<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1998
REGISTRATION NO. 333-59751
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
AMENDMENT NO. 5
TO
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 (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
----------------
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 & 1290 AVENUE OF THE AMERICAS
JACOBSON NEW YORK, NEW YORK 10104
ONE NEW YORK PLAZA (212) 468-8000
NEW YORK, NEW YORK 10004
(212) 859-8000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (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
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.001 par
value(2)...................... $50,000,000 $14,750
</TABLE>
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- -------------------------------------------------------------------------------
(1) Estimated pursuant to Rule 457(o) solely for the purpose of calculating
the registration fee.
(2) 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 OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 12, 1998
PRELIMINARY PROSPECTUS
3,100,000 SHARES
[LOGO]
COMMON STOCK
All of the 3,100,000 shares of Common Stock, par value $0.001 per share (the
"Common Stock"), offered hereby are being sold by theglobe.com, inc. (the
"Company" or "theglobe.com"). Of the shares offered hereby, the Company is
offering (the "Concurrent Offering") directly to certain investors, including
officers and directors of the Company, their relatives and their business
associates (collectively, the "Concurrent Purchasers"), shares having an
aggregate initial public offering price of up to approximately $5 million
(555,556 shares assuming an initial public offering price of $9.00 per share,
which is the midpoint of the estimated initial public offering price range set
forth below). If the Concurrent Offering is consummated, the balance of the
3,100,000 shares of Common Stock offered hereby will be included in the initial
public offering (the "Initial Public Offering"). The price per share will be
the same in the Initial Public Offering and the Concurrent Offering. The
consummation of the Concurrent Offering and the Initial Public Offering are
contingent upon each other. If the Concurrent Offering is not consummated for
the proposed amount, the shares of Common Stock not sold to the Concurrent
Purchasers will not be offered to purchasers in the Initial Public Offering.
See "Concurrent Offering." References herein to the "Offerings" include the
Initial Public Offering and the Concurrent Offering.
Prior to the Offerings, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price for the Common Stock will be between $8.00 and $10.00 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The shares of Common Stock have been
approved for quotation on the Nasdaq National Market under the symbol "TGLO,"
subject to official notice of issuance.
----------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE 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.
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<TABLE>
<CAPTION>
UNDERWRITING NET
PRICE TO AND PLACEMENT PROCEEDS TO
PUBLIC AGENT FEES(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share
Initial Public Offering................... $ $ $
Concurrent Offering....................... $ $ $
- --------------------------------------------------------------------------------
Total(3).................................... $ $ $
</TABLE>
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(1) Bear, Stearns & Co. Inc. and Volpe Brown Whelan & Company are acting as the
Company's placement agents (the "Placement Agents") in connection with the
Concurrent Offering, for which they will receive the Placement Agent fees
indicated above. The Company has agreed to indemnify the Underwriters and
the Placement Agents 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 $1,275,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
381,667 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 and Placement
Agent Fees and Net Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
----------
The shares of Common Stock included in the Initial Public Offering are being
offered by the Underwriters, subject to prior sale, when, as and if delivered
to and accepted by the Underwriters against payment therefor and subject to
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify the Initial Public 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, STEARNS & CO. INC. VOLPE BROWN WHELAN & COMPANY
The date of this Prospectus is , 1998.
<PAGE>
theglobe.com is one of the world's leading online communities with over 7.5
million unique users+ and over 2 million members.*
+ ABC Interactive, October 1998 Site Report
* as determined by management of
theglobe.com
theglobe.com [Logo] [ORBIT LOGO]
Focus on social dynamics of a community:
home work family travel
entertainment special interests
day-to-day conversation
[graphics of face photographs, screen shots of Web site pages]
[FOLD-OUT COVER]
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OF-
FERINGS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK
IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUB-
SEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 4
Risk Factors......................... 8
Cautionary Notice Regarding Forward-
Looking Statements.................. 25
Concurrent Offering.................. 26
Use of Proceeds...................... 26
Dividend Policy...................... 26
Capitalization....................... 27
Dilution............................. 28
Selected Financial Data.............. 29
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 30
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business........................... 41
Management......................... 54
Certain Relationships and Related
Transactions...................... 63
Principal Stockholders............. 65
Description of Capital Stock....... 67
Shares Eligible for Future Sale.... 74
Underwriting....................... 76
Legal Matters...................... 77
Experts............................ 77
Additional Information............. 77
Index to Financial Statements...... F-1
</TABLE>
----------------
UNTIL , 1998 (25 DAYS AFTER 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.
----------------
The Company has a registered United States 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 in various foreign countries for theglobe.com and theglobe.com
logo. See "Business--Intellectual Property and Proprietary Rights."
----------------
This Prospectus includes statistical data regarding the Company and the
Internet industry. Such data are based on Company records or are taken or
derived from information published by various sources, including Media Metrix,
Inc., a media research firm specializing in market and technology measurement
on the Internet ("Media Metrix"), Jupiter Communications, LLC, a media
research firm focusing on the Internet industry ("Jupiter Communications"),
International Data Corporation, a provider of market information and strategic
information for the information technology industry ("IDC") and ABC
Interactive, an auditor of statistical information for the Internet industry.
----------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS 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 DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the Financial Statements
and Notes related thereto appearing elsewhere in this Prospectus. Except where
the context otherwise requires, 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 Offerings, (i) the automatic conversion 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 1
for 2 reverse split of the Company's capital stock effected as of September 24,
1998.
THE COMPANY
theglobe.com is one of the world's leading online communities with over 2
million members in the United States and abroad. In October 1998, over 7.5
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 founded by Todd V. Krizelman and Stephan J. Paternot in May
1995 to capitalize on the growing demand for online destinations that allow
users to develop their own identities and establish relationships with other
Internet users. theglobe.com offers users the ability to become active
participants 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. There are ten
"Themes of Interest": Arts, Business, Entertainment, Life, Metro, News,
Romance, Sports, Technology and Travel. 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 are
not limited as to the number of communities they can join and are able to leave
an Interest Group at any time. Because of this, the communities are dynamic and
evolve as member interests change. "Community Leaders" are elected to manage
communities and are able to highlight member content, communicate directly to
constituents and organize events. The community focus of theglobe.com offers
several advantages to the Company that include (i) member loyalty, (ii) member-
developed content at a low cost to the Company and (iii) the ability to offer
advertising targeted to specific user interests. In the last three months, the
Company had approximately 110 advertisers, including Coca Cola, Dunkin' Donuts,
J. Crew, Procter & Gamble, Sony, 3Com and Visa.
Since its founding, theglobe.com has experienced strong growth. According to
Media Metrix, theglobe.com was ranked as the fourth fastest-growing Web site in
terms of audience reach for the first half of 1998. Over 7.5 million unique
users visited the site in October 1998, according to ABC Interactive.
Additionally, the site has added approximately 100,000 new members every month
since October 1997. Approximately 25% to 35% of theglobe.com's monthly traffic
originates from abroad, reflecting the site's international appeal.
theglobe.com's goal is to be the leading online community site. The Company
seeks to attain this goal through the following key strategies: (i) improving
user experience, (ii) developing brand identity and awareness, (iii) increasing
new membership acquisition through strategic alliances, (iv) expanding
globally, (v) further developing e-commerce and (vi) enhancing membership
services.
4
<PAGE>
RECENT DEVELOPMENTS
Based on preliminary information as to the results of operations for the nine
months ended September 30, 1998, the Company had revenues of $2.7 million
compared with revenues of $415,000 for the nine months ended September 30,
1997, an increase of approximately $2.3 million. Total operating expenses
(including cost of revenues) for the nine months ended September 30, 1998 were
$14.9 million compared to $3.1 million for the nine months ended September 30,
1997. Additionally, the net loss for the nine months ended September 30, 1998
was $11.5 million compared to $2.6 million for the nine months ended September
30, 1997.
The period to period increase in revenues was primarily due to an increase in
the number of advertisers as well as an increase in the average contract
duration and dollar value. The growth in the number of advertisers was
attributable to an increase in the number of unique users, growth of the
Company's sales force and the launch of an extensive advertising campaign in
the first quarter of 1998.
The increase in total operating expenses and net loss was primarily due to an
increase in personnel in all areas of the Company's business, the launch of an
advertising campaign in the first quarter of 1998, an increase in technological
and product development related expenses, and other back-office related
expenses in order to support the rapid growth of the Company's operations. In
addition, total operating expenses for the nine months ended September 30, 1998
included a non-recurring, non-cash charge of $1,370,300 in connection with the
transfer of outstanding warrants (the "Warrants") to acquire 225,000 shares of
Common Stock at approximately $2.91 per share from Dancing Bear Investments,
Inc. ("Dancing Bear Investments"), the Company's largest shareholder, to
certain officers of the Company. See Note 9 to the Financial Statements
appearing elsewhere in this Prospectus.
On November 12, 1998, the Company launched a redesign of its Web site which
included, among other things, increasing the number of "Themes of Interest"
from six to ten and adding content from additional third-party providers,
including Reuters Limited and Thomson Financial Services.
5
<PAGE>
THE OFFERINGS
<TABLE>
<S> <C>
Common Stock offered by the
Company..................... 3,100,000 shares
Common Stock to be
outstanding after the
Offerings................... 9,791,339 shares(1)(2)
Use of Proceeds.............. The Company will use the net proceeds of the
Offerings for advertising, brand name promotions
and other general corporate purposes, including
investment in the development and functionality
of theglobe.com 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. See "Use of Proceeds."
Proposed Nasdaq National
Market Symbol............... "TGLO"
</TABLE>
- --------
(1) Based on the number of shares of Common Stock outstanding as of September
30, 1998, including 5,473,735 shares of Common Stock that will be issued
upon the automatic conversion of the Company's existing preferred stock
(the "Preferred Stock") upon consummation of the Offerings. Excludes
2,023,009 shares of Common Stock issuable upon the exercise of outstanding
Warrants to acquire Common Stock at an exercise price of approximately
$2.91 per share following consummation of the Offerings. If the
Underwriters' over-allotment option is exercised in full, an additional
381,667 shares of Common Stock would be offered by the Company, and
10,173,006 shares of Common Stock would be outstanding after the Offerings.
(2) Also excludes (i) 822,650 and 693,771 shares of Common Stock issuable upon
the exercise of stock options that would be outstanding after the Offerings
under the Company's 1998 Stock Option Plan and 1995 Stock Option Plan,
respectively, at a weighted average exercise price of $8.86 per share
(assuming an initial public offering price of $9.00 per share) and $0.72
per share, respectively; and (ii) 377,350 and 4,625 shares of Common Stock
reserved for future issuance under the 1998 Stock Option Plan and the 1995
Stock Option Plan, respectively. See "Capitalization," "Management--
Executive Compensation," "Description of Capital Stock" and the Financial
Statements and the Notes related thereto appearing elsewhere in this
Prospectus.
RISK FACTORS
Purchasers of the Common Stock in the Offerings should carefully consider the
risk factors set forth under the caption "Risk Factors" beginning on page 8 and
the other information included in this Prospectus prior to making an investment
decision regarding the Common Stock. An investment in the shares of Common
Stock offered hereby involves a high degree of risk. The Company has a limited
operating history and anticipates losses and negative operating cash flow for
the foreseeable future. The Company's operations are dependent on the growth
and commercial viability of the Internet and an unproven business model, and
are subject to government regulation and legal uncertainties associated with
the Internet, security risks and intense competition. See "Risk Factors" for a
description of these and other risks.
----------------
The Company was incorporated in May 1995 in the State of Delaware. The
Company's principal executive offices are located at 31 West 21st Street, New
York, New York 10010, and its telephone number is (212) 886-0800.
6
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth certain summary financial data for the
Company. This information should be read in conjunction with the Financial
Statements and Notes related thereto appearing elsewhere in this Prospectus.
See "Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
MAY 1, 1995 SIX MONTHS
(INCEPTION) YEAR ENDED ENDED
THROUGH DECEMBER 31, JUNE 30,
DECEMBER 31, ---------------------- ----------------------
1995 1996 1997 1997 1998
------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
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 share(1).... (0.06) (0.67) (3.13) (0.67) (5.01)
Weighted average
shares outstanding
used in basic and
diluted per share
calculation(1)....... 1,125,000 1,125,000 1,146,773 1,140,960 1,161,389
Pro forma basic and
diluted net loss per
share(2)............. $ (0.91) $ (0.95)
Weighted average
shares used in
computing pro forma
basic and diluted net
loss per share
calculation(2)....... 3,920,095 6,115,148
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments.. $13,155 38,002
Working capital....................................... 10,452 35,299
Total assets.......................................... 15,603 40,450
Capital lease obligations, excluding current
installments......................................... 629 629
Total stockholders' equity............................ 11,571 36,418
</TABLE>
- --------
(1) Weighted average shares do not include any common stock equivalents because
such inclusion would have been anti-dilutive. See the Financial Statements
and Notes related thereto appearing elsewhere in this Prospectus for the
determination of shares used in computing basic and diluted loss per share.
(2) Pro forma gives effect to the conversion of all outstanding shares of the
Company's Preferred Stock into Common Stock upon the closing of the
Offerings as if such conversion had occurred on January 1, 1997, or the
date of issuance, if later.
(3) As adjusted to reflect the sale of 3,100,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $9.00 per share (the
midpoint of the estimated initial public offering price range set forth on
the front cover of this Prospectus) after deducting the estimated
underwriting and Placement Agent fees and estimated offering expenses
payable by the Company. See "Use of Proceeds" and "Capitalization."
7
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following factors and other information contained in this
Prospectus should be considered carefully before purchasing the Common Stock
offered hereby.
LIMITED OPERATING HISTORY
The Company was founded in May 1995. Accordingly, the Company has a limited
operating history upon which an evaluation of the Company, its current
business and its prospects can be based, each of which must 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 entering new and rapidly developing 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 subscription
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 to maintain and increase levels of traffic on its Web
site, the inability of the Company to 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.
FLUCTUATING RATES OF REVENUE GROWTH
There can be no assurance the Company's revenue growth in recent periods
will continue or increase. The Company's limited operating history makes the
prediction of future results difficult or impossible and, therefore, the
Company's recent revenue growth should not be taken 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 indication of future performance. To the
extent that revenues do not grow at anticipated rates, the Company's business,
results of operations and financial condition would be materially and
adversely affected.
ANTICIPATED LOSSES FOR THE FORSEEABLE FUTURE
The Company has not achieved profitability to date, and the Company
anticipates that it will continue to incur net losses for the foreseeable
future. The extent of these losses will depend, in part, on the amount of
growth in the Company's revenues from advertising sales, e-commerce and
membership subscription fees. As of June 30, 1998, the Company had an
accumulated deficit of $10.2 million. The Company expects that its operating
expenses will increase significantly during the next several years, especially
in the areas of sales and marketing, and brand promotion. Thus, the Company
will need to generate increased revenues to achieve profitability. To the
extent that increases in its operating expenses precede or 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, results of operations and financial condition would be
materially and adversely affected.
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There can be no assurance that the Company will ever achieve or sustain
profitability or that the Company's operating losses will not increase in the
future.
DEPENDENCE ON CONTINUED GROWTH IN USE 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 can be assured. The Internet may prove not to be a viable
commercial marketplace. Additionally, due to the ability of consumers to
easily compare prices of similar products 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 and financial condition
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 or 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
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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."
BRAND IDENTITY IS CRITICAL TO THE COMPANY; 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.
SUBSTANTIAL RELIANCE ON ADVERTISING REVENUES; SHORT-TERM NATURE OF ADVERTISING
CONTRACTS; COMPANY GUARANTEE OF MINIMUM IMPRESSION LEVELS
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.
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Additionally, the process of managing advertising within a large, high-
traffic Web site such as the Company's is an increasingly important and
complex task. The Company licenses from DoubleClick, Inc. ("DoubleClick") its
advertising management system ("D.A.R.T."). Under the license agreement,
DoubleClick provides the Company an Internet advertising administration system
to facilitate the Company's management of advertising on its Web site. The
D.A.R.T. service is intended to permit the Company to generate ad tags,
schedule advertising to run in the online environments in which the Company
places the ad tags and generate reports on such advertising. The DoubleClick
agreement is for a term of three years and will expire on April 15, 2000,
subject to DoubleClick's right to terminate the agreement upon 30 days' notice
following the Company's breach of the terms of the agreement or if
DoubleClick, in its reasonable good faith discretion, determines that the
Company has used, could use or intends to use the D.A.R.T. technology in a
manner that could damage or cause injury to the D.A.R.T. technology or
reflects unfavorably on the reputation of DoubleClick. No assurance can be
given that DoubleClick will not elect to terminate the agreement. Any such
termination and replacement could disrupt the Company's ability to manage its
advertising operations for a period of time. In addition, to the extent that
the Company encounters system failures or material difficulties in the
operation of this system, the Company could be unable to deliver banner
advertisements and sponsorships through its site. Any extended failure of, or
material difficulties encountered in connection with, the Company's
advertising management system may expose the Company to "make good"
obligations with its advertisers, which, by displacing saleable advertising
inventory, among other consequences, would reduce revenues and 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 could be materially and adversely affected.
The Internet as an advertising medium has not been available for a
sufficient period of time to gauge its effectiveness as compared with
traditional advertising media. No standards have been widely accepted for the
measurement of the effectiveness of Internet-based advertising, and there can
be no assurance that any such standards will become widely accepted in the
future. Internet advertising rates are based in part on third-party estimates
of users of an Internet site. Such estimates are often based on sampling
techniques or other imprecise measures, and may materially differ from Company
estimates. 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 operations 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 or the adoption of such software by certain
Internet access providers 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.
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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" and "--Fluctuating Rates of Revenue
Growth." 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 Offerings. See "--Brand Identity Is Critical to the
Company; 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 seasonal and other patterns in Internet
advertising may develop as the market matures, and there can be no assurance
that such patterns will not have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company derives a significant portion of its revenues from the sale of
advertising under short-term contracts, averaging one to two months in length.
As a result, the Company's 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's ability to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall. See "--
Substantial Reliance on Advertising Revenues; Short-term Nature of Advertising
Contracts; Company Guarantee of Minimum Impression Levels."
In addition to selling advertising, a key element of the Company's strategy
is to generate revenues through e-commerce arrangements. To date, the revenues
received by the Company under the revenue-sharing portions 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 is
terminable upon short notice. As a result, the Company's revenues from e-
commerce may fluctuate significantly from period to period depending on the
continuation of its key e-commerce arrangements.
The foregoing factors, in some future quarters, may lead the Company's
operating results to fall below the expectations of securities analysts and
investors. In such event, the trading price of the Common Stock would likely
be materially and adversely affected.
BROAD DISCRETION IN USE OF PROCEEDS
The Company intends to use the net proceeds from the sale of Common Stock
offered hereby for advertising, brand name promotions and other general
corporate purposes, including investment in the development and functionality
of theglobe.com Web site, enhancements of the Company's network infrastructure
and working capital. The Company may also use a portion of the proceeds for
potential strategic alliances and acquisitions. The Company has not yet
determined the amount of the net proceeds that will be used specifically for
each of the foregoing purposes. Accordingly, management will have significant
flexibility in applying the net proceeds of the Offerings. The failure of
management to apply such funds effectively could have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Use of Proceeds."
DEPENDENCE ON KEY PERSONNEL
The Company's performance is substantially dependent on the performance of
its senior management and key technical personnel. In particular, the
Company's success depends on the continued efforts of its senior
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management team, especially its Co-Chief Executive Officers and Co-Presidents
(and co-founders), Todd V. Krizelman and Stephan J. Paternot. The Company does
not carry key person life insurance on any of its personnel. The loss of the
services of any of its executive officers or other key employees could have a
material adverse effect on the business, results of operations and financial
condition of the Company.
The Company's future success also depends on its continuing ability to
retain and attract highly qualified technical and managerial personnel. As of
August 31, 1998, the Company had grown to 93 full-time employees from
approximately 20 in June 1997, and the Company anticipates that the number of
its employees will increase significantly in the next 12 months. 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 difficulty from time to time in
attracting the personnel necessary to support the growth of its business, and
there can be no assurance that the Company will not experience similar
difficulty in the future. The inability to attract and retain the technical
and managerial personnel necessary to support the growth of the Company's
business, due to, among other things, a large increase in the wages demanded
by such personnel, could have a material adverse effect upon the Company's
business, results of operations and financial condition. See "Business--
Employees" and "--Technology" and "Management."
MANAGEMENT OF GROWTH; INEXPERIENCED MANAGEMENT
The Company's recent growth has placed, and is expected to continue to
place, a significant strain on its managerial, operational and financial
resources. To manage its potential growth, the Company must continue to
implement and improve its operational and financial systems, and must expand,
train and manage its employee base. The Company's Chief Operating Officer and
Chief Financial Officer joined the Company during August and July 1998,
respectively. In addition, each of the Company's Director of Advertising
Sales, Director of Technology, Director of Communications and Director of
Human Resources has been with the Company for less than two years.
Furthermore, the members of the Company's 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
Company will be able to effectively manage the expansion of its operations,
that the Company's systems, procedures or controls will be adequate to support
the Company's operations or that Company management will be able to achieve
the rapid execution necessary to fully exploit the market opportunity for the
Company's products and services. Any inability to manage growth effectively
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business."
COMPETITION FOR MANAGEMENT TIME; POTENTIAL CONFLICTS OF INTEREST
Michael S. Egan is the Chairman of the Company and, as such, Mr. Egan serves
as Chairman of the Board of Directors and as an executive officer of the
Company with primary responsibility for day-to-day strategic planning and
financing arrangements. After the Offerings, Mr. Egan will also continue to be
the controlling investor of Dancing Bear Investments, which will hold a
controlling interest in the Company after the Offerings, and Chairman and
Chief Executive Officer of Certified Vacations, an entity affiliated with
Dancing Bear Investments. Dancing Bear Investments may also acquire other
entities in the future. Edward A. Cespedes is the Vice President of Corporate
Development of the Company with primary responsibility for corporate
development opportunities including mergers and acquisitions. After the
Offerings, Mr. Cespedes will also continue to serve 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.
Accordingly, the Company will compete with Dancing Bear Investments and
related entities for the time of Messrs. Egan and Cespedes. The Company has
recently begun e-commerce arrangements with certain entities controlled by
Dancing Bear Investments or by Republic Industries, Inc. ("Republic
Industries"), an entity affiliated with H. Wayne Huizenga, a director of the
Company, which are not currently material to the Company. See "Certain
Relationships and Related Transactions." These arrangements are not the result
of arm's-length negotiations. Due to their relationships with
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their related entities, Messrs. Egan, Cespedes and Huizenga will have an
inherent conflict of interest in making any decision related to transactions
between their related entities and the Company. The Company intends to review
related party transactions in the future on a case-by-case basis.
