As filed with the Securities and Exchange Commission on May 14, 1999
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 March 31, 1999
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)
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 X No
--- ---
The number of shares outstanding of the Registrant's Common Stock,
$.001 par value (the "Common Stock"), as of May 12, 1999 was 22,917,412.
<PAGE>
THEGLOBE.COM, INC.
FORM 10-Q
INDEX
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 1
Condensed Consolidated Balance Sheets at
March 31, 1999 (unaudited) and December 31, 1998 1
Unaudited Condensed Consolidated Statements of
Operations for the three months ended
March 31, 1999 and 1998 2
Unaudited Condensed Consolidated Statements of Cash
Flows for the three months ended March 31, 1999
and 1998 3
Notes to Unaudited Condensed Consolidated Financial
Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Qualitative and Quantitative Disclosure about
Market Risk 39
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-1
Item 4. Submission of Matters to a Vote of Security Holders II-1
Item 5. Other Information II-2
Item 6. Exhibits and Reports on Form 8-K II-2
A. Exhibits
B. Reports on Form 8-K
Signatures II-3
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<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
THEGLOBE.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1999 1998
--------------------- ---------------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................ $ 11,241,436 $ 29,250,572
Short-term investments ................... 11,686,863 898,546
Accounts receivable, net ................. 2,319,339 2,004,875
Prepaids and other current assets......... 736,407 678,831
---------------- ---------------
Total current assets................. 25,984,045 32,832,824
Property and equipment, net ................ 4,315,793 3,562,559
Goodwill and other intangible assets, net... 21,293,591 --
Restricted investments ..................... 3,522,987 1,734,495
---------------- ---------------
Total assets......................... $ 55,116,416 $ 38,129,878
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 2,930,524 $ 2,614,445
Accrued expenses.......................... 1,662,174 817,463
Accrued compensation...................... 771,640 691,279
Deferred revenue.......................... 647,641 673,616
Deferred rent............................. 246,623 --
Current installments of obligations
under capital leases.................... 1,125,077 1,026,728
---------------- ---------------
Total current liabilities............ 7,383,679 5,823,531
Obligations under capital leases,
excluding current installments............ 1,933,856 2,005,724
Stockholders' equity:
Common stock.............................. 21,326 20,625
Additional paid-in capital................ 72,663,635 50,904,181
Net unrealized loss on securities......... (57,980) (50,006)
Deferred compensation..................... (111,832) (128,251)
Accumulated deficit....................... (26,716,268) (20,445,926)
---------------- ---------------
Total stockholders' equity........... 45,798,881 30,300,623
Commitments................................. -- --
---------------- ---------------
Total liabilities and stockholders'
equity............................. $ 55,116,416 $ 38,129,878
================ ===============
See accompanying notes to consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THEGLOBE.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
----------------------------------------
1999 1998
(UNAUDITED) (UNAUDITED)
------------------ --------------------
<S> <C> <C>
Revenues............................................. $ 3,191,804 $ 393,586
Cost of revenues..................................... 1,322,751 212,552
---------------- --------------
Gross profit................................... 1,869,053 181,034
---------------- --------------
Operating expenses:
Sales and marketing................................ 2,060,517 1,410,500
Product development................................ 2,113,806 85,532
General and administrative......................... 2,754,031 1,097,608
Amortization of goodwill and intangible assets 1,360,778 --
---------------- --------------
Total operating expenses.................... 8,289,132 2,593,640
---------------- --------------
Loss from operations........................... (6,420,079) (2,412,606)
---------------- --------------
Interest and other income, net....................... 195,626 455,179
---------------- --------------
Loss before provision for income taxes (6,224,453) (1,957,427)
Provision for income taxes........................... 45,889 16,025
---------------- --------------
Net loss....................................... $ (6,270,342) $ (1,973,452)
================ ==============
Basic and diluted net loss per share................. $ (0.30) $ (0.38)
================ ==============
Weighted average basic and diluted shares
outstanding........................................ 21,089,668 5,208,533
================ ==============
See accompanying notes to consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THEGLOBE.COM, INC.
THREE MONTHS ENDED
MARCH 31,
----------------------------------------
1999 1998
----------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................. $ (6,270,342) $ (1,973,452)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................... 1,623,321 107,671
Amortization of deferred compensation............ 16,419 11,560
Non cash compensation............................ 31,769 --
Changes in operating assets and liabilities, net
of effect of acquisition:
Accounts receivable, net......................... (314,464) (70,387)
Prepaids and other current assets................ (51,108) (52,043)
Accounts payable................................. (23,084) 340,007
Accrued expense.................................. 59,269 (57,497)
Accrued compensation............................. (20,573) (1,148,999)
Deferred rent.................................... 246,623 --
Deferred revenue................................. (25,975) (25,667)
--------------- ---------------
Net cash used in operating activities.......... (4,728,145) (2,868,807)
--------------- ---------------
Cash flows used in investing activities:
Purchase of property and equipment................... (566,611) (197,288)
Purchase of short-term investments................... (10,796,291) --
Proceeds from sale of short-term investments......... -- 2,600,891
Cash paid for acquisition of Azazz, net of cash 2,511 --
acquired...........................................
Payment of security deposits......................... (1,785,011) --
--------------- ---------------
Net cash (used in) provided by investing activities (13,145,402) 2,403,603
--------------- ---------------
Cash flows from financing activities:
Payments under capital lease obligations............. (232,989) (32,776)
Proceeds from exercise of common stock options....... 97,400 --
--------------- ---------------
Net cash used in financing activities.............. (135,589) (32,776)
--------------- ---------------
Net change in cash and cash equivalents................ (18,009,136) (497,980)
Cash and cash equivalents, beginning of period......... 29,250,572 5,871,291
Cash and cash equivalents, end of period............... $ 11,241,436 $ 5,373,311
=============== ===============
Supplemental disclosure of noncash transactions:
Equipment acquired under capital leases.......... $ 178,864 $ 836,642
=============== ===============
See accompanying notes to consolidated financial statements.
</TABLE>
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<PAGE>
THEGLOBE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
theglobe.com, inc. (the "Company" or "theglobe") was incorporated on May 1,
1995 (inception) and commenced operations on that date. theglobe.com is an
online network 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 Consolidated Financial Information
The unaudited interim consolidated financial statements of the Company as
of March 31, 1999 and for the three months ended March 31, 1999 and 1998,
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 consolidated financial statements.
In the opinion of management, the accompanying unaudited interim
consolidated financial statements reflect all adjustments, consisting only
of normal recurring adjustments, necessary to present fairly the financial
position of the Company at March 31, 1999, and the results of their
operations and their cash flows for the three months ended March 31, 1999
and 1998.
The results of operations for such periods are not necessarily indicative
of results expected for the full year or for any future period. These
financial statements should be read in conjunction with the audited
financial statements as of December 31, 1998, and for the three years then
ended and related notes included in the Company's Form 10-K filed with the
Securities and Exchange Commission.
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<PAGE>
(c) Principles of Consolidation
The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All significant intercompany
balances and transactions have been eliminated.
(d) Use of Estimates
The preparation of consolidated 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 consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
(e) Short-term Investments
Short-term investments are classified as available-for-sale and are
available to support current operations or to take advantage of other
investment opportunities. These investments are corporate bonds, commercial
paper and corporate bond funds, which are stated at their estimated fair
value based upon publicly available market quotes. Unrealized gains and
losses are computed on the basis of specific identification and are
included in stockholders' equity. Realized gains, realized losses and
declines in value, judged to be other-than-temporary, are included in other
income. There were no material gross realized gains or losses from sales of
securities in the periods presented. The costs of securities sold are based
on the specific-identification method and interest earned is included in
interest income. As of March 31, 1999, the Company had gross unrealized
losses of $59,939 and gross unrealized gains of $1,959 from its short-term
investments. As of December 31, 1998, the Company had gross unrealized
losses of $50,006 from its short-term investments. As a result, the
Company's comprehensive net loss was $6,278,316 and $1,960,689 for the
three months ended March 31, 1999 and 1998.
(f) Goodwill and Other Purchased Intangibles
Goodwill and other purchased intangibles is stated net of total accumulated
amortization of $1,360,778 at March 31, 1999. Goodwill and all other
purchased intangibles are being amortized on a straight-line basis over
their expected period of benefit ranging from two to three years (three
years for goodwill).
(g) 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
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<PAGE>
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 17% and
16% of revenues for the three months ended March 31, 1999 and 1998,
respectively.
The Company trades advertisements on its Web properties in exchange for
advertisements on the Internet sites of other companies. Barter revenues
and expenses are recorded at the fair market value of services provided or
received, whichever is more determinable in the circumstances. Revenue from
barter transactions is recognized as income when advertisements are
delivered on the Company's Web properties. Barter expense is included in
cost of revenues and 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 4% of
total revenues for the three months ended March 31, 1999 and 1998,
respectively.
(h) 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.
Diluted net loss per common share for the three months ended March 31, 1999
and 1998 does not include the effects of options to purchase 3,935,662 and
1,493,810 shares of common stock, respectively; 4,064,828 and 3,522,732
common stock warrants, respectively; and 9,906,654 shares of convertible
preferred stock on an "as if" converted basis for the three months ended
March 31, 1998.
(i) 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. We adopted SFAS 130 as of December 31, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS
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<PAGE>
No. 131 establishes standards for the way that a public enterprise reports
information about operating segments in annual financial statements, and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997 and
requires statement of earlier periods presented. The Company has determined
that it does not have any separately reporting business segments.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Corporate Software Developed or Obtained for Internal Use", which
establishes guidelines for the accounting for the costs of all computer
software developed or obtained for internal use. We adopted SOP 98-1
effective for the year ended December 31, 1998. The adoption of SOP 98-1 is
not expected to have a material impact on our consolidated financial
statements.
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.
(2) ACQUISITIONS
On February 1, 1999, theglobe.com formed Nirvana Acquisition Corp. ("Merger
Sub"), a Washington corporation and a wholly-owned subsidiary of
theglobe.com. Merger Sub was merged with and into factorymall.com, inc., a
Washington corporation d/b/a Azazz ("factorymall"), with factorymall as the
surviving corporation. The merger was effected pursuant to the Agreement
and Plan of Merger, dated February 1, 1999, by and among theglobe.com,
Merger Sub, and factorymall and certain shareholders thereof. As a result
of the Merger, factorymall became a wholly-owned subsidiary of
theglobe.com. factorymall operates Azazz, a leading interactive department
store.
