As filed with the Securities and Exchange Commission on July 24, 1998April 13, 1999
                                            Registration No. 333-
===========================================================================333-_______

==============================================================================
                     SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, DC 20549

                    -----------------------------------

                                  FORM S-1
                           REGISTRATION STATEMENT
                                   UNDER
                         THE SECURITIES ACT OF 1933
                    -----------------------------------

                             theglobe.com, inc.

           (Exact name of registrant as specified in its charter)





       Delaware                       7310                      14-1781422
   (State or other        (Primary Standard Industrial       (I.R.S. Employer
   jurisdiction of         Classification Code Number)        Identification
   incorporation or                                              -----------------------------------         Number)
    organization)
                       -----------------------------------
                            31 West 21st Street
                          New York, New York 10010
                               (212) 886-0800

                     (Address, including zip code, and
                      telephone number, including area
                      code, of registrant's principal
                             executive offices)
                    -----------------------------------


                             Todd V. Krizelman
                            Stephan J. Paternot
                             theglobe.com, inc.
                            31 West 21st Street
                          New York, New York 10010
                               (212) 886-0800

         (Name, address, including zip code, and telephone number,
               including area code, of co-agents for service)
                    -----------------------------------


                                 Copies to:


        Valerie Ford Jacob, Esq.               Allen L. Weingarten, Esq.
        Stuart H. Gelfond, Esq.                 Morrison & Foerster LLP
Fried, Frank, Harris, Shriver & Jacobson      1290 Avenue of the Americas
           One New York Plaza                   New York, New York 10104
        New York, New York 10004                     (212) 468-8000
             (212) 859-8000
                     -----------------------------------

  Approximate date of commencement of proposed sale to public: As soon as
    practicable after the effective date of this Registration Statement.the 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, (the "Securities Act"), 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, please 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  registration  statement for the
same offering. |_| .[  ].


   If  delivery  of  the  Prospectus  is  expected  to be  made  pursuant  to
Rule 434, please check the following box.  |_|[  ]


                       CALCULATION OF REGISTRATION FEE
==========================================================================================================================================================
Title of Each Class of   Amount To     Proposed        Maximum
       Securities                  AggregateProposed     Amount of
      Securities            Be          Maximum        Maximum     Registration
   to be Registered     Registered(1) Offering Price(1)          RegistrationPrice    Aggregate      Fee (2)
                                       Per Unit        Offering
                                                        Price
- ----------------------------------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001$0.001     4,600,000      $79.63       $366,298,000    $101,831
par $50,000,000                 $14,750
value (3)             shares
===============================================================================
(1)  Amount to be registered  is determined  pursuant to Rule 416 regarding
     stock splits.
(2)
===========================================================================
(1)  Estimated   pursuant  to  Rule  457(o)457(c)   solely  for  the  purpose  of
     calculating  the  registration  fee.  (2)The  average of the high and low
     prices  reported  on the Nasdaq  National  Market on April 9, 1999 was
     $79.63.
(3)  The Common Stock offered  hereby  includes  Preferred  Stock  Purchase
     Rights (the  "Rights").  The Rights will be associated  and trade with
     the Common Stock.  The value,  if any, of the Rights will be reflected
     in the market price of the Common Stock.

                     -----------------------------------

     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 ofTHE 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  Commission,  acting
pursuant to said Section 8(a)OR UNTIL THE  REGISTRATION
STATEMENT  SHALL BECOME  EFFECTIVE ON SUCH DATE AS THE  COMMISSION,  ACTING
PURSUANT TO SAID SECTION 8(A), may determine.
===========================================================================
Information  contained  herein is subject to  completion  or  amendment.  A
registration statement relating to these securities has been filed with the
Securities and Exchange  Commission.  These  securities may not be sold nor
may offers to buy be accepted prior to the time the registration  statement
becomes effective. This Prospectus shall not constitute an offer to sell or
the  solicitation  of an offer to buy nor shall  there be any sale of these
securities in any State in which such offer,  solicitation or sale would be
unlawful prior to the  registration or  qualification  under the securities
laws of any such State.MAY DETERMINE.

===============================================================================



                 SUBJECT TO COMPLETION DATED JULY 24, 1998APRIL 13, 1999
PRELIMINARY PROSPECTUS
                              4,000,000 Shares
                            [LOGO][theglobe.com logo]
                                theglobe.com
                                Common Stock
                                All------------


This is a public offering of 4,000,000 shares of common stock of
theglobe.com, inc. We are selling 2,000,000 shares of common stock and the
selling stockholders identified in this prospectus are selling 2,000,000
shares. We will not receive any of the proceeds from the shares of Common Stock, par value $0.001 per share (the
"Common  Stock"),  offered  hereby  (the  "Offering")  are  beingthe
common stock sold by theglobe.com,  inc.  (the  "Company"  or  "theglobe.com").   Priorthe selling stockholders.

The underwriters have an option to the
Offering,  there  has been no public  market  for the  Common  Stockpurchase a maximum of 600,000 additional
shares of common stock from some of the Company.  Itselling stockholders to cover
over-allotment of shares.

Our common stock is currently  estimated that the initial public offering price
for the Common Stock will be between $     and $     per share. See "Under-
writing" for a discussion of the factors to  be  considered  in determining
the initial  public offering price. Application will be made for  quotation
of the Common Stocktraded on the Nasdaq National Market under the symbol
"TGLO." ------------------On April 9, 1999, the last reported sale price of our common stock
was $78 15/16 per share.

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION9 TO READ ABOUT RISKS THAT YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THEOUR COMMON STOCK.

                                ------------------

THESE  SECURITIES  HAVE NOT BEEN APPROVED OR  DISAPPROVED BY------------

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR ANY STATEDISAPPROVED OF THESE SECURITIES COMMISSION  NOR HAS THE
SECURITIES  AND  EXCHANGE  COMMISSION  OR ANY STATE  SECURITIES  COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

                                ===========================================================================
                                               Underwriting
                               Price to        Discounts and     Proceeds to------------

                                                             Per Share  Total
                                                             ---------  -----

Public Commissions (1)    Company (2)
- -------------------------------------------------------------------------------
Per Share...................offering price....................................... $         $
$
- -------------------------------------------------------------------------------
Total (3)...................Underwriting discount....................................... $         $
Proceeds, before expenses, to us............................ $         ===============================================================================

(1)$
Proceeds, before expenses, to the selling stockholders...... $         $


The Company has agreed to indemnifyunderwriters are severally underwriting the Underwriters  against certain
     liabilities,  including  liabilities under the Securities Act of 1933,
     as amended (the "Securities Act"). See "Underwriting."
(2)  Before deducting expenses payable by the Company estimated at $      .
(3)  The Company has granted the  Underwriters  a 30-day option to purchase
     up to     additional shares of Common  Stock  on the  same  terms  and
     conditions as set forth above,  to cover  over-allotments,  if any. If
     such  option  is  exercised  in  full,  the  total  Price  to  Public,
     Underwriting Discounts and Commissions and Proceeds to Company will be
     $     , $     and $     , respectively. See "Underwriting."

                             ------------------

     The  shares of Common  Stock are being offered byin
this prospectus. The underwriters expect to deliver the Underwriters,
subject to prior sale,  when,  as and if  delivered  to and accepted by the
Underwritersshares against
payment therefor  and  subject  to  certain  other
conditions.  The  Underwriters  reserve  the right to  withdraw,  cancel or
modify  the  Offering  and to  reject  orders  in whole  or in part.  It is
expected  that  delivery of the Common Stock will be made  against  payment
therefor on or about     , 1998 at the offices of Bear, Stearns & Co. Inc.,
245 Park Avenue, New York, New York 10167. 

                             ------------------

Bear, Stearnson     , 1999.

                                ------------

BEAR, STEARNS & Co. Inc.                           Volpe Brown WhelanCO. INC.
                   NATIONSBANC MONTGOMERY SECURITIES LLC
                                     VOLPE BROWN WHELAN & Co.COMPANY
                                                WIT CAPITAL CORPORATION
                                                        as e-Manager(TM)

                The date of this Prospectusprospectus is     , 1998.1999.


[RED HERRING]

The Company has a registered United States trademarkinformation in this preliminary 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. The
information in this preliminary prospectus is not an offer to sell nor does
it seek an offer to buy these securities in any jurisdiction where the
offer or sale is not permitted.

                                    -1-

                             TABLE OF CONTENTS

                                                                          Page
                                                                          ----

Summary......................................................................4
Risk Factors.................................................................9
Cautionary Notice Regarding Forward Looking Statements......................30
How We Intend to Use the Proceeds from the Offering.........................31
Dividend Policy.............................................................31
Price Range of Our Common Stock.............................................32
Capitalization..............................................................33
Dilution....................................................................35
Selected Financial Data.....................................................36
Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................38
Business....................................................................46
Management..................................................................66
Certain Relationships and Related Transactions..............................83
Principal and Selling Stockholders..........................................86
Description of Capital Stock................................................90
Shares Eligible for theglobe. The
Company has filed United States trademark applications for theglobe.com and
theglobe.com  logo.  Additionally,  the  Company  has  submitted  trademark
applications in various foreign countries for theglobe.com and theglobe.com
logo. See "Business -- Intellectual Property Rights."Future Sale............................................100
Underwriting...............................................................103
Legal Matters..............................................................106
Experts....................................................................106
Where You Can Find More Information........................................106
Index to Financial Statements..............................................F-1



                             ------------------

     This Prospectusprospectus includes statistical data regarding the Internet
industry. Such data is takenWe obtained or derived the data from information  published  by
sources including Media Metrix, Inc., a media research firm specializing in
market and technology measurement on the Internet ("Media Metrix"),including:

     o    Jupiter Communications, LLC, a media research firm focusing on
          the Internet industry, ("Jupiter Communications"),  and

     o    International Data Corporation, a provider of market information
          and strategic information for the information technology
          industry ("IDC").industry.

     o    DoubleClick Inc., a global Internet advertising solutions company
          that centralizes advertising planning, execution, control,
          tracking and reporting for online media companies.

     o    ABC Interactive, a provider of independent third-party audits and
          industry-developed standards for web site and other online
          advertising.

     Although the Company believeswe believe that suchthe data are generally indicative ofcorrect, the matters reflected therein,  such data are
inherently imprecise  and  investors  are cautionedimprecise. Accordingly, you should not to place undue reliance on
suchthe data.
                                    -2-
------------------


     CERTAIN PERSONS  PARTICIPATING  IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING  OVER-ALLOTMENT,   STABILIZING   TRANSACTIONS,   SYNDICATE  SHORT
COVERING   TRANSACTIONS  AND  PENALTY  BIDS.  FOR  A  DESCRIPTON  OF  THESE
ACTIVITIES, SEE "UNDERWRITING."You should rely only on the information contained in this prospectus.
We have not authorized any other person to provide you with different
information. If anyone provides you with different or inconsistent
information, you should not rely on it. We are not making an offer to sell
these securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in this
prospectus is accurate only as of the date on the front cover of this
prospectus. Our business and financial condition may have changed since
that date.
                                    -3-

                             PROSPECTUS

                                  SUMMARY

     The following summary is qualified in its entirety by, and should be
read in  conjunction  with,  the more  detailedcontains basic information and Financial
Statements  and Notes  thereto,  appearing  elsewhere  in this  Prospectus.
Except  where  the  context  otherwise  requires,about our company.
This summary may not contain all  references  in this
Prospectus to (a) the "Company" or  "theglobe.com"  refer to  theglobe.com,
inc., a Delaware corporation, (b) the "Web" refer to the World Wide Web and
(c) the "site" refer to the Company's Web site. Unless otherwise  indicated
or  unless  the  context  otherwise  requires,   all  information  in  this
Prospectus  reflects,  upon the closing of the Offering,  (i)information that is important to
you. You should carefully read this entire document, the automatic
conversionfinancial
statements and the other documents to which we refer for a more complete
understanding of all outstanding shares of the Company's  Preferred Stock into
shares  of  Common   Stock,   (ii)  no   exercise   of  the   Underwriters'
over-allotment  option and (iii) the Company's for Common Stock split to be
effected immediately prior to the consummation of the Offering.

                                The Companythis offering.

OUR BUSINESS

     theglobe.com is one of the world's leading online communitiesnetworks with
over 1.7nearly 2.3 million members in the United States and abroad.abroad who have
registered on our web site and provided us with personal information. In
JuneDecember 1998, 6.1over 9.3 million unique usersindividuals visited the site. theglobe.comour web site, according
to DoubleClick, as audited by ABC Interactive. Approximately 40% of our
monthly traffic originates from abroad, reflecting our site's international
appeal. Our web site is a destination on the Internet where users are able
to personalize their online experience by publishing their own content and
interacting with others having similar interests. theglobe.com  facilitatesWe facilitate this
interaction by providing various free services, including home page
building, discussion forums, chat rooms, e-mail and a  marketplace  where members can purchase a variety of products
and services.electronic commerce.
Additionally, theglobe.com provides itswe provide our users with news, business information, real
time stock quotes, weather, movie and music reviews, multi-player gaming
horoscopes and personals. By satisfying itsour users' personal and practical needs, theglobe.com  seekswe
seek to become theirour users' online home.

     The Company's  primary revenue source isWe generate revenues primarily by selling advertisements, sponsorship
placements within our site, development fees and, to a lesser extent, from
electronic commerce revenues. In the salelast three months of advertising,  with1998, we had
approximately 147 advertisers, including Coca Cola, Hewlett Packard,
Hilton, LEGO, Office Max, 3Com and Visa. In February 1999, we acquired
factorymall.com, an online retail store doing business as Azazz.com which
sells a variety of name brand products directly to consumers. We have begun
integrating Azazz.com into our electronic commerce site, now known as
"shop.theglobe.com."  We expect to begin to generate additional revenues
from electronic commerce in the second quarter of 1999. In April 1999, we
acquired Attitude Network, a provider of online entertainment content whose
web sites include HappyPuppy.com and GamesDomain.com, two leading web sites
serving game enthusiasts.

     Our site currently has ten themes of interest. Within each theme is a
combination of content, electronic commerce and interactive services.
Content is both user generated through  e-commerce
arrangements  and professional. We have several
professional content relationships. These include CBS Marketwatch, CNET, E!
Online, Fox Sports, Reuters, Thomson Investors Network, UPI, and Variety.
Electronic commerce is woven contextually throughout themes. For example,
within the Sports theme a user will find sports equipment for sale, of  membership   subscriptions  for  enhanced
services.

     The Company was founded by Todd V.  Krizelmanwhile
in the Business theme a user will find products directed at the business
professional. Interactive services such as chat, discussion forums, and
Stephan J. Paternot
in May 1995surveys are paired with content to capitalize  on the growing  demand for online  destinations
that  allow  userspromote usage.

     Members are also encouraged to developgenerate their own identitieswebpages and
establish
relationships  with other  Internet  users.  theglobe.com  offers users the
ability to become active  participantsaggregate in its community and provides users
set-up  tools and guidance to build a personal Web site quickly and easily.
theglobe.com community is organized in an intuitive hierarchy modeled after
the real world where each layer reflects a more specific level of interest.
There are six "Themes of Interest":  Arts and  Entertainment,  Business and
Finance, Lifestyles, Romance, Special Interests and Geographical Interests.
Themes of  Interest  are  subdivided  into 24  "Cities,"  which are further
divided into 75 "Districts."  Within each District members have the ability
to  create  or join  "Interest  Groups,"  theglobe.com's  smallest  form of
community.  There are currently 325 Interest Groups.  Interest Groups, once
proposed by any member,  are posted for petition.  Those groups that garner
enough votes then go "live" on the site.  Members areonline communities. We do not limited as tolimit the number of communities
theywhich our members can join and members are ablefree to leave an Interest Group
at any time, ensuring that thetime.
Because of this, communities are dynamic and evolve as member interestsinterests'
change.
                                    "Community Leaders" are elected to manage communities and
are able to highlight member content,  communicate directly to constituents
and organize  events.-4-


     The unique community focus of theglobe.comour site offers us several advantages
to the Company that include (i)include:

     o    member loyalty,  (ii)loyalty;

     o    member-developed content at a low cost to the Companycontent; and

     (iii) the ability
to offer advertisingo    targeted to specific user interests. In June 1998, the
Company had 90 advertisers,  including, Coca Cola, Dunkin' Donuts, J. Crew,
Procter & Gamble, Sony, 3Com and Visa.

     Since its founding,  theglobe.com has experienced  strong growth.  The
site has added approximately  100,000 new members every month since October
1997,  and generated  over 100 million page views in June 1998, an increase
of over 100% from January 1998.  More than 6.1 million unique users visited
the site in June  1998,  reflecting  an  increase  of more than 350%  since
January 1998.  Approximately 25% to 35% of  theglobe.com's  monthly traffic
originates  from  abroad,   reflecting  the  site's  international  appeal.
According to Media Metrix,  the average time spent per user at theglobe.com
in the period  April to June 1998 was  approximately  15%  higher  than the
average time spent on the top 25 Web sites visited most frequently.

     theglobe.com'sadvertising.


     Our goal is to be the leading online community  site. The
Company seeksnetwork. We seek to attain
this goal through the following key strategies:

     (i)
improvingo    improve user experience,  (ii) developingexperience;

     o    develop brand identity and awareness,
(iii) increasing new membershipawareness;

     o    further develop electronic commerce;

     o    implement acquisition, through strategic  alliances,
(iv)  expanding  globally,  (v)  further  developing  e-commercejoint venture and (vi)
enhancingalliance strategy;

     o    expand globally; and

     o    enhance membership services.

     -----------------------------------

     The Company wasshare amounts throughout the document do not give effect to the
stock split that will be distributed to stockholders on May 14, 1999.

     We were incorporated in May 1995 in the State of Delaware. The
Company'sOur
principal executive offices are located at 31 West 21st Street, New York,
New York 10010, and itsour telephone number is (212) 886-0800.

                               
                                The OfferingTHE OFFERING

Common Stockstock offered by us...................2,000,000 shares

Common stock offered by the Company..................selling
 stockholders................................2,000,000 shares (1)

Common Stock to bestock outstanding after the Offering....this
 offering....................................13,447,963 shares (1)(2)

Use of Proceeds......................................Advertising,     brand
                                                     name   promotions  and
                                                     otherproceeds..............................For general corporate purposes,
                                             including investmentworking capital,
                                             expansion of our sales and
                                             marketing capabilities, brand
                                             name promotions, potential
                                             acquisitions and improvements in
                                             our web site.  See "How We Intend
                                             to Use the Proceeds from the
                                             Offering."  We will not receive
                                             any proceeds from the sale of
                                             common stock by the selling
                                             stockholders.

Nasdaq Symbol................................TGLO

- --------------
                                    -5-


(1)  This represents the estimated amount of shares that we expect the
     selling stockholders may sell in the development and
                                                     functionalityoffering. The possible selling
     stockholders have not yet determined whether or not they want to to
     participate in the offering. If the selling stockholders collectively
     sell less than 2,000,000 shares in the offering, we will sell the
     difference in order for the total shares of theglobe.com Web site,
                                                     enhancements   ofcommon stock to be sold in
     the Company's      network
                                                     infrastructure     and
                                                     working  capital.  The
                                                     Company may also use a
                                                     portion     of     the
                                                     proceeds for strategic
                                                     alliances          and
                                                     acquisitions. See "Use
                                                     of Proceeds."

Proposed Nasdaq National Market Symbol...............TGLO
- -------------

(1)offering to be 4,000,000 shares.

(2)  Based on the number of shares of Common Stockcommon stock outstanding as of June
     30,  1998,  including  10,947,469April
     9, 1999, which is inclusive of the shares issued in connection with
     the Azazz.com and Attitude Network, Ltd. acquisitions. Excludes:

     o    2,055,759 shares of Common Stock that will be
     issued  upon  the  automatic  conversion  of  the  Company's  existing
     preferredcommon stock (the  "Preferred  Stock")  upon  consummation  of the
     Offering. Also includes 4,046,018 shares of Common Stock issuable upon the exercise of
          outstanding warrants (the  "Warrants")  to acquire Common  Stockcommon stock at ana weighted
          average exercise price of approximately $1.45$3.16 per share
     following   consummation  of  the  Offering.   If  the   Underwriters'
     over-allotment option were exercised in full, an additionalshare;

     o    1,888,979 shares of Common  Stock  would  be offered by the Company, and     shares of
     Common Stock would be outstanding after the Offering.

(2)  Excludes (i) 1,235,000 and 1,425,941  shares of Common Stockcommon stock issuable upon the exercise of
          stock options that would be outstanding after the Offering  under the  Company's  1998 Stock  Option Plan and 1995 Stock
     Option Plan,  respectively,offering at a
          weighted average exercise price of $$13.08 per share (assuming an initial offering price of $     per share)
     and $    per share, respectively;  and  (ii) 565,000 and 12,001share;

     o    447,527 shares of Common  Stockcommon stock reserved for future issuance under
          the 1998 and 1995 stock option plans; and

     o    200,000 shares of common stock reserved for future issuance under
          the 1999 Employee Stock Option  Plan  and  the  1995  Stock  Option  Plan,  respectively.Purchase Plan.


     See "Capitalization","Capitalization," "Management--Executive Compensation,"
     "Description of Capital Stock" and Financial  Statementsthe financial statements and the
     Notes  related theretonotes appearing elsewhere in this Prospectus.prospectus.

                                    -6-



                          SUMMARY FINANCIAL DATA
               (Dollars in thousands, except per share data)(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

     The following table sets forth certain summarysummarizes the financial data for our business.
You should read the Company.  Thisfollowing information should be read in conjunction with the Financial
Statementsfinancial
statements and Notes  related theretofinancial statement notes appearing elsewhere in
this Prospectus.prospectus. See "Selected Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."



