As filed with the Securities and Exchange Commission on December 23, 1998
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to ___________________
Commission File No. 0-25053
theglobe.com, inc.
-----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
State of Delaware 14-1781422
------------------------------- -------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
31 West 21st Street
New York, New York 10010
------------------------------- -------------------------------
(Address of Principal Executive Offices) (Zip Code)
(212) 886-0800
--------------------------------------------------
Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes No X
The number of shares outstanding of the Registrant's Common Stock,
$.001 par value (the "Common Stock"), as of December 17, 1998 was
10,308,756.
<PAGE>
theglobe.com, inc.
FORM 10-Q
INDEX
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Balance Sheets at September 30, 1998 (unaudited)
and December 31, 1997 1
Unaudited Statements of Operations for the Three and Nine
Month Period Ended September 30, 1998 and 1997 2
Unaudited Statements of Cash Flows for the Nine Month
Period Ended September 30, 1998 and 1997 3
Notes to Unaudited Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Qualitative and Quantitative Disclosure about Market
Risk 43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings II-1
Item 2. Changes in Securities and Use of Proceeds II-1
Item 3. Defaults Upon Senior Securities II-2
Item 4. Submission of Matters to a Vote of Security Holders II-2
Item 5. Other Information II-2
Item 6. Exhibits and Reports on Form 8-K II-3
A. Exhibits
B. Reports on Form 8-K
Signatures
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
theglobe.com, inc.
BALANCE SHEETS
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents................. $ 9,189 $ 5,871,291
Short-term investments.................... 6,924,471 13,003,173
Accounts receivable, net.................. 1,268,790 254,209
Prepaids and other current assets......... 296,036 --
------------- ------------
Total current assets.................. 8,498,486 19,128,673
Property and equipment, net................. 2,311,111 325,842
Other assets................................ 1,057,746 7,657
------------- ------------
Total assets.......................... $ 11,867,343 $ 19,462,172
------------- ------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.......................... $ 1,234,919 $ 396,380
Accrued expense........................... 496,997 325,454
Accrued compensation...................... 376,729 1,148,999
Deferred revenue.......................... 486,119 113,290
Current installments of obligations
under capital leases..................... 670,522 27,174
------------- ------------
Total current liabilities............. 3,265,286 2,011,297
Obligations under capital leases,
excluding current installments............ 1,326,418 98,826
Stockholders' equity:
Preferred stock........................... 1,450 1,450
Common stock.............................. 1,218 1,154
Additional paid-in capital................ 23,365,798 21,866,965
Net unrealized loss on securities......... (29,491) (41,201)
Deferred compensation..................... (149,645) (76,033)
Accumulated deficit....................... (15,913,691) (4,400,286)
------------- ------------
Total stockholders' equity............ 7,275,639 17,352,049
Commitments................................. ------------- ------------
Total liabilities and stockholders'
equity.............................. $ 11,867,343 $ 19,462,172
------------- ------------
See accompanying notes to financial statements.
<PAGE>
theglobe.com, inc.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues.................. $ 1,560,963 $ 206,723 $ 2,734,361 $ 414,964
Cost of revenues.......... 614,656 132,439 1,117,837 238,471
----------- ----------- ------------ -----------
Gross profit......... 946,307 74,284 1,616,524 176,493
Operating expenses:
Sales and marketing..... 2,109,747 403,608 6,602,786 627,779
Product development..... 1,149,424 37,500 1,400,293 100,000
General and
administrative......... 2,032,878 1,511,332 4,429,594 2,105,690
Non-recurring charge.... 1,370,250 -- 1,370,250 --
----------- ----------- ------------ -----------
Loss from
operations.......... (5,715,992) (1,878,156) (12,186,399) (2,656,976)
----------- ----------- ------------ -----------
Interest and other income,
net..................... 35,062 112,945 707,699 124,329
----------- ----------- ------------ -----------
Loss before
provision for
income taxes........ (5,680,930) (1,765,211) (11,478,700) (2,532,647)
Provision for income taxes 8,205 18,050 34,705 18,050
Net loss............. $(5,689,135) $(1,783,261) $(11,513,405) $(2,550,697)
----------- ----------- ------------ -----------
Basic and diluted net
loss per share.......... $ (4.74) $ (1.54) $ (9.80) $ (2.23)
Weighted average basic
and diluted shares
outstanding............. 1,200,417 1,154,271 1,174,398 1,144,510
----------- ----------- ------------ -----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
theglobe.com, inc.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
--------------------------------
1998 1997
---------------- --------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss.................................... $ (11,513,405) $ (2,550,697)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization............ 416,459 54,428
Deferred compensation earned............. 44,513 21,087
Nonrecurring charges..................... 1,370,250 --
Changes in operating assets and liabilities:
Accounts receivable, net................. (1,014,581) 29,550
Prepaids and other current assets........ (296,036) (6,759)
Other assets............................. (883,087) 10,945
Accounts payable......................... 838,539 330,046
Accrued expense.......................... 171,543 425,835
Accrued compensation..................... (772,270) 1,037,250
Deferred revenue......................... 372,829 76,484
------------- ------------
Net cash used in operating activities... (11,265,246) (571,831)
Cash flows used in investing activities:
Purchase of property and equipment.......... (360,552) (239,733)
Proceeds from sale of short-term investments 6,090,412 --
Purchase of short-term investments.......... -- (15,187,410)