The consideration paid by theglobe.com in connection with the merger
consisted of approximately 614,000 newly issued shares of common stock, par
value $0.001, of theglobe.com. In addition, options to purchase shares of
factorymall's common stock, without par value, were exchanged for options
to purchase approximately 82,034 shares of theglobe.com's common stock.
Warrants to purchase shares of factorymall common stock were exchanged for
warrants to purchase approximately 18,810 shares of theglobe.com's common
stock. theglobe.com also assumed certain bonus obligations of factorymall
triggered in connection with the merger that will result in the issuance by
theglobe.com of approximately 73,728 shares of theglobe.com's common stock
and payment by theglobe.com of approximately $451,232 in cash. The Company
also incurred expenses of approximately $694,300 related to the merger.
This acquisition was accounted for using the purchase method of accounting
and the total purchase price for this transaction was $22,776,549. The
difference between the fair market
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<PAGE>
value of factorymall's net tangible assets and the purchase price has been
allocated to goodwill and other intangible assets and will be amortized
over a period of two to three years (three years for goodwill), the
expected period of benefit.
Acquired Effective Acquisition Net Tangible Intangibles/
Company Date Costs Assets Goodwill
- ------- ---- ----- ------ --------
factorymall February 1, 1999 $694,300 $126,000 $22,650,000
The following unaudited pro forma consolidated amounts give effect to the
acquisition as if it had occurred on January 1, 1998, by consolidating the
results of operations of factorymall with the results of the Company for
the three months ended March 31, 1999 and 1998.
Three Months Three Months
Ended Ended
March 31, March 31,
1999 1998
---- ----
Total revenues 3,200,160 428,429
Net loss (8,066,303) (4,198,204)
Net loss per share--basic and diluted $(0.38) $(0.71)
Weighted average shares used in basic and
diluted net loss per share calculation (1) 21,318,945 5,896,365
- ---------------------
The unaudited pro forma consolidated statements of operations are not
necessarily indicative of the operating results that would have been
achieved had the transactions been in effect as of the beginning of the
periods presented and should not be construed as being representative of
future operating results.
(1) The Company computes net loss per share in accordance with the
provisions of SFAS No. 128, "Earnings Per Share." Basic net loss per
share is computed by dividing the net loss for the period by the
weighted average number of common shares outstanding during the
period. The weighted average common shares used to compute pro forma
basic net loss per share includes the actual weighted average common
shares outstanding for the historical three months ended March 31,
1999 and 1998, respectively, plus the common shares issued in
connection with the acquisition of factorymall from January 1, 1998.
The common stock issued in connection with the acquisition of
factorymall was 687,832 shares, which was adjusted for the weighted
average period such shares were considered to be outstanding during
1999. In addition, diluted net loss per share is equal to basic net
loss per share as common stock issuable upon exercise of employee
stock options and upon exercise of outstanding warrants are not
included because they are antidilutive. In future periods, the
weighted average shares used to compute diluted earnings per share
will include the incremental shares of common stock relating to
outstanding options and warrants to the extent such incremental shares
are dilutive.
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<PAGE>
(3) 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 three months ended March 31, 1999 and 1998, there were no customers
that accounted for over 10% of revenues generated by the Company, or of
accounts receivable at March 31, 1999 and 1998.
(4) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------------------- ----------------------
(UNAUDITED)
<S> <C> <C>
Computer equipment, including assets
under capital leases of
$3,573,331 and $3,305,598, respectively........ $ 5,298,835 $ 4,298,702
Furniture and fixtures, including assets under
capital leases of $42,171 and $42,171,
respectively................................... 183,027 88,819
--------------- ---------------
5,481,862 4,387,521
Less accumulated depreciation and
amortization, including amounts
related to assets under capital
leases of $611,823 and $460,998,
respectively................................... 1,166,069 824,962
--------------- ---------------
Total.................................. $ 4,315,793 $ 3,562,559
=============== ===============
</TABLE>
(5) 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
2,400,000 shares of Common Stock, subject to adjustment as provided in the
1998 Plan. In March 1999 the Board of Directors authorized an increase in
the number
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<PAGE>
of shares reserved for issuance under the Company's 1998 Stock Option Plan
from 2,400,000 to 3,400,000.
(6) EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan ("ESPP") was adopted by the
Board of Directors in February 1999. The ESPP will provide eligible
employees of the Company the opportunity to apply a portion of their
compensation to the purchase of shares of the Company at a 15% discount.
The Company has reserved 400,000 authorized but unissued shares of common
stock for issuance under the ESPP. The ESPP is subject to stockholder
approval.
(7) SUBSEQUENT EVENTS
(a) Acquisitions
On April 5, 1999, theglobe.com formed Bucky Acquisition Corp. ("Merger
Sub"), a Delaware corporation and a wholly-owned subsidiary of
theglobe.com. Merger Sub was merged with and into Attitude Network, Ltd., a
Delaware corporation ("Attitude"), with Attitude as the surviving
corporation. The merger was effective pursuant to the Agreement and Plan of
Merger, dated April 5, 1999, which closed on April 9, 1999, by and among
theglobe.com, Merger Sub, and Attitude and certain shareholders thereof. As
a result of the merger, Attitude became a wholly-owned subsidiary of
theglobe.com. Attitude publishes entertainment web sites including Happy
Puppy and Games Domain.
The consideration payable by theglobe.com in connection with the merger
consists of approximately 1,570,000 newly issued shares of common stock,
par value $0.001, of theglobe.com. In addition, options to purchase shares
of Attitude's common stock, par value $0.001, were exchanged for options to
purchase approximately 84,760 shares of theglobe.com common stock. Warrants
to purchase shares of Attitude common stock were exchanged for warrants to
purchase approximately 46,706 shares of theglobe.com common stock. The
Company also incurred expenses of approximately $800,000 related to the
merger.
The total purchase price for this transaction was approximately $46.8
million. The difference between the fair market value of Attitude's net
tangible assets and the purchase price will be accounted for as goodwill
and will be amortized over three years, the expected period of benefit.
(b) Stock Split
In April 1999, the Company announced a two-for-one stock split that was
payable on May 14, 1999 to shareholders of record as of May 3, 1999. All
share and per share information in the accompanying consolidated financial
statements has been retroactively restated to reflect the effect of the
stock split.
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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
Our web site is one of the world's leading online networks with nearly
2.5 million members in the United States and abroad. In March 1999,
approximately 10.2 million individuals visited our site. Our web site is a
destination on the Internet where users are able to personalize their
online experience by publishing their own content and interacting with
others having similar interests. We facilitate this interaction by
providing various free services, including home page building, discussion
forums, chat, e-mail and electronic commerce. Additionally, we provide our
users with news, business information, real time stock quotes, weather,
movie and music reviews, multi-player gaming, horoscopes and personals. By
satisfying our users' personal and practical needs, we seek to become our
users' online home. Our primary revenue source is the sale of advertising,
with additional revenues generated through electronic commerce, development
fees and, to a lesser extent, the sale of membership service fees for
enhanced services.
We were incorporated in May 1995. For the period from inception
through December 1995, we had minimal sales and our operating activities
related primarily to the development of the necessary computer
infrastructure and initial planning and development. Operating expenses in
1995 were minimal. During 1996, we continued the foregoing activities and
also focused on recruiting personnel, raising capital and developing
programs to attract and retain members. In 1997, we
o moved our headquarters to New York City;
o expanded our membership base from less than 250,000 to almost
1 million;
o improved and upgraded our services;
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o expanded our production staff;
o built an internal sales department; and
o began active promotion of theglobe.com to increase market
awareness.
During 1998, revenues and operating expenses increased as we placed a
greater emphasis on building our advertising revenues and memberships by
expanding our sales force and promoting theglobe.com brand.
On February 1, 1999, we acquired factorymall.com, an online department
store doing business as Azazz.com, which sells a variety of name brand
products directly to consumers. We have integrated Azazz.com into our
electronic commerce site, now known as "shop.theglobe.com."
In April 1999, we acquired Attitude Network, a provider of online
entertainment content whose web sites include Happy Puppy, Games Domain and
Kids Domain, three leading web sites serving game enthusiasts.
To date, our revenues have been derived principally from the sale of
advertisements and sponsorship placements within our web site and, to a
lesser extent, from subscription and electronic commerce revenues.
Electronic commerce revenues have not been significant to date, but are
expected to increase with the acquisition of Azazz, and as our existing
electronic arrangements grow and new arrangements are entered into.
Advertising revenues constituted 83% of total revenues for the three months
ended March 31, 1999 and 84% of total revenues for the three months ended
March 31, 1998. We sell a variety of advertising packages to clients,
including banner advertisements, event sponsorship, and targeted and direct
response advertisements. Our advertising revenues are derived principally
from short-term advertising arrangements, averaging one to three months. We
generally guarantee a minimum number of impressions for a fixed fee.
Advertising revenues are recognized ratably in the period in which the
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, we defer recognition of the
corresponding revenues until guaranteed levels are achieved.
In addition to advertising revenues, we derive other revenues
primarily from our membership service fees, electronic commerce revenue,
development fees and sponsorship placements within our site. Subscription
fees are recognized over the membership term. A number of recent
arrangements with our premier electronic commerce partners provide us with
a share of any sales resulting from direct links from our web site. We
recognize revenues from our share of the proceeds from our electronic
commerce partners' sales upon notification from our partners of sales
attributable to our web site. To date, revenues from electronic commerce
arrangements have not been significant. We also earn additional revenue on
sponsorship contracts for fees relating to the design, coordination, and
integration of the customer's content and links. We recognize these
development fees as revenue once the related activities have been
performed.
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RESULTS OF OPERATIONS
Revenues
Revenues increased to $3.2 million for the three months ended March
31, 1999 from $394,000 for the three months ended March 31, 1998, an
increase of 711%. The period to period growth in revenues resulted from an
increase in (1) the number of advertisers as well as the average commitment
per advertiser, (2) our web site traffic, (3) the number of sales people
and (4) marketing and advertising expenditures. Advertising revenues were
$2.6 million or 83% of total revenues for the three months ended March 31,
1999 and $332,000 or 84% of total revenues for the three months ended March
31, 1998. Since March 1999, we significantly increased our sales force,
relaunched our web site, and began a marketing campaign to promote
theglobe.com web site. We anticipate that advertising revenues will
continue to account for a substantial share of our total revenues for the
foreseeable future. Other revenues were derived from membership service
fees, development fees, electronic commerce revenue shares and sponsorship
placements within our web site. At March 31, 1999, we had deferred revenues
of approximately $647,600. Barter revenues were approximately 4% of total
revenues for each of the three months ended March 31, 1999 and 1998.
