December 31, 1998 included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits, schedules and amendment filed with
the registration statement, under the Securities Act with respect to the common
stock to be sold in this offering. This prospectus does not contain all of the
information set forth in this registration statement. For further information
about Playboy.com and the shares of common stock to be sold in the offering,
please refer to this registration statement. For additional information, please
refer to the exhibits that have been filed with our registration statement on
Form S-1.
You may read and copy all or any portion of the registration statement or
any other information we file at the Securities and Exchange Commission's public
reference room at 450 Fifth Street, N.W., Washington, D.C., 20549. You can
request copies of these documents upon payment of a duplicating fee, by writing
to the Securities and Exchange Commission. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information about the public
reference rooms. Our Securities and Exchange Commission filings, including the
registration statement, will also be available to you on the Securities and
Exchange Commission's Web site (http://www.sec.gov).
We intend to furnish our stockholders with annual reports containing audited
financial statements and to make available quarterly reports containing
unaudited financial information.
64
PLAYBOY.COM, INC.
TABLE OF CONTENTS
PAGE
----------------
Report of Independent Accountants........................... F-2
Financial Statements:
Balance Sheets as of December 31, 1998 and September 30,
1999.................................................... F-3
Statements of Operations for the years ended December 31,
1997 and 1998 and the nine months ended September 30,
1998 (unaudited) and 1999............................... F-4
Statements of Cash Flows for the years ended December 31,
1997 and 1998 and the nine months ended September 30,
1998 (unaudited) and 1999............................... F-5
Statements of Stockholder's Deficit for the years ended
December 31, 1997 and 1998 and the nine months ended
September 30, 1999...................................... F-6
Notes to Financial Statements............................. F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Playboy.com, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of cash flows and of stockholder's deficit present fairly, in all
material respects, the financial position of Playboy.com, Inc. at September 30,
1999 and December 31, 1998, and the results of its operations and its cash flows
for the nine months ended September 30, 1999 and each of the two years in the
period ended December 31, 1998, in conformity with accounting principles
generally accepted in the United States. 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 of these statements in accordance with auditing standards generally
accepted in the United States, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
December 23, 1999
F-2
PLAYBOY.COM, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
Assets:
Accounts receivable, net of allowance for doubtful
accounts of $320 and $409............................... $ 426 $ 1,034
Prepaid expenses and other current assets................. 308 247
-------- --------
Total current assets.................................. 734 1,281
-------- --------
Capitalized software, net of accumulated amortization of
$775 and $1,857......................................... 681 981
-------- --------
Total assets.......................................... $ 1,415 $ 2,262
======== ========
Liabilities:
Accounts payable.......................................... $ 695 $ 203
Accrued salaries, wages and employee benefits............. 204 156
Deferred revenues......................................... 365 658
Other liabilities and accrued expenses.................... 49 116
-------- --------
Total current liabilities............................. 1,313 1,133
-------- --------
Due to related party...................................... 13,369 21,591
-------- --------
Total liabilities..................................... 14,682 22,724
-------- --------
Commitments and contingencies
Stockholder's deficit:
Preferred stock, $0.01 par value; authorized 5,000,000
shares; no shares issued and outstanding................ -- --
Common stock, $0.01 par value; authorized 100,000,000
shares; 25,000,000 shares issued and outstanding........ 250 250
Accumulated deficit....................................... (13,517) (20,712)
-------- --------
Total stockholder's deficit........................... (13,267) (20,462)
-------- --------
Total liabilities and stockholder's deficit........... $ 1,415 $ 2,262
======== ========
The accompanying notes are an integral part of these financial statements.