------------- ------------
Net cash provided by (used in) investing
activities............................... 5,729,860 (15,427,143)
Cash flows from financing activities:
Payments under capital lease obligations.... (170,236) --
Proceeds from exercise of common stock
options.................................... 10,522 4,507
Proceeds from issuance of convertible C
stock...................................... -- 280,000
Proceeds from issuance of convertible
preferred Series D stock................... -- 20,000,000
Payment of offering/financing costs......... (167,002) (118,880)
------------- ------------
Net cash (used in) provided by financing
activities............................... (326,716) 20,165,627
------------- ------------
Net change in cash............................ (5,862,102) 4,166,653
Cash and cash equivalents, beginning
of period.................................. 5,871,291 757,118
Cash and cash equivalents, end of period...... $ 9,189 $ 4,923,771
------------- ------------
Supplemental disclosure of noncash transactions:
Equipment acquired under capital leases.. $ 2,044,308 $ --
The accompanying notes are an integral part of these financial
statements.
<PAGE>
theglobe.com, inc.
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998
AND 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.
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 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.
(b) Unaudited Interim Financial Information
The unaudited interim financial statements of the Company for the
three and nine months ended September 30, 1998 and 1997, included herein
have been prepared in accordance with the instructions for Form 10-Q under
the Securities Exchange Act of 1934, as amended and Article 10 of
Regulation S-X under the Securities Act of 1933, as amended. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations relating
to interim financial statements.
In the opinion of management, the accompanying unaudited interim financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of the
Company at September 30, 1998, and the results of its operations and its
cash flows for the three and nine months ended September 30, 1998 and 1997.
(c) 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.
(d) Other Assets
At September 30, 1998, other assets included $890,744 of security deposits
and $167,002 of deferred offering costs. The deferred offering costs
represent costs incurred in connection with the Company's initial public
offering. These costs were charged against additional paid in capital when
the initial public offering occurred in November 1998.
(e) Revenue Recognition
The Company's revenues are derived principally from the sale of
advertisements under short-term contracts. To date, the duration of the
Company's advertising commitments has generally averaged from one to three
months. Advertising revenues are recognized ratably in the period in which
the advertisement is displayed, provided that no significant Company
obligations remain and collection of the resulting receivable is probable.
Company obligations typically include the guarantee of a minimum number of
"impressions" or times that an advertisement appears in pages viewed by the
users of the Company's online properties.
The Company also derived other revenues from its membership service fees,
e-commerce revenue shares and sponsorship placements within the Company's
site. Membership service fees are deferred and recognized ratably over the
term of the subscription period. Revenues from the Company's share of the
proceeds from its e-commerce partners' sales are recognized upon
notification from its partners of sales attributable to the Company's site.
Other revenues accounted for 11% and 28% of revenues for the nine months
ended September 30, 1998 and 1997, 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 were less than 3% and 24% of total revenues for
the nine months ended September 30, 1998 and 1997, respectively.
(f) 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 initial public offering (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 8,751,522 and
7,390,797 for the nine months ended September 30, 1998 and 1997.
(g) 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 nine months ended September 30, 1998,
comprehensive net loss was approximately $11,700 lower than the net loss
reported in the Company's statement of operations for the applicable
period, due to unrealized gains or losses on securities classified as
available-for-sale. For the nine months ended September 30, 1997, the
comprehensive loss was equal to the loss reported in the Company's
statement of operations for the applicable period.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an 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.
(h) Stock Split
In August 1997, the Company authorized and implemented a 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 split
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 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 nine months ended September 30, 1998, there were no customers that
accounted for over 10% of revenues (excluding barter revenues of $80,749)
generated by the Company, or of accounts receivable at September 30, 1998.
For the nine months ended September 30, 1997, there was one customer that
accounted for 19% of revenues (excluding barter advertising revenues of
$97,500) generated by the Company.
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
Computer equipment, including assets
under capital leases of
$2,170,308 and $126,000, respectively.. $ 2,790,474 $ 421,164
Furniture and fixtures................... 46,648 14,230
------------ ------------
2,837,122 435,394
Less accumulated depreciation and
amortization, including amounts
related to assets under capital
leases of $236,841 and $-0-,
respectively........................... 526,011 109,552
------------ ------------
Total.......................... $ 2,311,111 $ 325,842
------------ ------------
(4) 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 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 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. During the period from June 30, 1998 through September 30, 1998
the Company granted 822,650 options.