Cost of Revenues
Cost of revenues consist primarily of Internet connection charges, web
site equipment leasing costs, depreciation, maintenance, barter advertising
expenses, cost of merchandise sold, shipping and handling fees, staff costs
and related expenses of operations personnel. Gross margins were 59% for
the three months ended March 31, 1999 and 46% for the three months ended
March 31, 1998. The increase in gross margin was primarily due to an
increase in revenues relative to the increase in cost of revenues. The
absolute dollar increase in cost of revenues was due to an increase in
Internet connection costs to support the increase in web site traffic, as
well as an increase in equipment costs, depreciation and staff costs
required to support the expansion of our site and services. With the
addition of Azazz, cost of revenues also increased as a result of cost of
merchandise sold and shipping and handling fees. In addition, we recorded
barter advertising expenses during the three months ended March 31, 1999
and 1998, which is equivalent to the barter advertising revenues recorded
in the same period. The gross margins exclusive of the barter transactions
were 61% for the three months ended March 31, 1999 and 48% for the three
months ended March 31, 1998.
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 approximately $2.1 million or 65% of total
revenue for the three months ended March 31, 1999 from $1.4 million or 358%
of total revenues for the three months ended March 31, 1998. The period to
period increase in sales and marketing expenses in absolute dollars was
primarily attributable to increased sales and marketing personnel and
related expenses required to implement our branding and marketing strategy.
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Product Development Expenses
Product development expenses include professional fees, staff costs
and related expenses associated with the development, testing and upgrades
to our web site as well as expenses related to its editorial content and
community management and support. Product development expenses increased to
approximately $2.1 million or 66% of total revenues for the three months
ended March 31, 1999 from $85,500 or 22% of total revenues for the three
months ended March 31, 1998. The increase in product development expenses
was primarily attributable to increased staffing levels required to support
our web site and to enhance its content and features. Product development
expenses also increased as a result of added features in connection with
the launch of our site redesign in November 1998. We intend to continue
recruiting and hiring experienced product development personnel and to make
additional investments in product development.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and
related costs for general corporate functions, including finance, human
resources, facilities and legal, along with professional fees and other
corporate expenses. General and administrative expenses increased to $2.8
million or 86% of total revenues for the three months ended March 31, 1999
from $1.1 million or 279% of total revenues for the three months ended
March 31, 1998, an increase of approximately $1.7 million. The absolute
dollar increase in these expenses was primarily due to increased salaries
and related expenses associated with increased staffing in order to build
our basic infrastructure, 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 increase
was also due to costs related to us operating as a public company such as
directors' and officers' liability insurance, investor relations programs
and professional service fees. We expect that we will incur additional
general and administrative expenses as we hire additional personnel and
incur additional costs related to the growth of the business. Accordingly,
we anticipate that general and administrative expenses will continue to
increase in absolute dollars.
Amortization of Goodwill and Intangible Assets
We recorded amortization of approximately $1.4 million in the first
quarter 1999. This amortization is in connection with the acquisition of
Azazz in February 1999. The goodwill and purchased intangibles of
approximately $22.7 million related to this acquisition is being amortized
over the expected period of benefit ranging from two to three years (three
years for goodwill). There was no similar charge in 1997.
Interest and Other Income, net
Interest and other income, net includes interest income from our cash
and investments, interest expenses related to our capital lease obligations
and realized gains and losses from the sale of short-term investments.
Other income decreased from approximately $455,000 for the three months
ended March 31, 1998 to approximately $196,000 for the three months ended
March 31, 1999. The decrease in other income was due to an increase in
interest expense related to new capital lease obligations, which the
Company entered into subsequent to March 1998.
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Income Taxes
Income taxes of $45,889 for the three months ended March 31, 1999 were
based solely on state and local taxes on business and investment capital.
Our effective tax rate differs from the statutory federal income tax rate,
primarily as a result of the uncertainty regarding our ability to utilize
our net operating loss carryforwards. Due to the uncertainty surrounding
the timing or realization of the benefits of our net operating loss
carryforwards in future tax returns, we have placed a valuation allowance
against our otherwise recognizable deferred tax assets. As of December 31,
1998, we had approximately $29.2 million of federal net operating loss
carryforwards for tax reporting purposes available to offset future taxable
income. Our federal net operating loss carryforwards expire beginning 2001
through 2018, if not utilized. The Tax Reform Act of 1986 imposes
substantial restrictions on the utilization of net operating losses and tax
credits in the event of an "ownership change" of a corporation. Due to the
change in our ownership interests in the third quarter of 1997, as defined
in the Internal Revenue Code of 1986, as amended (the "Code"), future
utilization of our net operating loss carryforwards will be subject to
certain limitations or annual restrictions.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, we had approximately $11.2 million in cash and
cash equivalents and approximately $11.7 million in marketable securities.
Net cash used in operating activities was $4.7 million and $2.9 million for
the three months ended March 31, 1999 and 1998, respectively. The increase
in net cash used resulted primarily from an increase in our net cash
operating losses which do not give effect to our amortization expense
related to our acquisition of Azazz as well as payments made in 1998
related to our 1997 accrued compensation.
Net cash (used) provided by investing activities was $(13.1) million
and $2.4 million for the three months ended March 31, 1999 and 1998,
respectively. Net cash used in investing activities for the three months
ended March 31, 1999 was primarily related to the purchase of short-term
investments with the proceeds from our initial public offering, as well as,
security deposit payments associated with our new office space lease. For
the three months ended March 31, 1998, the net cash provided by investing
activities was primarily related to the sale of short-term investments in
order to finance our operating expenses. In each period, additional cash
was used to purchase property and equipment in connection with the build
out of our infrastructure.
Net cash used in financing activities was approximately $136,000 and
$33,000 for the three months ended March 31, 1999 and 1998, respectively.
Net cash used in financing activities for the three months ended March 31,
1999 consisted primarily of payments under our capital lease obligations
partially offset by proceeds from the exercise of common stock options. For
the three months ended March 31, 1998, cash used in financing activities
was related to the payment of capital lease obligations.
On February 1, 1999, we purchased factorymall.com, an interactive
department store doing business as Azazz.com, which is being integrated
into our electronic commerce site, known as "shop.theglobe.com." We expect
to invest an aggregate of up to approximately $3.8 million of working
capital in 1999 to support the future operation of shop.theglobe.com. On
April 9, 1999,
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we purchased Attitude Network, an online provider of
entertainment content. We expect to invest an aggregate of up to $3.5
million of working capital in 1999 to support the future operations of
Attitude Network.
Our capital requirements depend on numerous factors, including market
acceptance of our services, the amount of resources we devote to
investments in our web site, the resources we devote to marketing and
selling our services and our brand promotions and other factors. We have
experienced a substantial increase in our capital expenditures and lease
arrangements since our inception consistent with the growth in our
operations and staffing, and we anticipate that this will continue for the
foreseeable future. Additionally, we will continue to evaluate possible
investments in businesses, products and technologies, and we plan to expand
our sales force. On April 13, 1999 we filed a registration statement with
the Securities and Exchange Commission that will permit us to sell
8,000,000 shares of our common stock in a public offering. We are selling
4,000,000 shares of common stock and existing stockholders are selling an
additional 4,000,000 shares. We believe that the net proceeds from the
offering, together with our current cash and cash equivalents, will be
sufficient to meet our anticipated cash needs for working capital and
capital expenditures for our existing business for the foreseeable future.
However, we may need to raise funds during 1999 or thereafter to obtain or
operate any additional acquired businesses or joint venture arrangements.
See "Risk Factors--We may need to raise additional funds, including through
the issuance of debt."
IMPACT OF THE YEAR 2000
The Year 2000 issue is the potential for system and processing
failures of date-related data and the result of computer-controlled systems
using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the 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. We may be affected by Year 2000 issues related to
non-compliant information technology systems or non-information technology
systems operated by us or by third parties. We have substantially completed
an assessment of our internal and external third-party information
technology systems and non-information technology systems and a test of the
information technology systems that support our web site. At this point in
our assessment and testing, we are not aware of any Year 2000 problems
relating to systems we or third parties operate that would have a material
effect on our business or financial condition, without taking into account
our efforts to avoid these problems. However, we cannot assure you that
there will be no Year 2000 problems.
Our information technology systems consist of software developed
either in-house or purchased from third parties, and hardware purchased
from vendors. We have contacted our principal vendors of hardware and
software. All of those contacted vendors have notified us that the hardware
and software that they supplied to us is Year 2000 compliant.
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We have also substantially completed an assessment of our
non-information technology systems which we have identified as possibly
having Year 2000 issues. At this point in our assessment, we are not aware
of any Year 2000 problems relating to these systems which would have a
material effect on our business or financial condition, without taking into
account our efforts to avoid these problems.
Our information technology systems and other business resources rely
on information technology systems and non-information technology systems
provided by service providers and therefore may be vulnerable to those
service providers' failure to remediate their own Year 2000 issues. These
service providers include those for our network and e-mail services and
landlords for our leased office spaces. We have contacted these principal
service providers and we have been notified that the information technology
and non-information technology systems which they provide to us are Year
2000 compliant.
Cost. Based on our assessment to date, we do not anticipate that costs
associated with remediating our non-compliant systems will be material.
Risks. To the extent that our assessment is finalized without
identifying any material non-compliant information technology or
non-information technology systems operated by us or by third parties, the
most reasonably likely worst case Year 2000 scenario is the failure of one
or more of our vendors of hardware or software or one or more providers of
non-information technology systems to properly identify any Year 2000
compliance issues and remediate any issues before the end of the second
quarter of 1999. A failure could prevent us from operating our business,
prevent users from accessing our web site or change the behavior of
advertising customers or persons accessing our web site. We believe that
the primary business risks, in the event of a failure, would include but
not be limited to:
o lost advertising revenues;
o increased operating costs;
o loss of customers or persons accessing our web site;
o other business interruptions of a material nature; and
o claims of mismanagement, misrepresentation, or breach of
contract.
Contingency Plan. As discussed above, we are engaged in an ongoing
Year 2000 assessment and testing. Following the completion of the
assessment, we plan to conduct a full-scale Year 2000 simulation of our
information technology systems by the end of the second quarter of 1999.
The results of this simulation and our assessment will be taken into
account in determining the nature and extent of any contingency plans.
EFFECTS OF INFLATION
Due to relatively low levels of inflation in 1996, 1997, 1998 and 1999
inflation has not had a significant effect on our results of operations
since inception.