F-3
PLAYBOY.COM, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED)
Net revenues:
Advertising and sponsorships.............. $ 1,857 $ 2,371 $ 1,600 $ 3,580
E-commerce................................ 1,044 1,298 862 1,316
Subscriptions............................. 490 1,892 1,377 1,773
----------- ----------- ----------- -----------
Total net revenues.................... 3,391 5,561 3,839 6,669
----------- ----------- ----------- -----------
Cost of revenues, related party............. 1,407 2,597 1,910 2,380
----------- ----------- ----------- -----------
Gross profit................................ 1,984 2,964 1,929 4,289
----------- ----------- ----------- -----------
Operating expenses, related party:
Sales and marketing....................... 497 1,853 1,118 2,823
Content and product development........... 1,797 3,939 2,500 5,149
General and administrative................ 2,369 2,860 2,061 1,939
----------- ----------- ----------- -----------
Total operating expenses.............. 4,663 8,652 5,679 9,911
----------- ----------- ----------- -----------
Operating loss.............................. (2,679) (5,688) (3,750) (5,622)
Interest expense, related party............. 607 1,192 811 1,573
----------- ----------- ----------- -----------
Net loss.................................... $ (3,286) $ (6,880) $ (4,561) $ (7,195)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding:
Basic..................................... 25,000,000 25,000,000 25,000,000 25,000,000
=========== =========== =========== ===========
Diluted................................... 25,000,000 25,000,000 25,000,000 25,000,000
=========== =========== =========== ===========
Basic and diluted loss per share............ $ (0.13) $ (0.28) $ (0.18) $ (0.29)
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
PLAYBOY.COM, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- ------------------------
1997 1998 1998 1999
---------- ---------- ----------- ----------
(UNAUDITED)
Cash flows from operating activities:
Net loss................................. $(3,286) $(6,880) $(4,561) $(7,195)
Adjustments to reconcile net loss to
net cash used for operating
activities:
Amortization of capitalized software... 137 638 309 1,082
Increase (decrease) in cash
attributable to changes in
assets and liabilities:
Accounts receivable.................. (46) 20 90 (608)
Prepaid expenses and other
current assets..................... (31) (277) (286) 61
Accounts payable..................... 320 233 37 (492)
Accrued salaries, wages and
employee benefits.................. 14 183 63 (48)
Deferred revenues.................... 184 171 152 293
Other liabilities and accrued
expenses........................... 4 (38) (49) 67
------- ------- ------- -------
Net cash used for operating
activities....................... (2,704) (5,950) (4,245) (6,840)
------- ------- ------- -------
Cash flows from investing activities:
Software development costs capitalized... (185) (1,170) (769) (1,382)
------- ------- ------- -------
Net cash used in investing
activities....................... (185) (1,170) (769) (1,382)
------- ------- ------- -------
Cash flows from financing activities:
Proceeds for issuance of common stock.... -- 250 -- --
Proceeds from related party.............. 2,889 6,870 5,014 8,222
------- ------- ------- -------
Net cash provided by financing
activities....................... 2,889 7,120 5,014 8,222
------- ------- ------- -------
Net change in cash and cash
equivalents -- -- -- --
Cash and cash equivalents
beginning of year........................ -- -- -- --
------- ------- ------- -------
Cash and cash equivalents
end of year.............................. $ -- $ -- $ -- $ --
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-5
PLAYBOY.COM, INC.
STATEMENTS OF STOCKHOLDER'S DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK TOTAL
---------------------- ACCUMULATED STOCKHOLDER'S
SHARES PAR VALUE DEFICIT DEFICIT
---------- --------- ------------ -------------
Balance at December 31, 1996................ $ (3,351) $ (3,351)
Net loss.................................... (3,286) (3,286)
---------- -------- ------------ ------------
Balance at December 31, 1997................ (6,637) (6,637)
Common stock issued on incorporation........ 25,000,000 $ 250 -- 250
Net loss.................................... (6,880) (6,880)
---------- -------- ------------ ------------
Balance at December 31, 1998................ 25,000,000 250 (13,517) (13,267)
Net loss.................................... (7,195) (7,195)
---------- -------- ------------ ------------
Balance at September 30, 1999............... 25,000,000 $ 250 $ (20,712) $ (20,462)
========== ======== ============ ============
The accompanying notes are an integral part of these financial statements.
F-6
PLAYBOY.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
1. DESCRIPTION OF BUSINESS
Playboy.com, Inc. (the "Company") is an Internet company dedicated to the
lifestyle and entertainment interests of young men around the world. The Company
was incorporated on November 25, 1998 in the state of Delaware as a wholly-owned
subsidiary of Playboy Enterprises, Inc. ("Playboy Enterprises"). From the launch
of the PLAYBOY.COM Web site in August 1994 to November 25, 1998, the Company was
operated as a division of Playboy Enterprises.
