As filed with the Securities and Exchange Commission on April 13, 1999
Registration No. 333-_______
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------------
theglobe.com, inc.
(Exact name of registrant as specified in its charter)
Delaware 7310 14-1781422
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification
incorporation or Number)
organization)
-----------------------------------
31 West 21st Street
New York, New York 10010
(212) 886-0800
(Address, including zip code, and
telephone number, including area
code, of registrant's principal
executive offices)
-----------------------------------
Todd V. Krizelman
Stephan J. Paternot
theglobe.com, inc.
31 West 21st Street
New York, New York 10010
(212) 886-0800
(Name, address, including zip code, and telephone number,
including area code, of co-agents for service)
-----------------------------------
Copies to:
Valerie Ford Jacob, Esq. Allen L. Weingarten, Esq.
Stuart H. Gelfond, Esq. Morrison & Foerster LLP
Fried, Frank, Harris, Shriver & Jacobson 1290 Avenue of the Americas
One New York Plaza New York, New York 10104
New York, New York 10004 (212) 468-8000
(212) 859-8000
-----------------------------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after the effective date of the registration statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the registration statement for the
same offering. [ ].
If delivery of the Prospectus is expected to be made pursuant to
Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
===============================================================================
Title of Each Class of Amount To Proposed Proposed Amount of
Securities Be Maximum Maximum Registration
to be Registered Registered(1) Offering Price Aggregate Fee (2)
Per Unit Offering
Price
- -------------------------------------------------------------------------------
Common Stock, $0.001 4,600,000 $79.63 $366,298,000 $101,831
par value (3) shares
===============================================================================
(1) Amount to be registered is determined pursuant to Rule 416 regarding
stock splits.
(2) Estimated pursuant to Rule 457(c) solely for the purpose of
calculating the registration fee. The average of the high and low
prices reported on the Nasdaq National Market on April 9, 1999 was
$79.63.
(3) The Common Stock offered hereby includes Preferred Stock Purchase
Rights (the "Rights"). The Rights will be associated and trade with
the Common Stock. The value, if any, of the Rights will be reflected
in the market price of the Common Stock.
-----------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
===============================================================================
<PAGE>
SUBJECT TO COMPLETION DATED APRIL 13, 1999
PRELIMINARY PROSPECTUS
4,000,000 Shares
[theglobe.com logo]
theglobe.com
Common Stock
------------
This is a public offering of 4,000,000 shares of common stock of
theglobe.com, inc. We are selling 2,000,000 shares of common stock and the
selling stockholders identified in this prospectus are selling 2,000,000
shares. We will not receive any of the proceeds from the shares of the
common stock sold by the selling stockholders.
The underwriters have an option to purchase a maximum of 600,000 additional
shares of common stock from some of the selling stockholders to cover
over-allotment of shares.
Our common stock is traded on the Nasdaq National Market under the symbol
"TGLO." On April 9, 1999, the last reported sale price of our common stock
was $78 15/16 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 TO READ ABOUT RISKS THAT YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------
Per Share Total
--------- -----
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to us............................ $ $
Proceeds, before expenses, to the selling stockholders...... $ $
The underwriters are severally underwriting the shares being offered in
this prospectus. The underwriters expect to deliver the shares against
payment in New York, New York on , 1999.
------------
BEAR, STEARNS & CO. INC.
NATIONSBANC MONTGOMERY SECURITIES LLC
VOLPE BROWN WHELAN & COMPANY
WIT CAPITAL CORPORATION
as e-Manager(TM)
The date of this prospectus is , 1999.
[RED HERRING]
The information in this preliminary prospectus is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. The
information in this preliminary prospectus is not an offer to sell nor does
it seek an offer to buy these securities in any jurisdiction where the
offer or sale is not permitted.
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<PAGE>
TABLE OF CONTENTS
Page
----
Summary......................................................................4
Risk Factors.................................................................9
Cautionary Notice Regarding Forward Looking Statements......................30
How We Intend to Use the Proceeds from the Offering.........................31
Dividend Policy.............................................................31
Price Range of Our Common Stock.............................................32
Capitalization..............................................................33
Dilution....................................................................35
Selected Financial Data.....................................................36
Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................38
Business....................................................................46
Management..................................................................66
Certain Relationships and Related Transactions..............................83
Principal and Selling Stockholders..........................................86
Description of Capital Stock................................................90
Shares Eligible for Future Sale............................................100
Underwriting...............................................................103
Legal Matters..............................................................106
Experts....................................................................106
Where You Can Find More Information........................................106
Index to Financial Statements..............................................F-1
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This prospectus includes statistical data regarding the Internet
industry. We obtained or derived the data from sources including:
o Jupiter Communications, LLC, a media research firm focusing on
the Internet industry, and
o International Data Corporation, a provider of market information
and strategic information for the information technology
industry.
o DoubleClick Inc., a global Internet advertising solutions company
that centralizes advertising planning, execution, control,
tracking and reporting for online media companies.
o ABC Interactive, a provider of independent third-party audits and
industry-developed standards for web site and other online
advertising.
Although we believe that the data are generally correct, the data are
inherently imprecise. Accordingly, you should not place undue reliance on
the data.
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<PAGE>
------------------
You should rely only on the information contained in this prospectus.
We have not authorized any other person to provide you with different
information. If anyone provides you with different or inconsistent
information, you should not rely on it. We are not making an offer to sell
these securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in this
prospectus is accurate only as of the date on the front cover of this
prospectus. Our business and financial condition may have changed since
that date.
-3-
<PAGE>
SUMMARY
The following summary contains basic information about our company.
This summary may not contain all of the information that is important to
you. You should carefully read this entire document, the financial
statements and the other documents to which we refer for a more complete
understanding of this offering.
OUR BUSINESS
theglobe.com is one of the world's leading online networks with
nearly 2.3 million members in the United States and abroad who have
registered on our web site and provided us with personal information. In
December 1998, over 9.3 million individuals visited our web site, according
to DoubleClick, as audited by ABC Interactive. Approximately 40% of our
monthly traffic originates from abroad, reflecting our site's international
appeal. Our web site is a destination on the Internet where users are able
to personalize their online experience by publishing their own content and
interacting with others having similar interests. We facilitate this
interaction by providing various free services, including home page
building, discussion forums, chat rooms, e-mail and electronic commerce.
Additionally, we provide our users with news, business information, real
time stock quotes, weather, movie and music reviews, multi-player gaming
and personals. By satisfying our users' personal and practical needs, we
seek to become our users' online home.
We generate revenues primarily by selling advertisements, sponsorship
placements within our site, development fees and, to a lesser extent, from
electronic commerce revenues. In the last three months of 1998, we had
approximately 147 advertisers, including Coca Cola, Hewlett Packard,
Hilton, LEGO, Office Max, 3Com and Visa. In February 1999, we acquired
factorymall.com, an online retail store doing business as Azazz.com which
sells a variety of name brand products directly to consumers. We have begun
integrating Azazz.com into our electronic commerce site, now known as
"shop.theglobe.com." We expect to begin to generate additional revenues
from electronic commerce in the second quarter of 1999. In April 1999, we
acquired Attitude Network, a provider of online entertainment content whose
web sites include HappyPuppy.com and GamesDomain.com, two leading web sites
serving game enthusiasts.
Our site currently has ten themes of interest. Within each theme is a
combination of content, electronic commerce and interactive services.
Content is both user generated and professional. We have several
professional content relationships. These include CBS Marketwatch, CNET, E!
Online, Fox Sports, Reuters, Thomson Investors Network, UPI, and Variety.
Electronic commerce is woven contextually throughout themes. For example,
within the Sports theme a user will find sports equipment for sale, while
in the Business theme a user will find products directed at the business
professional. Interactive services such as chat, discussion forums, and
surveys are paired with content to promote usage.
Members are also encouraged to generate their own webpages and
aggregate in online communities. We do not limit the number of communities
which our members can join and members are free to leave at any time.
Because of this, communities are dynamic and evolve as member interests'
change.
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<PAGE>
The unique community focus of our site offers us several advantages
that include:
o member loyalty;
o member-developed content; and
o targeted advertising.
Our goal is to be the leading online network. We seek to attain
this goal through the following key strategies:
o improve user experience;
o develop brand identity and awareness;
o further develop electronic commerce;
o implement acquisition, joint venture and alliance strategy;
o expand globally; and
o enhance membership services.
The share amounts throughout the document do not give effect to the
stock split that will be distributed to stockholders on May 14, 1999.
We were incorporated in May 1995 in the State of Delaware. Our
principal executive offices are located at 31 West 21st Street, New York,
New York 10010, and our telephone number is (212) 886-0800.
THE OFFERING
Common stock offered by us...................2,000,000 shares
Common stock offered by the selling
stockholders................................2,000,000 shares (1)
Common stock outstanding after this
offering....................................13,447,963 shares (2)
Use of proceeds..............................For general corporate purposes,
including working capital,
expansion of our sales and
marketing capabilities, brand
name promotions, potential
acquisitions and improvements in
our web site. See "How We Intend
to Use the Proceeds from the
Offering." We will not receive
any proceeds from the sale of
common stock by the selling
stockholders.
Nasdaq Symbol................................TGLO
- --------------
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<PAGE>
(1) This represents the estimated amount of shares that we expect the
selling stockholders may sell in the offering. The possible selling
stockholders have not yet determined whether or not they want to to
participate in the offering. If the selling stockholders collectively
sell less than 2,000,000 shares in the offering, we will sell the
difference in order for the total shares of common stock to be sold in
the offering to be 4,000,000 shares.
(2) Based on the number of shares of common stock outstanding as of April
9, 1999, which is inclusive of the shares issued in connection with
the Azazz.com and Attitude Network, Ltd. acquisitions. Excludes:
o 2,055,759 shares of common stock issuable upon the exercise of
outstanding warrants to acquire common stock at a weighted
average exercise price of approximately $3.16 per share;
o 1,888,979 shares of common stock issuable upon the exercise of
stock options that would be outstanding after the offering at a
weighted average exercise price of $13.08 per share;
o 447,527 shares of common stock reserved for future issuance under
the 1998 and 1995 stock option plans; and
o 200,000 shares of common stock reserved for future issuance under
the 1999 Employee Stock Purchase Plan.
See "Capitalization," "Management--Executive Compensation,"
"Description of Capital Stock" and the financial statements and the
related notes appearing elsewhere in this prospectus.
-6-
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes the financial data for our business.
You should read the following information in conjunction with the financial
statements and related financial statement notes appearing elsewhere in
this prospectus. See "Selected Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
May 1, 1995 Year Ended
(inception) December 31,
through ------------------------------
December 31,
1995 1996 1997 1998
------------- ------- ------ ---------
STATEMENT OF OPERATIONS
DATA:
Revenues................ $27 $229 $770 $5,510
Gross profit............ 14 113 347 3,271
Loss from operations.... (66) (772) (3,883) (16,859)
Net loss................ (66) (750) (3,584) (16,046)
Basic and diluted net loss
per share (1).......... $ (0.06) $ (0.67) $ (3.13) $ (6.74)
Weighted average shares
outstanding used in basic
and diluted per share
outstanding (1)........ 1,125,000 1,125,000 1,146,773 2,381,140
- ------------------
(1) Weighted average shares do not include any common stock equivalents
because inclusion of common stock equivalents would have been
anti-dilutive. See the financial statements and related financial
statement notes appearing elsewhere in this prospectus for the
determination of shares used in computing basic and diluted loss per
share.
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<PAGE>
The following table indicates a summary of our balance sheet at December
31, 1998:
o on an actual basis;
o on a pro forma basis giving effect to (1) the acquisition of
Azazz.com and (2) the acquisition of Attitude Network, Ltd.;
o on a pro forma as adjusted basis to reflect pro forma events
described above and the receipt of the estimated net proceeds
from the sale of 2,000,000 shares of common stock, after
deducting the estimated underwriting discounts and commissions
and offering expenses. Please see "How We Intend to Use the
Proceeds from the Offering", "Capitalization," and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
December 31, 1998
-----------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ---------------- -------------
(In Thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents and
short-term investments.......... $30,149 $32,569 $180,966
Working capital.................... 27,009 28,271 176,668
Total assets....................... 38,130 111,743 260,140
Capital lease obligations,
excluding current installments.. 2,006 2,022 2,022
Stockholders' equity............... 30,301 99,846 248,243
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<PAGE>
RISK FACTORS
An investment in our common stock is risky. Before investing, you
should carefully consider the following risk factors together with all of
the other information included in this prospectus.
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. 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, and $16.0
million for 1998. As of December 31, 1998, we had an accumulated deficit of
approximately $20.4 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.
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<PAGE>
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.
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.
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<PAGE>
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 our most highly active
members become dissatisfied with our services or our focus on the
commercialization of those services or for any other reason stop generating
content that effectively promotes our site.
OUR BUSINESS MODEL IS NEW AND UNPROVEN.
Our business model is new and relatively unproven. This model depends
upon our ability to obtain more than one type of revenue source by using
our community platform. To be successful, we must, among other things,
develop and market products and services that achieve broad market
acceptance by our users, advertisers and electronic commerce vendors. We
must also market products directly to users and have users purchase
products through our site. We cannot assure you that any Internet
community, including our site, will achieve broad market acceptance. We
also cannot assure you that our business model will be successful, that it
will sustain revenue growth or that it will be profitable.
Additionally, the market for our products and services is new, rapidly
developing and characterized by an increasing number of market entrants. As
is typical of most new and rapidly evolving markets, demand and market
acceptance for recently introduced products and services are highly
uncertain and risky. Moreover, because this market is new and rapidly
evolving, we cannot predict our future 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
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<PAGE>
may not be consummated. Our future acquisitions or joint ventures could
result in numerous risks and uncertainties, including:
o potentially dilutive issuances of equity securities, which may be
freely tradable in the public market;
o large and immediate write-offs;
o the incurrence of debt and contingent liabilities or amortization
expenses related to goodwill and other intangible assets;
o difficulties in the assimilation of operations, personnel,
technologies, products and information systems of the acquired
companies;
o the diversion of management's attention from other business
concerns;
o the risks of entering geographic and business markets in which we
have no or limited prior experience such as electronic commerce
retailing;
o the risk that the acquired business will not perform as expected;
and
o risks associated with international expansion.
WE MAY BE UNSUCCESSFUL IN DEVELOPING BRAND AWARENESS; BRAND IDENTITY IS
CRITICAL TO US.
We believe that establishing and maintaining awareness of
"theglobe.com" brand name is critical to attracting and expanding our
member base, the traffic on our web site and advertising and electronic
commerce relationships. If we fail to promote and maintain our brand or our
brand value is diluted, our business, operating results and financial
condition could be materially adversely affected. The 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. During 1998, advertising revenues represented 89% of
our net revenues. Our business model and revenues are highly dependent on
the amount of traffic on our site. The level of traffic on our site
determines the amount of advertising inventory we can sell. Our ability to
generate significant advertising revenues depends, in part, on our ability
to create new advertising programs without diluting the perceived value of
our existing programs. Our ability to generate advertising revenues will
also depend, in part, on the following:
o advertisers' acceptance of the Internet as an attractive and
sustainable medium;
o advertisers' willingness to pay for advertising 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;
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<PAGE>
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 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 advertisement 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.
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<PAGE>
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 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.
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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 majority
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 related entities for their time.
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. See "Certain
Relationships and Related Transactions."
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.
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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 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, West Virginia, which are hosted by Frontier GlobalCenter, and in
London, England which are hosted by Telehouse International. Although each
of Exodus, Frontier and Telehouse provides comprehensive facilities
management services, including human and technical monitoring of all
production servers 24 hours-per-day, seven days-per-week, neither Exodus,
Frontier nor Telehouse guarantees that our Internet access will be
uninterrupted, error-free or secure. Our operations depend on the 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.
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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 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!;
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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.
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 Lycos announced a transaction in which USA Networks
would merge its online and retailing assets, which include Ticketmaster
Citysearch Online, with Lycos. In addition, there has been other
significant consolidation in the 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 and third-party content providers. 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.
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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 sponsor or maintain high-traffic web
sites or that provide an initial point of entry for Internet viewers, such
as the Regional Bell Operating Companies, cable companies or Internet
service providers, such as Microsoft and America Online, offer and can be
expected to consider further development, acquisition or licensing of
Internet search and navigation functions that compete with us. These
competitors could also take actions that make it more difficult for viewers
to find and use our products and services.
Additionally, the electronic commerce market is new and rapidly
evolving, and we expect competition among electronic commerce merchants to
increase significantly. Because the Internet allows consumers to easily
compare prices of similar products or services on competing web sites and
there are low barriers to entry for potential competitors, gross margins
for electronic commerce transactions may narrow in the future. Many of the
products that we sell on our web site may be sold by the maker of the
product directly or by other web sites. Competition among Internet
retailers, our electronic commerce partners and product makers may have a
material adverse effect on our ability to generate revenues through
electronic commerce transactions or from these electronic commerce
partners. See also "Business--Competition."
WE DEPEND ON THE CONTINUED GROWTH IN THE USE AND COMMERCIAL VIABILITY OF
THE WEB.