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IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
We adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" as of January
1, 1998. SFAS No. 130 requires us to report in our financial statements, in
addition to our net income (loss), comprehensive income (loss), which
includes all changes in equity during a period from non-owner sources
including, as applicable, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on investments in debt and
equity securities. We adopted SFAS 130 as of December 31, 1997 and have
presented comprehensive income for all periods presented in the statement
of stockholders' equity.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. We have determined that we do not
have any separately reportable business segments.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which
establishes guidelines for the accounting for the costs of all computer
software developed or obtained for internal use. We adopted SOP 98-1
effective for the year ended December 31, 1998. The adoption of SOP 98-1 is
not expected to have a material impact on our consolidated financial
statements.
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. The statement is not expected to affect us as we do
not have any derivative instruments or hedging activities.
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RISK FACTORS
OUR LIMITED OPERATING HISTORY MAKES FINANCIAL FORECASTING DIFFICULT.
theglobe was founded in May 1995. Accordingly, we have a limited
operating history for you to use in evaluating us and our prospects. Our
prospects should be considered in light of the risks encountered by
companies in the early stages of development, particularly companies
operating in new and rapidly evolving markets like the Internet. We may not
successfully address these risks. For example, we may not be able to:
o maintain and increase levels of user and member traffic on our
web site;
o maintain and increase the percentage of our advertising
inventory sold;
o adapt to meet changes in our markets and competitive
developments;
o develop or acquire content for our services;
o generate electronic commerce-related revenues; and
o identify, attract, retain and motivate qualified personnel.
REVENUE GROWTH IN PRIOR PERIODS MAY NOT BE INDICATIVE OF FUTURE GROWTH.
We achieved significant revenue growth in 1998 and in the first
quarter of 1999. Our limited operating history makes prediction of future
growth difficult. Accurate predictions of future growth are also difficult
because of the rapid changes in our markets. Accordingly, investors should
not rely on past revenue growth rates as a prediction of future growth.
WE ANTICIPATE INCREASED OPERATING EXPENSES AND EXPECT TO CONTINUE TO
INCUR LOSSES.
To date, we have not been profitable, and we expect that we will
continue to incur net losses for the foreseeable future. We had net losses
of approximately $750,200 for 1996, $3.6 million for 1997, $16.0 million
for 1998, and $6.3 million for the three months ended March 31, 1999. As of
March 31, 1999, we had an accumulated deficit of approximately $26.7
million. The principal causes of our losses are likely to continue to be:
o increased general and administrative expenses;
o costs resulting from enhancement of our services;
o significant increases in operating expenses in the next several
years, especially in the areas of sales and marketing;
o increased expenses necessary to maintain and develop brand
identity;
o growth of our sales force;
o expansion of our business facilities; and
o failure to generate sufficient revenue in light of increased
costs.
We will need to generate significantly increased revenues to achieve
profitability, particularly if we are unable to adjust our expenses in
light of any earnings shortfall. We cannot assure you that we will ever
achieve or sustain profitability.
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OUR QUARTERLY OPERATING RESULTS FLUCTUATE AND VARY BY SEASON.
Our quarterly revenues, expenses and operating results have varied
significantly in the past and are likely to vary significantly from quarter
to quarter in the future. As a result, quarter to quarter comparisons of
our revenues and operating results may not be meaningful. In addition, due
to our limited operating history and our new and unproven business model,
we cannot predict our future revenues or results of operations accurately.
It is likely that in one or more future quarters our operating results will
fall below the expectation of securities analysts and investors. If this
happens, the trading price of our common stock would almost certainly be
materially and adversely affected.
The factors which will cause our quarterly operating results to
fluctuate include:
o the level of traffic on our web site;
o the overall demand for Internet advertising and electronic
commerce;
o the addition or loss of advertisers and electronic commerce
partners on our web site;
o usage of the Internet;
o seasonal trends in advertising and electronic commerce sales
and member usage;
o capital expenditures and other costs relating to the expansion
of our operations;
o the incurrence of costs relating to acquisitions; and
o the timing and profitability of acquisitions, joint ventures
and strategic alliances.
We derive a substantial portion of our revenues from the sale of
advertising under short-term contracts. These contracts average one to
three months in length. As a result, our quarterly revenues and operating
results are, to a significant extent, dependent on advertising revenues
from contracts entered into within the quarter, and on our ability to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. We believe that advertising sales in traditional media, such as
television and radio, generally are lower in the first and third calendar
quarters. If the Internet transitions from an emerging to a more developed
form of media, these same patterns may develop in Internet advertising
sales. Internet advertising expenditures may also develop a different
seasonality pattern. Traffic levels on our site and the Internet have
typically declined during the summer and year-end vacation and holiday
periods.
In addition to selling advertising, an increasing portion of our
revenues may be generated from electronic commerce through our Azazz
subsidiary. We also have existing electronic commerce arrangements with
third parties for the sale of merchandise on our web site which are
terminable upon short notice. As a result, our revenues from electronic
commerce may fluctuate significantly from period to period depending on the
level of demand for electronic commerce on our site and the continuation of
our electronic commerce arrangements.
WE DEPEND ON OUR MEMBERS FOR CONTENT AND PROMOTION.
We depend substantially upon member involvement for content and
word-of-mouth promotion. Particularly, we depend upon the voluntary efforts
of some highly motivated members who are most active in developing content
to attract other Internet users to our site. This member involvement
reduces the need for us to spend funds on content development and site
promotion. However, we cannot assure you that these members will continue
to effectively generate significant content or promote our site. Our
business may be materially and adversely affected if
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our most highly active members become dissatisfied with our services or our
focus on the commercialization of those services or for any other reason
stop generating content that effectively promotes our site.
OUR BUSINESS MODEL IS NEW AND UNPROVEN.
Our business model is new and relatively unproven. This model depends
upon our ability to obtain more than one type of revenue source by using
our community platform. To be successful, we must, among other things,
develop and market products and services that achieve broad market
acceptance by our users, advertisers and electronic commerce vendors. We
must also develop significant electronic commerce revenues by marketing
products directly to users and having users purchase products through our
site. We cannot assure you that any Internet community, including our site,
will achieve broad market acceptance. We also cannot assure you that our
business model will be successful, that it will sustain revenue growth or
that it will be profitable.
Additionally, the market for our products and services is new, rapidly
developing and characterized by an increasing number of market entrants. As
is typical of most new and rapidly evolving markets, demand and market
acceptance for recently introduced products and services are highly
uncertain and risky. Moreover, because this market is new and rapidly
evolving, we cannot predict our future growth rate, if any. If this market
fails to develop, develops more slowly than expected or becomes saturated
with competitors, or if our products and services do not achieve or sustain
market acceptance, our business would be materially and adversely affected.
OUR ACQUISITIONS OR JOINT VENTURES ENTAIL NUMEROUS RISKS AND UNCERTAINTIES.
As part of our business strategy, we review acquisition prospects or
joint ventures that we expect to complement our existing business, increase
our traffic, augment the distribution of our community, enhance our
technological capabilities or increase our electronic commerce revenues. On
February 1, 1999, we acquired Azazz.com to develop electronic commerce
retailing on our site. On April 9, 1999, we acquired Attitude Network to
add two leading game enthusiast web sites to our entertainment theme. We
have been approached from time to time to consider and evaluate potential
business combinations, either involving potential investments in our common
stock, or other business combinations or joint ventures, or our acquisition
of other companies. If consummated, any such transaction could result in a
change of control of our company or could otherwise be material to our
business or to your investment in our common stock. We are currently in
discussions or negotiations for various of these kinds of transactions,
some of which may be material, but we have not reached any binding
agreements. These transactions may or may not be consummated. Our future
acquisitions or joint ventures could result in numerous risks and
uncertainties, including:
o potentially dilutive issuances of equity securities, which may
be freely tradable in the public market;
o large and immediate write-offs;
o the incurrence of debt and contingent liabilities or amortization
expenses related to goodwill and other intangible assets;
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o difficulties in the assimilation of operations, personnel,
technologies, products and information systems of the acquired
companies;
o the diversion of management's attention from other business
concerns;
o the risks of entering geographic and business markets in which
we have no or limited prior experience such as electronic commerce
retailing;
o the risk that the acquired business will not perform as
expected; and
o risks associated with international expansion.
WE MAY BE UNSUCCESSFUL IN DEVELOPING BRAND AWARENESS; BRAND IDENTITY
IS CRITICAL TO US.
We believe that establishing and maintaining awareness of
"theglobe.com" brand name is critical to attracting and expanding our
member base, the traffic on our web site and advertising and electronic
commerce relationships. If we fail to promote and maintain our brand or our
brand value is diluted, our business, operating results and financial
condition could be materially adversely affected. The importance of brand
recognition will increase because low barriers to entry continue to result
in an increased number of web sites. To promote our brand, we may be
required to continue to increase our financial commitment to creating and
maintaining brand awareness. We may not generate a corresponding increase
in revenues to justify these costs. Additionally, if members, other
Internet users, advertisers and customers do not perceive our community
experience to be of high quality, or if we introduce new services or enter
into new business ventures that are not favorably received by these
parties, the value of our brand could be diluted.
WE RELY SUBSTANTIALLY ON ADVERTISING REVENUES.
We derive a substantial portion of our revenues from the sale of
advertisements on our web site. We expect to continue to do so for the
foreseeable future. For the year ended December 31, 1998 and for the three
months ended March 31, 1999, advertising revenues represented 89% and 83%,
respectively, of our total revenues. Our business model and revenues are
highly dependent on the amount of traffic on our site. The level of traffic
on our site determines the amount of advertising inventory we can sell. Our
ability to generate significant advertising revenues depends, in part, on
our ability to create new advertising programs without diluting the
perceived value of our existing programs. Our ability to generate
advertising revenues will also depend, in part, on the following:
o advertisers' acceptance of the Internet as an attractive and
sustainable medium;
o advertisers' willingness to pay for advertising on the Internet
at current rates;
o the development of a large base of users of our products and
services;
o our level of traffic;
o the effective development of web site content that attracts
users having demographic characteristics attractive to
advertisers; and
o price competition among web sites.
We cannot assure you that the market for Internet advertising will
continue to emerge or become sustainable. If the Internet advertising
market develops slower than we expect, our business performance would be
materially adversely affected. To date, substantially all our advertising
contracts have been for terms averaging one to three months in length, with
relatively few longer term advertising contracts. Additionally, our
advertising customers may object to the
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placement of their advertisements on some members' personal homepages, the
content of which they deem undesirable. For any of the foregoing reasons,
we cannot assure you that our current advertisers will continue to purchase
advertisements on our site. We also compete with traditional advertising
media, including television, radio, cable and print, for a share of
advertisers' total advertising budgets. This results in significant pricing
pressures on our advertising rates, which could have a material adverse
effect on us.