The Company has sustained significant net losses and negative cash flows
from operations since its inception. The Company's ability to meet its
obligations in the ordinary course of business is dependent upon its ability to
establish profitable operations or raise additional financing through public or
private equity financing, bank financing, or other sources of capital.
Since inception, Playboy Enterprises has provided the funds to finance the
Company's operations. These funds have been advanced bearing an interest rate of
12%. At September 30, 1999, the Company owed Playboy Enterprises approximately
$21.6 million.
Playboy Enterprises has represented its intention to continue to fund the
Company until the equity sale transaction described in Note 3 is completed.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements present the results of operations,
financial position and cash flows of the Company as a component of Playboy
Enterprises prior to the consummation of the transaction contemplated in
Note 3. The financial information included herein may not necessarily reflect
the financial position, results of operations, or cash flows of the Company in
the future or what the financial position, results of operations, or cash flows
of the Company would have been if it had been a separate, stand-alone
publicly-held corporation during the periods presented.
The accompanying interim statement of operations and statement of cash flows
for the nine months ended September 30, 1998 have not been audited. However,
they have been prepared in conformity with the accounting principles stated in
the audited financial statements of the year ended December 31, 1998 and the
nine months ended September 30, 1999 and include all adjustments, which were of
a normal and recurring nature, which in the opinion of management are necessary
to present fairly the financial position of the Company and results of
operations and cash flows for the period presented. The operating results for
the interim periods are not necessarily indicative of results expected for the
full years.
For all periods presented, certain expenses reflected in the financial
statements include allocations of expenses from Playboy Enterprises. These
allocations take into consideration headcount, square footage, volume of
transactions, or other appropriate bases and generally include administrative
expenses related to general management, insurance, information management, and
other services provided to the Company by Playboy Enterprises. Allocations of
expenses are estimates based on management's best assessment of actual expenses
incurred by the Company. It is management's opinion that the expenses charged to
the Company are reasonable.
F-7
PLAYBOY.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Since the Company's inception, Playboy Enterprises has funded its working
capital. The Company participates in Playboy Enterprises' cash management
system. As a part of the Company's central cash management system, all cash
generated from and cash required to support the Company's operations are
deposited and received through Playboy Enterprises' corporate operating cash
accounts. Accordingly, the amounts represented by the caption "Proceeds from
related party" in the Company's statements of cash flows represent the net
effect of all cash transactions between the Company and Playboy Enterprises.
REVENUE RECOGNITION: Revenues are derived from the sale of advertising and
sponsorships, e-commerce and fees from subscription services and pay-per-view
events.
ADVERTISING AND SPONSORSHIPS: Revenues from the sale of advertising and
sponsorships are recognized ratably over the period in which the advertising or
sponsorships are displayed, provided that no significant obligations remain and
collection of the resulting receivable is probable. The Company's obligations
typically include a guaranteed minimum number of impressions, or number of times
that a sponsorship banner appears in pages viewed by users of the Company's
network of Web sites. To the extent minimum guaranteed impressions are not met,
revenue is deferred and is recognized as the required impressions are delivered.
The Company has not included advertising revenues resulting from barter
transactions in these financial statements. Such revenue is primarily derived
from barter transactions with other Internet-related companies.
E-COMMERCE: E-commerce revenues consist of merchandise revenues and
commission revenues.
Merchandise revenues consist of product sales to customers and is recognized
upon the shipment of the merchandise, which occurs only after credit card
authorization is obtained. For sales of merchandise, the Company is responsible
for establishing prices, processing the orders, and forwarding the information
to the manufacturer, distributor or third-party warehouse for shipment. For
these transactions, the Company assumes credit risk and is responsible for
processing returns. The Company provides for estimated returns at the time of
shipment based on historical data.
Commission revenue is earned by the Company from e-commerce partners for
transactions processed through the Company's Web sites. Revenue is recognized
when the order is transmitted to such partner. In commission sales, the Company
processes orders in exchange for a commission on the sale of the vendor's
merchandise. At the conclusion of the sale, the Company forwards the order
information to the vendor, which then charges the customer's credit card and
ships the merchandise directly to the customer. In a commission sale
transaction, the Company does not take title or possession of the merchandise,
and the vendor assumes all the risk of credit card chargebacks.