(5) NON-RECURRING CHARGE
The Company recorded a non-cash, non-recurring charge of $1,370,250 to
earnings in the third quarter of 1998 in connection with the transfer of
warrants to acquire 225,000 shares of Common Stock by Dancing Bear
Investments, Inc. (the Company's principal shareholder at the date of
transfer) 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 was recorded as a non-cash, non-recurring
compensation expense in the Company's statement of operations for services
provided by such officers to the Company with an offsetting increase in
additional paid-in capital. The amount of such non-cash charge was based on
the difference between the Company's initial public offering price ($9 per
share) and the exercise price per warrant of approximately $2.91 per share.
(6) EMPLOYMENT AGREEMENTS
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 was 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 were 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 recorded deferred
compensation expense of $118,100 in the third quarter relating to the
87,500 shares granted at 85% of the initial public offering price,
representing the difference between the initial public offering price 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
three year vesting period of the applicable options. The compensation
expense relating to these options was $9,842 in the third quarter of 1998.
(7) SUBSEQUENT EVENT
On November 13, 1998, the Company completed an initial public offering and
concurrent offering directly to certain investors in which it sold
3,481,667 shares of Common Stock, including 381,667 shares in connection
with the exercise of the underwriters' over-allotment option, at $9.00 per
share. Upon the closing of the offerings, all of the Company's preferred
stock, par value $0.001 per share (the "Preferred Stock"), automatically
converted into in an aggregate of 5,473,735 shares of Common Stock. Net
proceeds from the offerings, after underwriting and placement agent fees of
$2,018,500 and estimated offering costs of $2.0 million were $27.3 million.
After the offerings, the Company had 10,308,756 shares of Common Stock
outstanding.
<PAGE>
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Certain statements contained herein constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of
1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). These
forward-looking statements can be identified by the use of predictive,
future-tense or forward-looking terminology, such as "believes,"
"anticipates," "expects," "estimates," "plans," "may," "intends," "will,"
or similar terms. These statements appear in a number of places in this
report 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 set forth under "Risk Factors" and elsewhere in this report. 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 report.
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 with 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 September 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 sponsorship placements within the Company's site
and, to a lesser extent, from subscription and e-commerce revenues.
Advertising revenues constituted 89% of total revenues for the nine months
ended September 30, 1998 and 72% of total revenues for the nine months
ended September 30, 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 three months, in which the Company
guarantees a minimum number of impressions for a fixed fee. Advertising
revenues are recognized ratably in the period in which the advertisement is
displayed, provided that no significant Company obligations remain and
collection of the resulting receivable is probable. Payments received from
advertisers prior to displaying their advertisements on the site are
recorded as deferred revenues and are recognized as revenue ratably when
the advertisement is displayed. To the extent minimum guaranteed impression
levels are not met, the Company defers recognition of the corresponding
revenues until guaranteed levels are achieved.
In addition to advertising revenues, the Company derives other
revenues primarily from its membership service fees, e-commerce revenue
shares and sponsorship placements within the Company's site. A number of
recent arrangements with its premier e-commerce partners provide the
Company with a share of any sales resulting from direct links from the
Company's Web site. Revenues from the Company's share of the proceeds from
its e-commerce partners' sales are recognized 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 $11.5
million for the nine months ended September 30, 1998. At September 30,
1998, the Company had an accumulated deficit of $15.9 million. The Company
has recorded deferred compensation of approximately $118,100 and $83,100
for the nine months ended September 30, 1998 and for the year ended
December 31, 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.
In addition, the Company incurred a non-recurring, non-cash charge of
$1,370,250 to earnings in the third quarter of 1998 in connection with the
transfer of warrants to acquire 225,000 shares of common stock from Dancing
Bear Investments, Inc. (the Company's principal shareholder at the date of
transfer) to certain officers of the Company, at an exercise price of $2.91
per share. The amount of such non-cash charge was based on the difference
between the Company's initial public offering price ($9.00 per share) and
the exercise price per warrant of approximately $2.91 per share. This
expense has been classified separately in the statement of operations as a
non-recurring charge.