NEED TO ENHANCE AND DEVELOP THEGLOBE.COM TO REMAIN COMPETITIVE
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, resulting 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 have a material adverse effect
on 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 have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business--Products and Services."
INTERNET INDUSTRY IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE
The market for Internet products and services is characterized by rapid
technological developments, evolving industry standards and customer demands,
and frequent new product introductions and enhancements. These market
characteristics are exacerbated by the emerging nature of the market and the
fact that many companies are expected to introduce new Internet products and
services in the near future. The Company's future success will depend in
significant part on its ability to continually improve the performance,
features and reliability of the site in response to both 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. In addition,
the widespread adoption of developing multimedia enabling technologies could
require fundamental and costly changes in the Company's technology 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 FAILURES
A key element of the Company's strategy is to generate a high volume of user
traffic. The Company's ability to attract advertisers and to achieve market
acceptance of its products and services, and its reputation, depend
significantly upon the performance of the Company and its network
infrastructure (including its server, hardware and software). Any system
failure that causes interruption or slower response time of the Company's
products and services could result in less traffic to the Company's Web site
and, if sustained or repeated, could reduce the attractiveness of the
Company's products and services to advertisers and licensees. An 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 could 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
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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 faces risks related to its ability to scale up to its expected
customer levels while maintaining superior performance. Any failure of the
Company's server and networking systems to handle current or higher volumes of
traffic would have a material adverse effect on the Company's business,
results of operations and financial condition.
The Company is also dependent upon third parties to provide potential users
with Web browsers and Internet and online services necessary for access to the
site. In the past, users have occasionally experienced difficulties with
Internet and online services due to system failures, including failures
unrelated to the Company's systems. Any disruption in Internet access provided
by third parties could have a material adverse effect on the Company's
business, results of operations and financial condition. Furthermore, the
Company is dependent on hardware suppliers for prompt delivery, installation
and service of equipment used to deliver the Company's 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. The Company's servers are also vulnerable to computer
viruses, break-ins and similar disruptions from unauthorized tampering with
the Company's computer systems. The occurrence of any of these events could
result in the interruption, delay or cessation of service, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, the Company's reputation and theglobe.com
brand could be materially and adversely affected. See "Business--Facilities."
SECURITY RISKS
Experienced programmers ("hackers") have attempted on occasion to penetrate
the Company's network security. The Company expects 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's network security could
misappropriate proprietary information or cause interruptions in the Company's
products and services, the Company may be required to expend significant
capital and resources to protect against or to alleviate problems caused by
such parties. Additionally, the Company may not have a timely remedy against a
hacker who is able to penetrate its network security. Such purposeful security
breaches could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition to purposeful
security breaches, the inadvertent transmission of computer viruses could
expose the Company to a material risk of loss or litigation and possible
liability.
In offering certain payment services through its "globeStores" program, the
Company could become increasingly reliant on encryption and authentication
technology licensed from 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 could 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 and engage the services of third parties 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 COMPETITION
The market for members, users and Internet advertising is new and rapidly
evolving, and competition for members, users and advertisers, as well as
competition in the e-commerce market, is intense and is expected to increase
significantly. Barriers to entry are relatively insubstantial and the Company
may face competitive pressures from many additional companies both in the
United States and abroad.
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The Company believes that the principal competitive factors for companies
seeking to create communities 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,
in the future, Internet communities may be developed or acquired by companies
currently operating Web directories, search engines, shareware archives and
content sites, and by commercial online service providers ("OSPs"), Internet
service providers ("ISPs") and other entities, certain of which may have more
resources than the Company. 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 The Walt Disney Company ("Disney"), CBS Corporation
("CBS") and The National Broadcasting Company ("NBC"), have recently made
significant acquisitions of or investments in Internet companies.
The Company believes 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 members and users, the
Company's ability to offer targeted audiences and the overall cost
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 Internet 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.
Many of the Company's existing and potential competitors, including
companies operating Web directories and search engines, and traditional media
companies, have longer operating histories in the Internet market, greater
name recognition, larger customer bases and significantly greater financial,
technical and marketing resources than the Company. Such 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, e-commerce
companies, advertisers and third-party content providers. Furthermore, the
Company's existing and potential competitors may develop communities that are
equal or superior in quality to, or that achieve greater market acceptance
than, theglobe.com. There can be no assurance that the Company will be able 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.
Additionally, the e-commerce market is new and rapidly evolving, and
competition among e-commerce merchants is expected to increase significantly.
The Company will rely primarily on e-commerce partners to generate e-commerce
revenues. The Company's ability to generate revenues from any of its present
or future e-commerce partners may be adversely affected by competition between
any such partner and other Internet retailers.
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, strategic partners or e-commerce partners will not
sever or will elect not to renew their agreements with the Company, the result
of which could have a material adverse effect on the Company's business,
results of operations and financial condition.
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DEPENDENCE ON THIRD-PARTY RELATIONSHIPS
The Company is and will continue to be significantly dependent on a 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 Company also has relationships 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 and other
third-party service providers do not require future minimum commitments to use
the Company's services or to provide access or links to the Company's services
or products, are not exclusive and are short-term or may be terminated at the
convenience of the other party. Moreover, the Company does not have agreements
with the majority of other Web site operators that provide links to
theglobe.com, and such Web site operators may terminate such links at any time
without notice to the Company. There can be no assurance 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 Company will be able to maintain
relationships with third parties that supply the Company with software or
products that are crucial to the Company's success, or that such software or
products will be able to sustain any third-party claims or rights against
their use. Furthermore, there can be no assurance that the software, services
or products of those companies that provide access or links to the Company's
services or products will achieve market acceptance or commercial success.
Accordingly, there can be no assurance that the Company's 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; ABILITY TO INCUR DEBT; EXPECTED NEGATIVE
OPERATING CASH FLOW FOR THE FORESEEABLE FUTURE
The Company currently anticipates that the net proceeds of the Offerings,
together with available funds and cash flows generated from advertising
revenues, will be sufficient to meet its anticipated needs for working
capital, capital expenditures and business expansion for the next 12 months.
The Company expects that it will continue to experience negative operating
cash flow for the foreseeable future as a result of significant spending on
advertising and infrastructure. Accordingly, the Company may need to raise
additional funds in a timely manner in order to fund its anticipated
expansion, develop new or enhanced services or products, respond to
competitive pressures or acquire complementary products, businesses or
technologies. If additional funds are raised through the issuance of equity or
convertible debt securities, the percentage ownership of the stockholders of
the Company will be reduced, stockholders may experience additional dilution
and such securities may have rights, preferences or privileges senior to those
of the holders of the Common Stock. The Company does not currently have any
contractual restrictions on its ability to incur debt and, accordingly, the
Company could incur significant amounts of indebtedness to finance its
operations. Any such indebtedness could contain covenants which would restrict
the Company's operations. There can be no assurance that additional financing
will be available on terms favorable to the Company, or at all. If adequate
funds are not available or are not available on acceptable terms, the Company
may not be able to fund its expansion, take advantage of acquisition
opportunities, develop or enhance services or products or respond to
competitive pressures. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
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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 regards substantial elements of its Web site and underlying
technology as proprietary and attempts to protect them by relying on
trademark, service mark, copyright and trade secret laws and restrictions on
disclosure and transferring title and other methods. The Company also
generally enters into confidentiality agreements with its employees and
consultants and in connection with its license agreements with third parties
and generally seeks to control access to and distribution of its 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's proprietary information without authorization or to develop similar
technology independently. The Company pursues the registration of its
trademarks in the United States and internationally. The Company has
registered a United States 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 secret protection may not be available in
every country in which the Company's services are distributed or made
available through the Internet, and policing unauthorized use of the Company's
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
uncertain and still evolving, and no assurance can be given as to the future
viability or value of any of the Company's 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's
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 assurance that the
Company's business activities will not infringe upon the proprietary rights of
others, or that other parties will not assert infringement claims against the
Company, including claims that by directly or indirectly providing hyperlink
text links to Web sites operated by third parties. Moreover, from time to
time, the Company may be subject to claims of alleged infringement by the
Company or its members of the trademarks, service marks and other intellectual
property rights of third parties. Such claims and any resultant litigation,
should it occur, might subject the Company to significant liability for
damages, might result in
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invalidation of the Company's proprietary rights and, even if not meritorious,
could result in substantial costs and diversion of resources and management
attention and could have a material adverse effect on the Company's business,
results of operations and financial condition.
The Company currently licenses from third parties certain technologies
incorporated into theglobe.com. As the Company continues to introduce new
services that incorporate new technologies, it may be required to license
additional technology from others. There can be no assurance that these third-
party technology licenses will continue to be available to the Company on
commercially reasonable terms, if at all. Additionally, there can be no
assurance that the third parties from which the Company currently licenses its
technology will be able to defend their proprietary rights successfully
against claims of infringement. As a result, any 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 its existing services until equivalent technology can be identified,
licensed and integrated. See "Business--Intellectual Property and Proprietary
Rights."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES ASSOCIATED WITH THE INTERNET
A number of legislative and regulatory proposals under consideration by
federal, state, local and foreign governmental organizations may lead to 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, which could in turn decrease the demand for
the Company's services, increase the Company's cost of doing business or
otherwise have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business--Government Regulation and
Legal Uncertainties" for a description of various legislative and regulatory
proposals which could be material to the Company.
There can be no assurance that the United States or foreign nations will not
enact legislation or seek to enforce existing laws prohibiting or restricting
certain content, such as online gambling, from the Internet. Currently, online
gambling advertisers account for under ten percent 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. Recently, the Children's Online Privacy Protection Act was signed into
law, which authorizes the Federal Trade Commission (the "FTC") to develop
regulations for the collection of data from children by commercial Web site
operators. The Company is currently undertaking a review of its information-
collection practices. However, the Company cannot predict the exact form of
the regulations that the FTC may adopt. There can be no assurance that the
United States or foreign nations will not adopt additional 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. Recently, the Internet Tax
Information Act was signed into law, placing a three-year moratorium on new
state and local taxes on Internet commerce. However, there can be no assurance
that future laws imposing taxes or other regulations on commerce over the
Internet would not substantially impair the growth of e-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
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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 take action
against 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;
LIABILITY FOR PRODUCTS SOLD 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 for
defamation, negligence, copyright or trademark infringement or other theories
based on the nature and content of such materials. Such claims have been
brought against online services in the past and, from time to time, the
Company has received inquiries from third parties regarding such matters. Such
claims could be material in the future. In addition, the increased attention
focused upon liability issues and legislative proposals could materially
impact the overall growth of Internet use.
The Company could also be exposed to liability with respect to third-party
information that may be accessible through the Company's Web site, or through
content and materials that may be posted by members on their personal Web
sites or on chat rooms or 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 offers e-mail service, which is provided by a third party. See
"--Dependence on Third-Party Relationships." Such service may expose the
Company 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 Company also enters into agreements with commerce partners and sponsors
under which the Company is entitled to receive a share of any revenue from the
purchase of goods and services through direct links from the Company's Web
site. Such arrangements may expose the Company to additional legal risks and
uncertainties, including pursuant to regulation by local, state, federal and
foreign authorities and potential liabilities to consumers of such products
and services, even if the Company does not itself provide such products or
services. There can be no assurance that any indemnification provided to the
Company in its agreements with these parties, if available, will be adequate.
Even to the extent such claims do not result in liability to the Company,
the Company could incur significant costs in investigating and defending
against such claims. The imposition on the Company of potential liability for
information carried on or disseminated through its systems could require the
Company to implement measures to reduce its exposure to such liability, which
may require the expenditure of substantial resources and limit the
attractiveness of the Company's services to members and users.
The Company's general liability insurance may not cover all potential claims
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
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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 EXPANSIONS
A part of the Company's strategy is to continue to develop theglobe.com
community model in international markets. Approximately 25% to 35% of the
Company's monthly traffic originates from abroad. There can be no assurance
that the Internet or the Company's community model will become widely accepted
for advertising and e-commerce in any international markets. In addition, the
Company expects that the success of any additional foreign operations it
initiates in the future will also be substantially dependent upon local
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 Company may experience difficulty in managing international operations as
a result of difficulty in locating an effective foreign partner, competition,
technical problems, local laws and regulations, distance and language and
cultural differences, and there can be no assurance that the Company or its
international partners will be able to successfully market and operate the
Company's community model in foreign markets. The Company also believes that,
in light of substantial anticipated competition, it will be necessary to move
quickly into international markets in order to effectively obtain market
share, and there can be no assurance that the Company will be able to do so.
There are certain risks inherent in doing business on an international level,
such as unexpected changes in regulatory requirements, trade barriers,
difficulties in staffing and managing foreign operations, fluctuations in
currency exchange rates, longer payment cycles in general, problems in
collecting accounts receivable, difficulty in enforcing contracts, political
and economic instability, seasonal reductions in business activity in certain
other parts of the world and potentially adverse tax consequences. There can
be no assurance that one or more of such factors will not have a material
adverse effect on the Company's future international operations and,
consequently, on the Company's business, results of operations and financial
condition.
CONTROL BY CURRENT STOCKHOLDERS
Following consummation of the Offerings, it is anticipated that Michael S.
Egan, the Chairman of the Company, will beneficially own or control, directly
or indirectly, 6,071,024 shares of Common Stock which in the aggregate will
represent approximately 51.4% of the outstanding shares of Common Stock.
Following the consummation of the Offerings, it is anticipated that Messrs.
Krizelman and Paternot, collectively, will beneficially own 15.7% of the
Common Stock. Messrs. Egan, Krizelman and Paternot and certain directors of
the Company will also hold outstanding Warrants exercisable for 2,023,009
shares of Common Stock in the aggregate. See "Description of Capital Stock--
Warrants." Messrs. Egan, Krizelman, Paternot and Cespedes and Rosalie V.
Arthur, a director of the Company, expect to enter into a stockholders'
agreement (the "Stockholders' Agreement") pursuant to which Dancing Bear
Investments, Mr. Egan or entities controlled by Mr. Egan and certain permitted
transferees (collectively, the "Egan Group") will agree to vote for certain
nominees of Messrs. Krizelman and Paternot or entities controlled by Messrs.
Krizelman and Paternot and certain permitted transferees (the "Krizelman and
Paternot Groups") to the Board of Directors and the Krizelman and Paternot
Groups will agree to vote for the nominees of the Egan Group to the Board, who
will represent a majority of the Board of Directors. Accordingly, the Egan
Group will have the ability to elect a majority of the directors of the
Company and the Egan Group and the Krizelman and Paternot Groups will also
have the ability to control the outcome of all issues submitted to a vote of
the stockholders of the Company requiring majority approval. See "Principal
Stockholders." The Stockholders' Agreement will also provide that the Egan
Group, the Krizelman and Paternot Groups, Mr. Cespedes and Ms. Arthur will be
subject to certain "tag-along" and "drag-along" rights in connection with any
private sale of securities of the Company after the Offerings. Voting control
by the Egan Group and the Krizelman and Paternot Groups may discourage certain
types of transactions involving an actual or potential change of control of
the Company, including transactions in which the holders of Common Stock might
receive a premium for their shares over prevailing market prices. See "Certain
Relationships and Related Transactions."
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,
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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 may be affected by Year 2000 issues related to non-compliant
information technology ("IT") systems or non-IT systems operated by the
Company or by third parties. The Company has substantially completed
assessment of its internal and external (third-party) IT systems and non-IT
systems. At this point in its assessment, the Company is not currently aware
of any Year 2000 problems relating to systems operated by the Company or by
third parties that would have a material effect on the Company's business,
results of operations or financial condition, without taking into account the
Company's efforts to avoid such problems. Based on its assessment to date, the
Company does not anticipate that costs associated with remediating the
Company's non-compliant IT systems or non-IT systems will be material,
although there can be no assurance to such effect. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Impact of the Year 2000."
To the extent that the Company's assessment is finalized without identifying
any additional material non-compliant IT systems operated by the Company or by
third parties, the most reasonably likely worst case Year 2000 scenario is a
systemic failure beyond the control of the Company, such as a prolonged
telecommunications or electrical failure. Such a failure could prevent the
Company from operating its business, prevent users from accessing the
Company's Web site, or change the behavior of advertising customers or persons
accessing the Company's Web site. The Company believes that the primary
business risks, in the event of such failure, would include, but not be
limited to, lost advertising revenues, increased operating costs, loss of
customers or persons accessing the Company's Web site, or other business
interruptions of a material nature, as well as claims of mismanagement,
misrepresentation, or breach of contract, any of 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 typically
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 Offerings, there has been no public market for the Common
Stock. The shares of Common Stock have been approved for quotation on the
Nasdaq National Market, subject to official notice of issuance; however, 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 Offerings. See "Underwriting." The trading price of the Company's
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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. In the past, following
periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such
company. Such 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 the Company's
business, results of operations and financial condition.
SHARES ELIGIBLE FOR FUTURE SALE; NO PRIOR TRADING MARKET; REGISTRATION RIGHTS
Upon consummation of the Offerings, the Company will have outstanding a
total of 9,791,339 shares of Common Stock (10,173,006 if the Underwriters'
over-allotment option is exercised in full), and 822,650 and 693,771 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." In addition, upon consummation of the Offerings,
2,023,009 shares of Common Stock will be issuable upon exercise of outstanding
Warrants. Of the outstanding shares, the 3,100,000 shares of Common Stock
being sold in the Offerings (3,481,667 if the Underwriters' over-allotment
option is exercised in full) 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 the Company (within
the meaning of the Securities Act). All of the shares of Common Stock
outstanding prior to the Offerings are "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. Of the 5,628,884 shares of capital stock issued prior to the
Offerings, and not registered under the Securities Act, approximately
1,062,455 shares are not subject to the volume limitations of Rule 144 and are
currently eligible for sale in the public market without restriction. Holders
of substantially all of the Company's Common Stock and outstanding preferred
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 seven days prior to and 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 Securities Exchange Act of 1934, as amended (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 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
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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 Offerings, the Board of Directors expects
to adopt a Rights Agreement (defined below), to be effective upon the
consummation of the Offerings, 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 Fourth
Amended and Restated 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."
SIGNIFICANT DILUTION; ABSENCE OF DIVIDENDS
Investors purchasing shares of Common Stock in the Offerings will incur
immediate and substantial dilution of $5.27 per share (assuming an initial
public offering price of $9.00 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."
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains statements that constitute "forward-looking
statements." 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.
25
<PAGE>
CONCURRENT OFFERING
Concurrent with the shares offered hereby in the Initial Public Offering,
the Company intends to sell to the Concurrent Purchasers up to approximately
$5 million of Common Stock (555,556 shares assuming an initial public offering
price of $9.00 per share, which is the midpoint of the estimated initial
public offering price range set forth on the front cover of this Prospectus)
at the same price per share to be paid by the investors in the Initial Public
Offering. The Company expects that the Concurrent Purchasers will include
certain of the Company's officers and directors, their relatives and their
business associates. The consummation of the Concurrent Offering and the
Initial Public Offering are contingent upon each other. In the event the
Concurrent Offering is not consummated by the closing date of the Initial
Public Offering, the Concurrent Offering will be terminated and all payments
made by the Concurrent Purchasers in connection with the Concurrent Offering
will be promptly returned. If the Concurrent Offering is not consummated for
the proposed amount, the shares of Common Stock not sold to the Concurrent
Purchasers will not be offered to purchasers in the Initial Public Offering.
All proceeds of the Concurrent Offering will be paid directly to the Company
and will be segregated in a separate non-interest bearing bank account
established by the Company pending the consummation of the Concurrent
Offering. Bear, Stearns & Co. Inc. and Volpe Brown Whelan & Company are acting
as the Placement Agents in connection with the Concurrent Offering. The
Placement Agents will receive a Placement Agent fee of $ per share of Common
Stock sold in the Concurrent Offering and will be indemnified by the Company
against certain liabilities, including liabilities under the Securities Act.
See "Underwriting."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,100,000 shares of
Common Stock offered in the Offerings by the Company are estimated to be
approximately $24.8 million (approximately $28.0 million if the Underwriters'
over-allotment option is exercised in full), based on an assumed initial
public offering price of $9.00 per share (the midpoint of the estimated
initial public offering price range set forth on the front cover of this
Prospectus) and after deducting the estimated underwriting discounts and
commissions, Placement Agent fees and other estimated offering expenses.
The Company will use the net proceeds of the Offerings for advertising,
brand name promotions and for other general corporate purposes, including
investment in the development and functionality of theglobe.com 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. Although the Company reviews potential strategic alliances and
acquisitions from time to time, it has not had more than preliminary
discussions with respect to any such alliances or acquisitions. The Company
has not yet determined the amount of net proceeds to be used specifically for
each of the foregoing purposes. Accordingly, management will have significant
flexibility in applying the net proceeds of the Offerings. Pending any such
use, as described above, the Company intends to invest the net proceeds in
interest-bearing instruments. See "Risk Factors--Broad Discretion in Use of
Proceeds."
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.
26
<PAGE>
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 3,100,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$9.00 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.
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Obligations under capital leases, excluding
current installments.......................... $ 629 $ 629 $ 629
Stockholders' equity:
Preferred Stock, 3,000,000 shares authorized:
Series A through E, $.001 par value;
2,900,001 shares authorized; 1,449,995.5
shares issued and outstanding (aggregate
liquidation value of $21,886,110); none
issued and outstanding, pro forma and pro
forma as adjusted........................... 1 -- --
Common Stock, $.001 par value; 22,000,000
shares authorized, actual, 100,000,000
shares authorized pro forma and pro forma as
adjusted; 1,196,979 shares issued and
outstanding, actual; 6,670,714 shares
outstanding, pro forma; 9,770,714 shares
issued and outstanding, pro forma as
adjusted(1)(2).............................. 1 7 10
Additional paid-in capital................... 21,875 21,870 46,714
Net unrealized loss on available-for-sale se-
curities.................................... (29) (29) (29)
Deferred compensation........................ (53) (53) (53)
Accumulated deficit.......................... (10,224) (10,224) (10,224)
-------- -------- --------
Total stockholders' equity................... 11,571 11,571 36,418
-------- -------- --------
Total capitalization....................... $ 12,200 $ 12,200 $ 37,047
======== ======== ========
</TABLE>
- --------
(1) Based on the number of shares of Common Stock outstanding as of June 30,
1998, and adjusted to include 5,473,735 shares of Common Stock that will
be issued upon the automatic conversion of all of the Company's
outstanding shares of Preferred Stock upon consummation of the Offerings.