Our market is new and rapidly evolving. Our business 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.
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If the Internet develops as a commercial medium more slowly than we
expect, it will adversely affect our business. Additionally, if web usage
grows, the Internet infrastructure may not be able to support the demands
placed on it by this growth or its performance and reliability may decline.
Web sites have experienced interruptions in their service as a result of
outages and other delays occurring throughout the Internet network
infrastructure. If these outages or delays frequently occur in the future,
web usage, as well as usage of our web site, could grow more slowly or
decline. Also, the Internet's commercial viability may be significantly
hampered due to:
o delays in the development or adoption of new operating and
technical standards and performance improvements required to
handle increased levels of activity;
o increased government regulation; and
o insufficient availability of telecommunications services which
could result in slower response times and adversely affect usage
of the Internet.
WE MAY BE MATERIALLY ADVERSELY AFFECTED IF ELECTRONIC COMMERCE DOES
NOT BECOME A VIABLE SOURCE OF SIGNIFICANT REVENUES FOR THEGLOBE.COM. IN
ADDITION, OUR ELECTRONIC COMMERCE BUSINESS MAY RESULT IN SIGNIFICANT
LIABILITY CLAIMS AGAINST US.
In the first quarter of 1999, we acquired Azazz, which is a direct
marketer of products over the Internet. However, we have limited experience
in the sale of products online and the development of relationships with
manufacturers and suppliers of these products. We also face many
uncertainties which may affect our ability to generate electronic commerce
revenues, including:
o our ability to obtain new customers at a reasonable cost, retain
existing customers and encourage repeat purchases;
o the likelihood that both online and retail purchasing trends may
rapidly change;
o the level of product returns;
o merchandise shipping costs and delivery times;
o our ability to manage inventory levels;
o our ability to secure and maintain relationships with vendors;
o the possibility that our vendors may sell their products through
other sites; and
o intense competition for electronic commerce revenues.
Accordingly, we cannot assure you that electronic commerce
transactions will provide a significant or sustainable source of revenues
or profits. Additionally, due to the ability of consumers to easily compare
prices of similar products or services on competing web sites, gross
margins for electronic commerce transactions may narrow in the future and,
accordingly, our revenues and profits from electronic commerce arrangements
may be materially negatively impacted. If use of the Internet for
electronic commerce does not continue to grow, our business and financial
condition would be materially and adversely affected.
Additionally, consumers may sue us if any of the products that we sell
are defective, fail to perform properly or injure the user. Some of our
agreements with manufacturers contain provisions intended to limit our
exposure to liability claims. However, these limitations may not
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prevent all potential claims. Liability claims could require us to spend
significant time and money in litigation or to pay significant damages. As
a result, any claims, whether or not successful, could seriously damage our
reputation and our business.
INTERNET ADVERTISING MAY NOT PROVE AS EFFECTIVE AS TRADITIONAL MEDIA.
The Internet advertising market is new and rapidly evolving. We cannot
yet gauge its effectiveness as compared to traditional advertising media.
Many of our current or potential advertising partners have little or no
experience using the Internet for advertising purposes and they have
allocated only a limited portion of their advertising budgets to Internet
advertising. The adoption of Internet advertising, particularly by those
entities that have historically relied upon traditional media, requires the
acceptance of a new way of conducting business, exchanging information and
advertising products and services. Advertisers that have traditionally
relied upon other advertising media may be reluctant to advertise on the
Internet or find it less effective.
No standards have been widely accepted to measure the effectiveness of
Internet advertising or to measure the demographics of our user base.
Additionally, no standards have been widely accepted to measure the number
of members, unique users or page views related to a particular site. We
cannot assure you that any standards will become available in the future or
that standards will accurately measure our users or the full range of user
activity on our site. If standards do not develop, advertisers may not
advertise on the Internet. In addition, we depend on third parties to
provide these measurement services. These measurements are often based on
sampling techniques or other imprecise measures and may materially differ
from each other and from our estimates. We cannot assure you that
advertisers will accept our or other parties' measurements. The rejection
by advertisers of these measurements could have a material adverse effect
on our business and financial condition.
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.
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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.
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 this 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 at least twelve months. 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
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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 adverse 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, 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.
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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 protecting
proprietary rights is unclear. Therefore, we may not be able to prevent
third parties from acquiring domain names that infringe or otherwise
decrease the value of our trademarks and other proprietary rights. See
"Business--Intellectual Property and Proprietary Rights."
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. See "Business--Government Regulation and Legal
Uncertainties."
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,
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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.
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 Gamesdomain.com through
a wholly-owned U.K. subsidiary. We have not previously operated
internationally. Additionally, we are not completely familiar with U.K. law
and its ramifications on our business. There can be no assurance that the
Internet or 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.
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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.
VARIOUS STOCKHOLDERS, INDIVIDUALLY OR IN THE AGGREGATE, MAY CONTROL US.
Before this offering, Michael S. Egan, our Chairman, beneficially
owned or controlled, directly or indirectly, 6,123,024 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 owned 15.4% of our common stock. After this offering, Mr. Egan
will beneficially own or control, directly or indirectly, approximately %
of our common stock, and % if the over-allotment option is exercised.
Mssrs. Krizelman and Paternot, together, will beneficially own
approximately % of our common stock, and % if the over-allotment option is
exercised. 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 225,000 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. See "Description of Capital
Stock."
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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."
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
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class action litigation has often been instituted against a company.
Litigation, if instituted, whether or not successful, could result in
substantial costs and a diversion of management's attention and resources,
which would have a material adverse effect on our business.
THE SALE OF SHARES ELIGIBLE FOR FUTURE SALE IN THE OPEN MARKET COULD
DEPRESS OUR STOCK PRICE.
Sales of significant amounts of common stock in the public market in
the future or the perception that sales will occur could materially and
adversely affect the market price of the common stock or our future ability
to raise capital through an offering of our equity securities. There are
6,495,840 shares of common stock held by our stockholders that are
"restricted securities," as that term is defined in Rule 144 of the
Securities Act of 1933. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 under the Securities Act. In
connection with our initial public offering, all of our directors, officers
and the holders of a substantial portion of our stock agreed, with
exceptions, that they will not sell any common stock without the prior
consent of Bear, Stearns & Co. Inc. before May 12, 1999. Bear, Stearns &
Co. Inc. may, however, in its sole discretion and at any time without
notice, release all or any portion of the shares subject to lock-up
agreements. Following this date, approximately 1,133,380 shares of the
restricted securities will be immediately eligible for sale in the public
market under Rule 144 without volume limitation or further registration
under the Securities Act, not including approximately 5,362,460 shares held
by our "affiliates," within the meaning of the Securities Act. These
5,362,460 shares will be eligible for public sale subject to volume
limitation. In connection with this offering, the underwriters will require
all of our directors, and officers, with the exception of any shares sold
by them in the offering, to agree not to sell any common stock, without the
prior consent of Bear, Stearns & Co. at any time prior to 90 days following
the effective date of this registration statement.
There are outstanding options to purchase 1,888,979 shares of common
stock which are eligible for sale in the public market from time to time
depending on vesting and the expiration of lock-up agreements. The issuance
of these securities are registered under the Securities Act. In addition,
there are outstanding warrants to purchase up to 2,055,759 shares of our
common stock upon exercise.
Substantially all of our stockholders holding restricted securities,
including shares issuable upon the exercise of warrants to purchase our
common stock, are entitled to registration rights under various conditions.
Following the expiration of the 90 day lock-up period required by the
underwriters in connection with this offering, we have agreed to file a
registration statement for up to 343,916 shares of common stock issued to
acquire Azazz.com. We filed a Form S-8 registration statement under the
Securities Act to register 41,017 shares of common stock issuable upon the
exercise of options assumed in connection with the acquisition of
Azazz.com. The shares covered by that registration statement will be
eligible for sale in the public markets. See "Principal and Selling
Stockholders" and "Description of Capital Stock."
ANTI-TAKEOVER PROVISIONS AFFECTING US COULD PREVENT OR DELAY A CHANGE OF
CONTROL.
Provisions of our charter, by-laws and stockholder rights plan and
provisions of applicable Delaware law may:
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o have the effect of delaying, deferring or preventing a change in
control of our company;
o discourage bids of our common stock at a premium over the market
price; or
o adversely affect the market price of, and the voting and other
rights of the holders of, our common stock.
We must follow Delaware laws that could have the effect of delaying,
deterring or preventing a change in control of our company. One of these
laws prohibits us from engaging in a business combination with any
interested stockholder for a period of three years from the date the person
became an interested stockholder, unless various conditions are met. In
addition, provisions of our charter and by-laws, and the significant amount
of common stock held by our executive officers, directors and affiliates,
could together have the effect of discouraging potential takeover attempts
or making it more difficult for stockholders to change management. See
"Description of Capital Stock--Delaware Law and Various Charter and By-laws
Provisions."
WE DO NOT EXPECT TO PAY CASH DIVIDENDS.
We do not anticipate paying any cash dividends in the foreseeable
future.
OUR MANAGEMENT CAN SPEND MOST OF THE PROCEEDS FROM THIS OFFERING IN WAYS
WITH WHICH STOCKHOLDERS MIGHT NOT AGREE.
Our management can spend most of the proceeds from this offering in
ways with which the stockholders might not agree. We cannot predict that
the proceeds will be invested to yield a favorable return. See "How We
Intend to Use the Proceeds from the Offering."
AS A NEW INVESTOR, YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
Investors purchasing shares of common stock in the offering will incur
immediate and substantial dilution in net tangible book value per share of
the common stock from the offering price of $65.68 per share. To the extent
outstanding options or warrants to purchase common stock are exercised,
there will be further dilution. See "Dilution."
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward looking statements that have been
made under the provisions of the Private Securities Litigation Reform Act
of 1995. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates," and variations of these words and similar
expressions are intended to identify forward-looking statements. We have
based these statements on our current expectations about future events.
Although we believe that our expectations about future events are
reasonable, we cannot assure you that these expectations will be achieved.
Important factors which would cause our actual results to differ materially
from the forward-looking statements in this prospectus are described in the
"Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere in this
prospectus. We urge you to carefully consider these factors. We caution you
that any forward-looking statements are not guarantees of future
performance and involve significant risks and uncertainties, and that
actual results may differ materially from those projected in the
forward-looking statements as a result of various factors. All
forward-looking statements attributable to us are expressly qualified in
their entirety by the foregoing cautionary statement.
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HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING
The estimated net proceeds to us from the sale of the 2,000,000 shares
of common stock we are offering are estimated to be $148.4 million at an
assumed public offering price of $78.94 per share, the price on April 9,
1999, after deducting the estimated underwriting discount and offering
expenses. We will not receive any proceeds from the sale of the shares that
the selling stockholders are selling.
We expect to use the net proceeds for general corporate purposes,
including working capital, expansion of our sales and marketing
capabilities, brand name promotions, potential acquisitions and
improvements in our web site. The amounts we actually spend for these
purposes may vary significantly and will depend on a number of factors,
including our future revenue and cash generated by operations and the other
factors described under "Risk Factors." In the ordinary course of business,
we evaluate potential acquisitions of businesses, technologies and product
offerings or minority investments in businesses. However, we have no
current agreements with respect to any such acquisitions or investments.
Pending use of the net proceeds, we intend to invest them in short-term,
interest-bearing, investment grade securities. Therefore, we will have
broad discretion in the way we use the net proceeds. See "Our management
can spend most of the proceeds from this offering in ways with which
stockholders might not agree."
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common stock.
We currently intend to retain our future earnings, if any, to fund the
development and growth of our business and, therefore, do not anticipate
paying any cash dividends in the foreseeable future. The declaration and
payment of dividends by us are subject to the discretion of the board of
directors. Any future determination to pay dividends will depend on our
results of operations, financial condition, capital requirements,
contractual restrictions and other factors deemed relevant by the board of
directors.
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PRICE RANGE OF OUR COMMON STOCK
Our common stock trades on the Nasdaq National Market under the symbol
"TGLO." The following table sets forth the range of high and low closing
sales prices of our common stock for the periods indicated:
FISCAL 1998 HIGH LOW
----------- ---- ---
Quarter ended December 31, 1998 $63.500 $27.438
(from November 13, 1998)
FISCAL 1999
-----------
First Quarter $67.063 $31.500
On April 9, 1999, the last reported sale price for our common stock on
the Nasdaq National Market was $78.94 per share. The market price for our
stock is highly volatile and fluctuates in response to a wide variety of
factors. See "Risk Factors--Our stock price is volatile."
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CAPITALIZATION
The following table sets forth our capitalization as of December 31,
1998:
o on an actual basis;
o on a pro forma basis giving effect to (1) the acquisition of
Azazz.com and (2) the acquisition of Attitude Network, Ltd.;
o on a pro forma as adjusted basis to reflect the pro forma events
described above and the receipt of the estimated net proceeds
from the sale of 2,000,000 shares of common stock, after
deducting the estimated underwriting discounts and commissions
and offering expenses. See "How We Intend to Use the Proceeds
from the Offering."
You should read this information together with our financial
statements and the notes to those statements appearing elsewhere in this
prospectus.
December 31, 1998
----------------------------
Pro Forma
Actual Pro Forma As
Adjusted
------- --------- ---------
(Dollars in thousands)
Notes payable-related party, net of current
portion........................................ $ -- $ 103 $ 103
Long-term debt.................................. -- 2,343 2,343
Obligations under capital leases, excluding
current installments........................... 2,006 2,022 2,022
Stockholders' equity:
Preferred Stock, 3,000,000 shares authorized:
Convertible preferred stock, Series A
through E, $0.001 par value; 2,900,001
shares authorized; -0- shares issued and
outstanding............................... -- -- --
Common stock, $0.001 par value: 100,000,000
shares authorized; 10,312,256 shares issued
and outstanding, actual; 11,441,358 and
13,441,358 shares issued and outstandin
pro forma and pro forma as adjusted,
respectively(1)........................... 10 11 13
Additional paid-in capital................ 50,915 120,459 268,854
Deferred compensation..................... (128) (128) (128)
Net unrealized loss on available-for-sale
securities.............................. (50) (50) (50)
Accumulated deficit....................... (20,446) (20,446) (20,446)
---------- ---------- ----------
Total stockholders' equity................... 30,301 99,846 248,243
---------- ---------- ----------
Total capitalization........................ $32,307 $104,314 $252,711
========== ========== ==========
- ---------------------
(1) Excludes:
o 2,055,759 shares of our common stock issuable upon the exercise
of outstanding warrants at a weighted average exercise price of
approximately $3.16 per share;
o 1,888,979 shares of our common stock issuable upon the exercise
of stock options that would be outstanding at a weighted average
exercise price of $13.08 per share; and
o 447,527 shares of our common stock reserved for future issuance
under our 1998 and 1995 stock option plans;
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o 200,000 shares of common stock reserved for future issuance under
the 1999 Employee Stock Purchase Plan.
See "Capitalization," "Management--Executive Compensation,"
"Description of Capital Stock" and the financial statements and
related financial statement notes appearing elsewhere in this
prospectus.
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DILUTION
Our pro forma net tangible book value as of December 31, 1998 was
approximately $29.8 million, or approximately $2.60 per share of common
stock. Pro forma net tangible book value per share represents the amount of
total tangible assets less total liabilities, divided by the pro forma
number of shares of common stock outstanding after giving effect to:
o the acquisition of Azazz.com; and
o the acquisition of Attitude Network, Ltd.
After giving effect to the sale of the common stock offered by us
hereby and after deducting the estimated underwriting discount and offering
expenses payable by us, our pro forma net tangible book value, as adjusted,
as of December 31, 1998, would have been approximately $178,172,875, or
$13.26 per pro forma share of common stock. This represents an immediate
increase in net tangible book value of $10.66 per share to existing
stockholders and an immediate dilution in net tangible book value of $65.68
per share to new investors of common stock in this offering. The following
table illustrates this per share dilution:
Assumed public offering price per share....................$ 78.94
Pro forma net tangible book value per
share prior to this offering.............$ 2.60
Increase per share attributable to
new investors............................ 10.66
-------
Adjusted pro forma net tangible book
value per share after the offering...................... 13.26
-------
Dilution per share to new investors........................$ 65.68
=======
If the public offering price is higher or lower, the dilution to the
new investors will be greater or less, respectively.
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SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and notes to those statements and
other financial information included elsewhere in this prospectus. The
statement of operations data for the years ended December 31, 1996, 1997
and 1998 and the consolidated balance sheet data as of December 31, 1997
and 1998 are derived from the audited financial statements of theglobe.com
included in this prospectus. The balance sheet data as of December 31, 1995
and 1996 and the statement of operations data for the period for May 1,
1995 (inception) to December 31, 1995 are derived from the audited
financial statements of theglobe.com not included herein. The historical
results presented here are not necessarily indicative of future results.