WE RELY ON THIRD PARTIES OVER WHOM WE HAVE LIMITED CONTROL TO MANAGE THE
PLACEMENT OF ADVERTISING ON OUR WEB SITE.
The process of managing advertising within a large, high-traffic web
site such as ours is an increasingly important and complex task. We license
our advertising management system from DoubleClick, Inc. under an agreement
expiring April 15, 2000. DoubleClick may terminate the agreement upon 30
days' notice (1) if we breach the agreement or (2) if DoubleClick
reasonably determines that we have used their advertising management system
in a manner that could damage their technology or which reflects
unfavorably on DoubleClick's reputation. No assurance can be given that
DoubleClick would not terminate the agreement. Any termination and
replacement of DoubleClick's service could disrupt our ability to manage
our advertising operations. Additionally, we have entered into a contract
with Engage Technologies, Inc. for the license of proprietary software to
manage the placement of advertisements on our web site. This software is
still being implemented and our relationship under the contract has not yet
been material. There can be no assurance that this software will
effectively manage the placement of advertisements on our web site and that
errors will not occur.
To the extent that we encounter system failures or material
difficulties in the operation of our advertising management systems, we may
o be unable to deliver banner advertisements and sponsorships
through our site; and
o be required to provide additional impressions to our advertisers
after the contract term.
Our obligations to provide additional impressions would displace
saleable advertising inventory. This would reduce revenues and could have a
material adverse effect on us.
WE DEPEND SUBSTANTIALLY ON OUR KEY PERSONNEL.
Our performance is substantially dependent on the continued service of
our senior management and key technical personnel, all of whom have only
worked together for a short time. In particular, our success depends on the
continued efforts of our senior management team, especially our Co-Chief
Executive Officers, Co-Presidents, and co-founders, Todd V. Krizelman and
Stephan J. Paternot. We do not carry key person life insurance on any of
our personnel. The loss of the services of any of our executive officers or
other key employees would likely have a material adverse effect on our
business.
WE DEPEND ON HIGHLY QUALIFIED TECHNICAL AND MANAGERIAL PERSONNEL.
Our future success also depends on our continuing ability to attract,
retain and motivate highly qualified technical and managerial personnel.
Our business plan requires us to increase our
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employee base significantly over the next 12 months. Competition for
employees in our industry is intense. We may be unable to attract,
assimilate or retain highly qualified technical and managerial personnel in
the future. Wages for managerial and technical employees are increasing and
are expected to continue to increase in the future. We have from time to
time in the past experienced, and we expect to continue to experience in
the future, difficulty in hiring and retaining highly skilled employees
with appropriate qualifications. If we are unable to attract and retain the
technical and managerial personnel necessary to support the growth of our
business, our business would likely be materially and adversely affected.
WE MAY NOT EFFECTIVELY MANAGE OUR GROWTH; OUR MANAGEMENT TEAM IS
INEXPERIENCED IN THE MANAGEMENT OF A LARGE PUBLIC COMPANY.
Our recent growth has placed significant strains on our resources. To
manage our future growth, we must continue to implement and improve our
operational and financial software systems and expand and train our
employee base. Some of our key employees were hired during 1998, including
our Chief Operating Officer, who joined us in August 1998 and our Chief
Financial Officer, who joined us in July 1998. In addition, our Director of
Marketing, Director of Advertising Sales, General Counsel, Director of
Business Development, Director of Communications and Director of Human
Resources each have been with us for less than two years. Furthermore, the
members of our current senior management, other than the Chairman, have not
had any previous experience managing a public company or a large operating
company. Accordingly, we cannot assure you that:
o we will be able to effectively manage the expansion of our
operations;
o our key employees will be able to work together effectively as
a team to successfully manage our growth;
o we will be able to hire, train and manage our growing employee
base;
o our systems, procedures or controls will be adequate to support
our operations; and
o our management will be able to achieve the rapid execution
necessary to fully exploit the market opportunity for our
products and services.
Our inability to manage growth effectively could have a material
adverse effect on our business.
OUR CHAIRMAN AND VICE PRESIDENT OF CORPORATE DEVELOPMENT HAVE OTHER
INTERESTS AND TIME COMMITMENTS; WE HAVE CONFLICTS OF INTEREST WITH
SOME OF OUR DIRECTORS.
Because our Chairman and our Vice President of Corporate Development
are officers or employees of other companies, we will have to compete for
their time. Michael S. Egan is our Chairman. Mr. Egan serves as the
Chairman of our board of directors and as an executive officer with primary
responsibility for day-to-day strategic planning and financing
arrangements. Mr. Egan also is the controlling investor of Dancing Bear
Investments, an entity controlled by Mr. Egan, which is our largest
stockholder. Edward A. Cespedes is our Vice President of Corporate
Development with primary responsibility for corporate development
opportunities including mergers and acquisitions. Mr. Cespedes also serves
as a Managing Director of Dancing Bear Investments. Messrs. Egan and
Cespedes have not committed to devote any specific percentage of their
business time with us. Accordingly, we compete with Dancing Bear
Investments and Messr. Egan's other related entities for their time. In
April 1999, Mr. Egan was
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appointed to the board of directors of Lowestfare.com, an entity with which
we have a premier partner relationship.
We have begun advertising electronic commerce arrangements with
entities controlled by Mr. Egan and by AutoNation, Inc., an entity
affiliated with H. Wayne Huizenga, one of our directors. These arrangements
were not the result of arm's-length negotiations, but we believe that the
terms of these arrangements are on comparable terms as if they were entered
into with unaffiliated third parties. 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 us. We intend to review related party
transactions in the future on a case-by-case basis.
WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL AND OTHER CHANGES.
The markets in which we compete are characterized by:
o rapidly changing technology;
o evolving industry standards;
o frequent new service and product announcements, introductions
and enhancements; and
o changing consumer demands.
We may not be able to keep up with these rapid changes. In addition,
these market characteristics are heightened by the emerging nature of the
Internet and the apparent need of companies from varying industries to
offer Internet-based products and services. As a result, our future success
depends on our ability to adapt to rapidly changing technologies and
standards. We will also need to continually improve the performance,
features and reliability of our services in response to competitive
services and product offerings and the evolving demands of the marketplace.
In addition, the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could
require us to incur substantial expenditures to modify our services or
infrastructure and could fundamentally affect the nature of our business.
WE HAVE CAPACITY CONSTRAINT AND SYSTEM DEVELOPMENT RISKS.
A key element of our strategy is to generate a high volume of user
traffic. Our ability to attract advertisers and to achieve market
acceptance of our products and services and our reputation depend
significantly upon the performance of our network infrastructure, including
our server, hardware and software. Any system failure, including network,
software or hardware failure, that causes an interruption in our service or
a decrease in responsiveness of our web site could result in reduced
traffic and reduced revenue, and could impair our reputation. Our web site
must accommodate a high volume of traffic and deliver frequently updated
information. Our web site has in the past and may in the future experience
slower response times for a variety of reasons, including system failures
and an increase in the volume of user traffic on our web site. Accordingly,
we face risks related to our ability to accommodate our expected customer
levels while maintaining superior performance. In addition, slower response
time may result in fewer users at our site or users spending less time at
our site. This would decrease the amount of inventory available for sale to
advertisers. Accordingly, any failure of our server and networking
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systems to handle current or higher volumes of traffic at sufficient
response times would have a material adverse effect on our business.
In the fourth quarter of 1998 and the first quarter of 1999, we moved
our principal servers to the New York Teleport facility in Staten Island,
New York under a lease with Telehouse International Corporation of America.
Telehouse International does not guarantee that our Internet access will be
uninterrupted, error-free or secure. We maintain computer hardware, servers
and operations relating to shop.theglobe.com in Seattle, Washington which
are hosted by Exodus Communications, Inc. Additionally, we maintain
computer hardware, servers and operations relating to Attitude Network in
Herndon, Virginia which are hosted by Frontier GlobalCenter, and in London,
England, which are hosted by Telehouse International. Although each of
Exodus, Frontier and Telehouse provides comprehensive facilities management
services, including human and technical monitoring of all production
servers 24 hours-per-day, seven days-per-week, neither Exodus, Frontier nor
Telehouse guarantees that our Internet access will be uninterrupted,
error-free or secure. Our operations depend on the ability to protect our
systems against damage from unexpected events, including fire, power loss,
water damage, telecommunications failures and vandalism. Any disruption in
our Internet access could have a material adverse effect on us. In
addition, computer viruses, electronic break-ins or other similar
disruptive problems could also materially adversely affect our web site.
Our reputation and theglobe.com brand could be materially and adversely
affected by any problems to our site. Our insurance policies may not
adequately compensate us for any losses that may occur due to any failures
or interruptions in our systems. We do not presently have any secondary
off-site systems or a formal disaster recovery plan.
In addition, our users depend on Internet service providers, online
service providers and other web site operators for access to our web sites.
Many of them have experienced significant outages in the past, and could
experience outages, delays and other difficulties due to system failures
unrelated to our systems. Moreover, the Internet infrastructure may not be
able to support continued growth in its use. Furthermore, we depend on
hardware suppliers for prompt delivery, installation and service of
equipment used to deliver our products and services. Any of these problems
could materially adversely affect our business.
HACKERS MAY ATTEMPT TO PENETRATE OUR SECURITY SYSTEM; ONLINE SECURITY
BREACHES COULD HARM OUR BUSINESS.
Consumer and supplier confidence in our web site depends on
maintaining relevant security features. Substantial or ongoing security
breaches on our system or other Internet-based systems could significantly
harm our business. We incur substantial expenses protecting against and
remedying security breaches. Security breaches also could damage our
reputation and expose us to a risk of loss or litigation. Experienced
programmers or "hackers" have successfully penetrated our system and we
expect that these attempts will continue to occur from time to time.
Because a hacker who is able to penetrate our network security could
misappropriate proprietary information or cause interruptions in our
products and services, we may have to expend significant capital and
resources to protect against or to alleviate problems caused by these
hackers. Additionally, we may not have a timely remedy against a hacker who
is able to penetrate our network security. Such security breaches could
materially adversely affect our company. In addition, the transmission of
computer viruses resulting from hackers or otherwise could expose us to
significant liability. Our insurance policies carry low coverage limits,
which may not be
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adequate to reimburse us for losses caused by security breaches. We also
face risks associated with security breaches affecting third parties with
whom we have relationships.
COMPETITION FOR MEMBERS, USERS AND ADVERTISERS, AS WELL AS COMPETITION
IN THE ELECTRONIC COMMERCE MARKET IS INTENSE AND IS EXPECTED TO INCREASE
SIGNIFICANTLY.