Authorized pro forma and pro forma as adjusted give effect to Fourth
Amended and Restated Certificate of Incorporation of the Company to
become effective prior to consummation of the Offerings. Each share of
the Company's Series A, B and C Preferred Stock, totaling 1,449,970
shares, by its terms, is automatically convertible into one share of
Common Stock. Each of the Company's 25.5 shares of Series D Preferred
Stock is automatically convertible into approximately 157,795 shares of
Common Stock, totaling 4,023,765 shares in the aggregate. Based upon the
Series D Preferred Stock's original conversion terms, the shares of
Series D Preferred Stock are to be converted into 51% of the Company's
fully diluted shares on the date of conversion, excluding 700,000 options
from the Company's 1998 Stock Option Plan and the Series E Warrants. See
Note 5 to the Company's Financial Statements.
(2) Excludes 2,023,009 shares of Common Stock issuable upon the exercise of
outstanding Warrants at an exercise price of approximately $2.91 per
share following the consummation of the Offerings. See "Description of
Capital Stock--Warrants." If the Underwriters' over-allotment option is
exercised in full, an additional 381,667 shares of Common Stock would be
offered by the Company and 10,173,006 shares of Common Stock would be
outstanding after the Offerings. See "Underwriting." Excludes (i) 822,650
and 693,771 shares of Common Stock issuable upon the exercise of stock
options that would be outstanding after the Offerings under the Company's
1998 Stock Option Plan and 1995 Stock Option Plan, respectively, at a
weighted average exercise price of $8.86 per share (assuming an initial
public offering price of $9.00 per share) and $0.72 per share,
respectively, and (ii) 377,350 and 4,625 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," "Description of Capital Stock" and the Financial
Statements and Notes related thereto appearing elsewhere in this
Prospectus.
27
<PAGE>
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 5,473,735 shares of Common Stock, was approximately $11,570,624 or
$1.73 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 pro forma total liabilities) by the number of shares
of Common Stock. After giving effect to the sale of 3,100,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $9.00 per
share and the application of the estimated net proceeds from the Offerings,
pro forma net tangible book value of the Company as of June 30, 1998 would
have been $36,417,624 or $3.73 per share. This represents an immediate
increase in pro forma net tangible book value of $2.00 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$5.27 per share to new investors. The following table illustrates this
dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $9.00
Pro forma net tangible book value per share as of June 30,
1998......................................................... $1.73
Increase per share attributable to new investors.............. 2.00
-----
Pro forma net tangible book value per share after the
Offerings...................................................... 3.73
-----
Dilution per share to new investors............................. $5.27(1)
-----
</TABLE>
- --------
(1) The foregoing computations assume no exercise of the Underwriters' over-
allotment option, stock options or the Warrants. The Warrants entitle the
holders thereof to purchase an aggregate of 2,023,009 shares of Common
Stock at an exercise price of approximately $2.91 per share. If the
foregoing Warrants had been exercised at June 30, 1998, pro forma net
tangible book value after the Offerings would have been $42,299,977 in the
aggregate or $3.59 per share, representing an immediate dilution to new
investors of $5.41 per share and an immediate increase in net tangible
book value of $1.86 per share attributable to the Offerings.
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 the Offerings (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 Offerings):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
--------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing
stockholders(1)........ 6,670,714 68% $21,900,057 44% $3.28
Investors in the
Concurrent Offering.... 555,556(2) 6% 5,000,004 10% $9.00
Investors in the Initial
Public Offering........ 2,544,444 26% 22,899,996 46% $9.00
--------- --- ----------- ---
Total................. 9,770,714(3) 100% 49,800,057 100% $5.10
========= === =========== ===
</TABLE>
- --------
(1) Assumes all of the Company's outstanding Preferred Stock is converted into
Common Stock. Excludes 2,023,009 shares of Common Stock that may be issued
upon the exercise of the Warrants at approximately $2.91 per share.
(2) Represents an estimate of the number of shares to be purchased.
(3) Excludes 822,650 and 693,771 shares of Common Stock reserved for issuance
under options that will be outstanding after the Offerings 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 $8.86 per share
(assuming an initial public offering price of $9.00 per share) and $0.72
per share, respectively. See "Management--Executive Compensation,"
"Description of Capital Stock--Warrants" and Notes 5 and 6 to the
Financial Statements appearing elsewhere in this Prospectus. To the extent
stock options are exercised, there will be further dilution to new
investors.
28
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data should be read in
conjunction with the 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.
<TABLE>
<CAPTION>
MAY 1, 1995
(INCEPTION) YEAR ENDED SIX MONTHS ENDED
THROUGH DECEMBER 31, JUNE 30,
DECEMBER 31, -------------------- --------------------
1995 1996 1997 1997 1998
------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
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......... -- 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(1)...... $ (0.06) $ (0.67) $ (3.13) $ (0.67) $ (5.01)
========= ========= ========= ========= =========
Weighted average shares
outstanding used in
basic and diluted per
share calculation(1)... 1,125,000 1,125,000 1,146,773 1,140,960 1,161,389
========= ========= ========= ========= =========
Pro forma basic and
diluted net loss per
share(2)............... $ (0.91) $ (0.95)
========= =========
Weighted average shares
used in computing pro
forma basic and diluted
net loss per share
calculation(2)......... 3,920,095 6,115,148
========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1995 1996 1997 1998
---- ---- ------- --------
<S> <C> <C> <C> <C>
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
</TABLE>
- --------
(1) Weighted average shares do not include any common stock equivalents
because such inclusion would have been anti-dilutive. See the Financial
Statements and Notes related thereto appearing elsewhere in this
Prospectus for the determination of shares used in computing pro forma
basic and diluted loss per share.
(2) Pro forma gives effect to the conversion of all outstanding shares of the
Company's Preferred Stock into Common Stock upon the closing of the
Offerings as if such conversion had occurred on January 1, 1997, or the
date of original issuance, if later.
29
<PAGE>
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 Notes related thereto included elsewhere in this
Prospectus.
OVERVIEW
theglobe.com is one of the world's leading online communities with over 2
million members in the United States and abroad. In October 1998, over 7.5
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.
30
<PAGE>
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 enhancements of
theglobe.com's e-commerce merchandising solution, globeStores, 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 and
its expectation that its operating expenses will increase significantly in the
next several years, especially in the areas of sales and marketing and brand
promotion, the Company expects to incur additional losses from operations for
the foreseeable future. To the extent that increases in its operating expenses
precede or 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, results of operations and financial
condition would be materially and adversely affected. There can be no
assurance that the Company will ever achieve or sustain profitability or that
the Company's operating losses will not increase in the future.
The Company has recorded deferred compensation 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 estimated to be
$1,370,300 (assuming an initial public offering price of $9.00 per share) in
the third quarter of 1998 in connection with the transfer during the third
quarter of 1998 of Warrants to acquire 225,000 shares of Common Stock from
Dancing Bear Investments (its largest stockholder) to Todd V. Krizelman,
Stephan J. Paternot and Edward A. Cespedes. The actual amount of such charge
will be determined by the difference between the initial public offering price
and the exercise price per Warrant (approximately $2.91 per share assuming an
initial public offering price of $9.00 per share).
Also, during July 1998, pursuant to the terms of an employment agreement
with an officer of the Company, the Company granted stock options to purchase
112,500 shares of Common Stock, 87,500 of which have an exercise price per
share equal to 85% of the initial public offering price. As a result, the
Company will record deferred compensation expense estimated to be
approximately $118,100 (assuming an initial public offering price of $9.00 per
share), representing the difference between the deemed value of the Company's
Common Stock, the initial public offering price and the exercise price of
87,500 options at the date of grant. Such amount shall be presented as a
reduction of stockholders' equity and amortized over the vesting period of the
applicable
31
<PAGE>
options. The 87,500 options shall vest with respect to one-third of the shares
subject thereto on each of the first three anniversaries of the date of grant.
The remaining options will be granted at the initial public offering price
which is equal to the fair market value per share of the Company's Common
Stock on the date of grant.
RECENT DEVELOPMENTS
Based on preliminary information as to the results of operations for the
nine months ended September 30, 1998, the Company had revenues of $2.7 million
compared with revenues of $415,000 for the nine months ended September 30,
1997, an increase of approximately $2.3 million. Total operating expenses
(including cost of revenues) for the nine months ended September 30, 1998 were
$14.9 million compared to $3.1 million for the nine months ended September 30,
1997. Additionally, the net loss for the nine months ended September 30, 1998
was $11.5 million compared to $2.6 million for the nine months ended September
30, 1997.
The period to period increase in revenues was primarily due to an increase
in the number of advertisers as well as an increase in the average contract
duration and dollar value. The growth in the number of advertisers was
attributable to an increase in the number of unique users, growth of the
Company's sales force and the launch of an extensive advertising campaign in
the first quarter of 1998.
The increase in total operating expenses and net loss was primarily due to
an increase in personnel in all areas of the Company's business, the launch of
an advertising campaign in the first quarter of 1998, an increase in
technological and product development related expenses, and other back-office
related expenses in order to support the rapid growth of the Company's
operations. In addition, total operating expenses for the nine months ended
September 30, 1998 included a non-recurring, non-cash charge of $1,370,300 in
connection with the transfer of outstanding Warrants to acquire 225,000 shares
of Common Stock at approximately $2.91 per share from Dancing Bear
Investments, the Company's largest shareholder, to certain officers of the
Company. See Note 9 to the Financial Statements appearing elsewhere in this
Prospectus.
On November 12, 1998, the Company launched a redesign of its Web site which
included, among other things, increasing the number of "Themes of Interest"
from six to ten and adding content from additional third-party providers,
including Reuters Limited and Thomson Financial Services.
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.
<TABLE>
<CAPTION>
MAY 1, 1995
(INCEPTION) YEAR ENDED SIX MONTHS ENDED
TO DECEMBER 31, JUNE 30,
DECEMBER 31, --------------- -------------------
1995 1996 1997 1997 1998
------------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
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 administra-
tive.................. 68% 213% 367% 285% 204%
---- ------ ------ -------- --------
Total operating ex-
penses.............. 297% 386% 549% 423% 608%
---- ------ ------ -------- --------
Loss from operations..... (245%) (337%) (504%) (374%) (551%)
Interest income (ex-
pense), net............. (0%) 10% 43% 5% 57%
---- ------ ------ -------- --------
Loss before provision for
income taxes............ (245%) (327%) (461%) (369%) (494%)
Provision for income tax-
es...................... 0% 0% 4% 0% 2%
---- ------ ------ -------- --------
Net loss................. (245%) (327%) (465%) (369%) (496%)
==== ====== ====== ======== ========
</TABLE>
32
<PAGE>
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 order to properly represent theglobe.com brand on a consistent
basis as well as to reduce overall sales costs. Accordingly, the
advertisements sold by the Internet advertising service provider accounted for
approximately 28% 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 percentage of
total revenues have increased as a result of 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.
33
<PAGE>
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 the 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. 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 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 utilization of the Company's net operating loss
carryforwards will be subject to certain limitations or annual restrictions.
See Note 4 to the Notes to Financial Statements appearing elsewhere in this
Prospectus.
34
<PAGE>
COMPARISON 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 sold by the Internet advertising service
provider accounted for approximately 71% 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 provider.
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% of total revenues, $120,000 or 52% of total revenues, 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
35
<PAGE>
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
were 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
Preferred Stock and Common Stock, through which the Company raised $647,000 and
$4,700, respectively, in 1995 and (iii) capital equipment lease financing
which, from December 1997 through June 1998, raised approximately $963,000. 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
36
<PAGE>
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 1999 will be approximately $2 million 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 move 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 the Offerings, 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. The incurrence of indebtedness would
result in increased fixed obligations of the Company and could result in
operating covenants that would restrict the Company's operations. 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; Ability to Incur Debt; Expected Negative Operating Cash Flow for
the Foreseeable Future."
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 Financial
Statements and Notes related 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.
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<PAGE>
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."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1997 1997 1997 1997 1998 1998
--------- -------- ------------- ------------ --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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, 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, 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%)
===== ===== ======= ======= ======= =======
</TABLE>
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 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.
State of Readiness. The Company may be affected by Year 2000 issues related
to non-compliant IT systems or non-IT systems operated by the Company or by
third parties. The Company has substantially completed an assessment of its
internal and external (third-party) IT systems and non-IT systems. At this
point in its assessment, the Company is not currently aware of any Year 2000
problems relating to systems operated by the Company or by third parties that
would have a material effect on the Company's business, results of operations
or financial condition, without taking into account the Company's efforts to
avoid such problems, although there can be no assurance thereof.
The Company's IT systems consist of software developed either in-house or
purchased from third parties, and hardware purchased from vendors. At this
point, the Company's assessment of its in-house software has
38
<PAGE>
identified only approximately 2,000 lines of code out of several hundred
thousand in its proprietary, in-house software which are not Year 2000
compliant. Those portions of code which are not compliant are used solely for
internal statistical analysis. The Company does not anticipate any difficulty
in modifying this code to become Year 2000 compliant by December 31, 1998. The
Company has contacted its principal vendors of hardware and software. All of
those contacted vendors have notified the Company that the hardware and
software that they have supplied to the Company is Year 2000 compliant.
The Company has also substantially completed an assessment of its non-IT
systems which the Company has identified as containing embedded chip systems
for Year 2000 issues. At this point in its assessment, the Company is not
currently aware of any Year 2000 problems relating to these systems which would
have a material effect on the Company's business, results of operations, or
financial condition, without taking into account the Company's efforts to avoid
such problems.
The Company's IT systems and other business resources rely on IT systems and
non-IT systems provided by service providers and therefore may be vulnerable to
those service providers' failure to remediate their own Year 2000 issues. Such
service providers include those for the Company's network and e-mail services
and landlords for the Company's leased office spaces. The Company has contacted
these principal service providers and has been notified that the IT and non-IT
systems which they provide to the Company are Year 2000 compliant.
Cost. Based on its assessment to date, the Company does not anticipate that
costs associated with remediating the Company's non-compliant IT systems or
non-IT systems will be material.
Risks. To the extent that the Company's assessment is finalized without
identifying any additional material non-compliant IT systems operated by the
Company or by third parties, the most reasonably likely worst case Year 2000
scenario is a systemic failure beyond the control of the Company, such as a
prolonged telecommunications or electrical failure. Such a failure could
prevent the Company from operating its business, prevent users from accessing
the Company's Web site, or change the behavior of advertising customers or
persons accessing the Company's Web site. The Company believes that the primary
business risks, in the event of such failure, would include but not be limited
to, lost advertising revenues, increased operating costs, loss of customers or
persons accessing the Company's Web site, or other business interruptions of a
material nature, as well as claims of mismanagement, misrepresentation, or
breach of contract.
Contingency Plan. As discussed above, the Company is engaged in an ongoing
Year 2000 assessment. Following the completion of the assessment, the Company
plans to conduct a full-scale Year 2000 simulation of its IT systems. The
results of this simulation and the Company's assessment will be taken into
account in determining the nature and extent of any contingency 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's results of operations since inception.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" as of January 1,
1998. SFAS No. 130 requires the Company to report in its financial statements,
in addition to its 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. For the six months ended June 30, 1998 and the year ended
December 31, 1997, comprehensive net loss was approximately $11,600 lower and
$41,200 higher, respectively, than the net loss reported in the Company's
statements of operations for the applicable periods, due to unrealized gains or
losses on securities classified as available-for-sale.
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<PAGE>
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
beginning after December 15, 1997. The Company has determined that it does not
have any separately reportable business segments.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standard 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 Company as the Company
currently does not have any derivative instruments or hedging activities.
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<PAGE>
BUSINESS
OVERVIEW
theglobe.com is one of the world's leading online communities with over 2
million members in the United States and abroad. In October 1998, over 7.5
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.
Since its founding in May 1995, theglobe.com has experienced strong growth.
According to Media Metrix, theglobe.com was ranked as the fourth fastest-
growing Web site in terms of audience reach for the first half of 1998. Over
7.5 million unique users visited the site in October 1998, according to ABC
Interactive. Additionally, the site has added approximately 100,000 new
members every month since October 1997. Approximately 25% to 35% of
theglobe.com's monthly traffic originates from abroad, reflecting the site's
international appeal.
INDUSTRY BACKGROUND
The rapid adoption of the Internet as a means to gather information,
communicate, interact and be entertained, combined with the vast proliferation
of Web sites, has made the Internet an important new mass medium. IDC
estimates that the number of Web users exceeded 68 million in 1997, and will
grow to over 319 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 compelling
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. Community
sites were developed as a solution to the challenges posed by the Internet's
growth and complexity. They offer a single location where users can build
their personal Web sites and place them among the sites of others having
similar interests. In addition, community sites generally offer services
including access to e-mail accounts, chat rooms, news, and entertainment
services, among other features. By satisfying the needs of its users,
communities seek to establish a close relationship with their audience. As a
result, the Company believes 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 United States will grow from $940 million in 1997 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" advertising banners and other feedback tools enable
advertisers to measure impression levels, establish a dialogue with users and
receive "real-time" direct feedback from their target markets. 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 Web sites because they collect detailed demographic data and facilitate
the development of user-created affinity groups. The ability to target
advertisements to broad audiences, specific regional populations, affinity
groups or individuals makes community Web site advertising a highly versatile
and effective tool for delivering customized and cost-effective messages.
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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-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 $2.6 billion in 1997 to
approximately $37.5 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 include
online merchants offering broad product catalogs (such as books, music CDs and
toys), those seeking distribution efficiencies (such as PCs, flowers and
groceries) and those offering products and services with negotiable pricing
(such 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 believes that online
communities provide businesses an attractive environment for selling products
and services by providing direct access to users with like interests.
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 Web site participants indicate their areas of
personal interest by self-selecting themselves into affinity groups. This
added level of information provides direct marketers an invaluable 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 by Todd V. Krizelman and Stephan J. Paternot to
capitalize on the growing demand for online destinations that allow users to
develop their own identities and establish relationships with other Internet
users. theglobe.com community is organized in an intuitive hierarchy modeled
after the real world. There are ten "Themes of Interest": Arts, Business,
Entertainment, Life, Metro, News, Romance, Sports, Technology and Travel.
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 are not limited as to the number of communities
they can join and are able to leave an Interest Group at any time. Because of
this, the communities are dynamic and evolve as member interests 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 that it has a greater ability to convert them into members,
perpetuating the growth of the site.
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The unique community focus of theglobe.com offers the Company several
advantages that include:
Member Loyalty. Because theglobe.com provides a home for its members,
members develop loyalty to the site and to the communities in which they
participate. The Company believes that this translates into more frequent
usage by members and longer stays at the site. According to Media Metrix,
theglobe.com was ranked as the fourth fastest-growing Web site in terms of
audience reach for the first half of 1998.
Member-Developed Content. The majority of content on theglobe.com is
developed by users on a voluntary basis for the benefit of all users of the
site. As a result, the Company avoids the majority of costs associated with
content development.
Targeted Advertising. theglobe.com structure provides a valuable platform
for advertisers by allowing them to target advertisements based on both
demographic information and affinity group affiliations. Advertisers are also
drawn to theglobe.com's volume of user traffic, frequency and average length
of use. theglobe.com's ability to reach users across a wide variety of
interest areas has made the site attractive to both technology companies as
well as traditional consumer product and service companies. Currently,
approximately 60% of theglobe.com's advertisers are branded consumer product
and service companies.
BUSINESS STRATEGY
theglobe.com's goal is to be the leading online community site. The Company
seeks to attain this goal through the following key strategies:
Improve User Experience. The Company will continue efforts to improve user
experience on theglobe.com by: (i) simplifying user interfaces and improving
the ease of use of services, (ii) improving customer support, (iii) developing
loyalty programs to reward members for increased usage, (iv) expanding the
suite of personal publishing/Web site building tools, (v) creating additional
opportunities for participating in existing affinity groups, as well as
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.
Develop Brand Identity and Awareness. The Company intends to expand its
presence as a mass market site by building brand awareness. The Company plans
to continue to allocate a significant portion of its resources to develop its
brand in the same fashion as traditional consumer product and service
companies. The Company believes that establishing brand awareness among
consumers is instrumental in attracting new members to theglobe.com and also
has the effect of attracting 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 to build its brand name in selected cities.
Increase New Membership Acquisition through Strategic
Alliances. theglobe.com continues to seek new ways to reach potential members
when they are first becoming acquainted with the Internet. The Company
believes that early contact with such users will enhance its ability to
instill customer loyalty. Accordingly, the Company has established a strategic
alliance with EarthLink Network, Inc. ("EarthLink"), one 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 and Ziff
Davis University. 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.
Expand Globally. The Company believes that significant opportunities exist
to capitalize on the growth of the Internet internationally and is pursuing
strategic relationships with international companies to exploit cross-
marketing, co-branding and promotional opportunities. Approximately 25% to 35%
of theglobe.com's traffic is
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generated by members outside of the United States who are able to communicate
and publish on the site in their respective languages. The Company has
received prominent press coverage in Europe, Asia and Australia, and has
established a relationship with MTV U.K. to feature theglobe.com's founders on
a weekly news show (to be launched initially 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"), and through globeStores, its e-
commerce merchandising solution aimed at the small to mid-sized office and
home office market. 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 August 31, 1998, 43 companies, including Premier Partners,
participated in the Marketplace.
Enhance Membership Services. The Company currently offers additional
Internet services, such as increased storage space for building home pages,
through its Gold and Platinum membership programs. To attract a wider
subscriber base, the Company intends to develop new membership programs
offering premium content, shopping clubs and entertainment services.
PRODUCTS AND SERVICES
theglobe.com provides users with access to the following collection of
products and services to generate content and purchase merchandise online:
Free Services. theglobe.com provides a range of free services to its members
through which they are able to personalize their online experience. These
services include personal Web site hosting, discussion forums, chat 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 retailers in the
Marketplace.
theglobe.com Marketplace. theglobe.com Marketplace provides users access to
products offered by leading retailers and service providers. The Company
allows retailers to locate in its Marketplace and collects a fee based on a
percentage of transactions. The Marketplace currently has 43 participants,
including BarnesandNoble.com, FAO Schwarz and Lens Express.
Premier Partners. The Company has relationships with Premier Partners who
pay a fixed monthly fee, generally from $10,000 to $30,000 per month, in order
to receive prominent placement on theglobe.com. Premier Partner agreements
typically run for a period of six months to three years and are renewable at
the option of the partner. Examples include:
Lowestfare.com. Lowestfare.com, a division of Global Discount Travel
Services, LLC, is a full service discount travel company, offering
discounted airline, car and hotel reservations, vacation packages and
cruises to the leisure and business consumer. Lowestfare.com has entered
into a three-year agreement with theglobe.com to be the exclusive provider
of travel-related services, as well as content, including weather, mapping,
destination information and voice response e-mail. Additionally,
theglobe.com will provide Lowestfare.com with advertising and Marketplace
exposure.