May 1, 1995
(inception)
through
December 31, Year Ended December 31,
-------------------------------
1995 1996 1997 1998
--------- --------- -------- ----------
STATEMENT OF OPERATIONS DATA:
Revenues........................ $ 27 $229 $ 770 $5,510
Cost of revenue................. 13 116 423 2,239
--------- ----------- ----------- -----------
Gross profit.................... 14 113 347 3,271
Operating expenses:
Sales and marketing............. 1 276 1,248 9,299
Product development............. 60 120 154 2,633
General and administrative...... 19 489 2,828 6,828
Non-recurring charge............ -- -- -- 1,370
--------- ----------- ----------- -----------
Total operating expenses........ 80 885 4,230 20,130
--------- ----------- ----------- -----------
Loss from operations............ (66) (772) (3,883) (16,859)
Interest income (expense), net.. -- 22 335 892
Loss before provision for --------- ----------- ----------- -----------
income taxes................... (66) (750) (3,548) (15,967)
--------- ----------- ----------- -----------
Provision for income taxes...... -- -- 36 79
--------- ----------- ----------- -----------
Net loss........................ $(66) $(750) $(3,584) $ (16,046)
========== =========== =========== ==========
Basic and diluted net loss per
share (1)...................... $(0.06) $(0.67) $ (3.13) $ (6.74)
========== =========== =========== ==========
Weighted average shares
outstanding used in basic and
diluted per share
calculation(1).................. 1,125,000 1,125,000 1,146,773 2,381,140
========== =========== =========== ==========
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December 31,
-----------------------------------------
BALANCE SHEET DATA: 1995 1996 1997 1998
-------- --------- ---------- --------
Cash and cash equivalents and
short-term investments.......... $587 $757 $18,874 $30,149
Working capital................. 575 648 17,117 27,009
Total assets.................... 647 973 19,462 38,130
Capital lease obligations,
excluding current installments.. - - 99 2,006
Total stockholders' equity...... 632 795 17,352 30,301
- -----------------
(1) Weighted average shares do not include any common stock equivalents
because inclusion of common stock equivalents would have been
anti-dilutive. See the financial statements and related financial
statement notes appearing elsewhere in this prospectus for the
determination of shares used in computing pro forma basic and diluted
loss per share.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Our web site is one of the world's leading online networks with
nearly 2.3 million members in the United States and abroad. In December
1998, over 9.3 million unique users visited our site. Our web site is a
destination on the Internet where users are able to personalize their
online experience by publishing their own content and interacting with
others having similar interests. We facilitate this interaction by
providing various free services, including home page building, discussion
forums, chat rooms, e-mail and electronic commerce. Additionally, we
provide our users with news, business information, real time stock quotes,
weather, movie and music reviews, multi-player gaming and personals. By
satisfying our users' personal and practical needs, we seek to become our
users' online home. Our primary revenue source is the sale of advertising,
with additional revenues generated through electronic commerce, development
fees and, to a lesser extent, the sale of membership service fees for
enhanced services.
We were incorporated in May 1995. For the period from inception
through December 1995, we had minimal sales and our operating activities
related primarily to the development of the necessary computer
infrastructure and initial planning and development. Operating expenses in
1995 were minimal. During 1996, we continued the foregoing activities and
also focused on recruiting personnel, raising capital and developing
programs to attract and retain members. In 1997, we
o moved our headquarters to New York City;
o expanded our membership base from less than 250,000 to almost 1
million;
o improved and upgraded our services;
o expanded our production staff;
o built an internal sales department; and
o began active promotion of theglobe.com web site to increase
market awareness.
During 1998, revenues and operating expenses increased as we placed a
greater emphasis on building our advertising revenues and memberships by
expanding our sales force and promoting theglobe.com brand.
To date, our revenues have been derived principally from the sale of
advertisements and sponsorship placements within our site, and to a lesser
extent, from subscription and electronic commerce revenues. Electronic
commerce revenues have not been significant to date, but are expected to
increase with the acquisition of Azazz, and as our existing electronic
commerce arrangements grow and new arrangements are entered into.
Advertising revenues constituted 89%, 77% and 95% of total revenues for the
years ended December 31, 1998, 1997 and 1996. We sell a variety of
advertising packages to clients, including banner advertisements, event
sponsorship, and targeted and direct response advertisements. Our
advertising revenues are derived principally from short-term advertising
arrangements. These arrangements average one to three months. We generally
guarantee a minimum number of impressions for a fixed fee. Advertising
revenues are recognized ratably in the period in which the advertisement is
displayed,
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if no significant company obligations remain and collection of the
resulting receivable is probable. Payments received from advertisers before
displaying their advertisements on our web site are recorded as deferred
revenues and are recognized as revenue ratably when the advertisement is
displayed. To the extent minimum guaranteed impression levels are not met,
we defer recognition of the corresponding revenues until guaranteed levels
are achieved.
In addition to advertising revenues, we derive other revenues
primarily from our membership service fees, electronic commerce revenue,
development fees and sponsorship placements within our site. Subscription
fees are recognized over the membership term. A number of recent
arrangements with our premier electronic commerce partners provide us with
a share of any sales resulting from direct links from our web site. We
recognize revenues from our share of the proceeds from our electronic
commerce partners' sales upon notification from our partners of sales
attributable to our web site. To date, revenues from electronic commerce
arrangements have not been significant. In addition, in 1999 we began
direct electronic commerce sales to users. We also earn additional revenue
on sponsorship contracts for fees relating to the design, coordination, and
integration of the customer's content and links. We recognize these
development fees as revenue once the related activities have been
performed.
We incurred net losses of approximately $16.0 million in 1998, $3.6
million in 1997 and $750,200 in 1996. At December 31, 1998, we had an
accumulated deficit of $20.4 million. We recorded deferred compensation of
approximately $118,100 in 1998, $83,100 in 1997 and $25,000 in 1996 in
connection with the grant of various stock options to employees,
representing the difference between the deemed value of our common stock
for accounting purposes and the exercise price of the options at the date
of grant. This amount is presented as a reduction of stockholders' equity
and is being amortized over the vesting period of the applicable options,
generally three to five years. Amortization of deferred stock compensation
is allocated to the general and administrative expense line identified on
the statement of operations consistent with the classification of the
related personnel.
In addition, we incurred a charge of approximately $1.4 million to
earnings in the third quarter of 1998 in connection with the transfer of
warrants to acquire 225,000 shares of common stock by Dancing Bear
Investments, Inc., which was our principal shareholder at the date of
transfer, to some of our officers at approximately $2.91 per share. The
amount of this non-cash charge was based on the difference between the fair
market value of our stock at the date of transfer ($9.00 per share) and the
exercise price of the warrant of approximately $2.91 per share. This
expense was classified separately in the statement of operations as a
non-recurring charge.
RESULTS OF OPERATIONS
Revenues. Revenues increased to approximately $5.5 million in 1998 as
compared to $770,300 in 1997 and $229,400 in 1996. The year to year growth
resulted from an increase in (1) the number of advertisers and the average
commitment per advertiser, (2) our web site traffic, (3) the number of our
sales people and (4) marketing and advertising expenditures. Advertising
revenues were approximately $4.9 million or 89% of total revenues in 1998,
$592,400 or 77% of total revenues in 1997 and $216,800 or 95% of total
revenues in 1996. In 1998, we significantly increased our sales force and
began a marketing campaign to promote theglobe.com web site. We anticipate
that advertising revenues will continue to account for a substantial share
of our total
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revenues for the foreseeable future. Other revenues were derived from
membership service fees, development fees, electronic commerce revenue
shares and sponsorship placements within our web site. At December 31,
1998, we had deferred revenues of approximately $673,600. Barter revenues
were approximately 2% of total revenues for 1998, 22% for 1997 and 0% for
1996.
Cost of Revenues. Cost of revenues consist primarily of Internet
connection charges, web site equipment leasing costs, depreciation,
maintenance, barter advertising expenses, staff costs and related expenses
of operations personnel. Gross margins were 59% in 1998, 45% in 1997 and
49% in 1996. The increase in gross margin was primarily due to an increase
in revenues relative to the increase in cost of revenues. The absolute
dollar increase in cost of revenues was due to an increase in Internet
connection costs to support the increase in web site traffic, as well as an
increase in equipment costs, depreciation and staff costs required to
support the expansion of our site and services. In addition, we recorded
barter advertising expenses during 1998 and 1997, which was equivalent to
the barter advertising revenues recorded in the same period. The gross
margins exclusive of the barter transactions were 60% in 1998 and 57% in
1997. In 1996, we did not enter into any barter transactions. During the
fourth quarter of 1998, we moved our web site hosting functions to a
separate facility in Staten Island, New York. The new facility will allow
us to support our expanded services and content.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of salaries and related expenses of sales and marketing
personnel, commissions, advertising and public relations expenses. Sales
and marketing expenses were approximately $9.3 million or 169% of total
revenues in 1998, $1.2 million or 162% of total revenues in 1997, and
$275,900 or 120% of total revenues in 1996. The year-to-year increase in
sales and marketing expenses was primarily attributable to expansion of our
online and print advertising, public relations and other promotional
expenditures, as well as increased sales and marketing personnel and
related expenses required to implement our marketing strategy. Sales and
marketing expenses also increased as a result of our decision to shift our
advertising to an internal sales department in the second quarter of 1997.
Product Development Expenses. Product development expenses include
professional fees, staff costs and related expenses associated with the
development, testing and upgrades to our web site as well as expenses
related to its editorial content and community management and support.
Product development expenses were approximately $2.6 million or 48% of
total revenues in 1998, $153,700 or 20% of total revenues in 1997, and
$120,000 or 52% of total revenues in 1996. The increase in absolute dollars
in product development expenses was primarily attributable to increased
staffing levels required to support our web site and to enhance its content
and features. Product development expenses also increased as a result of
the launch of our web site redesign in November 1998. We intend to continue
recruiting and hiring experienced product development personnel and to make
additional investments in product development.
General and Administrative Expenses. General and administrative
expenses consist primarily of salaries and related costs for general
corporate functions, including finance, human resources, facilities and
legal, along with professional fees and bad debt expense and other
corporate expenses. General and administrative expenses were approximately
$6.8 million or 124% of total revenues in 1998, $2.8 million or 367% of
total revenues in 1997, and $489,100 or 213% of total revenues in 1996. The
absolute dollar increase in these expenses was primarily due
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to increased salaries and related expenses associated with our management's
employment contracts, hiring of additional personnel, and increases in
professional fees and travel. The increased salaries also reflect the
highly competitive nature of hiring in the new media industry. We expect
that we will incur additional general and administrative expenses as we
hire additional personnel and incur additional costs related to the growth
of our business and operation as a public company, including directors' and
officers' liability insurance, investor relations programs and professional
service fees. Accordingly, we anticipate that general and administrative
expenses will continue to increase in absolute dollars.
Non-recurring charges. We recorded a non-recurring, non-cash charge of
approximately $1.4 million in the third quarter of 1998. This charge was in
connection with the transfer of outstanding warrants to acquire 225,000
shares of common stock by Dancing Bear Investments, which was our principal
shareholder at the time of the transfer, to some of our officers. There was
no similar charge in 1997 or 1996.
Other Income (expense). Other income (expense) includes interest
income from our cash and investments, interest expenses related to our
capital lease obligations, and realized gains and losses from sale of
short-term investments. The year-to-year increase in interest and dividend
income was due to a higher average cash, cash equivalent and investment
balance as a result of the proceeds received from the issuance of shares of
our preferred stock in the third quarter of 1997, and the issuance of
common stock in connection with our initial public offering in November
1998.
Interest and other expense increased in 1998 due to new capital lease
obligations. We entered into our first capital lease in late December 1997.
As a result, interest expense from capital lease obligations did not begin
until 1998.
Income Taxes. Income taxes were approximately $78,900 in 1998, $36,100
in 1997 and -0- in 1996. These income taxes were based solely on state and
local taxes on business and investment capital. These taxes increased from
year to year due to an increase in our average equity balance. The average
equity balance increased as a result of the proceeds received from our
issuance of shares of preferred stock in the third quarter of 1997, and our
issuance of common stock in connection with our initial public offering in
November 1998. Our effective tax rate differs from the statutory federal
income tax rate, primarily as a result of the uncertainty regarding our
ability to utilize net operating loss carryforwards. Due to the uncertainty
surrounding the timing or realization of the benefits of our net operating
loss carryforwards in future tax returns, we have placed a 100% valuation
allowance against our deferred tax assets. As of December 31, 1998, we had
approximately $29.2 million of federal and state net operating loss
carryforwards for tax reporting purposes available to offset future taxable
income. Our federal net operating loss carryforwards will expire beginning
in 2001 through 2018, if not utilized. The Tax Reform Act of 1986 imposes
substantial restrictions on the utilization of net operating losses and tax
credits in the event of an "ownership change" of a corporation. Due to the
change in our ownership interests in the third quarter of 1997, as defined
in the Internal Revenue Code, future utilization of our net operating loss
carryforwards will be affected by limitations or annual restrictions.
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LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, we had approximately $29.3 million in cash
and cash equivalents and approximately $898,500 in marketable securities.
Net cash used in operating activities was approximately $13.5 million in
1998, $1.9 million in 1997 and $601,600 in 1996. The increase in net cash
used in 1998 resulted primarily from an increase in our expenses which
resulted in increased net operating losses. In addition we had a higher
level of receivables due to increased revenues and an increase in prepaid
expenses. These items were partially offset by an increase in accounts
payable and deferred revenues. The 1997 increase in net cash used was
primarily due to an increase in net operating loss and a higher account
receivable balance. These items were partially offset by the timing of
payments associated with our 1997 accrued bonuses paid in the first quarter
of 1998, as well as an increase in accounts payable and accrued expenses.
Net cash provided (used) in investing activities was approximately
$9.6 million in 1998, $(13.2) million in 1997 and $(138,300) in 1996. Net
cash provided by investing activities in 1998 was primarily related to the
sales of short-term investments to finance our working capital needs. These
sales were partially offset by approximately $1.7 million in security
deposits required for capital leases and the purchase of property and
equipment in connection with the build out of our infrastructure. Net cash
used in investing activities in 1997 was primarily related to the purchase
of securities with the proceeds from our private placement in the third
quarter of 1997. Cash used in investing activities in 1996 was related to
the purchase of property and equipment.
Net cash provided by financing activities was approximately $27.2
million in 1998, $20.2 million in 1997 and $910,000 in 1996. Net cash
provided by financing activities during 1998 consisted primarily of $27.3
million from the issuance of 3,481,667 shares of common stock in connection
with our initial public offering in November 1998. The net cash provided by
financing activities in 1997 consisted primarily of approximately $20.3
million from preferred stock issuances. These amounts were partially offset
by approximately $130,500 in financing costs related to the private
placements. The approximately $910,000 of net cash provided in 1996 was
from our private placements of preferred stock.
On February 1, 1999, we purchased factorymall.com, a leading
interactive department store doing business as Azazz.com, which is being
integrated into our electronic commerce site, known as "shop.theglobe.com."
We expect to invest an aggregate of up to approximately $3.8 million of
working capital in 1999 to support the future operations of
shop.theglobe.com. On April 9, 1999, we purchased Attitude Network, an
online provider of entertainment content. We expect to invest an aggregate
of up to approximately $3.5 million of working capital in 1999 to support
the future operations of Attitude Network.
Our capital requirements depend on numerous factors, including market
acceptance of our services, the amount of resources we devote to
investments in our web site, the resources we devote to marketing and
selling our services and our brand promotions and other factors. We have
experienced a substantial increase in our capital expenditures and lease
arrangements since our inception consistent with the growth in our
operations and staffing, and we anticipate that this will continue for the
foreseeable future. Additionally, we will continue to evaluate possible
investments in businesses, products and technologies, and we plan to expand
our sales force. We believe that the net proceeds from the offering,
together with our current cash and cash
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equivalents, will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for our existing business for at
least 12 months. However, we may need to raise additional funds during 1999
to obtain or operate any additional acquired businesses or joint venture
arrangements. See "Risk Factors--We may need to raise additional funds,
including through the issuance of debt."
IMPACT OF THE YEAR 2000
The Year 2000 issue is the potential for system and processing
failures of date-related data and the result of computer-controlled systems
using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the 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.
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.
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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 and 1998,
inflation has not had a significant effect on our results of operations
since inception.
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 Shareholders' Equity.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for fiscal
years
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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 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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BUSINESS
OVERVIEW
theglobe.com is one of the world's leading online networks with
nearly 2.3 million members in the United States and abroad. In December
1998, over 9.3 million individuals visited our web 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 rooms, e-mail and electronic commerce. Additionally, we
provide our users with news, business information, real time stock quotes,
weather, movie and music reviews, multi-player gaming and personals. By
satisfying our users' personal and practical needs, we seek to become our
users' online home.
We generate revenues primarily by selling advertisements, sponsorship
placements within our site, development fees and, to a lesser extent, from
electronic commerce revenues. In the last three months of 1998, we had
approximately 147 advertisers, including Coca Cola, Hewlett Packard,
Hilton, LEGO, Office Max, 3Com and Visa. In February 1999, we acquired
factorymall.com, an online retail store doing business as Azazz.com which
sells a variety of name brand products directly to consumers. We have begun
integrating Azazz.com into our electronic commerce site, now known as
"shop.theglobe.com," and expect to begin to generate additional revenues
from electronic commerce in the second quarter of 1999. In April 1999, we
acquired Attitude Network, a provider of online entertainment content whose
web sites include HappyPuppy.com and GamesDomain.com, two leading web sites
serving game enthusiasts. Attitude Network offers innovative and current
entertainment content that capitalizes on the web's unique graphical and
interactive capabilities.
