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.
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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
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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:
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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.
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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;
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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.
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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:
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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
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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.
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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
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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;
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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.
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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.
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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.
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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.
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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
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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
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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 $500,000
Co-Chief Executive Officer,
Co-President and Secretary
- ----------------------
(1) The Company did not have anyour three other most highly
compensated executive officers during this
period.the last two fiscal years:
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SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
-------------------------------- ---------------
Number of
Securities
Name and Principal Underlying All Other
Position Year (1) Salary ($) 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.
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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.
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(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.
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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
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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.
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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
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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
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(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.
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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
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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.
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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.
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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."
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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
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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
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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;
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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
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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.
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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
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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.
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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
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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
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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