SUBSCRIPTION: Revenues from the sale of Playboy Cyber Club subscriptions
are recognized ratably over the term of the subscription agreements.
Subscription periods currently range from one to 12 months.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Financial instruments, including
accounts receivable, accounts payable, and other liabilities and accrued
expenses, approximate fair value based on the short-term maturity of these
items.
F-8
PLAYBOY.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE: The allowance for doubtful accounts was $320 and $409
at December 31, 1998 and September 30, 1999, respectively.
Amounts written off from the accounts receivable ledger amounted to $0 and
$0 for the years ended December 31, 1997 and 1998, and $71 for the nine months
ended September 30, 1999.
CAPITALIZED SOFTWARE: In accordance with Statement of Position 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use, it is the Company's policy to capitalize all internal use software.
Capitalized software primarily consists of purchased software, outsourcing costs
and internal staff costs incurred to develop the Company's Web sites. The
Company's policy is to amortize these costs over one to three years.
INCOME TAXES: The Company is included in the consolidated U.S. income tax
return of Playboy Enterprises. Pursuant to a tax allocation agreement effective
prior to or upon the consummation of the offering described in Note 3, the
provision for income taxes of the Company has been calculated as if the Company
was a stand-alone corporation filing separate tax returns.
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 amounts reported in the financial
statements and accompanying notes. Although these estimates are based on
management's knowledge of current events and actions it may undertake in the
future, they may ultimately differ from actual results.
CONCENTRATION OF CREDIT RISK: Financial instruments that potentially
subject the Company to a concentration of credit risk principally consist of
accounts receivable. The Company's accounts receivable are derived from revenue
earned from customers located primarily in the United States and are denominated
in U.S. dollars. Management believes its credit policies are prudent and reflect
normal industry terms and business risk.
COMPREHENSIVE INCOME: Under the provisions of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), the
Company is required to report comprehensive income or losses. Comprehensive
losses comprise net losses as well as certain other changes in assets and
liabilities recorded in stockholder's deficit in the financial statements. There
were no components of comprehensive losses other than net losses reported in the
statement of operations.
SEGMENT INFORMATION: Statement of Financial Accounting Standards No. 131,
"Disclosure About Segments of an Enterprise and Related Information"
("SFAS 131"), requires that management identify operating segments based on the
way that management disaggregates the entity for making internal operating
decisions. The Company currently operates under the definition of one segment.
BASIC AND DILUTED LOSS PER SHARE: In connection with its incorporation on
November 25, 1998, the Company issued 100 common shares to Playboy Enterprises,
the sole stockholder of the Company. On December 14, 1999, the Company effected
a stock split, which increased the number of outstanding common shares to
25,000,000. Basic and diluted loss per share for all periods presented have been
calculated using the 25,000,000 common shares that will be outstanding
immediately prior to the offering described in Note 3.
F-9
PLAYBOY.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TECHNOLOGY COSTS: Technology costs consist principally of costs associated
with the maintenance of the features, content and functionality of the Company's
Web sites, transaction-processing systems, telecommunications infrastructure and
network operations.
ADVERTISING COSTS: Advertising costs are expensed as incurred. Advertising
expenses were $35 and $89 for the years ended December 31, 1997 and 1998,
respectively, and $190 for the nine months ended September 30, 1999.
3. EQUITY TRANSACTIONS
On November 25, 1998, the Company was incorporated as a wholly-owned
subsidiary of Playboy Enterprises and was capitalized through the authorization
and issuance of common stock to Playboy Enterprises.
On September 23, 1999, Playboy Enterprises' board of directors approved the
sale of common stock of the Company through a public equity offering.
On December 14, 1999, the Company effected a 250,000-for-one common stock
split. All share and per-share amounts have been retroactively restated to
reflect this split.
4. ARRANGEMENTS WITH PLAYBOY ENTERPRISES
These financial statements have been prepared for inclusion in a
registration statement relating to the public offering of a portion of the
common stock of the Company, and Playboy Enterprises will continue to
beneficially own more than 50% of the outstanding shares of common stock of the
Company after the offering.