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 recorded deferred compensation expense of
approximately $118,100, 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 is
presented as a reduction of stockholders' equity and amortized over the
vesting period of the applicable 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 were
granted at the initial public offering price which is equal to the fair
market value per share of the Company' Common Stock on the date of grant.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Revenues
Revenues increased to $1.6 million for the three months ended
September 30, 1998 from $206,724 for the three months ended September 30,
1997, an increase of 655%. The period to period growth in revenues resulted
from (i) an increase in the number of advertisers as well as the average
commitment per advertiser, (ii) an increase in the Company's Web site
traffic, (iii) an increase in the number of sales people and (iv) an
increase in marketing and advertising expenditures. Advertising revenues
were $1.4 million or 90% of total revenues and $155,059 or 75% of total
revenues for the three months ended September 30, 1998 and 1997,
respectively. In 1998, the Company significantly increased its sales force
and began a marketing campaign to promote theglobe.com Web site. The
Company anticipates that advertising revenues will continue to account for
a substantial share of total revenues for the foreseeable future. Other
revenues were derived from membership service fees, e-commerce revenue
shares and sponsorship placements within the Company's site. At September
30, 1998, the Company had deferred revenues of $486,119, comprised of
amounts received from advertisers and members prior to services being
performed. Subscription fees are recognized over the membership term and
advertising fees are recognized when the impressions are delivered.
Cost of Revenues
Cost of revenues consists primarily of Internet connection charges,
Web site equipment leasing costs, depreciation, maintenance, barter
advertising expenses, staff costs and related expenses of operations
personnel. Gross margins were 61% and 36% for the three months ended
September 30, 1998 and 1997, respectively. The increase in gross margin was
primarily due to an increase in revenues relative to the increase in cost
of revenues. In addition, the Company recorded barter advertising expenses
during the three months ended September 30, 1998 and 1997, which is
equivalent to the barter advertising revenues recorded in the same period.
The September 30, 1998 and 1997 gross margins exclusive of the barter
transactions were 62% and 51%, respectively.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries and related
expenses of sales and marketing personnel, commissions, advertising, public
relations expenses and other marketing related expenses. Sales and
marketing expenses increased to $2.1 million or 135% of total revenue for
the three months ended September 30, 1998 from $403,608 or 195% of total
revenues for the three months ended September 30, 1997. The period to
period increase in sales and marketing expenses in absolute dollars was
primarily attributable to expansion of the Company's online and print
advertising and other promotional expenditures, as well as increased sales
and marketing personnel and related expenses required to implement the
Company's branding and marketing strategy.
Product Development Expenses
Product development expenses include professional fees, staff costs
and related expenses associated with the development, testing and upgrades
to the Company's Web site as well as expenses related to its editorial
content and community management and support. Product development expenses
increased to $1,149,424 or 74% of total revenues for the three months ended
September 30, 1998 from $37,500 or 18% of total revenues for the three
months ended September 30, 1997. The increase in product development
expenses was primarily attributable to increased staffing levels required
to support the Company's Web site and to enhance its content and features.
Product development expenses also increased as a result of the launch of
the Company's site redesign in November 1998. 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.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and
related costs for general corporate functions, including finance, human
resources, facilities and legal, along with professional fees and other
corporate expenses. General and administrative expenses increased to $2
million or 130% of total revenues for the three months ended September 30,
1998 from $1.5 million or 731% of total revenues for the three months ended
September 30, 1997, an increase of approximately $500,000. 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.
Non-recurring charges
The Company recorded a non-recurring, non-cash charge of $1.4 million
in the third quarter 1998. This charge is in connection with the transfer
of outstanding warrants to acquire 225,000 shares of Common Stock by
Dancing Bear Investments (the Company's principal shareholder) to certain
officers of the Company. There was no similar charge in 1997.
Interest and Other Income, Net
Interest and other income, net includes interest income earned from
the Company's cash and short-term investments, interest expense related to
the Company's capital lease obligations and gains and losses on the sale of
short-term investments. Interest income remained consistent for the three
months ended September 30, 1998 and 1997. Interest expense increased during
the third quarter 1998 due to new capital lease obligations, which the
Company entered into in 1998. During the third quarter 1997 the Company did
not have any capital lease obligations.
Income Taxes
Income taxes of $8,205 for the three months ended September 30, 1998
are based solely on state and local taxes on business and investment
capital. These taxes decreased from $18,050 in the third quarter 1997 due
to a decrease in the average equity balance of the Company. 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 December 31, 1997, the Company had approximately $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.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Revenues
Revenues increased to approximately $2.7 million for the nine months
ended September 30, 1998 from $415,000 for the nine months ended September
30, 1997, an increase of 559%. The period to period growth in revenues
resulted from (i) an increase in the number of advertisers as well as the
average commitment per advertiser, (ii) an increase in the Company's Web
site traffic, (iii) an increase in the number of sales people and (iv) an
increase in marketing and advertising expenses. Advertising revenues were
approximately 89% of total revenues and 72% of total revenues for the nine
months ended September 30, 1998 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.