The market for members, users and Internet advertising among web sites
is new and rapidly evolving. Competition for members, users and
advertisers, as well as competition in the electronic commerce market, is
intense and is expected to increase significantly. Barriers to entry are
relatively insubstantial and we believe we will face competitive pressures
from many additional companies both in the United States and abroad.
Accordingly, pricing pressure on advertising rates will increase in the
future which could have a material adverse effect on us. All types of web
sites compete for users. Competitor web sites include community sites, as
well as "gateway" or "portal" sites and various other types of web sites.
We believe that the principal competitive factors in attracting users to a
site are:
o functionality of the web site;
o brand recognition;
o member affinity and loyalty;
o broad demographic focus;
o open access for visitors;
o critical mass of users, particularly for community-type sites; and
o services for users.
We compete for users, advertisers and electronic commerce marketers
with the following types of companies:
o other online community web sites, such as GeoCities, which has
agreed to be acquired by Yahoo!; Tripod and AngelFire,
subsidiaries of Lycos; and Xoom.com;
o search engines and other Internet "portal" companies, such as
Excite, InfoSeek, Lycos and Yahoo!;
o online content web sites, such as CNET, ESPN.com and ZDNet.com;
o publishers and distributors of television, radio and print, such
as CBS, NBC and CNN/Time Warner;
o general purpose consumer online services, such as America Online
and Microsoft Network;
o web sites maintained by Internet service providers, such as AT&T
WorldNet, EarthLink and MindSpring;
o electronic commerce web sites, such as Amazon.com, Etoys and
CDNow; and
o other web sites serving game enthusiasts, including Ziff Davis'
Gamespot and CNET's Gamecenter.
Additional competitive factors specific to attracting advertisers
include the ability to offer targeted audiences and the overall cost
effectiveness of the advertising medium we offer. We will also need to
continue to increase significantly our user base and traffic to compete
effectively.
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Many of our competitors, including other community sites, have
announced that they are contemplating developing Internet navigation
services and are attempting to become "gateway" or "portal" sites through
which users may enter the web. In the event these companies develop
successful "portal" sites, we could lose a substantial portion of our user
traffic. Furthermore, many non-community sites are seeking to develop
community aspects in their sites.
Many of our existing and potential competitors, including companies
operating web directories and search engines, and traditional media
companies, have the following advantages:
o longer operating histories in the Internet market,
o greater name recognition;
o larger customer bases; and
o significantly greater financial, technical and marketing
resources.
In addition, providers of Internet tools and services, including
community-type sites, may be acquired by, receive investments from, or
enter into other commercial relationships with larger, well-established and
well-financed companies, such as Microsoft and America Online. For example,
Excite has agreed to be acquired by At Home, America Online agreed to
acquire Netscape and Xoom announced a transaction in which NBC would merge
some of its online assets with Xoom. In addition, there has been other
significant consolidation in the industry. This consolidation may continue
in the future. We could face increased competition in the future from
traditional media companies, including cable, newspaper, magazine,
television and radio companies. A number of these large traditional media
companies, including Disney, CBS and NBC, have been active in Internet
related activities. Those competitors may be able to undertake more
extensive marketing campaigns for their brands and services, adopt more
aggressive advertising pricing policies and make more attractive offers to
potential employees, distribution partners, electronic commerce companies,
advertisers, third-party content providers and acquisition targets.
Furthermore, our existing and potential competitors may develop sites that
are equal or superior in quality to, or that achieve greater market
acceptance than, our site. We cannot assure you that advertisers may not
perceive our competitors' sites as more desirable than ours.
To compete with other web sites, we plan to develop and introduce new
features and functions, such as increased capabilities for user
personalization and interactivity. We also plan to develop and introduce
new products and services, such as new content targeted for specific user
groups with particular demographic and geographic characteristics. These
improvements will require us to spend significant funds and may require the
development or licensing of increasingly complex technologies. Enhancements
of or improvements to our web site may contain undetected programming
errors that require significant design modifications, resulting in a loss
of customer confidence and user support and a decrease in the value of our
brand name. Our failure to effectively develop and produce new features,
functions, products and services could affect our ability to compete with
other web sites. This could have a material adverse effect on us.
Web browsers offered by Netscape and Microsoft also increasingly
incorporate prominent search buttons that direct traffic to competing
services. These features could make it more difficult for Internet users to
find and use our product and services. In the future, Netscape, Microsoft
and other browser suppliers may also more tightly integrate products and
services similar to ours into their browsers or their browsers' pre-set
home page. Additionally, entities that
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sponsor or maintain high-traffic web
sites or that provide an initial point of entry for Internet viewers, such
as the Regional Bell Operating Companies, cable companies or Internet
service providers, such as Microsoft and America Online, offer and can be
expected to consider further development, acquisition or licensing of
Internet search and navigation functions that compete with us. These
competitors could also take actions that make it more difficult for viewers
to find and use our products and services.
Additionally, the electronic commerce market is new and rapidly
evolving, and we expect competition among electronic commerce merchants to
increase significantly. Because the Internet allows consumers to easily
compare prices of similar products or services on competing web sites and
there are low barriers to entry for potential competitors, gross margins
for electronic commerce transactions may narrow in the future. Many of the
products that we sell on our web site may be sold by the maker of the
product directly or by other web sites. Competition among Internet
retailers, our electronic commerce partners and product makers may have a
material adverse effect on our ability to generate revenues through
electronic commerce transactions or from these electronic commerce
partners.
WE DEPEND ON THE CONTINUED GROWTH IN THE USE AND COMMERCIAL VIABILITY
OF THE WEB.
Our market is new and rapidly evolving. Our business is substantially
dependent upon the continued rapid growth in the use of the Internet and
electronic commerce on the Internet becoming more widespread. Commercial
use of the Internet is relatively new. Web usage may be inhibited for a
number of reasons, including:
o inadequate network infrastructure;
o security and authentication concerns with respect to
transmission over the Internet of confidential information,
including credit card numbers, or other personal information;
o ease of access;
o inconsistent quality of service;
o availability of cost-effective, high-speed service; and
o bandwidth availability.
If the Internet develops as a commercial medium more slowly than we
expect, it will adversely affect our business. Additionally, if web usage
grows, the Internet infrastructure may not be able to support the demands
placed on it by this growth or its performance and reliability may decline.
Web sites have experienced interruptions in their service as a result of
outages and other delays occurring throughout the Internet network
infrastructure. If these outages or delays frequently occur in the future,
web usage, as well as usage of our web site, could grow more slowly or
decline. Also, the Internet's commercial viability may be significantly
hampered due to:
o delays in the development or adoption of new operating and
technical standards and performance improvements required to
handle increased levels of activity;
o increased government regulation; and
o insufficient availability of telecommunications services which
could result in slower
response times and adversely affect usage of the Internet.
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WE MAY BE MATERIALLY ADVERSELY AFFECTED IF ELECTRONIC COMMERCE DOES NOT
BECOME A VIABLE SOURCE OF SIGNIFICANT REVENUES FOR THEGLOBE.COM. IN
ADDITION, OUR ELECTRONIC COMMERCE BUSINESS MAY RESULT IN SIGNIFICANT
LIABILITY CLAIMS AGAINST US.
In the first quarter of 1999, we acquired Azazz, which is a direct
marketer of products over the Internet. However, we have limited experience
in the sale of products online and the development of relationships with
manufacturers and suppliers of these products. We also face many
uncertainties which may affect our ability to generate electronic commerce
revenues, including:
o our ability to obtain new customers at a reasonable cost,
retain existing customers and encourage repeat purchases;
o the likelihood that both online and retail purchasing trends
may rapidly change;
o the level of product returns;
o merchandise shipping costs and delivery times;
o our ability to manage inventory levels;
o our ability to secure and maintain relationships with vendors;
o the possibility that our vendors may sell their products
through other sites; and
o intense competition for electronic commerce revenues.
Accordingly, we cannot assure you that electronic commerce
transactions will provide a significant or sustainable source of revenues
or profits. Additionally, due to the ability of consumers to easily compare
prices of similar products or services on competing web sites, gross
margins for electronic commerce transactions may narrow in the future and,
accordingly, our revenues and profits from electronic commerce arrangements
may be materially negatively impacted. If use of the Internet for
electronic commerce does not continue to grow, our business and financial
condition would be materially and adversely affected.
Additionally, consumers may sue us if any of the products that we sell
are defective, fail to perform properly or injure the user. Some of our
agreements with manufacturers contain provisions intended to limit our
exposure to liability claims. However, these limitations may not prevent
all potential claims. Liability claims could require us to spend
significant time and money in litigation or to pay significant damages. As
a result, any claims, whether or not successful, could seriously damage our
reputation and our business.
INTERNET ADVERTISING MAY NOT PROVE AS EFFECTIVE AS TRADITIONAL MEDIA.
The Internet advertising market is new and rapidly evolving. We cannot
yet gauge its effectiveness as compared to traditional advertising media.
Many of our current or potential advertising partners have little or no
experience using the Internet for advertising purposes and they have
allocated only a limited portion of their advertising budgets to Internet
advertising. The adoption of Internet advertising, particularly by those
entities that have historically relied upon traditional media, requires the
acceptance of a new way of conducting business, exchanging information and
advertising products and services. Advertisers that have traditionally
relied upon other advertising media may be reluctant to advertise on the
Internet or find it less effective.
No standards have been widely accepted to measure the effectiveness of
Internet advertising or to measure the demographics of our user base.
Additionally, no standards have
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been widely accepted to measure the number of members, unique users or page
views related to a particular site. We cannot assure you that any standards
will become available in the future or that standards will accurately
measure our users or the full range of user activity on our site. If
standards do not develop, advertisers may not advertise on the Internet. In
addition, we depend on third parties to provide these measurement services.
These measurements are often based on sampling techniques or other
imprecise measures and may materially differ from each other and from our
estimates. We cannot assure you that advertisers will accept our or other
parties' measurements. The rejection by advertisers of these measurements
could have a material adverse effect on our business and financial
condition.
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. For example, advertising rates may be based on the
number of user requests for additional information made by clicking on the
advertisement, known as "click throughs," or on the number of times an
advertisement is displayed to a user, known as "impressions." Our contracts
with advertisers typically guarantee the advertiser a minimum number of
impressions. To the extent that minimum impression levels are not achieved
for any reason, including the failure to obtain the expected traffic, our
contracts with advertisers may require us to provide additional impressions
after the contract term, which may adversely affect the availability of our
advertising inventory. This could have a material adverse effect on us.