E! Online. E! Online, one of the premier Internet entertainment sites,
will be theglobe.com's Premier Partner in the Company's entertainment
category, providing among other things, movie reviews, celebrity news and
gossip. The Company has entered into a one-year relationship with E!
Online, whereby the Company will be paid a guaranteed fee in exchange for
giving E! Online preferred placement.
Republic Industries. Republic Industries 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. AutoNation will be given
preferred placement in theglobe.com's auto category, pursuant to a three-
year agreement that Republic Industries has entered into with theglobe.com.
The Company also has such agreements with Cyberian Outpost, Inc. for
software and computer hardware, GetSmart for consumer finance, Classified
Warehouse for classified advertisements, RSL Communications for Internet
telephony services and VitaSave for herbs and vitamin products.
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globeStores. globeStores is the Company's e-commerce merchandising solution
aimed at the small to mid-sized office and home office market. The globeStore
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 globeStore
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 globeStore
owners a monthly service fee based on the level of service utilized and a
transactional fee.
Member Subscriptions. The Company currently offers additional Internet
services through its Gold and Platinum membership packages. 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 established a number of relationships designed to drive
additional traffic to its site, create brand building opportunities, and allow
for the marketing of products and services to theglobe.com user base. These
arrangements are with a variety of online and offline partners and provide a
cost effective way to deliver traffic to the site because they do not require
significant capital expenditures. Examples include:
EarthLink. theglobe.com seeks to reach new 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 site 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 October 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 that 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, Launch Magazine, Wall Street Sports
LLC, LINCS and WebSurfer.
ADVERTISING CUSTOMERS
With over 6.5 million unique users as of August 1998, according to ABC
Interactive, and over 1.9 million members in the United States and abroad,
theglobe.com has successfully attracted both mass market consumer product
companies as well as technology-related businesses advertising on the
Internet. Due to its advantages as a community Web site, the Company believes
that it is well positioned to capture a portion of the growing number of
consumer product and service companies seeking to advertise online. In the
last three months,
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approximately 110 customers advertised on theglobe.com. During that period,
approximately 70% were repeat customers and no one customer accounted for more
than 10% of revenues. Some of the Company's advertising clients include:
Lee Jeans Coca Cola J. Crew Ziff Davis
Procter & Gamble Visa Polygram BellSouth
Dunkin' Donuts Office Depot Levi's Microsoft
Sony 3Com USWest Intel
ADVERTISING SALES AND DESIGN
The Company seeks to distinguish itself from its competition through the
creation of unique advertising and sponsorship opportunities that are designed
to build brand loyalty for its corporate sponsors by seamlessly integrating
their advertising messages into theglobe.com's content. Through its close
relationship with the end user, the Company has the ability to deliver
advertising to specific targets within the 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 believes that such sophisticated targeting is a critical element for
capturing worldwide advertising budgets for the Internet. Additionally, the
Company intends to expand the amount and type of demographic information it
collects from its members, which will allow it to offer more specific data to
its advertising clients.
While the Company's competition generally provides banner advertising as its
primary delivery system, the Company offers an assortment of advertising
options 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" sponsorship packages for its
advertisers at higher premiums, such as:
. Banner Advertising . Sweepstakes
. Button Advertising . Content Development
. Contextual Links within Relevant . Affinity Packages for Advertising
Content Partners
. Pop Up and Log Out Interstitials . Opt-In Direct Marketing/Lead
. E-mail Sponsorship Programs Generation
. Celebrity Event Sponsorships . Pre- and Post-Campaign Market
Research
The Company has built an internal sales organization of 23 professionals,
focusing on both selling advertisements on the Web site and developing long-
term strategic relationships with clients. A significant portion of the
Company's 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 has sales
offices in New York City and San Francisco, and intends to open additional
sales offices in selected markets around the world.
MARKETING AND PROMOTIONS
The Company has committed significant funds to advertising in traditional
offline media, totaling approximately $3.1 million in the first six months of
1998. The Company launched an $8 million advertising campaign in March 1998,
including television, print, billboards, buses, telephone kiosks, online
media, and other marketing and promotional efforts. These efforts are aimed at
generating significant additional traffic to theglobe.com, building and
defining a desirable online destination in the minds of present and potential
online consumers, and creating a strong and viable brand within the Internet
industry and advertising trades. The Company intends to continue to commit a
significant part of its budget to marketing theglobe.com 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.
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TECHNOLOGY
The Company's strategy is to apply existing technologies in novel ways to
deliver content and provide services to members of its online community. The
various features of theglobe.com's online environment are implemented using a
combination of commercially available and proprietary software components. The
Company favors licensing and integrating "best-of-breed" commercially
available technology from industry leaders such as 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
believes that this component approach is more manageable, reliable and
scalable than single-source solutions. In addition, the emphasis on commercial
components speeds development time, which is an advantage when competing in a
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 architecture is also entirely redundant. The Company's Internet
servers are connected to the Internet through multiple dedicated 45 Mb T3
connections obtained through two separate backbone providers, AppliedTheory
and UUNET. This approach to connectivity protects the Company by allowing it
to continue operations in the event of a failure in either backbone. See "Risk
Factors--Internet Industry Characterized by Rapid Technological Change."
In order to efficiently manage the system, the Company has developed highly
automated methods of monitoring the system performance of each component. In
the event of a failure in any subsystem, the failed subsystem is immediately
taken out of service and requests are distributed among the remaining
operational systems. The Company has 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 believes that its
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--Internet Industry Is Characterized by Rapid Technological Change" and
"--Dependence on Key Personnel."
COMPETITION
The market for members, users and Internet advertising is new and rapidly
evolving, and competition for members, users and advertisers is intense and is
expected to increase significantly. Barriers to entry are relatively
insubstantial and the Company may 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 communities 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 and GeoCities and, in the future,
Internet communities may be developed or acquired by companies currently
operating Web directories, search engines, shareware archives, content sites,
OSPs, ISPs and other entities, certain of which may have more resources than
the Company. In addition, the Company could face competition in the future
from traditional media companies, a number of which, including Disney, CBS and
NBC, have recently made significant acquisitions or investments in Internet
companies. 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 AOL, Angelfire, CNET, CNN/Time Warner, Excite, Hotmail,
Infoseek, Lycos, Microsoft, Netscape, Switchboard, Xoom and Yahoo!. The
Company also faces competitive pressure from traditional media such as
newspapers, magazines, radio and television. The Company believes that the
principal competitive factors in attracting advertisers include the amount of
traffic on its Web site, brand recognition, customer service, the
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demographics of the Company's members and users, the Company's ability to
offer targeted audiences and the overall cost-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 Internet 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.
See "Risk Factors--Intense Competition."
Additionally, the e-commerce market is new and rapidly evolving and
competition among e-commerce merchants is expected to increase significantly.
The Company will rely primarily on e-commerce partners to generate e-commerce
revenues. The Company's ability to generate revenues from any of its present
or future e-commerce partners may be adversely affected by competition between
any such partner and other Internet retailers.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards substantial elements of its Web site and underlying
technology as proprietary and attempts to protect them 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 Company also generally enters into confidentiality agreements with
its employees and consultants and in connection with its license agreements
with third parties and generally seeks to control access to and distribution
of its 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's proprietary information without authorization or
to develop similar technology independently. The Company pursues the
registration of its trademarks in the United States and internationally. The
Company has registered a United States 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 secret protection may not be available in
every country in which the Company's services are distributed or made
available through the Internet, and policing unauthorized use of the Company's
proprietary information is difficult. See "Risk Factors--Reliance on
Intellectual Property and Proprietary Rights."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is currently subject to certain federal and state laws and
regulations that are applicable to certain activities on the Internet.
Legislative and regulatory proposals under consideration by federal, state,
local and foreign governmental organizations concern various aspects of the
Internet, including, but not limited to, online content, user privacy,
taxation, access charges, liability for third-party activities and
jurisdiction. Such government regulation may place the Company's activities
under increased regulation, increase the Company's cost of doing business,
decrease the growth in Internet use and thereby decrease the demand for the
Company's 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."
Online Content. Online content restrictions cover many areas, including but
not limited to, indecent or obscene content and gambling. Several federal and
state statutes prohibit the transmission of certain types of indecent,
obscene, or offensive information and content, including sexually explicit
information and content, over the Internet to certain persons. The
constitutionality and the enforceability of some of these statues is not clear
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" and "patently offensive" content were
unconstitutional. Many other provisions of the CDA, including those relating
to "obscenity," however, remain in effect. Prior to the Supreme Court's
decision, a federal district court in New York held that certain provisions of
the New York penal law modeled on the CDA violated the Constitution. A
companion provision
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of that law, however, was subsequently upheld. Since the Supreme Court's
decision, a federal district court in New Mexico held that a recently adopted
provision of the New Mexico penal law purporting to make it unlawful to
disseminate over the Internet information that is "harmful to minors" also
violated the Constitution. Recently, the Child Online Protection Act ("COPA")
was signed into law, and is scheduled to become effective on November 20,
1998. COPA requires Web sites engaged in the business of the commercial
distribution of material that is deemed to be harmful to minors to restrict
their access to such material. However, COPA exempts from liability
telecommunications carriers, ISPs and companies involved in the transmission,
storage, retrieval, hosting, formatting or translation of third-party
communications where such companies do not select or alter the third-party
material. The constitutionality of COPA is currently being challenged in a
federal district court, and the Company cannot predict the outcome or the
effect of such challenges or the effect that COPA may have on the Company's
business.
The U.S. Department of Justice and some state Attorneys General have
recently intensified their efforts in taking action against businesses that
operate Internet gambling activities, and pending legislation seeks to ban
Internet gambling. On July 23, 1998 the Senate passed the "Internet Gambling
Prohibition Act," which, if enacted, would prohibit placing, receiving or
otherwise making 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 similar bill has been introduced in the House of
Representatives. As of the date hereof, no further legislative action has
taken place with respect to either the Senate or the House bill. Currently,
online gambling advertisers account for under ten percent of the Company's
advertising revenues.
Certain 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 statues is not clear 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. Recently, the Children's Online Privacy Protection Act was
signed into law, which authorizes the FTC to develop regulations for the
collection of data from children by commercial Web site operators. Separately,
the Federal Trade Commission Act (the "Act") prohibits unfair and deceptive
practices in and affecting commerce. The Act authorizes the FTC to seek
injunctive and other equitable relief, including redress, for violations of
the 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 certain circumstances and the
FTC would have authority to pursue the remedies available under the Act for
such violations. Furthermore, in certain circumstances, information practices
may be inherently deceptive or unfair, regardless of whether the entity has
publicly adopted any privacy policies.
Certain industry groups 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 bolster user and member confidence in its
privacy policies, the Company may incur expenses in obtaining the endorsement
of such industry groups or in altering its current policies to comply with
such standards. There can be no assurance 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. The report listed four core information
practices that the FTC believes
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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. On July
21, 1998, Commissioner Pitofsky stated before a hearing of the House of
Representatives Subcommittee on Telecommunications, Trade, and Consumer
Protection that, unless the computer industry could demonstrate that it had
developed and implemented broad-based and effective self-regulatory programs
by the end of 1998, the FTC would seek additional legislative standards and
agency authority regarding Internet privacy. At the same hearing, the FTC
proposed model legislation that would force companies to comply with the four
core information practices and offer a safe harbor for industries that choose
to establish their own means for providing consumer privacy protections, as
long as those means are subject to governmental approval. There can be no
assurance that these efforts will not adversely affect the Company's ability
to collect demographic and personal information from members, which could have
an adverse affect on its ability to attract advertisers. This, in turn, could
have a material adverse effect on the Company's business, results of
operations and financial condition.
Moreover, the FTC has begun investigations into the privacy practices of
companies that collect information on the Internet. For example, on August 13,
1998, the FTC announced that it had entered into a proposed consent order with
one of the Company's competitors. In its complaint, the FTC alleged that such
competitor engaged in three deceptive practices. First, the FTC alleged that
the company falsely represented that the personal identifying information it
collects through the membership application form is used only to provide
members the specific offers and products or services they request. Second, the
FTC alleged that the 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 the
competitor had falsely represented that it collected and maintained the
information provided by children who joined certain neighborhoods on its site,
rather than the undisclosed third parties who actually collected and
maintained the information.
Without admitting that these allegations are correct, the competitor has
tentatively agreed, 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 before collecting
information from children 12 and under. Finally, the competitor agreed to
post, for five years, a clear and prominent hyperlink within its privacy
statement directing visitors to the FTC's site to view educational material on
privacy.
The Company is undertaking a review of its practices in light of the
foregoing recent FTC activity and the enactment of the Children's Online
Privacy Protection Act. However, the Company cannot predict the exact form of
the regulations that the FTC may adopt. Accordingly, there can be no assurance
that the Company's current practices would comply with the regulatory scheme
that is ultimately adopted or that the Company will not have to make
significant changes to comply with such laws. The Company includes statements
about user privacy in its user agreement entered into with new members. The
current user agreement states that its members should not have an expectation
of privacy in their accounts and that the Company may be forced to disclose
member e-mail to the government or third parties under certain circumstances,
or that third parties may unlawfully intercept private communications.
Additionally, the current user agreement states that, from time to time, the
Company may make its database of user information (including e-mail addresses)
available to other parties for promotions of and solicitations for their goods
or services that may be of interest to members of theglobe.com community. In
the current user agreement, each member expressly consents to allow the use
and disclosure of personally identifiable information and each member is
informed that he or she has the ability to remove their personal information
from the database of information made available to third parties.
Regardless of the user agreement, the Company could be required under
several privacy statutes and regulations, including the Electronic
Communications Privacy Act of 1974, as amended, to disclose information about
users in a variety of contexts including, but not limited to, pursuant to an
administrative subpoena or court order.
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At the international level, the European Union (the "EU") has adopted a
directive (the "Directive") that provides for EU member countries to impose
restrictions on the collection and use of personal data, effective October 25,
1998. The Directive 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 Department of Commerce published for comment a set of
safe harbor principles regarding privacy protection for personally
identifiable data. The Department indicated that organizations that come
within the safe harbor would be presumed to maintain an adequate level of
privacy protection and that data transfers from EU member countries would
continue. The draft safe harbor principles provide for notice regarding the
organization's intended use of personal data, the opportunity for an
individual to choose how personal information will be used either by the
organization or by a third party, requirements regarding the security and
integrity of personal data collected by an organization, ensuring access by an
individual to data regarding that individual and providing mechanisms for
ensuring an organization's compliance with the privacy principles. However,
there can be no assurance that this Directive will not be interpreted or
applied in a manner that would adversely affect the Company's business,
results of operations and financial condition.
Any additional legislation or regulations enacted by federal, state or
foreign governments regulating online privacy or the application or
interpretation of existing laws and regulations could affect the way in which
the Company is allowed to conduct its business, especially those aspects that
contemplate the collection or use of members' personal information.
Internet Taxation. A number of proposals have been made at the federal,
state and local level, and by certain foreign governments, that would impose
additional taxes on the sale of goods and services over the Internet, and
certain states have taken measures to tax Internet-related activities.
Recently, the Internet Tax Freedom Act was signed into law, placing a three-
year moratorium on state and local taxes on Internet access and on multiple or
discriminatory taxes on electronic commerce. Existing state or local laws,
however, would be expressly excepted from this moratorium. The statute also
creates a commission to study several Internet taxation issues and to present
proposed legislation to the President and Congress.
There can be no assurance that future laws imposing taxes or other
regulations on Internet commerce would not substantially impair the growth of
Internet commerce and as a result materially adversely affect the Company's
opportunity to derive financial benefit from such activities.
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 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 assurance 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. Local telephone carriers such as Pacific Bell, a subsidiary of SBC
Communications Inc., have petitioned the FCC to regulate ISPs in a manner
similar to long-distance telephone carriers and to impose access fees on ISPs.
In May 1997, however, the FCC granted information service providers an
exemption from interstate access charges and, in August 1998, the Eighth
Circuit Court of Appeals upheld the FCC's exemption. If the FCC were to
withdraw the exemption or if the Supreme Court were to find that the exemption
is improper, the costs of communicating on or through the Internet could
increase
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substantially, potentially slowing the growth in Internet use, which could, in
turn, decrease demand for the Company's services or increase the Company's
cost of doing business.
In addition, H.R. 4105, passed by the House on June 23, 1998, contains a
provision that would, if enacted, prohibit the FCC and state commissions from
regulating the prices or charges paid by subscribers for Internet access or
online services. Under the bill, the FCC and the state commissions would
retain the right to regulate telecommunications carriers that offer Internet
access or online services in connection with telephone toll, telephone
exchange, or exchange access services. As of the date hereof, the Company
cannot predict whether this or a similar provision will become law, the
constitutionality of such a law, or the effect that such a law could have on
the Company.
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 or by
the Internet access providers with which the Company has relationships. These
third-party activities could result in potential claims against the Company
for defamation, negligence, copyright or trademark infringement or other
claims based on the nature and content of such materials. The CDA provides
that no provider or user of an interactive computer service shall be treated
as the publisher or speaker of any information provided by another information
content provider. See "Risk Factors--Liability for Information Retrieved from
or Transmitted over the Internet; Liability for Products Sold over the
Internet."
Future legislation or regulations or court decisions may hold the Company
liable for listings accessible through its Web site, for content and materials
posted by members on their respective personal Web pages, for hyperlinks from
or to the personal Web pages of members, or through content and materials
posted in the Company's chat rooms or bulletin boards. Such liability might
arise from claims alleging 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. If any third-party material on the Company's Web site contains
informational errors, the Company may be sued for losses incurred in reliance
on such information. While the Company attempts to reduce its exposure to such
potential liability through, among other things, provisions in member
agreements, user policies and disclaimers, the enforceability and
effectiveness of such measures are uncertain.
Recently,, the "Digital Millennium Copyright Act," whose Title II contains
the "Internet Copyright Infringement Liability Clarification Act" was signed
into law. This statute provides that, under certain circumstances, a "service
provider" would not be liable for any monetary relief, and would be subject to
limited injunctive relief, for claims of direct, vicarious or contributory
infringement, based on copyright materials transmitted by users over its
digital communications network, temporarily stored on its system by its system
caching procedures, stored on systems or networks under its control or
connected to its systems or networks by hyperlinks and other information
location tools. This statute also provides that, under certain circumstances,
a service provider shall not be liable for any claim based on the service
provider's good faith removal of or disabling access to such infringing
material.
The Company's e-mail service is provided by a third party. See "Risk
Factors--Dependence on Third-Party Relationships." Such relationship exposes
the Company to potential derivative risk, such as 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.
Potential liability for information carried on or disseminated through the
Company's systems could lead the Company to implement measures to reduce its
exposure to such liability, which may require the expenditure of substantial
resources and limit the attractiveness of the Company's services to members
and users. While the Company attempts to reduce its exposure to such potential
liability through, among other things, provisions in member agreements, user
policies and disclaimers, the enforceability and effectiveness of such
measures are uncertain.
The Company also enters into agreements with commerce partners and sponsors
under which the Company is entitled to receive a share of any revenue from the
purchase of goods and services through direct links from the Company's Web
site. Such arrangements may expose the Company to additional legal risks and
uncertainties, including potential liabilities to consumers of such products
and services by virtue of the Company's involvement in providing access to
such products or services, even if the Company does not itself provide such
products or
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services. While the Company's 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 enforceable or
adequate. Although the Company carries general liability insurance, the
Company's insurance may not cover all potential claims 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.
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
decreasing the demand for the Company's services. Even to the extent that
claims relating to such issues do not result in liability to the Company, the
Company could incur significant costs in investigating and defending against
such claims.
Domain Names. Domain names are the user's Internet "addresses." Domain names
have been the subject of significant trademark litigation in the United
States. The Company has registered the domain name "theglobe.com." There can
be no assurance that third parties will not bring claims for infringement
against the Company for the use of this trademark. Moreover, because domain
names derive value from the individual's ability to remember such names, there
can be no assurance that the Company's 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 assurance that the Company's domain names will not lose their value, or
that the Company will not have to obtain entirely new domain names in addition
to or in lieu of its current domain names, if such litigation or reform
efforts result in a restructuring in the current system.
Jurisdiction. 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 the Company's transmissions or
take action against 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.
EMPLOYEES
As of August 31, 1998, the Company had 93 full-time employees, including 23
in sales and marketing, 54 in production and 16 in finance and administration.
The Company's future success will depend, in part, on its ability to continue
to attract, retain and motivate highly qualified technical and management
personnel, for whom competition is intense. From time to time, the Company
also employs independent contractors to support its research and development,
marketing, sales and support and administrative organizations. The Company's
employees are not represented by any collective bargaining unit, and the
Company has never experienced a work stoppage. The Company believes that its
relations with its employees are good.
FACILITIES
The Company's headquarters are currently located in a leased facility in New
York City, consisting of approximately 12,000 square feet of office space, a
majority of which is under a five-year lease with four years remaining. The
Company has recently entered into a three-year lease for approximately 2,800
square feet of commercial space in New York City for its data facilities. The
Company intends to relocate its headquarters in the first half of 1999 to a
larger facility and is currently evaluating a number of locations in the
greater New York City area. Additionally, the Company has recently entered
into two six-month leases for a total of 3,943 square feet of office space in
New York City. The Company also leases approximately 1,200 square feet of
office space in San Francisco for its West Coast sales office.
LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to the Company's
knowledge, threatened against the Company.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages and positions of the
Company's executive officers and directors. Executive officers are appointed
by, and serve at the discretion of, the Board of Directors. All directors hold
office until the annual meeting of stockholders of the Company following their
election or until their successors are duly elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael S. Egan......... 58 Chairman
Todd V. Krizelman....... 24 Co-Chief Executive Officer, Co-President and Director
Stephan J. Paternot..... 24 Co-Chief Executive Officer, Co-President, Secretary and
Director
Dean S. Daniels......... 41 Vice President and Chief Operating Officer
Edward A. Cespedes...... 32 Vice President of Corporate Development and Director
Francis T. Joyce........ 45 Vice President, Chief Financial Officer and Treasurer
Rosalie V. Arthur....... 39 Director
Henry C. Duques......... 55 Director
Robert M. Halperin...... 70 Director
David H. Horowitz....... 69 Director
H. Wayne Huizenga....... 60 Director
</TABLE>
MICHAEL S. EGAN. Mr. Egan has served as Chairman of theglobe.com since
August 1997. As such, Mr. Egan serves as Chairman of the Board of Directors
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, which holds a controlling interest in the
Company. From 1986 to 1996, he was the majority owner and Chairman of Alamo
Rent-A-Car, Inc. ("Alamo"), now a subsidiary of Republic 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. 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 to 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's degree in Hotel Administration.