Since our founding, we have experienced strong growth. Over 9.3
million individuals visited our site in December 1998, according to
DoubleClick, as audited by ABC Interactive. We have nearly 2.3 million
members in the United States and abroad who have registered with us and
provided us personal information. Approximately 40% of our monthly traffic
originates from abroad, reflecting our site's international appeal.
ABOUT OUR INDUSTRY
The rapid adoption of the Internet as a means to gather information,
communicate, interact and be entertained, combined with the vast
proliferation of web sites, has made the Internet an important new mass
medium. The International Data Corporation estimates that the number of web
users exceeded 97 million in 1998, and will grow to over 319 million by
2002. The Internet enables advertisers to target advertising campaigns
utilizing sophisticated databases of information on the users of various
sites and to directly generate revenues from these users through online
transactions. As a result, the Internet has become a new means to advertise
and market products and services.
With the volume of sites and vast abundance of information available
on the Internet, users are increasingly seeking an online home where they
can interact with others with similar interests and quickly find
information, products and services related to a particular interest or
need.
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Community sites were developed as a solution to the challenges posed by the
Internet's growth and complexity. Community sites also offer a single
convenient location where users have access to electronic commerce, content
and user interaction. As a result, we must offer a wide scope of services
ranging from e-mail accounts, chat rooms, news, and entertainment services,
among other features. By satisfying the needs of their users, online
communities seek to establish a close relationship with their audience. As
a result, we believe that users tend to be loyal to and spend more time
online at community sites.
Advertising. Jupiter Communications estimates that spending on
Internet advertising in the United States will grow from $1.9 billion in
1998 to $7.7 billion in 2002. The Internet provides advertisers with
targeting tools not available from traditional advertising media. The
interactive nature of the Internet and the development of click-through
advertising banners and other feedback tools enable advertisers to measure
impression levels, establish a dialogue with users and receive real-time
direct feedback from their target audiences. Such feedback provides
advertisers with an effective means to measure the attractiveness of their
offerings among targeted audiences and make modifications to their
advertising campaigns on short notice.
Community sites are generally able to provide advertisers
significantly more information regarding consumers than other web sites
because they collect detailed demographic data and facilitate the
development of user-created affinity groups. One way community sites foster
affinity groups is by providing focused third party content, such as
business information or entertainment. The ability to target advertisements
to broad audiences, specific regional populations, affinity groups or
individuals makes community web site advertising a highly versatile and
effective tool for delivering customized and cost-effective messages.
One indicator of the Internet's popularity as an advertising medium is
the growing number and diversity of Internet advertisers. Most early
Internet advertisers were technology and Internet-related companies. Today,
a growing number of Internet advertisers consist of traditional, consumer
product and service companies. The diverse audience accessing community
sites has made such sites especially attractive to consumer product and
service companies advertising on the Internet.
Electronic commerce and Direct Marketing. The Internet has become a
significant marketplace for buying and selling goods and services. Jupiter
Communications estimates that the amount of goods or services purchased in
online consumer transactions will grow from approximately $7.1 billion in
1998 to approximately $41.1 billion in 2002. Improvements in security,
interface design and transaction-processing technologies have facilitated
an increase in online consumer transactions. Early adopters of such
improvements include:
o online merchants offering broad product catalogs, such as books,
music CDs and toys;
o those seeking distribution efficiencies, such as PCs, flowers and
groceries; and
o those offering products and services with competitive pricing,
such as automobiles and mortgages.
We believe that online communities provide businesses an attractive
environment for selling products and services by providing direct access to
users with like interests. For the members of
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the communities, we believe that providing the opportunity to make
purchases is both a convenience and a complimentary service.
The Internet allows marketers to collect meaningful demographic
information and feedback from consumers, and to rapidly respond to this
information with new messages. This offers a significant new opportunity
for businesses to increase the effectiveness of their direct marketing
campaigns. In traditional media, a significant portion of all advertising
budgets are spent on direct marketing because of its effectiveness.
However, the effectiveness of direct marketing campaigns is dependent upon
the quality of consumer data used to develop and place consumer
advertisements. In addition to providing detailed demographic data,
community web site participants indicate their areas of personal interest
by self-selecting themselves into affinity groups. This added level of
information provides direct marketers an important tool to target potential
customers more accurately. Accordingly, advertisers are able to improve
their direct marketing campaigns which may translate into higher sales.
THEGLOBE.COM
Todd V. Krizelman and Stephan J. Paternot created theglobe.com to take
advantage of the demand for online destinations that allow users to develop
their own identities and establish relationships with users with similar
interests. Our site provides breadth and depth in content and commerce and
pairs this with user interaction. It is this combination that attracts and
retains users. Our site has ten "Themes of Interest":
o Arts o News
o Business o Romance
o Entertainment o Sports
o Life o Technology
o Metro o Travel
Within each theme is a combination of content, electronic commerce and
interactive services. Content is both user generated as well as
professional. We have several professional content relationships. These
include CBS Marketwatch, Reuters, CNET, UPI, Variety, Thomson Investors
Network, E! Online, and Fox Sports. Electronic commerce is woven
contextually throughout themes. For example, within the Sports theme a user
will find sports equipment for sale, while in the Business theme the user
would find products directed at the business professional. Interactive
services such as chat, discussion forums, and surveys are paired with
content to promote usage.
Members are also encouraged to generate their own webpages and
aggregate in online communities. We do not limit the number of communities
which our members can join and members are free to leave at any time.
Because of this, communities are dynamic and evolve as member interests'
change.
The unique community focus of our site offers us several advantages
that include:
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o Member Loyalty. Because we provide a homepage for our members,
members develop loyalty to our site and to the communities in
which they participate. We believe that this translates into more
frequent usage by members and longer stays at our site.
o Member-Developed Content. Users develop the majority of the
content on our site on a voluntary basis for the benefit of all
of our users. As a result, we avoid some of the costs associated
with content development.
o Third-Party Content. We have a number of arrangements with third
party content providers who place original or proprietary
information on our site in exchange for payment to us or a share
of revenues generated from the sale of advertising attributable
to this content. As a result, we avoid the costs associated with
developing additional content.
o Targeted Advertising. We allow advertisers to target their
advertisements based on both demographic information and affinity
group affiliations. Our volume of user traffic, frequency and
average length of use also draw advertisers to our site. Our
ability to reach users across a wide variety of interest areas
has made our site attractive to technology companies and
traditional consumer product and service companies. As of
December 31, 1998, approximately 70% of our advertisers were
branded consumer product and service companies.
OUR BUSINESS STRATEGY
Our goal is to be the leading online network. We seek to attain
this goal through the following key strategies:
Improve User Experience. We will continue efforts to improve user
experience on our site by:
o launching new services to enhance our community;
o personalizing our site to the preferences of individual members;
o simplifying user interfaces and otherwise improving the ease of
use;
o improving customer support;
o developing loyalty programs to reward members for increased
usage;
o expanding the suite of personal publishing/web site building
tools; and
o creating additional opportunities for participating
in existing affinity groups, and expanding the number of affinity
groups.
Develop Brand Identity and Awareness. We intend to expand our presence
as a mass market site by building brand awareness. We plan to continue to
allocate a significant portion of our resources to develop our brand in the
same fashion as traditional consumer product and service companies. We
believe that establishing brand awareness among consumers is instrumental
in attracting new members to our site. It may also attract media buyers who
tend to favor well-known and trusted companies. To build its brand within
the games industry, Attitude Network's HappyPuppy.com is a major
participant in industry related events and gives out awards to reflect
users' selections of best games.
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Further Develop Electronic Commerce. We intend to increase our
electronic commerce revenues by (1) selling select products directly to
consumers through the integration of Azazz into our web site and (2)
indirectly selling products to consumers through increasing the number of
electronic commerce partners who establish virtual storefronts in the
shop.theglobe.com site.
We plan to re-launch the shop.theglobe.com site area in the second
quarter of 1999. We believe that integrating Azazz with our existing
electronic commerce business should enhance our users' overall shopping
experience. The acquisition enables us to directly offer a broad array of
products, attractive prices and premium customer service. In particular, we
will differentiate ourselves from competitors by offering Azazz's "personal
shopper" application which enables customers to communicate directly with a
live customer service representative during each step of the online
shopping process.
Acquisition, Joint Venture and Alliance Strategy. We review
acquisition candidates and joint ventures in the ordinary course of
business, some of which may be material. Our focus is to seek transactions
that would complement our existing business, increase our traffic, augment
the distribution of our community, enhance our technological capabilities
or increase our electronic commerce revenues. We have been approached from
time to 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 to acquire one or more companies in various transactions, some
of which may be material, but we have not reached any binding agreements.
These transactions may or may not be consummated.
Expand Globally. We believe that significant opportunities exist to
capitalize on the growth of the Internet internationally. We are pursuing
strategic relationships with international companies to exploit
cross-marketing, co-branding and promotional opportunities. Approximately
40% of our monthly traffic is generated by users outside of the United
States. Users outside of the United States are able to communicate and
publish on our site in their own languages. We have also received prominent
press coverage in Europe, Asia and Australia. Attitude Network's Games
Domain site is based in Birmingham, England and receives traffic at mirror
sites in Russia, Greece, South Africa and Portugal.
Enhance Membership Services. We offer additional Internet services,
including increased storage space for building home pages. To attract a
wider subscriber base, we intend to develop new membership programs
offering premium content, shopping clubs and entertainment services.
OUR PRODUCTS AND SERVICES
We provide users with the following products and services:
Free Services. We provide a range of free services to our members
including:
o business and technology news;
o real-time stock quotes and portfolio services;
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o "my globe" personalized home pages;
o classified listings;
o a marketplace where members can purchase a variety of products
and services;
o home page building;
o discussion forums;
o chat rooms; and
o e-mail.
By satisfying our users' personal and practical needs, we seek to
become our users' online home. Our primary revenue source is the sale of
advertising, with additional revenues generated through electronic
commerce. We derive electronic commerce revenues in shop.theglobe.com
through merchandise sales by partners, and, beginning in the second quarter
of 1999, from direct merchandise sales. We believe that the addition of
Azazz's broad array of products, attractive prices and premium customer
service to the shop.theglobe.com site will significantly enhance the
shopping experience for our millions of monthly users.
Premier Partners. We have relationships with premier partners who pay
a fixed monthly fee, generally from $5,000 to $100,000 per month, and often
a percentage of sales, to receive prominent placement in the
shop.theglobe.com site and on our site. Premier partner agreements
typically run for a period of six months to three years. In some instances,
premier partners pay us a share of the sales over a particular threshold
amount from users directed to them from our site. Premier partners include:
o Lowestfare.com. Lowestfare.com offers discounted airline, car and
hotel reservations, vacation packages and cruises. Lowestfare.com
has entered into a three-year agreement with us to be our
exclusive provider of travel-related services. They also provide
us with content, including weather, mapping, destination
information and voice response e-mail. We provide Lowestfare.com
with advertising and Marketplace exposure on the
shop.theglobe.com site.
o AutoNation. AutoNation owns the largest chain of new vehicle
dealerships in the United States and operates a chain of used car
megastores under the AutoNation USA brand name. We provide
AutoNation preferred placement in our auto category under a
three-year agreement.
o Cyberian Outpost. Cyberian Outpost sells computer hardware,
software and accessories directly to consumers online. We have
entered into a six month arrangement with Cyberian Outpost to be
our exclusive online computer hardware retailer.
o Boxlot. We have entered into a two year relationship with
Boxlot.com to provide a customized, co-branded person to person
auction service for theglobe.com. The co-branded auction service
will be integrated throughout each of theglobe.com theme areas.
Boxlot has agreed to pay us up to $2.3 million over the term of
the agreement.
o Music HQ. We have entered into a 1 year partnership with Music
HQ, Inc. to promote its music and movie retail online properties,
www.musichq.com and www.dvdflix.com, on shop.theglobe.com and
throughout the Entertainment theme on our site. Music HQ has
agreed to pay us $1.2 million over the term of the agreement.
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Member Subscriptions. We offer additional Internet services through
premium membership packages. For example, these packages provide additional
storage space and the ability to host limited commercial activity.
CORPORATE ALLIANCES AND RELATIONSHIPS
We have a number of relationships with partners and content providers
to provide our users with a full suite of web services. These arrangements
provide us with a cost-effective method for increasing our services without
incurring significant capital expenditures. Examples include:
o Business and Finance. By providing free real-time stock quotes,
stock screening analysis and portfolio tools from the Thomson
Financial Network and stock market editorial analysis and daily
articles from CBS MarketWatch, we are able to assist our users in
planning and tracking their investment decisions.
o Entertainment. Through entertainment news and gossip from E!
Online and Variety, and music reviews and commentary from
SonicNet, we offer our users multiple viewpoints on the latest
events in the entertainment industry.
o Online Calendar and Address Book. We license Visto's Briefcase
application for use on our site, which permits our users to
manage all of their appointments and contact information through
our site.
o Other Key Services. We provide sports highlights and scores from
Fox Sports, employment, real estate and automobile classified
listings from Classified Warehouse and weather forecasts from
AccuWeather.
ADVERTISING CUSTOMERS
With over 9.3 million unique users as of December 1998, and nearly 2.3
million members in the United States and abroad, we have attracted mass
market consumer product companies as well as technology-related businesses
to advertise on our site. We believe that our community site is well
positioned to capture a portion of the growing number of consumer product
and service companies advertising online.
Our advertising clients enter into short term agreements, which
typically last one to three months. Our clients generally receive a
guaranteed number of impressions for a fixed fee. In 1998, no single
advertiser accounted for more than 10% of total revenues and approximately
70% of our advertisers were repeat customers. In the last three months of
1998, approximately 147 advertising clients advertised on our site. Some of
our advertising clients include:
American Express Hilton Lee Jeans Polygram
AT&T Intel Levi's Sony
BellSouth J. Crew Microsoft 3Com
Coca Cola Kellogg's Brands Office Depot USWest
Dunkin' Donuts Kodak Pepsi Visa
The following advertisers have purchased advertising on Attitude
Network:
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Arizona Jeans IBM Silicon Graphics
Electronic Arts Oracle Toys "R" Us
Hasbro
ADVERTISING SALES AND DESIGN
We seek to distinguish ourselves from our competition by creating
unique advertising and sponsorship opportunities designed to build brand
loyalty for our corporate sponsors by seamlessly integrating their
advertising messages into our content. We can deliver advertising to
specific targets within our site's themed content areas, allowing
advertisers to single out and effectively deliver their messages to their
respective target audiences. For example, a company can target an
advertisement solely to males or females over 24 years of age coming to our
Business Theme area from Latin America. We believe that sophisticated
targeting is a critical element for capturing worldwide advertising budgets
for the Internet. Additionally, we intend to expand the amount and type of
demographic information we collect from our members, which will allow us to
offer more specific data to our advertising clients.
While our competition generally provides banner advertising as its
primary advertising option, we offer an assortment of advertising options
for our clients. We work with our advertising customers to meet their
needs. We offer advertisers:
o Banner advertising o Sweepstakes
o Button advertising o Content development
o Text links o Affinity packages for
o Pop-up advertisements advertising partners
o Log out links to full page o Direct marketing and lead
advertisements generation, if users have opted in
o Various sponsorship programs to these programs
o Market research for advertising
campaigns
We have an internal sales organization of approximately 25
professionals. These professionals focus on both selling advertisements on
our web site and developing long-term strategic relationships with clients.
A significant portion of our sales personnel's income is commission based.
We have sales offices in New York City, Chicago and San Francisco and
intend to open additional sales offices in selected markets around the
world.
Attitude Network has a particular expertise in online promotions. As
an example, HappyPuppy.com was one of only three web sites selected by
Gillette to promote the October 1998 introduction of the Mach3 razor. The
promotion featured a fast action shaving game created by Attitude Network
and a game oriented contest through which entrants could win copies of the
most popular games. A total of 25 sponsor promotions were run by Attitude
Network during 1998.
MARKETING AND PROMOTIONS
In 1998, we committed approximately $7.3 million to advertising in
traditional offline media and in online media. In March 1998, we launched
our advertising campaign through
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television, print, billboards, buses, telephone kiosks, online media, and
other marketing efforts. These efforts were aimed at:
o generating additional traffic to our site;
o building and defining a desirable online destination in the minds
of present and potential online consumers; and
o creating a strong and viable brand within the Internet and
advertising industries.
We intend to continue to commit a significant part of our budget to
marketing our brand.
TECHNOLOGY
Our strategy is to operate our business through the application of
existing technologies. The various features of our online environment are
implemented using a combination of off-the-shelf and proprietary software
components. Whenever possible, we favor licensing and integrating
"best-of-breed" technology from industry leaders, including Oracle, Sun
Microsystems and Microsoft. We believe that this component approach is more
manageable, reliable and scalable than single-source solutions. In
addition, our emphasis on commercial components accelerates our development
time. We believe that this is an advantage in our rapidly evolving market.