                              
May 1, 1995 (inception) Six Months through Year Ended Ended (inception) December 31, through ------------------------------ December 31, December 31, June 30, ------------ -------- 1995 1996 1997 1997 1998 ---- ---- ---- ---- ---- Statement of Operations Data: Revenues......................... $ 27 $ 229 $ 770 $ 208 $ 1,173 Gross profit..................... 14 113 347 102 670 Loss from operations............. (66) (772) (3,883) (779) (6,470) Net loss......................... (66) (750) (3,584) (767) (5,824) Basic and diluted net loss per (0.03) (0.33) (1.56) (0.34) (2.51) share(FN1) Weighted average shares outstanding used in basic and diluted per share calculation (FN1) 2,250,000 2,250,000 2,293,545 2,281,920 2,322,794 Pro forma basic and diluted net loss per share (basic and diluted) (FN2)................. Weighted average shares used in computing pro forma net loss per share (FN2)....................
June 30, 1998 ---------------------------------------- Actual As Adjusted(2)------------- ------- ------ -------------- Balance Sheet Data: Cash--------- STATEMENT OF OPERATIONS DATA: Revenues................ $27 $229 $770 $5,510 Gross profit............ 14 113 347 3,271 Loss from operations.... (66) (772) (3,883) (16,859) Net loss................ (66) (750) (3,584) (16,046) Basic and cash equivalentsdiluted net loss per share (1).......... $ (0.06) $ (0.67) $ (3.13) $ (6.74) Weighted average shares outstanding used in basic and short-term investments............. $ 13,155 Working capital........... 10,452 Total assets.............. 15,603 Capital lease obligations, excluding current installments.... 629 Total stockholders' equity 11,571diluted per share outstanding (1)........ 1,125,000 1,125,000 1,146,773 2,381,140 - ------------- [FN] (FN1)------------------ (1) Weighted average shares do not include any common stock equivalents because such inclusion of common stock equivalents would have been anti-dilutive. See Financial Statementsthe financial statements and related Notes theretofinancial statement notes appearing elsewhere in this Prospectusprospectus for the determination of shares used in computing basic and diluted loss per share. (FN2) As-7- The following table indicates a summary of our balance sheet at December 31, 1998: o on an actual basis; o on a pro forma basis giving effect to (1) the acquisition of Azazz.com and (2) the acquisition of Attitude Network, Ltd.; o on a pro forma as adjusted basis to reflect pro forma events described above and the receipt of the estimated net proceeds from the sale of 2,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $ per share) the midpoint of the estimated range set forth on the front cover of this Prospectus)common stock, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable byexpenses. Please see "How We Intend to Use the Company. See "UseProceeds from the Offering", "Capitalization," and "Management's Discussion and Analysis of Proceeds"Financial Condition and "Capitalization.Results of Operations." December 31, 1998 ----------------------------------------- Pro Forma Actual Pro Forma As Adjusted ----------- ---------------- ------------- (In Thousands) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents and short-term investments.......... $30,149 $32,569 $180,966 Working capital.................... 27,009 28,271 176,668 Total assets....................... 38,130 111,743 260,140 Capital lease obligations, excluding current installments.. 2,006 2,022 2,022 Stockholders' equity............... 30,301 99,846 248,243 -8- RISK FACTORS An investment in our common stock is risky. Before investing, you should carefully consider the sharesfollowing risk factors together with all of Common Stock offered hereby involves a high degree of risk. The following factors and the other information containedincluded in this Prospectus should be considered carefully before purchasing the Common Stock offered hereby. This Prospectus contains forward-looking statements that involve significant risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below, under "Cautionary Notice Regarding Forward-Looking Statements" and elsewhere in this Prospectus. Limited Operating History; Fluctuating Rates of Revenue Growth; Anticipated Losses The Companyprospectus. OUR LIMITED OPERATING HISTORY MAKES FINANCIAL FORECASTING DIFFICULT. theglobe was founded in May 1995. Accordingly, the Company haswe have a limited operating history upon which an evaluation of the Company, its current businessfor you to use in evaluating us and itsour prospects. Our prospects can be based, each of which mustshould be considered in light of the risks expenses and problems frequently encountered by all companies in the early stages of development, and particularly by such companies enteringoperating in new and rapidly developingevolving markets like the Internet. Such risks include, without limitation, the lack of broad acceptance of the community model on the Internet, the possibility that the Internet will fail to achieve broad acceptance as an advertising and commercial medium, the inability of the Company to attract or retain members, the inability of the Company to generate significant e-commerce-based revenues or premium service revenues from its members, a new and relatively unproven business model, the Company's ability to anticipate and adapt to a developing market, the failure of the Company's network infrastructure (including its server, hardware and software) to efficiently handle its Internet traffic, changes in laws that adversely affect the Company's business, the ability of the Company to manage effectively its rapidly expanding operations, including the amount and timing of capital expenditures and other costs relating to the expansion of the Company's operations, the introduction and development of different or more extensive communities by direct and indirect competitors of the Company, including those with greater financial, technical and marketing resources, the inability of the Company toWe may not successfully address these risks. For example, we may not be able to: o maintain and increase levels of user and member traffic on its Web site,our web site; o maintain and increase the inabilitypercentage of the Companyour advertising inventory sold; o adapt to meet changes in our markets and competitive developments; o develop or acquire content for our services; o generate electronic commerce-related revenues; and o identify, attract, retain and motivate qualified personnel, and general economic conditions. To address these risks, the Company must, among other things, attract and retain members, maintain its customer base and attract a significant number of new advertising customers, respond to competitive developments, develop and extend its brand, continue to form and maintain relationships with strategic partners, continue to attract, retain and motivate qualified personnel, and continue to develop and upgrade its technologies and commercialize its services incorporating such technologies. There can be no assurance that the Company will be successful in addressing such risks, and any failure to do so could have a material adverse effect on the Company's business, results of operations and financial condition. Although the Company has experiencedpersonnel. REVENUE GROWTH IN PRIOR PERIODS MAY NOT BE INDICATIVE OF FUTURE GROWTH. We achieved significant revenue growth in recent periods, there can be no assurance that this will continue or increase. The Company's1998. Our limited operating history makes the prediction of future resultsgrowth difficult. Accurate predictions of future growth are also difficult or impossible and, therefore,because of the Company's recentrapid changes in our markets. Accordingly, investors should not rely on past revenue growth should not be takenrates as an indication of any growth that can be expected in the future. Furthermore, its limited operating history leads the Company to believe that period-to-period comparisons of its operating results are not meaningful and that the results for any period should not be relied upon as an indicationa prediction of future performance.growth. WE ANTICIPATE INCREASED OPERATING EXPENSES AND EXPECT TO CONTINUE TO INCUR LOSSES. To the extentdate, we have not been profitable, and we expect that revenues do not grow at anticipated rates, the Company's business, results of operations and financial condition would be materially and adversely affected. The Company has not achieved profitability to date, and the Company anticipates that itwe will continue to incur net losses for the foreseeable future. The extentWe had net losses of these losses will depend, in part, on the amount of growth in the Company's revenues from advertising sales, e-commerceapproximately $750,200 for 1996, $3.6 million for 1997, and membership service fees.$16.0 million for 1998. As of June 30,December 31, 1998, the Companywe had an accumulated deficit of $10.2approximately $20.4 million. The Company expects that itsprincipal causes of our losses are likely to continue to be: o increased general and administrative expenses; o costs resulting from enhancement of our services; o significant increases in operating expenses will increase significantly duringin the next several years, especially in the areas of sales and marketing,marketing; o increased expenses necessary to maintain and develop brand promotion. Thus, the Companyidentity; o growth of our sales force; o expansion of our business facilities; and o failure to generate sufficient revenue in light of increased costs. -9- We will need to generate significantly increased revenues to achieve profitability. To the extent that increases in its operating expenses precede orprofitability, particularly if we are not subsequently followed by commensurate increases in revenues, or that the Company is unable to adjust operating expense levels accordingly, the Company's business, resultsour expenses in light of operations and financial condition would be materially and adversely affected. There can be no assuranceany earnings shortfall. We cannot assure you that the Companywe will ever achieve or sustain profitability or thatprofitability. OUR QUARTERLY OPERATING RESULTS FLUCTUATE AND VARY BY SEASON. Our quarterly revenues, expenses and operating results have varied significantly in the Company's operating losses will not increasepast and are likely to vary significantly from quarter to quarter in the future. Dependence on Continued Growth in UseAs a result, quarter to quarter comparisons of our revenues and Commercial Viability of the Internet The Company's future success is substantially dependent upon continued growth in the use of the Internet. To support advertising sales, e-commerce and membership service fees on theglobe.com, the Internet's recent and rapid growth must continue, and e-commerce on the Internet must become widespread. None of these canoperating results may not be assured. The Internet may prove not to be a viable commercial marketplace. Additionally,meaningful. In addition, due to the ability of consumers to easily compare prices of similar productsour limited operating history and our new and unproven business model, we cannot predict our future revenues or services on competing Web sites, gross margins for e-commerce transactions may narrow in the future and, accordingly, the Company's revenues from e-commerce arrangements may be materially negatively impacted. If use of the Internet does not continue to grow, the Company's business, results of operations accurately. It is likely that in one or more future quarters our operating results will fall below the expectation of securities analysts and financial conditioninvestors. If this happens, the trading price of our common stock would be materially and adversely affected. Additionally, to the extent that the Internet continues to experience significant growth in the number of users and the level of use, there can be no assurance that its technical infrastructure will continue to be able to support the demands placed upon it. The necessary technical infrastructure for significant increases in e-commerce, such as a reliable network backbone, may not be timely and adequately developed. In addition, performance improvements, such as high-speed modems, may not be introduced in a timely fashion. Furthermore, security and authentication concerns with respect to transmission over the Internet of confidential information, such as credit card numbers, may remain. Issues like these could lead to resistance against the acceptance of the Internet as a viable commercial marketplace. Also, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of activity, or due to increased governmental regulation. Changes in or insufficient availability of telecommunications services could result in slower response times and adversely affect usage of the Internet. To the extent the Internet's technical infrastructure does not effectively support the growth that may occur, the Company's business, results of operations and financial condition would be materially and adversely affected. Dependence on Members for Content and Promotion The Company depends substantially upon member involvement for content and for word-of-mouth promotion. Particularly, the Company depends upon the voluntary efforts of certain highly motivated members who are most active in developing content to attract other Internet users to the site. The Company expects such member involvement to reduce the need for the Company to expend resources on content development and site promotion. There can be no assurance that members will continue to generate significant content or to promote the site, nor that the member-generated content or promotional efforts will continue to attract other Internet users. There also can be no assurance that the Company's business would not be materially and adversely affected if its most highly active members became dissatisfied with the Company's services or its focus on the commercialization of those services. Unproven Business Model; Developing Market; Unproven Acceptance of the Company's Products The Company's business model is new and relatively unproven. The model depends upon the Company's ability to generate multiple revenue streams by leveraging its community platform. To be successful, the Company must, among other things, develop and market products and services that achieve broad market acceptance by its users, advertisers and e-commerce vendors. There can be no assurance that any Internet community, including theglobe.com, will achieve broad market acceptance. Accordingly, no assurance can be given that the Company's business model will be successful or that it can sustain revenue growth or be profitable. The market for the Company's products and services is new, rapidly developing and characterized by an increasing number of market entrants. As is typical of any new and rapidly evolving market, demand and market acceptance for recently introduced products and services are subject to a high level of uncertainty and risk. Moreover, because this market is new and rapidly evolving, it is difficult to predict its future growth rate, if any, and its ultimate size. If the market fails to develop, develops more slowly than expected or becomes saturated with competitors, or if the Company's products and services do not achieve or sustain market acceptance, the Company's business, results of operations and financial condition would be materially and adversely affected. See "Business--Industry Background." Risks Associated with Brand Development The Company believes that establishing and maintaining brand identity is a critical aspect of efforts to attract and expand its member base, Internet traffic and advertising and commerce relationships. Furthermore, the Company believes that the importance of brand recognition will increase as low barriers to entry encourage the proliferation of Internet sites. In order to attract and retain members, advertisers and commerce vendors, and in response to competitive pressures, the Company intends to increase substantially its financial commitment to the creation and maintenance of brand loyalty among these groups. The Company plans to accomplish this, although not exclusively, through advertising campaigns in several forms of media, including television, print, billboards, buses, telephone kiosks, online media, and other marketing and promotional efforts. If the Company does not generate a corresponding increase in revenue as a result of its branding efforts or otherwise fails to promote its brand successfully, or if the Company incurs excessive expenses in an attempt to promote and maintain its brand, the Company's business, results of operations and financial condition would be materially and adversely affected. Promotion and enhancement of theglobe.com brand will also depend, in part, on the Company's success in providing a high-quality "community experience." Such success cannot be assured. If members, other Internet users, advertisers and commerce vendors do not perceive theglobe.com community experience to be of high quality, or if the Company introduces new services or enters into new business ventures that are not favorably received by such parties, the value of the Company's brand could be diluted. Such brand dilution could decrease the attractiveness of theglobe.com to such parties, and could materially and adversely affect the Company's business, results of operations and financial condition. Reliance on Advertising Revenues The Company derives a substantial portion of its revenues from the sale of advertisements on its site, and expects to continue to do so for the foreseeable future. For the year ended December 31, 1997 and the six months ended June 30, 1998, advertising revenues represented 77% and 89%, respectively, of the Company's net revenues. The Company's business model therefore is highly dependent on the amount of "traffic" on theglobe.com, which has a direct effect on the Company's advertising revenues. The Company is in the early stages of implementing its advertising sales programs, which, if not successful, could materially and adversely affect the Company's business, results of operations and financial condition. To date, substantially all of the Company's advertising contracts have been for terms averaging one to two months in length, with relatively few longer-term advertising contracts. Many of the Company's advertising customers have limited experience with Internet advertising, have not devoted a significant portion of their advertising expenditures to Internet advertising, and may not believe Internet advertising to be effective relative to traditional advertising media. Also, the Company's advertising customers may object to the placement of their advertisements on certain members' personal homepages, the content of which they deem undesirable. There can be no assurance that the Company's current advertisers will continue to purchase advertisements on theglobe.com. The Company's contracts with advertisers typically guarantee the advertiser a minimum number of "impressions," or times that an advertisement is seen by users of theglobe.com. To the extent that minimum impression levels are not achieved for any reason, the Company may be required to "make good" or provide additional impressions after the contract term, which may adversely affect the availability of advertising inventory and which could have a material adverse effect on the Company's business, results of operations and financial condition. To the extent minimum guaranteed impressions are not met, the Company defers recognition of the corresponding revenues until guaranteed impression levels are achieved. Additionally, the process of managing the placement of advertising within a large, high-traffic Web site like theglobe.com is an increasingly important and complex task. The Company relies on internal inventory management systems to provide enhanced internal reporting and customer feedback on advertising. The Company also licenses software from a third-party provider. See "--Dependence of Third-Party Relationships." To the extent that any extended failure of the Company's advertising management system results in incorrect advertising insertions, the Company may be exposed to "make good" obligations that may adversely affect the availability of advertising inventory, and which could have a material adverse effect on the Company's business, results of operations and financial condition. The Company's ability to generate significant advertising revenues will depend, in part, on its ability to create new advertising programs without diluting the perceived value of its existing programs. The Company's ability to generate advertising revenues will depend also, in part, on advertisers' acceptance of the Internet as an attractive and sustainable medium, the development of a large base of users of the Company's products and services, the effective development of Web site content that provides user demographic characteristics that will be attractive to advertisers, and government regulation. The adoption of Internet-based advertising, particularly by those advertisers that have historically relied upon traditional advertising media, requires the acceptance of a new way of conducting business and exchanging information. There can be no assurance that the market for Internet advertising will continue to emerge or become sustainable. If the market develops more slowly than expected, the Company's business, results of operations and financial condition couldalmost certainly be materially and adversely affected. The factors which will cause our quarterly operating results to fluctuate include: o the level of traffic on our web site; o the overall demand for Internet as an advertising medium has not been available for a sufficient periodand electronic commerce; o the addition or loss of time to gauge its effectiveness as compared with traditional advertising media. No standards have been widely accepted for the measurementadvertisers and electronic commerce partners on our web site; o usage of the effectiveness of Internet-basedInternet; o seasonal trends in advertising and there can be no assurance that any such standards will become widely accepted in the future. There can be no assurance that advertisers will accept the Company's or other parties' measurements of impressions. The rejection by advertisers of such measurements could have a material adverse effect on the Company's business, results of operationselectronic commerce sales and financial condition. The sale of Internet advertising is subject to intense competition that has resulted in a wide variety of pricing models, rate quotes and advertising services. This has made it difficult to project future levels of advertising revenues and rates. It is also difficult to predict which pricing models, if any, will achieve broad acceptance among advertisers. As described above, to date, the Company has based its advertising rates on providing advertisers with a guaranteed number of impressions, and any failure of the Company's advertising model to achieve broad market acceptance, would have a material adverse effect on the Company's business, results of operations and financial condition. "Filter" software programs that limit or remove advertising from an Internet user's desktop are available to consumers. Widespread adoption or increased use of such software by users could have a material adverse effect upon the viability of advertising on the Internet and on the Company's business, results of operations and financial condition. Potential Fluctuations in Operating Results; Quarterly Fluctuations The Company's operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are outside the Company's control. See "--Limited Operating History; Fluctuating Rates of Revenue Growth; Anticipated Losses." As a strategic response to changes in the competitive environment, the Company may from time to time make certain pricing, service or marketing decisions or acquisitions that could have a material short-term or long-term adverse effect on the Company's business, results of operations and financial condition. In particular, in order to accelerate the promotion of theglobe.com as a brand, the Company intends to significantly increase its marketing budget after consummation of the Offering. See "--Risks Associated with Brand Development." The Company believes that it may experience seasonality in its business, with use of the Internet and theglobe.com being somewhat lower during the summer vacation and year-end holiday periods. Advertising impressions (and therefore revenues) may be expected to decline accordingly in those periods. Additionally, seasonality may affect significantly the Company's advertising revenues during the first and third calendar quarters, as advertisers historically spend less during these periods. Because Internet advertising is an emerging market, additional seasonalmember usage; o capital expenditures and other patterns in Internet advertising may develop ascosts relating to the market matures,expansion of our operations; o the incurrence of costs relating to acquisitions; and there can be no assurance that such patterns will not haveo the timing and profitability of acquisitions, joint ventures and strategic alliances. We derive a material adverse effect on the Company's business, results of operations and financial condition. The Company derives a significantsubstantial portion of itsour revenues from the sale of advertising under short-term contracts. These contracts averagingaverage one to twothree months in length. As a result, the Company'sour quarterly revenues and operating results are, to a significant extent, dependent on advertising revenues from contracts entered into within the quarter, and on the Company'sour ability to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. See "--RelianceWe believe that advertising sales in traditional media, such as television and radio, generally are lower in the first and third calendar quarters. If the Internet transitions from an emerging to a more developed form of media, these same patterns may develop in Internet advertising sales. Internet advertising expenditures may also develop a different seasonality pattern. Traffic levels on Advertising Revenues."our site and the Internet have typically declined during the summer and year-end vacation and holiday periods. In addition to selling advertising, a key elementan increasing portion of our revenues may be generated from electronic commerce through our Azazz subsidiary. We also have existing electronic commerce arrangements with third parties for the Company's strategy is to generate revenues through e-commerce arrangements. To date, the revenues received by the Company under the revenue-sharing portionssale of these arrangements have not been material, and there can be no assurance that the Company will receive a material amount of revenue under these agreements in the future. Each of the Company's existing e-commerce arrangements ismerchandise on our web site which are terminable upon short notice. As a result, the Company'sour revenues from e-commerceelectronic commerce may fluctuate significantly from period to period depending on the level of demand for electronic commerce on our site and the continuation of its key e-commerceour electronic commerce arrangements. The foregoing factors,-10- WE DEPEND ON OUR MEMBERS FOR CONTENT AND PROMOTION. We depend substantially upon member involvement for content and word-of-mouth promotion. Particularly, we depend upon the voluntary efforts of some highly motivated members who are most active in somedeveloping content to attract other Internet users to our site. This member involvement reduces the need for us to spend funds on content development and site promotion. However, we cannot assure you that these members will continue to effectively generate significant content or promote our site. Our business may be materially and adversely affected if our most highly active members become dissatisfied with our services or our focus on the commercialization of those services or for any other reason stop generating content that effectively promotes our site. OUR BUSINESS MODEL IS NEW AND UNPROVEN. Our business model is new and relatively unproven. This model depends upon our ability to obtain more than one type of revenue source by using our community platform. To be successful, we must, among other things, develop and market products and services that achieve broad market acceptance by our users, advertisers and electronic commerce vendors. We must also market products directly to users and have users purchase products through our site. We cannot assure you that any Internet community, including our site, will achieve broad market acceptance. We also cannot assure you that our business model will be successful, that it will sustain revenue growth or that it will be profitable. Additionally, the market for our products and services is new, rapidly developing and characterized by an increasing number of market entrants. As is typical of most new and rapidly evolving markets, demand and market acceptance for recently introduced products and services are highly uncertain and risky. Moreover, because this market is new and rapidly evolving, we cannot predict our future quarters, may lead the Company's operating resultsgrowth rate, if any. If this market fails to fall below the expectations of securities analystsdevelop, develops more slowly than expected or becomes saturated with competitors, or if our products and investors. In such event, the trading price of the Common Stockservices do not achieve or sustain market acceptance, our business would likely be materially and adversely affected. Broad DiscretionOUR ACQUISITIONS OR JOINT VENTURES ENTAIL NUMEROUS RISKS AND UNCERTAINTIES. As part of our business strategy, we review acquisition prospects or joint ventures that we expect to complement our existing business, increase our traffic, augment the distribution of our community, enhance our technological capabilities or increase our electronic commerce revenues. On February 1, 1999, we acquired Azazz.com to develop electronic commerce retailing on our site. On April 9, 1999, we acquired Attitude Network to add two leading game enthusiast web sites to our entertainment theme. We have been approached from time to time to consider and evaluate potential business combinations, either involving potential investments in Useour common stock, or other business combinations or joint ventures, or our acquisition of Proceedsother companies. If consummated, any such transaction could result in a change of control of our company or could otherwise be material to our business or to your investment in our common stock. We are currently in discussions or negotiations for various of these kinds of transactions, some of which may be material, but we have not reached any binding agreements. These transactions may or -11- may not be consummated. Our future acquisitions or joint ventures could result in numerous risks and uncertainties, including: o potentially dilutive issuances of equity securities, which may be freely tradable in the public market; o large and immediate write-offs; o the incurrence of debt and contingent liabilities or amortization expenses related to goodwill and other intangible assets; o difficulties in the assimilation of operations, personnel, technologies, products and information systems of the acquired companies; o the diversion of management's attention from other business concerns; o the risks of entering geographic and business markets in which we have no or limited prior experience such as electronic commerce retailing; o the risk that the acquired business will not perform as expected; and o risks associated with international expansion. WE MAY BE UNSUCCESSFUL IN DEVELOPING BRAND AWARENESS; BRAND IDENTITY IS CRITICAL TO US. We believe that establishing and maintaining awareness of "theglobe.com" brand name is critical to attracting and expanding our member base, the traffic on our web site and advertising and electronic commerce relationships. If we fail to promote and maintain our brand or our brand value is diluted, our business, operating results and financial condition could be materially adversely affected. The Company intendsimportance of brand recognition will increase because low barriers to useentry continue to result in an increased number of web sites. To promote our brand, we may be required to continue to increase our financial commitment to creating and maintaining brand awareness. We may not generate a corresponding increase in revenues to justify these costs. Additionally, if members, other Internet users, advertisers and customers do not perceive our community experience to be of high quality, or if we introduce new services or enter into new business ventures that are not favorably received by these parties, the net proceedsvalue of our brand could be diluted. WE RELY SUBSTANTIALLY ON ADVERTISING REVENUES. We derive a substantial portion of our revenues from the sale of Common Stock offered herebyadvertisements on our web site. We expect to continue to do so for the foreseeable future. During 1998, advertising revenues represented 89% of our net revenues. Our business model and revenues are highly dependent on the amount of traffic on our site. The level of traffic on our site determines the amount of advertising inventory we can sell. Our ability to generate significant advertising revenues depends, in part, on our ability to create new advertising programs without diluting the perceived value of our existing programs. Our ability to generate advertising revenues will also depend, in part, on the following: o advertisers' acceptance of the Internet as an attractive and sustainable medium; o advertisers' willingness to pay for advertising brand name promotions and other general corporate purposes, including investment inon the Internet at current rates; o the development of a large base of users of our products and functionalityservices; o our level of theglobe.com Webtraffic; -12- o the effective development of web site enhancementscontent that attracts users having demographic characteristics attractive to advertisers; and o price competition among web sites. We cannot assure you that the market for Internet advertising will continue to emerge or become sustainable. If the Internet advertising market develops slower than we expect, our business performance would be materially adversely affected. To date, substantially all our advertising contracts have been for terms averaging one to three months in length, with relatively few longer term advertising contracts. Additionally, our advertising customers may object to the placement of their advertisements on some members' personal homepages, the content of which they deem undesirable. For any of the Company's network infrastructureforegoing reasons, we cannot assure you that our current advertisers will continue to purchase advertisements on our site. We also compete with traditional advertising media, including television, radio, cable and working capital. The Company may also useprint, for a portionshare of the proceeds for strategic alliances and acquisitions. Accordingly, management will haveadvertisers' total advertising budgets. This results in significant flexibility in applying the net proceeds of this Offering. The failure of management to apply such funds effectivelypricing pressures on our advertising rates, which could have a material adverse effect on us. WE RELY ON THIRD PARTIES OVER WHOM WE HAVE LIMITED CONTROL TO MANAGE THE PLACEMENT OF ADVERTISING ON OUR WEB SITE. The process of managing advertising within a large, high-traffic web site such as ours is an increasingly important and complex task. We license our advertising management system from DoubleClick, Inc. under an agreement expiring April 15, 2000. DoubleClick may terminate the Company's business, resultsagreement upon 30 days' notice (1) if we breach the agreement or (2) if DoubleClick reasonably determines that we have used their advertising management system in a manner that could damage their technology or which reflects unfavorably on DoubleClick's reputation. No assurance can be given that DoubleClick would not terminate the agreement. Any termination and replacement of operationsDoubleClick's service could disrupt our ability to manage our advertising operations. Additionally, we have entered into a contract with Engage Technologies, Inc. for the license of proprietary software to manage the placement of advertisement on our web site. This software is still being implemented and financial condition. See "Useour relationship under the contract has not yet been material. There can be no assurance that this software will effectively manage the placement of Proceeds." Dependenceadvertisements on Key Personnel The Company'sour web site and that errors will not occur. To the extent that we encounter system failures or material difficulties in the operation of our advertising management systems, we may o be unable to deliver banner advertisements and sponsorships through our site; and o be required to provide additional impressions to our advertisers after the contract term. Our obligations to provide additional impressions would displace saleable advertising inventory. This would reduce revenues and could have a material adverse effect on us. -13- WE DEPEND SUBSTANTIALLY ON OUR KEY PERSONNEL. Our performance is substantially dependent on the performancecontinued service of itsour senior management and key technical personnel.personnel, all of whom have only worked together for a short time. In particular, the Company'sour success depends on the continued efforts of itsour senior management team, especially itsour Co-Chief Executive Officers, Co-Presidents, and Co-Presidents (and co-founders),co-founders, Todd V. Krizelman and Stephan J. Paternot. The Company doesWe do not carry key person life insurance on any of itsour personnel. The loss of the services of any of itsour executive officers or other key employees couldwould likely have a material adverse effect on the business, results of operations and financial condition of the Company. The Company'sour business. WE DEPEND ON HIGHLY QUALIFIED TECHNICAL AND MANAGERIAL PERSONNEL. Our future success also depends on itsour continuing ability to attract, retain and attractmotivate highly qualified technical and managerial personnel. As of June 30, 1998, the Company had grownOur business plan requires us to approximately 80 full-time employees from approximately 20 in June 1997, and the Company anticipates that the number of its employees will increase our employee base significantly inover the next 12 months. Competition for employees in our industry is intense. We may be unable to attract, assimilate or retain highly qualified technical and managerial personnel in the future. Wages for managerial and technical employees are increasing and are expected to continue to increase in the foreseeable future due to the competitive nature of this job market. There can be no assurance that the Company will be able to retain its key managerial and technical personnel or that it will be able to attract and retain additional highly qualified technical and managerial personnel in the future. The Company has experienced difficultyWe have from time to time in attracting the personnel necessarypast experienced, and we expect to supportcontinue to experience in the growth of its business, and there can be no assurance that the Company will not experience similarfuture, difficulty in the future. The inabilityhiring and retaining highly skilled employees with appropriate qualifications. If we are unable to attract and retain the technical and managerial personnel necessary to support the growth of the Company'sour business, due to, among other things, a large increase in the wages demanded by such personnel, could have a materialour business would likely be materially and adverse effect upon the Company's business, results of operations and financial condition. See "Business--Employees" and "--Technology" and "Management." Management of Growth; New Management Team The Company'sadversely affected. WE MAY NOT EFFECTIVELY MANAGE OUR GROWTH; OUR MANAGEMENT TEAM IS INEXPERIENCED IN THE MANAGEMENT OF A LARGE PUBLIC COMPANY. Our recent growth has placed and is expected to continue to place, a significant strainstrains on its managerial, operational and financialour resources. To manage its potentialour future growth, the Companywe must continue to implement and improve itsour operational and financial software systems and must expand and train and manage itsour employee base. The Company'sSome of our key employees were hired during 1998, including our Chief Operating Officer, who joined us in August 1998 and our Chief Financial Officer, who joined the Company duringus in July 1998. In addition, eachour Director of the Company'sMarketing, Director of Advertising Sales, General Counsel, Director of Technology,Business Development, Director of Communications and Director of Human Resources and Director of Sales and Marketing haseach have been with the Companyus for less than two years. Furthermore, the members of the Company'sour current senior management, other than the Chairman, have not had any previous experience managing a public company or a large operating company. There can be no assurance that the CompanyAccordingly, we cannot assure you that: o we will be able to effectively manage the expansion of its operations, that the Company'sour operations; o our key employees will be able to work together effectively as a team to successfully manage our growth; o we will be able to hire, train and manage our growing employee base; o our systems, procedures or controls will be adequate to support the Company's operations or that Companyour operations; and o our management will be able to achieve the rapid execution necessary to fully exploit the market opportunity for the Company'sour products and services. AnyOur inability to manage growth effectively could have a material adverse effect on the Company's business, resultsour business. -14- OUR CHAIRMAN AND VICE PRESIDENT OF CORPORATE DEVELOPMENT HAVE OTHER INTERESTS AND TIME COMMITMENTS; WE HAVE CONFLICTS OF INTEREST WITH SOME OF OUR DIRECTORS. Because our Chairman and our Vice President of operations and financial condition. See "Management's Discussion and AnalysisCorporate Development are officers or employees of Financial Condition and Results of Operations" and "Business." Competitionother companies, we will have to compete for Management Time; Potential Conflicts of Interesttheir time. Michael S. Egan is the Chairman of the Company and, as such,our Chairman. Mr. Egan serves as the Chairman of the Boardour board of Directorsdirectors and as an executive officer of the Company with primary responsibility for day-to-day strategic planning and financing arrangements. After the Offering, Mr. Egan will also continue to beis the controlling investor of Dancing Bear Investments, Inc. ("Dancing Bear Investments"), Chairman and Chief Executive Officer of Certified Vacations and Chairman of AutobyInternet, related entities of Dancing Bear Investments. Dancing Bear Investments may also acquire other entities in the future.an entity controlled by Mr. Egan, which is our majority stockholder. Edward A. Cespedes is theour Vice President of Corporate Development of the Company with primary responsibility for corporate development opportunities including mergers and acquisitions. After the Offering, Mr. Cespedes will also continue to serveserves as a Managing Director of Dancing Bear Investments. Messrs. Egan and Cespedes have not committed to devote any specific percentage of their business time with the Company.us. Accordingly, the Company willwe compete with Dancing Bear Investments and related entities for the management time of Messrs. Egan and Cespedes. The Company has recentlytheir time. We have begun e-commerceadvertising electronic commerce arrangements with certain entities controlled by Dancing Bear Investments which are not currently material to the Company. See "Certain RelationshipsMr. Egan and Related Transactions."by AutoNation, Inc., an entity affiliated with H. Wayne Huizenga, one of our directors. These arrangements arewere not the result of arms' lengtharm's-length negotiations, althoughbut we believe that the Company believes theyterms of these arrangements are on comparable terms that would be as favorable to the Company as would have been obtained on an arms' length basis.if they were entered into with unaffiliated third parties. Due to their relationships with Dancing Bear Investments,their related entities, Messrs. Egan, Cespedes and CespedesHuizenga will have an inherent conflict of interest in making any decision related to transactions between their related entities related to Dancing Bear Investments and the Company. The Company intendsus. We intend to review related party transactions in the future on a case-by-case basis. EnhancementSee "Certain Relationships and Development of theglobe.com To remain competitive, the Company must continue to enhance and improve the responsiveness, functionality and features of theglobe.com and develop other products and services. Enhancements of or improvements to the Web site may contain undetected programming errors that require significant design modifications, resultingRelated Transactions." WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL AND OTHER CHANGES. The markets in a loss of customer confidence and user support and a decrease in the value of the Company's brand name recognition. The Company plans to develop and introduce new features and functions, such as increased capabilities for user personalization and interactivity. This will require the development or licensing of increasingly complex technologies. There can be no assurance that the Company will be successful in developing or introducing such features and functions or that such features and functions will achieve market acceptance or enhance the Company's brand name recognition. Any failure of the Company to effectively develop and introduce new features and functions, or the failure of such new features and functions to achieve market acceptance, could materially adversely affect the Company's business, results of operations and financial condition. The Company also plans to develop and introduce new products and services, such as new content targeted for specific user groups with particular demographic and geographic characteristics. There can be no assurance that the Company will be successful in developing or introducing such products and services or that such products and services will achieve market acceptance or enhance the Company's brand name recognition. Any failure of the Company to effectively develop and introduce these products and services, or the failure of such products and services to achieve market acceptance, could adversely affect the Company's business, results of operations and financial condition. See "Business--Products and Services." Technological Change The market for Internet products and services iswhich we compete are characterized by rapid technological developments,by: o rapidly changing technology; o evolving industry standards and customer demands, andstandards; o frequent new service and product announcements, introductions and enhancements. Theseenhancements; and o changing consumer demands. We may not be able to keep up with these rapid changes. In addition, these market characteristics are exacerbatedheightened by the emerging nature of the marketInternet and the fact that manyapparent need of companies are expectedfrom varying industries to introduce new Internetoffer Internet-based products and services in the near future. The Company'sservices. As a result, our future success depends on our ability to adapt to rapidly changing technologies and standards. We will depend in significant part on its abilityalso need to continually improve the performance, features and reliability of the siteour services in response to bothcompetitive services and product offerings and the evolving demands of the marketplace and competitive product and service offerings, and there can be no assurance that the Company will be successful in doing so.marketplace. In addition, the widespread adoption of developing multimedia enablingnew Internet, networking or telecommunications technologies or other technological changes could require fundamental changes in the Company's technologyus to incur substantial expenditures to modify our services or infrastructure and could fundamentally affect the nature viability and measurability of Internet-based advertising, which could adversely affect the Company's business, results of operations and financial condition. See "Business--Products and Services." Risk of Capacity Constraints and Systems Failuresour business. -15- WE HAVE CAPACITY CONSTRAINT AND SYSTEM DEVELOPMENT RISKS. A key element of the Company'sour strategy is to generate a high volume of user traffic. The Company'sOur ability to attract advertisers and to achieve market acceptance of itsour products and services and itsour reputation depend significantly upon the performance of the Company and itsour network infrastructure, (including itsincluding our server, hardware and software).software. Any system failure, including network, software or hardware failure, that causes an interruption in our service or slower response timea decrease in responsiveness of the Company's products and servicesour web site could result in lessreduced traffic toand reduced revenue, and could impair our reputation. Our web site must accommodate a high volume of traffic and deliver frequently updated information. Our web site has in the Company's Web sitepast and if sustained or repeated, could reducemay in the attractivenessfuture experience slower response times for a variety of the Company's productsreasons, including system failures and services to advertisers and licensees. Anan increase in the volume of user traffic could strain the capacity of the Company's technical infrastructure, which could lead to slower response time or system failures, and adversely affect the delivery of the number of impressions that are owed to advertisers and thus the Company's advertising revenues. In addition, as the number of Web pages on and users of theglobe.com increase, there can be no assurance that the Company and its technical infrastructure will be able to grow accordingly, and the Company facesour web site. Accordingly, we face risks related to itsour ability to scale up to itsaccommodate our expected customer levels while maintaining superior performance. AnyIn addition, slower response time may result in fewer users at our site or users spending less time at our site. This would decrease the amount of inventory available for sale to advertisers. Accordingly, any failure of the Company'sour server and networking systems to handle current or higher volumes of traffic at sufficient response times would have a material adverse effect on our business. In the Company's business, resultsfourth quarter of operations1998 and financial condition. The Company intends to enter into a Web hosting agreement with a third party (the "Host") by the endfirst quarter of 1998. Pursuant1999, we moved our principal servers to the agreement,New York Teleport facility in Staten Island, New York under a lease with Telehouse International Corporation of America. Telehouse International does not guarantee that our Internet access will be uninterrupted, error-free or secure. We maintain computer hardware, servers and operations relating to shop.theglobe.com in Seattle, Washington, which are hosted by Exodus Communications, Inc. Additionally, we maintain computer hardware, servers and operations relating to Attitude Network in Herndon, West Virginia, which are hosted by Frontier GlobalCenter, and in London, England which are hosted by Telehouse International. Although each of Exodus, Frontier and Telehouse provides comprehensive facilities management services, including human and technical monitoring of all production servers 24 hours-per-day, seven days-per-week, neither Exodus, Frontier nor Telehouse guarantees that our Internet access will be uninterrupted, error-free or secure. Our operations depend on the Host is expectedability to provideprotect our systems against damage from unexpected events, including fire, power loss, water damage, telecommunications failures and manage power and environmentals for the Company's networking and server equipment and also provide site connectivity to the Internet.vandalism. Any disruption in theour Internet access provided by the Host or any failure of the Company's server and networking systems to handle current or higher volumes of traffic could have a material adverse effect on the Company's business, results of operationsus. In addition, computer viruses, electronic break-ins or other similar disruptive problems could also materially adversely affect our web site. Our reputation and financial condition. The Company is also dependent upon third partiestheglobe.com brand could be materially and adversely affected by any problems to provide potentialour site. Our insurance policies may not adequately compensate us for any losses that may occur due to any failures or interruptions in our systems. We do not presently have any secondary off-site systems or a formal disaster recovery plan. In addition, our users with Web browsersdepend on Internet service providers, online service providers and Internet and online services necessaryother web site operators for access to the site. Inour web sites. Many of them have experienced significant outages in the past, users have occasionally experiencedand could experience outages, delays and other difficulties with Internet and online services due to system failures including failures unrelated to our systems. Moreover, the Company's systems. Any disruptionInternet infrastructure may not be able to support continued growth in Internet access provided by third parties could have a material adverse effect on the Company's business, results of operations and financial condition.its use. Furthermore, the Company is dependentwe depend on hardware suppliers for prompt delivery, installation and service of equipment used to deliver the Company'sour products and services. The Company's operations are dependent in part upon its ability to protect its operating systems against damage from human error, fire, floods, power loss, telecommunications failures, break-ins and similar events. The Company does not presently have redundant, multiple site capacity in the event of any such occurrence. Despite the implementation of network security measures by the Company, its servers are also vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with the Company's computer systems. The occurrence of anyAny of these eventsproblems could resultmaterially adversely affect our business. -16- HACKERS MAY ATTEMPT TO PENETRATE OUR SECURITY SYSTEM; ONLINE SECURITY BREACHES COULD HARM OUR BUSINESS. Consumer and supplier confidence in the interruption, delayour web site depends on maintaining relevant security features. Substantial or cessation of service, whichongoing security breaches on our system or other Internet-based systems could have a material adverse effect on the Company's business, results of operationssignificantly harm our business. We incur substantial expenses protecting against and financial condition. In addition, the Company'sremedying security breaches. Security breaches also could damage our reputation and theglobe.com brand could be materially and adversely affected. See "Business--Facilities." Security Risksexpose us to a risk of loss or litigation. Experienced programmers ("hackers")or "hackers" have attempted on occasion to penetrate the Company's network security. The Company expectssuccessfully penetrated our system and we expect that these attempts some of which have succeeded, will continue to occur from time to time. Because a hacker who is able to penetrate the Company'sour network security could misappropriate proprietary information or cause interruptions in the Company'sour products and services, the Companywe may be requiredhave to expend significant capital and resources to protect against or to alleviate problems caused by such parties.these hackers. Additionally, the Companywe may not have a timely remedy against a hacker who is able to penetrate itsour network security. Such purposeful security breaches could be material to the Company, although such actions have not been so to date.materially adversely affect our company. In addition, to purposeful security breaches, the inadvertent transmission of computer viruses resulting from hackers or otherwise could expose the Companyus to a risk of loss or litigation and possiblesignificant liability. In offering certain payment services through its "Globe-shops" program, the Company could become increasingly reliant on encryption and authentication technology licensed fromOur insurance policies carry low coverage limits, which may not be adequate to reimburse us for losses caused by security breaches. We also face risks associated with security breaches affecting third parties to provide the security and authentication necessary to effect secure transmission of confidential information, such as customer credit card numbers. Advances in computer capabilities, discoveries in the field of cryptography and other discoveries, events, or developments could lead to a compromise or breach of the algorithms that the Company's licensed encryption and authentication technology used to protect such confidential information. If such a compromise or breach of the Company's licensed encryption authentication technology occurs, it couldwith whom we have a material adverse effect on the Company's business, results of operations and financial condition. The Company may be required to expend significant capital and resources to protect against the threat of such security, encryption and authentication technology breaches or to alleviate problems caused by such breaches. Concerns over the security of Internet transactions and the privacy of users may also inhibit the growth of the Internet generally, particularly as a means of conducting commercial transactions. Intense Competitionrelationships. COMPETITION FOR MEMBERS, USERS AND ADVERTISERS, AS WELL AS COMPETITION IN THE ELECTRONIC COMMERCE MARKET IS INTENSE AND IS EXPECTED TO INCREASE SIGNIFICANTLY. The market for members, users and Internet advertising among web sites is new and rapidly evolving, and competitionevolving. Competition for members, users and advertisers, as well as competition in the electronic commerce market, is intense and is expected to increase significantly. Barriers to entry are relatively insubstantial and the Company maywe believe we will face competitive pressures from many additional companies both in the United States and abroad. The Company believes that the principal competitive factors for companies seeking to create communitiesAccordingly, pricing pressure on the Internet are critical mass, functionality of the Web site, brand recognition, member affinity and loyalty, broad demographic focus and open access for visitors. Other companies that are primarily focused on creating Internet communities are Tripod, Inc., a subsidiary of Lycos, Inc. ("Tripod"), and GeoCities, Inc. ("GeoCities"), and,advertising rates will increase in the future Internet communities may be developedwhich could have a material adverse effect on us. All types of web sites compete for users. Competitor web sites include community sites, as well as "gateway" or acquired by companies currently operating Web directories, search engines, shareware archives and content"portal" sites and by commercial online service providers ("OSPs"), Internet service providers ("ISPs") andvarious other entities, certaintypes of which may have more resources than the Company. Furthermore, the Company competes for users and advertisers with other content providers and with thousands of Web sites operated by individuals, the government and educational institutions. Such providers and sites include America Online, Inc. ("AOL"), Angelfire Communications ("Angelfire"), CNET, Inc. ("CNET"), CNN/Time Warner, Inc. ("CNN/Time Warner"), Excite, Inc. ("Excite"), Hotmail Corporation ("Hotmail"), Infoseek Corporation ("Infoseek"), Lycos, Inc. ("Lycos"), Microsoft Corporation ("Microsoft"), Netscape Communications Corporation ("Netscape"), Switchboard Inc. ("Switchboard"), Xoom Inc. ("Xoom") and Yahoo! Inc. ("Yahoo!"). In addition, the Company could face competition in the future from traditional media companies, such as newspaper, magazine, television and radio companies, a number of which, including Disney, CBS and NBC, have recently made significant acquisitions of or investments in Internet companies. The Company believesweb sites. We believe that the principal competitive factors in attracting users to a site are: o functionality of the web site; o brand recognition; o member affinity and loyalty; o broad demographic focus; o open access for visitors; o critical mass of users, particularly for community-type sites; and o services for users. We compete for users, advertisers and electronic commerce marketers with the following types of companies: o other online community web sites, such as GeoCities, which has agreed to be acquired by Yahoo!; Tripod and AngelFire, subsidiaries of Lycos; and Xoom.com; o search engines and other Internet "portal" companies, such as Excite, InfoSeek, Lycos and Yahoo!; -17- o online content web sites, such as CNET, ESPN.com and ZDNet.com; o publishers and distributors of television, radio and print, such as CBS, NBC and CNN/Time Warner; o general purpose consumer online services, such as America Online and Microsoft Network; o web sites maintained by Internet service providers, such as AT&T WorldNet, EarthLink and MindSpring; o electronic commerce web sites, such as Amazon.com, Etoys and CDNow; and o other web sites serving game enthusiasts, including Ziff Davis' Gamespot and CNET's Gamecenter. Additional competitive factors specific to attracting advertisers include the amount of traffic on its Web site, brand recognition, customer service, the demographics of the Company's members and users, the Company's ability to offer targeted audiences and the overall cost-effectivenesscost effectiveness of the advertising medium offered by the Company. The Company believes that the number of Internet companies relying on Internet-based advertising revenue, as well as the number of advertisers on the Internetwe offer. We will also need to continue to increase significantly our user base and the number of users, will increase substantially in the future. Accordingly, the Company will likely face increased competition, resulting in increased pricing pressures on its advertising rates, which could have a material adverse effect on the Company.traffic to compete effectively. Many of our competitors, including other community sites, have announced that they are contemplating developing Internet navigation services and are attempting to become "gateway" or "portal" sites through which users may enter the Company'sweb. In the event these companies develop successful "portal" sites, we could lose a substantial portion of our user traffic. Furthermore, many non-community sites are seeking to develop community aspects in their sites. Many of our existing and potential competitors, including companies operating Webweb directories and search engines, and traditional media companies, have the following advantages: o longer operating histories in the Internet market,market; o greater name recognition,recognition; o larger customer basesbases; and o significantly greater financial, technical and marketing resources thanresources. In addition, providers of Internet tools and services, including community-type sites, may be acquired by, receive investments from, or enter into other commercial relationships with larger, well-established and well-financed companies, such as Microsoft and America Online. For example, Excite has agreed to be acquired by At Home, America Online agreed to acquire Netscape and Lycos announced a transaction in which USA Networks would merge its online and retailing assets, which include Ticketmaster Citysearch Online, with Lycos. In addition, there has been other significant consolidation in the Company. Suchindustry. This consolidation may continue in the future. We could face increased competition in the future from traditional media companies, including cable, newspaper, magazine, television and radio companies. A number of these large traditional media companies, including Disney, CBS and NBC, have been active in Internet related activities. Those competitors may be able to undertake more extensive marketing campaigns for their brands and services, adopt more aggressive advertising pricing policies and make more attractive offers to potential employees, distribution partners, electronic commerce companies, advertisers and third-party content providers. Furthermore, the Company'sour existing and potential competitors may develop communitiessites that are equal or superior in quality to, or that achieve greater market acceptance than, theglobe.com. There can be no assuranceour site. We cannot assure you that advertisers may not perceive our competitors' sites as more desirable than ours. -18- To compete with other web sites, we plan to develop and introduce new features and functions, such as increased capabilities for user personalization and interactivity. We also plan to develop and introduce new products and services, such as new content targeted for specific user groups with particular demographic and geographic characteristics. These improvements will require us to spend significant funds and may require the Company will be abledevelopment or licensing of increasingly complex technologies. Enhancements of or improvements to our web site may contain undetected programming errors that require significant design modifications, resulting in a loss of customer confidence and user support and a decrease in the value of our brand name. Our failure to effectively develop and produce new features, functions, products and services could affect our ability to compete successfully against its current or future competitors or that competition will not have a material adverse effect on the Company's business, results of operations and financial condition. There can be no assurance that Web sites maintained by the Company's existing and potential competitors will not be perceived by advertisers as being more desirable for placement of advertisements than theglobe.com. In addition, many of the Company's current advertising customers and strategic partners have established collaborative relationships with certain of the Company's existing or potential competitors. There can be no assurance that the Company will be able to retain or grow its membership base, traffic levels and advertising customer base at historical levels, or that competitors will not experience better retention or greater growth in these areas than the Company. Accordingly, there can be no assurance that any of the Company's advertising customers and strategic partners will not sever or will elect not to renew their agreements with the Company, the result of whichother web sites. This could have a material adverse effect on us. Web browsers offered by Netscape and Microsoft also increasingly incorporate prominent search buttons that direct traffic to competing services. These features could make it more difficult for Internet users to find and use our product and services. In the Company'sfuture, Netscape, Microsoft and other browser suppliers may also more tightly integrate products and services similar to ours into their browsers or their browsers' pre-set home page. Additionally, entities that sponsor or maintain high-traffic web sites or that provide an initial point of entry for Internet viewers, such as the Regional Bell Operating Companies, cable companies or Internet service providers, such as Microsoft and America Online, offer and can be expected to consider further development, acquisition or licensing of Internet search and navigation functions that compete with us. These competitors could also take actions that make it more difficult for viewers to find and use our products and services. Additionally, the electronic commerce market is new and rapidly evolving, and we expect competition among electronic commerce merchants to increase significantly. Because the Internet allows consumers to easily compare prices of similar products or services on competing web sites and there are low barriers to entry for potential competitors, gross margins for electronic commerce transactions may narrow in the future. Many of the products that we sell on our web site may be sold by the maker of the product directly or by other web sites. Competition among Internet retailers, our electronic commerce partners and product makers may have a material adverse effect on our ability to generate revenues through electronic commerce transactions or from these electronic commerce partners. See also "Business--Competition." WE DEPEND ON THE CONTINUED GROWTH IN THE USE AND COMMERCIAL VIABILITY OF THE WEB. Our market is new and rapidly evolving. Our business resultsis substantially dependent upon the continued rapid growth in the use of operationsthe Internet and electronic commerce on the Internet becoming more widespread. Commercial use of the Internet is relatively new. Web usage may be inhibited for a number of reasons, including: o inadequate network infrastructure; o security and authentication concerns with respect to transmission over the Internet of confidential information, including credit card numbers, or other personal information; o ease of access; o inconsistent quality of service; o availability of cost-effective, high-speed service; and o bandwidth availability. -19- If the Internet develops as a commercial medium more slowly than we expect, it will adversely affect our business. Additionally, if web usage grows, the Internet infrastructure may not be able to support the demands placed on it by this growth or its performance and reliability may decline. Web sites have experienced interruptions in their service as a result of outages and other delays occurring throughout the Internet network infrastructure. If these outages or delays frequently occur in the future, web usage, as well as usage of our web site, could grow more slowly or decline. Also, the Internet's commercial viability may be significantly hampered due to: o delays in the development or adoption of new operating and technical standards and performance improvements required to handle increased levels of activity; o increased government regulation; and o insufficient availability of telecommunications services which could result in slower response times and adversely affect usage of the Internet. WE MAY BE MATERIALLY ADVERSELY AFFECTED IF ELECTRONIC COMMERCE DOES NOT BECOME A VIABLE SOURCE OF SIGNIFICANT REVENUES FOR THEGLOBE.COM. IN ADDITION, OUR ELECTRONIC COMMERCE BUSINESS MAY RESULT IN SIGNIFICANT LIABILITY CLAIMS AGAINST US. In the first quarter of 1999, we acquired Azazz, which is a direct marketer of products over the Internet. However, we have limited experience in the sale of products online and the development of relationships with manufacturers and suppliers of these products. We also face many uncertainties which may affect our ability to generate electronic commerce revenues, including: o our ability to obtain new customers at a reasonable cost, retain existing customers and encourage repeat purchases; o the likelihood that both online and retail purchasing trends may rapidly change; o the level of product returns; o merchandise shipping costs and delivery times; o our ability to manage inventory levels; o our ability to secure and maintain relationships with vendors; o the possibility that our vendors may sell their products through other sites; and o intense competition for electronic commerce revenues. Accordingly, we cannot assure you that electronic commerce transactions will provide a significant or sustainable source of revenues or profits. Additionally, due to the ability of consumers to easily compare prices of similar products or services on competing web sites, gross margins for electronic commerce transactions may narrow in the future and, accordingly, our revenues and profits from electronic commerce arrangements may be materially negatively impacted. If use of the Internet for electronic commerce does not continue to grow, our business and financial condition would be materially and adversely affected. Additionally, consumers may sue us if any of the products that we sell are defective, fail to perform properly or injure the user. Some of our agreements with manufacturers contain provisions intended to limit our exposure to liability claims. However, these limitations may not -20- prevent all potential claims. Liability claims could require us to spend significant time and money in litigation or to pay significant damages. As a result, any claims, whether or not successful, could seriously damage our reputation and our business. INTERNET ADVERTISING MAY NOT PROVE AS EFFECTIVE AS TRADITIONAL MEDIA. The Internet advertising market is new and rapidly evolving. We cannot yet gauge its effectiveness as compared to traditional advertising media. Many of our current or potential advertising partners have little or no experience using the Internet for advertising purposes and they have allocated only a limited portion of their advertising budgets to Internet advertising. The adoption of Internet advertising, particularly by those entities that have historically relied upon traditional media, requires the acceptance of a new way of conducting business, exchanging information and advertising products and services. Advertisers that have traditionally relied upon other advertising media may be reluctant to advertise on the Internet or find it less effective. No standards have been widely accepted to measure the effectiveness of Internet advertising or to measure the demographics of our user base. Additionally, no standards have been widely accepted to measure the number of members, unique users or page views related to a particular site. We cannot assure you that any standards will become available in the future or that standards will accurately measure our users or the full range of user activity on our site. If standards do not develop, advertisers may not advertise on the Internet. In addition, we depend on third parties to provide these measurement services. These measurements are often based on sampling techniques or other imprecise measures and may materially differ from each other and from our estimates. We cannot assure you that advertisers will accept our or other parties' measurements. The rejection by advertisers of these measurements could have a material adverse effect on our business and financial condition. DependenceThe sale of Internet advertising is subject to intense competition that has resulted in a wide variety of pricing models, rate quotes and advertising services. For example, advertising rates may be based on Third-Party Relationships The Companythe number of user requests for additional information made by clicking on the advertisement, known as "click throughs," or on the number of times an advertisement is displayed to a user, known as "impressions." Our contracts with advertisers typically guarantee the advertiser a minimum number of impressions. To the extent that minimum impression levels are not achieved for any reason, including the failure to obtain the expected traffic, our contracts with advertisers may require us to provide additional impressions after the contract term, which may adversely affect the availability of our advertising inventory. This could have a material adverse effect on us. Our revenues could be materially adversely affected if we are unable to adapt to other pricing models for Internet advertising if they are adopted. It is difficult to predict which, if any, pricing models for Internet advertising will emerge as the industry standard. This makes it difficult to project our future advertising rates and will continuerevenues. Additionally, it is possible that Internet access providers may, in the future, act to be significantlyblock or limit various types of advertising or direct solicitations, whether at their own behest or at the request of users. Moreover, "filter" software programs that limit or prevent advertising from being delivered to an Internet user's computer are available. Widespread adoption of this software could adversely affect the commercial viability of Internet advertising. -21- WE DEPEND ON THIRD PARTIES TO INCREASE TRAFFIC ON OUR SITE AND TO PROVIDE SOFTWARE AND PRODUCTS. We are dependent on various web sites that provide direct links to our site. These web sites may not attract significant numbers of users and we may not receive a significant number of third-party relationships to increase traffic on theglobe.com and thereby generate advertising revenues, maintain the current level of service and variety of content for its members, and meet future milestones. The Company is generally dependent on other Web site operators that provide links to theglobe.com. The Companyadditional users from these relationships. We also has relationshipsenter into agreements with several online retailers whereby the Company is paid for providing to them online storefronts and promotional materials on theglobe.com. See "Business--Business Strategy--Increase New Membership Acquisition through Strategic Alliances." Most of the Company's arrangements with third-party Internet sites andadvertisers, electronic commerce marketers or other third-party service providersweb sites that require us to exclusively feature these parties in particular areas or on particular pages of our site. These exclusivity agreements may limit our ability to enter into other relationships. Our agreements with third party sites do not require future minimum commitments to use the Company'sour services or to provide access or links to the Company's services or products, are not exclusiveour site and are short-term or may be terminated at the convenience of the other party. Moreover, the Company doeswe do not have agreements with thea majority of other Web site operatorsthe web sites that provide links to theglobe.com, and such Web site operatorsour site. These sites may terminate suchtheir links at any time without noticetime. Many companies we may pursue for strategic relationships offer competing services. As a result, these competitors may be reluctant to the Company. There canenter into strategic relationships with us. Our business could be no assurancematerially adversely affected if we do not establish and maintain strategic relationships on commercially reasonable terms or if any of our strategic relationships do not result in increased traffic on our web site. Additionally, we cannot assure you that third parties regard their relationship with the Company as important to their own respective businesses and operations, that they will not reassess their commitment to the Company at any time in the future or that they will not develop their own competitive services or products. There can be no assurance that the Companywe will be able to maintain relationships with third parties that supply the Companyus with software or products that are crucial to the Company'sour success, or that suchthese software or products will be able to sustain any third-party claims or rights against their use. Furthermore, there can be no assurancewe cannot assure you that the software, services or products of those companies that provide access or links to the Company'sour services or products will achieve market acceptance or commercial success. Accordingly, there can be no assurancewe cannot assure you that the Company'sour existing relationships will result in sustained business partnerships, successful service or product offerings or the generation of significant revenues for the Company. Failure of one or more of the Company's strategic relationships to achieve or maintain market acceptance or commercial success or the termination of one or more successful strategic relationships could have a material adverse effect on the Company's business, results of operations and financial condition. In particular, the elimination of a pre-installed bookmark on a Web browser that directs traffic to the Company's Web site could significantly reduce traffic on the Company's Web site, which would have a material adverse effect on the Company's business, results of operations and financial condition. See "Business--Corporate Alliances and Relationships." Additional Financing Requirements The Company currently anticipatesus. WE MAY NEED TO RAISE ADDITIONAL FUNDS, INCLUDING THROUGH THE ISSUANCE OF DEBT. We believe that the net proceeds offrom this Offering,offering, together with available fundsour current cash and cash flows generated from advertising revenues,equivalents, will be sufficient to meet itsour anticipated cash needs for working capital and capital expenditures andfor our existing business expansion for the next 12at least twelve months. The Company expectsWe expect that itwe will continue to experience negative operating cash flow for the foreseeable future as a result of significant spending on advertising and infrastructure. Accordingly, the Companywe may need to raise additional funds in a timely manner in order toto: o fund itsour anticipated expansion,expansion; o develop new or enhanced services or products,products; o respond to competitive pressures orpressures; o acquire complementary products, businesses or technologies.technologies; and o enter into joint ventures. If we raise additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of theour stockholders of the Company will be reduced, stockholdersreduced. Stockholders may experience additional dilution and suchthese securities may have rights preferences or privileges senior to those of the holders of the Common Stock. There can be no assuranceour common stock. We do not have any contractual restrictions on our ability to incur debt. Any indebtedness could contain covenants which restrict our operations. We cannot assure you that -22- additional financing will be available on terms favorable to the Company,us, or at all. If adequate funds are not available or are not available on acceptable terms, the Company may notour business could be able to fund its expansion, take advantage of acquisition opportunities, develop or enhance services or products or respond to competitive pressures.materially adverse effected. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Risks Associated with Potential Acquisitions As part of its business strategy, the Company expects to review acquisition prospects that would complement its existing business, augment the distribution of its community or enhance its technological capabilities. Future acquisitions by the Company could result in potentially dilutive issuances of equity securities, large and immediate write-offs, the incurrence of debt and contingent liabilities or amortization expenses related to goodwill and other intangible assets, any of which could materially and adversely affect the Company's business, results of operations and financial condition. Furthermore, acquisitions entail numerous risks and uncertainties, including difficulties in the assimilation of operations, personnel, technologies, products and information systems of the acquired companies, the diversion of management's attention from other business concerns, the risks of entering geographic and business markets in which the Company has no or limited prior experience and the potential loss of key employees of acquired organizations. The Company has not made any acquisitions in the past. No assurance can be given as to the ability of the Company to successfully integrate any businesses, products, technologies or personnel that might be acquired in the future, and the failure of the Company to do so could have a material adverse effect on the Company's business, results of operations and financial condition. Reliance on Intellectual Property and Proprietary Rights The Company regardsWE RELY ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. We regard substantial elements of its Webour web site and underlying technology as proprietary and attemptsattempt to protect itthem by relying on trademark, service mark, copyright and trade secretintellectual property laws and restrictions on disclosure and transferring title and other methods. The Companydisclosure. We also generally entersenter into confidentiality agreements with itsour employees and consultants and inconsultants. In connection with itsour license agreements with third parties andwe generally seeksseek to control access to and distribution of itsour technology documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company'sour proprietary information without authorization or to develop similar technology independently. The Company pursuesThus, we cannot assure you that the steps taken by us will prevent misappropriation or infringement of our proprietary information which could have a material adverse effect on our business. In addition, our competitors may independently develop similar technology, duplicate our products or design around our intellectual property rights. We pursue the registration of itsour trademarks in the United States and internationally. The Company has registered a United StatesHowever, effective trademark for theglobe. The Company has filed United States trademark applications for theglobe.com and theglobe.com logo. Additionally, the Company has submitted trademark applications for theglobe.com and theglobe.com logo in Australia, Brazil, Canada, China, the European Union (covering Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Ireland, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom), Hong Kong, Israel, Japan, New Zealand, Norway, Russia, Singapore, South Africa, Switzerland and Taiwan. Effective trademark, service mark, copyright and trade secretother intellectual property protection may not be available in every country in which the Company'sour services are distributed or made available through the Internet, and policingInternet. Policing unauthorized use of the Company'sour proprietary information is difficult. See "Business--Intellectual Property and Proprietary Rights." Legal standards relating to the validity, enforceability and scope of protection of certain proprietary rights in Internet-related businesses are also uncertain and still evolving, and no assurance can be given as toevolving. We cannot assure you about the future viability or value of any of the Company'sour proprietary rights. There can be no assurance that the steps taken by the Company will prevent misappropriation or infringement of its proprietary information, which could have a material adverse effect on the Company's business, results of operations and financial condition. Litigation may be necessary in the future to enforce the Company'sour intellectual property rights to protect the Company's trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation might result in substantial costs and diversion of resources and management attention. Furthermore, there can be no assurancewe cannot assure you that the Company'sour business activities will not infringe upon the proprietary rights of others, or that other parties will not assert infringement claims against the Company,us, including claims that by directly or indirectlyrelated to providing hyperlink text linkshyperlinks to Webweb sites operated by third parties or providing advertising on a keyword basis that links a specific search term entered by a user to the Company is liable for copyright or trademark infringement.appearance of a particular advertisement. Moreover, from time to time, the Companythird parties may be subject toassert claims of alleged infringement by the Companyus or itsour members of the trademarks, service marks and othertheir intellectual property rights of third parties. Although suchrights. Any litigation claims have not resultedor counterclaims could impair our business because they could: o be time-consuming; o result in any significant litigation or had a material adverse effect on the Company's business to date, such claims and any resultant litigation, should it occur, mightcostly litigation; o subject the Companyus to significant liability for damages, mightdamages; o result in invalidation of the Company'sour proprietary rights and, even ifrights; o divert management's attention; o cause product release delays; or o require us to redesign our products or require us to enter into royalty or licensing agreements that may not meritorious, could result in substantial costs and diversion of resources and management attention and could have a material adverse effectbe available on the Company's business, results of operations and financial condition. The Company currently licensesterms acceptable to us, or at all. -23- We license from third parties certainvarious technologies incorporated into theglobe.com.our site. As the Company continueswe continue to introduce new services that incorporate new technologies, itwe may be required to license additional technology from others. There can be no assuranceWe cannot assure you that these third-party technology licenses will continue to be available to the Companyus on commercially reasonable terms, if at all.terms. Additionally, there can be no assurancewe cannot assure you that the third parties from which the Company currently licenses itswe license our technology will be able to defend theirour proprietary rights successfully against claims of infringement. As a result, anyour inability of the Company to obtain any of these technology licenses could result in delays or reductions in the introduction of new services or could adversely affect the performance of itsour existing services until equivalent technology can be identified, licensed and integrated. We own the Internet domain names "theglobe.com," "shop.theglobe.com," "tglo.com," "azazz.com," "happypuppy.com," "realmx.com," "kidsdomain.com" and "gamesdomain.com." The regulation of domain names in the United States and in foreign countries may change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names, any or all of which may dilute the strength of our names. We may not acquire or maintain our domain names in all of the countries in which our web site may be accessed, or for any or all of the top-level domain names that may be introduced. The relationship between regulations governing domain names and laws protecting proprietary rights is unclear. Therefore, we may not be able to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our trademarks and other proprietary rights. See "Business--Intellectual Property and Proprietary Rights." Government Regulation and Legal Uncertainties Associated with the Internet AWE MAY FACE INCREASED GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES IN OUR INDUSTRY. There are an increasing number of legislative and regulatory proposals under consideration by federal, state, local and foreign governmental organizationslaws and regulations pertaining to the Internet. In addition, a number of federal, state, local and foreign legislative and regulatory proposals are under consideration. Laws or regulations may leadbe adopted with respect to the Internet relating to liability for information retrieved from or transmitted over the Internet, online content regulation, user privacy and quality of products and services. Changes in tax laws relating to electronic commerce could materially effect our business. Moreover, the applicability to the Internet of existing laws governing issues such as intellectual property ownership and infringement, copyright, trademark, trade secret, obscenity, libel, employment and personal privacy is uncertain and developing. Any new legislation or regulation, or the application or interpretation of existing laws or regulations, concerning various aspects of the Internet, including, but not limited to, online content, user privacy, taxation, access charges, liability for third-party activities and jurisdiction. Additionally, it is uncertain as to how existing laws will be applied by the judiciary to the Internet. The adoption of new laws or the application of existing laws may decrease the growth in the use of the Internet, whichmay impose additional burdens on electronic commerce or may alter how we do business. This could in turn decrease the demand for the Company'sour services, increase the Company'sour cost of doing business, increase the costs of products sold through the Internet or otherwise have a material adverse effect on the Company'sour business, results of operations and financial condition. See "Business-- Government"Business--Government Regulation and Legal Uncertainties." There can be no assurance thatWE MAY BE EXPOSED TO LIABILITY FOR INFORMATION RETRIEVED FROM OR TRANSMITTED OVER THE INTERNET OR FOR PRODUCTS SOLD OVER THE INTERNET. Users may access content on our web site or the United Statesweb sites of our distribution partners or foreign nations will not enact legislationother third parties through web site links or seekother means, and they may download content and subsequently transmit this content to enforce existing laws prohibiting or restricting certain content, such as online gambling, fromothers over the Internet. Currently, online gambling advertisers account for under ten percentThis could result in claims against us based on a variety of the Company's advertising revenues. Prohibition and restriction of Internet content could dampen the growth of Internet use, decrease the acceptance of the Internet as a communications and commercial medium, expose the Company to liability, and/or require substantial modification of theglobe.com, and thereby have a material adverse effect on the Company's business, results of operations and financial condition. Internet user privacy has become an issue both in the United States and abroad. Current American privacy law consists of a few disparate statutes directed at specific industries that collect personal data, none of which specifically covers the collection of personal information online. There can be no assurance that the United States or foreign nations will not adopt legislation purporting to protect such privacy. Any such action could affect the way in which the Company is allowed to conduct its business, especially those aspects that involve the collection or use of personal information, and could have a material adverse effect on the Company's business, results of operations and financial condition. The tax treatment of the Internet and e-commerce is currently unsettled. A number of proposals have been made at the federal, state and local level and by certain foreign governments that could impose taxes on the sale of goods and services and certain other Internet activities. The United States Congress is considering legislation that would place a temporary moratorium on certain types of taxation on Internet commerce. There can be no assurance that any such legislation will be adopted by Congress or what form it will take, or that current attempts at taxing or regulating commerce over the Internet would not substantially impair the growth of commerce and as a result have a material adverse effect on the Company's business, results of operations and financial condition. Certain local telephone carriers have asserted that the growing popularity and use of the Internet has burdened the existing telecommunications infrastructure, and that many areas with high Internet use have begun to experience interruptions in telephone service. These carriers have petitioned the Federal Communications Commission (the "FCC") to impose access fees on ISPs and OSPs. If such access fees are imposed, the costs of communicating on the Internet could increase substantially, potentially slowing the growth in use of the Internet, which could in turn decrease demand for the Company's services or increase the Company's cost of doing business, and thus have a material adverse effect on the Company's business, results of operations and financial condition. Although the Company's server is located in the State of New York, the governments of other states and foreign countries might attempt to prosecute the Company for violations of their laws. There can be no assurance that violations of such laws will not be alleged or charged by state or foreign governments and that such laws will not be modified, or new laws enacted, in the future. Any of the foregoing could have a material adverse effect on the Company's business, results of operations and financial condition. Liability for Information Retrieved from or Transmitted over the Internet Because materials may be downloaded by the online or Internet services operated or facilitated by the Company or the Internet access providers with which it has relationships and may be subsequently distributed to others, there is a potential that claims will be made against the Company fortheories, including defamation, obscenity, negligence, copyright, or-24- trademark infringement or otherthe wrongful actions of third parties. Other theories may be brought based on the nature, publication and distribution of our content of such materials. Such claimsor based on errors or false or misleading information provided on our web site. Claims have been brought against online services in the past. The Company haspast and we have received inquiries from third parties regarding such matters, all of which have been resolved to date without any payments or otherthese matters. The claims could be material adverse effect onin the Company. In addition, the increased attention focused upon liability issues and legislative proposals could impact the overall growth of Internet use. The Companyfuture. We could also be exposed to liability with respect to third-party information that may be accessible through the Company's Web site, or throughfor third party content and materials that may be posted by members on their personal Web sitesweb pages or onby users in our chat rooms or on our bulletin boards offered by the Company. Such claims might include, among others, that by directly or indirectly providing hyperlink text links to Web sites operated by third parties or by providing hosting services for members' sites, the Company is liable for copyright or trademark infringement or other wrongful actions by such third parties through such Web sites. It is also possible that if any third-party content information provided on the Company's Web site contains errors, third parties could make claims against the Company for losses incurred in reliance on such information. The Company offersboards. Additionally, we offer e-mail service, which is provided by a third party. See "--Dependence on Third-Party Relationships." Suchparty provides. The e-mail service may expose the Companyus to potential risk, such as liabilities or claims resulting from unsolicited e-mail, ("spamming"), lost or misdirected messages, illegal or fraudulent use of e-mail or interruptions or delays in e-mail service. The CompanyWe also entersenter into agreements with commerce partners and sponsors under which the Company iswe are entitled to receive a share of any revenue from the purchase of goods and services through direct links from our site. After the Company's Web site. SuchAzazz acquisition in February 1999, we also began selling products directly to consumers. Those arrangements may expose the Companyus to additional legal risks, regulations by local, state, federal and uncertainties, includingforeign authorities and potential liabilities to consumers of suchthese products and services, even if the Company doeswe do not itselfourselves provide suchthese products or services. While the Company'sWe cannot assure you that any indemnification that may be provided to us in some of these agreements with these parties often provide that the Company will be indemnified against such liabilities, there can be no assurance that such indemnification, if available, will be adequate. Even to the extent suchif these claims do not result in our liability, to the Company, the Companywe could incur significant costs in investigating and defending against suchthese claims. The imposition on the Company of potential liability for information carried on or disseminated through itsour systems could require the Companyus to implement measures to reduce itsour exposure to such liability, whichliability. Those measures may require the expenditure of substantial resources and limit the attractiveness of the Company's services to members and users. While the Company will attempt to reduce its exposure to such liability through the use of member agreements and userour services. Additionally, our insurance policies and disclaimers, the enforceability and effectiveness of such measures are uncertain. Although the Company carries general liability insurance, the Company's insurance may not cover all potential claimsliabilities to which it is exposed or may not be adequate to indemnify the Company for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could have a material adverse effect on the Company's business, results of operations and financial condition. Risks Associated with International Operations and Expansionswe are exposed. WE MAY HAVE TROUBLE EXPANDING INTERNATIONALLY. A part of the Company'sour strategy is to continue to develop theglobe.com community model in internationalexpand into foreign markets. Approximately 25% to 35% of the Company's monthly traffic originates from abroad, although substantially all of the Company's advertising revenue is generated in the United States.In April 1999, we acquired Attitude Network, which operates Gamesdomain.com through a wholly-owned U.K. subsidiary. We have not previously operated internationally. Additionally, we are not completely familiar with U.K. law and its ramifications on our business. There can be no assurance that the Internet or the Company'sour community model will become widely accepted for advertising and e-commerceelectronic commerce in any international markets. In addition, the Company expects that the success of anyTo expand overseas we intend to seek to acquire additional web sites and enter into relationships with foreign operations it initiates in the future will also be substantially dependent upon localbusiness partners. If revenues from international ventures are not adequate to cover the investments in such activities, the Company's business, results of operations and financial condition could be materially and adversely affected. The CompanyThis strategy contains risks, including: o we may experience difficulty in managing international operations because of distance, as a result of difficulty in locating an effective foreign partner, competition, technical problems, local laws and regulations, distance andwell as language and cultural differences, and there can be no assurance that the Companydifferences; o we or its international partners willour future foreign business associates may not be able to successfully market and operate the Company's community modelour services in foreign markets. The Company also believes that, in lightmarkets; o because of substantial anticipated competition, it will be necessary to moveimplement our business strategy quickly intoin international markets to obtain a significant share of the market; and o we do not have the content or services necessary to substantially expand our operations in order to effectively obtain market share, and there can be no assurance that the Companymany foreign markets. -25- We will unlikely be able to do so.significantly penetrate these markets unless we gain the relevant content, either through partnerships, other business arrangements or possibly acquisitions with content-providers in these markets. There are certainalso risks inherent in doing business on an international level, such asincluding: o unexpected changes in regulatory requirements,requirements; o trade barriers,barriers; o difficulties in staffing and managing foreign operations,operations; o fluctuations in currency exchange rates and the introduction of the euro; o longer payment cycles in general,general; o problems in collecting accounts receivable,receivable; o difficulty in enforcing contracts,contracts; o political and economic instability,instability; o seasonal reductions in business activity in certain other parts of the worldworld; and o potentially adverse tax consequences. There can be no assurance that oneVARIOUS STOCKHOLDERS, INDIVIDUALLY OR IN THE AGGREGATE, MAY CONTROL US. Before this offering, Michael S. Egan, our Chairman, beneficially owned or morecontrolled, directly or indirectly, 6,123,024 shares of such factors will not have a material adverse effect onour common stock which in the Company's future international operations and, consequently, on the Company's business, results of operations and financial condition. Control by Current Stockholders Following the completionaggregate represents approximately 45.3% of the Offering, Michaeloutstanding shares of our common stock. Todd V. Krizelman and Stephen J. Paternot, our Co-Chief Executive Officers and Co-Presidents, together, beneficially owned 15.4% of our common stock. After this offering, Mr. Egan the Chairman of the Company, will beneficially own or control, directly or indirectly, shares of Common Stock which in the aggregate will represent approximately % of the outstanding shares of Common Stock (and sharesour common stock, and % on a fully diluted basis). Following consummation ofif the Offering, Messrs.over-allotment option is exercised. Mssrs. Krizelman and Paternot, collectively,together, will beneficially own approximately % of our common stock, and % if the Common Stock ( % on a fully diluted basis). Followingover-allotment option is exercised. These stockholders, if acting together, would be able to significantly influence all matters requiring approval by our stockholders, including the Offering,election of directors and the approval of mergers or other business combinations. Messrs. Egan, Krizelman, and Paternot and certain directorsEdward A. Cespedes and Rosalie V. Arthur, each of whom is a director of our company, and we have entered into a stockholders' agreement. As a result of the Company will hold outstanding Warrants exercisable for 4,046,018 shares of Common Stock. See "Description of Capital Stock -- Warrants." Messrs. Egan, Krizelman and Paternot expect to enter into a votingstockholders' agreement, (the "Voting Agreement") pursuant to which Mr. Egan agreeshas agreed to vote for certainup to two nominees of Messrs. Krizelman and Paternot to the Boardboard of Directorsdirectors and Messrs. Krizelman and Paternot agreehave agreed to vote for the nominees of Mr. Egan to the Board whoboard, which will represent a majority of the Board of Directors. Accordingly,be up to five directors. Consequently, Mr. Egan, will have theabilityKrizelman and Paternot control the ability to elect a majority of the directors of the company andour directors. In addition, collectively Messrs. Egan, Krizelman and Paternot will also have the ability to control theoutcomethe outcome of all issues submitted to a vote of theour stockholders of the Company requiring majority approval. See "Principal Stockholders." The Voting Agreement will also provide that Messrs.Additionally, each party other than Mr. Egan Krizelman and Paternot will behas granted an irrevocable proxy with respect to all matters subject to certain "tag-along"a stockholder vote to Dancing Bear Investments, Inc., an entity controlled by Mr. Egan, for any shares held by that party received upon the exercise of outstanding warrants for 225,000 shares of our common stock. The stockholders' agreement also provides for tag-along and "drag-along"drag-along rights in connection with any private sale of securitiesthese securities. See "Description of Capital Stock." -26- THE YEAR 2000 ISSUE MAY AFFECT OUR OPERATIONS. Year 2000 issues related to non-compliant information technology systems or non-information technology systems operated by us or by third parties may affect us. We have substantially completed an assessment of our internal and external third-party information technology systems and non-information technology systems and a test of the Companyinformation technology systems that support our web site. At this point in our assessment and testing, we are not aware of any Year 2000 problems relating to systems operated by us or by third parties that would have a material effect on our business, without taking into account our efforts to avoid these problems. Based on our assessment to date, we do not anticipate that costs associated with remediating our non-compliant information technology systems or non-information technology systems will be material, although we cannot assure you that this will be the case. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Impact of the Year 2000." To the extent that we finalize our assessment without identifying any material non-compliant information technology systems operated by us or by third parties, the most reasonably likely worst case Year 2000 scenario is the failure of one or more of our vendors of hardware or software or one or more providers of non-information technology systems to properly identify any Year 2000 compliance issues and remediate any issues before December 31, 1999. A failure could prevent us from operating our business, prevent users from accessing our web site, or change the behavior of advertising customers or persons accessing our web site. We believe that the primary business risks, in the event of a failure, would include, but not be limited to: o lost advertising revenues; o increased operating costs; o loss of customers or persons accessing our web site; o other business interruptions of a material nature; and o claims of mismanagement, misrepresentation, or breach of contract. Any of these risks could have a material adverse effect on our business. OUR STOCK PRICE IS VOLATILE. The trading price of our common stock has been volatile and may continue to be volatile in response to various factors, including: o quarterly variations in our operating results; o competitive announcements; o changes in financial estimates by securities analysts; o the operating and stock price performance of other companies that investors may deem comparable to us; and o news relating to trends in our markets. The stock market has experienced significant price and volume fluctuations, and the market prices of technology companies, particularly Internet-related companies, have been highly volatile. In the past, following periods of volatility in the market price of a company's securities, securities -27- class action litigation has often been instituted against a company. Litigation, if instituted, whether or not successful, could result in substantial costs and a diversion of management's attention and resources, which would have a material adverse effect on our business. THE SALE OF SHARES ELIGIBLE FOR FUTURE SALE IN THE OPEN MARKET COULD DEPRESS OUR STOCK PRICE. Sales of significant amounts of common stock in the public market in the future or the perception that sales will occur could materially and adversely affect the market price of the common stock or our future ability to raise capital through an offering of our equity securities. There are 6,495,840 shares of common stock held by our stockholders that are "restricted securities," as that term is defined in Rule 144 of the Securities Act of 1933. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 under the Securities Act. In connection with our initial public offering, all of our directors, officers and the holders of a substantial portion of our stock agreed, with exceptions, that they will not sell any common stock without the prior consent of Bear, Stearns & Co. Inc. before May 12, 1999. Bear, Stearns & Co. Inc. may, however, in its sole discretion and at any time without notice, release all or any portion of the shares subject to lock-up agreements. Following this date, approximately 1,133,380 shares of the restricted securities will be immediately eligible for sale in the public market under Rule 144 without volume limitation or further registration under the Securities Act, not including approximately 5,362,460 shares held by our "affiliates," within the meaning of the Securities Act. These 5,362,460 shares will be eligible for public sale subject to volume limitation. In connection with this offering, the underwriters will require all of our directors, and officers, with the exception of any shares sold by them in the offering, to agree not to sell any common stock, without the prior consent of Bear, Stearns & Co. at any time prior to 90 days following the effective date of this registration statement. There are outstanding options to purchase 1,888,979 shares of common stock which are eligible for sale in the public market from time to time depending on vesting and the expiration of lock-up agreements. The issuance of these securities are registered under the Securities Act. In addition, there are outstanding warrants to purchase up to 2,055,759 shares of our common stock upon exercise. Substantially all of our stockholders holding restricted securities, including shares issuable upon the exercise of warrants to purchase our common stock, are entitled to registration rights under various conditions. Following the expiration of the 90 day lock-up period required by the underwriters in connection with this offering, we have agreed to file a registration statement for up to 343,916 shares of common stock issued to acquire Azazz.com. We filed a Form S-8 registration statement under the Securities Act to register 41,017 shares of common stock issuable upon the exercise of options assumed in connection with the acquisition of Azazz.com. The shares covered by that registration statement will be eligible for sale in the public markets. See "Principal and Selling Stockholders" and "Description of Capital Stock." ANTI-TAKEOVER PROVISIONS AFFECTING US COULD PREVENT OR DELAY A CHANGE OF CONTROL. Provisions of our charter, by-laws and stockholder rights plan and provisions of applicable Delaware law may: -28- o have the effect of delaying, deferring or preventing a change in control of our company; o discourage bids of our common stock at a premium over the market price; or o adversely affect the market price of, and the voting and other rights of the holders of, our common stock. We must follow Delaware laws that could have the effect of delaying, deterring or preventing a change in control of our company. One of these laws prohibits us from engaging in a business combination with any interested stockholder for a period of three years from the date the person became an interested stockholder, unless various conditions are met. In addition, provisions of our charter and by-laws, and the significant amount of common stock held by our executive officers, directors and affiliates, could together have the effect of discouraging potential takeover attempts or making it more difficult for stockholders to change management. See "Description of Capital Stock--Delaware Law and Various Charter and By-laws Provisions." WE DO NOT EXPECT TO PAY CASH DIVIDENDS. We do not anticipate paying any cash dividends in the foreseeable future. OUR MANAGEMENT CAN SPEND MOST OF THE PROCEEDS FROM THIS OFFERING IN WAYS WITH WHICH STOCKHOLDERS MIGHT NOT AGREE. Our management can spend most of the proceeds from this offering in ways with which the stockholders might not agree. We cannot predict that the proceeds will be invested to yield a favorable return. See "How We Intend to Use the Proceeds from the Offering." AS A NEW INVESTOR, YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION. Investors purchasing shares of common stock in the offering will incur immediate and substantial dilution in net tangible book value per share of the common stock from the offering price of $65.68 per share. To the extent outstanding options or warrants to purchase common stock are exercised, there will be further dilution. See "Dilution." -29- CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward looking statements that have been made under the provisions of the Private Securities Litigation Reform Act of 1995. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and variations of these words and similar expressions are intended to identify forward-looking statements. We have based these statements on our current expectations about future events. Although we believe that our expectations about future events are reasonable, we cannot assure you that these expectations will be achieved. Important factors which would cause our actual results to differ materially from the forward-looking statements in this prospectus are described in the "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and elsewhere in this prospectus. We urge you to carefully consider these factors. We caution you that any forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. All forward-looking statements attributable to us are expressly qualified in their entirety by the foregoing cautionary statement. -30- HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING The estimated net proceeds to us from the sale of the 2,000,000 shares of common stock we are offering are estimated to be $148.4 million at an assumed public offering price of $78.94 per share, the price on April 9, 1999, after deducting the estimated underwriting discount and offering expenses. We will not receive any proceeds from the sale of the shares that the selling stockholders are selling. We expect to use the net proceeds for general corporate purposes, including working capital, expansion of our sales and marketing capabilities, brand name promotions, potential acquisitions and improvements in our web site. The amounts we actually spend for these purposes may vary significantly and will depend on a number of factors, including our future revenue and cash generated by operations and the other factors described under "Risk Factors." In the ordinary course of business, we evaluate potential acquisitions of businesses, technologies and product offerings or minority investments in businesses. However, we have no current agreements with respect to any such acquisitions or investments. Pending use of the net proceeds, we intend to invest them in short-term, interest-bearing, investment grade securities. Therefore, we will have broad discretion in the way we use the net proceeds. See "Our management can spend most of the proceeds from this offering in ways with which stockholders might not agree." DIVIDEND POLICY We have not declared or paid any cash dividends on our common stock. We currently intend to retain our future earnings, if any, to fund the development and growth of our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future. The declaration and payment of dividends by us are subject to the discretion of the board of directors. Any future determination to pay dividends will depend on our results of operations, financial condition, capital requirements, contractual restrictions and other factors deemed relevant by the board of directors. -31- PRICE RANGE OF OUR COMMON STOCK Our common stock trades on the Nasdaq National Market under the symbol "TGLO." The following table sets forth the range of high and low closing sales prices of our common stock for the periods indicated: FISCAL 1998 HIGH LOW ----------- ---- --- Quarter ended December 31, 1998 $63.500 $27.438 (from November 13, 1998) FISCAL 1999 ----------- First Quarter $67.063 $31.500 On April 9, 1999, the last reported sale price for our common stock on the Nasdaq National Market was $78.94 per share. The market price for our stock is highly volatile and fluctuates in response to a wide variety of factors. See "Risk Factors--Our stock price is volatile." -32- CAPITALIZATION The following table sets forth our capitalization as of December 31, 1998: o on an actual basis; o on a pro forma basis giving effect to (1) the acquisition of Azazz.com and (2) the acquisition of Attitude Network, Ltd.; o on a pro forma as adjusted basis to reflect the pro forma events described above and the receipt of the estimated net proceeds from the sale of 2,000,000 shares of common stock, after deducting the estimated underwriting discounts and commissions and offering expenses. See "How We Intend to Use the Proceeds from the Offering." You should read this information together with our financial statements and the notes to those statements appearing elsewhere in this prospectus. December 31, 1998 ---------------------------- Pro Forma Actual Pro Forma As Adjusted ------- --------- --------- (Dollars in thousands) Notes payable-related party, net of current portion........................................ $ -- $ 103 $ 103 Long-term debt.................................. -- 2,343 2,343 Obligations under capital leases, excluding current installments........................... 2,006 2,022 2,022 Stockholders' equity: Preferred Stock, 3,000,000 shares authorized: Convertible preferred stock, Series A through E, $0.001 par value; 2,900,001 shares authorized; -0- shares issued and outstanding............................... -- -- -- Common stock, $0.001 par value: 100,000,000 shares authorized; 10,312,256 shares issued and outstanding, actual; 11,441,358 and 13,441,358 shares issued and outstandin pro forma and pro forma as adjusted, respectively(1)........................... 10 11 13 Additional paid-in capital................ 50,915 120,459 268,854 Deferred compensation..................... (128) (128) (128) Net unrealized loss on available-for-sale securities.............................. (50) (50) (50) Accumulated deficit....................... (20,446) (20,446) (20,446) ---------- ---------- ---------- Total stockholders' equity................... 30,301 99,846 248,243 ---------- ---------- ---------- Total capitalization........................ $32,307 $104,314 $252,711 ========== ========== ========== - --------------------- (1) Excludes: o 2,055,759 shares of our common stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of approximately $3.16 per share; o 1,888,979 shares of our common stock issuable upon the exercise of stock options that would be outstanding at a weighted average exercise price of $13.08 per share; and o 447,527 shares of our common stock reserved for future issuance under our 1998 and 1995 stock option plans; -33- o 200,000 shares of common stock reserved for future issuance under the 1999 Employee Stock Purchase Plan. See "Capitalization," "Management--Executive Compensation," "Description of Capital Stock" and the financial statements and related financial statement notes appearing elsewhere in this prospectus. -34- DILUTION Our pro forma net tangible book value as of December 31, 1998 was approximately $29.8 million, or approximately $2.60 per share of common stock. Pro forma net tangible book value per share represents the amount of total tangible assets less total liabilities, divided by the pro forma number of shares of common stock outstanding after giving effect to: o the acquisition of Azazz.com; and o the acquisition of Attitude Network, Ltd. After giving effect to the sale of the common stock offered by us hereby and after deducting the estimated underwriting discount and offering expenses payable by us, our pro forma net tangible book value, as adjusted, as of December 31, 1998, would have been approximately $178,172,875, or $13.26 per pro forma share of common stock. This represents an immediate increase in net tangible book value of $10.66 per share to existing stockholders and an immediate dilution in net tangible book value of $65.68 per share to new investors of common stock in this offering. The following table illustrates this per share dilution: Assumed public offering price per share....................$ 78.94 Pro forma net tangible book value per share prior to this offering.............$ 2.60 Increase per share attributable to new investors............................ 10.66 ------- Adjusted pro forma net tangible book value per share after the Offering. Voting control by Messrs. Egan, Krizelmanoffering...................... 13.26 ------- Dilution per share to new investors........................$ 65.68 ======= If the public offering price is higher or lower, the dilution to the new investors will be greater or less, respectively. -35- SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The selected financial data should be read in conjunction with "Management's Discussion and Paternot may discourage certain typesAnalysis of transactions involving an actual or potential changeFinancial Condition and Results of controlOperations" and our financial statements and notes to those statements and other financial information included elsewhere in this prospectus. The statement of operations data for the years ended December 31, 1996, 1997 and 1998 and the consolidated balance sheet data as of December 31, 1997 and 1998 are derived from the audited financial statements of theglobe.com included in this prospectus. The balance sheet data as of December 31, 1995 and 1996 and the statement of operations data for the period for May 1, 1995 (inception) to December 31, 1995 are derived from the audited financial statements of theglobe.com not included herein. The historical results presented here are not necessarily indicative of future results. May 1, 1995 (inception) through December 31, Year Ended December 31, ------------------------------- 1995 1996 1997 1998 --------- --------- -------- ---------- STATEMENT OF OPERATIONS DATA: Revenues........................ $ 27 $229 $ 770 $5,510 Cost of revenue................. 13 116 423 2,239 --------- ----------- ----------- ----------- Gross profit.................... 14 113 347 3,271 Operating expenses: Sales and marketing............. 1 276 1,248 9,299 Product development............. 60 120 154 2,633 General and administrative...... 19 489 2,828 6,828 Non-recurring charge............ -- -- -- 1,370 --------- ----------- ----------- ----------- Total operating expenses........ 80 885 4,230 20,130 --------- ----------- ----------- ----------- Loss from operations............ (66) (772) (3,883) (16,859) Interest income (expense), net.. -- 22 335 892 Loss before provision for --------- ----------- ----------- ----------- income taxes................... (66) (750) (3,548) (15,967) --------- ----------- ----------- ----------- Provision for income taxes...... -- -- 36 79 --------- ----------- ----------- ----------- Net loss........................ $(66) $(750) $(3,584) $ (16,046) ========== =========== =========== ========== Basic and diluted net loss per share (1)...................... $(0.06) $(0.67) $ (3.13) $ (6.74) ========== =========== =========== ========== Weighted average shares outstanding used in basic and diluted per share calculation(1).................. 1,125,000 1,125,000 1,146,773 2,381,140 ========== =========== =========== ========== -36- December 31, ----------------------------------------- BALANCE SHEET DATA: 1995 1996 1997 1998 -------- --------- ---------- -------- Cash and cash equivalents and short-term investments.......... $587 $757 $18,874 $30,149 Working capital................. 575 648 17,117 27,009 Total assets.................... 647 973 19,462 38,130 Capital lease obligations, excluding current installments.. - - 99 2,006 Total stockholders' equity...... 632 795 17,352 30,301 - ----------------- (1) Weighted average shares do not include any common stock equivalents because inclusion of common stock equivalents would have been anti-dilutive. See the financial statements and related financial statement notes appearing elsewhere in this prospectus for the determination of shares used in computing pro forma basic and diluted loss per share. -37- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Our web site is one of the Company,world's leading online networks with nearly 2.3 million members in the United States and abroad. In December 1998, over 9.3 million unique users visited our site. Our web site is a destination on the Internet where users are able to personalize their online experience by publishing their own content and interacting with others having similar interests. We facilitate this interaction by providing various free services, including transactionshome page building, discussion forums, chat rooms, e-mail and electronic commerce. Additionally, we provide our users with news, business information, real time stock quotes, weather, movie and music reviews, multi-player gaming and personals. By satisfying our users' personal and practical needs, we seek to become our users' online home. Our primary revenue source is the sale of advertising, with additional revenues generated through electronic commerce, development fees and, to a lesser extent, the sale of membership service fees for enhanced services. We were incorporated in May 1995. For the period from inception through December 1995, we had minimal sales and our operating activities related primarily to the development of the necessary computer infrastructure and initial planning and development. Operating expenses in 1995 were minimal. During 1996, we continued the foregoing activities and also focused on recruiting personnel, raising capital and developing programs to attract and retain members. In 1997, we o moved our headquarters to New York City; o expanded our membership base from less than 250,000 to almost 1 million; o improved and upgraded our services; o expanded our production staff; o built an internal sales department; and o began active promotion of theglobe.com web site to increase market awareness. During 1998, revenues and operating expenses increased as we placed a greater emphasis on building our advertising revenues and memberships by expanding our sales force and promoting theglobe.com brand. To date, our revenues have been derived principally from the sale of advertisements and sponsorship placements within our site, and to a lesser extent, from subscription and electronic commerce revenues. Electronic commerce revenues have not been significant to date, but are expected to increase with the acquisition of Azazz, and as our existing electronic commerce arrangements grow and new arrangements are entered into. Advertising revenues constituted 89%, 77% and 95% of total revenues for the years ended December 31, 1998, 1997 and 1996. We sell a variety of advertising packages to clients, including banner advertisements, event sponsorship, and targeted and direct response advertisements. Our advertising revenues are derived principally from short-term advertising arrangements. These arrangements average one to three months. We generally guarantee a minimum number of impressions for a fixed fee. Advertising revenues are recognized ratably in the period in which the holders of Common Stock might receive a premium for their shares over prevailing market prices. See "Certain Relationshipsadvertisement is displayed, -38- if no significant company obligations remain and Related Transactions." Impactcollection of the Yearresulting receivable is probable. Payments received from advertisers before displaying their advertisements on our web site are recorded as deferred revenues and are recognized as revenue ratably when the advertisement is displayed. To the extent minimum guaranteed impression levels are not met, we defer recognition of the corresponding revenues until guaranteed levels are achieved. In addition to advertising revenues, we derive other revenues primarily from our membership service fees, electronic commerce revenue, development fees and sponsorship placements within our site. Subscription fees are recognized over the membership term. A number of recent arrangements with our premier electronic commerce partners provide us with a share of any sales resulting from direct links from our web site. We recognize revenues from our share of the proceeds from our electronic commerce partners' sales upon notification from our partners of sales attributable to our web site. To date, revenues from electronic commerce arrangements have not been significant. In addition, in 1999 we began direct electronic commerce sales to users. We also earn additional revenue on sponsorship contracts for fees relating to the design, coordination, and integration of the customer's content and links. We recognize these development fees as revenue once the related activities have been performed. We incurred net losses of approximately $16.0 million in 1998, $3.6 million in 1997 and $750,200 in 1996. At December 31, 1998, we had an accumulated deficit of $20.4 million. We recorded deferred compensation of approximately $118,100 in 1998, $83,100 in 1997 and $25,000 in 1996 in connection with the grant of various stock options to employees, representing the difference between the deemed value of our common stock for accounting purposes and the exercise price of the options at the date of grant. This amount is presented as a reduction of stockholders' equity and is being amortized over the vesting period of the applicable options, generally three to five years. Amortization of deferred stock compensation is allocated to the general and administrative expense line identified on the statement of operations consistent with the classification of the related personnel. In addition, we incurred a charge of approximately $1.4 million to earnings in the third quarter of 1998 in connection with the transfer of warrants to acquire 225,000 shares of common stock by Dancing Bear Investments, Inc., which was our principal shareholder at the date of transfer, to some of our officers at approximately $2.91 per share. The amount of this non-cash charge was based on the difference between the fair market value of our stock at the date of transfer ($9.00 per share) and the exercise price of the warrant of approximately $2.91 per share. This expense was classified separately in the statement of operations as a non-recurring charge. RESULTS OF OPERATIONS Revenues. Revenues increased to approximately $5.5 million in 1998 as compared to $770,300 in 1997 and $229,400 in 1996. The year to year growth resulted from an increase in (1) the number of advertisers and the average commitment per advertiser, (2) our web site traffic, (3) the number of our sales people and (4) marketing and advertising expenditures. Advertising revenues were approximately $4.9 million or 89% of total revenues in 1998, $592,400 or 77% of total revenues in 1997 and $216,800 or 95% of total revenues in 1996. In 1998, we significantly increased our sales force and began a marketing campaign to promote theglobe.com web site. We anticipate that advertising revenues will continue to account for a substantial share of our total -39- revenues for the foreseeable future. Other revenues were derived from membership service fees, development fees, electronic commerce revenue shares and sponsorship placements within our web site. At December 31, 1998, we had deferred revenues of approximately $673,600. Barter revenues were approximately 2% of total revenues for 1998, 22% for 1997 and 0% for 1996. Cost of Revenues. Cost of revenues consist primarily of Internet connection charges, web site equipment leasing costs, depreciation, maintenance, barter advertising expenses, staff costs and related expenses of operations personnel. Gross margins were 59% in 1998, 45% in 1997 and 49% in 1996. The increase in gross margin was primarily due to an increase in revenues relative to the increase in cost of revenues. The absolute dollar increase in cost of revenues was due to an increase in Internet connection costs to support the increase in web site traffic, as well as an increase in equipment costs, depreciation and staff costs required to support the expansion of our site and services. In addition, we recorded barter advertising expenses during 1998 and 1997, which was equivalent to the barter advertising revenues recorded in the same period. The gross margins exclusive of the barter transactions were 60% in 1998 and 57% in 1997. In 1996, we did not enter into any barter transactions. During the fourth quarter of 1998, we moved our web site hosting functions to a separate facility in Staten Island, New York. The new facility will allow us to support our expanded services and content. Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries and related expenses of sales and marketing personnel, commissions, advertising and public relations expenses. Sales and marketing expenses were approximately $9.3 million or 169% of total revenues in 1998, $1.2 million or 162% of total revenues in 1997, and $275,900 or 120% of total revenues in 1996. The year-to-year increase in sales and marketing expenses was primarily attributable to expansion of our online and print advertising, public relations and other promotional expenditures, as well as increased sales and marketing personnel and related expenses required to implement our marketing strategy. Sales and marketing expenses also increased as a result of our decision to shift our advertising to an internal sales department in the second quarter of 1997. Product Development Expenses. Product development expenses include professional fees, staff costs and related expenses associated with the development, testing and upgrades to our web site as well as expenses related to its editorial content and community management and support. Product development expenses were approximately $2.6 million or 48% of total revenues in 1998, $153,700 or 20% of total revenues in 1997, and $120,000 or 52% of total revenues in 1996. The increase in absolute dollars in product development expenses was primarily attributable to increased staffing levels required to support our web site and to enhance its content and features. Product development expenses also increased as a result of the launch of our web site redesign in November 1998. We intend to continue recruiting and hiring experienced product development personnel and to make additional investments in product development. General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related costs for general corporate functions, including finance, human resources, facilities and legal, along with professional fees and bad debt expense and other corporate expenses. General and administrative expenses were approximately $6.8 million or 124% of total revenues in 1998, $2.8 million or 367% of total revenues in 1997, and $489,100 or 213% of total revenues in 1996. The absolute dollar increase in these expenses was primarily due -40- to increased salaries and related expenses associated with our management's employment contracts, hiring of additional personnel, and increases in professional fees and travel. The increased salaries also reflect the highly competitive nature of hiring in the new media industry. We expect that we will incur additional general and administrative expenses as we hire additional personnel and incur additional costs related to the growth of our business and operation as a public company, including directors' and officers' liability insurance, investor relations programs and professional service fees. Accordingly, we anticipate that general and administrative expenses will continue to increase in absolute dollars. Non-recurring charges. We recorded a non-recurring, non-cash charge of approximately $1.4 million in the third quarter of 1998. This charge was in connection with the transfer of outstanding warrants to acquire 225,000 shares of common stock by Dancing Bear Investments, which was our principal shareholder at the time of the transfer, to some of our officers. There was no similar charge in 1997 or 1996. Other Income (expense). Other income (expense) includes interest income from our cash and investments, interest expenses related to our capital lease obligations, and realized gains and losses from sale of short-term investments. The year-to-year increase in interest and dividend income was due to a higher average cash, cash equivalent and investment balance as a result of the proceeds received from the issuance of shares of our preferred stock in the third quarter of 1997, and the issuance of common stock in connection with our initial public offering in November 1998. Interest and other expense increased in 1998 due to new capital lease obligations. We entered into our first capital lease in late December 1997. As a result, interest expense from capital lease obligations did not begin until 1998. Income Taxes. Income taxes were approximately $78,900 in 1998, $36,100 in 1997 and -0- in 1996. These income taxes were based solely on state and local taxes on business and investment capital. These taxes increased from year to year due to an increase in our average equity balance. The average equity balance increased as a result of the proceeds received from our issuance of shares of preferred stock in the third quarter of 1997, and our issuance of common stock in connection with our initial public offering in November 1998. Our effective tax rate differs from the statutory federal income tax rate, primarily as a result of the uncertainty regarding our ability to utilize net operating loss carryforwards. Due to the uncertainty surrounding the timing or realization of the benefits of our net operating loss carryforwards in future tax returns, we have placed a 100% valuation allowance against our deferred tax assets. As of December 31, 1998, we had approximately $29.2 million of federal and state net operating loss carryforwards for tax reporting purposes available to offset future taxable income. Our federal net operating loss carryforwards will expire beginning in 2001 through 2018, if not utilized. The Tax Reform Act of 1986 imposes substantial restrictions on the utilization of net operating losses and tax credits in the event of an "ownership change" of a corporation. Due to the change in our ownership interests in the third quarter of 1997, as defined in the Internal Revenue Code, future utilization of our net operating loss carryforwards will be affected by limitations or annual restrictions. -41- LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1998, we had approximately $29.3 million in cash and cash equivalents and approximately $898,500 in marketable securities. Net cash used in operating activities was approximately $13.5 million in 1998, $1.9 million in 1997 and $601,600 in 1996. The increase in net cash used in 1998 resulted primarily from an increase in our expenses which resulted in increased net operating losses. In addition we had a higher level of receivables due to increased revenues and an increase in prepaid expenses. These items were partially offset by an increase in accounts payable and deferred revenues. The 1997 increase in net cash used was primarily due to an increase in net operating loss and a higher account receivable balance. These items were partially offset by the timing of payments associated with our 1997 accrued bonuses paid in the first quarter of 1998, as well as an increase in accounts payable and accrued expenses. Net cash provided (used) in investing activities was approximately $9.6 million in 1998, $(13.2) million in 1997 and $(138,300) in 1996. Net cash provided by investing activities in 1998 was primarily related to the sales of short-term investments to finance our working capital needs. These sales were partially offset by approximately $1.7 million in security deposits required for capital leases and the purchase of property and equipment in connection with the build out of our infrastructure. Net cash used in investing activities in 1997 was primarily related to the purchase of securities with the proceeds from our private placement in the third quarter of 1997. Cash used in investing activities in 1996 was related to the purchase of property and equipment. Net cash provided by financing activities was approximately $27.2 million in 1998, $20.2 million in 1997 and $910,000 in 1996. Net cash provided by financing activities during 1998 consisted primarily of $27.3 million from the issuance of 3,481,667 shares of common stock in connection with our initial public offering in November 1998. The net cash provided by financing activities in 1997 consisted primarily of approximately $20.3 million from preferred stock issuances. These amounts were partially offset by approximately $130,500 in financing costs related to the private placements. The approximately $910,000 of net cash provided in 1996 was from our private placements of preferred stock. On February 1, 1999, we purchased factorymall.com, a leading interactive department store doing business as Azazz.com, which is being integrated into our electronic commerce site, known as "shop.theglobe.com." We expect to invest an aggregate of up to approximately $3.8 million of working capital in 1999 to support the future operations of shop.theglobe.com. On April 9, 1999, we purchased Attitude Network, an online provider of entertainment content. We expect to invest an aggregate of up to approximately $3.5 million of working capital in 1999 to support the future operations of Attitude Network. Our capital requirements depend on numerous factors, including market acceptance of our services, the amount of resources we devote to investments in our web site, the resources we devote to marketing and selling our services and our brand promotions and other factors. We have experienced a substantial increase in our capital expenditures and lease arrangements since our inception consistent with the growth in our operations and staffing, and we anticipate that this will continue for the foreseeable future. Additionally, we will continue to evaluate possible investments in businesses, products and technologies, and we plan to expand our sales force. We believe that the net proceeds from the offering, together with our current cash and cash -42- equivalents, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for our existing business for at least 12 months. However, we may need to raise additional funds during 1999 to obtain or operate any additional acquired businesses or joint venture arrangements. See "Risk Factors--We may need to raise additional funds, including through the issuance of debt." IMPACT OF THE YEAR 2000 The Year 2000 issue is the potential for system and processing failures of date-related data and the result of computer-controlled systems using two digits rather than four to define the applicable year. For example, computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the yearYear 2000. This could result in system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. The Company has reviewed its internal programs and has determined that there are no significantState of Readiness. We may be affected by Year 2000 issues within the Company'srelated to non-compliant information technology systems or services. However, althoughnon-information technology systems operated by us or by third parties. We have substantially completed an assessment of our internal and external third-party information technology systems and non-information technology systems and a test of the Company believesinformation technology systems that its systemssupport our web site. At this point in our assessment and testing, we are not aware of any Year 2000 compliant,problems relating to systems we or third parties operate that would have a material effect on our business or financial condition, without taking into account our efforts to avoid these problems. However, we cannot assure you that there will be no Year 2000 problems Our information technology systems consist of software developed either in-house or purchased from third parties, and hardware purchased from vendors. We have contacted our principal vendors of hardware and software. All of those contacted vendors have notified us that the Company utilizes third-party equipmenthardware and software that may not bethey supplied to us is Year 2000 compliant. FailureWe have also substantially completed an assessment of such third-party equipment or softwareour non-information technology systems which we have identified as possibly having Year 2000 issues. At this point in our assessment, we are not aware of any Year 2000 problems relating to operate properly with regard to the year 2000 and thereafter could require the Company to incur unanticipated expenses to remedy any problems,these systems which couldwould have a material adverse effect on the Company'sour business results of operationsor financial condition, without taking into account our efforts to avoid these problems. Our information technology systems and financial condition. The Company is in the process of contacting all of its significant suppliersother business resources rely on information technology systems and strategic partners to determine the extent to which the Company's interfacenon-information technology systems areprovided by service providers and therefore may be vulnerable to these third parties'those service providers' failure to remediate their own Year 2000 issues. Furthermore,These service providers include those for our network and e-mail services and landlords for our leased office spaces. We have contacted these principal service providers and we have been notified that the purchasing patterns of advertisers may be affected byinformation technology and non-information technology systems which they provide to us are Year 2000 issues as companies expend significant resourcescompliant. Cost. Based on our assessment to correct their currentdate, we do not anticipate that costs associated with remediating our non-compliant systems for Year 2000 compliance. These expenditures may result in reduced funds available for Internet advertising or sponsorship of Internet services, which could have a material adverse effect on the Company's business, results of operations and financial condition. Impact of General Economic Conditions Time spent on the Internet by individuals, purchases of new computers and purchases of membership subscriptions to Internet sites are discretionary for consumers and may be particularly affected by adverse trends in the general economy. The success of the Company's operations depends to a significant extent upon a number of factors relating to discretionary consumer spending, including economic conditions (and perceptions of such conditions by consumers) affecting disposable consumer income such as employment, wages and salaries, business conditions, interest rates, availability of credit and taxation, for the economy as a whole and in regional and local markets where the Company operates. There can be no assurance that consumer spending will not be adversely affected by general economic conditions, which could negatively impact the Company's results of operations or financial condition. Any significant deterioration in general economic conditions or increases in interest rates may inhibit consumers' use of credit and cause a material adverse effect on the Company's revenues and profitability. In addition, the Company's business strategy relies on advertising by and agreements with other Internet companies. Any significant deterioration in general economic conditions that adversely affected these companies could also have a material adverse effect on the Company's business, results of operations and financial condition. No Prior Public Market; Possible Volatility of Stock Price Prior to the Offering, there has been no public market for the Common Stock. Although the Company intends to apply for quotation on the Nasdaq National Market, if the Common Stock is listed, there can be no assurance as to the development or liquidity of any trading market for the Common Stock or that investors in the Common Stock will be able to resell their shares at or above the initial public offering price. The initial public offering price for the shares of Common Stock will be determined through negotiations between the Company and representatives of the Underwriters and may not be indicative of the market price of the Common Stock after the Offering. See "Underwriting." The trading price of the Company's Common Stock could be subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new products and services by the Company or its competitors, changes in financial estimates by securities analysts, the operating and stock price performance of other companies that investors may deem comparable to the Company and other events or factors. In addition, the stock market in general, and the market prices for Internet-related companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the trading price of the Company's Common Stock, regardless of the Company's operating performance. Shares Eligible for Future Sale; No Prior Trading Market; Registration Rights Upon consummation of the Offering, the Company will have outstanding a total of shares of Common Stock, and approximately 1,235,000 and 1,425,941 shares of Common Stock subject to stock options granted under the Company's 1998 Stock Option Plan and 1995 Stock Option Plan, respectively. See "Management--Executive Compensation." Of such shares, the shares of Common Stock being sold in the Offering (together with any shares sold upon exercise of the Underwriters' over-allotment options) will be immediately eligible for sale in the public market without restriction, except for shares purchased by or issued to any "affiliate" of the Company (within the meaning of the Securities Act). All of the shares of Common Stock outstanding prior to the Offering will be "restricted securities" as such term is defined under Rule 144 under the Securities Act ("Rule 144") in that such shares were issued in private transactions not involving a public offering. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k)or 701 promulgated under the Securities Act or another exemption from registration. In addition, upon consummation of the Offering, 4,046,018 shares of Common Stock will be issuable upon exercise of an outstanding Warrants. Approximately shares of Common Stock are not subject to the volume limitations of Rule 144 and are currently eligible for sale in the public market without restriction, except for shares held by an "Affiliate" of the Company. Additionally, holders of all of the Company's outstanding equity have been granted registration rights with respect to the shares of Common Stock into which their securities are convertible. See "Description of Capital Stock-- Registration Rights." However, pursuant to the terms of the agreements pursuant to which the registration rights were granted, such holders have agreed not to sell or otherwise transfer or dispose of any shares of Common Stock or other securities of the Company held by them without the consent of the Company for a period of up to 180 days after the date of this Prospectus. Additionally, the Company and members of the Company's management who are stockholders of the Company and certain other stockholders have agreed that, subject to certain exceptions, for a period of 180 days after the date of this Prospectus, without the prior written consent of Bear, Stearns & Co. Inc., they will not, directly or indirectly, issue, sell, offer or agree to sell, grant any option for the sale, pledge, make any short sale, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act or otherwise dispose of any shares of Common Stock (or securities convertible into, exercisable for or exchangeable for Common Stock) of the Company or of any of its subsidiaries. The Company intends to file a registration statement on Form S-8 for the shares held pursuant to its option plans and stock incentive plans that may make those shares freely tradeable. Such registration statement will become effective immediately upon filing, and shares covered by that registration statement will thereupon be eligible for sale in the public markets, subject to the applicable lock-up agreements and Rule 144 limitations applicable to Affiliates. See "Shares Eligible for Future Sale." No information is currently available and no prediction can be made as to the timing or amount of future sales of such shares or the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock (including shares issuable upon the exercise of stock options), or the perception that such sales could occur, could materially adversely affect prevailing market prices for the Common Stock and the ability of the Company to raise equity capital in the future. See "Shares Eligible for Future Sale" and "Description of Capital Stock--Registration Rights." Antitakeover Effect of Certain Charter Provisions Prior to the consummation of the Offering, the Board of Directors expects to adopt a Rights Agreement (defined below), to be effective upon the consummation of the Offering, that may have the effect of discouraging, delaying or preventing a change in control of the Company or unsolicited acquisition proposals. Further, certain provisions of the Company's Certificate of Incorporation and By-Laws and of Delaware law could have the effect of delaying or preventing a change in control of the Company. See "Description of Capital Stock." Dilution; Absence of Dividends Investors purchasing shares of Common Stock in the Offering will incur immediate and substantial dilution of $ per share in net tangible book value per share of the Common Stock from the initial public offering price. To the extent outstanding options to purchase Common Stock are exercised, there will be further dilution. In addition, the Company does not anticipate paying any cash dividends in the foreseeable future. See "Dividend Policy" and "Dilution."material. -43- CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS This Prospectus contains statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements can be identified by the use of predictive, future-tense or forward-looking terminology, such as "believes," "anticipates," "expects," "estimates," "may," "will," or similar terms. These statements appear in a number of places in this Prospectus and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) trends affecting the Company's financial condition or results of operations; (ii) the Company's business and growth strategies; (iii) the Internet and Internet commerce; and (iv) the Company's financing plans. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. Factors that could adversely affect actual results and performance include, among others, the Company's limited operating history, dependence on continued growth in the use of the Internet, the Company's unproven business model, dependence on members, reliance on advertising revenues, potential fluctuations in quarterly operating results, security risks of transmitting information over the Internet, government regulation, technological change and competition. The accompanying information contained in this Prospectus, including, without limitation, the information set forth under the heading "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" identifies important additional factors that could materially adversely affect actual results and performance. Prospective investors are urged to carefully consider such factors. All forward-looking statements attributable to the Company are expressly qualified in their entirety by the foregoing cautionary statement. USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby by the Company are estimated to be approximate- ly $ million (approximately $ million if the Underwriters' over- allotment option is exercised in full), based on an assumed initial public offering price of $ per share (the midpoint of the estimated range) and after deducting the estimated underwriting discounts and commissions and other estimated Offering expenses. See "Description of Capital Stock." The Company will use the net proceeds of the Offering for advertising, brand name promotions and for other general corporate purposes, including investment in the development and functionality of its Web site, enhancements of the Company's network infrastructure and working capital. The Company may also use a portion of the proceeds for strategic alliances and acquisitions. Accordingly, management will have significant flexibility in applying the net proceeds of this Offering. Pending any such use, as described above, the Company intends to invest the net proceeds in interest-bearing instruments. DIVIDEND POLICY The Company has not declared or paid any cash dividends on its Common Stock. The Company currently intends to retain its future earnings, if any, to fund the development and growth of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future. The declaration and payment of dividends by the Company are subject to the discretion of the Board of Directors. Any future determination to pay dividends will depend on the Company's results of operations, financial condition, capital requirements, contractual restrictions and other factors deemed relevant by the Board of Directors. CAPITALIZATION The following table sets forth (i) the actual capitalization of the Company as of June 30, 1998, (ii) the pro forma capitalization as of such date, after giving effect to the conversion of all outstanding shares of Preferred Stock into Common Stock, and (iii) the pro forma capitalization of the Company as of June 30, 1998 as adjusted to reflect the shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $ per share. The capitalization information set forth in the table below is qualified and should be read in conjunction with the Financial Statements and Notes related thereto included elsewhere in this Prospectus. June 30, 1998 --------------------------------------------- Pro Forma Actual Pro Forma As Adjusted --------------------------------------------- (Dollars in thousands, except per share data) Obligations under capital leases, excluding current installments..........$ 629 $ 629 Stockholders' equity: Preferred Stock, 3,000,000 shares authorized: Series A through E, $.001 par value; 2,900,001 shares authorized; 2,899,991 shares issued and outstanding (aggregate liquidation value of $21,886,110); none issued and outstanding, pro forma and pro forma as adjusted...... 3 -- Common Stock, $.001 par value; 22,000,000 shares authorized, actual and pro forma; 100,000,000 shares authorized, pro forma as adjusted; 2,308,541 shares issued and outstanding, actual; 13,341,527 shares outstanding, pro forma; shares issued and outstanding, pro forma as adjusted (1)............ 2 13 Unrealized loss on available-for-sale securities........................... (30) (30) Additional paid-in capital........... 21,873 21,865 Deferred compensation................. (52) (52) Accumulated deficit................... (10,225) (10,225) Total stockholders' equity............ 11,571 11,571 ======== ======== Total capitalization.............. $12,200 $12,200 $ ---------------------------------- ======== ======== ======== (1) Based on the number of shares of Common Stock outstanding as of June 30, 1998, and adjusted to include 10,947,469 shares of Common Stock that will be issued upon the automatic conversion of the Company's existing Preferred Stock upon consummation of the Offering. Excludes 4,046,018 shares of Common Stock issuable upon the exercise of outstanding Warrants at an exercise price of approximately $1.45 per share following the consummation of the Offering. See "Description of Capital Stock--Warrants." If the Underwriters' over-allotment option were exercised in full, an additional shares of Common Stock would be offered by the Company and shares of Common Stock would be outstanding after the Offering. "See "Underwriting." Excludes (i) 1,235,000 and 1,425,941 shares of Common Stock issuable upon the exercise of stock options that would be outstanding after the Offering under the Company's 1998 Stock Option Plan and 1995 Stock Option Plan, respectively, at a weighted average exercise price of $ per share (based on an initial public offering price of $ ) and $ per share, respectively and (ii) 565,000 and 12,001 shares of Common Stock reserved for future issuance under the Company's 1998 Stock Option Plan and the 1995 Stock Option Plan, respectively. See "Capitalization," "Management--Executive Compensation," "Descrip- tion of Capital Stock" and Financial Statements and Notes related thereto appearing elsewhere in this Prospectus. DILUTION The pro forma net tangible book value of the Company as of June 30, 1998, after giving effect to the conversion of all outstanding shares of Preferred Stock into 10,947,469 shares of Common Stock was approximately $ or $ per share of Common Stock. Pro forma net tangible book value per share is determined by dividing the pro forma tangible net worth of the Company (pro forma total assets less goodwill less pro forma total liabilities) by the number of shares of Common Stock. After giving effect to the sale of shares of Common Stock offered hereby at an assumed initial public offering price of $ per share and the application of the estimated net proceeds from the Offering, pro forma net tangible book value of the Company as of June 30, 1998 would have been $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $ per share to new investors. The following table illustrates this dilution on a per share basis: Assumed initial public offering price per share.... $____ Pro forma net tangible book value per share as of June 30, 1998..................................... $____ Increase per share attributable to new investors.. ____ Pro forma net tangible book value per share after the Offering...................................... ____ Dilution per share to new investors................ $ (1) ======= - ----------- (1) The foregoing computations assume no exercise of the Underwriters' overallotment option, stock options or the Warrants. The Warrants entitle the holders thereof to purchase an aggregate of 4,046,018 shares of Common Stock at an exercise price of approximately $1.45 per share. If the foregoing Warrants had been exercised at June 30, 1998, pro forma net tangible book value per share after the Offering would have been $ , representing an immediate dilution to new investors of $ per share and an immediate increase in net tangible book value of $ per share attributable to the Offering. The following table summarizes, as of June 30, 1998, the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by the existing stockholders and by new investors purchasing shares in this Offering (after giving effect to the conversion of the outstanding shares of Preferred Stock into shares of Common Stock and before deduction of estimated underwriting discounts and commissions and other estimated expenses of the Offering): Shares Purchased Total Consideration Average -------- ----------- --------------------- Price Number Percentage Amount Percentage Per Share -------- ----------- -------- ------------ --------- Existing stockholders(1)...... 13,341,527 $ 21,900,057 $ 1.64 Investors in Offering. ---------- ---------- -------- ------------ --------- Total............... (2) 100% 100% ========== ========== ======== ============ ========= - ------------------------- (1) Assumes all of the Company's outstanding Preferred Stock is converted into Common Stock. Excludes 4,046,018 shares of Common Stock that may be issued upon the exercise of the Warrants at approximately $1.45 per share. (2) Excludes 1,235,000 and 1,425,941 shares of Common Stock reserved for issuance under options that will be outstanding after the Offering pursuant to the Company's 1998 Stock Option Plan and the Company's 1995 Stock Option Plan, respectively at a weighted average exercise price of $ per share (based on an initial public offering price of $ ) and $ per share, respectively. See "Management--Executive Compensation," "Description of Capital Stock--Warrants" and Note ___ of Notes to Financial Statements. To the extent outstanding stock options are exercised, there will be further dilution to new investors. SELECTED FINANCIAL DATA (Dollars in thousands, except per share data) The following selected consolidated financial data should be read in conjunction with the Company's Financial Statements and Notes related thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. The consolidated statement of operations data for the period from May 1, 1995 (inception) to December 31, 1995 and each of the years in the two-year period ended December 31, 1997, and the consolidated balance sheet data at December 31, 1996 and 1997, are derived from the consolidated financial statements of the Company which have been audited by KPMG Peat Marwick LLP, independent accountants, and are included elsewhere in this Prospectus. The balance sheet data at December 31, 1995 are derived from audited financial statements of the Company not included herein. The statement of operations data for each of the six-month periods ended June 30, 1997 and 1998, and the balance sheet data at June 30, 1998, are derived from unaudited interim financial statements of the Company included elsewhere in this Prospectus. The unaudited financial statements have been prepared on substantially the same basis as the audited financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations for such periods. Historical results are not necessarily indicative of the results to be expected in the future, and results of interim periods are not necessarily indicative of results for the entire year.
May 1, 1995 (inception) through Year Ended Six Months Ended December 31, December 31, June 30, ------------- ----------- -------- 1995 1996 1997 1997 1998 ---- ---- ---- ---- ---- Statement of Operations Data: Revenues ...................................... $ 27 $ 229 $ 770 $ 208 $ 1,173 Cost of revenues .............................. 13 116 423 106 503 ----------- ----------- ----------- ----------- ----------- Gross profit .................................. 14 113 347 102 670 Operating expenses: Sales and marketing.......................... 1 276 1,248 224 4,493 Product development.......................... 60 120 154 63 251 General and administrative................... 19 489 2,828 594 2,396 ----------- ----------- ----------- ----------- ----------- Total Operating Expenses..................... 80 885 4,230 881 7,140 ----------- ----------- ----------- ----------- ----------- Loss from operations........................... (66) (772) (3,883) (779) (6,470) ----------- ----------- ----------- ----------- ----------- Interest income (expense), net ......................................... (0) 22 335 12 673 ----------- ----------- ----------- ----------- ----------- Loss before provision for...................... income taxes ................................ (66) (750) (3,548) (767) (5,797) ----------- ----------- ----------- ----------- ----------- Provision for income taxes..................... -- -- 36 27 ----------- ----------- ----------- ----------- ----------- Net loss ...................................... $ (66) $ (750) $ (3,584) $ (767) $ (5,824) =========== =========== =========== =========== =========== Basic and diluted net loss per share........................... $ (0.03) $ (0.33) $ (1.56) $ (0.34) $ (2.51) =========== =========== =========== =========== =========== Weighted average shares outstanding used in basic and diluted per share calculation.................................. 2,250,000 2,250,000 2,293,545 2,281,920 2,322,794 =========== =========== =========== =========== =========== Pro forma basic and diluted net loss per share (1) Weighted average shares outstanding used in pro forma basic and diluted per share calculation (1)