TODD V. KRIZELMAN. Mr. Krizelman co-founded the Company in the fall of 1994.
He is Co-Chief Executive Officer and Co-President of the Company and has
served in various capacities with the Company since its founding. Mr.
Krizelman graduated from Cornell University in 1996, where he received a
Bachelor's degree in Biology.
STEPHAN J. PATERNOT. Mr. Paternot co-founded the Company in the fall of
1994. He is Co-Chief Executive Officer, Co-President and Secretary of the
Company and has served in various capacities with the Company since its
founding. Mr. Paternot graduated from Cornell University in 1996, where he
received Bachelor's degrees in Business and Computer Science.
DEAN S. DANIELS. Mr. Daniels was appointed Vice President and Chief
Operating Officer of the Company in August 1998. From February 1997 until
joining the Company, 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. Prior
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to that time, Mr. Daniels held various positions at WCBS-TV, including
executive producer, and was the recipient of four Emmy Awards.
EDWARD A. CESPEDES. Mr. Cespedes was appointed Vice President of Corporate
Development in July 1998 and has served as a director of the Company 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 to 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 received a Bachelor's degree
in International Relations from Columbia University.
FRANCIS T. JOYCE. Mr. Joyce was appointed Vice President, Chief Financial
Officer and Treasurer of the Company in July 1998. From 1997 until joining the
Company, 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.
ROSALIE V. ARTHUR. Ms. Arthur has served as a director of the Company 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 and
affiliated entities and Nantucket Nectars. Prior to joining Dancing Bear
Investments, she served as Chief of Staff and Financial Counselor to the
Chairman of Alamo from 1986 to 1996, when the Company 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.
HENRY C. DUQUES. 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. Mr. Halperin has served as a director of the Company
since 1995. Mr. 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 Master of Business Administration degree from Harvard
Business School, and he earned a Bachelor's degree in liberal arts from the
University of Chicago and a Bachelor's degree in Mechanical Engineering from
Cornell University.
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DAVID H. HOROWITZ. Mr. Horowitz has served as a Director of the Company
since December 1995. Mr. 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's degree, and is
a graduate of Columbia Law School.
H. WAYNE HUIZENGA. Mr. Huizenga has served as a director of the Company
since July 1998. Mr. Huizenga has served as the Chairman of the Board of
Republic Industries 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., 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 as Pro
Player Stadium, in South Florida.
KEY EMPLOYEES
The following table sets forth the names and positions of the Company's key
employees.
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
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
</TABLE>
VANCE HUNTLEY. Vance Huntley joined theglobe.com in August 1995 as 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. Ms. Loewy joined theglobe.com in May 1997 as Director of
Communications. As such, Ms. Loewy is responsible for managing the in-house
communications department for the Company as well as the direction of
theglobe.com's media and public relations. Before joining theglobe.com, 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. Mr. Margiloff joined theglobe.com in March 1998 as Director
of Advertising Sales. Mr. Margiloff is responsible for the management and
direction of theglobe.com's sales force in New York and San Francisco, as well
as the expansion of the Company's advertising efforts both domestically and
internationally. Before joining theglobe.com, 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!
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RICHARD W. MASS. Mr. Mass was appointed General Counsel of the Company in
September 1998. From 1994 until joining the Company, 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.com in May 1998 as 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, 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 to that time, from
1994 to 1995, Mr. 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 COMMITTEES
The Audit Committee of the Board of Directors reviews and monitors the
corporate financial reporting and the internal and external audits of the
Company, including, among other things, the Company's control functions, the
results and scope of the annual audit and other services provided by the
Company's independent accountants, and the Company's compliance with legal
matters that have a significant impact on the Company's financial condition.
The Audit Committee will consult with the Company's management and the
Company's independent accountants prior to the presentation of financial
statements to stockholders and, as appropriate, initiates inquiries into
aspects of the Company's 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's independent accountants. The
current members of the Audit Committee are Messrs. Halperin and Horowitz and
Ms. Arthur.
The Compensation Committee of the Board of Directors reviews and makes
recommendations to the Board regarding the Company's compensation policies and
all forms of compensation to be provided to executive officers and directors
of the Company, including, among other things, annual salaries and bonuses and
stock option and other incentive compensation arrangements of the Company. In
addition, the Compensation Committee reviews bonus and stock compensation
arrangements for all other employees of the Company. The current members of
the Compensation Committee are Messrs. Egan, Halperin and Horowitz and Ms.
Arthur. Prior to 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
Board or a subcommittee of the Compensation Committee consisting of Messrs.
Horowitz and Halperin.
The Nominating Committee of the Board of Directors makes recommendations to
the Board of Directors regarding nominees for the Board of Directors. The
current members of the Nominating Committee are Messrs. Egan, Krizelman and
Paternot and Ms. Arthur.
EXECUTIVE OFFICERS
Executive officers of the Company are appointed by the Board of Directors
and serve at the discretion of the Board of Directors.
DIRECTORS' COMPENSATION
Directors who are also employees of the Company receive no compensation for
serving on the Board of Directors. With respect to Directors who are not
employees of the Company ("Non-Employee Directors"), the Company intends to
reimburse such directors for all travel and other expenses incurred in
connection with
57
<PAGE>
attending such Board of Directors and committee meetings. Non-Employee
Directors are also eligible to receive automatic stock option grants under the
1998 Plan. The 1998 Plan provides that each eligible Non-Employee Director as
of July 13, 1998 will receive an initial grant of options to acquire 25,000
shares of Common Stock, and each Director who becomes an eligible Non-Employee
Director after such date will receive an initial grant of options to acquire
12,500 shares of Common Stock. In addition, each eligible Non-Employee
Director will receive an annual grant of options to acquire 3,750 shares of
Common Stock on the first business day following each of the Company's annual
meeting of shareholders that occurs while the 1998 Plan is in effect. All such
stock options will be granted with per share exercise prices equal to the fair
market value of the Common Stock as of the date of grant.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid to the Company's Co-
Chief Executive Officers (collectively, the "Named Executives") during the
year ended December 31, 1997:
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- ------------
NUMBER OF
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)(2)
- --------------------------- ---------- --------- ------------ -------------------
<S> <C> <C> <C> <C>
Todd V. Krizelman,....... $76,000 $18,750 144,976 $500,000
Co-Chief Executive
Officer and
Co-President
Stephan J. Paternot,..... $76,000 $18,750 144,976 $500,000
Co-Chief Executive
Officer,
Co-President and
Secretary
</TABLE>
- --------
(1) The Company did not have any other executive officers during this period.
(2) Reflects a one-time payment of $500,000 associated with the Company's sale
of Preferred Stock and Warrants to Dancing Bear Investments in August
1997.
1997 YEAR END OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT FISCAL
AT FISCAL YEAR-END (#) YEAR-END ($)(2)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Todd V. Krizelman........... 25,000 144,976 $69,000 $301,550
Stephan J. Paternot......... 25,000 144,976 $69,000 $301,550
</TABLE>
- --------
(1) The Named Executives did not exercise any options in 1997.
(2) Based on a per share fair market value of Common Stock equal to $2.78, as
of December 31, 1997.
58
<PAGE>
OPTIONS GRANTS IN 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(1)
OPTIONS EMPLOYEES IN BASE PRICE ---------------------
NAME GRANTED (#) 1997 ($/SH) EXPIRATION DATE 5% 10%
- ---- ----------- ------------- ----------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Todd V. Krizelman....... 144,976 37% $0.70 May 2007 $ 172,348 $ 438,705
Stephan J. Paternot..... 144,976 37% $0.70 May 2007 $ 172,348 $ 438,705
</TABLE>
- --------
(1) These amounts represent certain assumed rates of appreciation only and are
displayed in connection with Securities and Exchange Commission ("SEC")
disclosure rules. Actual gains, if any, on stock option exercises are
dependent on future performance of the Common Stock.
EMPLOYMENT AGREEMENTS
On August 13, 1997, the Company entered into employment agreements (each a
"Chief Executive Employment Agreement") with Todd V. Krizelman and Stephan J.
Paternot. Pursuant to the terms of each Chief Executive Employment Agreement,
each individual will be employed as an Executive (as defined in each Chief
Executive Employment Agreement) of the Company. Each Chief Executive
Employment Agreement provides for an annual base salary of $125,000 with
eligibility to receive annual increases amounting to no less than 15% of the
Executive's then-base salary. Pursuant to the Chief Executive Employment
Agreements, each of the Executives also received a one-time payment of
$500,000 associated with the sale of Preferred Stock and Warrants to Dancing
Bear Investments, and each is entitled to an annual cash bonus, which will be
assessed at the Board's discretion and upon the achievement of target
performance objectives set forth in the Company's budget. Each Executive is
also entitled to participate in the stock option plans of the Company as well
as all health, welfare, and other benefit plans provided by the Company to its
most senior executives.
Each of the Chief Executive Employment Agreements is for a term expiring on
August 13, 2002, subject to earlier termination as provided in each Chief
Executive Employment Agreement. Each of the Chief Executive Employment
Agreements provides that, in the event of termination by the Company without
Cause (as defined in each Chief Executive Employment Agreement), the Executive
will be entitled to receive from the Company: (i) any accrued and unpaid base
salary, (ii) reimbursement for any reasonable and necessary monies advanced or
expenses incurred in connection with the Executive's employment, (iii) a pro-
rata portion of the annual bonus for the year of termination and (iv) for one
year following such termination or the remainder of the term of the Chief
Executive Employment Agreement, whichever is less, continued salary payments
and employee benefits. In addition, termination without Cause automatically
triggers the vesting of all stock options held by the Executive.
In the event of a Change in Control (as defined in each Chief Executive
Employment Agreement) or a dissolution of the Company, each Executive may
elect to terminate his employment by delivering a notice within 60 days to the
Company and receive (i) any accrued and unpaid base salary as of the
termination date and (ii) an amount reimbursing the Executive for expenses
incurred on behalf of the Company prior to the termination date.
Each Chief Executive Employment Agreement contains a covenant not to compete
with the Company for a period of five years from the date of each Chief
Executive Employment Agreement or, in the case of termination without Cause or
after a Change in Control, the earlier of a period of one year immediately
following termination of employment or five years from the consummation of the
Offerings.
The Company has entered into an Employment Agreement with Dean S. Daniels
(the "Daniels Employment Agreement"). Pursuant to the terms of the Daniels
Employment Agreement, Mr. Daniels will be employed as Chief Operating Officer
of the Company effective August 31, 1998. The Daniels Employment Agreement
provides for an annual base salary of not less than $250,000 per year and an
annual cash bonus of $50,000. Mr.
59
<PAGE>
Daniels will be granted stock options to purchase 112,500 shares of Common
Stock. The options will be granted at the initial public offering price which
is equal to the fair market value per share of Common Stock as of the date of
grant. Of such 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 such 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 25,000
of such options upon the Company's attainment of certain financial targets in
the 1998 and 1999 fiscal years of the Company.
The Daniels Employment Agreement is for a term expiring on August 31, 2001,
subject to earlier termination as provided in the Daniels Employment
Agreement. The Daniels Employment Agreement provides that, in the event of
termination by the Company without Cause (as defined in the Daniels Employment
Agreement), Mr. Daniels will be entitled to receive from the Company (i) any
accrued and unpaid base salary (as of the termination date) and salary
continuation during a non-competition period following termination which will
be one year, (ii) reimbursement for any and all reasonable monies advanced or
expenses incurred in connection with his employment, and (iii) the annual
bonus for the year of termination. In addition, termination without Cause
automatically triggers the vesting of all options held by Mr. Daniels that
have not yet vested.
The Daniels Employment Agreement contains a covenant not to compete with the
Company for a period of one year from the date of the Daniels Employment
Agreement's termination.
On July 13, 1998, the Company entered into an Employment Agreement with
Francis T. Joyce (the "Joyce Employment Agreement"). Pursuant to the terms of
the Joyce Employment Agreement, Mr. Joyce will be employed as Chief Financial
Officer of the Company. The Joyce Employment Agreement provides for an annual
base salary of not less than $200,000 per year with eligibility to receive
annual increases in base salary as determined by the Co-Chief Executive
Officers and Co-Presidents of the Company. Mr. Joyce will also receive an
annual cash bonus of $50,000. Mr. Joyce will be granted options to purchase
112,500 shares of Common Stock, 87,500 of which will have an exercise price
per share equal to 85% of the initial public offering price. As a result, the
Company will record a charge for deferred compensation expense of $118,100 in
the third quarter of 1998, representing the difference between the deemed
value of the Company's Common Stock, the initial public offering price
(assuming an initial public offering price of $9.00 per share) for accounting
purposes and the exercise price of such options at the date of grant. Such
amount will be presented as a reduction of stockholders' equity and amortized
over the vesting period of the applicable options. The remaining options will
be granted at the initial public offering price which is equal to the fair
market value per share of the Company's Common Stock on the date of grant. Of
such 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 such shares on each of the
first seven anniversaries of the date of grant. The Joyce Employment Agreement
also provides for the accelerated vesting of an aggregate of 25,000 of such
options upon the Company's attainment of certain financial targets in the 1998
and 1999 fiscal years of the Company.
The Joyce Employment Agreement is for a term expiring on July 13, 2001,
subject to earlier termination as provided in the Joyce Employment Agreement.
The Joyce Employment Agreement provides that, in the event of termination by
the Company without Cause (as defined in the Joyce Employment Agreement), Mr.
Joyce will be entitled to receive from the Company (i) any accrued and unpaid
base salary (as of the termination date) and salary continuation during a non-
competition period following termination which will be six months (or one
year, if the Company elects to pay Mr. Joyce his salary during such period),
(ii) reimbursement for any and all monies advanced or expenses incurred in
connection with his employment, and (iii) a pro rata portion of the annual
bonus for the year of termination. In addition, termination without Cause
automatically triggers the vesting of all stock options held by Mr. Joyce that
have not yet vested.
1998 STOCK OPTION PLAN
The Company's 1998 Stock Option Plan (the "1998 Plan") was adopted by the
Board of Directors on July 15, 1998, and approved by the stockholders of the
Company as of July 15, 1998. The 1998 Plan provides for the
60
<PAGE>
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. The 1998 Plan
is designed to comply with the requirements for "performance-based
compensation" under Section 162(m) of the Code, and the conditions for
exemption from the short-swing profit recovery rules under Rule 16b-3 of the
Exchange Act.
The purpose of the 1998 Plan is to strengthen the Company by providing an
incentive to its directors, officers, employees and consultants and thereby
encouraging them to devote their abilities and industry to the success of the
Company's business enterprise. Options may be granted by the Board or
Committee (as defined below) in its discretion to directors, officers,
employees and consultants 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 25,000 shares to the eligible non-employee directors who
served on the Board as of July 15, 1998 (12,500 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 3,750 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 1,200,000 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 100,000 options to each of Messrs.
Krizelman and Paternot and 25,000 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, 100,000 and 3,750
options to Mr. Egan and Mr. Cespedes, respectively, in connection with their
appointment as officers of the Company. Options will be granted by the Board
of Directors or a committee (the "Committee") of the Board of Directors
comprised of two or more "non-employee directors" within the meaning of Rule
16b-3, and unless otherwise determined by the Board of the Directors, "outside
directors" within the meaning of Section 162(m), which will administer the
1998 Plan. See "--Board Committees." No individual may be granted options with
respect to more than a total of 250,000 shares during any three consecutive
calendar year period under 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 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. The 1998 Plan provides that the term of any option may
not exceed ten years. In the event of a Change in Control (as defined in the
1998 Plan) all outstanding options will become immediately and fully vested.
If a participant's employment (or service as a director) is terminated
following a Change in Control, any options vested at such 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 enlargement of the rights of participants,
the 1998 Plan permits the Committee to make adjustments to the aggregate
number of shares subject to the 1998 Plan or any option, and to the purchase
price to be paid or the amount to be received in connection with the
realization of any option, upon the occurrence of certain events as described
in the 1998 Plan.
The Company intends, subject to final approval of the Board of Directors, to
issue shares of Common Stock to the Company's Community Leaders under the 1998
Plan. Immediately following the execution of the underwriting agreement, each
of the Company's Community Leaders, as of July 23, 1998, will be issued 11
fully vested shares of Common Stock (approximately 3,500 in the aggregate),
contingent upon the closing of the Offerings. As a result, the Company will
record a charge for compensation expense estimated at $31,500 in the fourth
quarter of 1998 (assuming an initial public offering price of $9.00 per share)
for the full value of the Company's Common Stock.
61
<PAGE>
1995 STOCK OPTION PLAN
The Company's 1995 Stock Option Plan, as amended (the "1995 Plan"), was
adopted by the Board of Directors on May 26, 1995. The 1995 Plan provides for
the grant of incentive stock options and non-qualified stock options.
Directors, employees and consultants of the Company and its affiliates are
eligible to receive grants under the 1995 Plan. The 1995 Plan authorizes for
issuance 791,000 shares of Common Stock, subject to adjustment as provided in
the 1995 Plan. The remaining options under the 1995 Plan may be granted by
Messrs. Krizelman and Paternot pursuant to the terms of the 1995 Plan. The
Company currently intends to grant 250 options to each of its employees
currently employed by the Company and who have served prior to January 1, 1998
and 100 options to each of its employees employed by the Company as of July
24, 1998 whose employment commenced after January 1, 1998.
401(K) SAVINGS PLAN
theglobe.com has established a savings and profit-sharing plan that
qualifies as a tax-deferred saving plan under Section 401(k) of the Code (the
"Savings Plan") for certain eligible employees of theglobe.com. Under the
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 employee
contributions are fully vested at all times. In addition, theglobe.com may, in
its discretion, make additional contributions on behalf of participants. All
amounts contributed under the Savings Plan are invested in one or more
investment accounts administered by the plan administrator.
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 such date, the Compensation Committee was comprised of Messrs. Egan,
Halperin, Krizelman and Paternot. Mr. Egan, effective as of July 22, 1998,
also serves as an executive officer of the Company 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--Arrangements with Entities Controlled
by Certain Directors and Officers." Although it is contemplated that Mr. Egan
will not receive a salary or bonus from the Company, the Company intends to
grant, subject to Board of Directors or Committee approval, stock options to
Mr. Egan for 100,000 shares of Common Stock under the 1998 Plan, as
consideration for his performance of services in his capacity as an executive
officer. In the past fiscal year, Mr. Egan has served as a director of
Certified Vacations, an entity with which the Company has recently begun e-
commerce arrangements.
KEY MAN INSURANCE
The Company does not have and currently does not intend to purchase key man
insurance.
INDEMNIFICATION AGREEMENTS
The Company has entered into indemnification agreements with its directors
and officers. These agreements provide, in general, that the Company 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
expenses (including attorneys' fees and disbursements) incurred in connection
with, or in any way arising out of, any claim, action or proceeding (whether
civil or criminal) against, or affecting, such directors and officers
resulting from, relating to or in any way arising out of, the service of such
directors and officers as directors and officers of the Company.
62
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ARRANGEMENTS WITH ENTITIES CONTROLLED BY CERTAIN DIRECTORS AND OFFICERS
The Company has recently entered into an e-commerce contract with Republic
Industries, an entity affiliated with H. Wayne Huizenga, 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 through
AutoNation, a subsidiary of Republic Industries. 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 e-commerce arrangement with
InteleTravel, an entity controlled by Michael S. Egan, whereby the Company
developed a Web community for InteleTravel in order for its travel agents to
conduct business through theglobe.com Web site 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 the date hereof, revenues received by the Company from Republic and
InteleTravel have not been material.
STOCKHOLDERS' AGREEMENT
Messrs. Egan, Krizelman, Paternot and Cespedes, Ms. Arthur and Dancing Bear
Investments (an entity controlled by Mr. Egan) expect to enter into a
Stockholders' Agreement pursuant to which the Egan Group will agree to vote
for certain nominees of the Krizelman and Paternot Groups to the Board of
Directors and the Krizelman and Paternot Groups will agree to vote for the
Egan Group's nominees to the Board, who will represent a majority of the
Board. Additionally, pursuant to the terms of the Stockholders' Agreement,
Messrs. Krizelman, Paternot and Cespedes and Ms. Arthur have granted an
irrevocable proxy to Dancing Bear Investments with respect to any shares that
may be acquired or beneficially owned by them pursuant to the exercise of
outstanding Warrants transferred to each of them by Dancing Bear Investments.
Such shares will be voted by Dancing Bear Investments, which is controlled by
Mr. Egan, and will be subject to a right of first refusal in favor of Dancing
Bear Investments upon transfer. The Stockholders' Agreement will also provide
that if the Egan 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 Krizelman and Paternot Groups,
Mr. Cespedes and Ms. Arthur will be required to sell up to the same percentage
of their shares as the Egan Group sells. If the Egan Group sells shares of
Common Stock or Warrants representing 25% or more of the Company's outstanding
Common Stock (including the Warrants) or the Krizelman and Paternot Groups
collectively 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.
63
<PAGE>
TRANSACTIONS WITH DIRECTORS, OFFICERS AND 5% STOCKHOLDERS
Since the Company's inception, the Company has raised capital primarily
through the sale of shares of its Common Stock and Preferred Stock. The
following table summarizes the shares of Common Stock and Preferred Stock
purchased by executive officers, directors and 5% stockholders of the Company
and persons associated with them since the Company's inception.
<TABLE>
<CAPTION>
PREFERRED STOCK
EXECUTIVE OFFICERS, COMMON -----------------------------------------
DIRCTORS AND 5% STOCKHOLDERSE STOCK SERIES B SERIES C SERIES D(1) SERIES E(2)
- ----------------------------- ------ -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Dancing Bear Investments,
Inc.(3)...................... 25.5 5
Michael S. Egan(4)............ 25.5 5
Robert M. Halperin(5)......... 42,709 23,810 6,250
David H. Horowitz(6).......... 15,972 50,000 12,500
</TABLE>
- --------
(1) Convertible into 4,023,765 shares of Common Stock.
(2) Represents Warrants to purchase 5 shares of Series E Preferred Stock prior
to the Offerings and an aggregate of 2,023,009 shares of Common Stock
after the Offerings.
(3) Dancing Bear Investments paid $20 million for its initial investment in
the Series D Preferred Stock and the Warrants.
(4) Includes the shares that Mr. Egan is deemed to beneficially own as the
controlling investor of Dancing Bear Investments.
(5) Mr. Halperin paid $8,171.88 in 1998 in connection with the exercise of
options for his Common Stock. Mr. Halperin paid $25,000.50 and $25,000 for
his Series B and Series C Preferred Stock issued in December 1995 and
November 1996, respectively.
(6) Mr. Horowitz paid $3,111.06 in 1997 in connection with the exercise of
options for his Common Stock. Mr. Horowitz paid $52,000 and $50,000 for
his Series B and Series C Preferred Stock issued in December 1995 and
November 1996, respectively.