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. The Company did
not record any expense for third party advertising service providers in the
nine months ended September 30, 1998. In addition, the Company recorded
barter advertising revenues representing 3% and 24% of total revenues for
the nine months ended September 30, 1998 and 1997, respectively. 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. Other revenues were derived from
membership service fees, e-commerce revenue shares and sponsorship
placements within the Company's site. At September 30, 1998, the Company
had deferred revenues of $486,119, comprised of amounts received from
advertisers and members prior to services being performed. Subscription
fees are recognized over the membership term and advertising fees are
recognized when impressions are delivered.
Cost of Revenues
Cost of revenues consists primarily of Internet connection charges,
Web site equipment leasing costs, depreciation, maintenance, barter
advertising expenses, staff costs and related expenses of operations
personnel. Gross margins were 59% and 43% for the nine months ended
September 30, 1998 and 1997, respectively. The increase in gross margin was
primarily due to an increase in revenues relative to the increase in cost
of revenues. In addition, the Company recorded barter advertising expenses
during the nine months ended September 30, 1998 and 1997, included in cost
of revenues, which is equivalent to the barter advertising revenues
recorded in the same period. The September 30, 1998 and 1997 gross margins
exclusive of the barter transactions were 61% and 56%, respectively.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries and related
expenses of sales and marketing personnel, commissions, advertising, public
relations and other marketing related expenses. Sales and marketing
expenses increased to $6.6 million or 241% of total revenues for the nine
months ended September 30, 1998 from $628,000 or 151% of total revenues for
the nine months ended September 30, 1997. The period to period increase in
sales and marketing expenses was primarily attributable to the 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. 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.
Product Development Expenses
Product development expenses include professional fees, staff costs
and related expenses associated with the development, testing and upgrades
to the Company's Web site as well as expenses related to its editorial
content and community management and support. Product development expenses
increased to $1,400,293 or 51% of total revenues for the nine months ended
September 30, 1998 from $100,000 or 24% of total revenues for the nine
months ended September 30, 1997. The increase in product development
expenses was partially attributable to increased staffing levels required
to support the Company's Web site and to enhance its content and features.
Product development expenses also increased as of result of the launch of
the Company's site redesign in November 1998. 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.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and
related costs for general corporate functions, including finance, human
resources, facilities and legal, along with professional fees and other
corporate expenses. General and administrative expenses increased to $4.4
million or 162% of total revenues for the nine months ended September 30,
1998 from $2.1 million or 507% of total revenues for the nine months ended
September 30, 1997, an increase of $2.3 million. 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. 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.
Non-recurring charges
The Company recorded a non-recurring, non-cash charge of $1.4 million
in the third quarter 1998. This charge is in connection with the transfer
of outstanding warrants to acquire 225,000 shares of Common Stock by
Dancing Bear Investments, Inc. (the Company's principal shareholder) to
certain officers of the Company. There was no similar charge in 1997.
Interest and Other Income, Net
Interest and other income, net includes interest income earned from
the Company's cash and short-term investments, interest expense related to
the Company's capital lease obligations and gains and losses on the sale of
short-term investments. Interest income increased to $816,454 for the nine
months ended on September 30, 1998 from $124,329 for the nine months ended
September 30, 1997, an increase of $692,125. 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 $34,705 for the nine months ended September 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 December 31, 1997, the Company had approximately $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 Code, future
utilization of the Company's net operating loss carryforwards will be
subject to certain limitations or annual restrictions.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had approximately $6.9 million
in cash, cash equivalents and short-term investments. Net cash used in
operating activities was $11.3 million and $571,831 for the nine months
ended September 30, 1998 and 1997, respectively. The increase in net cash
used resulted primarily from an increase in the Company's net operating
losses in addition to the timing of payments associated with the Company's
1997 accrued compensation in the first quarter of 1998 and a higher level
of receivables due to increased revenues and increases in prepaid expenses
and other assets. These items were partially offset by increases in
accounts payable, accrued expenses and deferred revenues
Net cash provided (used) in investing activities was $5.7 million and
$(15.4) million for the nine months ended September 30, 1998 and 1997
respectively. Net cash provided by investing activities for the nine months
ended September 30, 1998 was primarily related to sales of short-term
investments in order to finance the operating expenses of the Company. For
the nine months ended September 30, 1997, the net cash used in investing
activities was primarily related to the purchase of short-term investments
with the proceeds from the Company's issuance of shares of the Company's
Preferred Stock in the third quarter 1997. In each period, additional cash
was used to purchase property and equipment in connection with the
Company's build out of its infrastructure.
Net cash used in financing activities for the nine months ended
September 30, 1998 consisted primarily of payments under the Company's
capital lease obligations and payments relating to offering costs
associated with the Company's initial public offering. Net cash provided by
financing activities for the nine months ended September 30, 1997 was
primarily from issuance of the Company's Series C and D Preferred Stock
through private placements partially offset by financing costs associated
with these private placements.