In addition to being scalable, our system has many redundancies, which
benefit us if part of our system is down. Our servers are connected to the
Internet through a combination of links provided through three separate
carriers, AppliedTheory, UUNET and AT&T. This approach to connectivity
allows us to continue operations in the event of a failure in any carrier.
We plan to continue to upgrade our systems as necessary for our business
plan. Our system allows us to roll out upgrades incrementally on an
as-needed basis.
To efficiently manage our system, we have developed highly automated
methods of monitoring the performance of each system component. If any
subsystem fails, the failed subsystem is taken out of service and requests
are distributed among the remaining operational systems. We have also
developed tools to perform routine management tasks such as log processing
and content updates in an automated, remote-controlled fashion. We believe
that our investment in automation lessens the need for the additional
personnel that would otherwise be required to support the system as it
grows.
In the fourth quarter of 1998 and the first quarter of 1999, we
relocated our data processing systems and servers to the New York Teleport
in Staten Island, New York under a three year lease with Telehouse
International Corporation. The New York Teleport facility provides
security, electricity and premises for our systems. The facility has four
independent battery-operated power supplies, as well as four independent
diesel generators designed to provide power to these systems within seconds
of a power surge. If required, the diesel generators can supply the data
center's power for several days. Telehouse International Corporation does
not guarantee that our Internet access will be uninterrupted, error-free or
secure.
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We maintain server equipment related to shop.theglobe.com at Exodus
Communications, Inc.'s facility in Seattle, Washington. Additionally, we
maintain computer hardware, servers and operations relating to Attitude
Network in Herndon, West Virginia, which are hosted by Frontier
GlobalCenter and in London, England which are hosted by Telehouse
International. Each of Exodus, Frontier and Telehouse provides and manages
power, environmentals and connectivity to the Internet through multiple
links on a 24 hour-a-day, seven days per week basis. Neither Exodus,
Frontier, nor Telehouse guarantees that our Internet access will be
uninterrupted, error-free or secure.
COMPETITION
The market for members, users and Internet advertising among web sites
is new and rapidly evolving. We expect the intense competition for members,
users and advertisers, as well as competition in the electronic commerce
market, to increase significantly. Barriers to entry are relatively
insubstantial and we face competitive pressures from many additional
companies both in the United States and abroad. See "Risk Factors --
Competition for members, users and advertisers, as well as competition in
the electronic commerce market, is intense and is expected to increase
significantly."
All types of web sites compete for users. Competitor web sites include
community sites, as well as "gateway" or "portal" sites and various other
types of web sites. We believe that the principal competitive factors 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 customers
with:
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
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o other web sites serving game enthusiasts, including Ziff Davis'
Gamespot and CNET's Gamecenter.
Many of our existing competitors, as well as a number of potential
new competitors, have the following advantages:
o longer operating histories in the 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 acquired
Netscape and Lycos announced a transaction in which USA Networks would
merge its online and retailing assets, which include Ticketmaster
Citysearch Online, with Lycos. In addition, there has been other
significant consolidation in the 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.
Many of our competitors, including other community sites, have
announced that they are contemplating developing Internet navigation
services and are attempting to become "gateway" or "portal" sites through
which users may enter the Web. In the event these companies develop
successful "portal" sites, we could lose a substantial portion of our user
traffic. Furthermore, many non-community sites are seeking to develop
community aspects in their sites. Web browsers offered by Netscape and
Microsoft also increasingly incorporate prominent search buttons that
direct traffic to competing services. These features could make it more
difficult for Internet users to find and use our product and services. In
the 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 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.
We believe that the number of Internet companies relying on
Internet-based advertising revenue, as well as the number of advertisers on
the Internet and the number of users, will increase substantially in the
future. We believe that the principal competitive factors in attracting
advertisers include the following:
o amount of traffic on a web site;
o brand recognition;
o customer service;
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o the demographics of members and users of a web site;
o the ability to offer targeted audiences; and
o the overall cost effectiveness of the advertising medium offered.
In addition, many of our current advertising customers and strategic
partners have established collaborative relationships with some of our
existing and potential competitors. Accordingly, we will likely face
increased competition. We also compete with traditional advertising media,
including television, radio, cable and print, for a share of advertisers'
total advertising budgets. This will result in increased pricing pressures
on our advertising rates, which could have a material adverse effect on us.
See "Risk Factors--We rely substantially on advertising revenues."
Additionally, the electronic commerce market is new and rapidly
evolving, and we expect the intense competition among electronic commerce
merchants to increase significantly. We generate substantially all of our
electronic commerce revenues from our electronic commerce partners in our
Marketplace. In the future, we expect to generate electronic commerce
revenues through our Azazz acquisition. Because the Internet allows
consumers to easily compare prices of similar products or services on
competing web sites and there are low barriers to entry for potential
competitors, gross margins for electronic commerce transactions may narrow
further in the future. Competition among Internet retailers or among our
electronic commerce partners may have a material adverse effect on our
ability to generate revenues through electronic commerce transactions or
from these electronic commerce partners.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard substantial elements of our site and underlying technology
as proprietary. We attempt to protect them by relying on intellectual
property laws. We also generally enter into confidentiality agreements with
our employees and consultants and in connection with our license agreements
with third parties. We also seek to control access to and distribution of
our technology, documentation 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.
We pursue the registration of our trademarks in the United States and
internationally. Our efforts include:
o the registration of a United States trademark for the globe;
o the filing of United States trademark applications for
theglobe.com, theglobe.com logo, TGLO, A Whole New Life Awaits
You, globeDirect and globeStores;
o the submission of trademark applications for theglobe.com logo in
Australia, Brazil, Canada, China, the European Union, Hong Kong,
Israel, Japan, New Zealand, Norway, Russian Federation,
Singapore, South Africa, Switzerland and Taiwan; and
o the submission of trademark applications for A Whole New Life
Awaits You in the European Union and Switzerland.
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Additionally, Attitude Network has filed applications to register some
of its trademarks in the United States, including "Attitude Network" and
"Happy Puppy." Notice of Allowance has been received from the United States
Patent and Trademark Office on "Happy Puppy." Kaleidoscope Networks
Limited, the wholly owned subsidiary of Attitude Network, has registered
the mark "GD Games Domain" in the United Kingdom.
Effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our services are
distributed or made available through the Internet. Policing unauthorized
use of our proprietary information is difficult. See "Risk Factors--We rely
on intellectual property and proprietary rights."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
We are subject to laws and regulations that are applicable to various
Internet activities. There are many legislative and regulatory proposals
under consideration by federal, state, local and foreign governments and
agencies, including matters relating to:
o online content;
o Internet privacy;
o Internet taxation;
o access charges;
o liability for information retrieved from or transmitted over the
Internet;
o domain names;
o database protection;
o unsolicited commercial email messages;
o online gambling; and
o jurisdiction.
New regulations may increase our costs of compliance and doing business,
decrease the growth in Internet use and decrease the demand for our
services or otherwise have a material adverse effect on our business.
Online Content. Online content restrictions cover many areas,
including indecent or obscene content and gambling. Several federal and
state statutes prohibit the transmission of indecent or obscene information
and content, including sexually explicit information and content. The
constitutionality of some of these statues is unclear at this time. For
example, in 1997 the Supreme Court of the United States held that selected
parts of the federal Communications Decency Act of 1996 governing indecent
and patently offensive content were unconstitutional. Many other provisions
of the Communications Decency Act, including those relating to obscenity,
however, remain in effect. Prior to the Supreme Court's decision, a federal
district court in New York held that some provisions of the New York penal
law modeled on the Communications Decency Act violated the Constitution. A
companion provision of that law, however, was subsequently upheld. Since
the Supreme Court's decision, a federal district court in New Mexico held
that a provision of the New Mexico penal law purporting to make it unlawful
to disseminate over the Internet information that is harmful to minors
violated the Constitution.
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The Child Online Protection Act became effective on November 20, 1998.
It requires web sites engaged in the business of the commercial
distribution of material that is deemed to be obscene or harmful to minors
to restrict minors' access to this material. However, the Child Online
Protection Act exempts from liability telecommunications carriers, Internet
service providers and companies involved in the transmission, storage,
retrieval, hosting, formatting or translation of third-party communications
where these companies do not select or alter the third-party material. On
February 1, 1999, a federal district court in Pennsylvania entered a
preliminary injunction preventing enforcement of the harmful-to-minors
portion of the act. The provisions of the act relating to obscenity,
however, remain in effect. We cannot predict the ultimate outcome or effect
of this litigation or the effect that the Child Online Protection Act may
have on our business.
The U.S. Department of Justice and some state Attorneys General have
intensified their efforts in taking action against businesses that operate
Internet gambling activities. In the last Congress, the Senate passed the
Internet Gambling Prohibition Act, which, if enacted, would have prohibited
placing or receiving a bet via the Internet in any state. A similar bill
has been introduced in the current Congress. We cannot predict whether
similar legislation will be enacted in the current Congress. Even in the
absence of new legislation directed specifically at Internet-based
gambling, existing federal and state statutes generally criminalize these
activities. During 1998, online gambling advertisers accounted for under
ten percent of our advertising revenues. The enactment of any legislation
in the United States or abroad that limits or prevents businesses from
operating online gambling would likely have an adverse effect on our
advertising revenue.
Some states, including New York and California, have enacted laws or
adopted regulations that expressly or as a matter of judicial
interpretation apply various consumer fraud and false advertising
requirements to parties who conduct business over the Internet. The
constitutionality and the enforceability of some of these statutes is
unclear at this time. For example, in 1997, a federal district court held
that a Georgia criminal statute violated the Constitution when it
prohibited Internet transmissions that falsely identify the sender or use
trade names or logos that would falsely state or imply that the sender was
legally authorized to use them.
Internet Privacy. In October 1998, the Children's Online Privacy
Protection Act was signed into law, which directs the FTC to develop
regulations for the collection of data from children by commercial web site
operators. Separately, the Federal Trade Commission Act prohibits unfair
and deceptive practices in and affecting commerce. The FTC Act authorizes
the FTC to seek injunctive and other relief for violations of the FTC Act,
and provides a basis for government enforcement of fair information
practices. For instance, failure to comply with a stated privacy policy may
constitute a deceptive practice in some circumstances and the FTC would
have authority to pursue the remedies available under the Act for any
violations. Furthermore, in some circumstances, information practices may
be inherently deceptive or unfair, regardless of whether the entity has
publicly adopted any privacy policies.
Some industry groups and other organizations have proposed, or are in
the process of proposing, various voluntary standards regarding the
treatment of data collected over the Internet. In order to improve user and
member confidence in theglobe.com web site, we recently revised our user
agreement and privacy policy and became a licensee of the TRUSTe Privacy
Program.
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As a TRUSTe licensee, we have agreed to adhere to certain established
privacy principles at theglobe.com web site as well as to comply with
TRUSTe's oversight and consumer resolution process. theglobe.com web site
privacy policy now sets forth what personal information is being collected,
how it will be used, with whom it will be shared, who is gathering the
information, what options the user has, what security procedures are in
place to prevent misuse or loss, and how users can correct information to
control its dissemination. We may choose to join other organizations that
require us to comply with other privacy principles. We may incur expenses
in obtaining the endorsement of these organizations or in altering our
current policies to comply with these privacy principles. We cannot assure
you that the adoption of voluntary standards will preclude any legislative
or administrative body from taking governmental action regarding Internet
privacy.
In June 1998, the FTC released a report analyzing the effectiveness of
self-regulation as a means of protecting consumer privacy on the Internet.
The report concluded that industry self-regulation had not been adequate.
The report listed four core information practices that the FTC believes
must be part of any privacy protection effort: notice, choice, access and
security. The FTC has indicated that in the absence of effective
self-regulation, it may support federal legislation to address consumer
privacy concerns. We cannot assure you that the FTC's actions in this area
will not adversely affect our ability to collect demographic and personal
information from members, which could have an adverse affect on our ability
to attract advertisers. This could have a material adverse effect on us.
The FTC has begun investigations into the privacy practices of
companies that collect information on the Internet. For example, on August
13, 1998, the FTC announced that it had entered into a proposed consent
order with one of our competitors. In its complaint, the FTC alleged that
this competitor engaged in three deceptive practices. First, the FTC
alleged that the company falsely represented that the personal identifying
information it collects through its membership application form is used
only to provide members the specific offers and products or services they
request. Second, the FTC alleged that the competitor falsely represented
that the "optional information" it collects through the application form is
not disclosed to third parties without the member's permission. Third, the
FTC alleged that the competitor had falsely represented that it collected
and maintained the information provided by children who joined various
neighborhoods on its site, when in fact the undisclosed third parties
actually collected and maintained the information. Without admitting that
these allegations are correct, the competitor agreed in a consent order
made final by the FTC on February 12, 1999, among other things, to post a
clear and prominent privacy statement on its home page and each location
where information is collected, disclosing the information collected, the
purpose to which the information would be used, the persons to whom the
information would be released, and the methods by which subscribers could
access and remove the information. The competitor also agreed to obtain
express parental consent before collecting information from children 12 and
under and to notify individuals from whom it previously collected personal
information and offer them the opportunity to have that information
deleted. Finally, the competitor agreed to post, for five years, a clear
and prominent hyperlink within its privacy statement directing visitors to
the FTC's site to view educational material on privacy. The final order
also contained an additional provision added during the public comment
period, permitting the competitor to collect or use personal information
from children to the extent permitted by the Children's Online Privacy
Protection Act or by regulations or guides issued under that act.
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We are continuing to review our practices in light of the recent FTC
activity and the enactment of the Children's Online Privacy Protection Act.
As part of our ongoing review, we now require parental consent before
allowing children 12 and younger to access theglobe.com web site. We still
cannot predict the exact form of the regulations that the FTC may adopt.
Accordingly, we cannot assure you that our current practices will comply
with the regulatory scheme which the FTC ultimately adopts or that we will
not have to make significant changes to comply with such laws.
At the international level, the European Union adopted a directive
that requires EU member countries to impose restrictions on the collection
and use of personal data, effective October 25, 1998. Among other
provisions, the directive generally requires member countries to prevent
the transfer of personally-identifiable data to countries that do not offer
equivalent privacy protections. At present, the EU has indicated that the
United States does not provide protections equivalent to that of the
directive. The directive could, among other things, affect United States
companies that collect information over the Internet from individuals in EU
member countries, and may impose restrictions that are more stringent than
current Internet privacy standards in the United States. In response to the
directive, on November 4, 1998, the U.S. Department of Commerce published
for comment a set of safe harbor principles regarding privacy protection
for personally identifiable data. The Commerce Department proposed that
organizations that come within the safe harbor would be presumed to
maintain an adequate level of privacy protection and could continue to
receive personal data transfers from EU member countries. The draft safe
harbor provides for:
o notice regarding the organization's intended use of personal
data;
o the opportunity for an individual to choose how the organization
or a third party will use personal information;
o requirements regarding the security and integrity of personal
data and access by an individual to data regarding that
individual; and
o mechanisms for ensuring an organization's compliance with the
privacy principles.
The Commerce Department and the EU are engaged in ongoing discussions about
the application of the directive to United States companies. The Commerce
Department has indicated that it hopes to complete an agreement with the EU
by June 21, 1999. We cannot assure you that this directive will not
materially adversely affect our business.
Any additional legislation or regulations relating to consumer privacy
or the application or interpretation of existing laws and regulations could
affect the way in which we are allowed to conduct our business, especially
those aspects that contemplate the collection or use of our members'
personal information.
Internet Taxation. Governments at the federal, state and local level,
and some foreign governments, have made a number of proposals that would
impose additional taxes on the sale of goods and services and various other
Internet activities. In 1998, the federal Internet Tax Freedom Act was
signed into law, placing a three-year moratorium on state and local taxes
on Internet access and on multiple or discriminatory taxes on electronic
commerce. However, this moratorium exempts existing state or local laws.
The statute also creates a commission to study several Internet taxation
issues. We cannot assure you that future laws imposing taxes or other
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regulations on Internet commerce would not substantially impair the growth
of Internet commerce and as a result materially adversely affect our
business.
The Clinton Administration has stated that the United States will
advocate in the World Trade Organization and other appropriate
international organizations that the Internet be declared a tariff-free
environment whenever it is used to deliver products and services. In
addition, the Clinton Administration has stated that the government should
impose no new taxes on Internet commerce, but rather that taxation should
be consistent with established principles of international taxation, should
avoid inconsistent national tax jurisdictions and double taxation and
should be simple to administer and easy to understand. However, we cannot
assure you that foreign countries will not seek to tax Internet
transactions.