All of the directors and executive officers of the Company are also parties
to registration rights agreements with the Company which are described under
"Description of Capital Stock--Registration Rights." The Company also has
entered into indemnification agreements with its directors and officers. See
"Management--Indemnification Agreements."
In the Concurrent Offering, the Company will sell to the Concurrent
Purchasers shares of Common Stock having a value of up to approximately $5
million (555,556 shares assuming an initial public offering price of $9.00 per
share) at the same price paid per share in the Initial Public Offering. The
Company expects that the Concurrent Purchasers will include certain of the
Company's officers and directors, their relatives and their business
associates. See "Principal Stockholders."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of November 12, 1998 and as adjusted to
reflect the sale of 3,100,00 shares offered by the Company hereunder, certain
information with respect to the beneficial ownership of the Common Stock of
the Company by (i) each person known to the Company to own 5% or more of the
outstanding shares of Common Stock, (ii) each of the Company's directors,
(iii) each of the Company's executive officers, and (iv) all of the directors
and executive officers as a group.
The percentages of total shares of Common Stock set forth below assume that
only the indicated person or group has exercised options and warrants which
are exercisable within 60 days of November 12, 1998 and do not reflect the
percentage of Common Stock which would be calculated if all other holders of
currently exercisable options or Warrants had exercised their securities. See
footnote 1 below.
<TABLE>
<CAPTION>
SHARES OF COMMON PERCENTAGE OF TOTAL SHARES
NAME STOCK WHICH MAY BE OF COMMON STOCK
---- SHARES PURCHASED IN THE --------------------------------
BENEFICIALLY OWNED(1) CONCURRENT OFFERING(2) BEFORE OFFERINGS AFTER OFFERINGS
--------------------- ---------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Dancing Bear
Investments, Inc.(3)... 6,046,774 69.4% 51.5%
Michael S. Egan(4)...... 6,053,024 35,000(5) 69.4 51.4
Todd V. Krizelman(6).... 754,943 10.9 7.6
Stephan J. Paternot(7).. 807,488 11.7 8.1
Dean S. Daniels(8)...... 0 * *
Edward A. Cespedes(9)... 31,250 * *
Francis T. Joyce(10).... 0 * *
Rosalie V. Arthur(11)... 31,250 5,000 * *
Henry C. Duques(12)..... 6,250 * *
Robert M. Halperin(13).. 87,699 1.3 *
David H. Horowitz(14)... 107,639 1.6 1.1
H. Wayne Huizenga(15)... 6,250 0(16) * *
All directors and
executive officers as a
group (11
persons)(17)........... 7,881,974 85.3% 64.1%
</TABLE>
- --------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with rules of the SEC.
In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of Common Stock options or
Warrants held by that person that are currently exercisable or
exercisable within 60 days of November 12, 1998 are deemed outstanding.
Such shares, however, are not deemed outstanding for the purposes of
computing the percentage ownership of each other person.
(2) The Company is offering up to approximately $5 million of Common Stock in
the Concurrent Offering. The Concurrent Purchasers (which include officers
and directors of the Company, their relatives and their business
associates) have provided indications of interest to purchase shares of
Common Stock in the Concurrent Offering but may not be obligated to
purchase shares until after the registration statement of which this
Prospectus is a part becomes effective. These share numbers are based on
an initial public offering price of $9.00 per share (the mid-point of the
estimated initial public offering price range set forth on the front
cover).
(3) Includes: (a) 25.5 shares of Series D Preferred Stock, which will be
converted into an aggregate of 4,023,765 shares of Common Stock upon
consummation of the Offerings, (b) 1,773,009 shares of Common Stock
issuable following consummation of the Offerings upon exercise of
Warrants and (c) 250,000 shares of Common Stock issuable following
consummation of the Offerings, upon exercise of Warrants held by persons
other than Dancing Bear Investments but as to which Dancing Bear
Investments will have voting power upon exercise pursuant to a
Stockholders' Agreement. Dancing Bear Investments' mailing address is 333
East Las Olas Blvd., Ft. Lauderdale, FL 33301.
(4) Includes the following shares that Mr. Egan is deemed to beneficially own
as the controlling investor of Dancing Bear Investments: (a) 25.5 shares
of Series D Preferred Stock, which will be converted into an aggregate of
4,023,765 shares of Common Stock upon consummation of the Offerings, (b)
1,773,009 shares of Common Stock issuable, following consummation of the
Offerings, upon exercise of Warrants, (c)
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250,000 shares of Common Stock issuable following consummation of the
Offerings 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 the
Stockholders' Agreement, and (d) 6,250 shares of Common Stock subject to
options that are currently exercisable. Excludes 118,750 shares of Common
Stock subject to options that will not be exercisable within 60 days of
November 12, 1998. Mr. Egan's mailing address is care of the Company.
(5) Includes (a) 28,000 shares of Common Stock expected to be purchased by
certain trusts for the benefit of Mr. Egan's children as to which he
disclaims beneficial ownership and (b) 7,000 shares of Common Stock
expected to be purchased by Mr. Egan's wife, as to which he disclaims
beneficial ownership.
(6) Includes (a) 22,455 shares of Series A Preferred Stock, which will be
converted into an equal number of shares of Common Stock upon
consummation of the Offerings, (b) 107,488 shares of Common Stock subject
to options that are currently exercisable and (c) 100,000 shares of
Common Stock issuable following consummation of the Offerings upon
exercise of Warrants. Excludes 172,488 shares of Common Stock subject to
options that will not be exercisable within 60 days of November 12, 1998.
Mr. Krizelman's mailing address is care of the Company.
(7) Includes 107,488 shares of Common Stock subject to options that are
currently exercisable and 100,000 shares of Common Stock issuable
following consummation of the Offerings upon exercise of Warrants.
Excludes 172,488 shares of Common Stock subject to options that will not
be exercisable within 60 days of November 12, 1998. Mr. Paternot's
mailing address is care of the Company.
(8) Excludes 112,500 shares of Common Stock subject to options that will not
be exercisable within 60 days of November 12, 1998.
(9) Includes 6,250 shares of Common Stock subject to options that are
currently exercisable, and 25,000 shares of Common Stock issuable
following consummation of the Offerings upon exercise of Warrants.
Excludes 22,500 shares of Common Stock subject to options that will not
be exercisable within 60 days of November 12, 1998.
(10) Excludes 112,500 shares of Common Stock subject to options that will not
be exercisable within 60 days of November 12, 1998.
(11) Includes 6,250 shares of Common Stock subject to options that are
currently exercisable, and 25,000 shares of Common Stock issuable
following consummation of the Offerings upon exercise of Warrants.
Excludes (i) 22,500 shares of Common Stock subject to options that will
not be exercisable within 60 days of November 12, 1998 and (ii) shares
held by Dancing Bear Investments (see footnote 3 above) for which Ms.
Arthur serves as an officer and a director, and as to which Ms. Arthur
disclaims beneficial ownership.
(12) Includes 6,250 shares of Common Stock subject to options that are
currently exercisable. Excludes 18,750 shares of Common Stock subject to
options that will not be exercisable within 60 days of November 12,
1998.
(13) Includes 23,810 shares of Series B Preferred Stock, and 6,250 shares of
Series C Preferred Stock, each convertible into an equal number of
shares of Common Stock, and 14,930 shares of Common Stock subject to
options that are currently exercisable. Excludes 46,111 shares of Common
Stock subject to options that are not currently exercisable. Excludes
90,180 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.
(14) Includes 50,000 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 29,167 shares of Common Stock subject to
options that are currently exercisable. Excludes 33,611 shares of Common
Stock subject to options that are not currently exercisable.
(15) Includes 6,250 shares of Common Stock subject to options that are
exercisable within 60 days of November 12, 1998. Excludes 22,500 shares
of Common Stock subject to options that are not exercisable within 60
days of November 12, 1998.
(16) Excludes 333,333 shares for which one or more entities associated with
Mr. Huizenga have indicated interest in the purchase of Common Stock in
the Concurrent Offering and as to which Mr. Huizenga disclaims
beneficial ownership, based on an initial public offering price of $9.00
per share (the mid-point of the estimated initial public offering price
range set forth on the Front Cover).
(17) See footnotes 3 through 16 above.
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DESCRIPTION OF CAPITAL STOCK
The Company's stockholders have approved the Fourth Amended and Restated
Certificate of Incorporation (the "Certificate") which will be filed with the
Delaware Secretary of State prior to consummation of the Offerings. Pursuant
to the Certificate, the Company's authorized capital stock will consist of 100
million shares of Common Stock and three million shares of Preferred Stock,
par value $.001 per share (the "Preferred Stock"). As of June 30, 1998, there
were 1,196,979 shares of Common Stock outstanding and 1,449,995.5 shares of
Preferred Stock outstanding (which may be convertible into shares of Common
Stock at any time).
The following descriptions of the Company's capital stock do not purport to
be complete and are subject to and qualified in their entirety by the
provisions of the Certificate and the Company's By-Laws, which are included as
exhibits to the Registration Statement of which this Prospectus is a part, and
by the provisions of applicable law. The By-laws have been approved by the
Company's Board of Directors in the form included as an exhibit to the
Registration Statement and will become effective prior to consummation of the
Offerings.
COMMON STOCK
Following the Offerings, 9,791,339 shares of Common Stock will be
outstanding (10,173,006 if the Underwriters' over-allotment option is
exercised in full). As of September 23, 1998, there were approximately 36
holders of the Company's Common Stock (after giving effect to the conversion
of Preferred Stock which will occur upon consummation of the Offerings). All
of the issued and outstanding shares of Common Stock are, and upon the
completion of the Offerings the shares of Common Stock offered hereby will be,
fully paid and non-assessable. Each holder of shares of 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 Stock are entitled to dividends and other
distributions as may be declared from time to time by the Board of Directors
out of funds legally available therefor, if any. See "Dividend Policy." Upon
the liquidation, dissolution or winding up of the Company, the holders of
shares of Common Stock would be entitled to share ratably in the distribution
of all of the Company's assets remaining available for distribution after
satisfaction of all its liabilities and the payment of the liquidation
preference of any outstanding Preferred Stock as described below. The holders
of Common Stock have no preemptive or other subscription rights to purchase
shares of stock of the Company, nor are such holders entitled to the benefits
of any redemption or sinking fund provisions.
PREFERRED STOCK
As of June 30, 1998, the Company has 1,449,995.5 shares outstanding of
Preferred Stock, designated 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 concurrently with the closing of the Offerings (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 $0.20, $1.05 and $4.00 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 the Offerings, no shares of Preferred Stock will
remain outstanding. The Board of Directors has the authority, without further
action by the stockholders, to issue the Preferred Stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series or the designation of such series. Preferred Stock 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 Stock may have the effect of decreasing the market price
of the Common Stock, and may adversely affect the voting and other rights of
the holders of Common Stock.
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WARRANTS
As of June 30, 1998, the Company has issued and outstanding Warrants to
purchase 5 shares of Series E Preferred Stock, each convertible into one
percent of the fully diluted Common Stock. Upon consummation of the Offerings,
the Series E Preferred Stock will be converted into Common Stock, and the
Warrants will be exercisable into 2,023,009 shares of Common Stock (subject to
certain anti-dilution adjustments) at an exercise price of approximately $2.91
per share. Prior to the consummation of the Offerings, a portion of the
Warrants held by Dancing Bear Investments will be transferred to certain
employees and directors of the Company. The Warrants may be exercised at any
time on or before August 13, 2004. After expiration of the exercise period,
the holder of the Warrants will have no future rights to exercise such
Warrants.
RIGHTS AGREEMENT
The Board of Directors currently expects to adopt a rights agreement (the
"Rights Agreement") to be effective simultaneously with or shortly after the
consummation of the Offerings. Pursuant to the Rights Agreement, the Board of
Directors will declare a dividend of one preferred stock purchase right (a
"Right") for each outstanding share of Common Stock. Each Right will entitle
the registered holder to purchase from the Company one one-thousandth of a
share of a new series of junior participating preferred stock, par value $.001
per share (the "Junior Preferred Stock"), of the Company at a price to be
determined by the Board of Directors, per one one-thousandth of a share (the
"Purchase Price"), subject to adjustment. The description and terms of the
Rights will be set forth in a Rights Agreement between the Company and the
designated Rights Agent. The description set forth below is intended as a
summary only and is qualified in its entirety by reference to the form of the
Rights Agreement, a form of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. See "Additional
Information."
The Rights will be attached to all certificates representing outstanding
shares of Common Stock, and no separate Right Certificates (as defined below)
will be distributed. The Rights will separate from the shares of Common Stock
on the earlier to occur of (i) a public announcement that, without the prior
consent of the Board of Directors of the Company, a person or group (an
"Acquiring Person"), including any affiliates or associates of such person or
group (other than Dancing Bear Investments, Michael S. Egan, Todd V.
Krizelman, Stephan J. Paternot or any entities controlled by such persons)
acquired beneficial ownership of securities having 15% or more of the voting
power of all outstanding voting securities of the Company (as defined below)
and; (ii) 10 business days (or such later date as the Board of Directors of
the Company may determine) following the commencement of, or announcement of
an intention (which intention remains in effect for five business days) to
make, a tender offer or exchange offer the consummation of which would result
in any person or group becoming an Acquiring Person (the earlier of such dates
being called the "Distribution 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, until the Distribution Date, the
Rights will be transferred with and only with the shares of Common Stock.
Until the Distribution Date (or earlier redemption or expiration of the
Rights), new Common Stock certificates issued upon transfer or new issuance of
shares of Common Stock will contain a notation incorporating the Rights
Agreement by reference. Until the Distribution Date (or earlier redemption or
expiration of the Rights), the surrender for transfer of any certificates for
shares of Common Stock outstanding, even without such notation, will also
constitute the transfer of the Rights associated with the shares of Common
Stock represented by such 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
Stock as of the close of business on the Distribution Date (and to each
initial record holder of certain shares of Common Stock issued after the
Distribution Date), and such separate Right Certificates alone will evidence
the Rights.
The Rights will 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 Company as described below.
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In the event that any person becomes an Acquiring Person (except pursuant to
a Permitted Offer as defined below), each holder of a Right will have (subject
to the terms of the Rights Agreement) the right (the "Flip-In Right") to
receive upon exercise the number of shares of Common Stock, or, in the
discretion of the Board of Directors of the Company, the number of one-
thousandths of a share of Junior Preferred Stock (or, in certain
circumstances, other securities of the Company) having a value (immediately
prior to such triggering event) equal to two times the Purchase Price.
Notwithstanding the foregoing, following the occurrence of the event described
above, all Rights that are, or (under certain circumstances specified in the
Rights Agreement) were, beneficially owned by any Acquiring Person or any
affiliate or associate thereof will be null and void. A "Permitted Offer" is a
tender or exchange offer for all outstanding shares of Common Stock which is
at a price and on terms determined, prior to the purchase of shares under such
tender or exchange offer, by a majority of Disinterested Directors (as defined
below) to be adequate (taking into account all factors that such Disinterested
Directors deem relevant) and otherwise in the best interests of the Company
and its stockholders (other than the person or any affiliate or associate
thereof on whose behalf the offer is being made) taking into account all
factors that such Disinterested Directors may deem relevant. "Disinterested
Directors" are directors of the Company who are not officers of the Company
and who are not Acquiring Persons or affiliates or associates thereof, or
representatives of any of them.
In the event that, at any time following the Stock Acquisition Date, (i) the
Company is acquired in a merger or other business combination transaction in
which the holders of all of the outstanding shares of Common Stock immediately
prior to the consummation of the transaction are not the holders of all of the
surviving corporation's voting power, or (ii) more than 50% of the Company's
assets or earning power is sold or transferred, in either case with or to an
Interested Stockholder, or, if in such transaction all holders of shares of
Common Stock are not offered the same consideration, any other person, then
each holder of a Right (except Rights which previously have been voided as set
forth above) shall thereafter 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 such 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 adjustment from time to time to prevent dilution (i) in
the event of a stock dividend on, or a subdivision, combination or
reclassification of, the shares of Junior Preferred Stock, (ii) upon the grant
to holders of the shares of Junior Preferred Stock of certain 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 Stock or (iii) upon the distribution to holders of the shares
of Junior Preferred Stock of evidences of indebtedness or assets (excluding
regular quarterly cash dividends) or of subscription rights or warrants (other
than those referred to 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 are also subject to adjustment in the event of a stock split of the
shares of Common Stock, or a stock dividend on the shares of Common Stock
payable in shares of Common Stock, or subdivisions, consolidations or
combinations of the shares of Common Stock occurring, in any such case, prior
to the Distribution Date.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional one-thousandths of a share of Junior
Preferred Stock will be issued and, in lieu thereof, 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 to the date of exercise.
At any time prior to the earlier to occur of (i) a person becoming an
Acquiring Person or (ii) the expiration of the Rights, the Company may redeem
the Rights in whole, but not in part, at a price of $.001 per Right (the
"Redemption Price"), which redemption shall be effective upon the action of
the Board of Directors of the Company. Additionally, the Company may redeem
the then outstanding Rights in whole, but not in part, at the
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Redemption Price (i) 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 Company in which all holders of shares of Common
Stock are not offered the same consideration but not involving an Interested
Stockholder (as defined in the Rights Agreement), (ii) following an event
giving rise to, and the expiration of the exercise period for, the Flip-in
Right if and for as long as no person beneficially owns securities
representing 15% or more of the voting power of the Company's voting
securities or (iii) if the Acquiring Person reduces his ownership below 5% in
transactions not involving the Company. The redemption of Rights described in
the preceding sentence shall be effective only as of such time when the Flip-
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
Company may issue (unless otherwise provided in the terms of such 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, but in no event less than $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 or 1,000 times the payment made per each share of
Common Stock. Each share of Junior Preferred Stock will have 1,000 votes,
voting together with the shares of Common Stock. In the event of any merger,
consolidation or other transaction in which shares of Common 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. 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 Company 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 one-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 to the date of exercise.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of the Company, including, without limitation, the right to
vote or to receive dividends. While the distribution of the Rights will not be
taxable to 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.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group of persons that attempts to acquire
the Company on terms not approved by the Board of Directors. The Rights should
not interfere with any merger or other business combination approved by the
Board of Directors prior to the time that a person or group has acquired
beneficial ownership of 15% or more of the Common Stock since the Rights may
be redeemed by the Company at the Redemption Price until such time.
"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
such Acquiring Person or their affiliates or associates.
REGISTRATION RIGHTS
Pursuant to the terms of the Investor Rights Agreement, dated as of August
13, 1997 (the "Investor Rights Agreement"), among the Company and the holders
of the Series B, Series C, Series D and Series E Preferred Stock, at any time
following the Offerings, holders of 25% of all of the Common Stock converted
from Series B, Series C, Series D or Series E Preferred Stock, or issued as a
dividend or distribution for the above-mentioned Preferred Stock (the
"Registrable Securities"), or 50% of the Registrable Securities issued or
issuable in respect of the Series B and Series C Preferred Stock have the
right to require the Company to file a registration statement covering all or
part of their shares up to four times at the Company's expense. Holders of
4,890,740 shares of
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Common Stock (after giving effect to the conversion which will occur upon
consummation of the Offerings) have registration rights under the Investor
Rights Agreement. The Company will not be obligated to register such shares if
such holders propose to sell such securities at an aggregate price to the
public of less than $5 million. 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
Registrable Securities at such time. An underwriter participating in the sale
of the Registrable Securities may limit the number of shares of Registrable
Securities offered, and such number shall be allocated to the holders of such
securities on a pro rata basis. The Company is not required to effect more
than one demand registration on behalf of such holders in any 12 calendar
month period. The Company is not required in most cases to pay the
registration expenses for any such demand registration that is subsequently
withdrawn by the requesting Holders.
Holders of Registrable Securities have the right to include all or part of
their Registrable Securities in a registration statement filed by the Company
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 the Offerings. An
underwriter participating in such Offerings may limit the number of shares
offered, and such number shall be allocated first to the Company, then to such
holders on a pro rata basis, then to any stockholder on a pro rata basis. The
Company has the right to terminate or withdraw any such registration and shall
bear the expenses of any such withdrawn registration. The Company is not
obligated further after it has effected five such registrations for any such
holders.
Pursuant to the Investor Rights Agreement, holders of Registrable Securities
have agreed with the Company 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 to and 90 days following the effective date of
any subsequent prospectus. All registration rights terminate three years after
the date of this Prospectus. Any right described in this section may be
amended and waived by written consent of the Company and the holders of a
majority of the Registrable Securities.
Pursuant to the terms of a Registration Rights Agreement by and among
Dancing Bear Investments, certain holders of Series A Preferred Stock, Messrs.
Krizelman and Paternot and the Company, the Company has granted registration
rights to such persons similar to the rights granted pursuant to the Investor
Rights Agreement. As a result, virtually all of the Company's outstanding
Common Stock or Preferred Stock has registration rights.
LIMITATION OF DIRECTOR LIABILITY
The Certificate limits the liability of directors of the Company to the
Company and its stockholders to the fullest extent permitted by Delaware law.
Specifically, directors of the Company will not be personally liable for money
damages for breach of fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the Delaware General Corporation Law ("DGCL"), which concerns unlawful
payments of dividends, stock purchases or redemptions, or (iv) for any
transaction from which the director derived an improper personal benefit.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAWS PROVISIONS
Delaware Law. The Company is subject to the provisions of Section 203
("Section 203") of the DGCL. 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 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, in certain
cases, within three years prior, did 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 conditions: (i) the Company's Board of Directors must have
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previously approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder, or (ii) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the Company outstanding at the time the transaction commenced
(excluding, for purposes of determining the number of shares outstanding,
shares owned by (a) persons who are directors and also officers and (b)
employee stock plans, in certain instances) or (iii) the business combination
is approved by the Board of Directors 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-Laws provide that special meetings of stockholders
for any purpose or purposes can be called only upon the request of the
Chairman of the Board, the President, the Board of 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 to adopt, repeal, alter or amend the
provisions set forth therein, the 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 capital stock of the Corporation entitled to vote
thereon or by the Board of Directors.
Advance Notice Provisions for Stockholder Nominations and Proposals. The 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.