December 31, June 30, ------------ -------- 1995 1996 1997 1998 ----- ---- ---- ---- Balance Sheet Data: Cash and cash equivalents and short-term investments....................... $ 587 $ 757 $18,874 $13,155 Working capital ............................... 575 648 17,117 10,452 Total assets .................................. 647 973 19,462 15,603 Capital lease obligations, excluding current installments......................... -- -- 99 629 Total stockholders' equity....................................... $ 632 $ 795 $17,352 $11,571 (1) Weighted average shares do not include any common stock equivalents because such inclusion would have been anti-dilutive. See Financial Statements and Notes related thereto appearing elsewhere in this Prospectus for an explanation of the weighted average number of shares used to compute pro forma basic and diluted loss per share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All statements, trend analysis and other information contained in this Prospectus relative to markets for the Company's products and trends in revenues, gross margin and anticipated expense levels, as well as other statements including words such as "believe," "anticipate," "expect," "estimate," "plan" and "intend" and other similar expressions, constitute forward-looking statements. Those forward-looking statements are subject to business and economic risks, and the Company's actual results of operations may differ materially from those contained in the forward-looking statements. For a more detailed discussion of these business and economic risks, see "Risk Factors." The following discussion of the financial condition and results of operations of the Company should also be read in conjunction with the Financial Statements and the Notes related thereto included elsewhere in this Prospectus. Overview theglobe.com is one of the world's leading online communities today with over 1.7 million members in the United States and abroad. In June 1998, 6.1 million unique users visited the site. theglobe.com is a destination on the Internet where users are able to personalize their online experience by publishing their own content and interacting with others having similar interests. theglobe.com facilitates this interaction by providing various free services, including home page building, discussion forums, chat, e-mail and a marketplace where members can purchase a variety of products and services. Additionally, theglobe.com provides its users news, weather, movie and music reviews, multi-player gaming, horoscopes and personals. By satisfying its users' personal and practical needs, theglobe.com seeks to become their online home. The Company's primary revenue source is the sale of advertising, with additional revenues generated through e-commerce arrangements, and the sale of membership subscriptions for enhanced services. The Company was incorporated in May 1995. For the period from inception through December 1995, the Company had minimal sales and its operating activities related primarily to the development of the necessary computer infrastructure and initial planning and development of theglobe.com. Operating expenses in 1995 were minimal. During 1996, the Company continued the foregoing activities and also focused on recruiting personnel, raising capital, and developing programs to attract and retain members. In 1997, the Company moved its headquarters to New York City, expanded its membership base from less than 250,000 to almost 1 million, improved and upgraded its services, expanded its production staff, built an internal sales department, and began active promotion of theglobe.com to increase market awareness. From the end of 1997 through June 30, 1998, revenues and operating expenses have increased as the Company has placed a greater emphasis on building its advertising revenues and memberships by expanding its sales force and promoting theglobe.com brand. To date, the Company's revenues have been derived principally from the sale of advertisements and, to a lesser extent, from subscription revenues. E-commerce revenues have not been significant to date, but are expected to increase as the Company's existing e-commerce arrangements grow and new arrangements are entered into. Advertising revenues constituted 89% of total revenues for the six months ended June 30, 1998 and 77% of total revenues for the year ended December 31, 1997. The Company sells a variety of advertising packages to clients, including banner advertisements, event sponsorship, and targeted and direct response advertisements. Currently, the Company's advertising revenues are derived principally from short-term advertising arrangements, averaging one to two months, in which the Company guarantees a minimum number of impressions for a fixed fee. Advertising revenues are recognized ratably in the period in which the advertisement is displayed, provided that no significant Company obligations remain and collection of the resulting receivable is probable. Payments received from advertisers prior to displaying their advertisements on the site are recorded as deferred revenues and are recognized as revenue ratably when the advertisement is displayed. To the extent minimum guaranteed impression levels are not met, the Company defers recognition of the corresponding revenues until guaranteed levels are achieved. In addition to advertising revenues, the Company derives other revenues primarily from its membership subscriptions. The Company's membership programs offer premium services for a monthly fee, providing additional services such as incremental storage space and the ability to host limited commercial activity. Although non-advertising revenues may continue to grow through the development of new membership programs and the planned introduction of theglobe.com's e-commerce merchandising solution, Globe-shops, in the fourth quarter of 1998, the Company expects to derive its revenue principally from the sale of advertising space on its Web site for the foreseeable future. The Company's recent arrangements with its premier e-commerce partners generally provide the Company with a fee for renting space in theglobe.com Marketplace, and/or a share of any sales resulting from direct links from the Company's Web site. Revenues from these programs will be recognized in the month that the service is provided. Revenues from the Company's share of the proceeds from its e-commerce partners' sales will be recognized by the Company upon notification from its partners of sales attributable to the Company's site. To date, revenues from e-commerce arrangements have not been material. The Company incurred net losses of $65,706, $750,180 and $3.6 million for the period from May 1, 1995 (date of inception) to December 31, 1995, and the years ended December 31, 1996 and 1997, respectively, and $5.8 million for the six months ended June 30, 1998. At June 30, 1998, the Company had an accumulated deficit of $10.2 million. The net losses and accumulated deficit resulted from the Company's lack of substantial revenues and the significant operation, infrastructure and other costs incurred in the development and marketing of the Company's services. As a result of its expansion plans, the Company expects to incur additional losses from operations for the foreseeable future.Risks. To the extent that increases in its operating expenses precedeour assessment is finalized without identifying any material non-compliant information technology or are not subsequently followednon-information technology systems operated by commensurate increases in revenues,us or thatby third parties, the Companymost reasonably likely worst case Year 2000 scenario is unable to adjust operating expense levels accordingly, the Company's business, resultsfailure of operations and financial condition would be materially and adversely affected. There can be no assurance that the Company will ever achieveone or sustain profitabilitymore of our vendors of hardware or that the Company's operating losses will not increase in the future. The Company has recorded deferred compensationsoftware or one or more providers of approximately $25,000 and $83,100 for the years ended December 31, 1996 and 1997, respectively, in connection with the grant of certain stock options to employees, representing the difference between the deemed value of the Company's Common Stock for accounting purposes and the exercise price of such options at the date of grant. Such amount is presented as a reduction of stockholders' equity and amortized over the vesting period of the applicable options, generally three to five years. Amortization of deferred stock compensation is allocated to the general and administrative expense line identified on the statement of operations. As a result, the Company currently expects to amortize the following amounts of deferred compensation annually: 1998--$46,200; 1999--$26,300; 2000--$1,800; 2001--$1,200; and 2002--$500. Amortization of deferred compensation was $23,100 and $28,100 for the six months ended June 30, 1998 and the year ended 1997, respectively. The Company expects to record a charge to earnings in the third quarter of 1998 in connection with the transfer during the third quarter of 1998 of Warrants to acquire 450,000 shares of Common Stock from Dancing Bear Investments (its largest stockholder) to Todd V. Krizelman, Stephan J. Paternot and Edward A. Cespedes. The amount of such charge will be determined by the difference between the initial public offering price per share and the exercise price per Warrant (approximately $1.45 per share). Results of Operations The following table sets forth the results of operations (as a percentage of total revenues) for the periods indicated by each item reflected in the Company's statement of operations. Given its limited operating history, the Company believes that an analysis of its cost and expense categories as a percentage of revenue is not meaningful.
May 1, 1995 (inception) to Six Months Ended December 31, Year Ended December 31, June 30, ------------ ----------------------- -------- 1995 1996 1997 1997 1998 ---- ---- ---- ---- ---- Revenues.......................... 100% 100% 100% 100% 100% Cost of revenues.................. 48% 51% 55% 51% 43% ---- ---- ---- ---- ---- Gross profit ................... 52% 49% 45% 49% 57% Operating expenses: Sales and marketing............ 5% 121% 162% 108% 383% Product development 224% 52% 20% 30% 21% General and administrative..... 68% 213% 367% 285% 204% ---- ---- ---- ---- ---- Total Operating expenses 297% 386% 549% 423% 608% ---- ---- ---- ---- ---- Loss from operations.............. (245%) (337%) (504%) (374%) (551%) Interest income (expense), net.... (0%) 10% 43% 5% 57% ---- ---- ---- ---- ---- Loss before provision for income taxes.......................... (245%) (327%) (461%) (369%) (494%) Provision for income taxes........ 0% 0% 4% 0% 2% ---- ---- ---- ---- ---- Net loss.......................... (245%) (327%) (465%) (369%) (496%) ---- ---- ---- ---- ----
Comparison of Six Months Ended June 30, 1997 and 1998 Revenues. Revenues increased from $208,241 for the six months ended June 30, 1997 to $1.2 million for the six months ended June 30, 1998, an increase of 463%. The period to period growth in revenues resulted from an increase in (i) the number of advertisers as well as the average contract duration and value, (ii) the Company's Web site traffic and (iii) to a lesser extent, its subscription memberships. Advertising Revenues. Advertising revenues were $144,166 or 69% of total revenues and $1.0 million or 89% of total revenues for the six months ended June 30, 1997 and 1998, respectively. Commencing in April 1996, the Company engaged an Internet advertising service provider to sell the Company's Web site advertising inventory in exchange for a service fee. The Company recognized revenues net of such service fees. Commencing May 1, 1997, the Company canceled this arrangement and created its own internal sales department in ordernon-information technology systems to properly represent theglobe.com brand on a consistent basis as well as to reduce overall sales costs. Accordingly,identify any Year 2000 compliance issues and remediate any issues before the advertisements sold by the Internet advertising service provider accounted for approximately 28%end of total revenues for the six months ended June 30, 1997. The Company did not record any similar expense in the six months ended June 30, 1998. In addition, the Company recorded $37,500 and $39,906 of barter advertising revenues, representing 18% and 3% of total revenues, for the six months ended June 30, 1997 and 1998, respectively, which primarily related to an advertising contract with a major Internet search engine provider that was cancelled in January 1998. The Company anticipates that advertising revenues will continue to account for a substantial share of total revenues for the foreseeable future and that barter revenue will continue to comprise an insignificant portion of the Company's total revenues in the future. Subscription Revenues. The Company's subscription membership revenues were $64,075 or 31% of total revenues and $129,792 or 11% of total revenues for the six months ended June 30, 1997 and 1998, respectively. At June 30, 1998, the Company had deferred revenues of $132,353, attributable to prepaid subscription memberships which are amortized ratably over the remaining membership term, typically ranging from one to 12 months. Cost of Revenues. Cost of revenues consists primarily of Internet connection charges, Web site equipment leasing costs, depreciation, barter advertising expenses, salaries of operations personnel and other related maintenance and support costs. Gross margins were 49% and 57% for the six months ended June 30, 1997 and 1998, respectively. The increase in gross margin was primarily due to a greater increase in revenues relative to the increase in cost of revenues. In addition, the Company recorded $37,500 and $39,906 of barter advertising expenses during the six months ended June 30, 1997 and 1998, respectively, included in cost of revenues, which is equivalent to the barter advertising revenues recorded in the same period. The June 30, 1997 and 1998 gross margins exclusive of the barter transactions were 60% and 59%, respectively. Therefore, excluding barter, gross margins have remained fairly consistent from period to period. Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries of sales and marketing personnel, commissions, advertising, public relations, sales force and other marketing related expenses. Sales and marketing expenses increased from $224,170 or 108% of total revenues for the six months ended June 30, 1997 to $4.5 million or 383% of total revenues for the six months ended June 30, 1998. The period to period increase in sales and marketing expenses was primarily attributable to expansion of the Company's online and print advertising, public relations and other promotional expenditures, as well as increased sales and marketing personnel and related expenses required to implement the Company's marketing strategy in the first half of 1998. Sales and marketing expenses also increased as a result of the Company's decision to shift its advertising to an internal sales department in the second quarter of 1997. Sales and marketing expenses as a percentage1999. A failure could prevent us from operating our business, prevent users from accessing our web site or change the behavior of total revenues have increased as a result ofadvertising customers or persons accessing our web site. We believe that the continued development and implementation of theglobe.com's branding and marketing campaign. The Company expects sales and marketing expenses will continue to increase in absolute dollars for the foreseeable future as the Company continues its branding strategy, expands its direct sales force, hires additional marketing personnel and increases expenditures for marketing and promotion. Product Development Expenses. Product development expenses include personnel costs associated with the development, testing and upgrades to the Company's Web site and systems as well as personnel costs related to its editorial content and community management and support. Product development expenses increased from $62,500 or 30% of total revenues for the six months ended June 30, 1997 to $250,869 or 21% of total revenues for the six months ended June 30, 1998. The absolute dollar increase in product development expenses was primarily attributable to increased staffing levels required to support theglobe.com and related back-office systems and to enhance the content and features within the Company's Web site. The Company believes that timely deployment of new and enhanced features and technology are critical to attaining its strategic objectives and remaining competitive. Accordingly, the Company intends to continue recruiting and hiring experienced product development personnel and to make additional investments in product development. The Company expenses product development costs as incurred. As such, the Company expects that product development expenditures will increase in absolute dollars in future periods. General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related costs for general corporate functions, including finance, accounting, facilities and legal expenses, and fees for professional services. General and administrative expenses increased from $594,358 or 285% of total revenues for the six months ended June 30, 1997 to $2.4 million or 204% of total revenues for the six months ended June 30, 1998, an increase of $1.8 million, or 303%. The absolute dollar increase in general and administrative expenses was primarily due to increased salaries and related expenses associated with management's employment contracts, hiring of additional personnel, and increases in professional fees and travel. The increased salaries also reflect the highly competitive nature of hiring in the new media industry. The Company expects that it will incur additional general and administrative expenses as the Company hires additional personnel and incurs additional costs related to the growth of theprimary business and its operation as a public company, including directors' and officers' liability insurance, investor relations programs and professional service fees. Accordingly, the Company anticipates that general and administrative expenses will continue to increase in absolute dollars. Interest Income (Expense), Net. Interest income (expense), net includes income from the Company's cash and investments and expenses related to the Company's capital lease obligations. Interest income (expense), net increased from $11,384 for the six months ended June 30, 1997 to $672,637 for the six months ended on June 30, 1998, an increase of $661,253. The increase in interest income was primarily due to a higher average cash, cash equivalent and investment balance as a result of capital received from the issuance of shares of the Company's Preferred Stock in the third quarter of 1997. Income Taxes. Income taxes of $26,500 for the six months ended June 30, 1998 are based solely on state and local taxes on business and investment capital. The Company's effective tax rate differs from the statutory federal income tax rate, primarily as a result of the uncertainty regarding the Company's ability to utilize its net operating loss carryforwards. Due to the uncertainty surrounding the timing or realization of the benefits of its net operating loss carryforwards in future tax returns, the Company has placed a valuation allowance against its otherwise recognizable deferred tax assets. As of June 30, 1998 and December 31, 1997, the Company had approximately $9.9 million and $4.4 million of federal net operating loss carryforwards for tax reporting purposes available to offset future taxable income. The Company's federal net operating loss carryforwards expire beginning 2000 through 2012, respectively. The Tax Reform Act of 1986 imposes substantial restrictions on the utilization of net operating losses and tax creditsrisks, in the event of an "ownership change"a failure, would include but not be limited to: o lost advertising revenues; o increased operating costs; o loss of customers or persons accessing our web site; o other business interruptions of a corporation. Due tomaterial nature; and o claims of mismanagement, misrepresentation, or breach of contract. Contingency Plan. As discussed above, we are engaged in an ongoing Year 2000 assessment and testing. Following the change in the Company's ownership interests in the third quarter of 1997, as defined in the Internal Revenue Code of 1986, as amended (the "Code"), future utilizationcompletion of the Company's net operating loss carryforwards will be subjectassessment, we plan to certain limitations or annual restrictions. See Note 5 to the Notes to Financial Statements appearing elsewhere in this Prospectus. Comparisonconduct a full-scale Year 2000 simulation of the Period From May 1, 1995 (Inception) to December 31, 1995 and Years Ended December 31, 1996 and 1997 Revenues. Revenues were $26,815, $229,363, and $770,293 for the period from May 1, 1995 (inception) to December 31, 1995, and for the years ended December 31, 1996 and 1997, respectively. The period to period growth resulted from an increase in (i) the number of advertisers as well as the average contract duration and value, (ii) the Company's Web site traffic and (iii) to a lesser extent, its subscription memberships. Advertising Revenues. Advertising revenues were $26,815 or 100% of total revenues, $216,814 or 95% of total revenues, and $592,409 or 77% of total revenues for the period from May 1, 1995 (inception) to December 31, 1995, and for the years ended December 31, 1996 and 1997, respectively. Commencing in April 1996, the Company engaged an Internet advertising service provider to sell the Company's Web site advertising inventory in exchange for a service fee. During 1996, the advertisements soldour information technology systems by the Internet advertising service provider accounted for approximately 71%end of total revenues. Commencing May 1, 1997, the Company canceled this arrangement and created its own internal sales department in order to represent theglobe.com brand on a consistent basis as well as to reduce overall sales costs. During 1997, revenues from this service provider were only 8% of total revenues. During 1997, the Company recorded $166,500 of barter advertising revenues, representing 22% of total revenues, which primarily related to an advertising contract with a major Internet search engine. Subscription Revenues. The Company's subscription membership revenues were $12,549 or 5% of total revenues and $177,884 or 23% of total revenues for the years ended December 31, 1996 and 1997, respectively. At December 31, 1996 and 1997, the Company had deferred revenues of $32,144 and $113,290, respectively, attributable to prepaid subscription memberships. The Company did not have subscription revenues in its year of inception. Cost of Revenues. Cost of revenues were $12,779 or 48% of total revenues, $116,780 or 51% of total revenues, $423,706 or 55% of total revenues for the period from May 1, 1995 (inception) to December 31, 1995, and for the years ended December 31, 1996 and 1997, respectively. Gross margins were 52%, 49% and 45% in 1995, 1996 and 1997, respectively. The general decline in gross margins as a percentage of total revenues was attributable to the growth of the networking infrastructure resulting in an increase in Internet connection, support and maintenance charges, equipment costs as well as operations personnel costs. In 1995, the Company's first year of operation, cost of revenues only represented Internet connection and support and maintenance charges. In 1997, gross margins also decreased due to the inclusion of $166,500 of barter advertising expenses in cost of revenues, which was equivalent to the barter advertising revenues recorded in the same period. The 1997 gross margin exclusive of the barter transactions was 57%. The Company's 1997 gross margin was positively impacted by its decision to shift its advertising to an internal sales department during May 1997 and the increase in the Company's subscription members. Sales and Marketing Expenses. Sales and marketing expenses were $1,248 or 5% of total revenues, $275,947 or 121% of total revenues, and $1.2 million or 162% of total revenues for the period from May 1, 1995 (inception) to December 31, 1995, and for the years ended December 31, 1996 and 1997, respectively. In the first year of operation, the Company did not dedicate meaningful funds to sales and marketing. The period to period increase in sales and marketing expenses from 1996 to 1997 was primarily attributable to expansion of the Company's online and print advertising, public relations and other promotional expenditures as well as increased sales and marketing personnel and related expenses required to implement the Company's marketing strategy. Sales and marketing expenses also increased as a result of the Company's decision to shift its advertising to an internal sales department in the second quarter of 1997. Product Development Expenses. Product development expenses were $60,000 or 224%1999. The results of total revenues, $120,000 or 52% of total revenues,this simulation and $153,667 or 20% of total revenues for the period from May 1, 1995 (inception) to December 31, 1995, and for the years ended December 31, 1996 and 1997, respectively. The increases in absolute dollars in product development expenses were primarily attributable to increased staffing levels required to support theglobe.com and its related back-office systems. Product development expenses as a percentage of total revenues have decreased because of the growth in total revenues. General and Administrative Expenses. General and administrative expenses were $18,380 or 68% of total revenues, $489,073 or 213% of total revenues, and $2.8 million or 367% of total revenues for the period from May 1, 1995 (inception) to December 31, 1995, and for the years ended December 31, 1996 and 1997, respectively. The period to period increase in general and administrative expenses was primarily due to increases in the number of general and administrative personnel, professional services, travel and facility related expenses to support the growth of the Company's operations. The increased salaries reflect the highly competitive nature of hiring in the new media industry. General and administrative expenses as a percentage of total revenues decreased in 1996 because of the growth in total revenues. General and administrative expenses as a percentage of total revenues and in absolute dollars increased in 1997 primarily related to expenses associated with management's employment contracts and accrued bonuses granted during the second half of 1997 combined with the additional costs required to support the rapid growth of the Company's operations. Interest Income (Expense), Net. Interest income (expense), net was $(114), $22,257 and $334,720, for the period from May 1, 1995 (inception) to December 31, 1995, and for the years ended December 31, 1996 and 1997, respectively. The increase in interest income for the year ended December 31, 1997 was primarily due to a higher average cash, cash equivalent, and investment balance as a result of the proceeds received from the issuance of shares of the Company's Preferred Stock in the third quarter of 1997. Income Taxes. Income taxes of $36,100 for the year ended December 31, 1997 was based solely on state and local taxes on business and investment capital. The Company paid less than $1,000 in income taxes in 1995 and 1996. Liquidity and Capital Resources Since its inception, the Company has primarily financed its operations through (i) the private placement of its Preferred Stock through which the Company raised $20 million and $280,000 in the third and second quarters of 1997, respectively, and $910,000 in 1996, (ii) the private placement of Common Stock, through which the Company raised $647,000 in 1995 and (iii) capital equipment lease financing which, from December 1997 through June 1998, totaled approximately $963,000 million. As of June 30, 1998, the Company had approximately $3.0 million in cash and cash equivalents and $10.2 million in marketable securities. Net cash used in operating activities was $330,223 and $5.4 million for the six months ended June 30, 1997 and 1998, respectively, and $58,510, $601,602, and $1.9 million for the period from May 1, 1995 (inception) to December 31, 1995, and for the years ended December 31, 1996 and 1997, respectively. The Company had significant negative cash flows from operating activities in each fiscal and quarterly period to date. Net cash used in operating activities resulted primarily from the Company's net operating losses, adjusted for certain non-cash items, and a higher level of accounts receivable due to the time lag between revenue recognition and the receipt of payments from advertisers, which were partially offset by increases in accounts payable, accrued expenses, deferred revenues and the timing of payments associated with the Company's 1997 accrued bonuses in the first quarter of 1998. For the six months ended June 30, 1998, the increase in net cash used in operating activities resulted primarily from the Company's net operating loss of $5.8 million and the payment of 1997's bonuses of $1.1 million during the first six months of 1998. Net cash provided (used) in investing activities was $(229,696) and $2.6 million for the six months ended June 30, 1997 and 1998, respectively, and $(51,101), $(138,309), and $(13.2) million for the period from May 1, 1995 (inception) to December 31, 1995, and for the years ended December 31, 1996 and 1997, respectively. Net cash provided (used) in investing activities was primarily related to purchase and sales of short-term investments with the proceeds from the Company's issuance of shares of the Company's Preferred Stock in the third quarter of 1997, totaling $20 million, and the purchase of property and equipment in connection with the Company's build out of its infrastructure. During December 1997 and the first six months of 1998, the Company acquired additional equipment under capital leases of $126,000 and $836,648, respectively. Net cash provided by (used in) financing activities was $258,205 and $(69,233) for the six months ended June 30, 1997 and 1998, respectively, and $696,685, $909,955, and $20.2 million for the period from May 1, 1995 (inception) to December 31, 1995, and for the years ended December 31, 1996 and 1997, respectively. Net cash provided by financing activities during 1995 consisted primarily of $45,500 in convertible notes payable and $646,505 in proceeds from the issuance of the Company's Common Stock. Net cash provided by financing activities in 1996 and in 1997 consisted primarily of net proceeds from the issuance of the Company's Preferred Stock. Net cash used in financing activities of $(77,405) consisted primarily of payments under its capital lease obligations. As of June 30, 1998, the Company's principal commitments consisted of obligations outstanding under capital and operating leases. The Company spent approximately $557,253 on capital expenditures since inception, excluding capital lease arrangements. The Company estimates that its capital expenditures for the second half of 1998 and 1999our assessment will be approximately $2 milliontaken into account in determining the nature and $7 million, respectively. The Company currently expects that its principal capital expenditures during that time will relate to improvements to technical infrastructure and a planned moveextent of the Company headquarters at the end of 1998. The Company's capital requirements depend on numerous factors, including market acceptance of the Company's services, the amount of resources the Company devotes to investments in its Web site, the resources the Company devotes to marketing and selling its services and its brand promotions and other factors. The Company has experienced a substantial increase in its capital expenditures and operating lease arrangements since its inception consistent with the growth in the Company's operations and staffing, and anticipates that this will continue for the foreseeable future. Additionally, the Company will continue to evaluate possible investments in businesses, products and technologies, and plans to expand its sales and marketing programs and conduct more aggressive brand promotions. The Company believes that the net proceeds from this Offering, together with its current cash and cash equivalents, will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for at least 12 months. If cash generated from operations is insufficient to satisfy the Company's liquidity requirements, the Company may seek to sell additional equity or debt securities or to obtain a credit facility. The sale of additional equity or convertible debt securities could result in additional dilution to the Company's stockholders. There can be no assurance that financing will be available in amounts or on terms acceptable to the Company, if at all. See "Risk Factors--Additional Financing Requirements." Quarterly Results of Operations Data The following table sets forth certain unaudited quarterly statement of operations data for each of the six quarters ended June 30, 1998 as well as such data expressed as a percentage of the Company's total revenues for the periods indicated. In the opinion of management, this 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 audited financial statements of the Company and the notes thereto appearing elsewhere in this Prospectus. The operating results for any quarter are not necessarily indicative of the operating results for any future period. In particular, because of the Company's limited operating history, the Company has limited meaningful financial data upon which to base revenues and planned operating expenses. Additionally, the Company believes that it may experience seasonality in its business, with use of the Internet and theglobe.com being somewhat lower during the summer vacation period and year-end holiday periods. Additionally, seasonality may affect significantly the Company's advertising revenue during the first and third calendar quarters. See "Risk Factors-Potential Fluctuations in Operating Results; Quarterly Fluctuations."
Three Months Ended ------------------ March 31, June 30, September 30, December 31, March 31, June 30, 1997 1997 1997 1997 1998 1998 --------- -------- ------------- ------------ --------- -------- (Dollars in thousands, except per share data) Statement of Operations Data: Revenues ............... $ 87 $ 121 $ 207 $ 355 $ 394 $ 780 Cost of revenues ....... 25 81 133 185 213 291 ------- ------- ------- ------- ------- ------- Gross profit .......... 62 40 74 170 181 489 Operating expenses: Sales and marketing.... 64 160 404 620 1,411 3,083 Product development.... 30 32 37 54 85 165 General and administrative........ 303 291 1,511 722 1,098 1,299 ------- ------- ------- ------- ------- ------- Total operating expenses............... 397 483 1,952 1,396 2,594 4,547 Loss from operations.... (335) (443) (1,878) (1,226) (2,413) (4,058) Interest income (expense), net......... 3 8 113 210 456 217 ------- ------- ------- ------- ------- ------- Loss before provision for income taxes....... (332) (435) (1,765) (1,016) (1,957) (3,841) Provision for income taxes........... -- -- 18 18 16 10 ------- ------- ------- ------- ------- ------- Net loss ............... $ (332) $ (435) $ (1,783) $ (1,034) $ (1,973) $ (3,851) ======= ======= ======= ======= ======= ======= Percentage of Revenues: Revenues ............... 100% 100% 100% 100% 100% 100% Cost of revenues........ 29% 67% 64% 52% 54% 37% ------- ------- ------- ------- ------- ------- Gross profit .......... 71% 33% 36% 48% 46% 63% Operating expenses: Sales and marketing.... 74% 132% 196% 175% 358% 395% Product development.... 34% 27% 18% 15% 22% 21% General and administrative........ 348% 240% 731% 203% 279% 167% ------- ------- ------- ------- ------- ------- Total operating expenses............... 456% 399% 945% 393% 659% 583% Loss from operations.... (385%) (366%) (909%) (345%) (613%) (520%) Interest income (expense), net......... 4% 7% 55% 59% 116% 28% ------- ------- ------- ------- ------- ------- Loss before provision for income taxes.......... (381%) (359%) (854%) (286%) (497%) (492%) Provision for income taxes........... 0% 0% 9% 5% 4% 1% ------- ------- ------- ------- ------- ------- Net loss................ (381%) (359%) (863%) (291%) (501%) (493%) ======= ======= ======= ======= ======= =======
Impact of the Year 2000 The Year 2000 issue is the result of computer-controlled systems using two digits rather than four to define the applicable year. For example, computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. The Company has reviewed its internal programs and has determined that there are no significant Year 2000 issues within the Company's systems or services. However, although the Company believes that its systems are Year 2000 compliant, the Company utilizes third-party equipment and software that may not be Year 2000 compliant. Failure of such third-party equipment or software to operate properly with regard to the year 2000 and thereafter could require the Company to incur unanticipated expenses to remedy any problems, which could have a material adverse effect on the Company's business, results of operations and financial condition. The Company is in the process of contacting all of its significant suppliers and strategic partners to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues. Furthermore, the purchasing patterns of advertisers may be affected by Year 2000 issues as companies expend significant resources to correct their current systems for Year 2000 compliance. These expenditures may result in reduced funds available for Internet advertising or sponsorship of Internet services, which could have a material adverse effect on the Company's business, results of operations and financial condition. Effects of Inflationcontingency plans. EFFECTS OF INFLATION Due to relatively low levels of inflation in 1995, 1996, and 1997 and the first six months of 1998, inflation has not had a significant effect on the Company'sour results of operations since inception. Impact of Recently Issued Accounting Standards The CompanyIMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS We adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" in the quarter ended June 30,as of January 1, 1998. SFAS No. 130 requires the Companyus to report in theirour financial statements, in addition to itsour net income (loss), comprehensive income (loss), which includes all changes in equity during a period from non-owner sources including, as applicable, foreign currency items, minimum pension liability adjustments and unrealized gains and losses on certain investments in debt and equity securities. There were no differences betweenWe adopted SFAS 130 as of December 31, 1997 and have presented comprehensive income for all periods presented in the Company's comprehensive loss and its net loss as reported.Statement of Shareholders' Equity. In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for fiscal years -44- beginning after December 15, 1997. The Company hasWe have determined that it doeswe do not have any separately reportable business segments. In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", which establishes guidelines for the accounting for the costs of all computer software developed or obtained for internal use. We adopted SOP 98-1 effective for the year ended December 31, 1998. The adoption of SOP 98-1 is not expected to have a material impact on our financial statements. In June 1998, the FASB issued SFAS No. 133. Accounting133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standardstandards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The statement is not expected to affect the Companyus as the Company currently doeswe do not have any derivative instruments or hedging activities. -45- BUSINESS OverviewOVERVIEW theglobe.com is one of the world's leading online communitiesnetworks with over 1.7nearly 2.3 million members in the United States and abroad,abroad. In JuneDecember 1998, 6.1over 9.3 million unique usersindividuals visited thisour web site. theglobe.comOur web site is a destination on the Internet where users are able to personalize their online experience by publishing their own content and interacting with others having similar interests. theglobe.com facilitatesWe facilitate this interaction by providing various free services, including home page building, discussion forums, chat rooms, e-mail and a marketplace where members can purchase a variety of products and services.electronic commerce. Additionally, theglobe.com provides itswe provide our users with news, business information, real time stock quotes, weather, movie and music reviews, multi-player gaming horoscopes and personals. By satisfying itsour users' personal and practical needs, theglobe.com seekswe seek to become theirour users' online home. The Company's primary revenue source isWe generate revenues primarily by selling advertisements, sponsorship placements within our site, development fees and, to a lesser extent, from electronic commerce revenues. In the salelast three months of advertising, with1998, we had approximately 147 advertisers, including Coca Cola, Hewlett Packard, Hilton, LEGO, Office Max, 3Com and Visa. In February 1999, we acquired factorymall.com, an online retail store doing business as Azazz.com which sells a variety of name brand products directly to consumers. We have begun integrating Azazz.com into our electronic commerce site, now known as "shop.theglobe.com," and expect to begin to generate additional revenues generated through e-commerce arrangementsfrom electronic commerce in the second quarter of 1999. In April 1999, we acquired Attitude Network, a provider of online entertainment content whose web sites include HappyPuppy.com and GamesDomain.com, two leading web sites serving game enthusiasts. Attitude Network offers innovative and current entertainment content that capitalizes on the sale of membership subscriptions for enhanced services.web's unique graphical and interactive capabilities. Since itsour founding, in May 1995, theglobe.com haswe have experienced strong growth. The site has added over 100,000 new members every month since October 1997, and generated over 100Over 9.3 million page views in June 1998, an increase of over 100% from January 1998. More than 6.1 million unique usersindividuals visited theour site in JuneDecember 1998, reflecting an increaseaccording to DoubleClick, as audited by ABC Interactive. We have nearly 2.3 million members in the United States and abroad who have registered with us and provided us personal information. Approximately 40% of more than 350% since January 1998. Approximately 25% to 35% of theglobe.com'sour monthly traffic originates from abroad, reflecting theour site's international appeal. According to Media Metrix, the average time spent per user at theglobe.com in the period April to June 1998 was approximately 15% higher than the average time spent on the top 25 Web sites visited most frequently. Industry BackgroundABOUT OUR INDUSTRY The rapid adoption of the Internet as a means to gather information, communicate, interact and be entertained, combined with the vast proliferation of Webweb sites, has made the Internet an important new mass medium. IDCThe International Data Corporation estimates that the number of Internetweb users exceeded 6997 million in 1997,1998, and will grow to over 320319 million by 2002. The Internet enables advertisers to target advertising campaigns utilizing sophisticated databases of information on the users of various sites and to directly generate revenues from these users through online transactions. As a result, the Internet has become a compellingnew means to advertise and market products and services. With the volume of sites and vast abundance of information available on the Internet, users are increasingly seeking an online home where they can interact with others with similar interests and quickly find information, products and services related to a particular interest or need. -46- Community sites were developed as a solution to the challenges posed by the Internet's growth and complexity. TheyCommunity sites also offer a single convenient location where users can build their personal Web siteshave access to electronic commerce, content and place them among others having similar interests. In addition, these sites generallyuser interaction. As a result, we must offer a wide scope of services including access toranging from e-mail accounts, chat rooms, news, and entertainment services, among other features. By satisfying the needs of itstheir users, online communities seek to establish a close relationship with their audience. As a result, we believe that users tend to be loyal to and spend more time online at community sites. Advertising. Jupiter Communications estimates that spending on Internet advertising in the U.S.United States will grow from $1.9 billion in 19971998 to $7.7 billion in 2002. The Internet has become a compelling advertising vehicle that provides advertisers with targeting tools not available from traditional advertising media. The interactive nature of the Internet and the development of "click-through"click-through advertising banners and other feedback tools enable advertisers to measure impression levels, establish a dialogue with users and receive "real-time"real-time direct feedback from their target markets.audiences. Such feedback provides advertisers with an effective means to measure the attractiveness of their offerings among targeted audiences and make modifications to their advertising campaigns on short notice. Community sites are generally able to provide advertisers significantly more information regarding consumers than other Webweb sites because they collect detailed demographic data and facilitate the development of user-created affinity groups. One way community sites foster affinity groups is by providing focused third party content, such as business information or entertainment. The ability to target advertisements to broad audiences, specific regional populations, affinity groups or individuals makes community Webweb site advertising a highly versatile and effective tool for delivering customized and cost-effective messages. One indicator of the Internet's popularity as an advertising medium is the growing number and diversity of Internet advertisers. Most early Internet advertisers were technology and Internet-related companies. Today, a growing number of Internet advertisers consist of traditional, consumer product and service companies. The diverse audience of users accessing community sites has made such sites especially attractive to consumer product and service companies advertising on the Internet. The Company believes that this trend should continue, and that a wide variety of companies outside the technology and Internet industries, such as financial services, consumer goods, automotive and pharmaceutical companies, are or will be increasingly using the Internet, and community sites in particular, to advertise. E-commerceElectronic commerce and Direct Marketing. The Internet has become a significant marketplace for buying and selling goods and services. Jupiter Communications estimates that the amount of goods or services purchased in online consumer transactions will grow from approximately $3$7.1 billion in 19971998 to approximately $38$41.1 billion in 2002. Improvements in security, interface design and transaction-processing technologies have facilitated an increase in online consumer transactions. Early adopters of such improvements includeinclude: o online merchants offering broad product catalogs, (suchsuch as books, music CDs and toys),toys; o those seeking distribution efficiencies, (suchsuch as PCs, flowers and groceries)groceries; and o those offering products and services with negotiablecompetitive pricing, (suchsuch as automobiles and mortgages). The Company believes that as the volume of online transactions increases, traditional retailers will offer a wide variety of products and services online. The Company believesmortgages. We believe that online communities provide businesses an attractive environment for selling products and services by providing direct access to users with like interests. For the members of -47- the communities, we believe that providing the opportunity to make purchases is both a convenience and a complimentary service. The Internet allows marketers to collect meaningful demographic information and feedback from consumers, and to rapidly respond to this information with new messages. This offers a significant new opportunity for businesses to increase the effectiveness of their direct marketing campaigns. In traditional media, a significant portion of all advertising budgets are spent on direct marketing because of its effectiveness. However, the effectiveness of direct marketing campaigns is dependent upon the quality of consumer data used to develop and place consumer advertisements. In addition to providing detailed demographic data, community Webweb site participants indicate their areas of personal interest by self-selecting themselves into affinity groups. This added level of information provides direct marketers an invaluableimportant tool to target potential customers more accurately. Accordingly, advertisers are able to improve their direct marketing campaigns which may translate into higher sales. theglobe.com Solution The Company was founded byTHEGLOBE.COM Todd V. Krizelman and Stephan J. Paternot created theglobe.com to capitalize ontake advantage of the growing demand for online destinations that allow users to develop their own identities and establish relationships with other Internetusers with similar interests. Our site provides breadth and depth in content and commerce and pairs this with user interaction. It is this combination that attracts and retains users. theglobe.com community is organized in an intuitive hierarchy modeled after the real world, with each layer reflecting a more specific level of interest. There are sixOur site has ten "Themes of Interest": o Arts ando News o Business o Romance o Entertainment Business and Finance, Lifestyles, Romance, Special Interests and Geographical Interests. Themes of Interest are subdivided into 24 "Cities," which are further divided into 75 "Districts."o Sports o Life o Technology o Metro o Travel Within each District memberstheme is a combination of content, electronic commerce and interactive services. Content is both user generated as well as professional. We have several professional content relationships. These include CBS Marketwatch, Reuters, CNET, UPI, Variety, Thomson Investors Network, E! Online, and Fox Sports. Electronic commerce is woven contextually throughout themes. For example, within the abilitySports theme a user will find sports equipment for sale, while in the Business theme the user would find products directed at the business professional. Interactive services such as chat, discussion forums, and surveys are paired with content to create or join "Interest Groups," theglobe.com's smallest form of community. There are currently 325 Interest Groups. Interest Groups, once proposed by any member, are posted for petition. Those groups that garner enough votes then go "live" on the site.promote usage. Members are also encouraged to generate their own webpages and aggregate in online communities. We do not limited as tolimit the number of communities theywhich our members can join and members are ablefree to leave an Interest Group at any time, ensuring that thetime. Because of this, communities are dynamic and evolve as member interestsinterests' change. "Community Leaders" are elected to manage communities and are able to highlight member content, communicate directly to constituents and organize events. Within Interest Groups, members can access a collection of services provided by theglobe.com to generate content, including chat, open forums and e-mail. Member created content within Interest Groups satisfy users' desires for topic specific information, conversation and debate. Members vote and generate content for communities, thereby facilitating production of desirable content on theglobe.com. Viewing community content does not require membership, allowing theglobe.com to leverage its member-created content to attract a large audience of users. As these users become familiar with theglobe.com, the Company believes it has a greater ability to convert them into members, perpetuating the growth of the site. The unique community focus of theglobe.comour site offers the Companyus several advantages that include: -48- o Member Loyalty. Because theglobe.com provideswe provide a homehomepage for itsour members, members develop loyalty to theour site and to the communities in which they participate. ThisWe believe that this translates into more frequent usage by members and longer stays at theour site. According to Media Metrix,o Member-Developed Content. Users develop the average time spent per user at theglobe.com in the period April through June 1998 was approximately 15% higher than the average time spent on the top 25 Web sites visited most frequently. Member Developed Content. The majority of the content on theglobe.com is developed by usersour site on a voluntary basis for the benefit of all users of the site.our users. As a result, we avoid some of the Company avoids the majority of costs associated with content development. o Third-Party Content. We have a number of arrangements with third party content providers who place original or proprietary information on our site in exchange for payment to us or a share of revenues generated from the sale of advertising attributable to this content. As a result, we avoid the costs associated with developing additional content. o Targeted Advertising. theglobe.com structure provides a valuable platform forWe allow advertisers by allowing them to target their advertisements based on both demographic information and affinity group affiliations. Advertisers are also drawn to the globe.com'sOur volume of user traffic, frequency and average length of use. theglobe.com'suse also draw advertisers to our site. Our ability to reach users across a wide variety of interest areas has made theour site attractive to both technology companies as well asand traditional consumer product and service companies. Currently,As of December 31, 1998, approximately 60%70% of theglobe.com'sour advertisers arewere branded consumer product and service companies. Business Strategy theglobe.com'sOUR BUSINESS STRATEGY Our goal is to be the leading online community site. The Company seeksnetwork. We seek to attain this goal through the following key strategies: Improve User Experience. The CompanyWe will continue efforts to improve user experience on theglobe.comour site by: (i)o launching new services to enhance our community; o personalizing our site to the preferences of individual members; o simplifying user interfaces and otherwise improving the ease of use of services, (ii)use; o improving customer support, (iii)support; o developing loyalty programs to reward members for increased usage, (iv)usage; o expanding the suite of personal publishing/Webweb site building tools, (v)tools; and o creating additional opportunities for participating in existing affinity groups, as well asand expanding the number of affinity groups, (vi) personalizing the site to the preferences of individual members and (vii) launching new services to enhance the community.groups. Develop Brand Identity and Awareness. The Company intendsWe intend to expand itsour presence as a mass market site by building brand awareness. The Company plansWe plan to continue to allocate a significant portion of itsour resources to develop itsour brand in the same fashion as traditional consumer product and service companies. The Company believesWe believe that establishing brand awareness among consumers is instrumental in attracting new members to theglobe.com andour site. It may also has the effect of attractingattract media buyers who tend to favor well-known and trusted companies. theglobe.com also intends to continue to market its services in various media. In March 1998, theglobe.com launched advertising campaigns in several forms of media, including television, print, billboards, buses, telephone kiosks, online media, and other marketing and promotional efforts designed toTo build its brand namewithin the games industry, Attitude Network's HappyPuppy.com is a major participant in selected cities. Increase New Membershipindustry related events and gives out awards to reflect users' selections of best games. -49- Further Develop Electronic Commerce. We intend to increase our electronic commerce revenues by (1) selling select products directly to consumers through the integration of Azazz into our web site and (2) indirectly selling products to consumers through increasing the number of electronic commerce partners who establish virtual storefronts in the shop.theglobe.com site. We plan to re-launch the shop.theglobe.com site area in the second quarter of 1999. We believe that integrating Azazz with our existing electronic commerce business should enhance our users' overall shopping experience. The acquisition enables us to directly offer a broad array of products, attractive prices and premium customer service. In particular, we will differentiate ourselves from competitors by offering Azazz's "personal shopper" application which enables customers to communicate directly with a live customer service representative during each step of the online shopping process. Acquisition, through Strategic Alliances. theglobe.com continuesJoint Venture and Alliance Strategy. We review acquisition candidates and joint ventures in the ordinary course of business, some of which may be material. Our focus is to seek new waystransactions that would complement our existing business, increase our traffic, augment the distribution of our community, enhance our technological capabilities or increase our electronic commerce revenues. We have been approached from time to reachtime to consider and evaluate potential members when theybusiness combinations, either involving potential investments in our common stock or other business combinations or joint ventures, or our acquisition of other companies. If consummated, any such transaction could result in a change of control of our company or could otherwise be material to our business or to your investment in our common stock. We are first becoming acquainted with the Internet. The Company believes that early contact with such users will enhance its abilitycurrently in discussions or negotiations to instill customer loyalty. Accordingly, the Company has established a strategic alliance with EarthLink Network, Inc. ("EarthLink"),acquire one or more companies in various transactions, some of the largest ISPs in the United States, through which members gain Internet access and are directed to theglobe.com as their home site upon startup. The Company has also formed strategic alliances with companies including Advertising Age, Together Systems and Ziff Davis University.may be material, but we have not reached any binding agreements. These relationships are designed to drive additional traffic to the site, create brand building opportunities and allow for the marketing of products and services to theglobe.com's user base.transactions may or may not be consummated. Expand Globally. The Company believesWe believe that significant opportunities exist to capitalize on the growth of the Internet internationally and isinternationally. We are pursuing strategic relationships with international companies to exploit cross-marketing, co-branding and promotional opportunities. Approximately 25% to 35%40% of theglobe.com'sour monthly traffic is generated by membersusers outside of the United States. Users outside of the United States who are able to communicate and publish on theour site in their respectiveown languages. The Company hasWe have also received prominent press coverage in Europe, Asia and Australia,Australia. Attitude Network's Games Domain site is based in Birmingham, England and has established a relationship with MTV U.K. to feature theglobe.com's founders on a weekly news show (to be launched initiallyreceives traffic at mirror sites in the United Kingdom in the fall of 1998). Further Develop E-commerce. The Company intends to increase its e-commerce revenues by continuing to increase the number of e-commerce partners in theglobe.com Marketplace (the "Marketplace"),Russia, Greece, South Africa and through the introduction of "Globe-shops," its e-commerce merchandising solution aimed at the small to mid-sized office and home office market, in the fall of 1998. In addition, the Company is seeking to expand the number of its premier commerce partners ("Premier Partners") that rent space on theglobe.com. As of June 30, 1998, approximately 35 companies, including four Premier Partners, participated in the Marketplace.Portugal. Enhance Membership Services. The Company currently offersWe offer additional Internet services, such asincluding increased storage space for building home pages, through its Gold and Platinum membership programs.pages. To attract a wider subscriber base, the Company intendswe intend to develop new membership programs offering premium content, shopping clubs and entertainment services. Products and Services theglobe.com providesOUR PRODUCTS AND SERVICES We provide users with access to the following collection of products and services to generate content and purchase merchandise online:services: Free Services. theglobe.com providesWe provide a range of free services to itsour members including: o business and technology news; o real-time stock quotes and portfolio services; -50- o "my globe" personalized home pages; o classified listings; o a marketplace where members can purchase a variety of products and services; o home page building; o discussion forums; o chat rooms; and o e-mail. By satisfying our users' personal and practical needs, we seek to become our users' online home. Our primary revenue source is the sale of advertising, with additional revenues generated through which they are able to personalize their online experience. These services include personal Web site hosting, discussion forums, chatelectronic commerce. We derive electronic commerce revenues in shop.theglobe.com through merchandise sales by partners, and, e-mail. Additionally, theglobe.com provides news, weather, movie and music reviews, multiplayer gaming, horoscopes and personals. Members are also provided discounts on merchandise offered by certain retailersbeginning in the Marketplace. theglobe.com Marketplace. theglobe.com Marketplace provides users accesssecond quarter of 1999, from direct merchandise sales. We believe that the addition of Azazz's broad array of products, attractive prices and premium customer service to products offered by leading retailersthe shop.theglobe.com site will significantly enhance the shopping experience for our millions of monthly users. Premier Partners. We have relationships with premier partners who pay a fixed monthly fee, generally from $5,000 to $100,000 per month, and service providers. The Company allows retailers to locate in its Marketplace and collects a fee based onoften a percentage of transactions. The Marketplace currently has 35 participants including BarnesandNoble.com, FAO Schwarz and Lens Express. The Company also has relationships with four Premier Partners who pay an additional fixed monthly fee in ordersales, to receive prominent placement at theglobe.com.in the shop.theglobe.com site and on our site. Premier marketplacepartner agreements typically run for a period of six months to one year and are renewable at the optionthree years. In some instances, premier partners pay us a share of the partner. The Company currentlysales over a particular threshold amount from users directed to them from our site. Premier partners include: o Lowestfare.com. Lowestfare.com offers discounted airline, car and hotel reservations, vacation packages and cruises. Lowestfare.com has such agreementsentered into a three-year agreement with us to be our exclusive provider of travel-related services. They also provide us with content, including weather, mapping, destination information and voice response e-mail. We provide Lowestfare.com with advertising and Marketplace exposure on the shop.theglobe.com site. o AutoNation. AutoNation owns the largest chain of new vehicle dealerships in the United States and operates a chain of used car megastores under the AutoNation USA brand name. We provide AutoNation preferred placement in our auto category under a three-year agreement. o Cyberian Outpost. Cyberian Outpost sells computer hardware, software and accessories directly to consumers online. We have entered into a six month arrangement with Cyberian Outpost Inc. for software andto be our exclusive online computer hardware GetSmartretailer. o Boxlot. We have entered into a two year relationship with Boxlot.com to provide a customized, co-branded person to person auction service for consumer finance, Classified Warehouse for classified advertisementstheglobe.com. The co-branded auction service will be integrated throughout each of theglobe.com theme areas. Boxlot has agreed to pay us up to $2.3 million over the term of the agreement. o Music HQ. We have entered into a 1 year partnership with Music HQ, Inc. to promote its music and movie retail online properties, www.musichq.com and www.dvdflix.com, on shop.theglobe.com and throughout the Entertainment theme on our site. Music HQ has signed a letteragreed to pay us $1.2 million over the term of intent with RSL Communications for Internet telephony and phone services. Globe-shops. In the fourth quarter of 1998, the Company intends to introduce Globe-shops, its e-commerce merchandising solution aimed at the small to mid-sized office and home office market. The Globe-shop tool set will allow merchants and users to build storefronts at theglobe.com assisted by an easy-to-use online guide. The Company will offer Globe-shop merchants and users various options ranging from a basic promotional storefront to a more complete solution, including a catalog, shopping cart and online transaction capabilities. The Company intends to charge Globe-shop owners a monthly service fee based on the level of service utilized and a transactional fee.agreement. -51- Member Subscriptions. The Company currently offersWe offer additional Internet services through its Gold and Platinumpremium membership packages. TheseFor example, these packages provide services such as additional storage space and the ability to host limited commercial activity. Member subscriptions are available for a $4.95 or $9.95 monthly fee, depending on the level of service. Corporate Alliances and Relationships theglobe.com has establishedCORPORATE ALLIANCES AND RELATIONSHIPS We have a number of relationships designedwith partners and content providers to drive additional traffic to its site, create brand building opportunities, and allow for the marketingprovide our users with a full suite of products and services to theglobe.com user base.web services. These arrangements areprovide us with a variety of online and offline partners and provide a cost effective way to deliver traffic to the site because they do not requirecost-effective method for increasing our services without incurring significant capital expenditures. Examples include: EarthLink. theglobe.com seekso Business and Finance. By providing free real-time stock quotes, stock screening analysis and portfolio tools from the Thomson Financial Network and stock market editorial analysis and daily articles from CBS MarketWatch, we are able to reach newassist our users in planning and tracking their investment decisions. o Entertainment. Through entertainment news and gossip from E! Online and Variety, and music reviews and commentary from SonicNet, we offer our users multiple viewpoints on the latest events in the entertainment industry. o Online Calendar and Address Book. We license Visto's Briefcase application for use on our site, which permits our users to manage all of their appointments and contact information through our site. o Other Key Services. We provide sports highlights and scores from Fox Sports, employment, real estate and automobile classified listings from Classified Warehouse and weather forecasts from AccuWeather. ADVERTISING CUSTOMERS With over 9.3 million unique users as of December 1998, and nearly 2.3 million members as they first become acquainted with the Internet. The Company believes that early contact with such users will enhance the Company's ability to instill customer loyalty. Consistent with this strategy, the Company has established an alliance, currently in a trial phase, with EarthLink, one of the largest ISPs in the United States. EarthLink has created a custom version of their "start-up CD-ROM" which not only gives users Internet access but also automatically directs them to theglobe.com as their home site upon start-up. Additionally, EarthLink promotes theglobe.com within its siteStates and pays the production costs of co-branded theglobe.com/EarthLink start-up CD-ROMs. EarthLink pays a commission to the Company for each member or user gaining Internet access by utilizing the co-branded start-up CD-ROM. When the trial phase is completed (expected in August 1998), the alliance will be automatically renewed for one-year periods, unless terminated by either party. Advertising Age. theglobe.com hosts a full-service community for Advertising Age, a leading trade publication for the advertising industry. In exchange for providing the full range of membership services available on theglobe.com to users of the Advertising Age Web site, the Company receives free promotion on the Advertising Age Web site, as well as discounts on advertising in Advertising Age magazine. This relationship provides theglobe.com with significant exposure throughout the advertising community, particularly among media buyers. JobDirect, Inc. JobDirect, Inc. ("JobDirect") is an Internet resume service which connects entry-level job seekers with employment opportunities. In exchange for development of community features for its Web site, JobDirect provides theglobe.com with a link from its site as well as prominent promotion in its offline job events on college campuses. JobDirect provides all of its members e-mail from theglobe.com and distributes co-branded marketing material to college students, providing theglobe.com with exposure to the college-age market segment. In addition to the above relationships, the Company has a variety of other arrangements designed primarily to drive traffic to its site, including agreements with Ziff Davis University, Together Systems, Launch Magazine, Wall Street Sports LLC, LINCS, WebSurfer, Mining Company and Lycos. Advertising Customers With over 1.6 million registered members, over 6.1 million monthly users and over 100 million monthly page views as of June 1998, the Company has successfullyabroad, we have attracted both mass market consumer product companies as well as technology-related businesses advertisingto advertise on the Internet. Due to its advantages as aour site. We believe that our community Web site the Company believes it is well positioned to capture a portion of the growing number of consumer product and service companies seekingadvertising online. Our advertising clients enter into short term agreements, which typically last one to advertise online.three months. Our clients generally receive a guaranteed number of impressions for a fixed fee. In June 1998, approximately 90 customers advertised on theglobe.com. During that period, approximately 70% were repeat customers and no one customersingle advertiser accounted for more than 10% of revenues.total revenues and approximately 70% of our advertisers were repeat customers. In the last three months of 1998, approximately 147 advertising clients advertised on our site. Some of the Company'sour advertising clients include: American Express Hilton Lee Jeans Polygram AT&T Intel Levi's Sony BellSouth J. Crew Microsoft 3Com Coca Cola J. Crew Ziff Davis Procter & Gamble Visa Polygram BellSouthKellogg's Brands Office Depot USWest Dunkin' Donuts Office Depot Levi's Microsoft Sony 3Com USWest Intel Advertising Sales and DesignKodak Pepsi Visa The Company seeksfollowing advertisers have purchased advertising on Attitude Network: -52- Arizona Jeans IBM Silicon Graphics Electronic Arts Oracle Toys "R" Us Hasbro ADVERTISING SALES AND DESIGN We seek to distinguish itselfourselves from itsour competition through the creation ofby creating unique advertising and sponsorship opportunities that are designed to build brand loyalty for itsour corporate sponsors by seamlessly integrating their advertising messages into theglobe.com'sour content. Through its close relationship with the end user, the Company has the ability toWe can deliver advertising to specific targets within theour site's themed content areas, allowing advertisers to single out and effectively deliver their messages to their respective target audiences. For example, a company can target an advertisement solely to 35-40 year old Canadian men with music interests. The Company believesmales or females over 24 years of age coming to our Business Theme area from Latin America. We believe that such sophisticated targeting is a critical element for capturing worldwide advertising budgets for the Internet. Additionally, the Company intendswe intend to expand the amount and type of demographic information it collectswe collect from itsour members, which will allow itus to offer more specific data to itsour advertising clients. While the Company'sour competition generally provides banner advertising as its primary delivery system, the Company offersadvertising option, we offer an assortment of advertising options for our clients. We work with our advertising customers to its clients, allowing them to take advantage of theglobe.com's unique relationship with its users and rapidly growing membership base. In addition to direct response indicators like "click-throughs," theglobe.com also specializes in providing innovative and aggressive selling services and a number of "branding" and "beyond the banner" sponsorshipmeet their needs. We offer advertisers: o Banner advertising o Sweepstakes o Button advertising o Content development o Text links o Affinity packages for its advertisers at higher premiums, such as: . Banner Advertising . Sweepstakes . Button Advertising . Content Development . Contextual Links within Relevant . Affinity Packageso Pop-up advertisements advertising partners o Log out links to full page o Direct marketing and lead advertisements generation, if users have opted in o Various sponsorship programs to these programs o Market research for Advertising Content Partners . Pop Up and Log Out Interstitials . Opt-In Direct Marketing/Lead Generation . E-mail Sponsorship Programs . Celebrity Event Sponsorships . Pre- and Post-Campaign Market Research The Company has builtadvertising campaigns We have an internal sales organization of 16approximately 25 professionals. These professionals focusingfocus on both selling advertisements on the Webour web site and developing long-term strategic relationships with clients. A significant portion of the Company'sour sales personnel's income is commission based. All of the Company's sales personnel sell advertising exclusively for theglobe.com. The Company currently sells over 95% of its advertising inventory through its in-house sales staff, allowing the Company to better control its pricing and inventory, maintain brand consistency and capture maximum revenue. The Company hasWe have sales offices in New York City, Chicago and San Francisco and intendsintend to open additional sales offices in selected markets around the world. MarketingAttitude Network has a particular expertise in online promotions. As an example, HappyPuppy.com was one of only three web sites selected by Gillette to promote the October 1998 introduction of the Mach3 razor. The promotion featured a fast action shaving game created by Attitude Network and Promotions The Company wasa game oriented contest through which entrants could win copies of the first community Web site to commit significant fundsmost popular games. A total of 25 sponsor promotions were run by Attitude Network during 1998. MARKETING AND PROMOTIONS In 1998, we committed approximately $7.3 million to advertising in traditional offline media distinguishing itself from most of its competitors and otherin online companies. The Companymedia. In March 1998, we launched an $8 millionour advertising campaign in March 1998, includingthrough -53- television, print, billboards, buses, telephone kiosks, online media, and other marketing and promotional efforts. These efforts arewere aimed atat: o generating significant additional traffic to theglobe.com,our site; o building and defining a desirable online destination in the minds of present and potential online consumers,consumers; and o creating a strong and viable brand within the Internet industry and advertising trades. The Company intendsindustries. We intend to continue to commit a significant part of itsour budget to marketing theglobe.comour brand. The Company advertises on national cable channels like MTV, E! Entertainment Television, Comedy Central, ESPN and the Sci-Fi Channel. The Company has also purchased advertising on network television in several markets including New York, San Francisco, Seattle, Boston, Denver and Atlanta. Technology The Company'sTECHNOLOGY Our strategy is to applyoperate our business through the application of existing technologies in novel ways to deliver content and provide services to members of its online community.technologies. The various features of theglobe.com'sour online environment are implemented using a combination of commercially availableoff-the-shelf and proprietary software components. The Company favorsWhenever possible, we favor licensing and integrating "best-of-breed" commercially available technology from industry leaders, such asincluding Oracle, Sun Microsystems and Microsoft whenever possible. The Company reserves internal development of software for those components which are either unavailable on the market or which have major strategic advantages when developed internally. The Company believesMicrosoft. We believe that this component approach is more manageable, reliable and scalable than single-source solutions. In addition, theour emphasis on commercial components speedsaccelerates our development time, whichtime. We believe that this is an advantage when competing in aour rapidly evolving market. Consistent with the Company's preference for off-the-shelf software components, the hardware systems utilized by the Company also consist of commercially available components. The Company believes that this architecture provides the ability to increase scale more quickly and reliably, and at lower cost, than more centralized systems. Although the existing infrastructure currently exceeds the Company's present demand, the Company has aggressive plans for additional upgrades in anticipation of increased demand. The Company's distributed server architecture allows it to roll out upgrades incrementally on an as-needed basis. In addition to being scalable, the Web-serving architectureour system has many redundancies, which benefit us if part of our system is also entirely redundant. The Company's Internetdown. Our servers are connected to the Internet through multiple dedicated 45 Mb T3 connections obtaineda combination of links provided through twothree separate backbone providers,carriers, AppliedTheory, UUNET and UUNET.AT&T. This approach to connectivity protects the Company by allowing itallows us to continue operations in the event of a failure in either backbone. See "Risk Factors--Technological Change." In orderany carrier. We plan to continue to upgrade our systems as necessary for our business plan. Our system allows us to roll out upgrades incrementally on an as-needed basis. To efficiently manage theour system, the Company haswe have developed highly automated methods of monitoring the system performance of each system component. In the event of a failure inIf any subsystem fails, the failed subsystem is immediately taken out of service and requests are distributed among the remaining operational systems. The Company hasWe have also developed a suite of tools to perform routine management tasks such as log processing and content updates in an automated, remote-controlled fashion. The Company believesWe believe that itsour investment in automation lessens the need for the additional personnel that would otherwise be required to support the system as it grows. See "Risk Factors--Technological Change"In the fourth quarter of 1998 and "--Dependencethe first quarter of 1999, we relocated our data processing systems and servers to the New York Teleport in Staten Island, New York under a three year lease with Telehouse International Corporation. The New York Teleport facility provides security, electricity and premises for our systems. The facility has four independent battery-operated power supplies, as well as four independent diesel generators designed to provide power to these systems within seconds of a power surge. If required, the diesel generators can supply the data center's power for several days. Telehouse International Corporation does not guarantee that our Internet access will be uninterrupted, error-free or secure. -54- We maintain server equipment related to shop.theglobe.com at Exodus Communications, Inc.'s facility in Seattle, Washington. Additionally, we maintain computer hardware, servers and operations relating to Attitude Network in Herndon, West Virginia, which are hosted by Frontier GlobalCenter and in London, England which are hosted by Telehouse International. Each of Exodus, Frontier and Telehouse provides and manages power, environmentals and connectivity to the Internet through multiple links on Key Personnel." Competitiona 24 hour-a-day, seven days per week basis. Neither Exodus, Frontier, nor Telehouse guarantees that our Internet access will be uninterrupted, error-free or secure. COMPETITION The market for members, users and Internet advertising among web sites is new and rapidly evolving, andevolving. We expect the intense competition for members, users and advertisers, is intense and is expectedas well as competition in the electronic commerce market, to increase significantly. Barriers to entry are relatively insubstantial and the Company maywe face competitive pressures from many additional companies both in the United States and abroad. The Company believesSee "Risk Factors -- Competition for members, users and advertisers, as well as competition in the electronic commerce market, is intense and is expected to increase significantly." All types of web sites compete for users. Competitor web sites include community sites, as well as "gateway" or "portal" sites and various other types of web sites. We believe that the principal competitive factors for companies seekingin attracting users to create communities on the Internet are critical mass,a site are: o functionality of the Web site,web site; o brand recognition,recognition; o member affinity and loyalty,loyalty; o broad demographic focus andfocus; o open access for visitors. Other companies that are primarily focused on creating Internet communities arevisitors; o critical mass of users, particularly for community-type sites; and o services for users. We compete for users, advertisers and electronic commerce customers with: o other online community web sites, such as GeoCities, which has agreed to be acquired by Yahoo!, Tripod and GeoCities,AngelFire, subsidiaries of Lycos, and Xoom.com; o search engines and other Internet "portal" companies, such as Excite, InfoSeek, Lycos and Yahoo!; o online content web sites, such as CNET, ESPN.com and ZDNet.com; o publishers and distributors of television, radio and print, such as CBS, NBC and CNN/Time Warner; o general purpose consumer online services, such as America Online and Microsoft Network; o web sites maintained by Internet service providers, such as AT&T WorldNet, EarthLink and MindSpring; o electronic commerce web sites, such as Amazon.com, Etoys and CDNow; and -55- o other web sites serving game enthusiasts, including Ziff Davis' Gamespot and CNET's Gamecenter. Many of our existing competitors, as well as a number of potential new competitors, have the following advantages: o longer operating histories in the future, Internet communitiesmarket; o greater name recognition; o larger customer bases; and o significantly greater financial, technical and marketing resources. In addition, providers of Internet tools and services, including community-type sites, may be developed or acquired by, receive investments from, or enter into other commercial relationships with larger, well-established and well-financed companies, currently operating Web directories, search engines, shareware archives, content sites, OSPs, ISPssuch as Microsoft and other entities, certain ofAmerica Online. For example, Excite has agreed to be acquired by At Home, America Online acquired Netscape and Lycos announced a transaction in which may have more resources than the Company.USA Networks would merge its online and retailing assets, which include Ticketmaster Citysearch Online, with Lycos. In addition, there has been other significant consolidation in the Companyindustry. This consolidation may continue in the future. We could face increased competition in the future from traditional media companies, aincluding cable, newspaper, magazine, television and radio companies. A number of which,these large traditional media companies, including Disney, CBS and NBC, have recently made significant acquisitions or investmentsbeen active in Internet companies.related activities. Many of our competitors, including other community sites, have announced that they are contemplating developing Internet navigation services and are attempting to become "gateway" or "portal" sites through which users may enter the Web. In the event these companies develop successful "portal" sites, we could lose a substantial portion of our user traffic. Furthermore, many non-community sites are seeking to develop community aspects in their sites. Web browsers offered by Netscape and Microsoft also increasingly incorporate prominent search buttons that direct traffic to competing services. These features could make it more difficult for Internet users to find and use our product and services. In the Company competesfuture, Netscape, Microsoft and other browser suppliers may also more tightly integrate products and services similar to ours into their browsers or their browsers' pre-set home page. Additionally, entities that sponsor or maintain high-traffic web sites or that provide an initial point of entry for users and advertisers with other content providers and with thousands of Web sites operated by individuals, the government and educational institutions. Such providers and sites include AOL, Angelfire, CNET, CNN/Time Warner, Excite, Hotmail, Infoseek, Lycos, Microsoft, Netscape, Switchboard, Xoom and Yahoo! The Company also faces competitive pressure from traditional mediaInternet viewers, such as newspapers, magazines, radiothe Regional Bell Operating Companies, cable companies or Internet Service Providers, such as Microsoft and television. The Company believesAmerica Online, offer and can be expected to consider further development, acquisition or licensing of Internet search and navigation functions that the principal competitive factors in attracting advertisers include the amount of traffic on its Web site, brand recognition, customer service, the demographics of the Company's memberscompete with us. These competitors could also take actions that make it more difficult for viewers to find and users, the Company's ability to offer targeted audiencesuse our products and the overall cost-effectiveness of the advertising medium offered by the Company. The Company believesservices. We believe that the number of Internet companies relying on Internet-based advertising revenue, as well as the number of advertisers on the Internet and the number of users, will increase substantially in the future. We believe that the principal competitive factors in attracting advertisers include the following: o amount of traffic on a web site; o brand recognition; o customer service; -56- o the demographics of members and users of a web site; o the ability to offer targeted audiences; and o the overall cost effectiveness of the advertising medium offered. In addition, many of our current advertising customers and strategic partners have established collaborative relationships with some of our existing and potential competitors. Accordingly, the Companywe will likely face increased competition, resultingcompetition. We also compete with traditional advertising media, including television, radio, cable and print, for a share of advertisers' total advertising budgets. This will result in increased pricing pressures on itsour advertising rates, which could have a material adverse effect on the Company.us. See "Risk Factors--Intense Competition.Factors--We rely substantially on advertising revenues." Intellectual PropertyAdditionally, the electronic commerce market is new and Proprietary Rights The Company regardsrapidly evolving, and we expect the intense competition among electronic commerce merchants to increase significantly. We generate substantially all of our electronic commerce revenues from our electronic commerce partners in our Marketplace. In the future, we expect to generate electronic commerce revenues through our Azazz acquisition. Because the Internet allows consumers to easily compare prices of similar products or services on competing web sites and there are low barriers to entry for potential competitors, gross margins for electronic commerce transactions may narrow further in the future. Competition among Internet retailers or among our electronic commerce partners may have a material adverse effect on our ability to generate revenues through electronic commerce transactions or from these electronic commerce partners. INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS We regard substantial elements of its Webour site and underlying technology as proprietary and attemptsproprietary. We attempt to protect itthem by relying on trademark, service mark, copyright and trade secret laws and restrictions on disclosure and transferring title and other methods. The Company currently has no patents or patents pending and does not anticipate that patents will become a significant part of the Company's intellectual property in the foreseeable future. The Companylaws. We also generally entersenter into confidentiality agreements with itsour employees and consultants and in connection with itsour license agreements with third parties and generally seeksparties. We also seek to control access to and distribution of itsour technology, documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company'sour proprietary information without authorization or to develop similar technology independently. The Company pursuesWe pursue the registration of itsour trademarks in the United States and internationally. The Company has registeredOur efforts include: o the registration of a United States trademark for theglobe. The Company has filedthe globe; o the filing of United States trademark applications for theglobe.com, theglobe.com logo, TGLO, A Whole New Life Awaits You, globeDirect and theglobe.com logo. Additionally,globeStores; o the Company has submittedsubmission of trademark applications for theglobe.com and theglobe.com logo in Australia, Brazil, Canada, China, the European Union, (covering Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Ireland, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom), Hong Kong, Israel, Japan, New Zealand, Norway, Russia,Russian Federation, Singapore, South Africa, Switzerland and Taiwan.Taiwan; and o the submission of trademark applications for A Whole New Life Awaits You in the European Union and Switzerland. -57- Additionally, Attitude Network has filed applications to register some of its trademarks in the United States, including "Attitude Network" and "Happy Puppy." Notice of Allowance has been received from the United States Patent and Trademark Office on "Happy Puppy." Kaleidoscope Networks Limited, the wholly owned subsidiary of Attitude Network, has registered the mark "GD Games Domain" in the United Kingdom. Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which the Company'sour services are distributed or made available through the Internet, and policingInternet. Policing unauthorized use of the Company'sour proprietary information is difficult. See "Risk Factors--RelianceFactors--We rely on Intellectual Propertyintellectual property and Proprietary Rights.proprietary rights." Government Regulation and Legal Uncertainties The Company is currentlyGOVERNMENT REGULATION AND LEGAL UNCERTAINTIES We are subject to certain federal and state laws and regulations that are applicable to certain activities on the Internet. Legislativevarious Internet activities. There are many legislative and regulatory proposals under consideration by federal, state, local and foreign governmental organizations concern various aspects of thegovernments and agencies, including matters relating to: o online content; o Internet including, but not limited to, online content, user privacy, taxation,privacy; o Internet taxation; o access charges,charges; o liability for third-party activitiesinformation retrieved from or transmitted over the Internet; o domain names; o database protection; o unsolicited commercial email messages; o online gambling; and o jurisdiction. Such government regulationNew regulations may place the Company's activities under increased regulation, increase the Company's costour costs of compliance and doing business, decrease the growth in Internet use and thereby decrease the demand for the Company'sour services or otherwise have a material adverse effect on the Company's business, results of operations and financial condition. See "Risk Factors--Government Regulation and Legal Uncertainties Associated with the Internet."our business. Online Content. Online content restrictions cover many areas, including but not limited to, indecent or obscene or offensive informationcontent and content, such as sexually explicit information, gambling and consumer fraud.gambling. Several federal and state statutes prohibit the transmission of certain types of indecent obscene, or offensiveobscene information and content, including sexually explicit information and content, over the Internet to certain persons.content. The constitutionality and the enforceability of some of these statues is not clearunclear at this time. For example, in 1997 the Supreme Court of the United States held that selected parts of the federal Communications Decency Act of 1996 (the "CDA") governing "indecent"indecent and "patently offensive"patently offensive content were unconstitutional. Many other provisions of the CDA,Communications Decency Act, including those relating to "obscenity,"obscenity, however, remain in effect. Prior to the Supreme Court's decision, a federal district court in New York held that certainsome provisions of the New York penal law modeled on the CDACommunications Decency Act violated the Constitution. A companion provision of that law, however, was subsequently upheld. Since the Supreme Court's decision, a federal district court in New Mexico held that a provision of the New Mexico penal law purporting to make it unlawful to disseminate over the Internet information that is harmful to minors violated the Constitution. -58- The Child Online Protection Act became effective on November 20, 1998. It requires web sites engaged in the business of the commercial distribution of material that is deemed to be obscene or harmful to minors to restrict minors' access to this material. However, the Child Online Protection Act exempts from liability telecommunications carriers, Internet service providers and companies involved in the transmission, storage, retrieval, hosting, formatting or translation of third-party communications where these companies do not select or alter the third-party material. On February 1, 1999, a federal district court in Pennsylvania entered a preliminary injunction preventing enforcement of the harmful-to-minors portion of the act. The provisions of the act relating to obscenity, however, remain in effect. We cannot predict the ultimate outcome or effect of this litigation or the effect that the Child Online Protection Act may have on our business. The U.S. Department of Justice and some state Attorneys General have recently intensified their efforts in prosecutingtaking action against businesses that operate Internet gambling activities, and pending legislation seeks to ban Internet gambling.activities. In October 1997,the last Congress, the Senate Judiciary Committee approvedpassed the "InternetInternet Gambling Prohibition Act," which, if enacted, would prohibithave prohibited placing receiving or otherwise makingreceiving a bet or wager via the Internet in any state, and would also prohibit engaging in the business of betting or wagering through the Internet in any state. The bill also would direct the Secretary of State to negotiate with foreign countries to conclude international agreements that would enable the United States to enforce specified provisions of the act outside the United States. A substantially similar bill has been introduced in the Housecurrent Congress. We cannot predict whether similar legislation will be enacted in the current Congress. Even in the absence of Representatives. Certainnew legislation directed specifically at Internet-based gambling, existing federal and state statutes generally criminalize these activities. During 1998, online gambling advertisers accounted for under ten percent of our advertising revenues. The enactment of any legislation in the United States or abroad that limits or prevents businesses from operating online gambling would likely have an adverse effect on our advertising revenue. Some states, including New York and California, have enacted laws or adopted regulations that expressly or as a matter of judicial interpretation apply various consumer fraud and false advertising requirements to parties who conduct business over the Internet. The constitutionality and the enforceability of some of these statuesstatutes is not clearunclear at this time. For example, in 1997, a federal district court held that a Georgia criminal statute violated the Constitution when it prohibited Internet transmissions that falsely identify the sender or use trade names or logos that would falsely state or imply that the sender was legally authorized to use them. Internet Privacy. The United States government currently has limited authority overIn October 1998, the Children's Online Privacy Protection Act was signed into law, which directs the FTC to develop regulations for the collection and dissemination of personal data collected online. Thefrom children by commercial web site operators. Separately, the Federal Trade Commission Act (the "Act") prohibits unfair and deceptive practices in and affecting commerce. The FTC Act authorizes the Federal Trade Commission (the "FTC")FTC to seek injunctive and other equitable relief including redress, for violations of the FTC Act, and provides a basis for government enforcement of certain fair information practices. For instance, failure to comply with a stated privacy policy may constitute a deceptive practice in certainsome circumstances and the FTC would have authority to pursue the remedies available under the Act for suchany violations. Furthermore, in certainsome circumstances, information practices may be inherently deceptive or unfair, regardless of whether the entity has publicly adopted any privacy policies. The FTC has issued an opinion letter addressing the possible unfairness inherent in collecting certain personal identifying information from children onlineSome industry groups and transferring it to third parties without obtaining prior parental consent. However, as a general matter, the FTC lacks authority to require companies to adopt privacy policies. Certain industry groupsother organizations have proposed, or are in the process of proposing, various voluntary standards regarding the treatment of data collected over the Internet. In order to establish and bolsterimprove user and member confidence in theglobe.com web site, we recently revised our user agreement and privacy policy and became a licensee of the TRUSTe Privacy Program. -59- As a TRUSTe licensee, we have agreed to adhere to certain established privacy principles at theglobe.com web site as well as to comply with TRUSTe's oversight and consumer resolution process. theglobe.com web site privacy policy now sets forth what personal information is being collected, how it will be used, with whom it will be shared, who is gathering the information, what options the user has, what security procedures are in place to prevent misuse or loss, and how users can correct information to control its dissemination. We may choose to join other organizations that require us to comply with other privacy policies, the Companyprinciples. We may incur expenses in obtaining the endorsement of such industry groupsthese organizations or in altering itsour current policies to comply with such standards. There can be no assurancethese privacy principles. We cannot assure you that the adoption of such voluntary standards will preclude any legislative or administrative body from taking governmental action regarding Internet privacy. In June 1998, the FTC released a report analyzing the effectiveness of self-regulation as a means of protecting consumer privacy on the Internet. The report concluded that industry self-regulation had not provided adequate protection for Internet users.been adequate. The report listed four core principlesinformation practices that the FTC believes must be part of any privacy protection effort: notice, choice, access and security. In order to protect the privacy of children, the FTC recommended legislation that would require Web sites that obtain information from children to provide actual notice to parents and to obtain parental consent. The FTC expectshas indicated that in the absence of effective self-regulation, it may support federal legislation to announce legislative recommendations for onlineaddress consumer privacy protection for adults as early as the summer of 1998. To the extentconcerns. We cannot assure you that the Company's practices do not conform to these principles it may be subject to action by the FTC. There can be no assurance that these effortsFTC's actions in this area will not adversely affect the Company'sour ability to collect demographic and personal information from members, which could have an adverse affect on itsour ability to attract advertisers. This could in turn have a material adverse effect on the Company's business, results of operations and financial condition. Moreover, theus. The FTC has begun investigations into the privacy practices of companies that collect information on the Internet. In settlement negotiations with at least one Internet company,For example, on August 13, 1998, the FTC hasannounced that it had entered into a proposed consent order with one of our competitors. In its complaint, the FTC alleged that this competitor engaged in three deceptive practices. First, the FTC alleged that the company be required to establish certain procedures to give notice to consumers regardingfalsely represented that the company's information collection and disclosure practices, provide consumers with the ability to have that company delete their personal identifying information fromit collects through its membership application form is used only to provide members the specific offers and products or services they request. Second, the FTC alleged that company's database, more clearly identify its affiliation, or lack thereof, withthe competitor falsely represented that the "optional information" it collects through the application form is not disclosed to third parties without the member's permission. Third, the FTC alleged that may collectthe competitor had falsely represented that it collected and maintained the information or sponsor activitiesprovided by children who joined various neighborhoods on its site, when in fact the undisclosed third parties actually collected and maintained the information. Without admitting that company's site,these allegations are correct, the competitor agreed in a consent order made final by the FTC on February 12, 1999, among other things, to post a clear and prominent privacy statement on its home page and each location where information is collected, disclosing the information collected, the purpose to which the information would be used, the persons to whom the information would be released, and the methods by which subscribers could access and remove the information. The competitor also agreed to obtain express parental consent prior tobefore collecting and using personal identifying information obtained from children 12 and under 13and to notify individuals from whom it previously collected personal information and offer them the opportunity to have that information deleted. Finally, the competitor agreed to post, for five years, of age. Despitea clear and prominent hyperlink within its privacy statement directing visitors to the Company's policies protecting user privacy,FTC's site to view educational material on privacy. The final order also contained an additional provision added during the Company could be forced to disclose information about users by a court order. There can be no assurance that these efforts will not adversely affectpublic comment period, permitting the Company's abilitycompetitor to collect demographic andor use personal information from members,children to the extent permitted by the Children's Online Privacy Protection Act or by regulations or guides issued under that act. -60- We are continuing to review our practices in light of the recent FTC activity and the enactment of the Children's Online Privacy Protection Act. As part of our ongoing review, we now require parental consent before allowing children 12 and younger to access theglobe.com web site. We still cannot predict the exact form of the regulations that the FTC may adopt. Accordingly, we cannot assure you that our current practices will comply with the regulatory scheme which couldthe FTC ultimately adopts or that we will not have an adverse affect on its ability to attract advertisers. This could in turn have a material adverse effect on the Company's business, results of operations and financial condition.make significant changes to comply with such laws. At the international level, the European Union (the "EU") has adopted a directive (the "Directive") that willrequires EU member countries to impose restrictions on the collection and use of personal data, effective October 25, 1998. Among other provisions, the directive generally requires member countries to prevent the transfer of personally-identifiable data to countries that do not offer equivalent privacy protections. At present, the EU has indicated that the United States does not provide protections equivalent to that of the directive. The Directivedirective could, among other things, affect United States companies that collect information over the Internet from individuals in EU member countries, and may impose restrictions that are more stringent than current Internet privacy standards in the United States. In response to the directive, on November 4, 1998, the U.S. There canDepartment of Commerce published for comment a set of safe harbor principles regarding privacy protection for personally identifiable data. The Commerce Department proposed that organizations that come within the safe harbor would be no assurancepresumed to maintain an adequate level of privacy protection and could continue to receive personal data transfers from EU member countries. The draft safe harbor provides for: o notice regarding the organization's intended use of personal data; o the opportunity for an individual to choose how the organization or a third party will use personal information; o requirements regarding the security and integrity of personal data and access by an individual to data regarding that individual; and o mechanisms for ensuring an organization's compliance with the privacy principles. The Commerce Department and the EU are engaged in ongoing discussions about the application of the directive to United States companies. The Commerce Department has indicated that it hopes to complete an agreement with the EU by June 21, 1999. We cannot assure you that this Directivedirective will not materially adversely affect the Internet privacy activities of entities such as the Company that engage in data collection from users in certain EU member countries in conducting theirour business. Any newadditional legislation enacted by federal, state, or foreign governments regulating onlineregulations relating to consumer privacy or the application or interpretation of existing laws and regulations could affect the way in which the Company iswe are allowed to conduct itsour business, especially those aspects that contemplate the collection or use of our members' personal information. Internet Taxation. A number of proposals have been madeGovernments at the federal, state and local level, and by certainsome foreign governments, have made a number of proposals that would impose additional taxes on the sale of goods and services over theand various other Internet and certain states have taken measures to tax Internet-related activities. Currently, Congress is considering legislation that would place a temporary moratorium on any new taxation of Internet commerce. On June 23,In 1998, the House of Representatives passed H.R. 4105, the "Internetfederal Internet Tax Freedom Act" which includes was signed into law, placing a three-year moratorium on state and local taxes on Internet access bit taxes, orand on multiple or discriminatory taxes on electronic commerce. CertainHowever, this moratorium exempts existing state laws, however, would be expressly excepted from this moratorium if such state law was reaffirmed within a one-year period.or local laws. The bill wouldstatute also createcreates a commission to study several Internet taxation issues and to present proposed legislation to the President and Congress. H.R. 4105, if enacted in its current form, would also prohibit the FCC and the states from regulating the prices of Internet access and online services. The Senate is also considering legislationissues. We cannot assure you that future laws imposing taxes or other -61- regulations on Internet taxation. Any legislation that is eventually passed by both houses of Congress may contain provision different from those in H.R. 4105. See "Access Charges" below. There can be no assurance that any such legislation will be adopted by Congress or that new taxes will not be imposed upon Internet commerce after any moratorium adopted by Congress expires or that current attempts at taxing or regulating commerce over the Internet would not substantially impair the growth of e-commerceInternet commerce and as a result materially adversely affect the Company's opportunity to derive financial benefit from such activities.our business. The Clinton Administration has stated that the United States will advocate in the World Trade Organization and other appropriate international organizations that the Internet be declared a tariff-free environment whenever it is used to deliver products and services. In addition, the Clinton Administration has stated that the government should impose no new taxes should be imposed on Internet commerce, but rather that taxation should be consistent with established principles of international taxation, should avoid inconsistent national tax jurisdictions and double taxation and should be simple to administer and easy to understand. However, there can be no assurancewe cannot assure you that foreign countries will not seek to tax Internet transactions. Access Charges. Several telecommunications carriers are supporting regulation of the Internet by the FCC in the same manner that the FCC regulates other telecommunications services. These carriers have alleged that the growing popularity and use of the Internet has burdened the existing telecommunications infrastructure, resulting in interruptions in phone service. LocalIncumbent local exchange telephone carriers such as Pacific Bell, a subsidiary of SBC Communications Inc., have in the past petitioned the FCC to regulate ISPs and OSPsInternet service providers in a manner similar to long distancelong-distance telephone carriers and to impose interstate access feescharges on ISPsInternet service providers. In May 1997, however, the FCC confirmed that Internet service providers will continue to be exempt from interstate access charges. In August 1998, the Eighth Circuit Court of Appeals upheld the FCC's authority to maintain the exemption. On February 25, 1999, the FCC adopted an order concerning payment by incumbent local exchange carriers of reciprocal compensation for dial-up calls to Internet service providers that obtain their local telephone service from competitive local exchange carriers. The FCC found that Internet traffic is largely interstate, and OSPs.therefore subject to the FCC's jurisdiction, because end user calls to Internet service providers do not terminate at the Internet service providers' servers, but continue to Internet locations that often are outside the state or country in which the call originates. Although the FCC stated that the order does not require Internet service providers to pay access charges for calls placed through their services, the order does provide further support for a possible, ultimate finding that access charges must be paid for at least some categories of Internet services, such as Internet-based voice telephony. If either of these petitions is granted,the FCC were to withdraw the exemption or the relief sought therein is otherwise granted,take other action responding to telecommunications carrier concerns, the costs of communicating on or through the Internet could increase substantially, potentially slowing the growth in Internet use, whichuse. This could in turn decrease demand for the Company'sour services or increase the Company'sour cost of doing business. Liability for Information Retrieved from or Transmitted over the Internet. Materials may be downloaded and publicly distributed over the Internet by the Internet services operated or facilitated by the Company,us or by the Internet access providers with which the Company haswe have relationships. These third-party activities could result in potential claims against the Companyus for defamation, negligence, copyright or trademark infringement or other claims based on the nature and content of suchthese materials. See "Risk Factors--Liability for Information Retrieved fromThe Communications Decency Act of 1996 provides that no provider or Transmitted overuser of an interactive computer service shall be treated as the Internet."publisher or speaker of any information provided by another information content provider. Future legislation or regulations or court decisions may hold the Companyus liable for listings and other content accessible through its Webour web site, for content and materials posted by members on their -62- respective personal Webweb pages, for hyperlinks from or to the personal Webweb pages of members, or through content and materials posted in the Company'sour chat rooms or bulletin boards. Such liabilityLiability might arise from claims alleging that, by directly or indirectly providing hyperlink text linkshyperlinks to Webweb sites operated by third parties or by providing hosting services for members' sites, the Company iswe are liable for copyright or trademark infringement or other wrongful actions by suchthese third parties through such Web sites.parties. If any third-party material on the Company's Webour web site contains informational errors, the Company may be suedsomeone might sue us for losses incurred in reliance on suchthe erroneous information. While the Company attemptsWe attempt to reduce itsour exposure to such potential liability through, among other things, provisions in member agreements, user policies, insurance and disclaimers,disclaimers. However, the enforceability and effectiveness of suchthese measures are uncertain. In MayOctober 1998, the Senate passed the "DigitalDigital Millennium Copyright Millennium Act," whose Title II containedcontains the "InternetInternet Copyright Infringement Liability Clarification Act."Act, was signed into law. This legislation would, if enacted, providestatute provides that, under certainsome circumstances, a "service provider"service provider would not be liable for any monetary relief, and would be subject to limited injunctive relief, for infringingclaims of infringement, based on copyright materials transmitted by users over its digital communications network temporarilyor stored on its system by its system caching procedures, stored on systems or networks under itsthe control of or connected to its systems or networks by hyperlinks and other information location tools.systems. This legislationstatute also provides that, under certainsome circumstances, a service provider shallwould not be liable for any claim basedif the service provider acted in good faith to remove access to the infringing material. With respect to infringement caused by storing material on a system or network, in order to benefit from the protections of the act, a service provider must appoint a designated agent to receive notifications of claimed infringement and must provide information about that agent to the U.S. Copyright Office and to the public in a publicly accessible place on the service provider's good faith removalservice. We have appointed a designated agent to receive notifications of or disabling accessclaimed infringement on theglobe.com web site, have provided that information to such infringing material.the Copyright Office, and made it available to the public on the site. A similar bill has been introduced in the House of Representatives. The Company'sthird party provides our e-mail service is provided by a third party. See "Risk Factors-Dependence on Third-Party Relationships." Suchservice. This relationship exposes the Companyus to potential risk, such asclaims, including claims resulting from unsolicited e-mail ("spamming"),or "spamming," lost or misdirected messages, illegal or fraudulent use of e-mail or interruptions or delays in e-mail service. Some states have adopted laws that address spamming. Other states, including New York, are considering, or have considered, similar legislation. For example, California has adopted a law permitting electronic mail service providers to sue parties who initiate unsolicited commercial messages in violation of its e-mail policy, if the initiator has notice of that policy. California also requires unsolicited e-mail advertisements to include opt-out instructions with a toll-free telephone number or a valid return address in the e-mail and requires senders of unsolicited e-mail advertisements to honor opt-out requests. California also imposes criminal penalties on parties who knowingly use Internet domain name of another party to send one or more messages where such messages damage or cause damage to a computer, computer system, or computer network. Similarly, the Virginia legislature has passed, and the governor is considering signing a bill that, if adopted, would make it a crime to send unsolicited bulk e-mail containing false message headers or to sell software designed to do so and would impose civil penalties for injuries caused by unsolicited bulk e-mail. Washington has adopted a law that allows recipients of unsolicited e-mail containing false headers and misleading subject lines to bring lawsuits seeking damages of up to $500.00 for unsolicited commercial e-mail messages. Potential liability for information carried on or disseminated through the Company'sour systems could lead the Companyus to implement measures to reduce itsour exposure to such liability, which mayliability. This could require the expenditure of substantial resources and limit the attractiveness of the Company's services to members and users. While the Company attemptsour services. We attempt to reduce itsour exposure to such potential liability through, among other things, provisions in -63- member agreements, user policies and disclaimers,disclaimers. However, the enforceability and effectiveness of suchthese measures are uncertain. The CompanyWe sell products directly to consumers and we also entersenter into agreements with commerce partners and sponsors under which the Company iswe are entitled to receive a share of anythe revenue from the purchase of goods and services through direct links from the Company's Webour site. SuchThese arrangements may expose the Companyus to additional legal risks, and uncertainties, including potential liabilities to consumers of such products and services by virtue of the Company'sour involvement in providing access to suchthese products or services, even if the Company doeswe do not itselfourselves provide suchthese products or services. While the Company'sSome of our agreements with these parties often provide that the Companythese parties will be indemnifiedindemnify us against such liabilities, there can be no assuranceliabilities. However, we cannot assure you that suchthis indemnification if available, will be enforceable or adequate. Although the Company carrieswe carry general liability insurance, the Company'sour insurance may not cover all potential claims or liabilities to which it is exposed or may not be adequate to indemnify the Company for all liability that may be imposed.we are exposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could have a material adverse effect on the Company's business, results of operations and financial condition.our business. The increased attention on liability issues relating to information retrieved or transmitted over the Internet and legislative and administrative proposals in this area could decrease the growth of Internet use, thereby decreasinguse. This could decrease the demand for the Company'sour services. Even to the extent that claims relating to such issues do not result in liability to the Company, the Company couldWe may also incur significant costs in investigating and defending against suchthese claims. Domain names.Names. Domain names are the user's Internet "addresses."addresses. Domain names have been the subject of significant trademark litigation in the United States. The Company hasWe have registered the domain name "theglobe.com.names "theglobe.com," There can be no assurance"shop.theglobe.com," "tglo.com," "azazz.com," "happypuppy.com," "realmx.com," "kidsdomain.com" and "gamesdomain.com." We cannot assure you that third parties will not bring claims for infringement against the Companyus for the use of this trademark.these names. Moreover, because domain names derive value from the individual's ability to remember suchthe names, there can be no assurancewe cannot assure you that the Company'sour domain names will not lose their value if, for example, users begin to rely on mechanisms other than domain names to access online resources. The current system for registering, allocating and managing domain names has been the subject of litigation and of proposed regulatory reform. There can be no assuranceWe cannot assure you that the Company'sour domain names will not lose their value, or that the Companywe will not have to obtain entirely new domain names in addition to or in lieuplace of itsour current domain names, if such litigation or reform efforts resultnames. Jurisdiction. Our facilities are located primarily in a restructuring in the current system. Jurisdiction. DueNew York. However, due to the global reach of the Internet it is possible that although transmissions by the Company over the Internet originate primarily in the State of New York, the governments of other states and foreign countries might attempt to regulate Internet activity and our transmissions. Additionally, we have recently acquired web sites which are based in the Company's transmissions or prosecute the CompanyUnited Kingdom and are subject to regulation under U.K. law. Consequently, foreign countries may take action against us for violations of their laws. There can be no assuranceWe cannot assure you that violations of suchthese laws will not be alleged or charged by state or foreign governments and that suchthese laws will not be modified, or new laws enacted, in the future. Any actions of the foregoingthis type could have a material adverse effect on the Company's business, results of operations and financial condition. Employeesour business. EMPLOYEES As of June 30, 1998, the CompanyApril 9, 1999, we had 80approximately 210 full-time employees, including 20approximately 50 in sales and marketing, 45110 in production, and 1035 in finance and administration. The Company'sadministration and 15 in technology. Our future success will depend,depends, in part, on itsour ability to continue to attract, retain -64- and motivate highly qualified technical and management personnel,personnel. Competition for whom competitionthese persons is intense. From time to time, the Companywe also employsemploy independent contractors to support itsour research and development, marketing, sales and support and administrative organizations. The Company'sOur employees are not represented by any collective bargaining unit and the Company haswe have never experienced a work stoppage. The Company believes itsWe believe that our relations with itsour employees are good. Facilities The Company'sFACILITIES Our headquarters are currently located in a leased facility in New York City consistingand consist of approximately 12,00020,000 square feet of office space, a majority of which is under a five-year lease with four yearsapproximately six months remaining. The Company intendsWe have also entered into two six-month leases for a total of 3,943 square feet of office space in New York City. We intend to relocate itsour headquarters atin the endsecond quarter of 19981999 to a larger facility and is currently evaluatinghave entered into a numberfifteen-year lease for approximately 47,000 square feet of locationscommercial space in the greater New York City area. The Company has also leasedfor this purpose. We lease approximately 1,200 square feet of office space in San Francisco for itsour West Coast sales office. Legal Proceedings ThereIn connection with our acquisition of Azazz, we assumed a month-to-month lease for approximately 4,000 square feet of office space in Kirkland, Washington. In connection with our acquisition of Attitude Network, we assumed a month-to-month lease for approximately 750 square feet in Naples, Florida and approximately 3,000 square feet in New York, New York. We believe that additional commercial space will be available for lease at market rates. Our principal web server equipment and operations are maintained by our personnel at the New York Teleport facility in Staten Island, New York under a Data Center Space Lease with Telehouse International Corporation of America for 2,800 square feet of commercial space for a term of three years. Web server equipment relating to shop.theglobe.com is located with and maintained by Exodus Communications, Inc. in Seattle, Washington. Additionally, we maintain computer hardware, servers and operations relating to Attitude Network in Herndon, West Virginia, which are hosted by Frontier, GlobalCenter, and in London, England which are hosted by Telehouse International. LEGAL PROCEEDINGS From time to time we are named in claims arising in the ordinary of business. Currently, no material legal proceedings or claims are pending against or involve us that, in the opinion of management, could reasonably be expected to the Company's knowledge, threatened against the Company.have a material adverse effect on us. -65- MANAGEMENT Executive Officers and DirectorsEXECUTIVE OFFICERS AND DIRECTORS The following table sets forth the names, ages and positions of the Company'sour executive officers and directors. ExecutiveOur board of directors appoints executive officers. Our executive officers are appointed by, and serve at the discretion of the Board of Directors.our board. All directors hold office until the annual meeting of our stockholders of the Company following their election or until their successors are duly elected and qualified. Name Age Position ---- ---- ---------------------- -------- --------------------------------------------- Michael S. Egan............ 58Egan....... 59 Chairman Todd V. Krizelman.......... 24Krizelman..... 25 Co-Chief Executive Officer, Co-President and Director Stephan J. Paternot........ 24Paternot... 25 Co-Chief Executive Officer, Co-President, Secretary and Director Dean S. Daniels....... 41 Vice President and Chief Operating Officer Edward A. Cespedes......... 32Cespedes.... 33 Vice President of Corporate Development and Director Francis T. Joyce........... 45Joyce...... 46 Vice President, Chief Financial Officer and Treasurer Rosalie V. Arthur.......... 39Arthur..... 40 Director Henry C. Duques....... 56 Director Robert M. Halperin......... 70Halperin.... 71 Director David Horowitz............. 69H. Horowitz..... 70 Director H. Wayne Huizenga.......... 60Huizenga..... 61 Director MichaelMICHAEL S. Egan.EGAN. Mr. Egan has served as our Chairman of theglobe.com since August 1997. As such, Mr. Egan serves as Chairmanthe chairman of the Boardour board of Directorsdirectors and as an executive officer of the Company with primary responsibility for day-to-day strategic planning and financing arrangements. Mr. Egan has been the controlling investor of Dancing Bear Investments, a privately held investment company, since 1996. Dancing Bear Investments holds a controlling interest in us. From 1986 to 1996, he was the majority owner and Chairman of Alamo Rent-A-Car, Inc. ("Alamo"), now a subsidiary of Republic Industries, Inc.Industries. Mr. Egan began his career with Alamo in 1976 and held various management and ownership positions during this period until he bought a controlling interest in 1986. Mr. Egan is also Chairman and Chief Executive Officer of Certified Vacations, a wholesale tour operator, and Chairman of AutobyInternet.operator. Mr. Egan is a director of Florida Panthers Holdings, Inc. Mr. Egan began in the car rental business with Olins Rent-A-Car, where he held various positions, including President. Prior toBefore acquiring Alamo, Mr. Egan held various administrative positions at Yale University and administrative and teaching positions at the University of Massachusetts at Amherst. Mr. Egan is a graduate of Cornell University, where he received a bachelor'sBachelor's degree in Hotel Administration. ToddTODD V. Krizelman.KRIZELMAN. Mr. Krizelman co-founded the Companyus in the fall of 1994. He is our Co-Chief Executive Officer and Co-President of the Company and has served in various capacities with the Companyus since itsour founding. Mr. Krizelman graduated from Cornell University in 1996, where he received a bachelor'sBachelor's degree in Biology. StephanSTEPHAN J. Paternot.PATERNOT. Mr. Paternot co-founded the Companyus in the fall of 1994. He is our Co-Chief Executive Officer, Co-President and Secretary of the Company and has served in various capacities with the Companyus since itsour founding. Mr. Paternot graduated from Cornell University in 1996, where he received bachelor'sBachelor's degrees in Business and Computer Science. Edward-66- DEAN S. DANIELS. Mr. Daniels was appointed our Vice President and Chief Operating Officer in August 1998. From February 1997 until joining us, Mr. Daniels served as Vice President and General Manager of CBS New Media, a subsidiary managing all of CBS Television Network's activity on the Internet. From March 1996 to February 1997, Mr. Daniels was the Director of Interactive Services at CBS News. From 1994 to 1996, Mr. Daniels served as Director of Affiliate News Services at CBS NEWSPATH. From 1992 to 1994, Mr. Daniels was Director of News of WCBS-TV, a CBS owned television station in New York. Before that time, Mr. Daniels held various positions at WCBS-TV, including executive producer, and was the recipient of four Emmy Awards. EDWARD A. Cespedes.CESPEDES. Mr. Cespedes was appointed Vice President of Corporate Development in July 1998 and has served as a directorone of the Companyour directors since August 1997. As Vice President for Corporate Development, Mr. Cespedes has primary responsibility for corporate development opportunities including mergers and acquisitions. Mr. Cespedes is also a Managing Director of Dancing Bear Investments. Mr. Cespedes joined Dancing Bear Investments at its inception in 1996, where his responsibilities include venture capital investments, mergers and acquisitions and finance. Prior toBefore joining Dancing Bear Investments, Mr. Cespedes served as Director of Corporate Finance for Alamo in 1996, where he was responsible for general corporate finance in the United States and in Europe. From 1988 to 1996, Mr. Cespedes worked in the Investment Banking Division of J.P. Morgan & Company, where he most recently focused on mergers and acquisitions. Mr. Cespedes also serves on the board of directors of AutobyInternet. Mr. Cespedes received a bachelor'sBachelor's degree in International Relations from Columbia University. FrancisFRANCIS T. Joyce.JOYCE. Mr. Joyce was appointed our Vice President, Chief Financial Officer and Treasurer of the Company in July 1998. From 1997 until joining the Company,us, Mr. Joyce served as Chief Financial Officer of the Reed Travel Group, a division of Reed Elsevier Plc, which is an international publisher of travel information. From 1994 to 1997, Mr. Joyce was the Chief Financial Officer at Alexander Consulting Group, a division of Alexander & Alexander Services, Inc., an international professional services firm, which included a human resources consulting firm, an insurance brokerage unit and an executive planning life insurance unit. From 1988 to 1994, Mr. Joyce worked as a Senior Vice President and controller at Bates Worldwide, a division of Saatchi & Saatchi Co., an advertising firm. Mr. Joyce received a Bachelor of Science in Accounting from the University of Scranton and a Master of Business Administration from Fordham University. He is a Certified Public Accountant. RosalieROSALIE V. Arthur.ARTHUR. Ms. Arthur has served as a directorone of the Companyour directors since August 1997. Ms. Arthur is a Senior Managing Director and Vice President of Mergers and Acquisitions of Dancing Bear Investments. She currently serves on the Board of Directors of Dancing Bear Investments and several of its affiliated companies. She also served on the Board of Directors of Alamo Rent-A-Car and affiliated entities and Nantucket Nectars. Prior toBefore joining Dancing Bear Investments, she served as Chief of Staff and Financial Counselor to the Chairman of Alamo from 1986 to 1996, when the Companycompany was sold. Ms. Arthur was the Manager of Financial Reporting at Sensormatic Electronics Corporation from 1984 to 1986 and worked in the audit department of KPMG Peat Marwick from 1980 to 1984. Ms. Arthur received her Bachelor of Science in Accounting from the University of South Florida. She is a Certified Public Accountant. Robert-67- HENRY C. DUQUES. Mr. Duques has served as one of our directors since September 1998. Mr. Duques is Chairman and Chief Executive Officer of First Data Corporation, a position he has held since April 1989. From September 1987 to 1989, he served as President and Chief Executive Officer of the Data Based Services Group of American Express Travel Related Services Company, Inc., the predecessor to First Data Corporation. He was Group President of Financial Services and a member of the board of directors of Automatic Data Processing, Inc. from 1984 to 1987. Mr. Duques is currently a director of Unisys Corporation. Mr. Duques holds a Bachelor of Business Administration in Accounting and an MBA in Accounting and Finance from George Washington University. ROBERT M. Halperin.HALPERIN. Mr. Halperin has served as a directorone of the Companyour directors since 1995. HeMr. Halperin has acted as an advisor to Greylock Management, a venture capital firm, for the past five years. He is a member of the board of directors of Avid Technology, Inc. In addition, Mr. Halperin serves on the Board of Directors of the Associates of Harvard Business School, the Harvard Business School Publishing Co. and Stanford Health Services and also is a Life Trustee of the University of Chicago. He is the former Vice Chairman of Raychem Corporation's Board of Directors and also served as its President and Chief Operating Officer. Mr. Halperin joined Raychem Corporation in 1957. Mr. Halperin received a masterMaster of business administrationBusiness Administration degree from Harvard Business School, and he earned a bachelor'sBachelor's degree in liberal arts from the University of Chicago and a bachelor'sBachelor's degree in Mechanical Engineering from Cornell University. David Horowitz.DAVID H. HOROWITZ. Mr. Horowitz has served as a Directorone of the Companyour directors since December 1995. HeMr. Horowitz has acted as an investor and consultant in the media and communications industries for at least the past five years, and as a consultant to the American Society of Composers, Authors and Publishers, and a Lecturer at the Columbia University School of Law. From 1973 to 1984, Mr. Horowitz was an officer and director of Warner Communications, Inc., and until 1985 he was President and CEO of MTV Networks, Inc. Mr. Horowitz is a graduate of Columbia University, where he received a bachelor'sBachelor's degree, and is a graduate of Columbia Law School. H. Wayne Huizenga.WAYNE HUIZENGA. Mr. Huizenga has served as a directorone of the Companyour directors since July 1998. Mr. Huizenga has served as the Chairman of the Board of Republic Industries, Inc.AutoNation since August 1995, as its Co-Chief Executive Officer since October 1996 and as its Chief Executive Officer from August 1995 until October 1996. Mr. Huizenga also serves as the Chairman of the Board and Chief Executive Officer of Republic Services, Inc., as the Chairman of the Board of Florida Panthers Holdings, Inc. and, as the Chairman of the Board of Extended Stay America, Inc. and a director of NationsRent, Inc. From September 1994 until October 1995, Mr. Huizenga served as the Vice Chairman of Viacom Inc. ("Viacom"), and as the Chairman of the Board of Blockbuster Entertainment Group, ("Blockbuster"), a division of Viacom. From April 1987 through September 1994, Mr. Huizenga served as the Chairman of the Board and Chief Executive Officer of Blockbuster. In September 1994, Blockbuster merged into Viacom. In 1971, Mr. Huizenga co-founded Waste Management, Inc. and served in various capacities, including President, Chief Operating Officer and a director from its inception until 1984. Mr. Huizenga also owns or controls the Miami Dolphins and Florida Marlins professional sports franchises, as well asfranchise, and Pro Player Stadium, in South Florida. The Company currently intends to appoint an additional member to the Board of Directors. This Board member will be a nominee of Michael S. Egan. Key Employees-68- KEY EMPLOYEES The following table sets forth the names and positions of the Company'sour key employees. Name Position ---- -------- Susan Berkowitz Director of Sales and Marketing Vance Huntley Director of Technology Esther Loewy Director of Communications Will Margiloff Director of Advertising Sales Richard Mass General Counsel David Tonkin Director of Human Resources Susan Berkowitz. Ms. Berkowitz joined theglobe.com in 1996 as Director of Sales and Marketing. Before joining theglobe.com, Ms. Berkowitz was the Director of Media Ventures at SPIN Magazine from 1994 to 1996. Prior to that time, Ms. Berkowitz was hired to build a new worldwide Entertainment Marketing division for J. Walter Thompson from 1993 to 1994. Prior to that time, Ms. Berkowitz was a Vice President at Chase Manhattan Bank in the Real Estate Investment Banking division from 1987 to 1993. Vance Huntley.VANCE HUNTLEY. Vance Huntley joined theglobe.comus in August 1995 as our Director of Technology. Between 1991 and 1994, Mr. Huntley held software development positions with Delta-Epsilon Software and the Cornell Institute of Social Economic Research. In 1994 Mr. Huntley developed a Transmission Electron Microscopy simulation for the Cornell Materials Science Center while completing his BS in the Applied & Engineering Physics program at Cornell University. In 1990, Mr. Huntley wrote simulation software at the Lawrence Livermore National Laboratory Supercomputing Center. Esther Loewy.ESTHER LOEWY. Ms. Loewy joined theglobe.comus in May 1997 as our Director of Communications. As such, Ms. Loewy is responsible for managing the in-house communications department for the Company as well asand the direction of theglobe.com'sour media and public relations. Before joining theglobe.com,us, Ms. Loewy was a consultant for the @Cafe in New York and other media companies from 1995 to 1997. From 1992 to 1995 Ms. Loewy was a Senior Account Executive at Charles Levine Communication. Will Margiloff.WILL MARGILOFF. Mr. Margiloff joined theglobe.comus in March 1998 as our Director of Advertising Sales. Mr. Margiloff is responsible for the management and direction of theglobe.com'sour sales force in New York and San Francisco, as well asand the expansion of the Company'sour advertising efforts both domestically and internationally. Before joining theglobe.com,us, from 1997 to 1998 Mr. Margiloff was the Vice President of East Coast Sales for 24/7 Media. From 1995 to 1998 Mr. Margiloff held the senior sales management position at software site Jumbo! David Tonkin.RICHARD W. MASS. Mr. Mass was appointed our General Counsel in September 1998. From 1994 until joining us, Mr. Mass served as a senior attorney supporting AT&T's Internet services and was also the chief counsel for Downtown Digital, AT&T's digital production facility that developed interactive television programming and Web sites. From 1992 to 1994, Mr. Mass was an attorney at Gray Cary Ware & Freidenrich in Palo Alto, California. From 1991 to 1992, Mr. Mass was a Visiting Assistant Professor of Law at the University of Miami and from 1987 to 1990 Mr. Mass was an attorney at Proskauer, Rose, Goetz & Mendelsohn in New York. Mr. Mass received a Bachelor of Arts in Economics from Williams College and received a law degree from Stanford Law School. DAVID TONKIN. Mr. Tonkin joined theglobe.comus in May 1998 as our Director of Human Resources. Mr. Tonkin is responsible for managing the recruiting, hiring and human resource administration of all employees at theglobe.com. Before joining theglobe.com,us, from 1995 to 1998 Mr. Tonkin worked as a Senior Resource Manager for Knowledge Transfer International, responsible for recruiting, developing and managing consulting staffing services. Prior toBefore that time, from 1994 to 1995, Mr. -69- Tonkin worked as Human Resource Manager for NightRider (Alco Management Service). From 1993 to 1994 Mr. Tonkin worked as Operations Manager for Premier Shoe Company. Board CommitteesBOARD COMMITTEES The Audit Committee of the Boardour board of Directorsdirectors reviews and monitors theour corporate financial reporting and theour internal and external auditsaudits. Some of these tasks include reviewing and monitoring the Company, including, among other things, the Company'sfollowing: o our control functions,functions; o the results and scope of the annual audit and other services provided by the Company'sour independent accountants,accountants; and the Company'so our compliance with legal matters that have a significant impact on the Company'sour financial condition. The Audit Committee will consultconsults with the Company'sour management and the Company'sour independent accountants prior tobefore the presentation of financial statements to stockholders and, as appropriate, initiates inquiries into aspects of the Company'sour financial affairs. In addition, the Audit Committee has the responsibility to consider and recommend the appointment of, and to review fee arrangements with, the Company'sour independent accountants. The current members of the Audit Committee are Messrs. Halperin and Horowitz and Ms. Arthur. The Compensation Committee of the Boardour board of Directorsdirectors reviews and makes recommendations to the Boardour board regarding the Company'sour compensation policies and all forms of compensation to be provided to our executive officers and directorsdirectors. Some of these tasks include reviewing and monitoring the Company, including, among other things,following: o annual salaries and bonusesbonuses; and o stock option and other incentive compensation arrangements of the Company.arrangements. In addition, the Compensation Committee reviews bonus and stock compensation arrangements for all of our other employees of the Company.employees. The current members of the Compensation Committee are Messrs. Egan, Halperin and Horowitz and Ms. Arthur. Prior toBefore July 15, 1998, the Compensation Committee consisted of Messrs. Egan, Halperin, Krizelman and Paternot. Stock option grants will be approved, at the election of the Compensation Committee, by either the entire Boardboard or a subcommittee of the Compensation Committee consisting of Messrs. Horowitz and Halperin. The Nominating Committee of the Boardour board of Directorsdirectors makes recommendations to the Boardour board of Directorsdirectors regarding nominees for the Boardour board of Directors.directors. The current members of the Nominating Committee are Messrs. Egan, Krizelman and Paternot and Ms. Arthur. Executive Officers ExecutiveEXECUTIVE OFFICERS Our board of directors appoints our executive officers. Our executive officers of the Company are appointed by the Board of Directors and serve at the discretion of the Boardour board of Directors. Directors' Compensationdirectors. -70- DIRECTORS' COMPENSATION Directors who are also our employees of the Company receive no compensation for serving on the Boardour board of Directors. With respect to Directors who are not employees of the Company ("Non-Employee Directors"), the Company intendsdirectors. We intend to reimburse suchnon-employee directors for all travel and other expenses incurred in connection with attending such Boardboard of Directorsdirectors and committee meetings. Non-Employee DirectorsNon-employee directors are also eligible to receive automatic stock option grants under our 1998 stock option plan. Under the 1998 Plan. The 1998 Plan provides thatstock option plan each eligible Non-Employee Directornon-employee director as of July 13, 1998 will receive an initial grant of options to acquire 50,000 shares of Common Stock, and each Director who becomes an eligible Non-Employee Director after such date will receivereceived an initial grant of options to acquire 25,000 shares of Common Stock.our common stock. Each director who became an eligible non-employee director for the first time after July 13, 1998 received an initial grant of options to acquire 12,500 shares of our common stock. In addition, each eligible Non-Employee Directornon-employee director will receive an annual grant of options to acquire 7,5003,750 shares of Common Stockour common stock on the first business day following each of the Company'sour annual meeting of shareholders that occurs while the 1998 Planstock plan is in effect. All suchof these stock options will be granted with per share exercise prices equal to the fair market value of the Common Stockour common stock as of the date of grant. Executive CompensationEXECUTIVE COMPENSATION The following table sets forth information concerning compensation for services in all capacities awarded to, earned by or paid by us to the Company'sour Chairman, Co-Chief Executive Officers (collectively, the "Named Executives") during the year ended December 31, 1997: SUMMARY COMPENSATION TABLE (1) Long-Term Compensation ------------ Number of Securities Underlying Annual Compensation Securities ------------------- Underlying Bonus Options All Other Name and Principal Position Salary($) ($) (#) Compensation($)(2) - --------------------------- -------- ------ ----------- ----------------- Todd V. Krizelman, $76,000 $18,750 289,951 $500,000 Co-Chief Executive Officer and Co-President Stephan J. Paternot, $76,000 $18,750 289,951 $500,000 Co-Chief Executive Officer, Co-President and Secretary - ---------------------- (1) The Company did not have anyour three other most highly compensated executive officers during this period.the last two fiscal years: -71-
SUMMARY COMPENSATION TABLE Long-Term Annual Compensation Compensation -------------------------------- --------------- Number of Securities Name and Principal Underlying All Other Position Year (1) Salary ($) Bonus ($) Options (#) Compensation($)(3) - ------------------------- ---------- ----------- --------- ------------ ------------------ Michael S. Egan(4),..... 1998 -- --(5) 160,000 -- Chairman 1997 -- -- -- -- Todd V. Krizelman,...... 1998 $140,554 --(5) 150,250 -- Co-Chief Executive -- -- 100,000 (9) -- Officer and 1997 $ 76,000 $18,750 144,976 $500,000 Co-President Stephan J. Paternot,.... 1998 $140,554 --(5) 150,250 -- Co-Chief Executive -- -- 100,000 (9) -- Officer, Co-President 1997 $ 76,000 $18,750 144,976 $500,000 and Secretary Edward Cespedes,(6)..... 1998 $ 83,625 --(5) 53,750 -- VP Corporate -- -- 25,000 (10) -- development Frank Joyce, CFO(7)..... 1998 $ 80,769 -- 112,500 -- Dean Daniels, COO(8).... 1998 $ 80,731 -- 112,500 -- - ------------------- (1) We do not have any executive officers other than those named in the table. (2) Other than Mssrs. Krizelman and Paternot, we did not have any other executive officers whose aggregate salary, bonus and other compensation exceeded $100,000 during the fiscal year ended December 31, 1997. (3) Reflects a one-time payment of $500,000 associated with our sale of preferred stock and warrants to Dancing Bear Investments in August 1997. (4) Mr. Egan became an executive officer in July 1998. We did not pay Mr. Egan a base salary in 1998. (5) Included in long-term compensation are 35,000, 50,000, 50,000 and 25,000 options granted in January 1999 at an exercise price of $31.50 related to bonuses earned in 1998 for Messrs. Egan, Krizelman, Paternot and Cespedes, respectively. (6) Mr. Cespedes became an officer in July 1998. (7) Mr. Joyce became an officer in July 1998. (8) Mr. Daniels became an officer in August 1998. (9) Represents the transfer of 100,000 Series E Warrants from Dancing Bear Investments, Inc. at an exercise price of approximately $2.91. (10) Represents the transfer of 25,000 Series E Warrants from Dancing Bear Investments, Inc. at an exercise price of approximately $2.91.
-72- The following table sets forth, as of $500,000 associated withDecember 31, 1998, for each of the Company's saleexecutives listed in the Summary Compensation table (a) the total number of Preferred Stockunexercised options for common stock (exercisable and Warrants to Dancing Bear Investments in August 1997. 1997 YEAR END OPTION VALUES (1) Number of Value of Securities Unexercised Underlying In-the-Money Unexercised Options Options at Fiscal at Fiscal Year-End (#) Year-End ($)(2) --------------------------------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ---------------------- ----------- ------------- ----------- ------------- Todd V. Krizelman 50,000 289,951 $68,000 $295,750 Stephan J. Paternot 50,000 289,951 $68,000 $295,750 (1) The Named Executives did not exercise any options in 1997. (2) Based on a per share fair marketunexercisable) held and (b) the value of Common Stock equal to $ ,those options that were in-the-money on December 31, 1998 based on the difference between the closing price of our common stock on December 31, 1998 and the exercise price of the options on that date.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND 1998 YEAR END OPTION VALUES Number of Securities Underlying Value of Unexercised Unexercised Stock Options at In-the-Money Stock Options Fiscal Year-End (#) at Fiscal Year-End ($)(2) ------------------------------- -------------------------- Shares Acquired on Value Name Exercise (#)(1) Realized($) Exercisable Unexercisable Exercisable Unexercisable - ------------------- --------------- ----------- ------------- --------------- ------------- --------------- Michael Egan....... -- -- 6,250 118,750 149,219 2,835,156 Todd Krizelman..... -- -- 107,488 172,738 3,474,226 4,725,770 Stephan Paternot... -- -- 107,488 172,738 3,474,226 4,725,770 Edward Cespedes.... -- -- 6,250 22,500 149,219 537,188 Frank Joyce........ -- -- -- 112,500 -- 2,804,063 Dean Daniels....... -- -- -- 112,500 -- 2,685,938 - ------------------- (1) The named executive officers did not exercise any options in 1998. (2) Based on a per share fair market value of Common Stock equal to $32.875, as of December 31, 1998. OPTIONS GRANTS IN 1997 Potential Realizable Value at Assumed Rates Number of Percent Exercise of Stock Price Securities of Options or Appreciation for Underlying Granted to Base Option Term (1) Options Employees Price Expiration ---------------- Name Granted(#) in 1997 ($/sh) Date 5% 10% - ------------------ --------- --------- ------- ---------- --------- ----- Todd V. Krizelman 289,951 37% $0.35 May 2007 $172,348 $438,705 Stephan J. Paternot 289,951 37% $0.35 May 2007 $172,348 $438,705 - -------------- (1) These amounts represent certain assumed rates of appreciation only and are displayed in connection with SEC disclosure rules. Actual gains, if any, on stock option exercises are dependent on future performance of the Common Stock.
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OPTION GRANTS IN 1998 Potential Realizable Percent of Value at Assumed Rates Number of Total of Stock Price Securities Options Exercise Appreciation for Option Underlying Granted to or Base Term (2) Options Employees Price ----------- Granted(#)(1) in 1998 ($/sh) Expiration Date 5% 10% - -------------------------------------------------------------------------------------------------------- Michael Egan........ 25,000 (3) 2.72% 9.00 July 2008 $114,501 $ 358,592 100,000 (4) 10.90% 9.00 July 2008 $566,005 $1,434,368 Todd Krizelman...... 250 (5) 0.03% 9.00 July 2008 $ 1,415 $ 3,586 100,000 (4) 10.90% 9.00 July 2008 $566,005 $1,434,368 Stephan Paternot.... 250 (5) 0.03% 9.00 July 2008 $ 1,415 $ 3,586 100,000 (4) 10.90% 9.00 July 2008 $566,005 $1,434,368 Edward Cespedes..... 25,000 (3) 2.72% 9.00 July 2008 $141,501 $ 358,592 3,750 (6) 0.41% 9.00 July 2008 $ 21,225 $ 53,789 Frank Joyce......... 87,500 (7) 9.54% 7.65 July 2008 $420,966 $1,066,811 25,000 (8) 2.72% 9.00 July 2008 $141,501 $ 358,592 Dean Daniels........ 87,500 (9) 9.54% 9.00 September 2008 $495,255 $1,255,072 25,000(10) 2.72% 9.00 September 2008 $141,501 $ 358,592 - ------------------ (1) In the event of a change in control of the Company, all of these options become immediately and fully exercisable. (2) These amounts represent various assumed rates of appreciation only and are displayed in connection with SEC disclosure rules. Actual gains, if any, on stock option exercises are dependent on future performance of our common stock. (3) One-fourth of these options are exercisable. The remaining three-fourths will become exercisable with respect to one-third of the shares covered thereby on July 15 in each of 1999, 2000 and 2001. (4) These options become exercisable on July 15, 1999. (5) These options become exercisable on July 24, 1999. (6) These options become exercisable with respect to one-fourth of the shares indicated on July 31 in each of 1999, 2000, 2001 and 2002. (7) These options become exercisable with respect to one-third of the shares indicated on July 15 in each of 1999, 2000 and 2001. -74- (8) These options become exercisable with respect to one-seventh of the shares indicated on July 15 in each of 1999, 2000, 2001, 2002, 2003, 2004 and 2005. However, options covering 12,500 shares have accelerated vesting if specified financial targets are met in 1999. (9) These options become exercisable with respect to one-third of the shares indicated in September in each of 1999, 2000 and 2001. (10) These options become exercisable with respect to one-seventh of the shares indicated in September each of 1999, 2000, 2001, 2002, 2003, 2004 and 2005. However, options covering 12,500 shares have accelerated vesting if specified financial targets are met in 1999.
EMPLOYMENT AGREEMENTS CEO Employment AgreementsAgreements: On August 13, 1997, the Companywe entered into employment agreements (each a "Chief Executive Employment Agreement") with our co-CEOs, Todd V. Krizelman and Stephan J. Paternot. Pursuant toEach CEO agreement provides for the termsfollowing: o employment as one of each Chief Executive Employment Agreement, each individual will be employed as an Executive (as defined therein) of the Company. Each Chief Executive Employment Agreement provides forour executives; o an annual base salary of $125,000 with eligibility to receive annual increases amounting to no less than 15% of the Executive'sexecutive's then-base salary. Pursuant to the Chief Executive Employment Agreements, each of the Executives also receivedsalary; o a one-time payment of $500,000 associated with the sale of Preferred Stock and Warrants to Dancing Bear Investments, and are entitled to andiscretionary annual cash bonus, which will be assessedawarded at the Board'sour board's discretion and upon the achievement of target performance objectives set forthpresented in the Company's budget. Each Executive is also entitledour budget; and o a right to participate in theour stock option plans of the Company as well asand all health, welfare, and other benefit plans provided by the Companyus to itsour most senior executives. Each of the Chief Executive Employment AgreementsCEO agreements is for a term expiring on August 13, 2002, unless terminated for Cause (as definedwith possible earlier termination as provided in each Chief Executive Employment Agreement) or Disability (as defined in each Chief Executive Employment Agreement).CEO agreement. Each of the Chief Executive Employment AgreementsCEO agreements provides that, in the event of termination by us without cause, the Company without Cause, the Executiveexecutive will be entitled to receive from the Company: (i)us: o any accruedearned and unpaid base salary, (ii)salary; o reimbursement for any reasonable and necessary monies advanced or expenses incurred in connection with the Executive's employment, (iii)executive's employment; o a pro-rata portion of the annual bonus for the year of terminationtermination; and (iv)o for one year following such termination or the remainder of the term of the Chief Executive Employment Agreement,CEO agreement, whichever is less, continued salary payments and employee benefits. In addition, termination without Causecause automatically triggers the vesting of all stock options held by the Executive.executive. In the event of a Changeour change in Control (as defined in the Chief Executive Employment Agreement)control or a dissolution, of the Company, each Executiveexecutive may elect to terminate his employment by delivering a notice within 60 days to the Companyus and receive (i)(1) any accruedearned and unpaid base salary as of the termination date and (ii)(2) an amount reimbursing the Executiveexecutive for expenses incurred on our behalf of the Company prior tobefore the termination date. -75- Each Chief Executive Employment AgreementCEO agreement contains a covenantprovision that the CEO will not to compete with the Companyus for a period of five years from the date of each Chief Executive EmploymentCEO Agreement or, in the case of termination without Causecause or after a Changechange in Control,control, the earlier of a period of one year immediately following termination of employment or five years from the consummationdate of our initial public offering. Chief Operating Officer Employment Agreement. We have entered into an employment agreement with Dean S. Daniels. The following are key terms of the Daniels employment agreement: o employment as our Chief Operating Officer effective August 31, 1998; o an annual base salary of not less than $250,000 per year; o an annual cash bonus of $50,000; and o stock options to purchase 112,500 shares of our common stock. The options were granted at an exercise price of $9.00 per share. Of these options, 87,500 will vest with respect to one-third of the shares on each of the first three anniversaries of the date of grant, and 25,000 will vest with respect to one-seventh of the shares on each of the first seven anniversaries of the date of grant. The Daniels employment agreement also provides for the accelerated vesting of an aggregate of 12,500 of these options upon our attainment of financial targets in our 1999 fiscal year. In addition, the Daniels employment agreement is for a term expiring on August 31, 2001, with possible earlier termination as provided in the Daniels employment agreement. The Daniels employment agreement provides that, in the event of termination by us without cause, Mr. Daniels will be entitled to receive from us: o any earned and unpaid base salary as of the termination date and salary continuation during a one-year non-competition period following termination; o reimbursement for any and all reasonable monies advanced or expenses incurred in connection with his employment; and o this Offering.annual bonus for the year of termination. In addition, termination without cause automatically triggers the vesting of all options held by Mr. Daniels. The Daniels employment agreement contains a provision that he will not compete with us for a period of one year following the date of his termination of employment. Chief Financial Officer Employment Agreement. On July 13, 1998, the Companywe entered into an Employment Agreementemployment agreement with Francis T. Joyce (the "Joyce Employment Agreement"). Pursuant toJoyce. The following are the key terms of the Joyce Employment Agreement, he will be employedemployment agreement: o employment as our Chief Financial Officer ("CFO") of the Company. The Joyce Employment Agreement provides forOfficer; o an annual base salary of not less than $200,000 per year with eligibility to receive annual increases in base salary as determined by theour Co-Chief Executive Officers and Co-Presidents of the Company. Mr. Joyce will also receiveCo-Presidents; o an annual cash bonus of $50,000.$50,000; and -76- o Mr. Joyce shall be grantedreceived a stock options (the "Options")option grant to purchase 175,000112,500 shares of Common Stock, withour common stock, 87,500 of which have an exercise price per share equal to the fair market value per share85% of Common Stock as of the date of the grant (which shall be 15% below the initial public offering price.) The Joyce Employment Agreement also provides As a result, we recorded a charge for the grantdeferred compensation expense of additional options upon the Company's attainment of certain financial targets$118,100 in the 1999third quarter of 1998, representing the difference between the deemed value of our common stock, the initial public offering price for accounting purposes, and 2000 fiscal yearsthe exercise price of these options at the date of grant. This amount is presented as a reduction of stockholders' equity and amortized over the vesting period of the Company.applicable options. The Options shallremaining options were granted at an exercise price of $9.00 per share. Of these options, 87,500 will vest with respect to one-third of the shares subject thereto on each of the first three anniversaries of the date of grant, and 25,000 will vest with respect to one-seventh of the shares on each of the first seven anniversaries of the date of grant. The Joyce Employment Agreementemployment agreement also provides for the accelerated vesting of an aggregate of 12,500 of these options upon our attainment of financial targets in our 1999 fiscal year. In addition, the Joyce employment agreement is for a term expiring on July 13, 2001, unless terminated for Cause (as definedwith possible earlier termination as provided in the Joyce Employment Agreement) or Disability (as defined in the Joyce Employment Agreement).employment agreement. The Joyce Employment Agreementemployment agreement provides that, in the event of termination by the Companyus without Cause,cause, Mr. Joyce will be entitled to receive from the Company (i)us: o any accruedearned and unpaid base salary (asas of the termination date)date and salary continuation during a non-competition period following termination which will be six months (oror one year, if the Company electswe elect to pay Mr. Joyce his salary during such period), (ii)this period; o reimbursement for any and all monies advanced or expenses incurred in connection with his employment,employment; and (iii)o a pro-ratapro rata portion of thehis annual bonus for the year of termination. In addition, termination without Causecause automatically triggers the vesting of all stock options held by Mr. Joyce that have not yet vested. The Joyce Employment Agreement contains a covenant not to compete with the Company for a periodJoyce. 1998 STOCK OPTION PLAN Our board of from six months (or one year, if the Company elects to pay Mr. Joyce his salary during such period) from the date of the Joyce Employment Agreement's termination.directors adopted our 1998 Stock Option Plan The Company's 1998 Stock Option Plan (the "1998 Plan") was adopted by the Board of Directorsstock option plan on July 15, 1998, and our stockholders approved by the stockholders of the Companyit as of July 15, 1998. In March 1999, our board of directors approved an amendment of our 1998 stock option plan in order to increase the number of shares authorized for issuance from 1,200,000 to 1,700,000 and to increase the amount of options which may be granted to an individual during any three consecutive calendar year period, subject to stockholder approval. The 1998 Planstock option plan provides for the grant of "incentiveincentive stock options"options intended to qualify under Section 422 of the IRS Code and stock options which do not so qualify. The granting of incentive stock options is subject to limitation as set forth in the 1998 Plan. Directors,Our and our subsidiaries' directors, officers, employees and consultants of the Company and its subsidiaries are eligible to receive grants under the 1998 Plan.stock option plan. The 1998 Planstock option plan also provides for discretionary stock bonus awards for some community leaders. The 1998 stock option plan is designed to comply with the requirements for "performance-based compensation" under Section 162(m) of the IRS Code, and the conditions for exemption from the short-swing profit recovery rules under Rule 16b-3 ofunder the Securities Exchange Act of 1934, as amended (the "Exchange Act").Act. -77- The purpose of the 1998 Planstock option plan is to strengthen the Company by providingprovide an incentive to itsour directors, officers, employees and consultants and thereby encouragingencourage them to devote their abilities and industry to the success of the Company's business enterprise. Optionsour business. The 1998 stock option plan is administered by and options may be granted by the Board or Committee (as defined below) in its discretion to directors, officers, employees and consultantsa stock option committee of the Company and its subsidiaries. In addition, directors of the Company who are not also employees of the Company or any of its subsidiaries are eligible to receive automatic formula option grants as provided in the 1998 Plan. Such formula option grants include an initial grant of options to acquire 50,000 shares to the eligible non-employee directors who served on the Board as of July 15, 1998 (25,000 shares to eligible non-employee directors who become directors for the first time after July 15, 1998) as well as annual grants of options to acquire 7,500 shares to eligible non-employee directors on the day following each annual shareholders meeting while the 1998 Plan is in effect. The terms and conditions of such options are set forth in the 1998 Plan. The 1998 Plan authorizes for issuance 1,800,000 shares of Common Stock, subject to adjustment as provided in the 1998 Plan. As of July 15, 1998, the Board of Directors approved for grant 200,000 options to each of Messrs. Krizelman and Paternot and 50,000 options to Mr. Cespedes. One-quarter of Mr. Cespedes' options are immediately vested. Additionally, the Company intends to grant, subject to Board of Directors or Committee approval, 200,000 options to Mr. Egan in connection with his appointment as an officer in the Company. Options will be granted by the Board of Directors or a committee (the "Committee") of the Board of Directorsour board comprised of two or more "non-employee directors" within the meaning of Rule 16b-3 and unless otherwise determined by the Boardour board of the Directors,directors, "outside directors" within the meaning of Section 162(m), whichwho will administer the 1998 Plan. See "-- Board Committees." No individual may be granted options with respect to more than a total of 500,000 shares during any three consecutive calendar year period understock option plan in our discretion. Generally, the 1998 Plan. Shares of Common Stock subject to the 1998 Plan may either be authorized and unissued shares or previously issued shares acquired or to be acquired by the Company and held in its treasury. Subject to the terms of the 1998 Plan, the Committeestock option committee has the right to grant options to eligible participants and to determine the terms and conditions of option agreements, including the vesting schedule and exercise price of such options. In addition, our directors who are not also employees are eligible to receive automatic formula option grants as provided in the 1998 stock option plan. Formula option grants include an initial grant of options to acquire 25,000 shares to the eligible non-employee directors who served on our board as of July 15, 1998, and 12,500 shares to eligible non-employee directors who become directors for the first time after July 15, 1998, and annual grants of options to acquire 3,750 shares to eligible non-employee directors on the day following each annual shareholders meeting. The 1998 Planstock option plan, as amended, authorizes for issuance 1,700,000 shares of our common stock, with adjustment in the case of changes in capitalization affecting the options. In January 1999, the compensation committee of our board of directors approved for grant 50,000 options to each of Messrs. Krizelman and Paternot, 35,000 options to Mr. Egan, 25,000 options to Mr. Cespedes and 15,000 options to Ms. Arthur pursuant to the plan as bonus payments for 1998, all of which were immediately vested. No individual may be granted options with respect to more than 500,000 shares during any three consecutive calendar year period. The 1998 stock option plan provides that the term of any option may not exceed ten years. In the event of a Changechange in Control (as defined in the 1998 Plan)control all outstanding options will become immediately and fully vested. If a participant's employment, (oror service as a director)director, is terminated following a Changechange in Control,control, any options vested at suchthat time will remain outstanding until the earlier of the first anniversary of such termination and the expiration of the option term. In order to prevent dilution or enlargementthe event of a change in capitalization, the rightsstock option committee will adjust the maximum number and class of participants,shares which may be granted under the 1998 Plan permitsstock option plan or to any individual in any three calendar year period, the Committee to make adjustments to the aggregate number and class of shares which are subject to the 1998 Plan or any option,outstanding options and to the purchase price of the option, and the number and class of shares to be paid orgranted to directors as formula option grants. We issued shares of our common stock to our community leaders under the amount to be received in connection with the realization1998 stock option plan. Each of any option, upon the occurrenceour community leaders, as of certain events as describedJuly 23, 1998, were issued 11 fully vested shares of our common stock, approximately 3,500 in the aggregate. As a result, we recorded a charge for compensation expense estimated at $31,500 in the fourth quarter of 1998 Plan.for the value of our common stock issued to our community leaders. 1995 Stock Option Plan The Company'sSTOCK OPTION PLAN Our 1995 Stock Option Plan,stock option plan, as amended, (the "1995 Plan"), was adopted by the Boardour board of Directorsdirectors on May 26, 1995. The 1995 Planstock option plan provides for the grant of incentive stock options and non-qualified stock options. Directors,Our directors, employees and consultants of the Company and itsour affiliates are eligible to -78- receive grants under the 1995 Plan.stock option plan. The 1995 Planstock option plan authorizes for issuance 1,582,000791,000 shares of Common Stock, subject toour common stock, with adjustment as provided in the 1995 Plan. Ascase of June 30, 1998, options relating to approximately 1,425,941 shares of Common Stock are outstanding under the 1995 Plan and approximately 12,001 shares remain subject to future option grants.changes in capitalization affecting options. The remaining options under the 1995 Planstock option plan may be granted by Messrs. Krizelman and Paternot pursuant tounder the terms of the 1995 Plan. The Company currently intendsstock option plan. AZAZZ.COM 1998 STOCK OPTION PLAN Prior to grant 500our acquisition of Azazz.com, Azazz.com had established its 1998 Stock Option Plan and granted options to purchase shares of Azazz.com common stock to its officers, directors, consultants and employees. As a result of our acquisition of Azazz.com, we assumed the obligations of Azazz.com under its stock plan, and the outstanding options granted under the plan were converted into options entitling each option holder to purchase shares of our common stock. The other terms of the converted options remain unchanged. No additional grants will be made under the Azazz.com stock plan. Generally, our compensation committee will administer and interpret the Azazz.com stock plan and its employees currently employeddeterminations are final. The compensation committee has the authority to make amendments or modifications to outstanding options consistent with the plan's terms. Except as otherwise provided in an option agreement, in the event of a change in control of Azazz.com, each converted option that is outstanding at that time will automatically accelerate so that the converted option will immediately prior to the date for the change in control be 100% vested and exercisable. The option will not accelerate, however, if and to the extent that, in connection with the change in control, it is either assumed by the Companysuccessor corporation or replaced with a comparable award for the purchase of shares of the stock of the successor corporation. Any such converted options held by an officer that are assumed or replaced in connection with Azazz.com's change in control and who have served priordo not otherwise accelerate at that time will be accelerated in the event that the officer's employment terminates within two years following the change in control, unless the officer's employment was terminated by the successor corporation for cause or by the officer without good reason. ATTITUDE NETWORK LTD. 1996 STOCK OPTION PLAN Prior to January 1, 1998our acquisition of Attitude Network, it had established the Attitude Network, Ltd. 1996 Stock Option Plan and 200granted options to purchase shares of Attitude Network common stock to its officers, directors, consultants and employees. As a result of our acquisition of Attitude Network, we assumed the obligations of Attitude Network under the Attitude Network stock option plan, and the outstanding options granted under the plan were converted into options entitling each option holder to purchase shares of our common stock, instead of Attitude Network common stock. The other terms of the converted options remain unchanged. No additional grants will be made under the Attitude Network stock option plan. Generally, our compensation committee will administer and interpret the Attitude stock plan and its employees currently employed bydeterminations are final. The compensation committee has the Company whose employment commenced after January 1, 1998. 