Our revenues could be materially adversely affected if we are unable
to adapt to other pricing models for Internet advertising if they are
adopted. It is difficult to predict which, if any, pricing models for
Internet advertising will emerge as the industry standard. This makes it
difficult to project our future advertising rates and revenues.
Additionally, it is possible that Internet access providers may, in the
future, act to block or limit various types of advertising or direct
solicitations, whether at their own behest or at the request of users.
Moreover, "filter" software programs that limit or prevent advertising from
being delivered to an Internet user's computer are available. Widespread
adoption of this software could adversely affect the commercial viability
of Internet advertising.
WE DEPEND ON THIRD PARTIES TO INCREASE TRAFFIC ON OUR SITE AND TO
PROVIDE SOFTWARE AND PRODUCTS.
We are dependent on various web sites that provide direct links to our
site. These web sites may not attract significant numbers of users and we
may not receive a significant number of additional users from these
relationships. We also enter into agreements with advertisers, electronic
commerce marketers or other third-party web sites that require us to
exclusively feature these parties in particular areas or on particular
pages of our site. These exclusivity agreements may limit our ability to
enter into other relationships. Our agreements with third party sites do
not require future minimum commitments to use our services or provide
access to our site and may be terminated at the convenience of the other
party. Moreover, we do not have agreements with a majority of the web sites
that provide links to our site. These sites may terminate their links at
any time. Many companies we may pursue for strategic relationships offer
competing services. As a result, these competitors may be reluctant to
enter into strategic relationships with us. Our business could be
materially adversely affected if we do not establish and maintain strategic
relationships on commercially reasonable terms or if any of our strategic
relationships do not result in increased traffic on our web site.
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Additionally, we cannot assure you that we will be able to maintain
relationships with third parties that supply us with software or products
that are crucial to our success, or that these software or products will be
able to sustain any third-party claims or rights against their use.
Furthermore, we cannot assure you that the software, services or products
of those companies that provide access or links to our services or products
will achieve market acceptance or commercial success. Accordingly, we
cannot assure you that our existing relationships will result in sustained
business partnerships, successful service or product offerings or the
generation of significant revenues for us.
WE MAY NEED TO RAISE ADDITIONAL FUNDS, INCLUDING THROUGH THE
ISSUANCE OF DEBT.
We believe that the net proceeds from our secondary offering, together
with our current cash and cash equivalents, will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for our
existing business for the foreseeable future. However, we may need to raise
additional funds during 1999 or thereafter to obtain or operate any
additional acquired businesses or joint venture arrangements. We expect
that we will continue to experience negative operating cash flow for the
foreseeable future as a result of significant spending on advertising and
infrastructure. Accordingly, we may need to raise additional funds in a
timely manner in order to:
o fund our anticipated expansion;
o develop new or enhanced services or products;
o respond to competitive pressures;
o acquire complementary products, businesses or technologies; and
o enter into joint ventures.
If we raise additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of our stockholders
will be reduced. Stockholders may experience additional dilution and these
securities may have rights senior to those of the holders of our common
stock. We do not have any contractual restrictions on our ability to incur
debt. Any indebtedness could contain covenants which restrict our
operations. We cannot assure you that additional financing will be
available on terms favorable to us, or at all. If adequate funds are not
available or are not available on acceptable terms, our business could be
materially adversely effected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
WE RELY ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.
We regard substantial elements of our web site and underlying
technology as proprietary and attempt to protect them by relying on
intellectual property laws and restrictions on disclosure. We also
generally enter into confidentiality agreements with our employees and
consultants. In connection with our license agreements with third parties
we generally seek to control access to and distribution of our technology
and other proprietary information. Despite these precautions, it may be
possible for a third party to copy or otherwise obtain and use our
proprietary information without authorization or to develop similar
technology independently. Thus, we cannot assure you that the steps taken
by us will prevent misappropriation or infringement of our proprietary
information which could have a material adverse effect on our business. In
addition,
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our competitors may independently develop similar technology, duplicate our
products or design around our intellectual property rights.
We pursue the registration of our trademarks in the United States and
internationally. However, effective trademark and other intellectual
property protection may not be available in every country in which our
services are distributed or made available through the Internet. Policing
unauthorized use of our proprietary information is difficult. Legal
standards relating to the validity, enforceability and scope of protection
of proprietary rights in Internet-related businesses are also uncertain and
still evolving. We cannot assure you about the future viability or value of
any of our proprietary rights.
Litigation may be necessary in the future to enforce our intellectual
property rights or to determine the validity and scope of the proprietary
rights of others. Furthermore, we cannot assure you that our business
activities will not infringe upon the proprietary rights of others, or that
other parties will not assert infringement claims against us, including
claims related to providing hyperlinks to web sites operated by third
parties or providing advertising on a keyword basis that links a specific
search term entered by a user to the appearance of a particular
advertisement. Moreover, from time to time, third parties may assert claims
of alleged infringement by us or our members of their intellectual property
rights. Any litigation claims or counterclaims could impair our business
because they could:
o be time-consuming;
o result in costly litigation;
o subject us to significant liability for damages;
o result in invalidation of our proprietary rights;
o divert management's attention;
o cause product release delays; or
o require us to redesign our products or require us to enter
into royalty or licensing agreements that may not be available
on terms acceptable to us, or at all.
We license from third parties various technologies incorporated into
our site. As we continue to introduce new services that incorporate new
technologies, we may be required to license additional technology from
others. We cannot assure you that these third-party technology licenses
will continue to be available to us on commercially reasonable terms.
Additionally, we cannot assure you that the third parties from which we
license our technology will be able to defend our proprietary rights
successfully against claims of infringement. As a result, our inability 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 our existing services until equivalent technology can be
identified, licensed and integrated.
We own the Internet domain names "theglobe.com," "shop.theglobe.com,"
"tglo.com," "azazz.com," "happypuppy.com, " "realmx.com," "kidsdomain.com"
and "gamesdomain.com." The regulation of domain names in the United States
and in foreign countries may change. Regulatory bodies could establish
additional top-level domains, appoint additional domain name registrars or
modify the requirements for holding domain names, any or all of which may
dilute the strength of our names. We may not acquire or maintain our domain
names in all of the countries in which our web site may be accessed, or for
any or all of the top-level domain names that may be introduced. The
relationship between regulations governing domain names and laws
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protecting proprietary rights is unclear. Therefore, we may not be able to
prevent third parties from acquiring domain names that infringe or
otherwise decrease the value of our trademarks and other proprietary
rights.
WE MAY FACE INCREASED GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
IN OUR INDUSTRY.
There are an increasing number of federal, state, local and foreign
laws and regulations pertaining to the Internet. In addition, a number of
federal, state, local and foreign legislative and regulatory proposals are
under consideration. Laws or regulations may be adopted with respect to the
Internet relating to liability for information retrieved from or
transmitted over the Internet, online content regulation, user privacy and
quality of products and services. Changes in tax laws relating to
electronic commerce could materially effect our business. Moreover, the
applicability to the Internet of existing laws governing issues such as
intellectual property ownership and infringement, copyright, trademark,
trade secret, obscenity, libel, employment and personal privacy is
uncertain and developing. Any new legislation or regulation, or the
application or interpretation of existing laws or regulations, may decrease
the growth in the use of the Internet, may impose additional burdens on
electronic commerce or may alter how we do business. This could decrease
the demand for our services, increase our cost of doing business, increase
the costs of products sold through the Internet or otherwise have a
material adverse effect on our business, results of operations and
financial condition.
WE MAY BE EXPOSED TO LIABILITY FOR INFORMATION RETRIEVED FROM OR
TRANSMITTED OVER THE INTERNET OR FOR PRODUCTS SOLD OVER THE INTERNET.
Users may access content on our web site or the web sites of our
distribution partners or other third parties through web site links or
other means, and they may download content and subsequently transmit this
content to others over the Internet. This could result in claims against us
based on a variety of theories, including defamation, obscenity,
negligence, copyright, trademark infringement or the wrongful actions of
third parties. Other theories may be brought based on the nature,
publication and distribution of our content or based on errors or false or
misleading information provided on our web site. Claims have been brought
against online services in the past and we have received inquiries from
third parties regarding these matters. The claims could be material in the
future. We could also be exposed to liability for third party content
posted by members on their personal web pages or by users in our chat rooms
or on our bulletin boards.
Additionally, we offer e-mail service, which a third party provides.
The e-mail service may expose us to potential liabilities or claims
resulting from unsolicited e-mail, lost or misdirected messages, fraudulent
use of e-mail or delays in e-mail service. We also enter into agreements
with commerce partners and sponsors under which we are entitled to receive
a share of any revenue from the purchase of goods and services through
direct links from our site. After the Azazz acquisition in February 1999,
we also began selling products directly to consumers. Those arrangements
may expose us to additional legal risks, regulations by local, state,
federal and foreign authorities and potential liabilities to consumers of
these products and services, even if we do not ourselves provide these
products or services. We cannot assure you that any indemnification that
may be provided to us in some of these agreements with these parties will
be adequate.
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<PAGE>
Even if these claims do not result in our liability, we could incur
significant costs in investigating and defending against these claims. The
imposition of potential liability for information carried on or
disseminated through our systems could require us to implement measures to
reduce our exposure to liability. Those measures may require the
expenditure of substantial resources and limit the attractiveness of our
services. Additionally, our insurance policies may not cover all potential
liabilities to which we are exposed.
WE MAY HAVE TROUBLE EXPANDING INTERNATIONALLY.
A part of our strategy is to expand into foreign markets. In April
1999, we acquired Attitude Network, which operates Games Domain and Kids
Domain through a wholly-owned U.K. subsidiary. We have not previously
operated internationally. Additionally, we are not completely familiar with
U.K. law and its ramifications on our business. There can be no assurance
that the Internet or our community model will become widely accepted for
advertising and electronic commerce in any international markets. To expand
overseas we intend to seek to acquire additional web sites and enter into
relationships with foreign business partners. This strategy contains risks,
including:
o we may experience difficulty in managing international operations
because of distance, as well as language and cultural
differences;
o we or our future foreign business associates may not be able to
successfully market and operate our services in foreign markets;
o because of substantial anticipated competition, it will be
necessary to implement our business strategy quickly in
international markets to obtain a significant share of the
market; and
o we do not have the content or services necessary to substantially
expand our operations in many foreign markets.
We will unlikely be able to significantly penetrate these markets
unless we gain the relevant content, either through partnerships, other
business arrangements or possibly acquisitions with content-providers in
these markets. There are also risks inherent in doing business on an
international level, including:
o unexpected changes in regulatory requirements;
o trade barriers;
o difficulties in staffing and managing foreign operations;
o fluctuations in currency exchange rates and the introduction
of the euro;
o longer payment cycles in general;
o problems in collecting accounts receivable;
o difficulty in enforcing contracts;
o political and economic instability;
o seasonal reductions in business activity in certain other
parts of the world; and
o potentially adverse tax consequences.