These procedures provide that only persons who are nominated by or at the
direction of the Board of Directors, or by a stockholder who has given timely
written notice to the Secretary of the Company prior to the meeting at which
directors are to be elected, will be eligible for election as directors of the
Company. Further, these procedures provide that at an annual meeting, only
such business may be conducted as has been specified in the notice of the
meeting given by, or at the direction of, the Board or by a stockholder who
has given timely written notice to the Secretary of the Company of such
stockholder's intention to bring such business before such 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 Company
not less than 60 days nor more than 90 days prior to the date of the meeting
(or, if less than 70 days' notice or prior public disclosure of the date of
the meeting is given or made to the stockholders, the 10th day following the
earlier of (i) the day such notice was mailed or (ii) the day such public
disclosure was 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 Company 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, a stockholder's notice nominating a person for election
as a director must contain certain information about the proposed nominee and
the nominating stockholder. If the Chairman determines that a nomination was
not made in accordance with the By-Laws, such nomination will be disregarded.
Similarly, a stockholder's notice proposing the conduct of business must
contain certain information about such business and about the proposing
stockholder. If the Chairman determines that business was not properly brought
before the meeting in accordance with the By-Laws, such business will not be
conducted.
By requiring advance notice of nominations by stockholders, the By-Laws
afford the Board an opportunity to consider the qualifications of the proposed
nominee and, to the extent deemed necessary or desirable by the Board, to
inform stockholders about such qualifications. By requiring advance notice of
other proposed business, the By-Laws also provide an orderly procedure for
conducting annual meetings of stockholders and, to the extent deemed necessary
or desirable by the Board, provides the Board with an opportunity to inform
stockholders, prior to such meetings, of any business proposed to be conducted
at such meetings, together with any
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recommendations as to the Board's position regarding action to be taken with
respect to such 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 Certificate does not give the 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 such nominees or proposals might be harmful or
beneficial to the Company and its stockholders.
WRITTEN CONSENT PROVISIONS
The By-Laws provide that any action required or permitted to be taken by the
holders of capital stock at any meeting of 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 such action at a meeting at which all shares entitled to
vote thereon were present and voted.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
73
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offerings, there has been no public market for the Common
Stock. No 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 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."
Upon consummation of the Offerings, the Company will have 9,791,339
outstanding shares of Common Stock (10,173,006 if the Underwriters' over-
allotment option is exercised in full), and 822,650 and 693,771 shares of
Common Stock subject to options granted under the Company's 1998 Stock Option
Plan and 1995 Stock Option Plan, respectively. See "Management--Executive
Compensation." In addition, upon consummation of the Offerings, 2,023,009
shares of Common Stock will be issuable upon exercise of outstanding Warrants.
Of the outstanding shares, the 3,100,000 shares of Common Stock being sold in
the Offerings (3,481,667 if the Underwriters' over-allotment option is
exercised in full) 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 the Company, as that term is
defined in Rule 144, described below. All of the shares of Common Stock
outstanding prior to the Offerings are "restricted securities" as such term is
defined under Rule 144, in that such shares were issued in private
transactions not involving a public offering and may not be sold in the
absence of registration other than in accordance with Rule 144, 144(k) or 701
promulgated under the Securities Act or another exemption from registration.
In general, under Rule 144 as currently in effect, any affiliate of the
Company or any person (or persons whose shares are aggregated in accordance
with Rule 144) who has beneficially owned shares of Common Stock which are
treated as Restricted Securities for at least one year would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of 1% of the outstanding shares of Common Stock (approximately 97,913
shares based upon the number of shares outstanding after the Offerings) or the
reported average weekly trading volume in the Common Stock during the four
weeks preceding the date on which notice of such sale was filed under Rule
144. Sales under Rule 144 are also subject to certain manner of sale
restrictions and notice requirements and to the availability of current public
information concerning the Company. In addition, affiliates of the Company
must comply with the restrictions and requirements of Rule 144 (other than the
one-year holding period requirements) in order to sell shares of Common Stock
that are not Restricted Securities (such as Common Stock acquired by
affiliates in market transactions). Furthermore, if a period of at least two
years has elapsed from the date Restricted Securities were acquired from the
Company or an affiliate of the Company, a holder of such Restricted 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 such sale would be entitled to
sell the shares immediately without regard to the volume, manner of sale,
notice and public information requirements of Rule 144.
Holders of virtually all of the Company's outstanding Common Stock and all
of the Company's outstanding preferred equity will have certain demand
registration rights with respect to the shares of Common Stock into which
their securities are convertible (subject to the 180-day lock-up arrangement
described below), under certain circumstances and subject to certain
conditions, to require the Company to register their shares of Common Stock
under the Securities Act, and certain rights to participate in any future
registration of securities by the Company. The Company is not required to
effect more than one demand registration on behalf of such holders in any
twelve calendar month period. Pursuant to the agreements pursuant to which the
registration rights were granted, holders of Registrable 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 to and 90 days following the effective date of any subsequent
Prospectus. The Company intends to file a registration statement on Form S-8
for the shares held pursuant to its option plans that may make those shares
freely tradeable. Such registration statement will become effective
immediately upon filing and, shares covered by that
74
<PAGE>
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 "Description of Capital Stock--Registration
Rights."
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. The foregoing
sentence shall not apply to (A) in 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 hereof 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 certain
directors of the Company and 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) the 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.
75
<PAGE>
UNDERWRITING
The underwriters of the Offerings 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 the underwriting discounts and commissions set forth on
the cover page of this Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Bear, Stearns & Co. Inc............................................
Volpe Brown Whelan & Company, LLC..................................
---
Total............................................................
===
</TABLE>
The nature of the respective obligations of the Underwriters is such that
all of the shares of Common Stock must 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, initially at the initial public offering price set
forth on the cover page of this Prospectus and to certain selected dealers at
such price less a concession not to exceed $ per share; that the
Underwriters may allow, and such selected dealers may reallow, a concession to
certain other dealers not to exceed $ per share; and that after the
commencement of the Offerings, the public offering price and the concessions
may be changed.
The Company has granted the Underwriters an option to purchase in the
aggregate up to 381,667 additional shares of Common Stock solely to cover
over-allotments, if any. The option may be exercised in whole or in part at
any time within 30 days after the date of this Prospectus. To the extent the
option is 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 table.
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 Initial Public
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 Offerings, 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
76
<PAGE>
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.
The consummation of the Concurrent Offering and the Initial Public Offering
are contingent upon one another. The price of the shares to be sold to the
Concurrent Purchasers in the Concurrent Offering is equal to the initial
public offering price. See "Concurrent Offering." In connection with the
Concurrent Offering, the Placement Agents will be paid a fee of $ per share
for each share sold in the Concurrent Offering in consideration for the
provision of certain advisory services and for acting as the Company's
Placement Agents. The Placement Agents will be indemnified by the Company
against certain liabilities, including liabilities under the Securities Act.
In order to facilitate the Offerings, certain persons participating in the
Offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the Common Stock during and after the Offerings.
Specifically, the Underwriters may over-allot or otherwise create 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 maintain the price of the Common Stock by bidding for
or purchasing shares in the open market and may impose penalty bids, under
which selling concessions allowed to syndicate members or other broker-dealers
participating in the Offerings are reclaimed if shares previously distributed
in the Offerings are repurchased in connection with stabilization transactions
or otherwise. The effect of these transactions may be to stabilize or maintain
the market price of the Common 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 otherwise and, if commenced, may be discontinued at
any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Fried, Frank, Harris, Shriver & Jacobson (a
partnership including professional corporations), New York, New York. Certain
legal matters in connection with the Offerings will be passed upon for the
Underwriters by Morrison & Foerster LLP, New York, New York.
EXPERTS
The financial statements for theglobe.com, inc. as of December 31, 1996 and
1997 and for the period from May 1, 1995 (inception) to December 31, 1995 and
the years ended December 31, 1996 and 1997 included in this Prospectus and
elsewhere in the Registration Statement have been so included in reliance on
the report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, upon the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement (which term
shall encompass any 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
77
<PAGE>
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.
Information relating to the operation of the Public Reference Section may be
obtained by calling the SEC at 1-800-SEC-0330. 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.
78
<PAGE>
THEGLOBE.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Balance Sheets as of December 31, 1996 and 1997 and June 30, 1998
(unaudited).............................................................. F-3
Statements of Operations for the period from May 1, 1995 (inception) to
December 31, 1995 and for the years ended December 31, 1996 and 1997 and
for the six months ended June 30, 1997 (unaudited) and 1998 (unaudited).. F-4
Statements of Stockholders' Equity for the period from May 1, 1995
(inception) to December 31, 1995 and for the years ended December 31,
1996 and 1997 and for the six months ended June 30, 1998 (unaudited)..... F-5
Statements of Cash Flows for the period from May 1, 1995 (inception) to
December 31, 1995 and for the years ended December 31, 1996 and 1997 and
for the six months ended June 30, 1997 (unaudited) and 1998 (unaudited).. F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT 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, 1996 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 for the years ended December 31, 1996 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of theglobe.com, inc. as of
December 31, 1996 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 for
the years ended December 31, 1996 and 1997 in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
April 16, 1998, except for note 9,
which is as of July 22, 1998
F-2
<PAGE>
THEGLOBE.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1996 1997 1998
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
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 $19,462,172 $15,603,080
========== =========== ===========
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; 1,379,970,
1,449,995.5 and 1,449,995.5, shares
issued and outstanding at December 31,
1996 and 1997, and as of June 30,
1998, respectively; aggregate
liquidation preference of $1,606,110,
$21,886,110 and $21,886,110 at
December 31, 1996 and 1997, and as of
June 30, 1998, respectively........... 1,380 1,450 1,450
Common stock, $0.001 par value;
100,000,000 shares authorized;
1,125,000, 1,154,271 and 1,196,979
shares issued and outstanding at
December 31, 1996 and 1997, and as of
June 30, 1998, respectively........... 1,125 1,154 1,197
Additional paid-in capital............. 1,629,926 21,866,965 21,875,094
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
========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
THEGLOBE.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1995 YEAR ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, ---------------------- ----------------------
1995 1996 1997 1997 1998
-------------- --------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 26,815 $ 229,363 $ 770,293 $ 208,241 $ 1,173,398
Cost of revenues........ 12,779 116,780 423,706 106,032 503,181
--------- --------- ----------- --------- -----------
Gross profit........ 14,036 112,583 346,587 102,209 670,217
Operating expenses:
Sales and marketing... 1,248 275,947 1,248,349 224,170 4,493,039
Product development... 60,000 120,000 153,667 62,500 250,869
General and
administrative....... 18,380 489,073 2,827,591 594,358 2,396,716
--------- --------- ----------- --------- -----------
Loss from
operations......... (65,592) (772,437) (3,883,020) (778,819) (6,470,407)
--------- --------- ----------- --------- -----------
Other income (expense):
Interest and dividend
income............... 980 25,966 334,720 11,384 703,097
Interest expense...... (1,094) (3,709) -- -- (30,460)
--------- --------- ----------- --------- -----------
Total interest
income (expense),
net................ (114) 22,257 334,720 11,384 672,637
--------- --------- ----------- --------- -----------
Loss before
provision for
income taxes....... (65,706) (750,180) (3,548,300) (767,435) (5,797,770)
--------- --------- ----------- --------- -----------
Provision for income
taxes.................. -- -- 36,100 -- 26,500
--------- --------- ----------- --------- -----------
Net loss............ $ (65,706) $(750,180) $(3,584,400) $(767,435) $(5,824,270)
========= ========= =========== ========= ===========
Basic and diluted net
loss per share......... $ (0.06) $ (0.67) $ (3.13) $ (0.67) $ (5.01)
========= ========= =========== ========= ===========
Weighted average basic
and diluted shares
outstanding............ 1,125,000 1,125,000 1,146,773 1,140,960 1,161,389
========= ========= =========== ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
THEGLOBE.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE NET
PREFERRED COMMON UNREALIZED
STOCK STOCK ADDITIONAL GAIN (LOSS) TOTAL
------------------ ----------------- PAID-IN ON SALE OF DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL SECURITIES COMPENSATION DEFICIT EQUITY
----------- ------ --------- ------- ----------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common shares
to founders.... -- $ -- 1,125,000 $ 1,125 $ 3,555 $ -- $ -- $ -- $ 4,680
Issuance of
Series A
convertible
preferred
stock.......... 356,490 356 -- -- 66,644 -- -- -- 67,000
Promissory notes
converted to
Series A
convertible
preferred
stock.......... 226,505 227 -- -- 46,011 -- -- -- 46,238
Issuance of
Series B
convertible
preferred
stock.......... 551,915 552 -- -- 578,953 -- -- -- 579,505
Net loss for the
period from May
1, 1995
(inception) to
December 31,
1995........... -- -- -- -- -- -- -- (65,706) (65,706)
----------- ------ --------- ------- ----------- -------- -------- ------------- ------------
Balance as of
December 31,
1995........... 1,134,910 1,135 1,125,000 1,125 695,163 -- -- (65,706) 631,717
Issuance of
Series B
convertible
preferred
stock.......... 23,810 24 -- -- 24,961 -- -- -- 24,985
Issuance of
Series C
convertible
preferred
stock.......... 221,250 221 -- -- 884,749 -- -- -- 884,970
Deferred
compensation... -- -- -- -- 25,053 -- (25,053) -- --
Amortization of
deferred
compensation... -- -- -- -- -- -- 4,000 -- 4,000
Net loss........ -- -- -- -- -- -- -- (750,180) (750,180)
----------- ------ --------- ------- ----------- -------- -------- ------------- ------------
Balance at
December 31,
1996........... 1,379,970 1,380 1,125,000 1,125 1,629,926 -- (21,053) (815,886) 795,492
Issuance of
Series C
convertible
preferred
stock.......... 70,000 70 -- -- 279,930 -- -- -- 280,000
Exercise of
stock options.. -- -- 29,271 29 4,478 -- -- -- 4,507
Issuance of
Series D
convertible
preferred
stock, net of
expense of
$130,464....... 25.5 -- -- -- 19,869,536 -- -- -- 19,869,536
Net unrealized
loss on
securities..... -- -- -- -- -- (41,201) -- -- (41,201)
Deferred
compensation... -- -- -- -- 83,095 -- (83,095) -- --
Amortization of
deferred
compensation... -- -- -- -- -- -- 28,115 -- 28,115
Net loss........ -- -- -- -- -- -- -- (3,584,400) (3,584,400)
----------- ------ --------- ------- ----------- -------- -------- ------------- ------------
Balance at
December 31,
1997........... 1,449,995.5 1,450 1,154,271 1,154 21,866,965 (41,201) (76,033) (4,400,286) 17,352,049
Amortization of
deferred
compensation... -- -- -- -- -- -- 23,119 -- 23,119
Exercise of
stock options
(unaudited).... -- -- 42,708 43 8,129 -- -- -- 8,172
Net loss for the
period
(unaudited) -- -- -- -- -- -- -- (5,824,270) (5,824,270)
Change in net
unrealized gain
(loss) on
securities
(unaudited).... -- -- -- -- -- 11,554 -- -- 11,554
----------- ------ --------- ------- ----------- -------- -------- ------------- ------------
Balance at June
30, 1998
(unaudited).... 1,449,995.5 $1,450 1,196,979 $ 1,197 $21,875,094 $(29,647) $(52,914) $ (10,224,556) $ 11,570,624
=========== ====== ========= ======= =========== ======== ======== ============= ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
THEGLOBE.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1995 YEAR ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, ----------------------- ----------------------
1995 1996 1997 1997 1998
-------------- --------- ------------ --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(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......... 10,530 47,595 60,210 37,499 238,411
Non-cash related
interest............. 738
Deferred compensation
earned............... -- 4,000 28,115 14,057 23,119
Changes in operating
assets and
liabilities:
Accounts receivable,
net.................. (3,025) (63,103) (188,081) 23,212 (369,982)
Prepaids and other
current assets....... (16,440) (2,377) 2,377 2,377 (75,847)
Other assets.......... -- -- -- -- (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...... -- 32,144 81,146 72,579 19,063
-------- --------- ------------ --------- -----------
Net cash used in
operating activities.. (58,510) (601,602) (1,875,512) (330,223) (5,413,705)
-------- --------- ------------ --------- -----------
Cash flows from
investing activities:
Purchase of
securities............ -- -- (13,044,374) -- (230,484)
Proceeds from sale of
securities............ -- -- -- -- 3,087,381
Purchases of property
and equipment......... (51,101) (138,309) (119,984) (229,696) (247,859)
-------- --------- ------------ --------- -----------
Net cash (used in)
provided by investing
activities........... (51,101) (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 -- -- -- --
Proceeds from exercise
of common stock
options............... -- -- 4,507 4,507 8,172
Proceeds from issuance
of common stock....... 4,680 -- -- -- --
Proceeds from issuance
of convertible
preferred Series A, B
and C stock........... 646,505 909,955 280,000 280,000 --
Proceeds from issuance
of convertible
preferred Series D
stock................. -- -- 20,000,000 -- --
Payment of financing
costs................. -- -- (130,464) (26,302) --
-------- --------- ------------ --------- -----------
Net cash provided by
(used in) financing
activities........... 696,685 909,955 20,154,043 258,205 (69,233)
-------- --------- ------------ --------- -----------
Net change in cash and
cash equivalents..... 587,074 170,044 5,114,173 (301,714) (2,873,900)
Cash and cash
equivalents at
beginning of period.... -- 587,074 757,118 757,118 5,871,291
-------- --------- ------------ --------- -----------
Cash and cash
equivalents at end of
period................. $587,074 $ 757,118 $ 5,871,291 $ 455,404 $ 2,997,391
======== ========= ============ ========= ===========
Supplemental disclosure
of cash flow
information:
Cash paid during the
period for:
Interest............... $ 1,094 $ 3,709 $ -- $ -- $ 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.. $ -- $ -- $ 126,000 $ -- $ 836,648
======== ========= ============ ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
(1) ORGANIZATION 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
community 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-commerce arrangements and the
sale of membership subscriptions 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 5).
(b) Initial Public Offerings
In June 1998, the Board of Directors authorized the filing of a registration
statement with the Securities and Exchange Commission ("SEC") that would
permit the Company to sell shares of the Company's common stock in connection
with a proposed initial public offering ("IPO"). In addition to the IPO, the
Company will be offering shares in a concurrent offering (the "Concurrent
Offering") directly to certain investors at a price per share equal to the IPO
price per share (collectively referred to as the "Offerings"). The
consummation of the Concurrent Offering and the IPO are contingent upon each
other. In the event the Concurrent Offering is not consummated by the closing
date of the IPO, the Concurrent Offering will be terminated and all payments
received in connection with the Concurrent Offering will be promptly returned.
If the Concurrent Offering is not consummated for the proposed amount, the
shares of Common Stock not sold will not be offered to purchasers in the IPO.
The Company plans to offer 3,100,000 shares of Common Stock at an estimated
price of between $8 and $10 per share, of which 2,544,444 and 555,556 shares
of its Common Stock will be offered in its IPO and Concurrent Offering,
respectively, at an assumed offering price of $9 per share.
If the IPO is consummated under the terms presently anticipated, upon the
closing of the proposed Offerings all of the then outstanding shares of the
Company's Convertible Preferred Stock will automatically convert into shares
of common stock.
(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
F-7
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
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.
(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) 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, 1996 and 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) 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 these investments are corporate
bonds, 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 stockholders equity. Realized
gains, realized losses and declines in value, judged to be other-than-
temporary, are included in income. The costs of securities sold are based on
the specific-identification method and interest earned is included in interest
income. 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. As
of June 30, 1998 the Company had gross unrealized losses of $56,654 and gross
unrealized gains of $27,007.
(g) Property and Equipment
Property and equipment are 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 Assets
At June 30, 1998, other assets included $568,226 of security deposits held
in an escrow account as collateral for certain capital lease equipment.
(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 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 recorded.
F-8
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
(j) 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) 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 two
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 revenues from its membership subscriptions which
are deferred and recognized ratably over the term of the subscription period,
which is generally up to one year. Subscription revenues accounted for 0%, 5%,
23%, 31% and 11% of revenues for the period from May 1, 1995 (inception) to
December 31, 1995, the years ended December 31, 1996 and 1997, and for the six
months ended June 30, 1997 and 1998, respectively.
The Company trades advertisements on its Web 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 Web properties. Barter expense is recognized 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. Barter
revenues and expenses were approximately $-0-, $-0-, and $166,500 for the
period from May 1, 1995 (inception) to December 31, 1995 and for the years
ended December 31, 1996 and 1997, respectively, and $37,500 and $39,906 for
the six months ended June 30, 1997 and 1998, respectively.
(l) Product Development
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 costs and enhancements to existing
products are charged to operations as incurred. Software development costs are
required to be capitalized when a product's technological feasibility has been
established by completion of a working model of the product which capitalized
asset would be fully expensed by the time when a product is available for
general release to customers. 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.
F-9
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
(m) 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 for the six months ended June 30, 1997 and 1998,
respectively, are included in sales and marketing expenses in the Company's
statements of operations.
(n) Stock-Based Compensation
The Company accounts for stock-based compensation arrangements in accordance
with Statement of Financial Accounting Standard ("SFAS") No. 123, 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) 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 SEC Staff Accounting Bulletin 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.
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 potential common shares outstanding were 1,309,910 for the
period ended December 31, 1995, 1,722,019 and 7,436,672 for the years ended
December 31, 1996 and 1997, respectively, and 2,082,699 and 7,414,964 for the
six-month periods ended June 30, 1997 and 1998.
(p) Recent Accounting Pronouncements
In June 1997, the Financial 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. For
the six months ended June 30, 1998 and the year ended December 31, 1997,
comprehensive net loss was approximately $11,600 lower and approximately
$41,200 higher, respectively, than the net loss reported in the Company's
statements of operations for the applicable periods, due to unrealized gains
or losses on securities classified as available-for-sale.
F-10
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
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 June 1998, the FASB issued SFAS No. 133, 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 the stock
splits and the reverse stock split.
(2) CONCENTRATION 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 maintains cash and cash equivalents
with various domestic financial institutions. The Company performs periodic
evaluations of the relative credit standing of these institutions. 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, 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) to December 31, 1995, there were
no customers that accounted for over 10% of revenues generated by the Company,
or of accounts receivable at December 31, 1995.
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 December 31, 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.
F-11
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
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
======== ======== ==========
</TABLE>
(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 for the year ended December 31, 1997
are based solely on state and local taxes on business and investment capital.
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 year ended December 31, 1996 and 1997 are as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- --------- -----------
<S> <C> <C> <C>
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
======== ========= ===========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996 and 1997 are presented below.
<TABLE>
<CAPTION>
1996 1997
--------- -----------
<S> <C> <C>
Deferred tax assets:
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.................. 328,582 2,038,928
Less valuation allowance............................. (328,582) (2,038,928)
--------- -----------
Net deferred tax assets.......................... $ -- $ --
========= ===========
</TABLE>
F-12
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
The valuation allowance for deferred tax assets as of January 1, 1996 and
1997 was $328,582 and $2,038,928 respectively. The net change in the total
valuation allowance for the years ended December 31, 1996 and 1997 was
$302,644 and $1,710,346, respectively. 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.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this
assessment.