The Company's relationship with Playboy Enterprises following the offering
and separation will be governed by a number of intercompany agreements,
including an asset transfer agreement; an administrative services agreement; a
trademark and content license agreement; an advertising and co-promotions
agreement; a fulfillment and customer services agreement; a production services
agreement; a common stock registration rights agreement; and a tax allocation
agreement. These agreements will become effective prior to the public offering
of the Company's common stock.
5. RELATED PARTY TRANSACTIONS
The Company engages in transactions with Playboy Enterprises in the normal
course of its business. These transactions include purchases of corporate
services, facility rental and content usage fees, among various other
transactions. Playboy Enterprises allocates these costs based on appropriate
methodologies such as headcount, square footage, and the volume of transactions.
For the years ended December 31, 1997 and 1998, and for the nine months ended
September 30, 1999, the services provided by Playboy Enterprises amounted to
$6,667, $12,441 and $13,865, respectively. In management's opinion, the methods
to identify and allocate costs to the Company for these services provided by
Playboy Enterprises are reasonable. However, the charges may not approximate the
costs of these services if the Company was a stand-alone company for the periods
reported.
F-10
PLAYBOY.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
6. INCOME TAXES
Income tax expense (benefit) differed from the amounts computed by applying
the U.S. Federal income tax rate of 35% to losses before income tax expense as a
result of the following:
NINE
MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER SEPTEMBER 30,
1997 1998 30, 1998 1999
------------ ------------ ----------- -------------
(UNAUDITED)
Computed expected tax benefit................ $ 1,150 $ 2,408 $ 1,596 $ 2,518
Increase (decrease) in tax benefit resulting
from:
Change in valuation allowance.............. (1,281) (2,683) (1,778) (2,806)
State and local income taxes, net of
federal benefit.......................... 131 275 182 288
------- ------- ------- -------
Income tax expense (benefit)................. $ -- $ -- $ -- $ --
======= ======= ======= =======
No deferred income tax expense (benefit) was recognized, because the net
benefit resulting from temporary differences in the recognition of income and
expense for income tax and financial reporting purposes, was offset by a
valuation allowance. The sources and tax effects of those temporary differences
are prescribed below:
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
Deferred tax assets:
Net operating losses...................................... $ 2,682 $ 5,455
Allowance for doubtful accounts........................... 125 160
Deferred revenue.......................................... 142 257
------- -------
Total deferred tax assets............................. 2,949 5,872
Deferred tax liabilities:
Capitalized software...................................... 266 383
------- -------
2,683 5,489
Net deferred tax assets:
Valuation allowance....................................... (2,683) (5,489)
------- -------
Total deferred tax assets............................. $ -- $ --
======= =======
Net deferred tax assets, as determined on a separate company basis, have
been fully offset by a valuation allowance due to the uncertainty of realizing
such benefit.
F-11
[BACK COVER]
[COLOR ARTWORK TO FOLLOW]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an estimate of the costs and expenses, other
than the underwriting discounts and commissions, payable by the Registrant in
connection with the issuance and distribution of the common stock being
registered.
SEC registration fee........................................ $13,200
NASD fee.................................................... 5,500
NASDAQ listing fee..........................................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Printing expenses...........................................
Blue sky fees and expenses..................................
Transfer Agent and Registrar fees and expenses..............
Miscellaneous...............................................