On November 13, 1998, the Company raised approximately $27 million
from its initial public offering after deducting underwriting and placement
agents fees and other estimated offering costs.
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 initial
public offering in November 1998, together with its other 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. See "Risk
Factors--Additional Financing Requirements; Ability to Incur Debt; Expected
Negative Operating Cash Flow for the Foreseeable Future."
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
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 June 30,
1999. 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, with the exception of Microsoft Windows NT 4.0. The Company is
currently upgrading this software to MS Windows NT 4.0 SP4, which corrects
all known Y2K issues in this software.
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 or non-IT
systems operated by the Company or by third parties, the most reasonably
likely worst case Year 2000 scenario is the failure of one or more of the
Company's vendors of hardware or software or one or more providers of
non-IT systems to the Company to properly identify any Year 2000 compliance
issues and remediate any such issues prior to December 31, 1999. 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.
<PAGE>
RISK FACTORS
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 Foreseeable 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 September 30, 1998, the Company had an
accumulated deficit of $15.9 million. The Company expects that its
operating expenses will increase significantly during the next several
years, especially in the areas of product development and general and
administrative expenses. 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. 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 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.
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 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 nine
months ended September 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 three months in length, with relatively few
longer-term advertising contracts. Many of the Company's advertising
customers have limited experience with Internet advertising, have not
devoted a significant portion of their advertising expenditures to Internet
advertising and may not believe Internet advertising to be effective
relative to traditional advertising media. Also, the Company's advertising
customers may object to the placement of their advertisements on certain
members' personal homepages, the content of which they deem undesirable.
There can be no assurance that the Company's current advertisers will
continue to purchase advertisements on theglobe.com.
The Company's contracts with advertisers typically guarantee the
advertiser a minimum number of "impressions," or times that an
advertisement is seen by users of theglobe.com. To the extent that minimum
impression levels are not achieved for any reason, the Company may be
required to "make good" or provide additional impressions after the
contract term, which may adversely affect the availability of advertising
inventory and which could have a material adverse effect on the Company's
business, results of operations and financial condition. To the extent
minimum guaranteed impressions are not met, the Company defers recognition
of the corresponding revenues until guaranteed impression levels are
achieved.
Additionally, the process of managing 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. Additionally, no standards have been widely
accepted to measure the number of members, unique users or page views
related to a particular site. 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.
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. 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 three
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. Many of the Company's existing e-commerce
arrangements are 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 from Initial Public Offering
The Company intends to use the net proceeds from the Common Stock sold
in its initial public offering, completed in November 1998, 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 such net proceeds. 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.
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 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 September 30, 1998, the Company had grown to 94 employees from
approximately 27 in September 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.
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 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.
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. Mr. Egan is also the controlling investor of
Dancing Bear Investments, Inc., which holds a controlling interest in the
Company, and Chairman and Chief Executive Officer of Certified Vacations,
an entity affiliated with Dancing Bear Investments, Inc. Dancing Bear
Investments, Inc. 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. Mr. Cespedes is also 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, Inc.
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, Inc. 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.
These arrangements are not the result of arm's-length negotiations. Due to
their relationships with 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.
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.
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 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.
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.
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, a subsidiary of Lycos, Inc.
("Angelfire"), CNET, Inc. ("CNET"), CNN/Time Warner, Inc. ("CNN/Time
Warner"), Excite, Inc. ("Excite"), Hotmail Corporation, a subsidiary of
Microsoft Corporation ("Hotmail"), Infoseek Corporation ("Infoseek"),
Lycos, Inc. ("Lycos"), Microsoft Corporation ("Microsoft"), Netscape
Communications Corporation ("Netscape"), Switchboard Inc. ("Switchboard"),
Talk City, Inc. ("Talk City"), 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.
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.
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.
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 its initial
public offering, 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 "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Risks Associated with Potential Acquisitions
As part of its business strategy, the Company expects to review
acquisition prospects that would complement its existing business, augment
the distribution of its community or enhance its technological
capabilities. Future acquisitions by the Company could result in
potentially dilutive issuances of equity securities, large and immediate
write-offs, the incurrence of debt and contingent liabilities or
amortization expenses related to goodwill and other intangible assets, any
of which could materially and adversely affect the Company's business,
results of operations and financial condition.
Furthermore, acquisitions entail numerous risks and uncertainties,
including difficulties in the assimilation of operations, personnel,
technologies, products and information systems of the acquired companies,
the diversion of management's attention from other business concerns, the
risks of entering geographic and business markets in which the Company has
no or limited prior experience and the potential loss of key employees of
acquired organizations. The Company has not made any acquisitions in the
past. No assurance can be given as to the ability of the Company to
successfully integrate any businesses, products, technologies or personnel
that might be acquired in the future, and the failure of the Company to do
so could have a material adverse effect on the Company's business, results
of operations and financial condition.