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<PAGE>
VARIOUS STOCKHOLDERS, INDIVIDUALLY OR IN THE AGGREGATE, MAY CONTROL US.
Michael S. Egan, our Chairman, beneficially owns or controls, directly
or indirectly, 12,246,048 shares of our common stock which in the aggregate
represents approximately 45.3% of the outstanding shares of our common
stock. Todd V. Krizelman and Stephen J. Paternot, our Co-Chief Executive
Officers and Co-Presidents, together, beneficially own 15.4% of our common
stock. If the proposed secondary offering is consummated, Mr. Egan will
beneficially own or control, directly or indirectly, approximately 31.73%
of our common stock, and 27.87% if the over-allotment option is exercised
in full and Dancing Bear Investments, an entity he controls, determines to
sell stock to the underwriters upon such exercise and 30.55% if the
over-allotment option is exercised in full and we sell stock to the
underwriters upon such exercise. Messrs. Krizelman and Paternot, together,
will beneficially own approximately 12.39% of our common stock after the
proposed offering, and 12.39% if the over-allotment option is exercised and
provided by Mr. Egan and 11.87% if the over-allotment option is exercised
and provided by us. These stockholders, if acting together, would be able
to significantly influence all matters requiring approval by our
stockholders, including the election of directors and the approval of
mergers or other business combinations.
Messrs. Egan, Krizelman, Paternot and Edward A. Cespedes and Rosalie
V. Arthur, each of whom is a director of our company, and we have entered
into a stockholders' agreement. As a result of the stockholders' agreement,
Mr. Egan has agreed to vote for up to two nominees of Messrs. Krizelman and
Paternot to the board of directors and Messrs. Krizelman and Paternot have
agreed to vote for the nominees of Mr. Egan to the board, which will be up
to five directors. Consequently, Mr. Egan, Krizelman and Paternot control
the ability to elect a majority of our directors. In addition, collectively
Messrs. Egan, Krizelman and Paternot have the ability to control the
outcome of all issues submitted to a vote of our stockholders requiring
majority approval. Additionally, each party other than Mr. Egan has granted
an irrevocable proxy with respect to all matters subject to a stockholder
vote to Dancing Bear Investments, Inc., an entity controlled by Mr. Egan,
for any shares held by that party received upon the exercise of outstanding
warrants for 500,000 shares of our common stock. The stockholders'
agreement also provides for tag-along and drag-along rights in connection
with any private sale of these securities.
THE YEAR 2000 ISSUE MAY AFFECT OUR OPERATIONS.
Year 2000 issues related to non-compliant information technology
systems or non-information technology systems operated by us or by third
parties may affect us. We have substantially completed an assessment of our
internal and external third-party information technology systems and
non-information technology systems and a test of the information technology
systems that support our web site. At this point in our assessment and
testing, we are not aware of any Year 2000 problems relating to systems
operated by us or by third parties that would have a material effect on our
business, without taking into account our efforts to avoid these problems.
Based on our assessment to date, we do not anticipate that costs associated
with remediating our non-compliant information technology systems or
non-information technology systems will be material, although we cannot
assure you that this will be the case. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Impact of the
Year 2000."
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<PAGE>
To the extent that we finalize our assessment without identifying any
material non-compliant information technology systems operated by us or by
third parties, the most reasonably likely worst case Year 2000 scenario is
the failure of one or more of our vendors of hardware or software or one or
more providers of non-information technology systems to properly identify
any Year 2000 compliance issues and remediate any issues before December
31, 1999. A failure could prevent us from operating our business, prevent
users from accessing our web site, or change the behavior of advertising
customers or persons accessing our web site. We believe that the primary
business risks, in the event of a failure, would include, but not be
limited to:
o lost advertising revenues;
o increased operating costs;
o loss of customers or persons accessing our web site;
o other business interruptions of a material nature; and
o claims of mismanagement, misrepresentation, or breach of
contract.
Any of these risks could have a material adverse effect on our business.
OUR STOCK PRICE IS VOLATILE.
The trading price of our common stock has been volatile and may
continue to be volatile in response to various factors, including:
o quarterly variations in our operating results;
o competitive announcements;
o changes in financial estimates by securities analysts;
o the operating and stock price performance of other companies
that investors may deem comparable to us; and
o news relating to trends in our markets.
The stock market has experienced significant price and volume
fluctuations, and the market prices of technology companies, particularly
Internet-related companies, have been highly volatile. In the past,
following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted
against a company. Litigation, if instituted, whether or not successful,
could result in substantial costs and a diversion of management's attention
and resources, which would have a material adverse effect on our business.
THE SALE OF SHARES ELIGIBLE FOR FUTURE SALE IN THE OPEN MARKET COULD
DEPRESS OUR STOCK PRICE.
Sales of significant amounts of common stock in the public market in
the future or the perception that sales will occur could materially and
adversely affect the market price of the common stock or our future ability
to raise capital through an offering of our equity securities. On April 13,
1999 we filed a registration statement with the Securities and Exchange
Commission. That will permit us to sell 8,000,000 shares of our common
stock in a public offering. We purpose to sell 4,000,000 shares of common
stock and existing stockholders are proposing to sell an additional
4,000,000 shares. There are approximately 12,991,680 shares of common stock
held by our stockholders that are "restricted securities," as that term is
defined in Rule 144 of the Securities Act of 1933. Restricted securities
may be sold in the public market
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<PAGE>
only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 under the Securities Act. In connection with
our initial public offering, all of our directors, officers and the holders
of a substantial portion of our stock agreed, with exceptions, that they
will not sell any common stock without the prior consent of Bear, Stearns &
Co. Inc. before May 12, 1999. Bear, Stearns & Co. Inc. may, however, in its
sole discretion and at any time without notice, release all or any portion
of the shares subject to lock-up agreements. Following this date,
approximately 2,266,760 shares of the restricted securities will be
immediately eligible for sale in the public market under Rule 144 without
volume limitation or further registration under the Securities Act, not
including approximately 10,724,920 shares held by our "affiliates", within
the meaning of the Securities Act. These 10,724,920 shares will be eligible
for public sale subject to volume limitation. In connection with a proposed
follow-on offering, these shares will be subject to a lock-up period 7 days
before and 90 days after the effective date of the registration statement
filed in connection with that offering. Also, in connection with the
proposed follow-on offering, the underwriters will require all of our
directors, and officers, with the exception of any shares sold by them in
that offering and other specified exceptions, to agree not to sell any
common stock, without the prior consent of Bear, Stearns & Co. Inc. at any
time prior to 90 days following the effective date of the registration
statement filed in connection with that offering. Bear, Stearns & Co. Inc.
may, however, in its sole discretion and at any time without notice,
release all or any portion of the shares subject to lock-up agreements.
There are outstanding options to purchase 4,167,952 shares of common
stock which are eligible for sale in the public market from time to time
depending on vesting and the expiration of lock-up agreements. The issuance
of these securities are registered under the Securities Act. In addition,
there are outstanding warrants to purchase up to 4,111,534 shares of our
common stock upon exercise. Substantially all of our stockholders holding
restricted securities, including shares issuable upon the exercise of
warrants to purchase our common stock, are entitled to registration rights
under various conditions.
ANTI-TAKEOVER PROVISIONS AFFECTING US COULD PREVENT OR DELAY A
CHANGE OF CONTROL.
Provisions of our charter, by-laws and stockholder rights plan and
provisions of applicable Delaware law may discourage, delay or prevent a
merger or other change of control that a stockholder may:
o have the effect of delaying, deferring or preventing a change
in control of our company;
o discourage bids of our common stock at a premium over the
market price; or
o adversely affect the market price of, and the voting and other
rights of the holders of, our common stock.
We must follow Delaware laws that could have the effect of delaying,
deterring or preventing a change in control of our company. One of these
laws prohibits us from engaging in a business combination with any
interested stockholder for a period of three years from the date the person
became an interested stockholder, unless various conditions are met. In
addition, provisions of our charter and by-laws, and the significant amount
of common stock held by our executive officers, directors and affiliates,
could together have the effect of discouraging potential takeover attempts
or making it more difficult for stockholders to change management.
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<PAGE>
WE DO NOT EXPECT TO PAY CASH DIVIDENDS.
We do not anticipate paying any cash dividends in the foreseeable
future.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk. theglobe.com's accounts receivables are subject, in the
normal course of business, to collection risks. theglobe.com regularly
assesses these risks and has established policies and business practices to
protect against the adverse effects of collection risks. As a result,
theglobe.com does not anticipate any material losses in this area.
-39-
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to our knowledge,
threatened against us.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) SALES OF UNREGISTERED SECURITIES. During the period from January
1, 1998 through March 31, 1999, we granted an aggregate of 1,036,596
options to purchase common stock to our officers, directors and employees
pursuant to our 1998 Stock Option Plan with a weighted average exercise
price equal to $21.17 per share of common stock. 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. In addition, in connection with out acquisition of Azazz, we
assumed options to purchase shares of factorymall's common stock, without
par value, which we exchanged for options to purchase 82,034 shares of
common stock with a weighted average exercise price equal to $11.33 per
share of common stock. We also assumed warrants to purchase shares of
factorymall's common stock, which we exchanged for warrants to purchase
18,810 shares of common stock with a weighted average exercise price equal
to $10.64 per share of common stock. As of April 29, 1999, the total number
of shares of common stock subject to stock options outstanding was
4,167,952.
In addition, in connection with our acquisition of Azazz, we issued
687,832 shares of common stock. Such shares were exchanged for shares of
factorymall's common stock pursuant to the exemption from the registration
requirements of the Securities Act of 1933, as amended, afforded by Rule
506 of Regulation D, promulgated thereunder.
(d) USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES. During the
period from December 31, 1998 through March 31, 1999, we have used an
aggregate of $7.2 million for investments in our web site, including
enhancements to our server and networking infrastructure and the
functionality of our web site, and for general corporate purposes including
working capital, expansion of our sales and marketing capabilities and
brand-name promotions. We have also used a portion of such net proceeds for
acquisitions of complementary businesses, services and technology.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
II-1
<PAGE>
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit Number Description
-------------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
On February 16, 1999, we filed a Form 8-K under Item 2 and 7
regarding the completion of the acquisition of Azazz.
On February 19, 1999, we filed a Form 8-K under Item 5 announcing
our financial results for the fourth quarter of 1999.
II-2
<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)
May 14, 1999
II-3
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