401(k) Savings Plan theglobe.com hasauthority to make amendments or modifications to outstanding options consistent with the plan's terms. In the event of a change in control of Attitude Network, our board of directors must either provide -79- (a) for the substitution of any converted options outstanding at that time with options to purchase shares of the successor corporation, or (b) upon written notice to the optionee that the option must be exercised within 60 days of the date of such notice or it will be terminated. 401(K) SAVINGS PLAN We have established a savings and profit-sharing plan that qualifies as a tax-deferred saving plan under Section 401(k) of the Internal RevenueIRS Code (the "Savings Plan") for certainsome of our eligible employees of theglobe.com.employees. Under the Savings Plan,savings plan, participants may contribute up to 15% of their eligible compensation, up to $10,000, in any year on a pre-tax basis. Such employeeEmployee contributions are fully-vestedfully vested at all times. In addition, theglobe.comwe may, in itsour discretion, make additional contributions on behalf of participants. All amounts contributed under the Savings Plansavings plan are invested in one or more investment accounts administered by the plan administrator. 1999 EMPLOYEE STOCK PURCHASE PLAN Our board of directors adopted our 1999 Employee Stock IncentivePurchase Plan The Company intends,on February 18, 1999, subject to final approval by a majority of our stockholders present and represented at any special or annual meeting of the Boardstockholders held within 12 months after adoption of Directors,the plan. If the plan is not approved by a majority of the stockholders, it will not become effective. We intend to issuehave the plan qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. We will administer the plan in a manner consistent with the requirements of that section of the Internal Revenue Code. The purpose of the plan is to strengthen our company by providing our employees and our subsidiaries' employees the opportunity to acquire a proprietary interest in our company through the purchase of shares of Common Stockcommon stock at a discount. These purchases will be made through regular payroll deductions of up to 10% of a participant's gross cash wages, salary and overtime earnings for each pay period during an offering period. A committee consisting solely of no fewer than two non-employee directors appointed by our board will administer the Company's Community Leaders underplan. Each full-time employee who has completed six consecutive months of full-time employment with us or a stock incentive plan. Immediately followingsubsidiary and who is employed by us or a subsidiary may participate in the executionplan with respect to offering periods beginning after the six-month period. There will be four offering periods to purchase shares of the Underwriting Agreement,common stock during each twelve-month period. On the first day of each offering period, each participant is deemed to have been granted an option to purchase a maximum number of shares of common stock the fair market value of which is equal to o that percentage of the Company's Community Leaders, asparticipant's compensation which the participant has elected to have withheld multiplied by o the participant's compensation during the offering period then divided by o the applicable price at which the shares of July 23, 1998,common stock are being offered during that offering period. -80- The maximum number of shares of common stock that a participant may purchase during an individual offering period is 2,000. The offering price for shares for any offering period is the lower of 85% of the closing price of the stock on the first day or the last day of the offering period. Each participant will automatically purchase stock on the last day of the offering period with the accumulated payroll deductions in the participant's account at the time of purchase and at the offering price for that offering period. Upon termination of a participant's employment for any reason the participant's payroll deductions accumulated prior to such termination, if any, will be issued fully vestedapplied toward purchasing full shares of Common Stock (approximatelycommon stock in the aggregate), contingent uponthen-current offering period. Any cash balance remaining after the closingpurchase of shares in such offering period will be refunded to him or her and his or her participation in the plan will be terminated. In the event of a change in capitalization, appropriate and proportionate adjustments may be made by the committee in both the number and/or kind of shares to be purchased under the plan and in their purchase price, and the number and/or kind of shares to be purchased in the current offering period and their purchase price. Upon the occurrence of various corporate transactions, each participant during the offering period will be entitled to receive on the last day of the Offering. Compensation Committee Interlocksoffering period, for each share to be purchased as nearly as reasonably may be determined, the cash, securities and/or property which a holder of one share of the common stock was entitled to receive upon and Insider Participationat the time of such transaction. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION On July 15, 1998, Michael S. Egan, Robert M. Halperin, David H. Horowitz and Rosalie V. Arthur were appointed as members of the Compensation Committee. Prior to suchcompensation committee of our board. Before that date, the Compensation Committeecompensation committee was comprised of Messrs. Egan, Halperin, Krizelman and Paternot. Mr. Egan, will, effective as of July 22, 1998, also serveserves as anone of our executive officer of the Companyofficers in his role as Chairman. Mr. Egan is also the controlling investor of Dancing Bear Investments, and Ms. Arthur is a Senior Managing Director of Dancing Bear Investments. See "Certain Relationships and Related Transactions - ArrangementsTransactions-Arrangements with Entities Controlled by Michael Egan.Various Directors and Officers." It is contemplated thatAlthough Mr. Egan willdoes not receive a salary or bonus from the Company, however the Board of Directors approved a grant ofus, in 1998 we granted stock options covering 200,000to Mr. Egan for 100,000 shares of Common Stockour common stock under the Company's 1998 Stock Option Plan,stock option plan, as consideration for his performance of services in his capacity as an executive officer. Additionally, in January 1999, we granted stock options to Mr. Egan and Ms. Arthur for 35,000 and 15,000 shares, respectively, as bonus payments for 1998. In the past fiscal year, Mr. Egan has served as a director of AutobyInternet and Certified Vacations, entitiesan entity with which the Company haswe have recently begun e-commerceelectronic commerce arrangements. Key Man Insurance The Company doesKEY MAN INSURANCE We do not have and currently doesdo not intend to purchase key man insurance. Indemnification Agreements The Company hasINDEMNIFICATION AGREEMENTS We have entered into indemnification agreements with itsour directors and officers. These agreements provide, in general, that the Companywe shall indemnify and hold harmless such directors and officers to the fullest extent permitted by law against any judgments, fines, amounts paid in settlement, and -81- expenses, (includingincluding attorneys' fees and disbursements)disbursements, incurred in connection with, or in any way arising out of, any claim, action or proceeding, (whetherwhether civil or criminal)criminal, against, or affecting, suchthe directors and officers resulting from, relating to or in any way arising out of, the service of suchthe directors and officers as our directors and officers of the Company.officers. -82- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Arrangements with Entities Controlled by Michael Egan The Company has recentlyARRANGEMENTS WITH ENTITIES CONTROLLED BY VARIOUS DIRECTORS AND OFFICERS We entered into an e-commerceelectronic commerce contract with AutobyInternet,AutoNation, an entity affiliated with H. Wayne Huizenga, under which we have granted a right of first negotiation with respect to the exclusive right to engage in or conduct an automotive "clubsite" on theglobe.com. Additionally, AutoNation has agreed to purchase advertising from us for a three-year period at a price which will be adjusted to match any more favorable advertising price quoted to a third party by us, excluding various short-term advertising rates. In addition, we have entered into an electronic commerce arrangement with InteleTravel, an entity controlled by Michael S. Egan, pursuantunder which we developed a Web community for InteleTravel in order for its travel agents to whichconduct business through our Web site in exchange for access to InteleTravel customers for distribution of our products and services. We believe that the Company will pay AutobyInternet a fee for every new subscribing memberterms of theglobe.com referred to the Company by AutobyInternet. In addition, the Company hasforegoing arrangements are on comparable terms as if they were entered into an e-commerce arrangement with Certified Vacations, anotherunaffiliated third parties. During 1998, we received $83,300 from AutoNation and $265,000 from InteleTravel in connection with these arrangements. STOCKHOLDERS' AGREEMENT Messrs. Egan, Krizelman, Paternot and Cespedes, Ms. Arthur and Dancing Bear Investments, an entity controlled by Michael Egan. AsMr. Egan, entered into a stockholders' agreement under which the Egan group agreed to vote for some nominees of June 30, 1998, the Company had not paid any fees to AutobyInternet or received any revenues from Certified Vacations. Voting Agreement Messrs. Egan, Krizelman and Paternot expectgroups to enter into a Voting Agreement pursuant to which Mr. Egan agreesour board of directors and the Krizelman and Paternot groups agreed to vote for certain nominees of Messrs. Krizelman and Paternot to the Board of Directors and Messrs. Krizelman and Paternot agree to vote for Mr. Egan'sEgan group's nominees to the Board,our board, who will represent a majority of the Board.our board. Additionally, pursuant tounder the terms of the Voting Trust Agreement,stockholders' agreement, Messrs. Krizelman, Paternot and PaternotCespedes and Ms. Arthur have agreedgranted an irrevocable proxy to contributeDancing Bear Investments with respect to any shares whichthat may be acquired or beneficially owned by them pursuant toupon the exercise of outstanding Warrantswarrants transferred to each of them by Dancing Bear Investments to a voting trust controlled by Michael S. Egan. SuchInvestments. These shares will be voted by Michael S.Dancing Bear Investments, which is controlled by Mr. Egan. Dancing Bear Investments will have a right of first refusal upon transfer of these shares. The stockholders' agreement also provides that if the Egan group sells shares of our common stock and will be subject to restrictions on transfer for a periodwarrants representing 25% or more of years. The Voting Trust Agreement will also provide that Messrs. Egan,our outstanding common stock, including the warrants, in any private sale, the Krizelman and Paternot groups, Mr. Cespedes and Ms. Arthur will be subjectrequired to certain "tag-along"sell up to the same percentage of their shares as the Egan group sells. If the Egan group sells shares of our common stock or warrants representing 25% or more of our outstanding common stock, including the warrants, or the Krizelman and "drag-along" rightsPaternot groups collectively sell shares or warrants representing 7% or more of our shares and warrants in connection with any private sale, each other party to the stockholders' agreement, including entities controlled by them and their permitted transferees, may, at their option, sell up to the same percentage of securities of the Company after the Offering. Transactions with Directors, Officers andtheir shares. -83- TRANSACTIONS WITH DIRECTORS, EXECUTIVE OFFICERS AND 5% StockholdersSTOCKHOLDERS Since the Company'sour inception, the Company haswe have raised capital primarily through the sale of shares of its Preferred Stock.our common stock and preferred stock. The following table summarizes the shares of Common Stock and Preferred Stockour common stock purchased for greater than $60,000from us by our executive officers, directors and 5% stockholders of the Company and persons associated with them since the Company'sour inception. Executive Preferred Stock Officers, --------------------------------------------------Common Directors and Common 5% Stockholders Stock Series A Series B Series C Series D(1) SeriesE(2)- ----------------------------------------------------- ------------------- Dancing Bear Investments, Inc. (1)................. 6,046,774 Michael S. Egan (1)................................ 6,046,774 Robert M. Halperin (2)............................. 72,769 David H. Horowitz (3).............................. 78,472 Todd Krizelman(4).................................. 547,455 Stephan Paternot(5)................................ 600,000 - --------------- -------- -------- -------- -------- ----------- ---------- Dancing Bear(3) 51 10 Investments, Inc. Michael S.Egan(4) 51 10 Robert M. Halperin(5) 47,620 12,500 David Horowitz(6) 100,000 25,000 - -------------------- (1) Convertible into 8,047,5294,023,765 of the shares represents 25.5 shares of Common Stock. (2) Represents Warrantspreferred stock which were converted into 4,023,765 shares of our common stock upon our initial public offering. 2,023,009 of the shares represents warrants to purchase 10 shares of Series E Preferred Stock prior to the Offering and an aggregate of 4,046,0182,023,009 shares of Common Stock after the Offering. (3)our common stock. Dancing Bear Investments paid $20 million for its initial investment in the Seriesseries D Preferred Stockpreferred stock and the Warrants. (4)warrants. Upon our initial public offering, shares of the series D preferred stock were converted into 4,023,765 shares of our common stock. Includes the shares that Mr. Egan is deemed to beneficially own as the controlling investor of Dancing Bear Investments. (5)(2) Mr. Halperin paid $25,000.50 and $25,000$8,172 in 1998 in connection with the exercise of options for his Series42,709 shares of our common stock. Mr. Halperin paid $25,001 for the series B and Series C Preferred Stockpreferred stock issued in December 1995 and , respectively. (6)$25,000 for the series C preferred stock issued in November 1996. Upon our initial public offering, shares of the series B and the series C preferred stock were converted into 23,810 and 6,250 shares of our common stock. (3) Mr. Horowitz paid $3,111 in 1997 in connection with the exercise of options for 15,972 shares of our common stock. Mr. Horowitz paid $52,000 and $50,000 for his Seriesseries B and Series C Preferred Stockpreferred stock issued in December 1995 and , respectively.$50,000 for the series C preferred stock issued in November 1996. Upon our initial public offering, shares of the series B and series C preferred stock were converted into 50,000 and 12,500 shares of our common stock. (4) Mr. Krizelman paid $2,184 for his 525,000 shares of common stock issued in May 1995 and $3,500 for the series A preferred stock issued in November 1995. Upon our initial public offering, shares of the series A preferred stock were converted into 22,455 shares of common stock. (5) Mr. Paternot paid $2,496 for his 600,000 shares of common stock issued in May 1995. All of theour directors and executive officers of the Company are also parties to registration rights agreements with the Companyus which are described under "Description of Capital Stock--Registration Rights." The CompanyWe also has-84- have entered into indemnification agreements with itsour directors and officers. See "Management--Indemnification Agreements." Concurrently with our initial public offering, we sold 555,556 shares of our common stock to some of our officers and directors, their relatives and their business associates at the same price paid per share in the initial public offering. See "Principal Stockholders." -85- PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth information with respect to the beneficial ownership of our common stock as of July 24, 1998April 9, 1999 and as adjusted to reflect the sale of the shares offered hereby, by the Company hereunder, certain information with respect to the beneficial ownershipeach of the Common Stock of the Company by (i)following: o each person who is known by us to the Company tobeneficially own 5% or more of the outstanding shares of Common Stock, (ii)our common stock; o each of the Company's directors, (iii)our directors; o each of the Company'sour executive officers, and (iv)officers; o all of the directors and executive officers as a group.group; o each selling stockholder owning more than 1% of our common stock; and o other selling stockholders, each owning less than 1% of our common stock. The percentagestable below sets forth the selling stockholders. The total amount of shares to be sold in the table represents the amount of shares we expect may be sold in the offering. We are currently contacting other stockholders who may sell shares in the offering to determine whether or not they want to participate in the offering. If the selling stockholders collectively sell less than 2,000,000 shares in the offering, we will sell the difference in order for the total shares of Common Stock set forthcommon stock to be sold in the offering to be 4,000,000 shares. Unless otherwise indicated, the address of each person named in the table below assume that only the indicated person or group has exercised optionsis theglobe.com, inc., 31 West 21st Street, New York, New York 10010. The amounts and warrants which are exercisable within 60 days of July 24, 1998 and do not reflect the percentage of Common Stock which would be calculated if all other holderscommon stock beneficially owned are reported on the basis of currently exercisable options or Warrants had exercised their securities. See footnote 1 below. Percentage of Total Shares Shares of Common Stock Beneficially ------------------ Name Owned (1) Before Offering After Offering ---- ------------ ---------------- -------------- Dancing Bear Investments, 12,273,547 69.9% Inc. (2) 333 East Las Olas Blvd. Ft. Lauderdale, FL Michael S. Egan(3) 12,286,047 69.9 Todd V. Krizelman(4) 1,489,886 10.9 Stephan J. Paternot(5) 1,594,976 11.6 Edward A. Cespedes(6) 62,500 * * Francis T. Joyce(7) 0 * Rosalie V. Arthur(8) 62,500 * * Robert M. Halperin(9) 164,981 1.2 David Horowitz(10) 188,889 1.4 H. Wayne Huizenga(11) 12,500 * * All directors and 15,862,279 85.5% executive officers as a group (9 persons) (12) - ----------------------- *Less than one percent. (1) Beneficial ownership is determined in accordance with rulesregulations of the Securities and Exchange Commission (the "SEC"). In computinggoverning the numberdetermination of shares beneficially owned bybeneficial ownership of securities. Under the rules of the Commission, a person and the percentage ownershipis deemed to be a "beneficial owner" of a security if that person has or shares "voting power," which includes the power to vote or to direct the voting of Common Stock optionssuch security, or Warrants held by"investment power," which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person that are currently exercisable or exercisablehas a right to acquire beneficial ownership within 60 days of July 24, 1998 aredays. Under these rules, more than one person may be deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of each other person. (2) Includes: (a) 51 shares of Series D Preferred Stock, which will be converted into an aggregate of 8,047,529 shares of Common Stock upon consummationa beneficial owner of the Offering, (b) 3,726,018 sharessame securities and a person may be deemed to be a beneficial owner of Common Stock issuable following consummation of the Offering upon exercise of Warrants and (c) 500,000 shares of Common Stock issuable following consummation of the Offering, upon exercise of Warrants held by persons other than Dancing Bear Investments butsecurities as to which Dancing Bear Investments will have voting power upon exercise pursuant to a Voting Trust Agreement. (3) Includessuch person has no economic interest. The information set forth in the following table (1) assumes that the over-allotment option by the underwriters has not been exercised and (2) excludes any shares that Mr. Egan is deemed to beneficially own aspurchased in the controlling investor of Dancing Bear Investments: (a) 51 shares of Series D Preferred Stock, which will be converted into an aggregate of 8,047,529 shares of Common Stock upon consummation ofoffering by the Offering, and (b) 3,726,018 shares of Common Stock issuable, following consummation of the Offering, upon exercise of Warrants, and (c) 500,000 shares of Common Stock issuable following consummation of the Offering, upon exercise of Warrants held by persons other than Mr. Egan but as to which Mr. Egan will have voting power upon exercise pursuant to a Voting Trust Agreement. Excludes 200,000 shares subject to options that will not be exercisable within 60 days of July 24, 1998. (4) Includes (a) 44,910 shares of Series A Preferred Stock, which will be converted into an equal number of shares of Common Stock upon consummation of the Offering, (b) 194,976 shares of Common Stock subject to options that are currently exercisable and (c) 200,000 shares of Common Stock issuable following consummation of the Offering upon exercise of Warrants. Excludes 364,975 shares subject to options that will not be exercisable within 60 days of July 24, 1998. (5) Includes 194,976 shares of Common Stock subject to options that are currently exercisable and 200,000 shares of Common Stock issuable following consummation of the Offering upon exercise of Warrants. Excludes 364,975 shares subject to options that will not be exercisable within 60 days of July 24, 1998. (6) Includes 12,500 shares of Common Stock subject to options that are currently exercisable, and 50,000 shares of Common Stock issuable following consummation of the Offering upon exercise of Warrants. Excludes 37,500 shares subject to options that will not be exercisable within 60 days of July 24, 1998. (7) Excludes 225,000 share of Common Stock subject to options that will not be exercisable within 60 days of July 24, 1998. (8) Includes 12,500 shares of Common Stock subject to options that are currently exercisable, and 50,000 shares of Common Stock issuable following consummation of the Offering upon exercise of Warrants. Excludes 37,500 shares subject to options that will not be exercisable within 60 days of July 24, 1998 and shares held by Dancing Bear Investments (see footnote 2 above) for which Ms. Arthur serves as an officer and a director, and as to which Ms. Arthur disclaimsrespective beneficial ownership. (9) Includes 47,620 shares of Series B Preferred Stock, and 12,500 shares of Series C Preferred Stock, each convertible into an equal number of shares of Common Stock, and 19,344 shares of Common Stock subject to options that are currently exercisable. Excludes 95,139 shares of Common Stock subject to options that are not currently exercisable. Includes 180,360 shares of Common Stock owned by Mr. Halperin's children for which he has a power of attorney but as to which he disclaims beneficial ownership. (10) Includes 100,000 shares of Series B Preferred Stock and 25,000 shares of Series C Preferred Stock, each convertible into an equal number of shares of Common Stock, and 31,945 shares of Common Stock subject to options that are currently exercisable. Excludes 86,111 shares of Common Stock subject to options that are not currently exercisable. (11) Includes 12,500 shares subject to options that are exercisable within 60 days of July 24, 1998. Excludes 37,500 shares subject to options that are not exercisable within 60 days of July 24, 1998. (12) See footnotes 3 through 11owner: -86-
Number of Shares Number of Number of Shares Beneficially Owned Shares to be Beneficially Owned Before the Offering Sold in the After the Offering --------------------- ------------------------ Name Number Percentage Offering Number Percentage - ----------------------------- --------- ---------- --------- --------- ------------- Dancing Bear Investments, Inc. (1)................... 6,046,774 44.9% Michael S. Egan (2)........ 6,123,024 45.3 Todd V. Krizelman (3)...... 877,431 7.5 Stephan J. Paternot (4).... 929,976 7.9 Dean S. Daniel (5)......... 0 * Edward A. Cespedes (6)..... 56,250 * Francis T. Joyce (7)....... 0 * Rosalie V. Arthur (8)...... 51,250 * Henry C. Duques (9)........ 6,250 * Robert M. Halperin (10).... 99,853 * David H. Horowitz (11)..... 114,583 1.0 H. Wayne Huizenga (12)..... 6,250 * All directors and executive officers as a group (11 persons) (13).............. 8,264,867 58% OTHER SELLING STOCKHOLDERS We currently expect that selling stockholders will sell up to 2 million shares in this offering. We are currently in the process of contacting our stockholders who possess registration rights to determine the stockholders who desire to include their shares in this offering and to determine the amount of any such shares which will be included. ----------------- * Less than one percent (1) Includes: (1) 1,773,009 shares of our common stock issuable upon exercise of warrants at $2.91 per share and (2) 250,000 shares of our common stock issuable upon exercise of warrants held by persons other than Dancing Bear Investments but as to which Dancing Bear Investments has voting power upon exercise under a stockholders' agreement. Dancing Bear Investments' mailing address is 333 East Las Olas Blvd., Ft. Lauderdale, FL 33301. (2) Includes the following shares that Mr. Egan is deemed to beneficially own as the controlling investor of Dancing Bear Investments: (1) 1,773,009 shares of our common stock issuable upon exercise of warrants at $2.91 per share, (2) 250,000 shares of our common stock issuable upon exercise of warrants held by persons other than Mr. Egan but as to which Mr. Egan has voting power upon exercise under a stockholders' agreement, and (3) 41,250 shares of common stock issuable upon exercise of options that are currently exercisable. Excludes 118,750 shares of common stock issuable upon exercise of options that will not be exercisable within 60 days of April 9, 1999. Mr. Egan's mailing address is c/o our company. -87- (3) Includes (1) 229,976 shares of our common stock issuable upon exercise of options that are currently exercisable and (2) 100,000 shares of our common stock issuable upon exercise of warrants. Excludes 100,250 shares of our common stock issuable upon exercise of options that will not be exercisable within 60 days of April 9, 1999. Mr. Krizelman's mailing address is c/o our company. (4) Includes (1) 229,976 shares of our common stock issuable upon exercise of options that are currently exercisable and (2) 100,000 shares of our common stock issuable upon exercise of warrants. Excludes 100,250 shares of our common stock issuable upon exercise of options that will not be exercisable within 60 days of April 9, 1999. Mr. Paternot's mailing address is care of our company. (5) Excludes 112,500 shares of our common stock issuable upon exercise of options that will not be exercisable within 60 days of April 9, 1999. (6) Includes (1) 31,250 shares of our common stock issuable upon exercise of options that are currently exercisable, and (2) 25,000 shares of our common stock issuable upon exercise of warrants. Excludes 22,500 shares of our common stock issuable upon exercise of options that will not be exercisable within 60 days of April 9, 1999. (7) Excludes 112,500 shares of our common stock issuable upon exercise of options that will not be exercisable within 60 days of April 9, 1999. (8) Includes (1) 21,250 shares of our common stock issuable upon exercise of options that are currently exercisable, and (2) 25,000 shares of our common stock upon exercise of warrants. Excludes (1) 22,500 shares of our common stock issuable upon exercise of options that will not be exercisable within 60 days of April 9, 1999 and (2) shares held by Dancing Bear Investments for which Ms. Arthur serves as an officer and a director, and as to which Ms. Arthur disclaims beneficial ownership. (9) Includes 6,250 shares of our common stock issuable upon exercise of options that are currently exercisable. Excludes 18,750 shares of our common stock issuable upon exercise of options that will not be exercisable within 60 days of April 9, 1999. (10) Includes 27,085 shares of our common stock issuable upon exercise of options that are currently exercisable. Excludes 33,957 shares of our common stock issuable upon exercise of options that are not currently exercisable. Excludes 90,180 shares of our common stock owned by Mr. Halperin's children for which he has a power of attorney but as to which he disclaims beneficial ownership. (11) Includes 36,111 shares of our common stock issuable upon exercise of options that are currently exercisable. Excludes 26,667 shares of our common stock issuable upon exercise of options that are not currently exercisable. -88- (12) Includes 6,250 shares of our common stock issuable upon exercise of options that are exercisable within 60 days of April 9, 1999. Excludes 22,500 shares of our common stock issuable upon exercise of options that are not exercisable within 60 days of April 8, 1999. (13) See footnotes 2 through 13 above.
-89- DESCRIPTION OF CAPITAL STOCK The Company'sOur Fourth Amended and Restated Certificate of Incorporation provides that our authorized capital stock consists of 100 million shares of Common Stockcommon stock and three million shares of Preferred Stock,preferred stock, par value $.001 per share (the "Preferred Stock").share. As of June 30, 1998,April 9, 1999 there were 2,308,54111,447,963 shares of Common Stock outstanding and 2,899,991 shares of Preferred Stock outstanding (which may becommon stock outstanding. Our preferred stock is convertible into shares of Common Stockcommon stock at any time). The Company's Stockholders have approved the Second Amended and Restated Certificate of Incorporation (the "Certificate").time. The following descriptions of the Company'sour capital stock do not purport to be complete and are subject to and qualified in their entirety by the provisions of the Company's Certificateour certificate and By-Laws,our by-laws, which are included as exhibits to the Registration Statement of which this Prospectus is a part,our registration statement, and by the provisions of applicable law. Common Stock Following this Offering, approximatelyCOMMON STOCK As of April 9, 1999, 11,447,963 shares of Common Stock will beour common stock were outstanding. As of March 10, 1999, there were approximately 146 holders of our common stock. All of the issued and outstanding shares of Common Stockour common stock are and upon the completion of this Offering the shares of Common Stock offered hereby will be, fully paid and non-assessable. Each holder of shares of Common Stockour common stock is entitled to one vote per share on all matters to be voted on by stockholders generally, including the election of directors. There are no cumulative voting rights. The holders of Common Stockour common stock are entitled to dividends and other distributions as may be declared from time to time by the Boardour board of Directorsdirectors out of funds legally available therefor,funds, if any. See "Dividend"Price Range of Our Common Stock and Dividend Policy." Upon theour liquidation, dissolution or winding up, of the Company, the holders of shares of Common Stockour common stock would be entitled to share ratably in the distribution of all of the Company'sour assets remaining available for distribution after satisfaction of all itsour liabilities and the payment of the liquidation preference of any outstanding Preferred Stockpreferred stock as described below. The holders of Common Stockour common stock have no preemptive or other subscription rights to purchase shares of our stock, of the Company, nor are such holders entitled to the benefits of any redemption or sinking fund provisions. Preferred StockPREFERRED STOCK As of June 30, 1998, the Company has 2,900,001 shares of Preferred Stock, divided into Series A, Series B, Series C, Series D and Series E. Shares of each series of Preferred Stock are convertible into Common Stock, subject to anti-dilution adjustments, and will automatically convert into Common Stock concurrent with the closing of the Offering (subject to anti-dilution adjustments). Additionally, the holders of shares of each series of Preferred Stock may currently elect to convert each series to Common Stock by a majority vote of the outstanding shares in that series. Further, currently each share of Series A Preferred Stock shall automatically convert to Common Stock upon the conversion into shares of Common Stock of all outstanding shares of Series B Preferred Stock and Series C Preferred Stock. If the Company issues additional shares of Common Stock for per share consideration of less than $0.10, $0.525 and $2.00 for the Series A, Series B and Series C Preferred Stock, respectively, anti-dilution adjustments will be made. Assuming that the conditions to the Automatic Conversion are satisfied, following the closing of this Offering,April 9, 1999, we had no shares of Preferred Stock will remainpreferred stock outstanding. The BoardOur board of Directorsdirectors has the authority, without further action by theour stockholders, to issue the Preferred Stockpreferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof,of any series, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences and the number of shares constituting any series or the designation of suchthat series. Preferred Stockstock could thus be issued quickly with terms calculated to delay or prevent a change of control of the Company or to serve as an entrenchment device for incumbent management. The issuance of Preferred Stockpreferred stock may have the effect of decreasing the market price of the Common Stock,our common stock, and may adversely affect the voting and other rights of the holders of Common Stock. Warrantsour common stock. WARRANTS As of June 30, 1998, the Company hasApril 9, 1999, we had issued and outstanding Warrantswarrants to purchase 102,055,759 shares of Series E Preferred Stock, each convertible into one percent of the fully diluted Common Stock, and having an exercise price of $ per share. Upon consummation of the Offering, the Series E Preferred Stock will be converted into Common Stock, and the Warrants will be exercisable into 4,046,018 shares of Common Stock (subject to certainour common stock, with some possible anti-dilution adjustments)adjustments, at ana weighted average -90- exercise price of approximately $1.45$3.16 per share. Prior to the Consummation of the Offering, a portion of the Warrants held by Dancing Bear Investments will be transferred to certain employees and directors of the Company. The Warrantswarrants may be exercised at any time on or before August 13, 2004. After expiration of the exercise period, the holder of the Warrantswarrants will have no future rights to exercise such Warrants. Rights Agreement The Boardthe warrants. RIGHTS AGREEMENT Our board of Directors currently expects to adoptdirectors adopted a Rights Agreement to be effective simultaneously with the consummation of the Offering. Pursuant toAgreement. Under the Rights Agreement, the BoardAgreement: o our board of Directors will declaredirectors declared a dividend of one preferred sharestock purchase right (a "Right") for each outstanding share of Common Stock. Eachour common stock; and o each Right will entitleentitles the registered holder to purchase from the Companyus one one-thousandth of a share of a new series of junior participating preferred stock, par value $.01$.001 per share (the "Junior Preferred Shares"Stock"), of the Company at a price to be determined by our board of $directors, per one one-thousandth of a share (the "Purchase Price"), subject towith adjustment. The description and terms of the Rights will be set forthare described in a Rights Agreement between the Companyus and the designated Rights Agent. The description set forthpresented below is intended as a summary only and is qualified in its entirety by reference to the Rights Agreement, a form of the Rights Agreement, which will behas been filed as an exhibit to the Registration Statement.our registration statement. See "Available"Where You Can Find More Information." The Rights will beare attached to all certificates representing outstanding shares of Common Stock,our common stock, and no separate Right Certificates (as hereinafter defined) will bewere distributed. The Rights will separate from the shares of Common Stock onour common stock as soon as one of the earliest to occur of (i) the first date offollowing two events occur: o a public announcement that, without the prior consent of our board of directors, a person or "group" (other than Dancing Bear Investments, Michael S. Egangroup (an "Acquiring Person"), including any affiliates or any entity controlled by Michael S. Egan) hasassociates of that person or group, acquired beneficial ownership of securities having 15% or more of the voting power of all our outstanding voting securitiessecurities. Dancing Bear Investments, Michael S. Egan, Todd V. Krizelman, Stephan J. Paternot or any entities controlled by these persons are not included in the definition of the Company (as hereinafter defined), (ii)Acquiring Person; and o ten (10) business days, (or suchor a later date as the Boardour board of Directors of the Companydirectors may determine)determine, following the commencement of, or announcement of an intention that remains in effect for five business days to commence,make, a tender offer or exchange offer the consummation of whichthat would result in aany person or group becoming an Acquiring Person or (iii) twenty business days priorPerson. We refer to the date on which a Transaction (as defined in the Rights Agreement) is reasonably expected to become effective or be consummated (the earliestearlier of suchthese dates being calledas the "Distribution Date"). A person or group whose acquisition of voting securities causes a Distribution Date pursuant to clause (i) above is an "Acquiring Person.Date." The first date of public announcement that a person or group has become an Acquiring Person is the "Stock Acquisition Date." The Rights Agreement will provide that untilUntil the Distribution Date, the Rights will be transferred with and only with the shares of Common Stock. Untilour common stock. In addition, until the Distribution Date, (oror earlier redemption or expiration, of the Rights),Rights: o new Common Stockcommon stock certificates issued upon transfer or new issuance of shares of Common Stockcommon stock will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption or expiration of the Rights),reference; and -91- o the surrender for transfer of any certificates for shares of Common Stockcommon stock outstanding, even without sucha notation, will also constitute the transfer of the Rights associated with the shares of Common Stockcommon stock represented by suchthe certificate. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the shares of Common Stockcommon stock as of the close of business on the Distribution Date, (andand to each initial record holder of certainvarious shares of Common Stockcommon stock issued after the Distribution Date), and suchDate. The separate Right Certificates alone will evidence the Rights. The Rights willare not be exercisable until the Distribution Date and will expire at 5:00 P.M., New York, New York time, on the tenth anniversary of the date of issuance, unless earlier redeemed by the Companyus as described below. In the event thatIf any person becomes an Acquiring Person, (except pursuant toexcept by a Permitted Offer as hereinafter defined),defined below, each holder of a Right will have, (subject tounder the terms of the Rights Agreement)Agreement, the right (the "Flip-In Right") to receive upon exercise the number of shares of Common Stock,common stock, or, in the discretion of the Boardour board of Directors of the Company,directors, the number of one one-thousandthone-thousandths of a share of Junior Preferred Stock, (or,or, in certainsome circumstances, our other securities, of the Company) having a value (immediately prior to suchimmediately before the triggering event)event equal to two times the Purchase Price. Notwithstanding the foregoing,description above, following the occurrence of the event described above, all Rights that are, or (under certain circumstances specified in the Rights Agreement)generally were, beneficially owned by any Acquiring Person or any affiliate or associate thereofof an Acquiring Person will be null and void. A "Permitted Offer" is a tender or exchange offer for all outstanding shares of Common Stockcommon stock which is at a price and on terms determined, prior tobefore the purchase of shares under suchthe tender or exchange offer, by a majority of Disinterested Directors, (as hereinafter defined)as defined below, to be adequate, (takingtaking into account all factors that suchthe Disinterested Directors deem relevant)relevant, and otherwise in theour best interests of the Company and its stockholders (otherour stockholders' best interest, other than the person or any affiliate or associate thereof on whose basisbehalf the offer is being made)made, taking into account all factors that suchthe Disinterested Directors may deem relevant. "Disinterested Directors" are our directors of the Company who are not our officers of the Company and who are not Acquiring Persons or affiliates or associates thereof,of Acquiring Persons, or representatives of any of them, or any person who was directly or indirectly proposed or nominated as a director of the Company by a Transaction Person (as defined in the Rights Agreement). In the event that,them. If, at any time following the Stock Acquisition Date, or, if a Transaction is proposed, the Distribution Date, (i) the Company iso we are acquired in a merger or other business combination transaction in which the holders of all of the outstanding shares of Common Stockcommon stock immediately prior tobefore the consummation of the transaction are not the holders of all of the surviving corporation's voting power,power; or (ii)o more than 50% of the Company'sour assets or earning power is sold or transferred in either case with or to an Interested Stockholder,Stockholder; or o if in suchthe transaction all holders of shares of Common Stockcommon stock are not offered the same consideration as any other person,person; -92- then each holder of a Right, (exceptexcept Rights which previously have been voided as set forth above)described above, shall thereafterafterwards have the right (the "Flip-Over Right") to receive, upon exercise, shares of common stock of the acquiring company having a value equal to two times the Purchase Price. The holder of a Right will continue to have the Flip-Over Right whether or not suchthe holder exercises or surrenders the Flip-In Right. The Purchase Price payable, and the number of one-thousandths of a share of Junior Preferred Stock or other securities issuable, upon exercise of the Rights are subject to adjustmentmay be adjusted from time to time to prevent dilution (i) in the event of any one of the following: o a stock dividend on, or a subdivision, combination or reclassification of, the shares of Junior Preferred Stock, (ii) uponStock; o the grant to holders of the shares of Junior Preferred Stock of certainvarious rights or warrants to subscribe for or purchase shares of Junior Preferred Stock at a price, or securities convertible into shares of Junior Preferred Stock with a conversion price, less than the then current market price of the shares of Junior Preferred StockStock; or (iii) upono the distribution to holders of the shares of Junior Preferred Stock of evidences of indebtedness or assets, (excludingexcluding regular quarterly cash dividends)dividends, or of subscription rights or warrants, (otherother than those referred to above).above. The Purchase Price payable, and the number of one-thousandths of a share of Junior Preferred Stock or other securities issuable, upon exercise of the Rights aremay also subject to adjustmentbe adjusted in the event of a stock split of the shares of Common Stock,common stock, or a stock dividend on the shares of Common Stockcommon stock payable in shares of Common Stock,common stock, or subdivisions, consolidations or combinations of the shares of Common Stockcommon stock occurring, in any such case, prior tobefore the Distribution Date. With certainsome exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in suchthe Purchase Price. No fractional one-thousandths of a share of Junior Preferred Stock will be issued and, in lieu thereof,instead, an adjustment in cash will be made based on the market price of the shares of Junior Preferred Stock on the last trading day prior tobefore the date of exercise. At any time prior tobefore the earlier to occur of (i)(1) a person becoming an Acquiring Person or (ii)(2) the expiration of the Rights, the Companywe may redeem the Rights in whole, but not in part, at a price of $.01$.001 per Right (the "Redemption Price"), which redemption shall be effective upon the action of the Boardour board of Directors of the Company.directors. Additionally, the Companywe may redeem the then outstanding Rights in whole, but not in part, at the Redemption Price at any one of the following times: o after the triggering of the Flip-In Right and before the expiration of any period during which the Flip-In Right may be exercised in connection with a merger or other business combination transaction or series of transactions involving the Companyus in which all holders of shares of Common Stockour common stock are not offered the same consideration but not involving a Transaction Person (asan Interested Stockholder, as defined in the Rights Agreement), (ii)Agreement; o following an event giving rise to, and the expiration of the exercise period for, the SubscriptionFlip-in Right if and for as long as no person beneficially owns securities representing 15% or more of the voting power of the Company'sour voting securities or (iii) ifsecurities; and -93- o when the Acquiring Person reduces his ownership below 5% in transactions not involving the Company.us. The redemption of Rights described in the preceding sentenceabove shall be effective only as of suchthe time when the SubscriptionFlip-in Right is not exercisable, and in any event, only after 10 business days' prior notice. Upon the effective date of the redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. The shares of Junior Preferred Stock purchasable upon exercise of the Rights will be non-redeemable and junior to any other series of preferred stock the Companywe may issue, (unlessunless otherwise provided in the terms of such stock).the stock. Each share of Junior Preferred Stock will have a preferential quarterly dividend in an amount equal to 1,000 times the dividend declared on each share of Common Stock,common stock, but in no event less than $10.$1. In the event of liquidation, the holders of Junior Preferred Stock will receive a minimum preferred liquidation payment equal to the greater of $1,000$1 or 1,000 times the payment made per each share of Common Stock.common stock. Each share of Junior Preferred Stock will have 1,000 votes, voting together with the shares of Common Stock.common stock. In the event of any merger, consolidation or other transaction in which shares of Common Stockcommon stock are exchanged, each share of Junior Preferred Stock will be entitled to receive 1,000 times the amount and type of consideration received per share of Common Stock.common stock. The rights of the Junior Preferred Stock as to dividends, liquidation and voting, and in the event of mergers and consolidations, are protected by customary anti-dilution provisions. Fractional shares of Junior Preferred Stock will be issuable; however, the Companywe may elect to distribute depositary receipts in lieu of such fractional shares. In lieu of fractional shares other than fractions that are multiples of one two-hundredthone-thousandth of a share, an adjustment in cash will be made based on the market price of the Junior Preferred Stock on the last trading date prior tobefore the date of exercise. In the event that a majority of the Board of Directors of the Company is comprised of persons elected at a meeting of stockholders who were not nominated by the Board of Directors in office immediately prior to such meeting (including successors of such persons elected to the Board of Directors), then for 365 days following such meeting, the Rights Agreement may not be amended and the Rights may not be redeemed if such amendment or redemption, as the case may be, is reasonably likely to facilitate a combination or sale, mortgage or other transfer of assets or earning power (a "Transaction") with a Transaction Person (as defined below). The Rights Agreement may not be amended and the Rights may not be redeemed thereafter if during such 365 day period the Company enters into any agreement reasonably likely to facilitate a Transaction with a Transaction Person and the amendment or redemption, as the case may be, is reasonably likely to facilitate a Transaction with a Transaction Person. A "Transaction Person" with respect to a Transaction means (x) any Person who (i) is or will become an Acquiring Person or a Principal Party (as such term is defined in the Rights Agreement) if the Transaction were to be consummated and (ii) either (A) such Person directly or indirectly proposed or nominated a director of the Company which director is in office at the time of consideration of the Transaction, or (B) the Transaction with such Person was approved by persons elected to the Board of Directors with the objective, for the purpose or with the effect of facilitating a merger or consolidation of the Company, a sale, mortgage or transfer, in one or more transactions, of assets or earning power aggregating more than 50% of the assets or earning power of the Company and its subsidiaries (taken as a whole) or any transaction which would result in a Person becoming an Acquiring Person, or (y) an Affiliate or Associate of such a Person. Until a Right is exercised, the holder thereof, as such, will have no rights as aour stockholder, of the Company, including, without limitation, the right to vote or to receive dividends. While the distribution of the Rights willwas not be taxable to our stockholders, of the Company, stockholders may, depending upon the circumstances, recognize taxable income should the Rights become exercisable or upon the occurrence of certain events thereafter.some subsequent events. The Rights have certainvarious anti-takeover effects. The Rights will cause substantial dilution to a person or group of persons that attempts to acquire the Companyus on terms not approved by the Boardour board of Directors.directors. The Rights should not interfere with any merger or other business combination approved by the Boardour board of Directors prior todirectors before the time that a person or group has acquired beneficial ownership of 15% or more of the Common Stockour common stock since the Rights may be redeemed by the Companyus at the Redemption Price until suchthat time. Registration"Interested Stockholder" means any Acquiring Person or any of their affiliates or associates, or any other person in which an Acquiring Person or their affiliates or associates have in excess of 5% of the total combined economic or voting power, or any person acting in concert or on behalf of any Acquiring Person or their affiliates or associates. -94- REGISTRATION RIGHTS Investor Rights Pursuant toAgreement. Under the terms of thean Investor Rights Agreement, dated as of August 13, 1997, (the "Investor Rights Agreement"), at any time following the Offering, holders of 25% of all of the Common Stockcommon stock converted from Seriesour series B, Seriesseries C, Seriesseries D and series E preferred stock or purchased upon the exercise of warrants originally exercisable for Series E Preferred Stock, or issued as a dividend or distribution for the above-mentioned Preferred Stock (the "Registrable Securities"),preferred stock, or 50% of the Registrable Securitiesregistrable securities issued or issuable in respect of the Seriesour series B and Seriesseries C Preferred Stockpreferred stock, have the right to require the Companyus to file a registration statement covering all or part of their shares. Holders of an aggregate of 5,473,735 shares of our common stock, including 2,023,009 shares issuable upon the exercise of warrants, may exercise these registration rights up to four times at the Company's expense. Holders of shares of Common Stock (after giving effect to the conversion which will occur upon consummation of the Offering) have registration rights under the Investor Rights Agreement. The CompanyAgreement at our expense, subject the following restrictions: o we will not be obligated to register suchthe shares if suchthe holders propose to sell suchthe securities at an aggregate price to the public of less than $5,000,000. The Company may defer registration for not more than 120 days if the Board of Directors determines that it would be seriously detrimental to the Company and its stockholders to register the shares at such time. An underwriter participating in the sale of the Registrable Securities may limit the number of shares offered, and such number shall be allocated to the holders of such securities on a pro rata basis. The Company is$5 million; o we are not required to effect more than one demand registration on behalf of suchthe holders in any twelve12 calendar month period. The Company isperiod; o we may defer registration for up to 120 days if our board of directors determines that it would be seriously detrimental to us and our stockholders to register the registrable securities at the requested time; o no demand registration statement will be effected within 90 days of the effective date of this offering or any subsequent public offering; and o we are not required in most cases to pay the registration expenses for any such demandrequested registration that is subsequently withdrawn by the requesting Holders.holders. Holders of Registrable Securitiesregistrable securities have the rightpiggyback rights to include all or part of their Registrable Securitiesshares in a registration statement filed by the Companyus for purposes of a public offering (Piggyback Registration). The holders of a majority of Registrable Securities have amended the Investor Rights Agreement to waive any registration rights in connection with this Offering.offering. An underwriter participating in such offeringthese offerings may limit the number of shares offered, and suchthe number shall be allocated first to the Company,us, then generally to such holders on a pro rata basis, then to any stockholderof registrable securities under this agreement and other agreements on a pro rata basis. The Company hasWe have the right to terminate or withdraw any such registration and shallwill bear the expenses of any such withdrawn registration. The Company isregistration we withdraw. We are not obligated further after it haswe have effected five such registrations for any such holders. Pursuant toholders of registrable securities. Under the Investor Rights Agreement, holders of Registrable Securitiesregistrable securities have agreed with the Company to be subjectus to lock-up periods of not more thanup to seven days prior to and 180 days following the date of this Prospectus and of not more than seven days prior tobefore and 90 days followingafter the effective date of any subsequent Prospectus. All registration rights terminate three years after the date of this Prospectus.statement filed in connection with an underwritten public offering. Any right described in this section may be amended and waived by our written consent and the written consent of the Company and the holders of a majority of the Registerable Securities. Pursuant toregistrable securities. All registration rights under the Investor Rights Agreement terminate on November 12, 2001. Registration Rights Agreement. Under the terms of thea Registration Rights Agreement, by and amongdated September 1, 1998, with Dancing Bear Investments, thevarious holders of Seriesseries A Preferredpreferred Stock and Messrs. Krizelman and Paternot and the Company, the Company hasus, we have granted registration rights to such persons similar to the rights granted pursuant tounder the Investor Rights Agreement. LimitationHolders of Director Liability25% of all of the registrable securities covered by the Registration Rights Agreement, or 50% of the total number of shares of common stock originally issued as series A preferred stock, have the right to require us to file a registration statement covering all or part of their shares. Holders of a majority of these shares also have registration rights for their shares under the Investor Rights Agreement described -95- above. These holders have the right to require us to file up to four registration statements covering their shares, subject to the same restrictions set forth above under the description of the Investor Rights Agreement. Piggyback rights and lock-up periods are substantially the same as under the Investor Rights Agreement. The holders of registrable securities will cease to have registration rights at the time they are sold to the public pursuant to a registration statement or Rule 144 under the Securities Act of 1933. Azazz Registration Rights. On February 1, 1999, we entered into a registration rights agreement with various Azazz shareholders granting them registration rights with respect to shares of our common stock issued to them in connection with the acquisition. Under the agreement, we are required to use our commercially reasonable best efforts to file a shelf registration statement with the SEC within twenty days after we received completed audited financial statements for Azazz. We are obligated to use our commercially reasonable best efforts to cause the shelf registration statement to be declared and remain effective for a period of twenty business days or such shorter period as all of the registrable securities have been sold. We have the right on one or more occasions to delay the filing or effectiveness of the shelf registration statement, or, if it has been declared effective, to suspend the distribution of the Azazz shareholders' acquisition common stock issued to Azazz shareholders for three reasons: o we file a registration statement covering any of our securities to be issued by us or for resale by our other stockholders in a public offering; o we determine in our reasonable judgment that the filing, declaration of effectiveness or continued effectiveness of the shelf registration statement would require us to disclose a material business transaction, as defined below; or o we determine in our reasonable judgment that pro forma and/or historical financial statements are required to be filed with the SEC as a result of any material business transaction are not available at that time. A material business transaction is any proposed or consummated financing, reorganization or recapitalization, or pending or consummated negotiations relating to a merger, consolidation, acquisition or similar transaction or other business transaction, or other material event, the disclosure of which would otherwise adversely affect us. If we delay the shelf registration on account of a public offering as described above, the delay period begins on the fifth business day after our notice to the Azazz shareholders of the filing, and ends on the closing of the offering, subject to the lock-up described below. If we delay the shelf registration statement for any other reason, the delay period begins and ends on the dates specified in our notices to the Azazz shareholders. At the end of any delay period, we will use our commercially reasonable best efforts to file and cause to be declared effective a shelf registration statement, or reinstate the Azazz shareholders' ability to distribute our common stock under a shelf registration statement, generally o within ten business days following the end of a delay period on account of a public offering; and o within five business days following the end of a delay period caused by a material business transaction, as described above. -96- If we file a shelf registration statement covering these shares and keep it effective for twenty business days, we have no further obligations under the registration rights agreement and the registration rights of these holders terminate. Under the registration rights agreement, holders of our common stock received in this transaction have agreed to be subject to lock-up periods of up to seven days before and ninety days after the effective date of a registration statement covering shares of our common stock in any underwritten public offering, including this offering. No holder has any piggyback registration rights under the agreement. Attitude Network Registration Rights. On April 9, 1998, we entered into a registration rights agreement with various Attitude Network shareholders granting them registration rights with respect to shares of our common stock issued to them in connection with the acquisition. Under the agreement, the former Attitude Network shareholders have piggyback rights to include the same percentage of their registrable securities in a registration statement filed by us for purposes of a public offering as other shareholders of ours in the aggregate include in the registration statement. These holders are entitled to piggyback rights in this offering and the next two registration statements filed by us that become effective. Additionally, the holders will cease to have registration rights at the time their shares are sold or are eligible to be sold to the public pursuant to a registration statement or Rule 144. None of the holders have any right to include their shares in any over-allotment option in connection with a registration statement. We have the right to terminate, withdraw, or delay any registration initiated by us and will bear the expenses of any registration we withdraw. Under the agreement, these holders have agreed with us to lock-up periods of up to seven days before and 90 days following the effective date of any registration statement filed in connection with an underwritten public offering, including this offering. LIMITATION OF DIRECTOR LIABILITY Our Certificate limits the liability of our directors of the Company to the Companyus and itsour stockholders to the fullest extent permitted by Delaware law. Specifically, our directors of the Company will not be personally liable for money damages for breach of fiduciary duty as a director, except for liability (i)o for any breach of the director's duty of loyalty to the Companyus or its stockholders, (ii)our stockholders; o for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii)law; o under Section 174 of the Delaware General Corporation Law, ("DGCL"), which concerns unlawful payments of dividends, stock purchases or redemptions, or (iv)redemptions; and o for any transaction from which the director derived an improper personal benefit. DELAWARE LAW AND VARIOUS CHARTER AND BY-LAWS PROVISIONS Delaware Law and Certain Charter and By-Laws Provisions Delaware Law The Company is subject toLaw. We must comply with the provisions of Section 203 ("Section 203") of the DGCL.Delaware General Corporation Law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three -97- years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns, (or,or, in certainsome cases, within three years prior, did own)own, 15% or more of the corporation's voting stock. Under Section 203, a business combination between the Company and an interested stockholder is prohibited unless it satisfies one of the following three conditions: (i) the Company's Boardo our board of Directorsdirectors must have previously approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder, or (ii)stockholder; o upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of theour voting stock of the Company outstanding at the time the transaction commenced, (excluding,excluding, for purposes of determining the number of shares outstanding, shares owned by (a)(1) persons who are directors and also officers and (b)(2) employee stock plans, in certain instances) or (iii)some instances; and o the business combination is approved by the Boardour board of Directorsdirectors and authorized at an annual or special meeting of the stockholders by the affirmative vote of the holders of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Special Meetings The By-LawsMeetings. Our by-laws provide that special meetings of stockholders for any purpose or purposes can be called only upon the request of the Chairmanour chairman of the Board, the President, the Boardboard, our president, our board of Directors,directors, or the holders of shares entitled to at least a majority of the votes at the meeting. Amendment of Company By-Laws In order toOur By-Laws. To adopt, repeal, alter or amend the provisions set forth therein, the By-Lawsof our by-laws, our by-laws require either the affirmative vote of the holders of at least a majority of the voting power of all of the issued and outstanding shares of our capital stock of the Corporation entitled to vote thereonon the matter or by the Boardour board of Directors.directors. Advance Notice Provisions for Stockholder Nominations and Proposals The By-LawsProposals. Our by-laws establish advance notice procedures for stockholders to make nominations of candidates for election as directors, or bring other business before an annual meeting of stockholders of the Company.our stockholders. These procedures provide that only persons who are nominated by or at the direction of the Boardour board of Directors,directors, or by a stockholder who has given timely written notice to the Secretary of the Company prior toour secretary before the meeting at which directors are to be elected, will be eligible for election as directorsone of the Company.our directors. Further, these procedures provide that at an annual meeting, the only such business that may be conducted asis the business that has been specified in the notice of the meeting given by, or at the direction of, the Boardour board or by a stockholder who has given timely written notice to the Secretary of the Companyour secretary of such stockholder's intention to bring suchthat business before suchthe meeting. Under these procedures, notice of stockholder nominations to be made or business to be conducted at an annual meeting must be received by the Companyus not less than 60 days nor more than 90 days prior tobefore the date of the meeting, (or,or, if less than 70 days' notice or prior public disclosure of the -98- date of the meeting is given or made to the stockholders, the 10th day following the earlier of (i)(1) the day such notice was mailed or (ii)(2) the day such public disclosure was made).made. Under these procedures, notice of a stockholder nomination to be made at a special meeting at which directors are to be elected must be received by the Companyus not later than the close of business on the tenth day following the day on which such notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever occurs first. Under the By-Laws,our by-laws, a stockholder's notice nominating a person for election as a director must contain certainspecific information about the proposed nominee and the nominating stockholder. If the Chairmanour chairman determines that a nomination was not made in accordance with the By-Laws, suchmanner described in our by-laws, the nomination will be disregarded. Similarly, a stockholder's notice proposing the conduct of business must contain certainspecific information about suchthe business and about the proposing stockholder. If the Chairmanour chairman determines that business was not properly brought before the meeting in accordance with the By-Laws, suchmanner described in our by-laws, the business will not be conducted. By requiring advance notice of nominations by stockholders, the By-Lawsour by-laws afford the Boardour board an opportunity to consider the qualifications of the proposed nominee and, to the extent deemed necessary or desirable by the Board,our board, to inform stockholders about suchthese qualifications. By requiring advance notice of other proposed business, the By-Lawsour by-laws also provide an orderly procedure for conducting annual meetings of stockholders and, to the extent deemed necessary or desirable by the Board,our board, provides the Boardour board with an opportunity to inform stockholders, prior to suchbefore meetings, of any business proposed to be conducted at suchthe meetings, together with any recommendations as to the Board'sour board's position regarding action to be taken with respect to suchthe business, so that stockholders can better decide whether to attend such a meeting or to grant a proxy regarding the disposition of any such business. Although the Certificateour certificate does not give the Boardour board any power to approve or disapprove stockholder nominations of the election of directors or proposals for action, the foregoing provisions may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if the proper procedures are not followed, and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal, without regard to whether consideration of suchthese nominees or proposals might be harmful or beneficial to the Companyus and itsour stockholders. Written Consent Provisions The By-LawsWRITTEN CONSENT PROVISIONS Our by-laws provide that any action required or permitted to be taken by the holders of capital stock at any meeting of our stockholders of the Company may be taken without a meeting only by the holders of outstanding capital stock having not less than the minimum number of votes that would be necessary to authorize or take suchthe action at a meeting at which all shares entitled to vote thereon were present and voted. Transfer Agent and RegistrarTRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Commonour common stock is American Stock is .Transfer & Trust Company. -99- SHARES ELIGIBLE FOR FUTURE SALE Prior toSales of substantial amounts of our common stock, including shares issuable upon the Offering, there has been noexercise of stock options, in the public market after the lapse of the restrictions described below, or the perception that these sales may occur, could materially adversely affect the prevailing market prices for our common stock and our ability to raise equity capital in the Common Stock. Nofuture. Limited information is currently available and no prediction can be made as to the timing or amount of future sales of shares, or the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of the Common Stockour common stock prevailing from time to time. Sales of substantial amounts of the Common Stock (including shares issuable upon the exercise of stock options) in the public market after the lapse of the restrictions described below, or the perception that such sales may occur, could materially adversely affect the prevailing market prices for the Common Stock and the ability of the Company to raise equity capital in the future. See "Risk Factors--Shares Eligible for Future Sale; No Prior Trading Market; Registration Rights.Sale." Upon consummation of the Offering, the Companyofferings, we will have approximately 13,447,963 outstanding shares of Common Stock ( if the Underwriters' over-allotment option is exercised in full). All of theour common stock, and 1,838,979 shares of Common Stock offered hereby ( ifour common stock issuable upon exercise of outstanding options and we have an additional 497,527 shares of common stock reserved for issuance under such plans. See "Management--Executive Compensation." In addition, 2,055,759 shares of our common stock will be issuable upon exercise of outstanding warrants. Of the Underwriters' over-allotment option is exercisedoutstanding shares, the 2,000,000 newly issued shares of our common stock issued by us and sold in full),this offering and the 2,000,000 shares of our outstanding common stock sold by selling stockholders in this offering will be immediately eligible for sale in the public market without restriction or further registration under the Securities Act, unless purchased by or issued to any "affiliate" of our "affiliates" under the Company, as that term is defined in Rule 144, described below.Securities Act of 1933. All of the shares of Common Stockour common stock outstanding prior tobefore our initial public offering are "restricted securities" as the Offering (or shares issued upon conversion of Preferred Stock upon consummation of the Offering), are "Restricted Securities," as that term is defined under Rule 144. These shares were issued in Rule 144,private transactions not involving a public offering and may not be sold in the absence of registration other than in accordance withunder Rule 144, 144(k) or 701 promulgated under the Securities Act of 1933 or another exemption from registration. In addition, upon consummation of the Offering, 4,046,018 shares of Common Stock will be issuable upon exercise of outstanding Warrants. In general, under Rule 144 as currently in effect, any affiliate of the Companyour affiliates or any person, (oror persons whose shares are aggregated in accordance withunder Rule 144)144, who has beneficially owned shares of Common Stockour common stock which are treated as Restricted Securitiesrestricted securities for at least one year would be entitled to sell within any three-month period a number of shares that does not exceedexceed: o the greater of 1% of the outstanding shares of Common Stock (approximatelyour common stock, which would be approximately 134,480 shares based upon the number of shares outstanding after the Offering)offerings, or o the reported average weekly trading volume in the Common Stockcommon stock during the four weeks preceding the date on which notice of suchthe sale was filed under Rule 144. Sales under Rule 144 are also subject to certain manner ofmust comply with sale restrictions and notice requirements and to the availability of current public information concerning the Company.us. In addition, our affiliates of the Company must comply with the restrictions and requirements of Rule 144, (otherother than the one-year holding period requirements) in orderrequirements, to sell shares of Common Stockour common stock that are not Restricted Securities (suchrestricted securities, such as Common Stockcommon stock acquired by affiliates in market transactions). Further,transactions. Furthermore, if a period of at least two years has elapsed from the date Restricted Securitiesrestricted securities were acquired from the Companyus or an affiliate of the Company,our affiliates, a holder of such Restricted Securitiesrestricted securities who is not an affiliate at the time of the sale and who has not been an affiliate for at least three months prior to suchbefore the sale would be entitled to sell the shares -100- immediately without regard to the volume, manner of sale, notice and public information requirements of Rule 144. Holders of virtually all of the Company'sour outstanding equity willcommon stock have certainvarious demand registration rights (subjectwith respect to the 180-day lock-up arrangement described below),shares of our common stock, under certainsome circumstances and subject to certainwith some conditions, to require the Companyus to register their shares of Common Stockour common stock under the Securities Act of 1933, and certainvarious rights to participate in any future registration of securitiesour securities. These rights are limited by the Company. The Company is180-day lock-up arrangement described below. We are not required to effect more than one demand registration on behalf of suchthese holders in any twelve calendar month period. Pursuant toUnder the agreements pursuant toby which the registration rights were granted, holders of Registrable Securitiesregistrable securities have agreed to be subject to lock-up periods of not more than seven days prior to and 180 days following the date of this Prospectus and of not more than seven days prior tobefore and 90 days followingafter the effective date of any subsequent Prospectus. The Company intendsprospectus. We have filed two registration statements on Form S-8 covering the majority of shares issuable under our option plans, which will make those shares freely tradable upon issuance. In the near future, we intend to file aan additional registration statement on Form S-8 for the balance of any shares held pursuant to theissuable under our option plans which may make those shares freely tradeable. Suchhave not yet been registered. This registration statement will becomebecame effective immediately upon filing and shares covered by thatthis registration statement will thereupon be eligible for sale in the public markets, subject to thelimited by any applicable lock-up agreements and Rule 144 limitations applicable to affiliates. See "DescriptionAdditionally, in connection with our initial public offering in November 1998, we and all of Capital Stock--Registration Rights." The Companyour directors and its executive officers directors and certain of our other stockholders have agreed that, with some exceptions, without the prior written consent of Bear, Stearns & Co. Inc., not to, directly or indirectly, issue, sell, offer or agree to sell, grant any option for the sale, pledge, make any short sale, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, or otherwise dispose of any shares of our common stock, or securities convertible into, exercisable for or exchangeable for our common stock or of any of our subsidiaries until 180 days from November 12, 1998. Bear, Stearns & Co. Inc. may, however, in its currentsole discretion and at any time without notice, release all or any portion of the shares subject to lock-up agreements. In connection with this offering, we and all of our directors and officers will enter into agreements providing that we will not, for a period of 90 days after the date of this prospectus, enter into any of the transactions referred to in the preceding paragraph without the prior written consent of Bear, Stearns & Co. Inc. The foregoing agreements shall not apply to: o in our case, the shares of common stock to be sold in this offering; o the issuance of any shares of our common stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date of this prospectus and referred to in this prospectus; o in our case, any shares of our common stock issued or options to purchase our common stock granted under our existing employee benefit plans referred to in this prospectus; o the pledge by some of our directors and some of the directors of Dancing Bear Investments or our affiliates or affiliates of Dancing Bear Investments of shares of our -101- common stock to a financial institution in connection with a bona fide financing transaction; o transfers of shares of our common stock to immediate family members or trusts for the benefit of these family members as long as the transferee enters into a similar lock-up agreement; o the transfer of all or part of any warrants held by Dancing Bear Investments on the date of this prospectus to any employee of Dancing Bear Investments, any of our employees, Michael S. Egan or a family transferee of Michael S. Egan, as long as each transferee has executed a similar lock-up agreement; and o subject to specified limitations, shares of our common stock issued by us in connection with any merger, recapitalization, consolidation or acquisition by us or our subsidiaries. -102- UNDERWRITING The underwriters of the offering named below, for whom Bear, Stearns & Co. Inc., is acting as representative, have severally agreed with us, subject to the terms and conditions of the underwriting agreement, the form of which has been filed as an exhibit to the registration statement on Form S-1 of which this prospectus is a part, to purchase from us and the selling stockholders the aggregate number of shares of common stock set forth opposite their respective names below: Underwriter Number of Shares ----------- ---------------- Bear, Stearns & Co. Inc.................. NationsBanc Montgomery Securities LLC.... Volpe Brown Whelan & Company............. Wit Capital Corporation.................. --------- 4,000,000 Total.................................... ========= The underwriting agreement provides that the obligations of the several underwriters are subject to approval of certain legal matters by counsel and to various other conditions. We and the selling stockholders have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act, and where such indemnification is unavailable, to contribute to payments that the underwriters may be required to make in respect of such liabilities. The nature of the underwriters' obligations is such that they are committed to purchase and pay for all of the above shares of common stock if any are purchased. If the underwriters sell more than the total number set forth in the table above, the underwriters have an option to buy up to an additional 600,000 shares from us to cover such sales. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the underwriters will severally purchase shares in the same proportion as set forth in the table above. We and all of our directors and officers have agreed that, subject to certain exceptions, for a period of 18090 days afterfrom the date of this Prospectus,prospectus, without the prior written consent of Bear, Stearns & Co. Inc., theywe will not, directly or indirectly, issue, sell, offer or agree to sell, grant any option for the sale of, pledge, make any short sale, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act or otherwise dispose of any shares of Common Stockour common stock (or securities convertible into, exercisable for or exchangeable for Common Stock)our common stock) of the Companyour company or of any of itsour subsidiaries. The foregoing sentence shall not apply to (A) infollowing table shows the case of the Company , the shares of Common Stock to be sold hereunder, (B) the issuance of any shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereofper share and referred to in this Prospectus, (C) in the case of the Company, any shares of Common Stock issued or options to purchase Common Stock granted pursuant to existing employee benefit plans of the Company referred to in this Prospectus, (D) the pledge by Dancing Bear Investments or its affiliates of shares of Common Stock to a financial institution in connection with a bona fide financing transaction, (E) transfers of shares of Common Stock to immediate family members or trusts for the benefit of such family members (a "Family Transferee"); provided such transferee enters into a similar lock-up agreement, (F) transfer of all or part of any Warrants held by Dancing Bear Investments on the date hereof to any employee of Dancing Bear Investments, any employee of the Company, Michael S. Egan or a Family Transferee of Michael S. Egan, provided that each transferee shall have executed a similar lock-up agreement, or (G) shares of Common Stock issued in connection with a merger, recapitalization or consolidation of the Company. UNDERWRITING The underwriters of the Offering named below (the "Underwriters"), for whom Bear, Stearns & Co. Inc. and Volpe Brown Whelan & Company, LLC are acting as representatives, have severally agreed with the Company, subject to the terms and conditions of the Underwriting Agreement (the form of which has been filed as an exhibit to the Registration Statement on Form S-1 of which this Prospectus is a part), to purchase from the Company the aggregate number of shares set forth opposite their respective names below at the initial public offering price less thetotal underwriting discounts and commissions set forth onto be paid to the cover page of this Prospectus. Underwriter Number of ------------ Shares Bear, Stearns & Co. Inc......................... -------- Volpe Brown Whelan & Company, LLC.............. Total...................................... The natureunderwriters by us and by the selling stockholders. These amounts are shown assuming both no exercise and full exercise of the respective obligations ofunderwriters' option to purchase additional shares. -103- -------------------------- No Exercise Full Exercise ----------- ------------- Paid by us ---------- Per share..................... $ $ Total......................... $ $ Paid by Selling Stockholders ---------------------------- Per share..................... $ $ Total......................... $ $ Shares sold by the Underwriters is such that all ofunderwriters to the shares of Common Stock mustpublic will initially be purchased if any are purchased. Those obligations are subject, however, to various conditions, including the approval of certain matters by counsel. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, and, where such indemnification is unavailable, to contribute to payments that the Underwriters may be required to make in respect of such liabilities. The Company has been advised that the Underwriters propose to offer the shares of Common Stock, initiallyoffered at the public offering price set forth on the cover page of this Prospectus andprospectus. Any shares sold by the underwriters to certain selectedsecurities dealers may be sold at such price less a concession notdiscount of up to exceed $ per share; thatshare from the Underwriters may allow, andpublic offering price. Any such selectedsecurities dealers may reallow, a concessionresell any shares purchased from the underwriters to certain other brokers or dealers notat a discount of up to exceed $ per share; and that aftershare from the commencement ofpublic offering price. If all the Offerings,shares are not sold at the publicoffering price, the representative may change the offering price and the concessions may be changed. The Company has grantedother selling terms. In connection with the Underwriters an option to purchase in the aggregate up to additional shares of Common Stock solely to cover over-allotments, if any. The options may be exercised in whole or in part at any time within 30 days after the date of this Prospectus. To the extent the options are exercised, the Underwriters will be severally committed, subject to certain conditions, including the approval of certain matters by counsel, to purchase the additional shares of Common Stock in proportion to their respective purchase commitments as indicated in the preceding tables. The Underwriters have reserved for sale at the initial public offering, price up to 5% of the shares of Common Stock to be sold in the Offering for sale to employees of the Company and its affiliates, and to their associates and related persons. The number of shares available for sale to the general public will be reduced to the extent any reserved shares are purchased. Any reserved shares not so purchased will be offered by the Underwriters on the same basis as the other shares offered hereby. The Underwriters do not expect sales of Common Stock to any accounts over which they exercise discretionary authority to exceed 5% of the number of shares being offered hereby. The Company and its executive officers, directors and certain of its current stockholders have agreed that, subject to certain exceptions, for a period of 180 days after the date of this Prospectus, without the prior written consent of Bear, Stearns & Co. Inc., they will not, directly or indirectly, issue, sell, offer or agree to sell, grant any option for the sale of, pledge, make any short sale, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act or otherwise dispose of any shares of Common Stock (or securities convertible into, exercisable for or exchangeable for Common Stock) of the Company or of any of its subsidiaries. Prior to the Offering, there has been no public market for the Common Stock. Consequently, the initial public offering price will be determined through negotiations among the Company and representatives of the Underwriters. Among the factors to be considered in making such determination will be the Company's financial and operating history and condition, its prospects and prospects for the industry in which it does business in general, the management of the Company, prevailing equity market conditions and the demand for securities considered comparable to those of the Company. In order to facilitate the Offering, certain persons participating in the Offeringoffering may engagepurchase and sell shares of common stock in the open market. These transactions thatmay include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the common stock while the offering is in progress. The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representative has repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions. These activities by the underwriters may stabilize, maintain or otherwise affect the market price of the Common Stock during and after the Offering. Specifically, the Underwriters may over-allot or otherwise createcommon stock. As a short position in the Common Stock for their own account by selling more shares than have been sold to them by the Company. The Underwriters may elect to cover any such short position by purchasing shares in the open market or by exercising the over-allotment options granted to the Underwriters. In addition, such persons may stabilize or maintainresult, the price of the Common Stock by bidding for or purchasing sharescommon stock may be higher than the price that otherwise might exist in the open market andmarket. If these activities are commenced, they may impose penalty bids, under which selling concessions allowed to syndicate members or other broker-dealers participating inbe discontinued by the Offering are reclaimed if shares previously distributed in the Offering are repurchased in connection with stabilization transactions or otherwise. The effect of theseunderwriters at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. A Prospectus in electronic format is being made available on an Internet web site maintained by Wit Capital. In addition, all dealers purchasing shares from Wit Capital in this offering have agreed to stabilize or maintainmake a prospectus in electronic format available on web sites maintained by each of these dealers. Certain persons participating in this offering may also engage in passive market making transactions in the common stock on the Nasdaq National Market. Passive market making consists of displaying bids on the Nasdaq National Market limited by the prices of independent market makers and effecting purchases limited by such prices and in response to order flow. Rule 103 of Regulation M promulgated by the Commission limits the amount of net purchases that each passive market maker may make and the displayed size of each bid. -104- Passive market making may stablize the market price of the Common Stockcommon stock at a level above that which might otherwise prevail in the open market. The imposition of a penalty bid may also affect the price of the Common Stock to the extent that it discourages resales thereof. No representation is made as to the magnitude or effect of any such stabilization or other transactions. Such transactions may be effected on the Nasdaq National Market or otherwisemarket and, if commenced, may be discontinued at any time. The representative of the underwriters has advised us that Bear, Stearns & Co. Inc., NationsBanc Montgomery Securities LLC and Volpe Brown Whelan & Company each currently acts as a market maker for our common stock and currently intends to continue to act as a market maker following this offering. Since the average daily trading volume of our common stock exceeds $1 million and our public float exceeds $150 million, the provisions of Regulation M permit such underwriters to continue market making activities during the period of the offering. However, the underwriters are not obligated to do so and may discontinue any market making at any time. We estimate that our share of the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $ . We are paying the expenses of the selling stockholders, other than all applicable stock transfer taxes, fees of counsel for the selling stockholders and commissions, concessions and discounts of brokers, dealers or other agents. -105- LEGAL MATTERS The validity of the shares of Common Stockour common stock offered herebyby this prospectus will be passed upon for the Companyus by Fried, Frank, Harris, Shriver & Jacobson (a partnership including professional corporations), New York, New York. CertainVarious partners and employees of Fried, Frank, Harris, Shriver & Jacobson have, collectively, approximately 2,000 shares of our common stock. Various legal matters in connection with the offering will be passed upon for the Underwritersunderwriters by Morrison & Foerster LLP, New York, New York. EXPERTS The financialOur balance sheets as of December 31, 1998 and 1997 and the related statements of operations, stockholders' equity and cash flows for theglobe.com,the three years in the period ended December 31, 1998 and the balance sheets of factorymall.com, inc. as of December 31, 19961998 and 1997 and for the period from May 1, 1995 (inception) to December 31, 1995related statements of operations, stockholders' equity (deficit) and cash flows for the years ended December 31, 19961998 and 1997 included in this Prospectus and elsewhere in the Registration Statementperiod from April 26, 1996 (inception) to December 31, 1996 have been so included in reliance on the reportreports of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, upongiven on the authority of saidthat firm as experts in auditing and accounting. ADDITIONAL INFORMATION The Company has filed with the SEC a Registration Statement (which term shall encompass anyconsolidated balance sheets of Attitude Network, Ltd. and all amendments thereto) on Form S-1 (the "Registration Statement") under the Securities Act, with respect to the Common Stock offered hereby. This Prospectus, which is part of the Registration Statement, does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto, certain items of which are omitted in accordance with the rules and regulations of the SEC. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is hereby made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. For further information with respect to the Company, reference is hereby made to the Registration Statement and such exhibits and schedules filed as a part thereof, which may be inspected, without charge, at the Public Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at regional offices of the SEC located at Seven World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The SEC maintains a Web site that contains reports, proxy and information statements regarding registrants that file electronically with the SEC. The address of this Web site is (http://www.sec.gov). Copies of all or any portion of the Registration Statement may be obtained from the Public Reference Section of the SEC, upon payment of the prescribed fees. theglobe.com, inc. INDEX TO FINANCIAL STATEMENTS Page Independent Auditors' Report F-2 Balance Sheetssubsidiary as of December 31, 19961998 and 1997 and June 30, 1998 (unaudited) F-3 Statementsthe related consolidated statements of Operations for the period from May 1, 1995 (inception) to December 31, 1995operations, stockholders' equity (deficit) and cash flows for the years ended December 31, 19961998 and 1997 have been included in reliance on the reports of PricewaterhouseCoopers LLP, independent accountants, given on the authority of that firm as experts in auditing and accounting. The report of PricewaterhouseCoopers LLP covering the December 31, 1998 and 1997 financial statements contains an explanatory paragraph that states that the Company's recurring losses from operations raise substantial doubt about the entity's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty. WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any reports, statements or other information on file at the Commission's public reference room in Washington, D.C. You can request copies of those documents, upon payment of a duplicating fee, by writing to the Commission. We have filed a registration statement on Form S-1 with the Commission. This prospectus' which forms a part of that registration statement, does not contain all of the information included in the registration statement. Certain information is omitted and you should refer to the registration statement and its exhibits. With respect to references made in this prospectus to any contract or other document, such references are not necessarily complete and you should refer to the exhibits attached to the registration statement for copies of the actual contract or document. You may review a copy of the registration statement at the Commission's public reference room in Washington, D.C., and at the Commission's regional offices in Chicago, Illinois and New York, New York. Please call the Commission at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Our Commission filings and the -106- registration statement can also be reviewed by accessing the Commission's Internet site at http://www.sec.gov. -107- INDEX TO FINANCIAL STATEMENTS PAGE THEGLOBE.COM, INC. FINANCIAL STATEMENTS Report of Independent Accountants F-3 Balance Sheets at December 31, 1998 and 1997 F-4 Statements of Operations for the six monthsyears ended June 30,December 31, 1998, 1997 (unaudited) and 1998 (unaudited) F-41996 F-5 Statements of Stockholders' Equity for the period from May 1, 1995 (inception) toyears ended December 31, 19951998, 1997 and 1996 ` F-6 Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 F-7 Notes to Financial Statements F-8 Schedule of Valuation and Qualifying Accounts Exhibit 99.1 THEGLOBE.COM, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION Unaudited Pro Forma Condensed Consolidated Financial Information F-25 Unaudited Pro Forma Condensed Consolidated Balance Sheet as of December 31, 1998 F-27 Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1998 F-28 Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements as of and for the year ended December 31, 1998 F-29 FACTORYMALL.COM, INC. FINANCIAL STATEMENTS Report of Independent Accountants F-31 Balance Sheets at December 31, 1998 and 1997 F-32 F-1 Statements of Operations for the years ended December 31, 1998 and 1997 and the period from April 25, 1996 (inception) to December 31, 1996 F-33 Statements of Stockholders' Equity (Deficit) for the six monthsyears ended June 30,December 31, 1998 and 1997 (unaudited) and 1998 (unaudited) F-5the period from April 25, 1996 (inception) to December 31, 1996 F-34 Statements of Cash Flows for the years ended December 31, 1998 and 1997 and the period from May 1, 1995April 25, 1996 (inception) to December 31, 19951996 F-35 Notes to Financial Statements F-36 ATTITUDE NETWORK, LTD. FINANCIAL STATEMENTS Report of Independent Certified Public Accountants F-42 Consolidated Balance Sheets at December 31, 1998 and 1997 F-43 Consolidated Statements of Operations for the years ended December 31, 19961998 and 1997 andF-44 Consolidated Statements of Stockholders' Equity (Deficit) for the six monthsyears ended June 30,December 31, 1998 and 1997 (unaudited)F-45 Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1998 (unaudited) F-61997 F-46 Notes to Consolidated Financial Statements F-7F-47 F-2 Independent Auditors' ReportINDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders theglobe.com, inc.: We have audited the accompanying balance sheets of theglobe.com, inc. as of December 31, 19961998 and 1997, and the related statements of operations, stockholders' equity and cash flows for the period from May 1, 1995 (inception) to December 31, 1995 and foreach of the years in the three-year period ended December 31, 1996 and 1997.1998. In connection with our audits of the financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of theglobe.com, inc. as of December 31, 19961998 and 1997, and the results of its operations and its cash flows for the period from May 1, 1995 (inception) to December 31, 1995 and foreach of the years in the three-year period ended December 31, 1996 and 19971998 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick LLP New York, New York April 16, 1998, except for note 8, which is as of July 22, 1998February 20, 1999 F-3 theglobe.com, inc. Balance Sheets December 31, June 30, ----------------------- Assets 1996 1997 1998 ------------------------ --------- (unaudited) Current assets: Cash and cash equivalents......... $757,118 $5,871,291 $2,997,391 Short-term investments............ --- 13,003,173 10,157,830 Accounts receivable, less allowance for doubtful accounts of $12,000 and $27,868 in 1997 and 1998, respectively................... 66,128 254,209 624,191 Prepaids and other current assets. 2,377 -- 75,847 -------- -------- ---------- Total current assets.......... 825,623 19,128,673 13,855,259 Property and equipment, net......... 136,780 325,842 1,173,582 Other assets........................ 10,945 7,657 574,239 -------- ---------- ----------- Total assets.................. $973,348 $19,462,17 $15,603,080 ======== ==========
THEGLOBE.COM, INC. BALANCE SHEETS DECEMBER 31, ------------------------- 1998 1997 ----------- ------------ ASSETS Current assets: Cash and cash equivalents.................................... $29,250,572 $5,871,291 Short-term investments....................................... 898,546 13,003,173 Accounts receivable, less allowance for doubtful accounts of $300,136 and $12,000 in 1998 and 1997, respectively........ 2,004,875 254,209 Prepaids and other current assets............................ 678,831 -- ----------- ----------- Total current assets..................................... 32,832,824 19,128,673 Property and equipment, net...................................... 3,562,559 325,842 Restricted investments........................................... 1,734,495 -- Other assets..................................................... -- 7,657 ----------- ----------- Total assets................................................. $38,129,878 $19,462,172 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................................. $2,614,445 $ 396,380 Accrued expense.............................................. 817,463 325,454 Accrued compensation......................................... 691,279 1,148,999 Deferred revenue............................................. 673,616 113,290 Current installments of obligations under capital leases..... 1,026,728 27,174 ----------- --------- Total current liabilities................................ 5,823,531 2,011,297 Obligations under capital leases, excluding current installments. 2,005,724 98,826 Stockholders' equity: Preferred Stock, 3,000,000 shares authorized: Convertible preferred stock, Series A through E, $0.001 par value; 2,900,001 shares authorized; -0- and 1,449,995.5, shares issued and outstanding at December 31, 1998 and 1997, respectively; aggregate liquidation preference of -0- and $21,886,110 at December 31, 1998 and 1997, respectively......................................... -- 1,450 Common stock, $0.001 par value; 100,000,000 shares authorized; 10,312,256 and 1,154,271 shares issued and outstanding at December 31, 1998 and 1997 respectively..... 10,312 1,154 Additional paid-in capital................................... 50,914,494 21,866,965 Deferred compensation........................................ (128,251) (76,033) Net unrealized loss on securities............................ (50,006) (41,201) Accumulated deficit.......................................... (20,445,926) (4,400,286) ----------- ----------- Total stockholders' equity............................... 30,300,623 17,352,049 Commitments...................................................... ----------- ----------- Total liabilities and stockholders' equity............... $38,129,878 $19,462,172 =========== =========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $130,478 $396,380 $2,029,901 Accrued expense 15,234 325,454 834,959 Accrued bonuses -- 1,148,999 150,000 Deferred revenue 32,144 113,290 132,353 Current installments of obligations under capital leases.................. -- 27,174 255,962 -------- -------- ---------- Total current liabilities......... 177,856 2,011,297 3,403,175 Obligations under capital leases, excluding current installments.............. -- 98,826 629,281 Stockholders' equity: Preferred Stock, 3,000,000 shares authorized: Convertible preferred stock, Series A through E, $0.001 par value; 2,900,001 shares authorized; 2,759,940, 2,899,991 and 2,899,991, shares issued outstanding at December 31, 1996 and 1997, and as of June 30, 1998, respectively; aggregate liquidation preference of $21,837,110;.................. 2,760 2,900 2,900 Common stock, $0.001 par value; 100,000,000 shares authorized; 2,250,000, 2,308,541 and 2,394,058 shares issued and outstanding, respectively....... 2,250 2,309 2,395 Additional paid-in capital........ 1,627,421 21,864,360 21,872,446 Net unrealized loss on securities. -- (41,201) (29,647) Deferred compensation............. (21,053) (76,033) (52,914) Accumulated deficit............... (815,886) (4,400,286)(10,224,556) -------- ---------- ----------- Total stockholders' equity.... 795,492 17,352,049 11,570,624 Commitments ........................ ------- ---------- ----------- Total liabilities and stockholders' equity........ $973,348 $19,462,172 $15,603,080 ======== =========== ==========
See accompanying notes to financial statements. F-4
theglobe.com, inc. Statements of Operations Period from May 1, 1995 (inception) Year Ended Six Months Ended to DecemberTHEGLOBE.COM, INC. STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, June 30, December 31, ------------------- ----------------------- 1995---------------------------------------- 1998 1997 1996 1997 1997 1998---------- ------------- -------------- ------- ---------- ----------- ---------- (unaudited) Revenues: Advertising ......Revenues......................................... $5,509,818 $ 26,815770,293 $ 216,814 $ 592,409 $ 144,166 $ 1,043,606 Subscriptions .... -- 12,549 177,884 64,075 129,792 ----------- ----------- ----------- ----------- ----------- Total revenues 26,815 229,363 770,293 208,241 1,173,398 Cost of revenues .... 12,779revenues................................. 2,238,871 423,706 116,780 423,706 106,032 503,181 ----------- ----------- ----------- ----------- --------------------- ---------- --------- Gross profit .. 14,036profit............................. 3,270,947 346,587 112,583 346,587 102,209 670,217 Operating expenses: Sales and marketing ........ 1,248marketing.......................... 9,298,683 1,248,349 275,947 1,248,349 224,170 4,493,039 Product development ...... 60,000development.......................... 2,632,613 153,667 120,000 153,667 62,500 250,869 General and administrative ... 18,380administrative................... 6,828,134 2,827,591 489,073 2,827,591 594,358 2,396,716Non-recurring charge......................... 1,370,250 -- -- ----------- ---------- --------- Loss from operations..................... (16,858,733) (3,883,020) (772,437) ----------- ----------- ----------- ----------- ----------- Loss from operations .... (65,592) (772,437) (3,883,020) (778,819) (6,470,407) ----------- ----------- ----------- ----------- -------------------- Other income (expense): Interest and dividend income . 980income................. 1,083,400 334,720 25,966 334,720 11,384 703,097 Interest expense . (1,094)and other expense................... (191,389) -- (3,709) -- -- (30,460) ----------- ----------- ----------- ----------- -------------------- ---------- --------- Total interestother income (expense) .. (114), net........ 892,011 334,720 22,257 334,720 11,384 672,637 ----------- ----------- ----------- ----------- -------------------- ---------- --------- Loss before provision for income taxes ...... (65,706)taxes... (15,966,722) (3,548,300) (750,180) (3,548,300) (767,435) (5,797,770) ----------- ----------- ----------- ----------- --------------------- --------- Provision for income taxes ............... -- --taxes....................... 78,918 36,100 -- 26,500 ----------- ----------- ----------- ----------- -------------------- ---------- --------- Net loss ...... $ (65,706) $ (750,180)loss................................. $(16,045,640) $(3,584,400) $ (767,435) $(5,824,270)$(750,180) ============ =========== =========== =========== =========== ==================== Basic and diluted net loss per share ........share............. $ (0.03)(6.74) $ (0.33)(3.13) $ (1.56) $ (0.34) $ (2.51) =========== =========== =========== =========== ===========(0.67) ========= ========== ========= Weighted average basic and diluted shares outstanding ...... 2,250,000 2,250,000 2,293,545 2,281,920 2,322,794 =========== =========== =========== =========== ===========outstanding.................................... 2,381,140 1,146,773 1,125,000 ========= ========== =========
See accompanying notes to financial statements. F-5 theglobe.com, inc. Statements of Stockholders' Equity
Net unrealized gain Convertible (loss) Total preferred stock Common Stock Additional on sale stock- ----------------- ----------------- paid-in of Deferred Accumulated holders Shares Amount Shares Amount Capital securities compensation deficit equityTHEGLOBE.COM,INC. STATEMENTS OF STOCKHOLDERS' EQUITY OTHER TOTAL ADDITIONAL COMPRE- STOCK- CONVERTIBLE PAID-IN DEFERRED HENSIVE ACCUMULATED HOLDERS' PREFERRED STOCK COMMON STOCK CAPITAL COMPENSATION LOSS DEFICIT EQUITY ------------------ --------------------- ---------- ------------ -------- ------------ ----------- SHARES AMOUNT SHARES AMOUNT ------ ------ ------- ------- ---------- ---------- ------------ ----------- ------------- ------ IssuanceBalance as of common shares to founders...........December 31, 1995.. 1,134,910 $1,135 1,125,000 $1,125 $ -- $ $2,250,000 $2,250 $ 2,430695,163 $ -- $ -- $ --(65,706) $ 4,680 Issuance of Series A convertible preferred stock................. 712,980 713 -- -- 66,287 -- -- -- 67,000 Promissory notes converted to Series A convertible preferred stock................. 453,010 453 -- -- 45,785 -- -- -- 46,238 Issuance of Series B convertible preferred stock................. 1,103,830 1,104 -- -- 578,401 -- -- -- 579,505631,717 Net loss for the period from May 1, 1995 (inception) to December 31, 1995.....loss............. -- -- -- -- -- -- -- (65,706) (65,706)(750,180) (750,180) --------- ------Comprehensive loss... (750,180) --------- ------ ---------- ------ ------- ------- ---------- Balance as of December 31, 1995.............. 2,269,820 2,270 2,250,000 2,250 692,903 -- -- (65,706) 631,717 Issuance of Series B convertible preferred stock................. 47,620 48stock.... 23,810 24 -- -- 24,93724,961 -- -- -- 24,985 Issuance of Series C convertible preferred stock................. 442,500 442stock.... 221,250 221 -- -- 884,528884,749 -- -- -- 884,970 Deferred compensation....compensation -- -- -- -- 25,053 (25,053) -- (25,053) -- -- Amortization of deferred compensation.......... --compensation....... -- -- -- -- -- 4,000 -- -- 4,000 -------- ------ ---------- ------ ---------- ----------- -------- ------------- ----------- Balance at December 31, 1996........... 1,379,970 1,380 1,125,000 1,125 1,629,926 (21,053) -- (815,886) 795,492 Net loss.................loss............. -- -- -- -- -- -- -- (750,180) (750,180) --------- ------ ------ ------(3,584,400) (3,584,400) Net unrealized loss on securities...... -- -- -- -- -- -- (41,201) -- (41,201) ----------- ------- ------- -------- ---------- Balance at December 31, 1996.................. 2,759,940 2,760 2,250,000 2,250 1,627,421 -- (21,053) (815,886) 795,492Comprehensive loss... (3,625,601) ----------- Issuance of Series C convertible preferred stock................. 140,000 140stock.... 70,000 70 -- -- 279,860279,930 -- -- -- 280,000 Exercise of stock optionsoptions............ -- -- 58,541 59 4,44829,271 29 4,478 -- -- -- 4,507 Issuance of Series D convertible preferred stock, net of expense of $130,464........... 5125.5 -- -- -- 19,869,536 -- -- -- 19,869,536 Net unrealized loss on securities............ -- -- -- -- -- (41,201) -- -- (41,201) Deferred compensation....compensation -- -- -- -- 83,095 (83,095) -- (83,095) -- -- Amortization of deferred compensation.......... --compensation....... -- -- -- -- -- 28,115 -- -- 28,115 -------- ------ ---------- ------ ---------- ----------- -------- ------------- ----------- Balance at December 31, 1997.. 1,449,995.5 1,450 1,154,271 1,154 21,866,965 (76,033) (41,201) (4,400,286) 17,352,049 Net loss.................loss............. -- -- -- -- -- -- -- (3,584,400) (3,584,400) --------- ------ --------- ------ ----------- -------- -------- ----------- ---------- Balance at December 31, 1997.................. 2,899,991 2,900 2,308,541 2,309 21,864,360 (41,201) (76,033) (4,400,286) 17,352,049 Amortization of deferred compensation..........(16,045,640)(16,045,640) Change in net unrealized loss on securities......... -- -- -- -- -- -- 23,119(8,805) -- 23,119 Exercise of stock options (unaudited) -- -- 85,517 86 8 ,086(8,805) ---------- Comprehensive loss... (16,054,445) ---------- Deferred compensation -- -- -- 8,172 Net loss for the period (unaudited)...........-- 118,125 (118,125) -- -- -- Amortization of deferred compensation....... -- -- -- -- -- 65,907 -- -- (5,824,270) (5,824,270) Change65,907 Exercise of stock options............ -- -- 199,083 199 254,818 -- -- -- 255,017 Conversion of preferred stock in net unrealized gain (loss) on securities (unaudited)connection with the Company's IPO...... (1,449,995.5) (1,450) 5,473,735 5,474 (4,024) -- -- -- -- -- 11,554Issuance of Common Stock in connection for services....... -- -- 11,554 ---------3,500 3 31,497 -- -- -- 31,500 Issuance of common stock in connection with the Company's IPO, net of issuance costs of $4,054,658......... -- -- 3,481,667 3,482 27,276,863 -- -- -- 27,280,345 Transfer of warrants from significant shareholder to officers........... -- -- -- -- 1,370,250 -- -- -- 1,370,250 -------- ------ ---------- ------ ---------- ----------- --------- -------------- ------------- ---------- --------- Balance at June 30,December 31, 1998 (unaudited)........... 2,899,991 2,900 2,394,058 2,395 21,872,446 (29,647) (52,914) (10,224,556) 11,570,624 ========= =======. -- $ -- 10,312,256 $10,312 $50,914,494 $ (128,251) $(50,006) $(20,445,926) $30,300,623 ======== ====== ========== ====== ========== =========== ========= ======= ========== ================== ============= ===========
See accompanying notes to financial statements. F-6
theglobe.com, inc. Statements of Cash Flows Period from May 1, 1995 Year ended Six months ended (inception) to DecemberTHEGLOBE.COM, INC. STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, June 30, December 31, ---------------------- ---------------------------- 1995--------------------------------------- 1998 1997 1996 1997 1997 1998 ----------- --------- -------- ----------- ------------- (unaudited)------------ ------------ ---------- Cash flows from operating activities: Net loss...............................loss....................................... $(16,045,640) $(3,584,400) $ (65,706) $ (750,180) $(3,584,400) $(767,435) $(5,824,270) Adjustments to reconcile net loss to net cash used in operating activities:. Depreciation and amortization.... 10,530amortization.............. 715,410 60,210 47,595 60,210 37,499 238,411 Non-cash related interest........ 738Transfer of stock warrants from significant shareholder to officers.................. 1,370,250 -- -- Issuance of common stock for services...... 31,500 -- -- Deferred compensation earned..... --Amortization of deferred compensation...... 65,907 28,115 4,000 28,115 14,057 23,119 Changes in operating assets and liabilities: Accounts receivable, net......... (3,025)net................... (1,750,666) (188,081) (63,103) (188,081) 23,212 (369,982) Prepaids and other current assets (16,440)assets.......... (678,831) 2,377 (2,377) 2,377 2,377 (75,847) Other assets.....................assets............................... 7,657 -- -- Accounts payable........................... 2,218,065 265,902 120,684 Accrued expenses........................... 492,009 310,220 9,635 Accrued compensation....................... (457,720) 1,148,999 -- -- (568,226) Accounts payable................. 9,794 120,684 265,902 57,706 1,633,521 Accrued expenses................. 5,599 9,635 310,220 192,532 509,505 Accrued bonuses.................. -- -- 1,148,999 37,250 (998,999) Deferred revenue................. --revenue........................... 560,326 81,146 32,144 81,146 72,579 19,063 --------- ---------- ------------ -------------------- ----------- ----------- Net cash used in operating activities....................... (58,510)activities........ (13,471,733) (1,875,512) (601,602) (1,875,512) (330,223) (5,413,705) --------- ---------- ------------ -------------------- ----------- ----------- Cash flows from investing activities: Purchase of securities................. --securities......................... -- (13,044,374) -- (230,484) Proceeds from sale of securities.......securities............... 12,095,822 -- -- -- -- 3,087,381 Purchases of property and equipment.... (51,101)equipment............ (730,359) (119,984) (138,309) (119,984) (229,696) (247,859) ---------- ------------ ------------- ----------Payment of security deposits................... (1,734,495) -- -- ----------- ----------- ----------- Net cash provided by (used in) provided by investing activities............. (51,101)activities................................. 9,630,968 (13,164,358) (138,309) (13,164,358) (229,696) 2,609,038 ---------- ------------ ------------- --------------------- ----------- ----------- Cash flows from financing activities: Payments under capital lease obligations -- -- -- -- (77,405) Proceeds from convertible promissory notes................................ 45,500 -- --obligations....... (315,316) -- -- Proceeds from exercise of common stock options..............................options. 255,017 4,507 -- -- 4,507 4,507 8,172 ProceedsNet proceeds from issuance of common stock. 4,680stock..... 27,280,345 -- -- Payment of financing costs..................... -- (130,464) -- Proceeds from issuance of convertible preferred Series A, B and C stock.... 646,505stock...................... -- 280,000 909,955 280,000 280,000 -- Proceeds from issuance of convertible preferred Series D stock............. --stock............................... -- 20,000,000 -- -- Payment of financing costs............. -- -- (130,464) (26,302) -- --------- ---------- ------------ -------------------- ----------- ----------- Net cash provided by (used in) financing activities............. 696,685activities.. 27,220,046 20,154,043 909,955 20,154,043 258,205 (69,233) --------- ---------- ------------ -------------------- ----------- ----------- Net change in cash and cash equivalents...................... 587,074equivalents.... 23,379,281 5,114,173 170,044 5,114,173 (301,714) (2,873,900) Cash and cash equivalents at beginning of period.................................. --period. 5,871,291 757,118 587,074 757,118 757,118 5,871,291 --------- ---------- ------------- -------------------- ----------- ----------- Cash and cash equivalents at end of period $ 587,074period....... $29,250,572 $5,871,291 $ 757,118 $ 5,871,291 $ 455,404 $2,997,391 ========= ========== ============= ========= ===================== =========== =========== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest.............................Interest..................................... $ 1,094123,724 $ -- $ 3,709 =========== =========== =========== Income taxes................................. $ 69,890 $ -- $ -- $ 30,460 ========= =========== ============= ========= ============= Income taxes......................... -- -- -- -- 45,125 ========= =========== ============= ========= ======================== Supplemental disclosure of noncash transactions: Series A convertible preferred stock issued upon conversion of promissory notes, including accrued interest of $738................................. $ 46,238 $ -- $ -- $ -- $ -- ========= =========== ============= ========= ============.............................. Equipment acquired under capital leases $ -- $ --leases...... $3,221,769 $ 126,000 $ -- $ 836,648 ========= =========== ============= ========= ======================== ===========
See accompanying notes to financial statements. F-7 theglobe.com, inc. Notes to Financial StatementsTHEGLOBE.COM, INC. NOTES TO FINANCIAL STATEMENTS December 31, 19961998 and 1997 (All information subsequent to December 31, 1997 is Unaudited) (1) Organization and Summary of Significant Accounting PoliciesORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Description of Business theglobe.com, inc. (the "Company") was incorporated on May 1, 1995 (inception) and commenced operations on that date. theglobe.com is an online communitynetwork with members and users in the United States and abroad. theglobe.com's users are able to personalize their online experience by publishing their own content and interacting with others having similar interests. The Company's primary revenue source is the sale of advertising, with additional revenues generated through e-commerceelectronic commerce arrangements, development fees and the sale of membership subscriptionsservice fees for enhanced services. The Company's business is characterized by rapid technological change, new product development and evolving industry standards. Inherent in the Company's business are various risks and uncertainties, including its limited operating history, unproven business model and the limited history of commerce on the Internet. The Company's success may depend in part upon the emergence of the Internet as a communications medium, prospective product development efforts and the acceptance of the Company's solutions by the marketplace. During August 1997, Dancing Bear Investments, Inc. invested $20,000,000 in the Company in exchange for a 51% ownership interest in the Company on a fully diluted basis, plus warrants (the "Dancing Bear Investment"). (See Note 6) (b) Initial Public Offering In JuneOfferings On November 13, 1998, the Board of Directors authorized the filing of a registration statement with the SecuritiesCompany completed an initial public offering and Exchange Commission ("SEC") that would permit the Companyconcurrent offering directly to sellcertain investors in which it sold 3,481,667 shares of the Company's common stockCommon Stock, including 381,667 shares in connection with a proposed initial public offering ("IPO"). If the IPO is consummated underexercise of the terms presently anticipated, uponunderwriters' over-allotment option, at $9.00 per share. Upon the closing of the proposed IPOofferings, all of the then outstandingCompany's preferred stock, par value $0.001 per share (the "Preferred Stock") automatically converted into an aggregate of 5,473,735 shares of Common Stock. Net proceeds from the Company's Convertible Preferred Stock will automatically convert into sharesofferings, after underwriting and placement agent fees of common stock.$2.0 million and offering costs of $2.0 million were $27.3 million. (c) Unaudited Interim Financial Information The interim financial statements of the Company for the six months ended June 30, 1997 and 1998, included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements. In the opinion of management, the accompanying unaudited interim financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company at June 30, 1997 and 1998, and the results of its operations and its cash flows for the six months ended June 30, 1997 and 1998. theglobe.com, inc. Notes to Financial Statements, Continued (All information subsequent to December 31, 1997 is Unaudited) (1), Continued (d) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (e)F-8 THEGLOBE.COM, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1998 and 1997 (d) Cash and Cash Equivalents The Company considers all highly liquid securities with original maturities of three months or less to be cash equivalents. Cash equivalents at December 31, 19961998 were approximately $2,955,044 and at December 31, 1997 were approximately $752,000 and $3,997,000, respectively, and $2,994,000 as of June 30, 1998, which consisted of certificates of deposit. (f)corporate bonds and mutual funds. (e) Short-term Investments Short-term investments are classified as available-for-sale and are available to support current operations or to take advantage of other investment opportunities. The majority of theseThese investments are corporate bonds, commercial paper and corporate bond funds which are stated at their estimated fair value based upon publicly available market quotes. Unrealized gains and losses are computed on the basis of specific identification and are included in stockholdersstockholders' equity. Realized gains, realized losses and declines in value, judged to be other-than-temporary, are included in other income. There were no material gross realized gains or losses from sales of securities in the periods presented. The costs of securities sold are based on the specific-identification method and interest earned is included in interest income. (g)As of December 31, 1998, the Company had gross unrealized losses of $50,006 from its short-term investments. As of December 31, 1997, the Company had gross unrealized losses of $41,678 and gross unrealized gains of $477 from its short-term investments. (f) Property and Equipment Property and equipment areis stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, generally ranging from three to five years. Equipment under capital leases is stated at the present value of minimum lease payments and is amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the assets (h) Other Assetsassets. (g) Restricted Investments At June 30,December 31, 1998, other assetsrestricted investments included $568,226 of security deposits held in an escrow accountcertificates of deposit and other interest bearing accounts as collateral for certain capital lease equipment. (i)equipment and office space leases. (h) Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which F-9 THEGLOBE.COM, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1998 and 1997 the carrying amount of the assets exceeds the fair value of the assets. To date, no such impairment has been recorded. theglobe.com, inc. Notes to Financial Statements, Continued (All information subsequent to December 31, 1997 is Unaudited) (1), Continued (j)(i) Income Taxes The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in results of operations in the period that the tax change occurs. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. (k)(j) Revenue Recognition The Company's revenues are derived principally from the sale of banner advertisements under short-term contracts. To date, the duration of the Company's advertising commitments has generally averaged from one to twothree months. Advertising revenues are recognized ratably in the period in which the advertisement is displayed, provided that no significant Company obligations remain and collection of the resulting receivable is probable. Company obligations typically include the guarantee of a minimum number of "impressions" or times that an advertisement appears in pages viewed by the users of the Company's online properties. The Company also derived other revenues from its membership subscriptions whichservice fees, electronic commerce revenue shares and sponsorship placements within the Company's site. Membership service fees are deferred and recognized ratably over the term of the subscription period, which is generally upperiod. Revenues from the Company's share of proceeds from its electronic commerce partner's sales are recognized upon notification from its partners of sales attributable to one year.the Company's site. The Company also earns additional revenue on sponsorship contracts for fees relating to the design, coordination, and integration of the customer's content and links. These development fees are recognized as revenue once the related activities have been performed. Other revenues accounted for 11% of revenues for the year ended December 31, 1998, 23% for 1997 and 5% for 1996. The Company trades advertisements on its Webweb properties in exchange for advertisements on the Internet sites of other companies. Barter revenues and expenses are recorded at the fair market value of services provided or received, whichever is more determinable in the circumstances. Revenue from barter transactions is recognized as income when advertisements are delivered on the Company's Webweb properties. Barter expense is recognized when the Company's advertisements are run on other companies' Webweb sites, which is typically in the same period when the barter revenue is recognized. Barter revenues and expenses were approximately $-0-, $-0-, and $166,500$103,000 for the period from May 1, 1995 (inception) to December 31, 1995 and for the yearsyear ended December 31, 1996 and 1997, respectively, and $37,500 and $39,9061998, $166,500 for the six months ended June 30, 1997 and $-0- for 1996. F-10 THEGLOBE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 respectively. (l)AND 1997 (k) Product Development Product development expenses include personnelprofessional fees, staff costs and related expenses associated with the development, testing and upgrades to the Company's Webweb site and systems as well as personnel costsexpenses related to its editorial content and community management and support. Product development costs and enhancements to existing products are expensedcharged to operations as incurred. theglobe.com, inc. Notes to Financial Statements, Continued (All information subsequent to December 31, 1997 is Unaudited) (1), Continued (m)To date, completion of a working model of the Company's products and general release have substantially coincided. As a result, the Company has not capitalized any software development costs since such costs have not been significant. (l) Advertising Advertising costs are expensed as incurred. Advertising costs totaling $1,248, $202,986 and $1,057,606 in 1995, 1996 and 1997, respectively, and $183,413 and $4,000,047$7.3 million for the six monthsyear ended June 30,December 31, 1998, $1,057,606 for 1997 and 1998, respectively,$202,986 for 1996, are included in sales and marketing expenses in the Company's statements of operations. (n)(m) Stock-Based Compensation The Company accounts for stock-based compensation arrangements in accordance withhas adopted Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting"Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of Accounting Principle Board ("APB") Opinion No. 25 and provide pro forma net earnings disclosures for employee stock option grants if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. (o)(n) Net Loss Per Common Share The Company adopted SFAS No. 128, "Computation of Earnings Per Share," during the year ended December 31, 1997. In accordance with SFAS No. 128 and the Securities and Exchange Commission ("SEC")SEC Staff Accounting BullitinBulletin No. 98, basic earnings per share are computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of the incremental common shares issuable upon the conversion of the Convertible Preferred Stock (using the if-converted method) and shares issuable upon the exercise of stock options and warrants (using the Treasury Stock method); common equivalent shares are excluded from the calculation if their effect is anti-dilutive. Pursuant to SEC Staff Accounting Bulletin No. 98, common stock and convertible preferred stock issued for nominal consideration, prior to the anticipated effective date of an IPO, are required to be included in the calculation of basic and diluted net loss per share, as if they were outstanding for all periods presented. To date, the Company has not had any issuances or grants for nominal consideration. F-11 THEGLOBE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 Diluted loss per share has not been presented separately, as the outstanding stock options, warrants and contingent stock purchase warrants are anti-dilutive for each of the periods presented. Anti-dilutive potentialDiluted net loss per common shares outstanding were 2,619,820share for the periodyear ended December 31, 1995, 3,444,037 and 14,873,344 for the years ended December 31, 1996 and 1997, respectively, and 3,823,398 and 17,528,945 for the six-month periods ended June 30,1998, 1997 and 1998. theglobe.com, inc. Notes1996 does not include the effects of options to purchase 1,415,121, 721,979 and 342,049 shares of common stock, respectively; 2,023,009, 1,761,366 and -0- common stock warrants, respectively; and -0-, 4,953,327 and 1,379,970 shares of convertible preferred stock on an "as if" converted basis, respectively. (o) Fair Value of Financial Statements, Continued (All information subsequent to December 31, 1997 is Unaudited) (1), ContinuedInstruments The carrying amount of certain of the Company's financial instruments, including cash, short-term investment, accounts receivable, accounts payable and accrued expenses, approximate fair value because of their short maturities. The carrying amount of the Company's capital lease obligations approximate the fair value of such instruments based upon the implicit interest rate of the leases. (p) Recent Accounting Pronouncements In June 1997, the FASBFinancial Accounting Standards Board (the "FASB") issued SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income generally represents all changes in shareholders' equity during the period except those resulting from investments by, or distributions to, shareholders. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997 and requires restatement of earlier periods presented. We adopted SFAS No. 130 had no impact onas of December 31, 1997 and have presented comprehensive income for all periods presented in the Company's financial statements.Statement of Shareholders' Equity. In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of and Enterprise and Related Information." SFAS No. 131 establishes standards for the way that a public enterprise reports information about operating segments in annual financial statements, and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997 and requires statement of earlier periods presented. The Company has determined that it does not have any separately reporting business segments. In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Corporate Software Developed or Obtained for Internal Use", which establishes guidelines for the accounting for the costs of all computer software developed or obtained for internal use. We adopted SOP 98-1 effective for the year ended December 31, 1998. The adoption of SOP 98-1 is not expected to have a material impact on our financial statements. F-12 THEGLOBE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 In June 1998, the FASB issued SFAS No. 133, Accounting"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. This statement does not apply to the Company as the Company currently does not have any derivative instruments or hedging activities. (q) Stock Split In May 1996, the Company authorized and implemented a ten-for-one common stock split. In August 1997, the Company authorized and implemented an additional ten-for-one preferred stock split. In September 1998, the Company authorized a one-for-two reverse stock split of all common and preferred stock. All share and per share information in the accompanying financial statements has been retroactively restated to reflect the effect of thisthe stock splits and the reverse stock split. In August 1997, the Company authorized and implemented a ten-for-one preferred stock split. theglobe.com, inc. Notes to Financial Statements, Continued (All information subsequent to December 31, 1997 is Unaudited) (2) Concentration of Credit RiskCONCENTRATION OF CREDIT RISK Financial instruments which subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and trade accounts receivable. The Company maintainsinvests its cash and cash equivalents with various domestic financial institutions.among a diverse group of issuers and instruments. The Company performs periodic evaluations of the relative credit standing of these institutions.investments. From time to time, the Company's cash balances with any one financial institution may exceed Federal Deposit Insurance Corporation insurance limits. The Company's customers are concentrated in the United States. The Company performs ongoing credit evaluations of its customers' financial condition and generally does not require collateral and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends and other information; to date, such losses have been within management's expectations. For the period from May 1, 1995 (inception) toyear ended December 31, 1995,1998, there were no customers that accounted for over 10% of revenues generated by the Company, or of accounts receivable at December 31, 1995.1998. For the year ended December 31, 1997, there were no customers that accounted for over 10% of revenues generated by the Company or of accounts receivable at December 31, 1997. For the year ended December 31, 1996, one customer accounted for approximately 71% of total revenues generated by the Company and 90% of accounts receivable at December 31, 1996. For the year ended DecemberF-13 THEGLOBE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 there was one customer that accounted for 11% of revenues (excluding barter advertising revenues of $166,500) generated by the Company. There were no customers that accounted for over 10% of accounts receivable at December 31, 1997. For the six months ended June 30, 1998, there were no customers that accounted for over 10% of revenues generated by the Company, or of accounts receivable at June 30, 1998. (3) Property and EquipmentPROPERTY AND EQUIPMENT Property and equipment consist of the following: June December December 30, 31, 31, 1998 1996 1997 (unaudited) --------- ---------- ------------ Computer equipment, including assets under capital leases of $-0-, $126,000, and $962,648, respectively.................. $181,557 $421,164 1,500,187 Furniture and fixtures.................... 7,853 14,230 19,714 -------- --------- --------- 189,410 435,394 1,519,901 Less accumulated depreciation and amortization, including amounts related to assets under capital........ leases of $-0-, $-0- and $110,007, respectively............................ 52,630 109,552 346,319 -------- -------- ---------- Total............................... $136,780 $325,842 $1,173,582 ======== ======== ========== - ------------------------------------------- theglobe.com, inc. Notes to Financial Statements, Continued (All information subsequent to December 31, 1997 is Unaudited)
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ Computer equipment, including assets under capital leases of $3,305,598, and $126,000, respectively........................ $4,298,702 $ 421,164 Furniture and fixtures, including assets under capital leases of $42,171, and $-0-, respectively............................ 88,819 14,230 ---------- --------- 4,387,521 435,394 Less accumulated depreciation and amortization, including amounts related to assets under capital leases of $460,988 and $-0-, respectively....................................... 824,962 109,552 ---------- --------- Total....................................................... $3,562,559 $ 325,842 ========== =========
(4) Income Taxes The Company did not incur any income taxes for the period from May 1, 1995 (inception) to December 31, 1995 and for the year ended December 31, 1996 as a result of operating losses.INCOME TAXES Income taxes for the year ended December 31, 1998 and 1997 are based solely on state and local taxes on business and investment capital. The Company did not incur any income taxes for the year ended December 31, 1996. The difference between the provision for income taxes computed at the statutory rate and the reported amount of tax expense (benefit) attributable to income before income taxes for the period from May 1, 1995 (inception) to December 31, 1995 and for the yearyears ended December 31, 19961998, 1997 and 19971996 are as follows: 1995 1996 1997 ------------------------------------ Tax expense at statutory rates..... $(22,340) $ (257,781)$(1,218,695) Increase (reduction) in income taxes resulting from: Valuation allowance adjustment.. 25,938 302,644 1,710,346 State and local income taxes, net of Federal income tax benefit.............. (3,660) (45,131) (458,817) Other, net...................... 62 268 3,266 -------- -------- --------- $ -- $ -- $ 36,100 ======== ======== =========
1998 1997 1996 ------------- ------------- ------------ Tax benefit at statutory rates................... $(5,588,353) $(1,218,695) $(257,781) Increase (reduction) in income taxes resulting from: State and local income taxes, net of Federal income tax benefit......................... (1,665,150) (458,817) (45,131) Meals and entertainment...................... 13,521 3,266 268 Other, net................................... (44,324) -- -- Valuation allowance adjustment............... 7,363,224 1,710,346 302,644 ----------- ----------- ----------- $ 78,918 $ 36,100 $ -- ============ ============ ===========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 19961998 and 1997 are presented below. 1996F-14 THEGLOBE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997
1998 1997 ----------- ---------- Deferred tax assets: Net operating loss carryforwards............................ $13,411,724 $2,018,635 Allowance for doubtful accounts............................. 138,063 5,520 Depreciation................................................ (27,600) -- Issuance of warrants........................................ 630,315 -- Deferred compensation....................................... 45,090 14,773 Other....................................................... 96,600 -- ----------- ---------- --------- Net operating loss carryforwards....... $326,982 2,018,635 Allowance for doubtful accounts........ -- 5,520 Deferred compensation.................. 1,600 14,773 --------- --------- Total gross deferred tax assets......................... 14,294,192 2,038,928 Less valuation allowance........................................ (14,294,192) (2,038,928) ----------- ---------- Net deferred tax assets................................. $ -- $ -- =========== ==========
Because of the Company's lack of earnings history, the deferred tax assets.... 328,582 2,038,928 Lessassets have been fully offset by a valuation allowance................. (328,582) (2,038,928) --------- --------- Net deferred tax assets............ $ -- $ -- ========= =========allowance. The valuation allowance for deferred tax assets as of January 1, 1996December 31, 1998 was $14,294,192 and as of December 31, 1997 was $328,582 and $2,038,928 respectively.$2,038,928. The net change in the total valuation allowance for the yearsyear ended December 31, 1996 and 19971998 was $302,644$12,255,264 and $1,710,346 respectively.for 1997. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. theglobe.com, inc. Notes to Financial Statements, Continued (All information subsequent to December 31, 1997 is Unaudited) (4), Continued Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Of the total valuation allowance of $14,294,192, subsequently recognized tax benefits, if any, in the amount of $4,892,040 will be applied directly to contributed capital. At December 31, 1997,1998, the Company had net operating loss carryforwards available for federal and state income tax purposes of $4.4$29.2 million. These carryforwards expire through 20122018 for federal purposes and state purposes. Under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), the utilization of net operating loss carryforwards may be limited under the change in stock ownership rules of the Internal Revenue Code. As a result of ownership changes which occurred in August 1997, the Company's operating tax loss carryforwards and tax credit carryforwards are subject to these limitations. (5) CapitalizationCAPITALIZATION Authorized Shares During 1997,In July 1998, the Company amended and restated its certificate of incorporation. As a result, the total number of shares which the Company is authorized to issue is 25,000,000103,000,000 shares: 22,000,000100,000,000 of these shares are Common Stock, each having a par value of $0.001; and 3,000,000 shares are Preferred Stock, each having a par value of $0.001. F-15 THEGLOBE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 Common Stock During 1995, theThe Company issued a total of 2,250,000 shares of Common Stock to its founders in exchange for $4,680 in cash. During 1997, the Company issued an additional 58,541199,083 and 29,271 shares of Common Stock in connection with the exercise of certain stock options. Convertible Preferred Stock Each class of the Company's Convertible Preferred Stock (Preferred Stock) is convertible into Common Stock, as defined below,options in 1998 and has rights and preferences which are generally more senior to the Company's Common Stock and are more fully described in the Company's amended and restated certificate of incorporation.1997, respectively. In 1995, the Company completed a private placement of 1,165,990 shares of Series A Preferred Stock for an aggregate price of approximately $113,000. Such consideration consisted of $67,000 in cash and the conversion of outstanding Notes (described below) in the aggregate amount of approximately $46,000. In 1995,November 1998, the Company issued Convertible Promissory Notes ("Notes") in the aggregate principal amount of $45,500, bearing interest at rates between 6.62% and 8% per annum. These Notes, including interest thereon, were converted into a total of 453,0103,481,667 shares of Series A PreferredCommon Stock in connection with its initial public offering and concurrent offering. Upon consummation of the offerings, all of the Company's 1995 private placement, as required by the terms and conditionsoutstanding Preferred Stock was converted into 5,473,735 shares of such Notes.Common Stock. Convertible Preferred Stock As of December 31, 1997, the Company had five series of Convertible Preferred Stock (collectively "Preferred Stock") authorized and of which only four of the series were outstanding. The holders of the various series of Preferred Stock generally have the same rights and privileges. theglobe.com, inc. Notes to Financial Statements, Continued (All information subsequent to December 31, 1997 is Unaudited) (5), Continued During December 1995,Each class of the Company completed a private placement of 1,151,450 shares of Series BCompany's Preferred Stock at 0.525 per shareis convertible into Common Stock, as defined below, and has rights and preferences which are generally more senior to the Company's Common Stock and are more fully described in two issuances for an aggregate pricethe Company's amended and restated certificate of approximately $604,000, $579,000 was paid in cash in 1995 and $25,000 in 1996.incorporation. In 1996, the Company completed a private placement of 442,500221,250 shares of Series C Preferred Stock at $2.00$4.00 per share for an aggregate price of approximately $885,000, paid in cash. In April 1997, the Company amended the Series C Preferred Stock agreement in order to extend the above private placement of Series C Preferred Stock to April 15, 1997. In connection with this private placement, the Company issued an additional 140,00070,000 shares of Series C Preferred Stock at $2.00$4.00 per share for an aggregate price of $280,000 in 1997. In August 1997, the Company authorized and issued 5125.5 shares of Series D Preferred Stock for an aggregate cash amount of $20,000,000 in connection with the investment by Dancing Bear Investments, Inc., an entity controlled by the Chairman, which holds a majority interest in the Company. These shares constituted 51% of the fully diluted capital stock of the Company at that time.the time of exercise, as defined. In addition to the Series D Preferred Stock, Dancing Bear Investments, Inc. also received warrants which provideprovided the right to purchase up to 105 shares of Series E Preferred Stock representing 10% of the fully diluted capital stock of the Company at the time of exercise for an aggregate purchase price of $5,882,353, if exercised in total. In connection with the Dancing Bear Investment,investment, two officers and shareholders of the Company received $500,000 each as signing bonuses in connection with their employment agreements. Such amounts were accrued for at that time and were subsequently paid in the first quarter of 1998. The conversion rate of the Series A, B and C Preferred Stock, shall beas defined in the original private placement agreements was the quotient obtained by dividing the applicable series' original issue price by the applicable series' conversion price. The original issue price and conversion price shall be $0.10, $0.525 and $2F-16 THEGLOBE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 was $0.20 per share for Series A, $1.05 per share for Series B and $4 per share for Series C, respectively.as determined by negotiations among the parties. Each share of Series D and E Preferred Stock shall bewas convertible into an amount of common representing 1% of the fully diluted capital stock.stock, as defined in the original private placement agreement. Such conversion features were determined by negotiations among the parties. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, as defined, on a pari passu basis, an amount equal to $0.10, $0.525 and $2, $392,156.86 and $588,235.30$0.20 per share for Series A, $1.05 per share for Series B, $4 per share for Series C, $784,314 per share for Series D and $1,176,471 per share for Series E, convertible Preferred Stock, respectively, shallwould be paid out of the assets of the Company available for distribution before any such payments shallwould be made on any shares of the Company's common shares or any other capital stock of the Company other than the Preferred Stock, plus any declared but unpaid dividends. theglobe.com, inc. Notes to Financial Statements, Continued (All information subsequent to December 31, 1997 is Unaudited) (5), continuedUpon consummation of the offerings, all of the Company's outstanding Preferred Stock was converted into 5,473,735 shares of Common Stock. The following table summarizes the Convertible preferredPreferred Stock authorized, issued and outstanding and liquidation preferences: Shares Issued and Outstanding Shares Liquidation Authorized 1996 1997 Preference --------- ---- ---- ----------- Series A 1,165,990 1,165,990 1,165,990 $ 0.10 Series B 1,151,450 1,151,450 1,151,450 $ 0.525 Series C 582,500 442,500 582,500 $ 2.00 Series D 51 0 51 $ 392,156.86
PREFERRED SHARES EQUIVALENT SHARES OF ISSUED AND OUTSTANDING COMMON STOCK -------------------------------- ----------------------- SHARES AUTHORIZED 1998 1997 1998 1997 ----------- -------- --------- ----------- ---------- Series A........................... 1,165,990 -- 582,995 -- 582,995 Series B........................... 1,151,450 -- 575,725 -- 575,725 Series C........................... 582,500 -- 291,250 -- 291,250 Series D........................... 51 -- 25.5 -- 3,503,357 Series E........................... 10 -- -- 2,023,009 1,761,366 --------- ------ ----------- --------- --------- 2,900,001 -- 1,449,995.5 2,023,009 6,714,693 ========= ====== =========== ========= =========
LIQUIDATION LIQUIDATION PREFERENCE PREFERENCE PER ---------------------- SHARE 1998 1997 -------------- ----------- ---------- Series A......................................... $ 0.20 -- 116,599 Series B......................................... $ 1.05 -- 604,511 Series C......................................... $ 4.00 -- 1,165,000 Series D......................................... $ 784,313.72 -- 20,000,000 Series E......................................... $1,176,470.60 -- -- -------- ---------- -- 21,886,110 ======== ==========
The number of common shares that the outstanding Series E 10 0 0 --------- --------- --------- 2,900,001 2,759,940 2,899,991 ========= ========= ========= All Preferred Shares shall be automatically convertedWarrants are convertible into common sharesupon exercise became fixed as a result of the consummation of the offerings at 2,023,009 shares. These warrants are immediately exercisable at approximately $2.91 per share. F-17 theglobe.com, inc. NOTES TO FINANCIAL STATEMENTS December 31, 1998 and 1997 (6) NON-RECURRING CHARGE The Company recorded a non-cash, non-recurring charge of $1,370,250 to earnings in the eventthird quarter of 1998 in connection with the transfer of Series E Warrants to acquire 225,000 shares of Common Stock by Dancing Bear Investments, Inc. (the Company's principal shareholder at the date of transfer) to certain officers of the Company, closesat an exercise price of approximately $2.91 per share. The Company accounted for such transaction as if it were a firm commitment for an underwritten initial public offering of its common stock for an aggregatecompensatory plan adopted by the Company. Accordingly, such amount of at least $15,000,000. The Preferred Shares are subject to additional mandatory conversion rights,was recorded as defineda non-cash, non-recurring compensation expense in the Company's amendedstatement of operation for services provided by such officers to the Company with an offsetting increase to additional paid-in capital. The amount of such non-cash charge was based on the difference between the fair market value at the time of the transfer ($9 per share) and restated certificatethe exercise price per warrant of incorporation. (6) Stock Option Plan 1995 Stock Option Planapproximately $2.91 per share. (7) STOCK OPTION PLAN During 1995, the Company established the 1995 Stock Option Plan, which was amended (the "Amended Plan") by the Board of Directors in December 1996. Under the Amended Plan, the Board of Directors may issue incentive stock options or nonqualified stock options to purchase up to 1,332,000666,000 common shares. Incentive stock options may be granted only to officers who are employees of the Company, directors of the Company and other employees of the Company who are deemed to be "key employees." Incentive stock options must be granted at the fair market value of the Company's Common Stock at the date the option is issued. Nonqualified stock options may be granted to officers, directors, other employees, consultants and advisors of the Company. The option price for nonqualified stock options shall be at least 85% of the fair market value of the Company's Common Stock. The granted options under the amended plan shall be for periods not to exceed ten years. Incentive options granted to stockholders who own greater than 10% of the total combined voting power of all classes of stock of the Company must be issued at 110% of the fair market value of the stock on the date the options are granted. In connection with the Dancing Bear Investments investment, the Company reserved an additional 250,000125,000 shares of its common stock for issuance upon the exercise of options to be granted in the future under the Amended Plan. In July 1998, the Company's 1998 Stock Option Plan (the "1998 Plan") was adopted by the Board of Directors and approved by the stockholders of the Company. The 1998 Plan authorized the issuance of 1,200,000 shares of Common Stock, subject to adjustment as provided in the 1998 Plan. The 1998 Plan provides for the grant of "incentive stock options" intended to qualify under Section 422 of the Code and stock options which do not so qualify. The granting of incentive stock options is subject to limitation as set forth in the 1998 Plan. Directors, officers, employees and consultants of the Company and its subsidiaries are eligible to receive grants under the 1998 Plan. F-18 THEGLOBE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 The per share weighted-average fair value of stock options granted during 1995,1998, 1997 and 1996 and 1997 was $0.01, $0.08$8.03, $0.32 and $0.16, respectively, on the date of grant using the option-pricing method with the following weighted-average assumptions: 1995 - risk-free interest rate 6% and an expected life of three years; 1996 - risk-free1996--risk-free interest rate 6.18%, and an expected life of two years; 1997 - risk-free1997--risk-free interest rate 6.00%, and an expected life of three years.years; 1998--risk-free interest rate 5.00%, and an expected life of four years, and a volatility of 150%. As permitted under the provisions of SFAS No. 123, and based on the historical lack of a public market for the Company's units, no factor for volatility has been reflected in the option pricing calculation. theglobe.com, inc. Notes to Financial Statements, Continued (All information subsequent to December 31,calculation for 1997 is Unaudited) (6), continuedand 1996. The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, compensation cost of $4,000$65,887, $28,115 and $28,115$4,000 has been recognized for its stock options granted below fair market value in 19961998, 1997 and 1997,1996, respectively, in the accompanying financial statements. Stock option activity during the periods indicated is as follows: Weighted Options average granted exercise price ------WEIGHTED AVERAGE OPTIONS EXERCISE GRANTED PRICE ------- -------- Outstanding at December 31, 1995......... 350,000 $ 0.01 Granted.................................. 334,097 $ 0.06 Exercised................................ - Canceled................................. - ------- ------1995........... 175,000 $0.02 Granted.................................... 167,049 $0.12 Exercised.................................. -- Canceled................................... -- ---------- Outstanding at December 31, 1996......... 684,097 $ 0.03 Granted.................................. 823,402 $ 0.37 Exercised................................ (58,541) $ 0.08 Canceled................................. (5,000) $ 0.49 -------1996........... 342,049 $0.06 Granted.................................... 411,701 $0.74 Exercised.................................. (29,271) $0.16 Canceled................................... (2,500) $0.82 ---------- Outstanding at December 31, 1997......... 1,443,958 $ 0.22 =========1997........... 721,979 $0.44 Granted.................................... 917,550 $9.02 Exercised.................................. (202,583) $1.26 Canceled................................... (21,825) $0.78 ---------- Outstanding at December 31, 1998........... 1,415,121 $5.85 ========== Vested at December 31, 1997 795,965 =========1997................ 397,983 ========== Vested at December 31, 1998................ 347,173 ========== Options available at December 31, 1997..... 39,751 ========== Options available at December 31, 1998..... 344,025 ========== F-19 THEGLOBE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 79,502 ========= The following table summarizes information about stock options outstanding at 12/31/97: Options Outstanding Options Exercisable ------------------- ------------------------ Weighted Average ----------- Weighted Range of Remaining Weighted ----------- Exercise Number Contractual Average Number Average Price Outstanding Life Exercise Outstanding Exercise Price Price - ------------- ---------- ---------- ---------- ---------- ----------- $0.01-$0.0525 563,778 1 $ 0.026 466,524 $ 0.02 $0.20-$0.35 709,680 1 0.323 329,441 0.33 $0.49 170,500 5 0.49 0 0 ---------- -------- 1,443,958 795,965 ========== ======== theglobe.com, inc. Notes to Financial Statements, Continued (All information subsequent to December 31, 1997 Unaudited) (6), Continued1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------- ---------------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE - -------------- ------------- ------------ -------- ---------------- ---------------- $0.02-$0.105 136,431 6.9 years $ 0.04 120,486 $ 0.03 $0.40-$0.70 327,840 8.4 $ 0.67 163,137 $ 0.67 $0.82-$2.78 109,550 9.0 $ 1.66 26,050 $ 0.82 $4.60-$9.00 819,050 9.6 $ 8.80 37,500 $ 9.00 $27.44-$40.44 22,250 9.9 $30.22 -- $ 0.00 --------- ------- 1,415,121 347,173 ========= =======
At December 31, 1997,1998, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $0.01 - $0.49$0.02--$40.44 and 1 year,9.03 years, respectively. The Company applies APB No. 25 in accounting for its stock options granted to employees and, accordingly, no compensation expense has been recognized in the financial statements (except for those options issued with exercise prices less than fair market value at date of grant). Had the Company determined compensation expense based on the fair value at the grant date for its stock options issued to employees under SFAS No. 123, the Company's net loss would have been adjusted to the pro forma amounts indicated below: 1995 1996 1997 ---- ---- ---- Net loss - as reported $65,706 $750,180 $3,584,400 ======= ========
1998 1997 1996 ---- ---- ---- Net loss--as reported............................. $ 16,045,640 $ 3,584,400 $ 750,180 ============ ============ ========== Net loss--pro forma............................... $ 21,289,917 $ 3,621,373 $ 756,135 ============ ============ ========== Basic net loss per common share--as reported...... $ (6.74) $ (3.13) $ (0.67) ============ ============ ========== Basic net loss per common share--pro forma........ $ (8.94) $ (3.16) $ (0.67) ============ ============ ========== Net loss - pro forma $66,873 $756,135 $3,621,373 ======= ======== ========== Basic net loss per common $ (0.03) $ (0.33) $ (1.56) share - as reported ======= ======== ========== Basic net loss per common share -pro forma $ (0.03) $ (0.34) $ (1.58) ======= ======== ========= (7) Commitments
(8) COMMITMENTS (a) Office Leases In May 1997, the Company terminated its office lease in Ithaca, NY. The Company moved to New York City and entered into an operating lease agreement related to its new office space during February 1997.leases several facilities under noncancellable leases for varying periods through 2014. Rent expense for the operating leases was $-0-,$424,494, $81,157 and $26,181 and $81,157 for the period from May 1, 1995 (inception) to December 31, 1995 and for the years ended December 31, 1998, 1997 and 1996, andrespectively. F-20 THEGLOBE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 respectively. Future minimum payments under the New York Cityvarious office operating leases are as follows: Year ended DecemberYEAR ENDED DECEMBER 31, Amount 1998........................ $120,200 1999........................ 121,787 2000........................ 86,517 2001........................ 87,000 2002........................ 7,250 --------AMOUNT - ------------------------ ----------- 1999......................................... $1,642,791 2000......................................... 1,645,080 2001......................................... 1,548,246 2002......................................... 1,361,579 2003......................................... 1,361,579 Thereafter................................... 16,068,980 ---------- Total minimum lease payments $422,754 ======== theglobe.com, inc. Notes to Financial Statements, Continued (All information subsequent to December 31, 1997 is Unaudited) (7), Continuedpayments......... $23,628,255 =========== (b) Equipment Leases The Company's lease obligations are collateralized by certain assetsCDs and interest bearing accounts at December 31, 1997.1998. Future minimum lease payments under noncancellable operating leases (with initial or remaining lease terms in excess of one year) and future minimum capital lease obligations as of December 31, 19971998 are: Capital Operating Year ending December 31, leases leases ------------------------ 1998................................... $ 41,399 41,014 1999................................... 41,399 23,551 2000................................... 41,399 12,860 2001................................... 35,189 9,058 2002................................... -- 7,567 -------- ------- Total minimum lease payments. $159,386 $94,050 ======== ======= Less amount representing interest (at rates ranging from 11% to 12.5%).. 33,386 -------- Present value of minimum capital lease payments........................ 126,000 -------- Less current installments of obligation under capital leases 27,174 -------- Obligations under capital leases, excluding current installments $ 98,826 ======== In addition, the Company entered into five capital leases in 1998 with future minimum payments totaling $1,062,884 starting in 1998 through 2003.
CAPITAL OPERATING YEAR ENDING DECEMBER 31, LEASES LEASES - ------------------------- ------- --------- 1999............................................................ $1,353,905 $ 25,158 2000............................................................ 1,316,604 13,073 2001............................................................ 936,191 9,060 2002............................................................ 19,992 7,567 2003............................................................ 1,666 -- ---------- --------- Total minimum lease payments............................ $3,628,358 $ 54,858 ========== ========= Less amount representing interest (at rates ranging from 11% to 16.8%)........................................................ 595,906 ---------- Present value of minimum capital lease payments................. 3,032,452 ---------- Less current installments of obligation under capital leases.... 1,026,728 ---------- Obligations under capital leases, excluding current installments $2,005,724 ==========