Reliance on Intellectual Property and Proprietary Rights
The Company regards substantial elements of its Web site and
underlying technology as proprietary and attempts to protect them by
relying on intellectual property laws, including 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 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.
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 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.
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.
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. At the
international level, the European Union (the "EU") has adopted a directive
(the "Directive") that provides for EU members 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. 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 Freedom Act was signed into law, placing a
three-year moratorium on new state and local taxes on certain aspects of
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 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 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
30% 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
Michael S. Egan, the Chairman of the Company, beneficially owns or
controls, directly or indirectly, 6,088,024 shares of Common Stock which in
the aggregate represents approximately 49.9% of the Common Stock. Messrs.
Krizelman and Paternot, collectively, beneficially own 14.9% of the Common
Stock. 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, Inc., 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. Accordingly, the Egan Group together with
the Krizelman and Paternot Groups will have the ability to control the
outcome of all issues submitted to a vote of the stockholders of the
Company requiring majority approval. 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. 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.
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.
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 the failure of one or more of the Company's vendors of
hardware or software or one or more providers of non-IT systems to the
Company to properly identify any Year 2000 compliance issues and remediate
any such issues prior to December 31, 1999. 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.
Possible Volatility of Stock Price
The trading price of the Company's Common Stock has been volatile and
may continue to 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
The Company currently has outstanding a total of 10,308,756 shares of
Common Stock, and 826,950 and 584,021 shares of Common Stock subject to
stock options granted under the Company's 1998 Stock Option Plan and 1995
Stock Option Plan, respectively. In addition, 2,023,009 shares of Common
Stock are currently issuable upon exercise of outstanding warrants. Of the
5,628,884 shares of capital stock issued prior to the Company's initial
public offering and not registered under the Securities Act, approximately
1,062,455 shares are not subject to the volume limitations of Rule 144
under the Securities Act and are currently eligible for sale in the public
market without restriction. Holders of substantially all of the Company's
Common Stock have been granted registration rights. However, pursuant to
the terms of the agreements under which the registration rights were
granted, such holders have agreed not to sell or otherwise transfer or
dispose of any shares of Common Stock or other securities of the Company
held by them without the consent of the Company for a period of up to 180
days after November 12, 1998. 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 November 12, 1998, without the prior written consent of
Bear, Stearns & Co. Inc. (the lead managing underwriter for the Company's
initial public offering), they will not, directly or indirectly, issue,
sell, offer or agree to sell, grant any option for the sale, pledge, make
any short sale, establish an open "put equivalent position" within the
meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of
any shares of Common Stock (or securities convertible into, exercisable for
or exchangeable for Common Stock) of the Company. The Company has filed a
registration statement on Form S-8 for the shares held pursuant to its
option plans which makes those shares freely tradable upon exercise of such
options.
No information is currently available and no prediction can be made as
to the timing or amount of future sales of such shares or the effect, if
any, that future sales of shares, or the availability of shares for future
sale, will have on the market price of the Common Stock prevailing from
time to time. Sales of substantial amounts of Common Stock (including
shares issuable upon the exercise of stock options), or the perception that
such sales could occur, could materially adversely affect prevailing market
prices for the Common Stock and the ability of the Company to raise equity
capital in the future.
Antitakeover Effect of Certain Charter Provisions
The Board of Directors has adopted a rights agreement (the "Rights
Agreement") 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.
Absence of Dividends
The Company does not anticipate paying any cash dividends in the
foreseeable future.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings pending or, to the Company's
knowledge, threatened against the Company.
Item 2. Changes in Securities and Use of Proceeds
(c) SALES OF UNREGISTERED SECURITIES. During the period from June 30,
1998 through September 30, 1998, the Company granted an aggregate of
822,650 options to purchase Common Stock to its officers, directors and
employees pursuant to the Company's 1998 Stock Option Plan with a weighted
average exercise price equal to $9 per share of Common Stock, with the
exception of 87,500 options granted to one officer at $7.65. All of such
option grants were made pursuant to the exemption from the registration
requirements of the Securities Act of 1933, as amended, afforded by Rule
701 promulgated thereunder. As of December 22, 1998, the total number of
shares of Common Stock subject to stock options granted under the Company's
1998 Stock Option Plan and 1995 Stock Option Plan were 826,950 and 584,021
shares, respectively.
(d) USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES. On November
13, 1998, the Company completed an initial public offering of its Common
Stock, $0.001 par value. The managing underwriters in the offering were
Bear, Stearns & Co. Inc. and Volpe Brown Whelan & Co. (the "Underwriters").
The shares of Common Stock sold in the offering were registered under the
Securities Act of 1933, as amended, on a Registration Statement on Form S-1
(the "Registration Statement") (Reg. No. 333-59751) that was declared
effective by the Securities and Exchange Commission on November 12, 1998.