At December 31, 1997, the Company had net operating loss carryforwards
available for federal and state income tax purposes of $4.4 million. These
carryforwards expire through 2012 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 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) CAPITALIZATION
Authorized Shares
During 1997, 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 25,000,000 shares: 22,000,000 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. In July 1998, the
Company's stockholders approved the Fourth Amended and Restated Certificate of
Incorporation, which will be filed with the Delaware Secretary of State prior
to consummation of the Offerings, to increase the number of authorized shares
from 25,000,000 to 103,000,000 shares.
Common Stock
During 1995, the Company issued a total of 1,125,000 shares of Common Stock
to its founders in exchange for $4,680 in cash. During 1997, the Company
issued an additional 29,271 shares of Common Stock in connection with the
exercise of certain stock options.
Convertible Preferred Stock
As of December 31, 1997 and June 30, 1998, 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. Each
class of the Company's Preferred Stock is 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 the Company's
amended and restated certificate of incorporation.
In 1995, the Company completed a private placement of 582,995 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, the Company issued Convertible Promissory Notes ("Notes") in
the aggregate principal amount of $45,500,
F-13
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
bearing interest at rates between 6.62% and 8% per annum. Under the terms and
conditions of the original Note agreements, the Notes were convertible into
preferred stock at conversion prices equal to $0.20 per share, the highest
price paid for shares of its Preferred Stock sold during such time period.
These Notes, including interest thereon, were converted into a total of
226,505 shares of Series A Preferred Stock in connection with the Company's
1995 private placement of Series A Preferred Stock, in accordance with the
original terms and conditions of such Notes.
During December 1995, the Company completed a private placement of 575,725
shares of Series B Preferred Stock at $1.05 per share in two issuances for an
aggregate price of approximately $604,000, $579,000 was paid in cash in 1995
and $25,000 in 1996.
In 1996, the Company completed a private placement of 221,250 shares of
Series C Preferred Stock at $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 70,000 shares of Series C Preferred Stock at $4.00 per share for
an aggregate price of $280,000 in 1997.
In August 1997, the Company authorized and issued 25.5 shares of Series D
Preferred Stock for an aggregate cash amount of $20,000,000 in connection with
the Dancing Bear Investment. These shares constituted 51% of the fully diluted
capital stock of the Company at the time of exercise, as defined. In addition
to the Series D Preferred Stock, Dancing Bear Investments, Inc. also received
warrants which provide the right to purchase up to 5 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, 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, as defined in
the original private placement agreements shall be 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
$0.20, $1.05 and $4 per share for Series A, B and C, respectively, as
determined by negotiations among the parties. Each share of Series D and E
Preferred Stock shall be convertible into an amount of common representing 1%
of the fully diluted capital 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 $0.20, $1.05, $4, $784,314 and $1,176,471 per share for Series A, B, C, D
and E convertible Preferred Stock, respectively, shall be paid out of the
assets of the Company available for distribution before any such payments
shall 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.
F-14
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
The following table summarizes the Convertible Preferred Stock authorized,
issued and outstanding and liquidation preferences:
<TABLE>
<CAPTION>
PREFERRED SHARES EQUIVALENT SHARES OF
ISSUED AND OUTSTANDING COMMON STOCK
-------------------------------------------- -----------------------------
DECEMBER 31,
SHARES JUNE 30, ------------------- JUNE 30,
AUTHORIZED 1996 1997 1998 1996 1997 1998
---------- --------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Series A................ 1,165,990 582,995 582,995 582,995 582,995 582,995 582,995
Series B................ 1,151,450 575,725 575,725 575,725 575,725 575,725 575,725
Series C................ 582,500 221,250 291,250 291,250 221,250 291,250 291,250
Series D................ 51 0 25.5 25.5 0 3,503,357 3,503,357
Series E................ 10 0 0 0 0 1,761,366 1,761,366
--------- --------- ----------- ----------- --------- --------- ---------
2,900,001 1,379,970 1,449,995.5 1,449,995.5 1,379,970 6,714,593 6,714,593
========= ========= =========== =========== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
LIQUIDATION PREFERENCE
-------------------------------
DECEMBER 31,
LIQUIDATION -------------------- JUNE 30,
PREFERENCE PER SHARE 1996 1997 1998
-------------------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Series A................... $ 0.20 116,599 116,599 116,599
Series B................... $ 1.05 604,511 604,511 604,511
Series C................... $ 4.00 885,000 1,165,000 1,165,000
Series D................... $ 784,313.72 0 20,000,000 20,000,000
Series E................... $1,176,470.60 0 0 0
--------- ---------- ----------
1,606,110 21,886,110 21,886,110
========= ========== ==========
</TABLE>
As a result of the Company's adoption of the 1998 Stock Option Plan in July
1998 (see note 9), the number of shares that the outstanding Series E Warrants
are convertible into upon exercise increased from 1,761,366 to 2,023,009. In
accordance with the original terms of the Series E Warrant agreement up to
500,000 of the authorized options under the 1998 Stock Option Plan are to be
included in the calculation for determining the number of shares of Common
Stock that the Series E Warrants are convertible into upon exercise.
All Preferred Shares shall be automatically converted into common shares in
the event the Company closes a firm commitment for an underwritten initial
public offering of its common stock for an aggregate amount of at least
$15,000,000. The Preferred Shares are subject to additional mandatory
conversion rights, as defined in the Company's amended and restated
certificate of incorporation.
Holders of Preferred Stock are entitled to receive dividends when and if
declared by the Board of Directors. No such dividends have yet been declared
by the Board of Directors.
(6) STOCK OPTION PLAN
1995 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 666,000 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.
F-15
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
In connection with the Dancing Bear Investments investment, the Company
reserved an additional 125,000 shares of its common stock for issuance upon
the exercise of options to be granted in the future under the Amended Plan.
The per share weighted-average fair value of stock options granted during
1995, 1996 and 1997 was $0.02, $0.16 and $0.32, 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-free interest rate 6.18%, and an expected life of two years;
1997--risk-free interest rate 6.00%, and an expected life of three years. 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.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, compensation cost of $4,000 and $28,115 has been recognized for
its stock options granted below fair market value in 1996 and 1997,
respectively, in the accompanying financial statements.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE
GRANTED EXERCISE PRICE
------- --------------
<S> <C> <C>
Outstanding at December 31, 1995..................... 175,000 $0.02
Granted.............................................. 167,049 $0.12
Exercised............................................ --
Canceled............................................. --
-------
Outstanding at December 31, 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..................... 721,979 $0.44
=======
Vested at December 31, 1997.......................... 397,983
=======
Options available at December 31, 1997............... 39,751
=======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.02-$0.105 281,889 1 $ 0.05 233,262 $ 0.04
$0.40-$0.70 354,840 1 0.65 164,721 0.66
$0.82 82,250 5 0.82 0 0
------- -------
721,979 397,983
======= =======
</TABLE>
At December 31, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $0.02--$0.82 and 1 year,
respectively.
During the six month period ended June 30, 1998, the Company granted 55,750
options with a weighted average exercise price of $3.78 per share and a
weighted average contractual life of 5 years. The range of exercise prices
were as follows: 44,250 options at $2.78 per share; 1,500 options at $4.60 per
share; and 10,000 options at $8.10 per share. All options granted from July 1,
1998 through September 28, 1998 will be granted at the initial public offering
price, except as noted in note 9.
F-16
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
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:
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- ----------
<S> <C> <C> <C>
Net loss--as reported....................... $65,706 $750,180 $3,584,400
======= ======== ==========
Net loss--pro forma......................... $66,873 $756,135 $3,621,373
======= ======== ==========
Basic net loss per common share--as
reported................................... $ (0.06) $ (0.67) $ (3.13)
======= ======== ==========
Basic net loss per common share--pro forma.. $ (0.06) $ (0.67) $ (3.16)
======= ======== ==========
</TABLE>
(7) 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.
Rent expense for the operating leases was $-0-, $26,181 and $81,157 for the
period from May 1, 1995 (inception) to December 31, 1995 and for the years
ended December 31, 1996 and 1997, respectively.
Future minimum payments under the New York City office operating leases are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
----------------------- --------
<S> <C>
1998................................................................ $120,200
1999................................................................ 121,787
2000................................................................ 86,517
2001................................................................ 87,000
2002................................................................ 7,250
--------
Total minimum lease payments........................................ $422,754
========
</TABLE>
(b) Equipment Leases
The Company's lease obligations are collateralized by certain assets at
December 31, 1997. 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, 1997 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ -------- ---------
<S> <C> <C>
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
========
</TABLE>
F-17
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
In addition, the Company entered into five capital leases in 1998 with
future minimum payments totaling $1,062,884 starting in 1998 through 2003.
(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 2002, with two
executive officers of the Company. The employment agreements provide for
minimum salary levels, incentive compensation and severance benefits, among
other items.
(8) RELATED PARTY TRANSACTIONS
Certain officers and directors of the Company also serve as officers and
directors of Dancing Bear Investments, Inc., an entity which will continue to
control the Company following completion of the Offerings.
The Company has recently entered into an e-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 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 e-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 June 30,
1998, the Company had not received any revenues from InteleTravel or Republic.
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) expect to enter 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 a majority 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 transfer. The Stockholders' Agreement will also
provide 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
F-18
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
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.
(9) SUBSEQUENT EVENTS (UNAUDITED)
In July 1998, the Company approved the Fourth Amended and Restated
Certificate of Incorporation, which will be filed with the Delaware Secretary
of State prior to consummation of the Offerings, to increase the number of
authorized shares from 25,000,000 shares to 103,000,000 shares.
The Company's 1998 Stock Option Plan (the "1998 Plan") was adopted by the
Board of Directors on July 15, 1998, and approved by the stockholders of the
Company as of July 15, 1998. 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
option 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.
The 1998 Plan authorizes the issuance of 1,200,000 shares of Common Stock,
subject to adjustment as provided in the 1998 Plan. On July 15, 1998 the Board
of Directors approved the grant of 100,000 options each to two executives at
the initial public offering price. During the period from June 30, 1998
through September 24, 1998, the Company granted 822,650 options under the 1998
Plan with a weighted average exercise price equal to the initial public
offering price.
The Company expects to record a charge of $1,370,300 (assuming an initial
public offering price of $9 per share) to earnings in the third quarter of
1998 in connection with the transfer during the third quarter of 1998 of
warrants to acquire 225,000 shares of Common Stock by Dancing Bear Investments
to certain officers of the Company, at an exercise price of approximately
$2.91 per share. The Company has accounted for such transaction as if it were
a compensatory plan adopted by the Company. Accordingly, such amount will be
recorded as non-cash compensation expense in the Company's statement of
operations for services provided by such officers to the Company with an
offsetting contribution to capital by a principal shareholder. The amount of
such charge will based on the difference between the initial public offering
price (currently assumed to be $9 per share) and the exercise price per
warrant of approximately $2.91 per share.
During July and August 1998, the Company entered into two employment
agreements expiring in 2001, with two officers of the Company. The employment
agreements provide for minimum salary levels, incentive compensation and
severance benefits, among other items. The Company granted 112,500 stock
options to each of the two executives. The exercise price for 87,500 of the
options granted to one officer will be 85% of the initial public offering
price and the remaining options granted to that officer and the 112,500
options granted to the other officer will be granted at the initial public
offering price which is equal to the fair market value per share of the
Company's Common Stock on the date of grant. The 87,500 options will vest over
a three year period. As a result, the Company will record deferred
compensation expense of $118,100 (assuming an initial public offering price of
$9 per share) in the third quarter relating to the 87,500 shares granted at
85% of the initial public offering price, representing the difference between
the deemed value of the Company's Common Stock, the initial public offering
price for accounting purposes, and the exercise price of such options at the
date of grant. Such amount will be presented as a reduction of stockholders'
equity and amortized over the three year vesting period of the applicable
options.
F-19
<PAGE>
[GLOBESTORES LOGO, SCREEN SHOTS OF WEB SITE PAGES]
theglobe.com
One virtual community at theglobe.com, embodied by personal homepage building
and hosting, chat rooms, free e-mail, discussion forums, special interest
groups, a marketplace, neighborhoods, horoscope forum and more.
[FOLD-OUT COVER]
In the first half of '98, Media Metrix ranked theglobe.com as the 4th fastest-
growing web site in terms of audience reach.
Fastest-growing web sites
4. theglobe.com
theglobe.com [LOGO]
<PAGE>
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, Nasdaq Listing Fee and the NASD Filing Fee, all amounts are estimated.
<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 14,750
Nasdaq Listing Fee............................................... 74,625
NASD Filing Fee.................................................. 5,500
Blue Sky Fees and Expenses....................................... 15,000
Legal Fees and Expenses.......................................... 790,025
Accounting Fees and Expenses..................................... 250,000
Printing Expenses................................................ 125,000
Miscellaneous Expenses........................................... 100
----------
Total.......................................................... $1,275,000
==========
</TABLE>
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 statue requires court
approval before there can be any indemnification where the person seeking
indemnification has been found liable to the corporation. The statue 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 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
II-1
<PAGE>
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 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 10.4. 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.
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.
<TABLE>
<CAPTION>
DATE OF TITLE OF NUMBER OF CONSIDERATION
PURCHASER ISSUANCE SECURITIES SHARES RECEIVED ($)
- --------- -------- ------------------ --------- -------------
<S> <C> <C> <C> <C>
Alce Partners, L.P.......... 12/22/95 Series B Preferred 95,240 100,002
Bergendahl, Anders.......... 9/7/95 Series A Preferred 79,815 15,750
12/22/95 Series B Preferred 47,620 50,001
11/13/96 Series C Preferred 7,500 30,000
Bergendahl, Mia............. 9/7/95 Series A Preferred 79,815 15,750
12/22/95 Series B 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
3/15/97 Series C Preferred 62,500 250,000
de Selliers, Baudouin....... 11/13/96 Series C Preferred 12,500 50,000
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 Preferred 23,810 25,000.50
Grey, Nicki................. 11/16/95 Series A Preferred 3,215 500
Grinstead, Simon............ 11/16/95 Series A Preferred 53,215 10,500
Halperin, Mark R. .......... 12/22/95 Series B Preferred 23,810 25,000.50
11/13/96 Series C Preferred 6,250 25,000
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
DATE OF TITLE OF NUMBER OF CONSIDERATION
PURCHASER ISSUANCE SECURITIES SHARES RECEIVED ($)
- --------- -------- ------------------ --------- -------------
<S> <C> <C> <C> <C>
Halperin Dow, Peggy
Anne................... 12/22/95 Series B Preferred 23,810 25,000.50
11/13/96 Series C Preferred 6,250 25,000
Halperin, Philip W...... 12/22/95 Series B Preferred 23,810 25,000.50
11/13/96 Series C Preferred 6,250 25,000
Halperin, Robert M...... 12/22/95 Series B Preferred 23,810 25,000.50
11/13/96 Series C Preferred 6,250 25,000
5/29/98 Common Stock 42,708 8,171.88
Hirsch, Jason........... 11/16/95 Series A Preferred 19,245 3,000
Horowitz, David H. ..... 12/22/95 Series B Preferred 50,000 52,500
11/13/96 Series C Preferred 12,500 50,000
6/19/97 Common Stock 15,972 3,111.06
Huret Family Trust...... 11/13/96 Series C Preferred 6,250 25,000
Karlsson, Bengt......... 11/13/96 Series C Preferred 25,000 100,000
Krizelman, Allen........ 9/7/95 Series A Preferred 75,845 15,000
Krizelman, Susan........ 11/16/95 Series A Preferred 6,415 1,000
Krizelman, Todd......... 5/26/95 Common Stock 525,000 2,184
11/16/95 Series A Preferred 22,455 3,500
Leavitt Investments,
L.P.................... 11/13/96 Series C Preferred 37,500 150,000
Maconie, Andrew......... 11/16/95 Series A Preferred 3,215 513.70
Miller, Dan............. 11/13/96 Series C Preferred 18,750 75,000
Muckstadt, Jack......... 11/13/96 Series C Preferred 3,750 15,000
3/15/97 Series C Preferred 3,750 15,000
Muller, Georges......... 1/22/96 Series B Preferred 23,810 25,000.50
Paternot, Jacques....... 9/7/95 Series A Preferred 16,425 3,000
12/22/95 Series B Preferred 6,665 6,998.25
Paternot, Madeleine..... 11/16/95 Series A Preferred 1,285 205.48
Paternot, Monica........ 11/16/95 Series A Preferred 1,930 308.22
Paternot, Stephan....... 5/26/95 Common Stock 600,000 2,496
Paternot, Thierry....... 11/16/95 Series A Preferred 3,215 513.70
12/22/95 Series B Preferred 19,050 20,002.50
Paternot, Yves.......... 9/7/95 Series A Preferred 88,690 17,000
12/22/95 Series B Preferred 23,810 25,000.50
S. Knight Pond Trust.... 9/7/95 Series A Preferred 128,215 26,500
12/22/95 Series B Preferred 71,430 75,001.50
Tuli, John.............. 1/1/97 Common Stock 13,299 1,396.34
</TABLE>
(1) In August 1997, the Company issued and sold to Dancing Bear Investments
(i) 25.5 shares of Series D Preferred Stock which will convert into 4,023,765
shares of Common Stock upon consummation of the Offerings and (ii) Warrants to
purchase 2,023,009 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, the Company has granted stock options to directors,
officers and employees of the Company under the Company's 1998 Stock Option
Plan and 1995 Stock Option Plan. As of September 1998, the Company has granted
822,650 and 693,771 shares of Common Stock 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 92,604 shares
of Common Stock pursuant to the exercise of these options under the Company's
1998 Stock Option Plan and 1995 Stock Option Plan, respectively.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
The following Exhibits are attached hereto and incorporated herein by
reference:
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1.1 Form of Underwriting Agreement*
1.2 Form of Placement Agent Agreement*
3.1 Form of Fourth Amended and Restated Certificate of Incorporation of
the Company*
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, 1997*
4.2 Amendment No.1 to Second Amended and Restated Investor Rights
Agreement among the Company and certain equity holders of the Company
dated as of July 15, 1998*
4.3 Form of Registration Rights Agreement dated as of July 15, 1998*
4.4 Specimen certificate representing shares of Common Stock of the
Company*
4.5 Amended and Restated Warrant to Acquire Shares of Common Stock*
4.6 Form of Rights Agreement, by and between the Company and American
Stock Transfer & Trust Company as Rights Agent*
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson*
9.1 Form of Stockholders' Agreement by and among Dancing Bear Investments,
Inc., Michael Egan, Todd V. Krizelman, Stephan J. Paternot, Edward A.
Cespedes and Rosalie V. Arthur, dated as of October 1998*
10.1 Employment Agreement dated August 13, 1997, by and between the Company
and Todd V. Krizelman*
10.2 Employment Agreement dated August 13, 1997, by and between the Company
and Stephan J. Paternot*
10.3 Employment Agreement dated July 13, 1998, by and between the Company
and Francis T. Joyce*
10.4 Form of Indemnification Agreement between the Company and each of its
Directors and Executive Officers*
10.5 Lease Agreement dated January 14, 1997 between the Company and Fifth
Avenue West Associates L.P.*
10.6 1998 Stock Option Plan*
10.7 1995 Stock Option Plan*
10.8 Refiled as Exhibit 4.6
10.9 D.A.R.T. Service Agreement dated April 15, 1997*+
10.10 Amendment dated as of May 1, 1998, to original D.A.R.T. Service
Agreement dated April 15, 1997*+
10.11 Employment Agreement dated August 31, 1998, by and between the Company
and Dean Daniels*
10.12 Agreement between the Company, Republic Industries, Inc., and Michael
S. Egan, dated August 12, 1998, regarding the conduct of automotive
clubsites on theglobe.com*+
10.13 Data Center Space Lease between Telehouse International Corporation of
America and the Company, dated August 24, 1998*
10.14 Travel Services Alliance Agreement between the Company and
Lowestfare.com, dated as of September 15, 1998*+
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11.1 Computation of Loss Per Share*
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in
Exhibit 5.1)*
23.3 Consent of ABC Interactive*
23.4 Consent of Jupiter Communications, LLC*
23.5 Consent of International Data Corporation*
24.1 Power of Attorney*
27.1 Financial Data Schedule*
99.1 Valuation and Qualifying Accounts*
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*Previously filed.
+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 delivery 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 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.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 5 TO THE REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE CITY OF NEW YORK, STATE OF NEW YORK, ON THE 11TH DAY OF NOVEMBER 1998.
theglobe.com, inc.
/s/ Todd Krizelman
By: _________________________________
TODD KRIZELMAN
Co-Chief Executive Officer and
Co-President
/s/ Stephan Paternot
By: _________________________________
STEPHAN PATERNOT
Co-Chief Executive Officer, Co-
President and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 5 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE
Michael Egan* Chairman
- ------------------------------------- November 11,
MICHAEL EGAN 1998
/s/ Todd Krizelman Co-Chief Executive
- ------------------------------------- Officer, Co- November 11,
TODD KRIZELMAN President and 1998
Director
/s/ Stephan Paternot Co-Chief Executive
- ------------------------------------- Officer, Co- November 11,
STEPHAN PATERNOT President, 1998
Secretary and
Director
Francis T. Joyce* Vice President and
- ------------------------------------- Chief Financial November 11,
FRANK JOYCE Officer (Principal 1998
Accounting Officer)
Edward Cespedes* Director
- ------------------------------------- November 11,
EDWARD CESPEDES 1998
Rosalie Arthur* Director
- ------------------------------------- November 11,
ROSALIE ARTHUR 1998
Robert Halperin* Director
- ------------------------------------- November 11,
ROBERT HALPERIN 1998
David H. Horowitz* Director
- ------------------------------------- November 11,
DAVID H. HOROWITZ 1998
H. Wayne Huizenga* Director
- ------------------------------------- November 11,
H. WAYNE HUIZENGA 1998
*By Attorney-in-Fact
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EXHIBIT 23.1
ACCOUNTANTS' CONSENT AND REPORT ON SCHEDULE
The Board of Directors and Stockholders
theglobe.com, inc.:
The audits referred to in our report dated April 16, 1998, except for note 9,
which is as of July 22, 1998, included the related financial statement schedule
as of December 31, 1997, and for the period from May 1, 1995 (inception) to
December 31, 1995 and for the years ended December 31, 1996 and 1997, included
in the Registration Statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects, the information set forth therein.
We consent to the use of our report included herein and to the reference to our
firm under the headings "Selected Financial Data" and "Experts" in the
Prospectus.
KPMG PEAT MARWICK LLP
New York, New York
November 12, 1998