-------
Total................................................... $
=======
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The registrant's certificate of incorporation in effect as of the date
hereof, and the registrant's amended and restated certificate of incorporation
to be in effect upon the closing of this offering (collectively, the
"Certificate") provides that, except to the extent prohibited by the Delaware
General Corporation Law, as amended (the "DGCL"), the registrant's directors
shall not be personally liable to the registrant or its stockholders for
monetary damages for any breach of fiduciary duty as directors of the
registrant. Under the DGCL, the directors have a fiduciary duty to the
registrant which is not eliminated by this provision of the Certificate and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of non-monetary relief will remain available. In addition, each director will
continue to be subject to liability under the DGCL for breach of the director's
duty of loyalty to the registrant, for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are prohibited by DGCL. This provision
also does not affect the directors' responsibilities under any other laws, such
as the Federal securities laws or state or Federal environmental laws. The
registrant intends to obtain liability insurance for its officers and directors
prior to the closing of this offering.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL, or
(iv) for any transaction from which the director derived an improper personal
benefit. The DGCL provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the corporation's bylaws, any agreement, a vote
of stockholders or otherwise. The Certificate eliminates the personal liability
of directors to the fullest extent permitted by Section 102(b)(7) of the DGCL
and provides that the registrant shall fully indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding
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(whether civil, criminal, administrative or investigative) by reason of the fact
that such person is or was a director or officer of the registrant, or is or was
serving at the request of the registrant as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate. The registrant is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In November 1998, 100 shares of common stock were issued to Playboy
Enterprises in connection with the formation of Playboy.com, a transaction
exempt from Section 5 of the Securities Act pursuant to Section 4(2) thereof. In
December 1999, pursuant to a stock split, these shares were converted into a
total of 25,000,000 shares of common stock.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
1.1* Form of underwriting agreement.
3.1 Certificate of incorporation.
3.2 Amendment to certificate of incorporation.
3.3* Form of amended and restated certificate of incorporation to
be in effect upon the closing of this offering.
3.4 Bylaws.
3.5* Form of amended and restated bylaws to be in effect upon the
closing of this offering.
4.1* Specimen common stock certificate.
4.2 Please see Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5 for
provisions of the certificate of incorporation and bylaws of
the registrant defining the rights of holders of common
stock of the registrant.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1* 1999 Stock Incentive Plan.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1).
24.1 Powers of Attorney (please see Signature Page).
27.1 Financial Data Schedule.
- ------------------------
* To be filed by amendment.
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(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or the notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule 424
(b) (1) or (4) or 497 (h) under the Securities Act of 1933 shall be
deemed to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on this 10th day of January, 2000.
PLAYBOY.COM, INC.
By: /s/ CHRISTIE HEFNER
-----------------------------------------
Name: Christie Hefner
Title: Acting Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and/or officers of Playboy.com, Inc. (the
"Company"), hereby severally constitute and appoint Christie Hefner, Acting
Chief Executive Officer, and Linda G. Havard, Acting Chief Financial Officer,
and each of them individually, with full powers of substitution and
resubstitution, our true and lawful attorneys, with full powers to them and each
of them to sign for us, in our names and in the capacities indicated below, the
registration statement on Form S-1 filed with the Securities and Exchange
Commission, and any and all amendments to said registration statement (including
post-effective amendments), and any registration statement filed pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, in connection with the
registration under the Securities Act of 1933, as amended, of equity securities
of the Company, and to file or cause to be filed the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as each of them might or could do in person, and hereby ratifying and
confirming all that said attorneys, and each of them, or their substitute or
substitutes, shall do or cause to be done by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated below:
SIGNATURE TITLE(S) DATE
--------- -------- ----
Acting Chief Executive
/s/ CHRISTIE HEFNER Officer and Chairman of the
------------------------------------------- Board of Directors January 10, 2000
Christie Hefner (Principal Executive
Officer)
Acting Chief Financial
/s/ LINDA G. HAVARD Officer and Director
------------------------------------------- (Principal Financial and January 10, 2000
Linda G. Havard Accounting Officer)
/s/ DONALD G. DRAPKIN
------------------------------------------- Director January 10, 2000
Donald G. Drapkin
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
1.1* Form of underwriting agreement.
3.1 Certificate of incorporation.
3.2 Amendment to certificate of incorporation
3.3* Form of amended and restated certificate of incorporation to
be in effect upon the closing of this offering.
3.4 Bylaws.
3.5* Form of amended and restated bylaws to be in effect upon the
closing of this offering.
4.1* Specimen common stock certificate.
4.2 Please see Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5 for
provisions of the certificate of incorporation and bylaws of
the Registrant defining the rights of holders of common
stock of the Registrant.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1* 1999 Stock Incentive Plan.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1).
24.1 Powers of Attorney (please see Signature Page).
27.1 Financial Data Schedule.
- ------------------------
* To be filed by amendment.