The offering commenced on November 13, 1998. All 3,100,000 shares of Common
Stock registered under the Registration Statement were sold at a price of
$9.00 per share. The Underwriters also exercised an overallotment option of
381,667 shares on November 13, 1998. All 381,667 overallotment shares were
sold at a price of $9.00 per share. The aggregate price of the offering
amount registered and sold was $31,335,003. In connection with the
offering, the Company paid an aggregate of $2,018,450 in underwriting
discounts and commissions to the Underwriters. In addition, the following
table sets forth the other material expenses incurred in connection with
the offering.
<PAGE>
Nasdaq National Market filing and listing fee 76,000
Printing and engraving expenses 265,000
Legal fees and expenses 1,090,000
Accounting fees and expenses 278,000
Consulting fees and expenses 78,000
Roadshow and travel expenses 192,000
Transfer Agent and Registrar fees 5,000
Miscellaneous 16,000
----------
Total $2,000,000
----------
After deducting the underwriting discounts and commissions and the
offering expenses described above, the Company received net proceeds from
the offering of approximately $27,316,553. The proceeds from the initial
public offering will be used for investments in theglobe.com Web site,
including enhancements to the Company's server and networking
infrastructure and the functionality of its Web site and general corporate
purposes, including working capital, expansion of its sales and marketing
capabilities and brand-name promotions. The Company may also use a portion
of such proceeds for acquisitions of complementary businesses, services and
technology. None of the Company's net proceeds of the offering will be paid
directly or indirectly to any director, officer, general partner of the
Company or their associates, persons owning 10% or more of any class of
equity securities of the Company, or an affiliate of the Company.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
As of July 15, 1998, in a Written Consent of the stockholders of the
Company, a majority of the holders of the then outstanding shares of Common
Stock of the Company (which majority included all of the holders of the
Preferred Stock of the Company, voting on an as converted basis), approved
the adoption of the 1998 Stock Option Plan.
As of July 15, 1998, in a Written Consent of the stockholders of the
Company, a majority of the holders of the then outstanding shares of Common
Stock of the Company (which majority included the holders of the Preferred
Stock of the Company, voting on an as converted basis), approved the Fourth
Amended and Restated Certificate of Incorporation of the Company.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number Description
11.1 Computation of Loss Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report on Form 10-Q to be signed on its
behalf by the undersigned thereto duly authorized.
theglobe.com, inc.
/s/ Francis T. Joyce
------------------------------
Francis T. Joyce
Vice President, Chief Financial Officer
and Treasurer (Principal Financial and
Accounting Officer)
December 22, 1998
Exhibit 11.1
Loss per share
Computation of loss per share
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
Basic:
Net Loss ($5,689,135) ($1,783,261) ($11,513,405) ($2,550,697)
Net loss applicable
to common stockholders ($5,689,135) ($1,783,261) ($11,513,405) ($2,550,697)
=========== =========== ============ ===========
Basic weighted
average shares
outstanding 1,200,417 1,154,271 1,174,398 1,144,510
=========== =========== ============ ===========
Basic loss per common
share ($4.74) ($1.54) ($9.80) ($2.23)
=========== =========== ============ ===========
Diluted:
Net loss applicable
to common stockholders ($5,689,135) ($1,783,261) ($11,513,405) ($2,550,697)
=========== =========== ============ ===========
Basic weighted
average shares
outstanding 1,200,417 1,154,271 1,174,398 1,144,510
Net effect of
dilutive securities 0 0 0 0
----------- ----------- ------------ -----------
Diluted weighted
average shares
outstanding 1,200,417 1,154,271 1,174,398 1,144,510
=========== =========== ============ ===========
Diluted loss per
common share ($4.74) ($1.54) ($9.80) ($2.23)
=========== =========== ============ ===========
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 9,189
<SECURITIES> 6,924,471
<RECEIVABLES> 1,495,926
<ALLOWANCES> (227,136)
<INVENTORY> 0
<CURRENT-ASSETS> 8,498,486
<PP&E> 2,837,122
<DEPRECIATION> (526,011)
<TOTAL-ASSETS> 11,867,343
<CURRENT-LIABILITIES> 3,265,286
<BONDS> 0
0
1,450
<COMMON> 1,218
<OTHER-SE> 7,272,971
<TOTAL-LIABILITY-AND-EQUITY> 11,867,343
<SALES> 0
<TOTAL-REVENUES> 2,734,361
<CGS> 0
<TOTAL-COSTS> 1,117,837
<OTHER-EXPENSES> 13,802,923
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (11,478,700)
<INCOME-TAX> 34,705
<INCOME-CONTINUING> (11,513,405)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,513,405)
<EPS-PRIMARY> (9.80)
<EPS-DILUTED> (9.80)
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