Access Charges. Several telecommunications carriers are supporting
regulation of the Internet by the FCC in the same manner that the FCC
regulates other telecommunications services. These carriers have alleged
that the growing popularity and use of the Internet has burdened the
existing telecommunications infrastructure, resulting in interruptions in
phone service. Incumbent local exchange telephone carriers have in the past
petitioned the FCC to regulate Internet service providers in a manner
similar to long-distance telephone carriers and to impose interstate access
charges on Internet service providers. In May 1997, however, the FCC
confirmed that Internet service providers will continue to be exempt from
interstate access charges. In August 1998, the Eighth Circuit Court of
Appeals upheld the FCC's authority to maintain the exemption. On February
25, 1999, the FCC adopted an order concerning payment by incumbent local
exchange carriers of reciprocal compensation for dial-up calls to Internet
service providers that obtain their local telephone service from
competitive local exchange carriers. The FCC found that Internet traffic is
largely interstate, and therefore subject to the FCC's jurisdiction,
because end user calls to Internet service providers do not terminate at
the Internet service providers' servers, but continue to Internet locations
that often are outside the state or country in which the call originates.
Although the FCC stated that the order does not require Internet service
providers to pay access charges for calls placed through their services,
the order does provide further support for a possible, ultimate finding
that access charges must be paid for at least some categories of Internet
services, such as Internet-based voice telephony. If the FCC were to
withdraw the exemption or take other action responding to
telecommunications carrier concerns, the costs of communicating through the
Internet could increase substantially, potentially slowing the growth in
Internet use. This could decrease demand for our services or increase our
cost of doing business.
Liability for Information Retrieved from or Transmitted over the
Internet. Materials may be downloaded and publicly distributed over the
Internet by the Internet services operated or facilitated by us or by the
Internet access providers with which we have relationships. These
third-party activities could result in potential claims against us for
defamation, negligence, copyright or trademark infringement or other claims
based on the nature and content of these materials. The Communications
Decency Act of 1996 provides that no provider or user of an interactive
computer service shall be treated as the publisher or speaker of any
information provided by another information content provider.
Future legislation or regulations or court decisions may hold us
liable for listings and other content accessible through our web site, for
content and materials posted by members on their
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respective personal web pages, for hyperlinks from or to the personal web
pages of members, or through content and materials posted in our chat rooms
or bulletin boards. Liability might arise from claims alleging that, by
directly or indirectly providing hyperlinks to web sites operated by third
parties or by providing hosting services for members' sites, we are liable
for copyright or trademark infringement or other wrongful actions by these
third parties. If any material on our web site contains informational
errors, someone might sue us for losses incurred in reliance on the
erroneous information. We attempt to reduce our exposure to potential
liability through, among other things, provisions in member agreements,
user policies, insurance and disclaimers. However, the enforceability and
effectiveness of these measures are uncertain.
In October 1998, the Digital Millennium Copyright Act, whose Title II
contains the Internet Copyright Infringement Liability Clarification Act,
was signed into law. This statute provides that, under some circumstances,
a service provider would not be liable for any monetary relief, and would
be subject to limited injunctive relief, for claims of infringement, based
on copyright materials transmitted by users over its digital communications
network or stored on its systems or under the control of or connected to
its systems. This statute also provides that, under some circumstances, a
service provider would not be liable for any claim if the service provider
acted in good faith to remove access to the infringing material. With
respect to infringement caused by storing material on a system or network,
in order to benefit from the protections of the act, a service provider
must appoint a designated agent to receive notifications of claimed
infringement and must provide information about that agent to the U.S.
Copyright Office and to the public in a publicly accessible place on the
service. We have appointed a designated agent to receive notifications of
claimed infringement on theglobe.com web site, have provided that
information to the Copyright Office, and made it available to the public on
the site.
A third party provides our e-mail service. This relationship exposes
us to potential claims, including claims resulting from unsolicited e-mail
or "spamming," lost or misdirected messages, illegal or fraudulent use of
e-mail or interruptions or delays in e-mail service. Some states have
adopted laws that address spamming. Other states, including New York, are
considering, or have considered, similar legislation. For example,
California has adopted a law permitting electronic mail service providers
to sue parties who initiate unsolicited commercial messages in violation of
its e-mail policy, if the initiator has notice of that policy. California
also requires unsolicited e-mail advertisements to include opt-out
instructions with a toll-free telephone number or a valid return address in
the e-mail and requires senders of unsolicited e-mail advertisements to
honor opt-out requests. California also imposes criminal penalties on
parties who knowingly use Internet domain name of another party to send one
or more messages where such messages damage or cause damage to a computer,
computer system, or computer network. Similarly, the Virginia legislature
has passed, and the governor is considering signing a bill that, if
adopted, would make it a crime to send unsolicited bulk e-mail containing
false message headers or to sell software designed to do so and would
impose civil penalties for injuries caused by unsolicited bulk e-mail.
Washington has adopted a law that allows recipients of unsolicited e-mail
containing false headers and misleading subject lines to bring lawsuits
seeking damages of up to $500.00 for unsolicited commercial e-mail
messages. Potential liability for information disseminated through our
systems could lead us to implement measures to reduce our exposure to
liability. This could require the expenditure of substantial resources and
limit the attractiveness of our services. We attempt to reduce our exposure
to potential liability through, among other things, provisions in
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member agreements, user policies and disclaimers. However, the
enforceability and effectiveness of these measures are uncertain.
We sell products directly to consumers and we also enter into
agreements with commerce partners and sponsors under which we are entitled
to receive a share of the revenue from the purchase of goods and services
through direct links from our site. These arrangements may expose us to
additional legal risks, including potential liabilities to consumers by
virtue of our involvement in providing access to these products or
services, even if we do not ourselves provide these products or services.
Some of our agreements with these parties provide that these parties will
indemnify us against liabilities. However, we cannot assure you that this
indemnification will be enforceable or adequate. Although we carry general
liability insurance, our insurance may not cover all potential claims or
liabilities to which we are exposed. Any imposition of liability that is
not covered by insurance could have a material adverse effect on our
business.
The increased attention on liability issues relating to information
retrieved or transmitted over the Internet and legislative and
administrative proposals in this area could decrease the growth of Internet
use. This could decrease the demand for our services. We may also incur
significant costs in investigating and defending against these claims.
Domain Names. Domain names are the user's Internet addresses. Domain
names have been the subject of significant trademark litigation in the
United States. We have registered the domain names "theglobe.com,"
"shop.theglobe.com," "tglo.com," "azazz.com," "happypuppy.com,"
"realmx.com," "kidsdomain.com" and "gamesdomain.com." We cannot assure you
that third parties will not bring claims for infringement against us for
the use of these
names. Moreover, because domain names derive value from the individual's
ability to remember the names, we cannot assure you that our domain names
will not lose their value if, for example, users begin to rely on
mechanisms other than domain names to access online resources.
The current system for registering, allocating and managing domain
names has been the subject of litigation and proposed regulatory reform. We
cannot assure you that our domain names will not lose their value, or that
we will not have to obtain entirely new domain names in addition to or in
place of our current domain names.
Jurisdiction. Our facilities are located primarily in New York.
However, due to the global reach of the Internet it is possible that the
governments of other states and foreign countries might attempt to regulate
Internet activity and our transmissions. Additionally, we have recently
acquired web sites which are based in the United Kingdom and are subject to
regulation under U.K. law. Consequently, foreign countries may take action
against us for violations of their laws. We cannot assure you that
violations of these laws will not be alleged or charged by state or foreign
governments and that these laws will not be modified, or new laws enacted,
in the future. Any actions of this type could have a material adverse
effect on our business.
EMPLOYEES
As of April 9, 1999, we had approximately 210 full-time employees,
including approximately 50 in sales and marketing, 110 in production, 35 in
finance and administration and 15 in technology. Our future success
depends, in part, on our ability to continue to attract, retain
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and motivate highly qualified technical and management personnel.
Competition for these persons is intense. From time to time, we also employ
independent contractors to support our research and development, marketing,
sales and support and administrative organizations. Our employees are not
represented by any collective bargaining unit and we have never experienced
a work stoppage. We believe that our relations with our employees are good.
FACILITIES
Our headquarters are located in a leased facility in New York City and
consist of approximately 20,000 square feet of office space, a majority of
which is under a lease with approximately six months remaining. We have
also entered into two six-month leases for a total of 3,943 square feet of
office space in New York City. We intend to relocate our headquarters in
the second quarter of 1999 to a larger facility and have entered into a
fifteen-year lease for approximately 47,000 square feet of commercial space
in New York City for this purpose. We lease approximately 1,200 square feet
of office space in San Francisco for our West Coast sales office. In
connection with our acquisition of Azazz, we assumed a month-to-month lease
for approximately 4,000 square feet of office space in Kirkland,
Washington. In connection with our acquisition of Attitude Network, we
assumed a month-to-month lease for approximately 750 square feet in Naples,
Florida and approximately 3,000 square feet in New York, New York. We
believe that additional commercial space will be available for lease at
market rates. Our principal web server equipment and operations are
maintained by our personnel at the New York Teleport facility in Staten
Island, New York under a Data Center Space Lease with Telehouse
International Corporation of America for 2,800 square feet of commercial
space for a term of three years. Web server equipment relating to
shop.theglobe.com is located with and maintained by Exodus Communications,
Inc. in Seattle, Washington. Additionally, we maintain computer hardware,
servers and operations relating to Attitude Network in Herndon, West
Virginia, which are hosted by Frontier, GlobalCenter, and in London,
England which are hosted by Telehouse International.
LEGAL PROCEEDINGS
From time to time we are named in claims arising in the ordinary of
business. Currently, no legal proceedings or claims are pending against or
involve us that, in the opinion of management, could reasonably be expected
to have a material adverse effect on us.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages and positions of our
executive officers and directors. Our board of directors appoints executive
officers. Our executive officers serve at the discretion of our board. All
directors hold office until the annual meeting of our stockholders
following their election or until their successors are duly elected and
qualified.
Name Age Position
- ---------------------- -------- ---------------------------------------------
Michael S. Egan....... 59 Chairman
Todd V. Krizelman..... 25 Co-Chief Executive Officer, Co-President and
Director
Stephan J. Paternot... 25 Co-Chief Executive Officer, Co-President,
Secretary and Director
Dean S. Daniels....... 41 Vice President and Chief Operating Officer
Edward A. Cespedes.... 33 Vice President of Corporate Development and
Director
Francis T. Joyce...... 46 Vice President, Chief Financial Officer and
Treasurer
Rosalie V. Arthur..... 40 Director
Henry C. Duques....... 56 Director
Robert M. Halperin.... 71 Director
David H. Horowitz..... 70 Director
H. Wayne Huizenga..... 61 Director
MICHAEL S. EGAN. Mr. Egan has served as our Chairman since August
1997. 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 has been the controlling
investor of Dancing Bear Investments, a privately held investment company,
since 1996. Dancing Bear Investments holds a controlling interest in us.
From 1986 to 1996, he was the majority owner and Chairman of Alamo
Rent-A-Car, Inc., now a subsidiary of Republic Industries. Mr. Egan began
his career with Alamo in 1976 and held various management and ownership
positions during this period until he bought a controlling interest in
1986. Mr. Egan is also Chairman and Chief Executive Officer of Certified
Vacations, a wholesale tour operator. Mr. Egan is a director of Florida
Panthers Holdings, Inc. Mr. Egan began in the car rental business with
Olins Rent-A-Car, where he held various positions, including President.
Before acquiring Alamo, Mr. Egan held various administrative positions at
Yale University and administrative and teaching positions at the University
of Massachusetts at Amherst. Mr. Egan is a graduate of Cornell University,
where he received a Bachelor's degree in Hotel Administration.
TODD V. KRIZELMAN. Mr. Krizelman co-founded us in the fall of 1994. He
is our Co-Chief Executive Officer and Co-President and has served in
various capacities with us since our founding. Mr. Krizelman graduated from
Cornell University in 1996, where he received a Bachelor's degree in
Biology.
STEPHAN J. PATERNOT. Mr. Paternot co-founded us in the fall of 1994.
He is our Co-Chief Executive Officer, Co-President and Secretary and has
served in various capacities with us since our founding. Mr. Paternot
graduated from Cornell University in 1996, where he received Bachelor's
degrees in Business and Computer Science.
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DEAN S. DANIELS. Mr. Daniels was appointed our Vice President and
Chief Operating Officer in August 1998. From February 1997 until joining
us, Mr. Daniels served as Vice President and General Manager of CBS New
Media, a subsidiary managing all of CBS Television Network's activity on
the Internet. From March 1996 to February 1997, Mr. Daniels was the
Director of Interactive Services at CBS News. From 1994 to 1996, Mr.
Daniels served as Director of Affiliate News Services at CBS NEWSPATH. From
1992 to 1994, Mr. Daniels was Director of News of WCBS-TV, a CBS owned
television station in New York. Before that time, Mr. Daniels held various
positions at WCBS-TV, including executive producer, and was the recipient
of four Emmy Awards.
EDWARD A. CESPEDES. Mr. Cespedes was appointed Vice President of
Corporate Development in July 1998 and has served as one of our directors
since August 1997. As Vice President for Corporate Development, Mr.
Cespedes has primary responsibility for corporate development opportunities
including mergers and acquisitions. Mr. Cespedes is also a Managing
Director of Dancing Bear Investments. Mr. Cespedes joined Dancing Bear
Investments at its inception in 1996, where his responsibilities include
venture capital investments, mergers and acquisitions and finance. Before
joining Dancing Bear Investments, Mr. Cespedes served as Director of
Corporate Finance for Alamo in 1996, where he was responsible for general
corporate finance in the United States and in Europe. From 1988 to 1996,
Mr. Cespedes worked in the Investment Banking Division of J.P. Morgan &
Company, where he most recently focused on mergers and acquisitions. Mr.
Cespedes received a Bachelor's degree in International Relations from
Columbia University.
FRANCIS T. JOYCE. Mr. Joyce was appointed our Vice President, Chief
Financial Officer and Treasurer in July 1998. From 1997 until joining us,
Mr. Joyce served as Chief Financial Officer of the Reed Travel Group, a
division of Reed Elsevier Plc, which is an international publisher of
travel information. From 1994 to 1997, Mr. Joyce was the Chief Financial
Officer at Alexander Consulting Group, a division of Alexander & Alexander
Services, Inc., an international professional services firm, which included
a human resources consulting firm, an insurance brokerage unit and an
executive planning life insurance unit. From 1988 to 1994, Mr. Joyce worked
as a Senior Vice President and controller at Bates Worldwide, a division of
Saatchi & Saatchi Co., an advertising firm. Mr. Joyce received a Bachelor
of Science in Accounting from the University of Scranton and a Master of
Business Administration from Fordham University. He is a Certified Public
Accountant.
ROSALIE V. ARTHUR. Ms. Arthur has served as one of our directors since
August 1997. Ms. Arthur is a Senior Managing Director and Vice President of
Mergers and Acquisitions of Dancing Bear Investments. She currently serves
on the Board of Directors of Dancing Bear Investments and several of its
affiliated companies. She also served on the Board of Directors of Alamo
and affiliated entities and Nantucket Nectars. Before joining Dancing Bear
Investments, she served as Chief of Staff and Financial Counselor to the
Chairman of Alamo from 1986 to 1996, when the company was sold. Ms. Arthur
was the Manager of Financial Reporting at Sensormatic Electronics
Corporation from 1984 to 1986 and worked in the audit department of KPMG
Peat Marwick from 1980 to 1984. Ms. Arthur received her Bachelor of Science
in Accounting from the University of South Florida. She is a Certified
Public Accountant.
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HENRY C. DUQUES. Mr. Duques has served as one of our directors since
September 1998. Mr. Duques is Chairman and Chief Executive Officer of First
Data Corporation, a position he has held since April 1989. From September
1987 to 1989, he served as President and Chief Executive Officer of the
Data Based Services Group of American Express Travel Related Services
Company, Inc., the predecessor to First Data Corporation. He was Group
President of Financial Services and a member of the board of directors of
Automatic Data Processing, Inc. from 1984 to 1987. Mr. Duques is currently
a director of Unisys Corporation. Mr. Duques holds a Bachelor of Business
Administration in Accounting and an MBA in Accounting and Finance from
George Washington University.
ROBERT M. HALPERIN. Mr. Halperin has served as one of our directors
since 1995. Mr. Halperin has acted as an advisor to Greylock Management, a
venture capital firm, for the past five years. He is a member of the board
of directors of Avid Technology, Inc. In addition, Mr. Halperin serves on
the Board of Directors of the Associates of Harvard Business School, the
Harvard Business School Publishing Co. and Stanford Health Services and
also is a Life Trustee of the University of Chicago. He is the former Vice
Chairman of Raychem Corporation's Board of Directors and also served as its
President and Chief Operating Officer. Mr. Halperin joined Raychem
Corporation in 1957. Mr. Halperin received a Master of Business
Administration degree from Harvard Business School, and he earned a
Bachelor's degree in liberal arts from the University of Chicago and a
Bachelor's degree in Mechanical Engineering from Cornell University.
DAVID H. HOROWITZ. Mr. Horowitz has served as one of our directors
since December 1995. Mr. Horowitz has acted as an investor and consultant
in the media and communications industries for at least the past five
years, and as a consultant to the American Society of Composers, Authors
and Publishers, and a Lecturer at the Columbia University School of Law.