(c) Advertising Contracts During October 1997, the Company entered into an exclusive one-year contract with an advertising agency with a minimum monthly fee of $50,000. (d) Employment Agreements The Company maintains employment agreements expiring in 2001 and 2002, with twofour executive officers of the Company. The employment agreements provide for minimum salary levels, incentive compensation and severance benefits, among other items. (9) RELATED PARTY TRANSACTIONS Certain officers and directors of the Company also serve as officers and directors of Dancing Bear Investments, Inc. The Company has entered into an electronic commerce contract with Republic Industries, Inc. ("Republic"), an entity affiliated with a Director of the Company, pursuant to which the Company has granted a right of first negotiation with respect to the exclusive right to engage in or conduct an automotive "clubsite" on theglobe.com web site through AutoNation, a subsidiary of F-21 THEGLOBE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 Republic. Additionally, Republic has agreed to purchase advertising from the Company for a three-year period at a price which will be adjusted to match any more favorable advertising price quoted to a third party by the Company, excluding certain short-term advertising rates. In addition, the Company has entered into an electronic commerce arrangement with InteleTravel, an entity controlled by the Chairman of the Company, whereby the Company developed a web community for InteleTravel in order for its travel agents to conduct business through theglobe.com in exchange for access to InteleTravel customers for distribution of the Company's products and services. The Company believes that the terms of the foregoing arrangements are on comparable terms as if they were entered into with unaffiliated third parties. As of December 31, 1998, the Company received $83,300 and $265,000 from Republic and InteleTravel, respectively, in connection with these arrangements. STOCKHOLDERS' AGREEMENT The Chairman, the Co-Chief Executive Officers, a Vice President and a Director of the Company and Dancing Bear Investments, Inc. (an entity controlled by the Chairman) entered into a Stockholders' Agreement (the "Stockholders' Agreement") pursuant to which the Chairman and Dancing Bear Investments, Inc. or certain entities controlled by the Chairman and certain permitted transferees (the "Chairman Group") will agree to vote for certain nominees of the Co-Chief Executive Officers or certain entities controlled by the Co-Chief Executive Officers and certain permitted transferees (the "Co-Chief Executive Officer Groups") to the Board of Directors and the Co-Chief Executive Officer Groups will agree to vote for the Chairman Group's nominees to the Board, who will represent up to five members of the Board. Additionally, pursuant to the terms of the Stockholders' Agreement, the Co-Chief Executive Officers, a Vice President and a Director have granted an irrevocable proxy to Dancing Bear Investments, Inc. with respect to any shares that may be acquired by them pursuant to the exercise of outstanding Warrants transferred to each of them by Dancing Bear Investments, Inc. Such shares will be voted by Dancing Bear Investments, Inc., which is controlled by the Chairman, and will be subject to a right of first refusal in favor of Dancing Bear Investments, Inc. upon certain private transfers. The Stockholders' Agreement also provides that if the Chairman Group sells shares of Common Stock and Warrants representing 25% or more of the Company's outstanding Common Stock (including the Warrants) in any private sale after the Offerings, the Co-Chief Executive Officer Groups, a Vice President and a Director of the Company will be required to sell up to the same percentage of their shares as the Chairman Group sells. If either the Chairman Group sells shares of Common Stock or Warrants representing 25% or more of the Company's outstanding Common Stock (including the Warrants) or the Co-Chief Executive Officer Groups sell shares or Warrants representing 7% or more of the shares and Warrants of the Company in any private sale after the Offerings, each other party to the Stockholders' Agreement, including entities controlled by them and their permitted transferees, may, at their option, sell up to the same percentage of their shares. F-22 theglobe.com, inc. Notes to Financial Statements, Continued (All information subsequent toNOTES TO FINANCIAL STATEMENTS December 31, 1997 is Unaudited) (8) Subsequent Event (unaudited)1998 and 1999 (10) SUBSEQUENT EVENTS (UNAUDITED) (a) Acquisitions factorymall.com, inc. On February 1, 1999, theglobe.com formed Nirvana Acquisition Corp. ("Merger Sub"), a Washington corporation and a wholly-owned subsidiary of theglobe.com. Merger Sub was merged with and into factorymall.com, inc., a Washington corporation d/b/a Azazz ("factorymall"), with factorymall as the surviving corporation. The Company expectsmerger was effected pursuant to recordthe Agreement and Plan of Merger, dated February 1, 1999, by and among theglobe.com, Merger Sub, and factorymall and certain shareholders thereof. As a charge to earnings inresult of the third quarterMerger, factorymall became a wholly-owned subsidiary of 1998theglobe.com. factorymall operates Azazz, a leading interactive department store. The consideration payable by theglobe.com in connection with the transfer during the third quarter 1998merger consists of 307,000 newly issued shares of common stock, par value $0.001, of theglobe.com. In addition, options to purchase shares of factorymall's common stock, without par value, were exchanged for options to purchase approximately 41,017 shares of theglobe.com Common Stock. Warrants to purchase shares of factorymall Common Stock were exchanged for warrants to acquire 450,000purchase approximately 9,405 shares of theglobe.com Common Stock. theglobe.com also assumed certain bonus obligations of factorymall triggered in connection with the Merger which will result in the issuance by theglobe.com of approximately 36,864 shares of theglobe.com Common Stock and payment by Dancing Bear Investmentstheglobe.com of approximately $451,232 in cash. The Company also incurred expenses of approximately $694,300 related to certain officers of the Company.Merger. The amount of such charge will be determined by thetotal purchase price for this transaction was approximately $22.8 million. The difference between the initial public offering price per sharefair market value of factorymall's assets and the exercisepurchase price per warrant.will be accounted for as goodwill and will be amortized over three years, the expected period of benefit. Attitude Network, Ltd. On April 5, 1999, theglobe.com formed Bucky Acquisition Corp. ("Merger Sub"), a Delaware corporation and a wholly-owned subsidiary of theglobe.com. Merger Sub was merged with and into Attitude Network, Ltd., a Delaware corporation ("Attitude"), with Attitude as the surviving corporation. The merger was effected pursuant to the Agreement and Plan of Merger, dated April 5, 1999, which closed on April 9, 1999, by and among theglobe.com, Merger Sub, and Attitude and certain shareholders thereof. As a result of the Merger, Attitude became a wholly-owned subsidiary of theglobe.com. Attitude publishes entertainment web sites including Happy Puppy and Games Domain. The consideration payable by theglobe.com in connection with the merger consists of approximately 785,000 newly issued shares of common stock, par value $0.001, of theglobe.com. F-23 THEGLOBE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1999 In July 1998,addition, options to purchase shares of Attitude's common stock, par value $0.001, were exchanged for options to purchase approximately 42,948 shares of theglobe.com common stock. Warrants to purchase shares of Attitude common stock were exchanged for warrants to purchase approximately 23,345 shares of theglobe.com common stock. The Company also incurred expenses of approximately $800,000 related to the Company approvedMerger. The total purchase price for this transaction was approximately $46.8 million. The difference between the amendmentfair market value of Attitude's assets and restatementthe purchase price will be accounted or as goodwill and will be amortized over three years, the expected period of its certificate of incorporation to increase the number of authorized shares from 25,000,000 shares to 100,000,000 shares.benefit. (b) Employee Stock Purchase Plan The Company's 1998Employee Stock OptionPurchase Plan (the "1998 Plan"("ESPP") was adopted by the Board of Directors on July 15, 1998, and approved by the stockholdersin February 1999. The ESPP will provide eligible employees of the Company the opportunity to apply a portion of their compensation to the purchase of shares of the Company at a 15% discount. 200,000 shares of authorized but unissued Company common stock will be reserved for issuance under the ESPP. The ESPP is subject to stockholder approval. (c) Stock Option Plan In March 1999, the Board of Directors authorized an increase in the number of shares reserved for issuance under the Company's 1998 Stock Option Plan from 1,200,000 to 1,700,000. F-24 THEGLOBE.COM, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION ACQUISITION OF FACTORYMALL.COM, INC. On February 1, 1999, theglobe.com formed Nirvana Acquisition Corp. ("Merger Sub"), a Washington corporation and a wholly-owned subsidiary of theglobe.com. Merger Sub was merged with and into factorymall.com, inc., a Washington corporation d/b/a Azazz ("factorymall"), with factorymall as the surviving corporation. The merger was effected pursuant to the Agreement and Plan of Merger, dated February 1, 1999, by and among theglobe.com, Merger Sub, and factorymall and certain shareholders thereof. As a result of the Merger, factorymall became a wholly-owned subsidiary of theglobe.com. factorymall operates Azazz, a leading interactive department store. The consideration payable by theglobe.com in connection with the merger consists of approximately 307,000 newly issued shares of common stock, par value $0.001, of theglobe.com. In addition, options to purchase shares of factorymall's common stock, without par value, were exchanged for options to purchase approximately 41,017 shares of theglobe.com common stock. Warrants to purchase shares of factorymall common stock were exchanged for warrants to purchase approximately 9,405 shares of theglobe.com common stock. theglobe.com also assumed certain bonus obligations of factorymall triggered in connection with the Merger which will result in the issuance by theglobe.com of approximately 36,864 shares of theglobe.com common stock and payment by theglobe.com of approximately $451,232 in cash. The Company also incurred expenses of approximately $694,300 related to the Merger. The total purchase price for this transaction was approximately $22.8 million. The difference between the fair market value of factorymall's assets and the purchase price will be accounted for as goodwill and will be amortized over three years. ACQUISITION OF ATTITUDE NETWORK LTD. On April 5, 1999, theglobe.com formed Bucky Acquisition Corp. ("Merger Sub"), a Delaware corporation and a wholly-owned subsidiary of theglobe.com. Merger Sub was merged with and into Attitude Network, Ltd., a Delaware corporation ("Attitude"), with Attitude as the surviving corporation. The merger was effected pursuant to the Agreement and Plan of Merger, dated April 5, 1999, which closed on April 9, 1999 by and among theglobe.com, Merger Sub, and Attitude and certain shareholders thereof. As a result of the Merger, Attitude became a wholly-owned subsidiary of theglobe.com. Attitude publishes entertainment web sites including Happy Puppy and Games Domain. The consideration payable by theglobe.com in connection with the merger consists of approximately 785,000 newly issued shares of common stock, par value $0.001, of theglobe.com. In addition, options to purchase shares of Attitude's common stock, par value $0.001, were exchanged for options to purchase approximately 42,948 shares of theglobe.com common stock. Warrants to purchase shares of Attitude common stock were exchanged for warrants to purchase approximately 23,345 shares of theglobe.com common stock. The Company also incurred expenses of approximately $800,000 related to the Merger. F-25 The total purchase price for this transaction was approximately $46.8 million. The difference between the fair market value of Attitude's assets and the purchase price will be accounted or as goodwill and will be amortized over three years, the expected period of benefit. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited Pro Forma Condensed Consolidated Statement of Operations (the "Pro Forma Statements of Operations") for the year ended December 31, 1998 gives effect to the acquisition of factorymall and Attitude (the "Acquisitions") as if it had occurred on January 1, 1998. The Pro Forma Statement of Operations are based on historical results of operations of the theglobe.com and the Acquisitions for the year ended December 31, 1998. The unaudited Pro Forma Condensed Consolidated Balance Sheet (the "Pro Forma Balance Sheet") gives effect to the Acquisitions as if the acquisition had occurred on that date. The unaudited Pro Forma Condensed Consolidated Financial Statements have been included as required by the rules of the Securities and Exchange Commission and are provided for informational purposes only. The unaudited Pro Forma Condensed Consolidated Financial Statements do not purport to be indicative of the results of operations or financial position that would have been obtained if the transactions had been effected on the date indicated or which may be obtained in the future. The accompanying unaudited Pro Forma Condensed Consolidated Financial Statements should be read in connection with the historical financial statements of theglobe.com, inc. which are contained elsewhere in this prospectus. F-26
theglobe.com, inc. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET December 31, 1998 ------------------------------------------------------------- Attitude theglobe.com, inc. factorymall.com, inc. Network, Ltd. Adjustments Pro Forma ------------------ --------------------- ------------- ---------------- ------------- ASSETS - ------ Cash and cash equivalents $ 29,250,572 $ 258,438 $ 2,161,513 $ - $ 31,670,523 Short-term investments 898,546 - - - 898,546 Accounts receivable, net 2,004,875 - 406,412 - 2,411,287 Inventory - 34,113 - - 34,113 Prepaids and other current assets 678,831 6,913 - - 685,744 ------------ ---------- ----------- -------------- ------------ Total current assets 32,832,824 299,464 2,567,925 35,700,213 Property and equipment, net 3,562,559 270,365 382,277 - 4,215,201 Restricted investments 1,734,495 - 24,308 - 1,758,803 Goodwill and intangible assets - - 1,825,039 22,841,666(a) 70,069,258 45,402,553(b) ------------ ---------- ----------- -------------- ------------ Total assets $ 38,129,878 $ 569,829 $ 4,799,549 $68,244,219 $111,743,475 ============ ========== =========== ============== ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Accounts payable $ 2,614,445 $299,210 $185,127 - $ 3,098,782 Accrued expenses 817,463 128,938 358,668 - 1,305,069 Accrued compensation 691,279 - - - 691,279 Deferred revenue 673,616 - 346,775 - 1,020,391 Current portion of notes payable to related party 64,767 950,000 (950,000)(d) 64,767 Current portion of long-term debt - - 200,000 - 200,000 Current installments of obligations under capital leases 1,026,728 22,258 - - 1,048,986 ------------ ---------- ----------- -------------- ------------ Total current liabilities 5,823,531 515,173 2,040,570 - 7,429,274 Notes payable to related party, net of current portion - 103,271 - - 103,271 Long-term debt - - 2,343,171 - 2,343,171 Obligations under capital leases, excluding current installments 2,005,724 16,502 - - 2,022,226 ------------ ---------- ----------- -------------- ------------ Total liabilities 7,829,255 634,946 4,383,741 - 11,897,942 22,776,549(a) 46,768,361(b) 65,117(a) 69,544,910 Stockholders' equity 30,300,623 (65,117) 415,808 (415,808)(b) 30,300,623 ------------ ---------- ----------- -------------- ------------ Total liabilities and stockholders' equity $ 38,129,878 $569,829 $4,799,549 $68,244,219 $111,743,475 ============ ========== =========== ============== ============
F-27
theglobe.com, inc. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS Year Ended December 31, 1998 ------------------------------------------------------------- Attitude theglobe.com, inc. factorymall.com, inc. Network, Ltd. Adjustments Pro Forma ------------------ --------------------- ------------- ---------------- -------------- Revenues $ 5,509,818 $ 473,563 $ 1,885,547 $ - $ 7,868,928 Cost of revenues 2,238,871 349,563 903,476 - 3,491,910 ------------ ------------ ----------- -------------- ------------ Gross profit 3,270,947 124,000 982,071 4,377,018 Operating expenses: Sales and marketing 9,298,683 333,415 681,585 - 10,313,683 Product development 2,632,613 223,957 1,860,686 - 4,717,256 General and administrative 6,828,134 673,530 1,644,415 - 9,146,079 Non-recurring charge 1,370,250 - - - 1,370,250 Amortization of intangible assets - - 1,883,137 7,613,889(a) 24,631,210 - 15,134,184(b) - ------------ ------------ ----------- -------------- ------------ Loss from operations (16,858,733) (1,106,902) (5,087,752) (22,748,073) (45,801,460) Other income (expense): Interest and dividend income 1,083,400 8 - - 1,083,408 Interest and other expenses (191,389) (213,573) (1,101,753) - (1,506,715) ------------ ------------ ----------- -------------- ------------ Total other income (expense), net 892,011 (213,565) (1,101,753) - (423,307) ------------ ------------ ----------- -------------- ------------ Loss before provision for income taxes (15,966,722) (1,320,467) (6,189,505) (22,748,073) (46,224,767) ------------ ------------ ----------- -------------- ------------ Provision for income taxes 78,918 - - - 78,918 ------------ ------------ ----------- -------------- ------------ Net loss $(16,045,640) $ (1,320,467) $(6,189,505) $ (22,748,073) $ (46,303,685) ============ ============ =========== ============== ============ Basic and diluted net loss per share $ (6.74) $ (13.19)(c) ============ ============ Weighted average basic and diluted shares outstanding 2,381,140 1,129,102(c) 3,510,242(c) ============ ============== ============
F-28 THEGLOBE.COM, INC. NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION (1) Pro Forma Adjustments and Assumptions (a) The Company acquired factorymall.com, inc.("factorymall.com") in a stock transaction for approximately $22.8 million in February 1999, including costs of acquisition, of which approximately $22.8 million was allocated to intangible assets. The components of the purchase price were as follows: $17.4 million for all of the outstanding common stock, $402,570 for outstanding warrants, $1.7 million for outstanding options to purchase common stock, $2.0 million in connection with the retention of certain bonus obligations of factorymall triggered in connection with the merger, $451,232 for cash, and the remaining amount was for costs of the acquisition. Goodwill and other intangible assets will be amortized over a period of 3 years, the expected period of benefit. The Pro Forma adjustments reflect twelve months of amortization expense for the year ended December 31, 1998, assuming the transaction had occurred on January 1, 1998. The value of the intangible assets at January 1, 1998 would have been approximately $22.8 million. The following represents the allocation of the purchase price over the historical net book values of the acquired assets and liabilities of factorymall.com at December 31, 1998, and is for illustrative pro forma purposes only. Actual fair values will be based on financial information as of July 15,the acquisition date (February 1, 1999). Assuming the transaction had occurred on December 31, 1998, the allocation would have been as follows: factorymall.com, inc. --------------------------- Assets acquired: Cash 258,438 Inventory 34,113 Other assets 6,913 Computer equipment, furniture and office equipment 270,365 Goodwill and intangibles 22,841,666 Liabilities assumed (634,946) --------------------------- Purchase price 22,776,549 =========================== The Pro Forma adjustment reconciles the historical balance sheet of factorymall.com at December 31, 1998 to the allocated purchase price assuming the transaction had occurred on December 31, 1998. F-29 THEGLOBE.COM, INC. NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION (b) The Company acquired Attitude Network, Ltd. ("Attitude") in a stock transaction for approximately $46.8 million in April 1999, including costs of acquisition, of which approximately $45.4 million was allocated to intangible assets. The components of the purchase price were as follows: $43.1 million for all of the outstanding common stock, $1 million for outstanding warrants, $1.8 million for outstanding options to purchase common stock, and the remaining amount was for costs of the acquisition. Goodwill and other intangible assets will be amortized over a period of 3 years, the expected period of benefit. The Pro Forma adjustments reflect twelve months of amortization expense for the year ended December 31, 1998, assuming the transaction had occurred on January 1, 1998. The value of the intangible assets at January 1, 1998 Planwould have been approximately $45.4 million. The following represents the allocation of the purchase price over the historical net book values of the acquired assets and liabilities of Attitude at December 31, 1998, and is for illustrative pro forma purposes only. Actual fair values will be based on financial information as of the acquisition date (April 9, 1999). Assuming the transaction had occurred on December 31, 1998, the allocation would have been as follows: Attitude Network, Ltd. --------------------------- Assets acquired: Cash 2,161,513 Accounts receivable, net 406,412 Other assets 24,308 Computer equipment, furniture and office equipment 382,277 Goodwill and intangibles 47,227,592 Liabilities assumed (3,433,741) --------------------------- Purchase price 46,768,361 =========================== The Pro Forma adjustment reconciles the historical balance sheet of Attitude at December 31, 1998 to the allocated purchase price assuming the transaction had occurred on December 31, 1998. (c) The pro forma basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. The calculation of the weighted average number of shares outstanding assumes that the 343,916 of the Company's common stock issued in its acquisition of factorymall.com and the 785,186 of the Company's common stock issued in its acquisition of Attitude Network, Ltd. were outstanding for the entire period. (d) The pro forma adjustment reflects the conversion of convertible demand notes into shares of theglobe.com's common stock as stipulated in the merger agreement. F-30 INDEPENDENT AUDITORS' REPORT The Board of Directors factorymall.com, inc.: We have audited the accompanying balance sheets of factorymall.com, inc. as of December 31, 1998 and 1997, and the related statements of operations, stockholders' equity (deficit), and cash flows for the years ended December 31, 1998 and 1997 and the period from April 25, 1996 (inception) to December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of factorymall.com, inc. as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years ended December 31, 1998 and 1997 and the period from April 25, 1996 (inception) to December 31, 1996, in conformity with generally accepted accounting principles. /s/ KPMG LLP Seattle, Washington March 5, 1999 F-31
FACTORYMALL.COM, INC. (dba azazz!) Balance Sheets December 31, 1998 and 1997 ASSETS 1998 1997 -------------- -------------- Current assets: Cash $ 258,438 42,286 Inventory 34,113 6,608 Prepaid expenses and other current assets 6,913 38,136 -------------- -------------- 299,464 87,030 Total current assets Computer equipment, furniture and office equipment, net 270,365 43,634 -------------- -------------- $ 569,829 130,664 Total assets ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 299,210 46,219 Accrued expenses 128,938 9,858 Current portion of capital lease obligations 22,258 17,917 Current portion of notes payable to related parties 64,767 -- -------------- -------------- 515,173 73,994 Total current liabilities Capital lease obligations, net of current portion 16,502 20,533 Notes payable to related parties, net of current portion 103,271 -- -------------- -------------- 634,946 94,527 Total liabilities -------------- -------------- Stockholders' equity (deficit): Preferred stock, no par value. Authorized 5,000,000 shares; no shares issued and outstanding -- -- Common stock, no par value. Authorized 25,000,000 shares; issued and outstanding 11,315,671 shares in 1998 and 9,950,000 shares in 1997 1,494,551 546,000 Additional paid-in capital 562,825 -- Deferred stock compensation (292,163) -- Accumulated deficit (1,830,330) (509,863) -------------- -------------- Total stockholders' equity (deficit) (65,117) 36,137 -------------- -------------- Total liabilities and stockholders' equity (deficit) $ 569,829 130,664 ============== ============== See accompanying notes to financial statements.
F-32
FACTORYMALL.COM, INC. (dba azazz!) Statements of Operations Years ended December 31, 1998 and 1997 and the period from April 25, 1996 (inception) to December 31, 1996 1998 1997 1996 --------------------- --------------------- --------------------- Net sales $ 473,563 70,656 -- Cost of sales 349,563 53,314 -- --------------------- --------------------- --------------------- Gross profit 124,000 17,342 -- Sales and marketing expense 333,415 94,997 -- Research and development expense 223,957 82,852 8,500 General and administrative expense 673,530 211,062 131,462 Loss from operations (1,106,902) (371,569) (139,962) --------------------- --------------------- --------------------- Other income (expense): Interest expense (213,573) -- -- Other income, net 8 1,668 -- --------------------- --------------------- --------------------- Total other income (expense) (213,565) 1,668 -- --------------------- --------------------- --------------------- Net loss $ (1,320,467) (369,901) (139,962) ====================== ===================== ===================== See accompanying notes to financial statements.
F-33
FACTORYMALL.COM, INC. (dba azazz!) Statements of Stockholders' Equity (Deficit) Years ended December 31, 1998 and 1997 and the period from April 25, 1996 (inception) to December 31, 1996 COMMON STOCK ADDITIONAL DEFERRED TOTAL ----------------- PAID-IN STOCK ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY (DEFICIT) ------ ------ ------- ------------ ------- ---------------- Balances at April 25, 1996 (inception) -- $ -- -- -- -- -- Issuance of common stock 9,000,000 100,000 -- -- -- 100,000 Net loss -- -- -- -- (139,962) (139,962) --------- --------- --------- --------- --------- -------- Balances at December 31, 1996 9,000,000 100,000 -- -- (139,962) (39,962) Issuance of common stock 927,000 400,000 -- -- -- 400,000 Conversion of note payable 23,000 46,000 -- -- -- 46,000 Net loss -- -- -- -- (369,901) (369,901) -------- -------- -------- -------- -------- -------- Balances at December 31, 1997 9,950,000 546,000 -- -- (509,863) 36,137 Issuance of common stock 705,671 529,251 -- -- -- 529,251 Issuance of warrants in connection with convertible debt -- -- 190,000 -- -- 190,000 Conversion of notes payable to common stock 416,000 312,000 -- -- -- 312,000 Exercise of warrants 200,000 100,000 -- -- -- 100,000 Exercise of stock options 44,000 7,300 -- -- -- 7,300 Deferred stock compensation -- -- 372,825 (372,825) -- -- Amortization of deferred stock compensation -- -- -- 80,662 -- 80,662 Net loss -- -- -- -- (1,320,467) (1,320,467) ---------- ---------- ------- -------- --------- ---------- Balances at December 31, 1998 11,315,671 $1,494,551 562,825 (292,163) (1,830,330) (65,117) ========== ========== ======= ======== ========= ==========
See accompanying notes to financial statements. F-34
FACTORYMALL.COM, INC. (dba azazz!) Statements of Cash Flows Years ended December 31, 1998 and 1997 and the period from April 25, 1996 (inception) to December 31, 1996 1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net loss $(1,320,467) (369,901) (139,962) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 45,476 15,459 3,808 Stock compensation expense 80,662 -- -- Accrued interest expense converted into common stock 190,000 -- -- Change in certain assets and liabilities: Inventory (27,505) (4,628) (1,980) Prepaid expenses and other current assets 31,223 (28,799) (9,337) Accounts payable 252,991 34,462 11,757 Accrued expenses 131,080 9,858 -- ------- ------- ------- Net cash used in operating activities (616,540) (343,549) (135,714) ------- ------- ------- Cash used in investing activities - purchase of computer equipment, furniture and office equipment (235,570) (2,627) (7,642) ------- ------- ------- Cash flows from financing activities: Proceeds from issuance of notes payable 151,790 -- 46,000 Proceeds from issuance of convertible notes payable 300,000 -- -- Repayment of capital lease obligations (20,079) (11,538) (2,644) Proceeds from exercise of warrants 100,000 -- -- Proceeds from exercise of stock options 7,300 -- -- Proceeds from issuance of common stock 529,251 400,000 100,000 --------- ------- ------- Net cash provided by financing activities 1,068,262 388,462 143,356 --------- ------- ------- Net increase in cash 216,152 42,286 -- Cash at beginning of period 42,286 -- -- ------- ------- ------- Cash at end of period $ 258,438 42,286 -- =========== ======= ======= Supplemental schedule of cash flow information - cash paid during the period for interest $ 4,219 3,108 337 =========== ======= ======= Supplemental schedule of noncash investing and financing activities: Computer equipment acquired through capital lease $ 20,389 17,606 35,026 obligations =========== ======= ======= Notes payable and accrued interest converted to common stock 312,000 46,000 -- =========== ======= =======
See accompanying notes to financial statements F-35 FACTORYMALL.COM, INC. (dba azazz!) Notes to Financial Statements Years ended December 31, 1998 and 1997 and the period from April 25, 1996 (inception) to December 31, 1996 (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) DESCRIPTION OF BUSINESS factorymall.com, inc. (Company) (dba azazz!) is a retailer on the Internet. The Company was incorporated in the State of Washington on April 25, 1996. Through its Internet web site (www.azazz.com), the Company allows customers to purchase various consumer goods. Inherent in the Company's business are various risks and uncertainties, including its limited operating history and the limited history of commerce on the Internet. Future revenues from the Company's services are dependent on the continued growth and acceptance of the Internet and use of the Internet for various commercial transactions. (b) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (c) INVENTORIES Inventories consist of finished goods which are valued at the lower of cost or market (net realizable value) on a first-in, first-out basis. (d) COMPUTER EQUIPMENT, FURNITURE AND OFFICE EQUIPMENT Computer equipment, furniture and office equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Computer equipment is depreciated over an estimated useful life of three years. Furniture and office equipment is depreciated over an estimated useful life of five years. (e) REVENUE RECOGNITION The Company recognizes revenue from product sales, net of any discounts, when the products are shipped to customers. Outbound shipping and handling charges are included in net sales. The Company provides an allowance for sales returns, which has been insignificant, based on historical experience. F-36 FACTORYMALL.COM, INC. (dba azazz!) Notes to Financial Statements Years ended December 31, 1998 and 1997 and the period from April 25, 1996 (inception) to December 31, 1996 (f) ADVERTISING COSTS The cost of advertising is expensed as incurred. In 1998 and 1997, the Company incurred advertising expense of $93,066 and $17,739, respectively, which is included in sales and marketing expense. The Company incurred no advertising costs in 1996. (g) INCOME TAXES The Company is an S corporation for Federal income tax purposes. Consequently, taxable income or loss of the Company is attributed to the Company's stockholders and no provision for income taxes has been reflected in the accompanying financial statements. Pro forma income tax information has not been provided. Had the Company been taxed as a C corporation, any income tax benefit as a result of the losses incurred by the Company would have been fully offset by the establishment of a valuation allowance for deferred tax assets. (h) STOCK-BASED COMPENSATION The Company accounts for its stock option plans for employees in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense related to employee stock options is recorded only if, on the date of grant, the fair value of the underlying stock exceeds the exercise price. The Company follows the disclosure-only requirements of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, which allows entities to continue to apply the provisions of APB Opinion No. 25 for transactions with employees and provide pro forma disclosures of operating results as if the fair value based method of accounting in SFAS No. 123 had been applied to employee stock option grants. (i) IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of their carrying amount or fair value less costs to sell. (j) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts for the Company's cash, accounts payable, notes payable and capital lease obligations approximate fair value. F-37 FACTORYMALL.COM, INC. (dba azazz!) Notes to Financial Statements Years ended December 31, 1998 and 1997 and the period from April 25, 1996 (inception) to December 31, 1996 (2) COMPUTER EQUIPMENT, FURNITURE AND OFFICE EQUIPMENT Computer equipment, furniture and office equipment consist of the following at December 31: 1998 1997 --------------- ------------- Computer equipment $ 309,269 57,651 Furniture and office equipment 25,839 5,250 --------------- ------------- 335,108 62,901 Less accumulated depreciation 64,743 19,267 --------------- ------------- Net computer equipment, furniture and office equipment $ 270,365 43,634 =============== ============= (3) COMMITMENTS (a) OPERATING LEASES The Company leases its offices under an operating lease agreement expiring in February 1999. Minimum lease payments required in 1999 under this lease total $4,000. The Company also rents warehouse space under a month-to-month arrangement. Rent expense totaled $27,056, $24,000 and $5,772 for the years ended December 31, 1998 and 1997 and the period from April 25, 1996 (inception) to December 31, 1996, respectively. (b) CAPITAL LEASES The Company leases computer equipment under capital leases. Future minimum lease payments under capital leases are as follows: 1999 $ 25,678 2000 12,994 2001 4,821 ------------- 43,493 Less amounts representing interest at 9.3% to 14.0% 4,733 ------------- 38,760 Less current portion 22,258 ------------- $ 16,502 ============= F-38 FACTORYMALL.COM, INC. (dba azazz!) Notes to Financial Statements Years ended December 31, 1998 and 1997 and the period from April 25, 1996 (inception) to December 31, 1996 (c) PORTAL COMMITMENTS The Company has agreements with certain Internet portal companies to purchase advertising on their Internet web sites in 1999. Total commitments under these contracts are approximately $85,000. (4) NOTES PAYABLE TO RELATED PARTIES Notes payable to related parties include the following: Note payable to stockholder, payable monthly in installments of $4,896, including interest at 12%, secured by computer equipment $ 147,449 Note payable to officer, payable monthly in installments of $969, including interest at 12%, secured by computer equipment 20,589 ------------ 168,038 Less current portion 64,767 ------------ $ 103,271 ============ Subsequent to December 31, 1998, the notes were repaid as part of the sale of the Company. (5) STOCKHOLDERS' EQUITY (a) CONVERTIBLE NOTES PAYABLE In March 1998, the Company issued $300,000 of convertible notes payable. The notes carried an annual interest rate of 12% and matured in July 1998. In addition, the Company issued the noteholders warrants to purchase 600,000 shares of common stock at $0.50 per share. The fair value of the warrants was $190,000 which was determined using a Black-Scholes pricing model with the following assumptions--fair market value of the underlying stock of $0.50 per share, expected life of five years, expected volatility of 70%, and a risk-free interest rate of 5.6%. The value of the warrants was recorded as a discount on the convertible notes payable and amortized to interest expense in 1998. In 1998, 200,000 warrants were exercised. At December 31, 1998, 400,000 warrants remained outstanding. In July 1998, the noteholders elected to convert the notes payable to common stock. The total principal and accrued interest of $312,000 outstanding was converted into 416,000 shares of common stock at $0.75 per share. In 1996, the Company issued a $46,000 convertible note payable. This note was converted into 92,000 shares of common stock in 1997 at $0.50 per share. F-39 FACTORYMALL.COM, INC. (dba azazz!) Notes to Financial Statements Years ended December 31, 1998 and 1997 and the period from April 25, 1996 (inception) to December 31, 1996 (b) STOCK OPTION PLAN In 1998, the Company adopted a stock option plan (the Plan) that provides for the grantissuance of "incentive stock options" intended to qualify under Section 422 of the Codeincentive and nonqualified stock options which do not so qualify. The granting of incentive stock option is subject to limitation as set forth in the 1998 Plan. Directors, officers, directors, employees, and consultants to acquire 1,500,000 shares of the CompanyCompany's common stock. The Board of Directors determines the terms and its subsidiaries are eligible to receive grantsconditions of options granted under the Plan, including the exercise price and vesting schedule. The exercise price for qualified incentive stock options shall not be less than the fair market value of the underlying stock at the date of grant, and have terms no longer than ten years from the date of grant. Options granted generally vest over periods ranging from 18 months to four years. Under APB 25, compensation expense is measured as the excess of the fair value of the underlying stock over the exercise price on the date of grant. Had stock compensation expense for the Company's stock option plan been determined based on the fair value methodology under SFAS 123, the Company's 1998 Plan.net loss would have increased to the following pro forma amount: Net loss: As reported $ (1,320,407) Pro forma (1,327,492) The weighted average fair value of options granted in 1998 was $0.36. The fair value for these options was estimated at the date of grant using the minimum value method which takes into account (1) the fair value of the underlying stock at the grant date, (2) the exercise price, (3) an expected life of five years, (4) no dividends, and (5) a risk-free interest rate of 5.4%. Compensation expense recognized in providing pro forma disclosures may not be representative of the effects on net income or loss for future years. A summary of stock option activity under the Plan authorizes for issuance of 1,800,000is as follows:
OUTSTANDING OPTIONS ---------------------------------- SHARES WEIGHTED AVAILABLE NUMBER AVERAGE FOR GRANT OF SHARES EXERCISE PRICE ---------------- ---------------- --------------- Balances at December 31, 1997 -- -- $ -- Plan adoption 1,500,000 -- -- Options granted (1,500,000) 1,500,000 0.50 Options exercised -- (44,000) 0.16 ---------------- ---------------- --------------- Balances at December 31, 1998 -- 1,456,000 $ 0.51 ================ ================ ===============
F-40 FACTORYMALL.COM, INC. (dba azazz!) Notes to Financial Statements Years ended December 31, 1998 and 1997 and the period from April 25, 1996 (inception) to December 31, 1996 The Company issued additional options to acquire 183,900 shares of Common Stock, subjectthe Company's common stock during 1998. Subsequent to adjustment as provided in the 1998 Plan. On July 15, 1998year-end, the Board of Directors approved the grantissuance of 200,000these options eachand amended the Plan to two executives. There are 1,235,000provide for the issuance of incentive and nonqualified stock options to acquire an additional 500,000 shares of Companythe Company's common stock. The following table summarizes information about stock options outstanding under the Plan at December 31, 1998: OUTSTANDING OPTIONS OPTIONS EXERCISABLE ---------------------------- ---------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE ------------- ------------- ------------ ------------- ------------ ------------- $ 0.50 1,371,000 4.5 years $ 0.50 223,250 $ 0.50 0.75 85,000 4.7 years 0.75 2,313 0.75 ------------- ------------ ------------- ------------ ------------- 1,456,000 4.6 years 0.51 225,563 0.50 ============= ============ ============= ============ =============
(6) SUBSEQUENT EVENT In February 1999, the Company entered into an agreement to merge the Company with Nirvana Acquisition Corporation (a wholly-owned subsidiary of theglobe.com). All issued and outstanding options to purchase common stock of the Company vested fully on the acquisition date and were converted into options to purchase common stock of theglobe.com at a specified conversion rate. As a result of the acquisition, certain employees received a percentage of the sale proceeds, as provided for under the terms of their employment contracts. F-41 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders Attitude Network, Ltd. Naples, Florida In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows present fairly, in all material respects, the financial position of Attitude Network, Ltd. and its subsidiary (the "Company") at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the two years ended December 31, 1998, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards, 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. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 15 to the consolidated financial statements, the Company has suffered recurring losses from operations which raises substantial doubt about its ability to continue as a going concern. As discussed in Note 16 to the consolidated financial statements, on April 9, 1999 the Company merged with a wholly owned subsidiary of theglobe.com, inc. whereby the stockholders of the Company exchanged their common stock for shares of common stock of theglobe.com, inc. at a specified conversion rate. The financial statements do not include any adjustments that might result from the outcome of this Plan.uncertainty. /s/ PricewaterhouseCoopers LLP March 19, 1999, except for Note 16, for which the date is April 9, 1999 F-42 No dealer, sales representative
ATTITUDE NETWORK, LTD. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 ASSETS 1998 1997 ---- ---- Current assets: Cash $ 2,171,513 $ 83,318 Accounts receivable, less allowance for doubtful accounts of $200,000 and $96,473 at December 31, 1998 and 1997, respectively 406,412 546,993 ------- ------- Total current assets 2,567,925 630,311 --------- ------- Property and equipment, net 382,277 453,081 Intangible assets, net 1,825,039 3,706,919 Deposits 24,308 13,799 ------------ ------------ Total assets $ 4,799,549 $ 4,804,110 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 185,127 $ 647,784 Accrued expenses 385,668 1,680,636 Deferred revenue 346,775 300,000 Convertible notes payable to directors 950,000 - Current portion of long-term debt 200,000 137,615 --------- --------- Total current liabilities 2,040,570 2,766,035 Long-term debt 2,343,171 2,293,536 --------- --------- Total liabilities 4,383,741 5,059,571 --------- --------- Commitments and contingencies (Note 14) Stockholders' equity (deficit): Preferred stock, $.0l par value, 5,000 shares authorized, no shares issued and outstanding - - Common stock, $.001 par value, 20,000,000 shares authorized, 13,114,457 and 11,446,352 shares issued and outstanding at December 31, 1998 and 1997, respectively 13,115 11,446 Additional paid-in capital 17,542,540 10,683,250 Accumulated deficit (17,139,972) (10,950,467) Accumulated other comprehensive income 125 310 Total stockholders' equity (deficit) 415,808 (255,461) ----------- ----------- Total liabilities and stockholders' equity $ 4,799,549 $ 4,804,110 ============ ============
F-43
ATTITUDE NETWORK, LTD. CONSOLIDATED STATEMENTS OF OPERATIONS DECEMBER 31, 1998 AND 1997 1998 1997 ---- ---- Sales $ 1,885,547 $ 2,474,537 Cost of sales 903,476 1,325,662 ----------- ----------- Gross profit 982,071 1,148,875 ----------- ----------- Operating expenses: Selling and marketing 681,585 1,609,202 Product development 1,860,686 2,520,090 General and administrative 1,644,415 1,484,360 Amortization 1,883,137 1,320,098 ----------- ----------- Total operating expenses 6,069,823 6,933,750 ----------- ----------- Operating loss (5,087,752) (5,784,875) Nonoperating income (expense): Gain on sale of website - 200,000 Interest expense (1,101,753) (250,076) Litigation settlement - (1,395,000) ----------- ----------- Net loss $(6,189,505) $(7,229,951) =========== ===========
F-44
ATTITUDE NETWORK, LTD. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) DECEMBER 31, 1998 AND 1997 ACCUMULATED PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER STOCKHOLDERS' --------------- ------------- PAID-IN ACCUMULATED COMPREHENSIVE EQUITY SHARES PAR VALUE SHARES PAR VALUE CAPITAL DEFICIT INCOME (DEFICIT) ------ --------- ------ --------- ------- ------- ------ --------- Balances, December 31, 1996 - $ - 9,447,520 $ 9,448 $ 4,914,342 $(3,720,516) $ - $ 1,203,274 Issuance of shares of common stock for acquisition - - 1,000,000 1,000 2,499,000 - - 2,500,000 Issuance of shares of common stock - - 666,667 667 1,999,333 - - 2,000,000 Issuance of shares of common stock - - 330,665 330 1,264,576 - - 1,264,906 Conversion of debt to common stock - - 1,500 1 5,999 - - 6,000 Comprehensive income (loss) Foreign currency translation - - - - - - 310 310 Net loss - - - - - (7,229,951) - (7,229,951) ---------- Total comprehensive income (loss) (7,229,951) -------- -------- ---------- ---------- ---------- ---------- ---------- ---------- Balances, December 31, 1997 - - 11,446,352 11,446 10,683,250 (10,950,467) 310 (255,461) Issuance of shares of common stock - - 250,000 250 999,750 - - 1,000,000 Issuance of shares of common stock - - 259,939 260 999,750 - - 1,000,010 Exercise of common stock options for shares - - 26,500 27 11,899 - - 11,926 Issuance of shares of common stock for legal settlement - - 465,000 465 1,394,535 - - 1,395,000 Issuance of shares of common stock, net of issue cost - - 666,666 667 1,909,326 - - 1,909,993 Issuance of 400,000 common stock warrants - - - - 798,920 - - 798,920 Stock option expense - - - - 745,110 - - 745,110 Comprehensive income (loss) Foreign currency translation - - - - - - (185) (185) Net loss - - - - - (6,189,505) - (6,189,505) ----------- Total comprehensive income(loss) (6,189,690) -------- -------- ---------- ---------- ---------- ---------- ---------- ---------- Balances, December 31, 1998 - $ - 13,114,457 $13,115 $10,683,250 $(10,950,467) $ 310 $ 415,808 ======== ======== ========== ========== ========== =========== ========= ============
F-45
ATTITUDE NETWORK, LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS DECEMBER 31, 1998 AND 1997 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (6,189,505) $(7,229,951) ------------ ----------- Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 120,594 84,790 Amortization 1,883,137 1,320,098 Amortization of discount on note payable 262,020 262,360 Non-cash interest related to warrant valuation 798,920 - Stock options expense 745,110 - Provision for bad debts 103,527 253,521 Gain on sale of website - (200,000) (Gain) loss on sale of property and equipment (4,316) 22,055 Changes in assets and liabilities: Decrease in inventory - 7,047 Increase (decrease) in accounts receivable 37,054 (304,096) Increase in other assets (11,766) (10,207) Increase (decrease) in accounts payable (462,657) 403,378 Increase in accrued expenses 73,032 1,606,509 Increase in deferred revenue 46,775 297,517 ------ ------- Total adjustments 3,591,430 3,742,972 --------- --------- Net cash used in operating activities (2,598,075) (3,486,979) ---------- ---------- CASH FLOW FROM INVESTING ACTIVITIES Purchase of property and equipment (47,174) (341,047) Cash received from sale of property and equipment 1,700 14,111 Cash received from sale of website - 200,000 Acquisition, net of cash acquired - (59,128) ------- ------- Net cash used in investing activities (45,474) (186,064) ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock 4,000,003 3,270,906 Stock issuance costs (90,000) - Proceeds from exercise of stock option 11,926 - Proceeds from directors notes 950,000 - Payments on long-term debt (150,000) (179,100) -------- -------- Net cash provided by financing activities 4,721,929 3,091,806 --------- --------- Effect of exchange rate changes on cash (185) 3,172 ------- ----- Net increase (decrease) in cash 2,078,195 (578,065) Cash at beginning of period 83,318 661,383 --------- ------- Cash at end of period $ 2,161,513 $ 83,318 ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION In 1997, common stock was issued in satisfaction of amounts payable to a vendor in the amount of $6,000. In 1997, 1,000,000 shares of common stock were issued to acquire Kaleidoscope Network, Ltd. (see Note 3). In 1998, 465,000 shares of common stock were issued to settle litigation accrued for at December 31, 1997 for $1,395,000. F-46 ATTITUDE NETWORK, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 - --------------------------------------------------------------------------- 1. ORGANIZATION Attitude Network, Ltd. (the Company) was formed in January 1995 to establish, develop and deliver customized website programming to narrowly defined target audiences. The Company seeks to support its markets by providing advertising supported online entertainments. Its audiences include but are not limited to the on-line games market. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Attitude Network, Ltd. and its wholly owned subsidiary, Kaleidoscope Network, Ltd. All material intercompany transactions have been eliminated in consolidation. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the related assets. Major improvements and betterments of property are capitalized. Maintenance, repairs and minor improvements are charged to expense in the period incurred. Upon the sale or other disposition of property, the cost and related accumulated depreciation are removed from the accounts and any other persongain or loss is reflected in income. INTANGIBLE ASSETS The costs of web rights purchased by the Company are being amortized on the straight-line method over the estimated useful life of three years. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. To date, no such impairment has been authorizedrecorded. IMPLEMENTATION OF SFAS 130 In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," effective for fiscal periods beginning after December 15, 1997. The new standard requires that comprehensive income, which includes net income, as well as certain changes in assets and liabilities recorded in common equity, be reported in the financial statements. The Company adopted SFAS No. 130 during the year ended December 31, 1998. F-47 ATTITUDE NETWORK, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 - --------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED FOREIGN CURRENCY TRANSLATION The financial position and results of operations of the Company's foreign operations are measured using local currency as the functional currency. Current assets and liabilities of these operations are translated to give any informationthe U.S. dollar at the exchange rate in effect at year-end. Income statement accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from differences in exchange rates from period to period are recorded in accumulated comprehensive income. Realized gains and losses resulting from foreign currency transactions are included in the statement of operations. DEFERRED REVENUE Deferred revenue represents amounts received by the Company related to future services to be provided. REVENUE RECOGNITION Website advertising revenue is earned by providing advertisers with a space on the Company's website to promote products. The Company's advertising revenues are derived principally from short-term advertising contracts in which the Company guarantees a minimum number of impressions (a view of an advertisement by a consumer) for a fixed fee. Advertising revenues are recognized ratably over the term of the contract. Hotel discount revenue represents revenue earned by the Company for reservations booked through their hotel discount web page and is recognized in the month earned. Revenue received in connection with an agreement between the Company and a telephone company, whereby the Company has agreed to develop, deliver, install and operate a computer-based games service designed for the telephone company is recognized on a monthly basis in accordance with the agreement. The Company trades advertisements on its website in exchange for advertisements on the internet sites of other companies. Barter revenues and expenses are recorded at the fair market value of services provided or received, whichever is more determinable in the circumstances. Revenue from barter transactions is recognized as advertisements are delivered on the Company's website. Barter expense is recognized as cost of sales when the Company's advertisements are run on other companies web sites, which is typically in the same period when the barter revenue is recognized. COST OF SALES Cost of sales includes communication/on-line costs associated with connecting the Company's website with servers, costs incurred for website audits, barter expense and other direct costs. F-48 ATTITUDE NETWORK, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 - --------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED PRODUCT DEVELOPMENT The costs to develop and maintain the Company's web sites are being expensed as incurred. INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. MANAGEMENT'S USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the 1998 presentation. 3. ACQUISITION In February 1997, the Company acquired all of the issued and outstanding shares of Kaleidoscope Networks Limited, a company registered in England, for an aggregate purchase price of approximately $2.6 million. The purchase consisted primarily of an internet worldwide games website including all software, documentation, licenses, contracts and contract rights, and property rights necessary to operate the website. The acquisition was funded through the issuance of 1,000,000 shares of the Company's common stock, stock options for the purchase of an additional 100,000 shares of common stock and cash payments of approximately $106,000. The acquisition has been accounted for using the purchase method of accounting. Substantially all of the purchase price was allocated to the website intangible asset. F-49 ATTITUDE NETWORK, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 - --------------------------------------------------------------------------- 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31, 1998 and 1997:
1998 1997 ---- ---- Computers and office equipment $ 612,962 $ 571,276 Furniture and fixtures 17,165 16,480 Leasehold improvements 3,200 3,200 ----- ----- 633,327 590,956 Less accumulated depreciation (251,050) (137,875) -------- -------- $ 382,277 $ 453,081 ============= ==============
5. INTANGIBLE ASSETS Intangible assets consisted of the following at December 31, 1998 and 1997:
1998 1997 ---- ---- Website rights $ 5,119,515 $ 5,119,515 Organization costs 15,326 15,326 Other 1,257 - -------- -------- 5,136,098 5,134,841 Accumulated amortization (3,311,059) (1,427,922) ---------- ---------- $ 1,825,039 $ 3,706,919 ============== ==============
F-50 ATTITUDE NETWORK, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 - --------------------------------------------------------------------------- 6. LEASES The Company leases certain equipment and office space under operating type leases. Future minimum payments under these leases are as follows: 1999 $ 62,085 2000 60,876 2001 63,311 2002 6,809 ---- ----- $ 213,081 ======= Rental expense for the years ended December 31, 1998 and 1997 was approximately $132,000 and $193,000, respectively. 7. CONVERTIBLE NOTES PAYABLE TO DIRECTORS During 1998, the Company borrowed $950,000 from various directors of the Company. These notes are due on demand and accrue interest at 8.5%. The notes feature a conversion right at the option of the holder, which may be exercised in the event the Company is sold. The conversion right allows the holder to convert the note into stock of the new or surviving entity at a price equal to the per share transaction price. Most of the notes include detachable warrants for a total of 400,000 shares of common stock at an exercise price of $1.00 per share. The warrants expire in 2003. A value of approximately $800,000 was assigned to the warrants (additional paid-in capital) based on the difference between the fair market value of the stock at date of issuance ($3.00) and the exercise price of $1.00. Since the notes are demand notes, the entire value assigned to the warrants was charged to interest expense in 1998. 8. LONG-TERM DEBT The Company's long-term debt consisted of the following at December 31: 1998 1997 Non-interest bearing obligation payable to a corporation related to the purchase of an internet worldwide website $ 2,543,171 $ 2,431,151 =========== =========== F-51 ATTITUDE NETWORK, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 - --------------------------------------------------------------------------- 8. LONG-TERM DEBT, CONTINUED The obligation is to be repaid based on 5% of the Company's gross revenues related to the website, less certain costs directly associated with the website. The payments required by the agreement are also subject to specific minimum amounts payable per year. In the event of an initial public offering by the Company, the total unpaid amount of the obligation would become due and payable. The $5.6 million obligation has been recorded at its present value, assuming a 9% interest rate, and has been reduced by $150,000 and $179,000 of payments made by the Company in 1998 and 1997, respectively. The unamortized discount was $2,556,829 and $2,818,849 as of December 31, 1998 and 1997, respectively. The minimum principal amounts payable over the next five years under this agreement are as follows: 1999 $ 200,000 2000 250,000 2001 300,000 2002 300,000 2003 3,000,000 Thereafter 3,750,000 ---------------- 5,100,000 Less Discount (2,556,829) ---------------- 2,543,171 Less current portion (200,000) ---------------- $ 2,343,171 =============== 9. INCOME TAXES No provision for federal or state income taxes has been made for the years ended December 31, 1998 and 1997, since the Company reported a loss for both financial reporting and income tax purposes. The Company had available approximately $10,556,000 of net operating loss carryforwards to reduce future taxable income as of December 31, 1998. The utilization of the net operating loss F-52 ATTITUDE NETWORK, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 - --------------------------------------------------------------------------- 9. INCOME TAXES, CONTINUED carryforwards, which begin to expire in the year 2012, will be subject to limitations as a result of a more than 50% change in ownership of the Company in 1997 (See Note 10). The tax effects of the temporary differences that gave rise to the deferred tax balances at December 31, 1998 and 1997 were the following:
1998 1997 ---- ---- Deferred tax assets Net operating loss carryforwards $ 3,972,000 $ 2,719,000 Allowance for doubtful accounts 81,000 130,000 Start-up expenditures 193,000 280,000 Amortization of intangible assets 524,000 -- Other 136,000 131,000 Valuation allowance (4,906,000) (3,222,600) ---------- ---------- -- 37,400 Deferred liability: Amortization of intangible assets -- (37,400) ---------- ---------- Net deferred tax asset $ -- $ -- ============= ============
The Company provides for a valuation allowance on deferred tax assets since utilization is uncertain. 10. STOCKHOLDERS' EQUITY In February 1997, Maricopa Investment Corporation, an unaffiliated company, purchased all the outstanding shares held by a shareholder of the Company and subscribed to the Company for an additional 666,667 shares of common stock at $3.00 per share. In total, these purchases represent approximately 42% of the shares outstanding. F-53 ATTITUDE NETWORK, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 - --------------------------------------------------------------------------- 10. STOCKHOLDERS' EQUITY, CONTINUED In February 1997, the Company also issued 1,000,000 shares of common stock to acquire Kaleidoscope Networks, Ltd. (see Note 3). As part of this acquisition agreement, the Company entered into an additional agreement with the sellers whereby, upon notice from the sellers at any representationstime in the five-year period following the 18th month from the date of the agreement, the Company shall be required to purchase up to 500,000 shares of common stock owned by the sellers at a purchase price of $2.50 per share. Five years following the 36th month from the date of this agreement, the sellers may give notice and the Company may be required to purchase up to an additional 500,000 shares of common stock owned by the seller at a purchase price of $2.50 per share. This agreement shall terminate upon the ninth anniversary from the date of this agreement. The above transactions exceeded 50% of the outstanding shares of the Company. During 1997, the Company issued to certain directors and unrelated parties 330,665 shares of common stock at $4.00 per share. In November 1997, the Company issued 1,500 shares of common stock in exchange for forgiveness of a $6,000 payable to a vendor. During 1998, the Company sold 1,166,666 shares to various investors at prices ranging from $3.00 - $4.00 per share for total proceeds of approximately $4,000,000. The sale of 666,666 shares included anti-dilution provisions, as well as a shareholder rights agreement, which provides for certain future registration rights. In September 1998, the Company issued 465,000 shares in connection with the Offeringsettlement of a lawsuit filed in December 1997. The lawsuit related to claims for a 10.75% equity interest in the Company and unspecified other than those containeddamages by a media service and editorial management company who had previously been party to a memorandum of understanding with certain of the Company's stockholders, officers, and directors. The settlement was accrued for at December 31, 1997. 11. STOCK OPTION PLAN Effective July 1, 1996, the Company adopted the 1996 Stock Option Plan (the Plan) available for grant to eligible employees and eligible participants to purchase up to 1,200,000 shares of the Company's common stock. The Plan is administered by a committee appointed by the Board of Directors or by the Board of Directors if each member of the committee is eligible to receive stock options or if the members of the committee have been eligible to receive stock options for a period of one year prior to their services on the committee. The Board of Directors or a committee shall administer the Plan, select the eligible employees and eligible participants to whom options will be granted, determine the number of shares subject to any such options and interpret, construe and implement the provisions of the Plan. The Board of Directors or the committee shall also determine the price to be paid for the shares upon exercise of each option, the period within which each option may be exercised, and the terms and conditions of each option. F-54 ATTITUDE NETWORK, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 - --------------------------------------------------------------------------- 11. STOCK OPTION PLAN, CONTINUED The option exercise price will be equal to 100% of market value on the day the option is granted (110% in this Prospectus,the case of a 10% owner of the Company), as determined by the Board of Directors or the committee. No option shall be exercisable after ten years from the date of the grant of the option, and if given or made, such information or representations mustshares subject to the option granted to a 10% owner shall not be reliedexercisable after five years from the date of grant of the option. The Plan expires on July 1, 2006. Compensation expense resulting from stock options is measured at the grant date based upon the difference between the exercise price and the market value of the common stock. All stock options granted in 1997 were granted at an exercise price equal to the market value at the date of grant. During 1998 the Company granted 192,200 stock options at $.45 that were not in accordance with the 1996 stock option plan as having been authorizedthey were not granted at fair market value. The aggregate compensation cost related to these $.45 stock options granted in the year ended December 31, 1998 was $449,310. Additionally, expense of $295,800 was recognized in connection with options granted to a non-employee who performed financial advisory services for the Company in 1998. A summary of the stock option activity is presented below:
WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE ------ ----- Outstanding as of December 31, 1996 790,000 $ 1.02 Options granted 305,000 2.90 Forfeited (145,000) 2.86 -------- ---- Outstanding as of December 31, 1997 950,000 1.46 Options granted 377,200 1.65 Exercised (26,500) 0.45 Forfeited (295,350) 1.59 -------- ---- Outstanding as of December 31, 1998 1,005,350 $ 1.52 ========= =======
The Company applies APB Opinion No.25 and related interpretation in accounting for its Plan. Statement of Financial Accounting Standards No.123 "Accounting for Stock-Based Compensation" (SFAS No.123) requires compensation expense measured as the excess of the fair value of the underlying stock over the exercise price on the date of grant. Pro forma disclosures as if the Company had adopted the cost recognition requirements under SFAS No. 123 are not presented as the effects were immaterial. F-55 ATTITUDE NETWORK, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 - --------------------------------------------------------------------------- The weighted average fair value of options-granted in 1998 was $1.79. The fair value for these option was estimated at the date of granting using the minimum value method which takes into account (1) the fair value of the underlying stock at the grant date, (2) the exercise price, (3) weighted average expected life of 5.70 years, (4) no dividends, and (5) a weighted average risk-free interest rate of 5.76%. Compensation expense recognized in providing pro forma disclosures may not be representative of the effects on net income or loss for future years. The following table summarizes information about stock options outstanding under the Plan at December 31, 1998: WEIGHTED AVERAGE REMAINING EXERCISE NUMBER CONTRACTUAL NUMBER PRICES OUTSTANDING LIFE EXERCISABLE -------- ----------- ----------- ----------- $ 0.45 254,100 3.1 years 254,100 0.70 510,000 7.5 years 385,000 2.50 100,000 7.5 years 100,000 3.00 81,250 7.5 years 22,000 4.00 50,000 7.5 years 5.00 10,000 7.5 years 10,000 ----------- ----------- ----------- 1,005,350 6.9 years 771,100 =========== =========== =========== F-56 ATTITUDE NETWORK, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 - --------------------------------------------------------------------------- 12. RISKS AND UNCERTAINTIES The Company has derived revenues of approximately $300,000 and $256,000 in 1998 and 1997, respectively, from one customer, which approximates 16% and 10%, respectively, of total revenue. The Company's accounts receivable also includes $200,000 and $87,850 receivable from this customer, which represents 49% and 14% of total accounts receivable as of December 31, 1997 and 1998, respectively. The Company maintains cash balances at a financial institution located in Southwest Florida in excess of the $100,000 insured by the Federal Deposit Insurance Corporation. The Company orhas not experienced any Underwriter. This Prospectus doeslosses in such accounts and believes it is not constitute an offer to sell, or a solicitation of an offer to buy, the Common Stock in any jurisdiction where, orexposed to any personsignificant credit risk on cash balances. 13. RELATED PARTY TRANSACTIONS Accounts payable as of December 31, 1998 and 1997 includes $29,396 and $64,346, respectively, which is payable to whom, itemployees, individuals and organizations related to the Company. The Company has an agreement under which total payments of $155,000 have been made each year to the chief executive officer in 1998 and 1997, which includes a bonus of $35,000 for 1998 and 1997. The agreement extends through July 1999 and provides for monthly payments of $10,000 with a provision for a discretionary bonus to be determined by the Company's Board of Directors. The Company had a consulting agreement with one of its directors, under which $105,000 was paid in 1997. The consulting agreement expired in October 1997. The Company rents its office space in Florida on a month-to-month basis as a subtenant of a Company controlled by a member of its Board of Directors. It also receives certain office support services. These rents and support services are priced on a pass-through basis without mark-up, and totaled approximately $13,000 and $15,000 in 1998 and 1997, respectively. 14. COMMITMENTS AND CONTINGENCIES In March 1998, the Company entered into an agreement with MacMillan Digital Publishing USA (MacMillan) to create and operate a website designed to serve as an on-line resource for the gaming market. The Company is unlawfulprimarily responsible for the operation of the website and MacMillan will pay the Company a commission on product sales related to make such offer or solicitation. Neither the deliverywebsite. The terms of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that therethe agreement commenced upon execution. The agreement will terminate May 31, 1999, and is renewable for successive one-year terms. As discussed in Note 10, the Company has been no changeissued a put option to the former owners of Kaleidoscope Networks Limited. F-57 ATTITUDE NETWORK, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 - --------------------------------------------------------------------------- 14. COMMITMENTS AND CONTINGENCIES, CONTINUED The Company is a defendant in various legal proceedings, which occurred in the affairsordinary course of business. In the opinion of management, the ultimate settlement of such legal proceedings will not have a material adverse impact on the Company's financial statements. 15. GOING CONCERN Since inception, the Company has incurred significant operating losses. These losses have been financed primarily through the issuance of common stock and loans from directors. The ability of the Company sinceto continue as a going concern is dependent upon additional funding and/or attaining profitable operations. The financial statements do not include any adjustments that might be necessary if the date hereof or thatCompany is unable to continue as a going concern. See Note 16. 16. SUBSEQUENT EVENT On April 9, 1999 the information contained herein is correctCompany merged with a wholly owned subsidiary of theglobe.com, inc. wherby the stockholders of the Company exchanged their common stock for shares of common stock of theglobe.com, inc. at a specified conversion rate. Management believes the merger will result in sufficient funds to continue operating activities. The shares issued in connection with the Kaleidoscope Networks, Ltd. acquisition, subject to a put option, were exchanged as part of any time subsequent to the date hereof. - ----------------- TABLE OF CONTENTS Page Prospectus Summary........... 3 Risk Factors................. 7 Cautionary Notice Regarding Forward Looking Statements. 23 Use of Proceeds.............. 24 Dividend Policy.............. 24 Capitalization............... 25 Dilution..................... 26 Selected Financial Data...... 27 Management's Discussionmerger and Analysis of Financial Condition and Results of Operations................. 28 Business..................... 37 Management................... 49 Certain Relationships and Related Transactions....... 58 Principal Stockholders....... 60 Description of Capital Stock. 62 Shares Eligible for Future Sale 69 Underwriting................. 71 Legal Matters................ 72 Experts...................... 72 Additional Information....... 72 Index to Financial Statements F-1 Until , 1998 (25 days afterthus the date of this Prospectus), all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligations of dealers to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments and subscriptions. = Shares [LOGO] Common Stock PROSPECTUS Bear, Stearns & Co. Inc. Volpe Brown Whelan & Co. , 1998put option terminated. F-58 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table shows the expenses, other than underwriting discounts and commissions, to be incurred in connection with the sale and distribution of securities being registered by the Company. Except for the SEC registration fee, the Nasdaq Listing Fee and the NASD Filing Fee, all amounts are estimated. SEC Registration Fee..................................... $14,750$101,831 Nasdaq Listing Fee....................................... * NASD Filing Fee.......................................... 5,500* Blue Sky Fees and Expenses............................... * Legal Fees and Expenses.................................. * Accounting Fees and Expenses............................. * Printing Expenses........................................ * Miscellaneous Expenses................................... * ------------ Total................................................. $ =* ======== - ------------- * To be filed by amendment. Item 14. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law (the "DGCL") provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement in connection with specified actions, suits, proceedings whether civil, criminal, administrative, or investigative (other than action by or in the right of the corporation -- a "derivative action"), if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. A similar standard is applicable in the case of derivative actions, except that indemnification only extends to expenses (including attorneys' fees) incurred in connection with the defense or settlement of such action, and the statuestatute requires court approval before there can be any indemnification where the person seeking indemnification has been found liable to the corporation. The statuestatute provides that it is not exclusive of other indemnification that may be granted by a corporation's charter, by-laws, disinterested director vote, stockholder vote, agreement, or otherwise. Article VI of the By-Laws requires the Company to indemnify any person who was or is a party or is threatened to be made a party to or is involved (including, without limitation, as a witness) in any threatened, pending or completed action, suit, arbitration, alternative dispute mechanism, investigation, administrative hearing or any other proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) brought by reason of the fact that he or she is or was a director or officer of the Company, or, while a II-1 director or officer of the Company, is or was serving at the request of the Company as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to an employee benefits plan against expenses (including attorneys' fees, judgments, fines, excise taxes under the Employee Retirement Income Security Act of 1974, penalties and amounts paid in settlement) incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. Section 102(b)(7) of the DGCL permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for (i) any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) payment of unlawful dividends or unlawful stock purchases or redemptions, or (iv) any transaction from which the director derived an improper personal benefit. Article VI of the Company's Fourth Amended and Restated Certificate of Incorporation (the "Certificate") provides that to the fullest extent that the DGCL, as it now exists or may hereafter be amended, permits the limitation or elimination of the liability of directors, a director of the Company shall not be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director. Any amendment to or repeal of, or adoption of any provision of the Certificate inconsistent with, such Article VI shall not adversely affect any right or protection of a director of the Company for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. The Company has entered into indemnification agreements with its directors and officers substantially in the form attached to this registration statement as Exhibit 10.2.10.4. These agreements provide, in general, that the Company will indemnify such directors and officers for, and hold them harmless from and against, any and all amounts paid in settlement or incurred by, or assessed against, such directors and officers arising out of or in connection with the service of such directors and officers as a director or officer of the Company or its Affiliates (as defined therein) to the fullest extent permitted by Delaware law. The Company maintains directors' and officers' liability insurance which provides for payment, on behalf of the directors and officers of the Company and its subsidiaries, of certain losses of such persons (other than matters uninsurable under law) arising from claims, including claims arising under the Securities Act, for acts or omissions by such persons while acting as directors or officers of the Company and/or its subsidiaries, as the case may be. The Underwriting Agreement (the form of which is filed as Exhibit 1.1 hereto) provides for indemnification by the Underwriters of the Company and its officers and directors for certain liabilities arising under the Securities Act or otherwise. II-2 Item 15. Recent Sales of Unregistered Securities All sales, unless otherwise noted, were made in reliance on Section 4(2) of the Securities Act and/or Regulation D or Rule 701 promulgated under the Securities Act and were made without general solicitation or advertising. The purchasers were sophisticated investors with access to all relevant information necessary to evaluate these investments, and who represented to the Registrant that the shares were being acquired for investment.
DATE OF TITLE OF NUMBER OF CONSIDERATION PURCHASER ISSUANCE SECURITIES SHARES RECEIVED ($) - --------- -------- ---------- ------------ ------------------------ ------------- Alce Partners, L.P. 12/22/95 Series B 190,480Preferred 95,240 100,002 Preferred Bergendahl, Anders 9/7/95 Series A 159,630Preferred 79,815 15,750 Preferred12/22/95 Series B 95,240Preferred 47,620 50,001 Preferred11/13/96 Series C 15,000Preferred 7,500 30,000 Preferred Bergendahl, Mia 9/7/95 Series A 159,630Preferred 79,815 15,750 Preferred Series B 47,620 25,000.50 Preferred Cayuga Venture Fund Series C 12,500 25,000 Preferred David Duffield 12/22/95 Series B 190,480 100,002 Trust Preferred 23,810 25,000.50 Cayuga Venture Fund 11/13/96 Series C Preferred 6,250 25,000 David Duffield Trust 12/22/95 Series B Preferred 95,240 100,002 11/13/96 Series C Preferred 62,500 250,000 500,0003/15/97 Series C Preferred 62,500 250,000 de Selliers, Baudouin 11/13/96 Series C 25,000Preferred 12,500 50,000 Baudouin Preferred Ganem, Bruce 11/13/96 Series C Preferred 3,750 15,000 3/15/97 Series C Preferred 3,750 15,000 GC&H Investments 12/22/95 Series B 47,620 Preferred 23,810 25,000.50 Grey, Nicki 11/16/95 Series A 6,430Preferred 3,215 500 Preferred Grinstead, Simon 11/16/95 Series A 106,430Preferred 53,215 10,500 Preferred Halperin, Mark R. 12/22/95 Series B 47,620 Preferred 23,810 25,000.50 11/13/96 Series C 12,500 Preferred 6,250 25,000 Halperin Dow, Peggy Anne 12/22/95 Series B 47,620Preferred 23,810 25,000.50 Peggy Anne Preferred11/13/96 Series C 12,500 Preferred 6,250 25,000 Halperin, Philip W. 12/22/95 Series B 47,620Preferred 23,810 25,000.50 Preferred11/13/96 Series C 12,500 Preferred 6,250 25,000 Halperin, Robert M. 12/22/95 Series B 47,620Preferred 23,810 25,000.50 Preferred11/13/96 Series C 12,500 Preferred 6,250 25,000 5/29/98 Common Stock 42,708 8,171.88 Hirsch, Jason 11/16/95 Series A 38,490Preferred 19,245 3,000 Preferred Horowitz, David 12/22/95 Series B 100,000Preferred 50,000 52,500 Preferred11/13/96 Series C 25,000Preferred 12,500 50,000 Preferred6/19/97 Common Stock 31,944 3,11115,972 3,111.06 Huret Family Trust 11/13/96 Series C 12,500Preferred 6,250 25,000 Preferred Karlsson, Bengt 11/13/96 Series C 50,000Preferred 25,000 100,000 Preferred Krizelman, Allen 9/7/95 Series A 151,690Preferred 75,845 15,000 Preferred Krizelman, Susan 11/16/95 Series A 12,830Preferred 6,415 1,000 Preferred Krizelman, Todd 5/26/95 Common Stock 1,050,000525,000 2,184 11/16/95 Series A 44,910Preferred 22,455 3,500 Preferred Leavitt Investments, L.P. 11/13/96 Series C 75,000Preferred 37,500 150,000 Investments, L.P. Preferred Maconie, Andrew 11/16/95 Series A 6,430 Preferred 3,215 513.70 Miller, Dan 11/13/96 Series C 37,500Preferred 18,750 75,000 Preferred Muckstadt, Jack 11/13/96 Series C Preferred 3,750 15,000 30,0003/15/97 Series C Preferred 3,750 15,000 Muller, Georges 1/22/96 Series B 47,620Preferred 23,810 25,000.50 Preferred Paternot, Jacques 9/7/95 Series A 32,850Preferred 16,425 3,000 Preferred 12/22/95 Series B 13,330Preferred 6,665 6,998.25 Preferred Paternot, Madeleine 11/16/95 Series A 2,570 Preferred 1,285 205.48
II-3
DATE OF TITLE OF NUMBER OF CONSIDERATION PURCHASER ISSUANCE SECURITIES SHARES RECEIVED ($) - --------- -------- ---------- --------- ------------- Paternot, Monica 11/16/95 Series A 3,860 Preferred 1,930 308.22 Paternot, Stephan 5/26/95 Common Stock 1,200,000600,000 2496 Paternot, Thierry 11/16/95 Series A 6,430 500 Preferred 3,215 513.70 12/22/95 Series B 38,100Preferred 19,050 20,002.50 Preferred Paternot, Yves 9/7/95 Series A 177,380Preferred 88,690 17,000 Preferred 12/22/95 Series B 47,620Preferred 23,810 25,000.50 Preferred S. Knight Pond Trust 9/7/95 Series A 256,430Preferred 128,215 26,500 Trust Preferred 12/22/95 Series B 142,860Preferred 71,430 75,001.50 Preferred Tuli, John 1/1/97 Common Stock 26,597 13,299 1396.34 (1) In August 1997, the Company issued and sold to Dancing Bear Investments (i) 5125.5 shares of Series D Preferred Stock which will convertconverted into 8,047,5294,023,765 shares of Common Stock upon consummation of this Offeringthe Company's initial public offering in November 1998 and (ii) Warrants to purchase 4,046,0182,023,009 shares of Common Stock of the Company at the time of exercise for an aggregate price of $5,882,353. The aggregate consideration for such transaction was $20 million. (2) Since inception,In connection with the Company has grantedacquisition of factorymall.com on February 1, 1999, we issued 343,916 shares of our common stock and assumed options to directors, officers and employees of the Company under the Company's 1998 Stock Option Plan and 1995 Stock Option Plan. As of July 1998, the Company has granted 1,235,000 and 1,425,941purchase approximately 41,017 shares of Common Stockour common stock. Such options have an aggregate exercise price of approximately $928,950. In addition, we assumed warrants to directors, officers and employees of the Company under the Company's 1998 Stock Option Plan and 1995 Stock Option Plan, respectively, and the Company issued -0- and 144,058purchase 9,405 shares of Common Stock pursuantour common stock at an aggregate exercise price of approximately $200,000. (3) On April 9, 1999 we issued 785,186 shares of our common stock in connection with the acquisition of Attitude Network, Ltd. We also assumed options to thepurchase 42,948 shares of our common stock at an aggregate exercise price of these options under the Company's 1998 Stock Option Plan and 1995 Stock Option Plan, respectively $955,605. Additionally, we assumed warrants to purchase 23,345 shares of our common stock at an aggregate exercise price of $400,000.
II-4 Item 16. Exhibits and financial statement schedules (a) Exhibits The following Exhibits are attached hereto and incorporated herein by reference: 1.1 Form of Underwriting Agreement***** 2.1 Agreement and Plan of Merger dated as of February 1, 1999 by and among theglobe.com, inc., Nirvana Acquisition Corp., factorymall.com, inc. d/b/a Azazz, and certain selling stockholders thereof.** 2.2 Agreement and Plan of Merger dated as of April 5, 1999 by and among theglobe.com, inc., Bucky Acquisition Corp., Attitude Network Ltd. and certain stockholders thereof. 3.1 Form of SecondFourth Amended and Restated Certificate of Incorporation of the CompanyCompany* 3.2 Form of By-Laws of the Company* 4.1 Second Amended and Restated Investor Rights Agreement among the Company and certain equity holders of the Company, dated as of August 13, 19971997* 4.2 Amendment No.1No. 1 to Second Amended and Restated Investor Rights Agreement among the Company and certain equity holders of the Company, dated as of July 15, 1998August 31, 1998*** 4.3 Amendment No. 2 to Second Amended and Restated Investor Rights Agreement among the Company and certain equity holders of the Company, dated as of April 9, 1999. 4.4 Registration Rights Agreement, dated as of July 15,September 1, 1998* 4.4** 4.5 Amendment No. 1 to Registration Rights Agreement, dated as of April 9, 1999. 4.6 Specimen certificate representing shares of Common Stock of the Company* 4.54.7 Amended and Restated Warrant to Acquire Shares of Common Stock* 5.14.8 Form of Rights Agreement, by and between the Company and American Stock Transfer & Trust Company as Rights Agent* 4.9 Registration Rights Agreement among the Company and certain equity holders of the Company, dated February 1, 1999, in connection with the acquisition of factorymall.com.*** 4.10 Registration Rights Agreement among the Company and certain shareholders of the Company, dated April 9, 1999, in connection with the acquisition of Attitude Network. II-5 5.5 Opinion of Fried, Frank, Harris, Shriver & Jacobson***** 9.1 Voting TrustStockholders' Agreement by and among Dancing Bear Investments, Inc., Michael Egan, Todd V. Krizelman, and Stephan J. Paternot, Edward A. Cespedes and Rosalie V. Arthur, dated as of 1998*February 14, 1999*** 10.1 Employment Agreement dated August 13, 1997, by and between the Company and Todd V. KrizelmanKrizelman* 10.2 Employment Agreement dated August 13, 1997, by and between the Company and Stephan J. PaternotPaternot* 10.3 Employment Agreement dated July 13, 1998, by and between the Company and Francis T. JoyceJoyce* 10.4 Form of Indemnification Agreement between the Company and each of its Directors and Executive OfficersOfficers* 10.5 Lease Agreement dated January 14, 1997 between the Company and Fifth Avenue West Associates L.P.* 10.6 Lease Agreement dated January 12, 1999 between the Company and Broadpine Realty Holding Company, Inc.*** 10.7 1998 Stock Option Plan, as amended 10.8 1995 Stock Option Plan* 10.9 factorymall.com, inc. 1998 Stock Option Plan* 10.7 1995*** 10.10 Form of Nonqualified Stock Option Plan 10.8 RightsAgreement with James McGoodwin, Kevin McKeown and Mark Tucker**** 10.11 Attitude Network Ltd. Stock Option Plan***** 10.12 Form of Employee Stock Purchase Plan*** 10.13 D.A.R.T. Service Agreement dated April 15, 1997*+ 10.14 Amendment dated as of May 1, 1998, to original D.A.R.T. Service Agreement dated April 15, 1997*+ 10.15 License Agreement between the Company and Engage Technologies, Inc. dated October 31, 1998.***++ 10.16 Employment Agreement dated August 31, 1998, by and between the Company and Dean Daniels* 10.17 Agreement between the Company, Republic Industries, Inc., and Michael S. Egan, dated August 12, 1998, regarding the conduct of automotive clubsites on theglobe.com*+ 10.18 Data Center Space Lease between Telehouse International Corporation of America and the Company, dated August 24, 1998* 10.19 Travel Services Alliance Agreement between the Company and Lowestfare.com, dated as Rights Agent*of September 15, 1998*+ II-6 10.20 Boxlot Agreement***** 10.21 Music HQ Agreement***** 11.1 Computation of Loss Per Share 23.1 Consent of KPMG Peat Marwick 23.2 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in Exhibit 5.1)* 24.1 Power**** 23.2 Consents of Attorney (contained on signature page on page 8)KPMG LLP 23.3 Consent of PricewaterhouseCoopers LLP 23.4 Consent of ABC Interactive* 23.5 Consent of DoubleClick, Inc. 23.6 Consent of Jupiter Communications, LLC 23.7 Consent of International Data Corporation 27.1 Financial Data Schedule*Schedule 99.1 Valuation and Qualifying Accounts ____________________________ - ------------------------- * Incorporated by reference from our registration statement on Form S-1 (Registration No. 333-59751). ** Incorporated by reference from our report on Form 8-K filed on February 16, 1999. *** Incorporated by reference from our report on Form 10-K filed on March, 1999. **** Incorporated by reference from our Registration Statement on Form S-8 (No. 333-75503), filed on April 1, 1999. ***** To be filed by amendment. + Confidential treatment granted as to parts of this document. ++ Confidential treatment requested. Item 17. Undertakings The undersigned Registrant hereby undertakes: (1) to provide to the Underwriters at the closing specified in the Underwriting Agreements, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt deliverdelivery to each purchaser. (2) that 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 II-7 the Securities Act of 1933 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 questions whether such indemnification by them is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. (3) that 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; and (4) that for purposes of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus filed 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. II-8 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the cityCity of New York, stateState of New York, on the 24th9th day of July 1998.April 1999. theglobe.com, inc. By: /s/ Todd Krizelman ---------------------------------------------------- Todd Krizelman Co-Chief Executive Officer and Co-President By: /s/ Stephan Paternot ----------------------------------------------------- Stephan Paternot Co-Chief Executive Officer, Co-President and Secretary ----------------------------------- POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the persons whose signatures appear below, constitute and appoint Michael Egan, Todd Krizelman and Stephan Paternot, and each of them as their true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for them and in their names, places, and steads, in any and all capacities, to sign the Registration Statement to be filed in connection with the public offering of common stock of theglobe.com, inc. and any and all amendments (including post-effective amendments) to the Registration Statement, and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and the other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, 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 they might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. -----------------------------------II-9 Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated: Signature Title Date ----------- -------- ---------------- ----- ---- /s/ Michael Egan Chairman July 24, 1998April 9, 1999 - -------------------------- Michael Egan Chairman /s/ Todd Krizelman April 9, 1999 - -------------------------- Co-Chief Executive Officer, July 24, 1998 - --------------------------Todd Krizelman Co-President and Director Todd KrizelmanCo-Chief Executive Officer, /s/ Stephan Paternot Co-Chief Executive Officer, July 24, 1998 - -------------------------- Co-President, Secretary and April 9, 1999 - -------------------------- Director Stephan Paternot /s/ Frank Joyce Vice President and Chief July 24, 1998April 9, 1999 - -------------------------- Financial Officer (Principal Frank Joyce Accounting Officer) Frank Joyce /s/ Edward Cespedes Director July 24, 1998April 9, 1999 - -------------------------- Edward Cespedes Director /s/ Rosalie Arthur Director July 24, 1998April 9, 1999 - -------------------------- Rosalie Arthur Director - -------------------------- ___________, 1999 Henry C. Duques Director /s/ Robert Halperin Director July 24, 1998April 9, 1999 - -------------------------- Robert Halperin Director /s/ David H. Horowitz Director July 24, 1998April 9, 1999 - -------------------------- David H. Horowitz Director /s/ H. Wayne Huizenga Director July 24, 1998April 9, 1999 - ----------------------------------------------------- H. Wayne Huizenga - -------------------------- Director II-10