From 1973 to 1984, Mr. Horowitz was an officer and director of Warner
Communications, Inc., and until 1985 he was President and CEO of MTV
Networks, Inc. Mr. Horowitz is a graduate of Columbia University, where he
received a Bachelor's degree, and is a graduate of Columbia Law School.
H. WAYNE HUIZENGA. Mr. Huizenga has served as one of our directors
since July 1998. Mr. Huizenga has served as the Chairman of the Board of
AutoNation since August 1995, as its Co-Chief Executive Officer since
October 1996 and as its Chief Executive Officer from August 1995 until
October 1996. Mr. Huizenga also serves as the Chairman of the Board and
Chief Executive Officer of Republic Services, Inc., as the Chairman of the
Board of Florida Panthers Holdings, Inc., as the Chairman of the Board of
Extended Stay America, Inc. and a director of NationsRent, Inc. From
September 1994 until October 1995, Mr. Huizenga served as the Vice Chairman
of Viacom Inc., and as the Chairman of the Board of Blockbuster
Entertainment Group, a division of Viacom. From April 1987 through
September 1994, Mr. Huizenga served as the Chairman of the Board and Chief
Executive Officer of Blockbuster. In September 1994, Blockbuster merged
into Viacom. In 1971, Mr. Huizenga co-founded Waste Management, Inc. and
served in various capacities, including President, Chief Operating Officer
and a director from its inception until 1984. Mr. Huizenga also owns or
controls the Miami Dolphins professional sports franchise, and Pro Player
Stadium, in South Florida.
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KEY EMPLOYEES
The following table sets forth the names and positions of our key
employees.
Name Position
---- --------
Vance Huntley Director of Technology
Esther Loewy Director of Communications
Will Margiloff Director of Advertising Sales
Richard Mass General Counsel
David Tonkin Director of Human Resources
VANCE HUNTLEY. Vance Huntley joined us in August 1995 as our Director
of Technology. Between 1991 and 1994, Mr. Huntley held software development
positions with Delta-Epsilon Software and the Cornell Institute of Social
Economic Research. In 1994 Mr. Huntley developed a Transmission Electron
Microscopy simulation for the Cornell Materials Science Center while
completing his BS in the Applied & Engineering Physics program at Cornell
University. In 1990, Mr. Huntley wrote simulation software at the Lawrence
Livermore National Laboratory Supercomputing Center.
ESTHER LOEWY. Ms. Loewy joined us in May 1997 as our Director of
Communications. Ms. Loewy is responsible for managing the in-house
communications department for the Company and the direction of our media
and public relations. Before joining us, Ms. Loewy was a consultant for the
@Cafe in New York and other media companies from 1995 to 1997. From 1992 to
1995 Ms. Loewy was a Senior Account Executive at Charles Levine
Communication.
WILL MARGILOFF. Mr. Margiloff joined us in March 1998 as our Director
of Advertising Sales. Mr. Margiloff is responsible for the management and
direction of our sales force in New York and San Francisco, and the
expansion of our advertising efforts both domestically and internationally.
Before joining us, from 1997 to 1998 Mr. Margiloff was the Vice President
of East Coast Sales for 24/7 Media. From 1995 to 1998 Mr. Margiloff held
the senior sales management position at software site Jumbo!
RICHARD W. MASS. Mr. Mass was appointed our General Counsel in
September 1998. From 1994 until joining us, Mr. Mass served as a senior
attorney supporting AT&T's Internet services and was also the chief counsel
for Downtown Digital, AT&T's digital production facility that developed
interactive television programming and Web sites. From 1992 to 1994, Mr.
Mass was an attorney at Gray Cary Ware & Freidenrich in Palo Alto,
California. From 1991 to 1992, Mr. Mass was a Visiting Assistant Professor
of Law at the University of Miami and from 1987 to 1990 Mr. Mass was an
attorney at Proskauer, Rose, Goetz & Mendelsohn in New York. Mr. Mass
received a Bachelor of Arts in Economics from Williams College and received
a law degree from Stanford Law School.
DAVID TONKIN. Mr. Tonkin joined us in May 1998 as our Director of
Human Resources. Mr. Tonkin is responsible for managing the recruiting,
hiring and human resource administration of all employees at theglobe.com.
Before joining us, from 1995 to 1998 Mr. Tonkin worked as a Senior Resource
Manager for Knowledge Transfer International, responsible for recruiting,
developing and managing consulting staffing services. Before that time,
from 1994 to 1995, Mr.
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Tonkin worked as Human Resource Manager for NightRider (Alco Management
Service). From 1993 to 1994 Mr. Tonkin worked as Operations Manager for
Premier Shoe Company.
BOARD COMMITTEES
The Audit Committee of our board of directors reviews and monitors our
corporate financial reporting and our internal and external audits. Some of
these tasks include reviewing and monitoring the following:
o our control functions;
o the results and scope of the annual audit and other services
provided by our independent accountants; and
o our compliance with legal matters that have a significant impact
on our financial condition.
The Audit Committee consults with our management and our independent
accountants before the presentation of financial statements to stockholders
and, as appropriate, initiates inquiries into aspects of our financial
affairs. In addition, the Audit Committee has the responsibility to
consider and recommend the appointment of, and to review fee arrangements
with, our independent accountants. The current members of the Audit
Committee are Messrs. Halperin and Horowitz and Ms. Arthur.
The Compensation Committee of our board of directors reviews and makes
recommendations to our board regarding our compensation policies and all
forms of compensation to be provided to our executive officers and
directors. Some of these tasks include reviewing and monitoring the
following:
o annual salaries and bonuses; and
o stock option and other incentive compensation arrangements.
In addition, the Compensation Committee reviews bonus and stock
compensation arrangements for all of our other employees. The current
members of the Compensation Committee are Messrs. Egan, Halperin and
Horowitz and Ms. Arthur. Before July 15, 1998, the Compensation Committee
consisted of Messrs. Egan, Halperin, Krizelman and Paternot. Stock option
grants will be approved, at the election of the Compensation Committee, by
either the entire board or a subcommittee of the Compensation Committee
consisting of Messrs. Horowitz and Halperin.
The Nominating Committee of our board of directors makes
recommendations to our board of directors regarding nominees for our board
of directors. The current members of the Nominating Committee are Messrs.
Egan, Krizelman and Paternot and Ms. Arthur.
EXECUTIVE OFFICERS
Our board of directors appoints our executive officers. Our executive
officers serve at the discretion of our board of directors.
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DIRECTORS' COMPENSATION
Directors who are also our employees receive no compensation for
serving on our board of directors. We intend to reimburse non-employee
directors for all travel and other expenses incurred in connection with
attending board of directors and committee meetings. Non-employee directors
are also eligible to receive automatic stock option grants under our 1998
stock option plan. Under the 1998 stock option plan each eligible
non-employee director as of July 13, 1998 received an initial grant of
options to acquire 25,000 shares of our common stock. Each director who
became an eligible non-employee director for the first time after July 13,
1998 received an initial grant of options to acquire 12,500 shares of our
common stock. In addition, each eligible non-employee director will receive
an annual grant of options to acquire 3,750 shares of our common stock on
the first business day following each of our annual meeting of shareholders
that occurs while the 1998 stock plan is in effect. All of these stock
options will be granted with per share exercise prices equal to the fair
market value of our common stock as of the date of grant.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid by us to our
Chairman, Co-Chief Executive Officers and our three other most highly
compensated executive officers during the last two fiscal years:
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<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
-------------------------------- ---------------
Number of
Securities
Name and Principal Underlying All Other
Position Year (1) Salary ($) Bonus ($) Options (#) Compensation($)(3)
- ------------------------- ---------- ----------- --------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Michael S. Egan(4),..... 1998 -- --(5) 160,000 --
Chairman 1997 -- -- -- --
Todd V. Krizelman,...... 1998 $140,554 --(5) 150,250 --
Co-Chief Executive -- -- 100,000 (9) --
Officer and 1997 $ 76,000 $18,750 144,976 $500,000
Co-President
Stephan J. Paternot,.... 1998 $140,554 --(5) 150,250 --
Co-Chief Executive -- -- 100,000 (9) --
Officer, Co-President 1997 $ 76,000 $18,750 144,976 $500,000
and Secretary
Edward Cespedes,(6)..... 1998 $ 83,625 --(5) 53,750 --
VP Corporate -- -- 25,000 (10) --
development
Frank Joyce, CFO(7)..... 1998 $ 80,769 -- 112,500 --
Dean Daniels, COO(8).... 1998 $ 80,731 -- 112,500 --
- -------------------
(1) We do not have any executive officers other than those named in the
table.
(2) Other than Mssrs. Krizelman and Paternot, we did not have any other
executive officers whose aggregate salary, bonus and other
compensation exceeded $100,000 during the fiscal year ended December
31, 1997.
(3) Reflects a one-time payment of $500,000 associated with our sale of
preferred stock and warrants to Dancing Bear Investments in August
1997.
(4) Mr. Egan became an executive officer in July 1998. We did not pay
Mr. Egan a base salary in 1998.
(5) Included in long-term compensation are 35,000, 50,000, 50,000 and
25,000 options granted in January 1999 at an exercise price of $31.50
related to bonuses earned in 1998 for Messrs. Egan, Krizelman, Paternot
and Cespedes, respectively.
(6) Mr. Cespedes became an officer in July 1998.
(7) Mr. Joyce became an officer in July 1998.
(8) Mr. Daniels became an officer in August 1998.
(9) Represents the transfer of 100,000 Series E Warrants from Dancing Bear
Investments, Inc. at an exercise price of approximately $2.91.
(10) Represents the transfer of 25,000 Series E Warrants from Dancing Bear
Investments, Inc. at an exercise price of approximately $2.91.
</TABLE>
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The following table sets forth, as of December 31, 1998, for each of
the executives listed in the Summary Compensation table (a) the total
number of unexercised options for common stock (exercisable and
unexercisable) held and (b) the value of those options that were
in-the-money on December 31, 1998 based on the difference between the
closing price of our common stock on December 31, 1998 and the exercise
price of the options on that date.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
1998 YEAR END OPTION VALUES
Number of Securities Underlying Value of Unexercised
Unexercised Stock Options at In-the-Money Stock Options
Fiscal Year-End (#) at Fiscal Year-End ($)(2)
------------------------------- --------------------------
Shares
Acquired on Value
Name Exercise (#)(1) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------- --------------- ----------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Michael Egan....... -- -- 6,250 118,750 149,219 2,835,156
Todd Krizelman..... -- -- 107,488 172,738 3,474,226 4,725,770
Stephan Paternot... -- -- 107,488 172,738 3,474,226 4,725,770
Edward Cespedes.... -- -- 6,250 22,500 149,219 537,188
Frank Joyce........ -- -- -- 112,500 -- 2,804,063
Dean Daniels....... -- -- -- 112,500 -- 2,685,938
- -------------------
(1) The named executive officers did not exercise any options in 1998.
(2) Based on a per share fair market value of Common Stock equal to $32.875,
as of December 31, 1998.
</TABLE>
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<TABLE>
<CAPTION>
OPTION GRANTS IN 1998
Potential Realizable
Percent of Value at Assumed Rates
Number of Total of Stock Price
Securities Options Exercise Appreciation for Option
Underlying Granted to or Base Term (2)
Options Employees Price -----------
Granted(#)(1) in 1998 ($/sh) Expiration Date 5% 10%
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Michael Egan........ 25,000 (3) 2.72% 9.00 July 2008 $114,501 $ 358,592
100,000 (4) 10.90% 9.00 July 2008 $566,005 $1,434,368
Todd Krizelman...... 250 (5) 0.03% 9.00 July 2008 $ 1,415 $ 3,586
100,000 (4) 10.90% 9.00 July 2008 $566,005 $1,434,368
Stephan Paternot.... 250 (5) 0.03% 9.00 July 2008 $ 1,415 $ 3,586
100,000 (4) 10.90% 9.00 July 2008 $566,005 $1,434,368
Edward Cespedes..... 25,000 (3) 2.72% 9.00 July 2008 $141,501 $ 358,592
3,750 (6) 0.41% 9.00 July 2008 $ 21,225 $ 53,789
Frank Joyce......... 87,500 (7) 9.54% 7.65 July 2008 $420,966 $1,066,811
25,000 (8) 2.72% 9.00 July 2008 $141,501 $ 358,592
Dean Daniels........ 87,500 (9) 9.54% 9.00 September 2008 $495,255 $1,255,072
25,000(10) 2.72% 9.00 September 2008 $141,501 $ 358,592
- ------------------
(1) In the event of a change in control of the Company, all of these
options become immediately and fully exercisable.
(2) These amounts represent various assumed rates of appreciation only and
are displayed in connection with SEC disclosure rules. Actual gains,
if any, on stock option exercises are dependent on future performance
of our common stock.
(3) One-fourth of these options are exercisable. The remaining
three-fourths will become exercisable with respect to one-third of the
shares covered thereby on July 15 in each of 1999, 2000 and 2001.
(4) These options become exercisable on July 15, 1999.
(5) These options become exercisable on July 24, 1999.
(6) These options become exercisable with respect to one-fourth of the
shares indicated on July 31 in each of 1999, 2000, 2001 and 2002.
(7) These options become exercisable with respect to one-third of the
shares indicated on July 15 in each of 1999, 2000 and 2001.
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(8) These options become exercisable with respect to one-seventh of the
shares indicated on July 15 in each of 1999, 2000, 2001, 2002, 2003,
2004 and 2005. However, options covering 12,500 shares have
accelerated vesting if specified financial targets are met in 1999.
(9) These options become exercisable with respect to one-third of the
shares indicated in September in each of 1999, 2000 and 2001.
(10) These options become exercisable with respect to one-seventh of the
shares indicated in September each of 1999, 2000, 2001, 2002, 2003,
2004 and 2005. However, options covering 12,500 shares have
accelerated vesting if specified financial targets are met in 1999.
</TABLE>
EMPLOYMENT AGREEMENTS
CEO Employment Agreements: On August 13, 1997, we entered into
employment agreements with our co-CEOs, Todd V. Krizelman and Stephan J.
Paternot. Each CEO agreement provides for the following:
o employment as one of our executives;
o an annual base salary of $125,000 with eligibility to receive
annual increases amounting to no less than 15% of the executive's
then-base salary;
o a discretionary annual cash bonus, which will be awarded at our
board's discretion and upon the achievement of target performance
objectives presented in our budget; and
o a right to participate in our stock option plans and all health,
welfare, and other benefit plans provided by us to our most
senior executives.
Each of the CEO agreements is for a term expiring on August 13, 2002,
with possible earlier termination as provided in each CEO agreement. Each
of the CEO agreements provides that, in the event of termination by us
without cause, the executive will be entitled to receive from us:
o any earned and unpaid base salary;
o reimbursement for any reasonable and necessary monies advanced or
expenses incurred in connection with the executive's employment;
o a pro-rata portion of the annual bonus for the year of
termination; and
o for one year following termination or the remainder of the term
of the CEO agreement, whichever is less, continued salary
payments and employee benefits.
In addition, termination without cause automatically triggers the
vesting of all stock options held by the executive.
In the event of our change in control or a dissolution, each executive
may elect to terminate his employment by delivering a notice within 60 days
to us and receive (1) any earned and unpaid base salary as of the
termination date and (2) an amount reimbursing the executive for expenses
incurred on our behalf before the termination date.
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Each CEO agreement contains a provision that the CEO will not compete
with us for a period of five years from the date of each CEO Agreement or,
in the case of termination without cause or after a change in control, the
earlier of a period of one year immediately following termination of
employment or five years from the date of our initial public offering.
Chief Operating Officer Employment Agreement. We have entered into an
employment agreement with Dean S. Daniels. The following are key terms of
the Daniels employment agreement:
o employment as our Chief Operating Officer effective August 31,
1998;
o an annual base salary of not less than $250,000 per year;
o an annual cash bonus of $50,000; and
o stock options to purchase 112,500 shares of our common stock. The
options were granted at an exercise price of $9.00 per share. Of
these options, 87,500 will vest with respect to one-third of the
shares on each of the first three anniversaries of the date of
grant, and 25,000 will vest with respect to one-seventh of the
shares on each of the first seven anniversaries of the date of
grant. The Daniels employment agreement also provides for the
accelerated vesting of an aggregate of 12,500 of these options
upon our attainment of financial targets in our 1999 fiscal year.
In addition, the Daniels employment agreement is for a term expiring
on August 31, 2001, with possible earlier termination as provided in the
Daniels employment agreement. The Daniels employment agreement provides
that, in the event of termination by us without cause, Mr. Daniels will be
entitled to receive from us:
o any earned and unpaid base salary as of the termination date and
salary continuation during a one-year non-competition period
following termination;
o reimbursement for any and all reasonable monies advanced or
expenses incurred in connection with his employment; and
o this annual bonus for the year of termination.
In addition, termination without cause automatically triggers the vesting
of all options held by Mr. Daniels.
The Daniels employment agreement contains a provision that he will not
compete with us for a period of one year following the date of his
termination of employment.
Chief Financial Officer Employment Agreement. On July 13, 1998, we
entered into an employment agreement with Francis T. Joyce. The following
are the key terms of the Joyce employment agreement:
o employment as our Chief Financial Officer;
o an annual base salary of not less than $200,000 per year with
eligibility to receive annual increases in base salary as
determined by our Co-Chief Executive Officers and Co-Presidents;
o an annual cash bonus of $50,000; and
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o Mr. Joyce received a stock option grant to purchase 112,500
shares of our common stock, 87,500 of which have an exercise
price per share equal to 85% of the initial public offering
price. As a result, we recorded a charge for deferred
compensation expense of $118,100 in the third quarter of 1998,
representing the difference between the deemed value of our
common stock, the initial public offering price for accounting
purposes, and the exercise price of these options at the date of
grant. This amount is presented as a reduction of stockholders'
equity and amortized over the vesting period of the applicable
options. The remaining options were granted at an exercise price
of $9.00 per share. Of these options, 87,500 will vest with
respect to one-third of the shares on each of the first three
anniversaries of the date of grant, and 25,000 will vest with
respect to one-seventh of the shares on each of the first seven
anniversaries of the date of grant. The Joyce employment
agreement also provides for the accelerated vesting of an
aggregate of 12,500 of these options upon our attainment of
financial targets in our 1999 fiscal year.
In addition, the Joyce employment agreement is for a term expiring on
July 13, 2001, with possible earlier termination as provided in the Joyce
employment agreement. The Joyce employment agreement provides that, in the
event of termination by us without cause, Mr. Joyce will be entitled to
receive from us:
o any earned and unpaid base salary as of the termination date and
salary continuation during a non-competition period following
termination which will be six months or one year, if we elect to
pay Mr. Joyce his salary during this period;
o reimbursement for any and all monies advanced or expenses
incurred in connection with his employment; and
o a pro rata portion of his annual bonus for the year of
termination.
In addition, termination without cause automatically triggers the vesting
of all stock options held by Mr. Joyce.
1998 STOCK OPTION PLAN
Our board of directors adopted our 1998 stock option plan on July 15,
1998, and our stockholders approved it as of July 15, 1998. In March 1999,
our board of directors approved an amendment of our 1998 stock option plan
in order to increase the number of shares authorized for issuance from
1,200,000 to 1,700,000 and to increase the amount of options which may be
granted to an individual during any three consecutive calendar year period,
subject to stockholder approval. The 1998 stock option plan provides for
the grant of incentive stock options intended to qualify under Section 422
of the IRS Code and stock options which do not so qualify. Our and our
subsidiaries' directors, officers, employees and consultants are eligible
to receive grants under the 1998 stock option plan. The 1998 stock option
plan also provides for discretionary stock bonus awards for some community
leaders. The 1998 stock option plan is designed to comply with the
requirements for "performance-based compensation" under Section 162(m) of
the IRS Code, and the conditions for exemption from the short-swing profit
recovery rules under Rule 16b-3 under the Exchange Act.
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The purpose of the 1998 stock option plan is to provide an incentive
to our directors, officers, employees and consultants and encourage them to
devote their abilities to the success of our business. The 1998 stock
option plan is administered by and options may be granted by a stock option
committee of our board comprised of two or more "non-employee directors"
within the meaning of Rule 16b-3 and unless otherwise determined by our
board of the directors, "outside directors" within the meaning of Section
162(m), who will administer the 1998 stock option plan in our discretion.
Generally, the stock option committee has the right to grant options to
eligible participants and to determine the terms and conditions of option
agreements, including the vesting schedule and exercise price of options.
In addition, our directors who are not also employees are eligible to
receive automatic formula option grants as provided in the 1998 stock
option plan. Formula option grants include an initial grant of options to
acquire 25,000 shares to the eligible non-employee directors who served on
our board as of July 15, 1998, and 12,500 shares to eligible non-employee
directors who become directors for the first time after July 15, 1998, and
annual grants of options to acquire 3,750 shares to eligible non-employee
directors on the day following each annual shareholders meeting.
The 1998 stock option plan, as amended, authorizes for issuance
1,700,000 shares of our common stock, with adjustment in the case of
changes in capitalization affecting the options. In January 1999, the
compensation committee of our board of directors approved for grant 50,000
options to each of Messrs. Krizelman and Paternot, 35,000 options to Mr.
Egan, 25,000 options to Mr. Cespedes and 15,000 options to Ms. Arthur
pursuant to the plan as bonus payments for 1998, all of which were
immediately vested. No individual may be granted options with respect to
more than 500,000 shares during any three consecutive calendar year period.
The 1998 stock option plan provides that the term of any option may
not exceed ten years. In the event of a change in control all outstanding
options will become immediately and fully vested. If a participant's
employment, or service as a director, is terminated following a change in
control, any options vested at that time will remain outstanding until the
earlier of the first anniversary of termination and the expiration of the
option term.
In the event of a change in capitalization, the stock option committee
will adjust the maximum number and class of shares which may be granted
under the 1998 stock option plan or to any individual in any three calendar
year period, the number and class of shares which are subject to any
outstanding options and the purchase price of the option, and the number
and class of shares to be granted to directors as formula option grants.
We issued shares of our common stock to our community leaders under
the 1998 stock option plan. Each of our community leaders, as of July 23,
1998, were issued 11 fully vested shares of our common stock, approximately
3,500 in the aggregate. As a result, we recorded a charge for compensation
expense estimated at $31,500 in the fourth quarter of 1998 for the value of
our common stock issued to our community leaders.
1995 STOCK OPTION PLAN
Our 1995 stock option plan, as amended, was adopted by our board of
directors on May 26, 1995. The 1995 stock option plan provides for the
grant of incentive stock options and non-qualified stock options. Our
directors, employees and consultants and our affiliates are eligible to
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receive grants under the 1995 stock option plan. The 1995 stock option
plan authorizes for issuance 791,000 shares of our common stock, with
adjustment in the case of changes in capitalization affecting options. The
remaining options under the 1995 stock option plan may be granted by
Messrs. Krizelman and Paternot under the terms of the 1995 stock option
plan.
AZAZZ.COM 1998 STOCK OPTION PLAN
Prior to our acquisition of Azazz.com, Azazz.com had established its
1998 Stock Option Plan and granted options to purchase shares of Azazz.com
common stock to its officers, directors, consultants and employees. As a
result of our acquisition of Azazz.com, we assumed the obligations of
Azazz.com under its stock plan, and the outstanding options granted under
the plan were converted into options entitling each option holder to
purchase shares of our common stock. The other terms of the converted
options remain unchanged. No additional grants will be made under the
Azazz.com stock plan.
Generally, our compensation committee will administer and interpret
the Azazz.com stock plan and its determinations are final. The compensation
committee has the authority to make amendments or modifications to
outstanding options consistent with the plan's terms.
Except as otherwise provided in an option agreement, in the event of a
change in control of Azazz.com, each converted option that is outstanding
at that time will automatically accelerate so that the converted option
will immediately prior to the date for the change in control be 100% vested
and exercisable. The option will not accelerate, however, if and to the
extent that, in connection with the change in control, it is either assumed
by the successor corporation or replaced with a comparable award for the
purchase of shares of the stock of the successor corporation. Any such
converted options held by an officer that are assumed or replaced in
connection with Azazz.com's change in control and do not otherwise
accelerate at that time will be accelerated in the event that the officer's
employment terminates within two years following the change in control,
unless the officer's employment was terminated by the successor corporation
for cause or by the officer without good reason.
ATTITUDE NETWORK LTD. 1996 STOCK OPTION PLAN
Prior to our acquisition of Attitude Network, it had established the
Attitude Network, Ltd. 1996 Stock Option Plan and granted options to
purchase shares of Attitude Network common stock to its officers,
directors, consultants and employees. As a result of our acquisition of
Attitude Network, we assumed the obligations of Attitude Network under the
Attitude Network stock option plan, and the outstanding options granted
under the plan were converted into options entitling each option holder to
purchase shares of our common stock, instead of Attitude Network common
stock. The other terms of the converted options remain unchanged. No
additional grants will be made under the Attitude Network stock option
plan.
Generally, our compensation committee will administer and interpret
the Attitude stock plan and its determinations are final. The compensation
committee has the authority to make amendments or modifications to
outstanding options consistent with the plan's terms.
In the event of a change in control of Attitude Network, our board of
directors must either provide
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(a) for the substitution of any converted options outstanding at that
time with options to purchase shares of the successor corporation, or
(b) upon written notice to the optionee that the option must be
exercised within 60 days of the date of such notice or it will be terminated.
401(K) SAVINGS PLAN
We have established a savings and profit-sharing plan that qualifies
as a tax-deferred saving plan under Section 401(k) of the IRS Code for some
of our eligible employees. Under the savings plan, participants may
contribute up to 15% of their eligible compensation, up to $10,000, in any
year on a pre-tax basis. Employee contributions are fully vested at all
times. In addition, we may, in our discretion, make additional
contributions on behalf of participants. All amounts contributed under the
savings plan are invested in one or more investment accounts administered
by the plan administrator.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our board of directors adopted our 1999 Employee Stock Purchase Plan
on February 18, 1999, subject to approval by a majority of our stockholders
present and represented at any special or annual meeting of the
stockholders held within 12 months after adoption of the plan. If the plan
is not approved by a majority of the stockholders, it will not become
effective. We intend to have the plan qualify as an employee stock purchase
plan under Section 423 of the Internal Revenue Code. We will administer the
plan in a manner consistent with the requirements of that section of the
Internal Revenue Code.
The purpose of the plan is to strengthen our company by providing our
employees and our subsidiaries' employees the opportunity to acquire a
proprietary interest in our company through the purchase of shares of
common stock at a discount. These purchases will be made through regular
payroll deductions of up to 10% of a participant's gross cash wages, salary
and overtime earnings for each pay period during an offering period. A
committee consisting solely of no fewer than two non-employee directors
appointed by our board will administer the plan.
Each full-time employee who has completed six consecutive months of
full-time employment with us or a subsidiary and who is employed by us or a
subsidiary may participate in the plan with respect to offering periods
beginning after the six-month period. There will be four offering periods
to purchase shares of the common stock during each twelve-month period. On
the first day of each offering period, each participant is deemed to have
been granted an option to purchase a maximum number of shares of common
stock the fair market value of which is equal to
o that percentage of the participant's compensation which the
participant has elected to have withheld multiplied by
o the participant's compensation during the offering period then
divided by
o the applicable price at which the shares of common stock are
being offered during that offering period.
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The maximum number of shares of common stock that a participant may
purchase during an individual offering period is 2,000. The offering price
for shares for any offering period is the lower of 85% of the closing price
of the stock on the first day or the last day of the offering period. Each
participant will automatically purchase stock on the last day of the
offering period with the accumulated payroll deductions in the
participant's account at the time of purchase and at the offering price for
that offering period.
Upon termination of a participant's employment for any reason the
participant's payroll deductions accumulated prior to such termination, if
any, will be applied toward purchasing full shares of common stock in the
then-current offering period. Any cash balance remaining after the purchase
of shares in such offering period will be refunded to him or her and his or
her participation in the plan will be terminated.
In the event of a change in capitalization, appropriate and
proportionate adjustments may be made by the committee in both the number
and/or kind of shares to be purchased under the plan and in their purchase
price, and the number and/or kind of shares to be purchased in the current
offering period and their purchase price. Upon the occurrence of various
corporate transactions, each participant during the offering period will be
entitled to receive on the last day of the offering period, for each share
to be purchased as nearly as reasonably may be determined, the cash,
securities and/or property which a holder of one share of the common stock
was entitled to receive upon and at the time of such transaction.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
On July 15, 1998, Michael S. Egan, Robert M. Halperin, David H.
Horowitz and Rosalie V. Arthur were appointed as members of the
compensation committee of our board. Before that date, the compensation
committee was comprised of Messrs. Egan, Halperin, Krizelman and Paternot.
Mr. Egan, effective as of July 22, 1998, also serves as one of our
executive officers in his role as Chairman. Mr. Egan is also the
controlling investor of Dancing Bear Investments, and Ms. Arthur is a
Senior Managing Director of Dancing Bear Investments. See "Certain
Relationships and Related Transactions-Arrangements with Entities
Controlled by Various Directors and Officers." Although Mr. Egan does not
receive a salary from us, in 1998 we granted stock options to Mr. Egan for
100,000 shares of our common stock under the 1998 stock option plan, as
consideration for his performance of services in his capacity as an
executive officer. Additionally, in January 1999, we granted stock options
to Mr. Egan and Ms. Arthur for 35,000 and 15,000 shares, respectively, as
bonus payments for 1998. In the past fiscal year, Mr. Egan has served as a
director of Certified Vacations, an entity with which we have recently
begun electronic commerce arrangements.
KEY MAN INSURANCE
We do not have and currently do not intend to purchase key man
insurance.
INDEMNIFICATION AGREEMENTS
We have entered into indemnification agreements with our directors and
officers. These agreements provide, in general, that we shall indemnify and
hold harmless directors and officers to the fullest extent permitted by law
against any judgments, fines, amounts paid in settlement, and
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expenses, including attorneys' fees and disbursements, incurred in
connection with, or in any way arising out of, any claim, action or
proceeding, whether civil or criminal, against, or affecting, the directors
and officers resulting from, relating to or in any way arising out of, the
service of the directors and officers as our directors and officers.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ARRANGEMENTS WITH ENTITIES CONTROLLED BY VARIOUS DIRECTORS AND OFFICERS
We entered into an electronic commerce contract with AutoNation, an
entity affiliated with H. Wayne Huizenga, under which we have granted a
right of first negotiation with respect to the exclusive right to engage in
or conduct an automotive "clubsite" on theglobe.com. Additionally,
AutoNation has agreed to purchase advertising from us for a three-year
period at a price which will be adjusted to match any more favorable
advertising price quoted to a third party by us, excluding various
short-term advertising rates.
In addition, we have entered into an electronic commerce arrangement
with InteleTravel, an entity controlled by Michael S. Egan, under which we
developed a Web community for InteleTravel in order for its travel agents
to conduct business through our Web site in exchange for access to
InteleTravel customers for distribution of our products and services.
We believe that the terms of the foregoing arrangements are on
comparable terms as if they were entered into with unaffiliated third
parties. During 1998, we received $83,300 from AutoNation and $265,000 from
InteleTravel in connection with these arrangements.
STOCKHOLDERS' AGREEMENT
Messrs. Egan, Krizelman, Paternot and Cespedes, Ms. Arthur and Dancing
Bear Investments, an entity controlled by Mr. Egan, entered into a
stockholders' agreement under which the Egan group agreed to vote for some
nominees of the Krizelman and Paternot groups to our board of directors and
the Krizelman and Paternot groups agreed to vote for the Egan group's
nominees to our board, who will represent a majority of our board.
Additionally, under the terms of the stockholders' agreement, Messrs.
Krizelman, Paternot and Cespedes and Ms. Arthur have granted an irrevocable
proxy to Dancing Bear Investments with respect to any shares that may be
acquired or beneficially owned by them upon the exercise of outstanding
warrants transferred to each of them by Dancing Bear Investments. These
shares will be voted by Dancing Bear Investments, which is controlled by
Mr. Egan. Dancing Bear Investments will have a right of first refusal upon
transfer of these shares.
The stockholders' agreement also provides that if the Egan group sells
shares of our common stock and warrants representing 25% or more of our
outstanding common stock, including the warrants, in any private sale, the
Krizelman and Paternot groups, Mr. Cespedes and Ms. Arthur will be required
to sell up to the same percentage of their shares as the Egan group sells.
If the Egan group sells shares of our common stock or warrants representing
25% or more of our outstanding common stock, including the warrants, or the
Krizelman and Paternot groups collectively sell shares or warrants
representing 7% or more of our shares and warrants in any private sale,
each other party to the stockholders' agreement, including entities
controlled by them and their permitted transferees, may, at their option,
sell up to the same percentage of their shares.
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TRANSACTIONS WITH DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS
Since our inception, we have raised capital primarily through the sale
of shares of our common stock and preferred stock. The following table
summarizes the shares of our common stock purchased from us by our
executive officers, directors and 5% stockholders and persons associated
with them since our inception.
Executive Officers, Common
Directors and 5% Stockholders Stock
- ----------------------------------------------------- -------------------
Dancing Bear Investments, Inc. (1)................. 6,046,774
Michael S. Egan (1)................................ 6,046,774
Robert M. Halperin (2)............................. 72,769
David H. Horowitz (3).............................. 78,472
Todd Krizelman(4).................................. 547,455
Stephan Paternot(5)................................ 600,000
- ---------------
(1) 4,023,765 of the shares represents 25.5 shares of preferred stock
which were converted into 4,023,765 shares of our common stock upon
our initial public offering. 2,023,009 of the shares represents
warrants to purchase an aggregate of 2,023,009 shares of our common
stock. Dancing Bear Investments paid $20 million for its initial
investment in the series D preferred stock and the warrants. Upon our
initial public offering, shares of the series D preferred stock were
converted into 4,023,765 shares of our common stock. Includes the
shares that Mr. Egan is deemed to beneficially own as the controlling
investor of Dancing Bear Investments.
(2) Mr. Halperin paid $8,172 in 1998 in connection with the exercise of
options for 42,709 shares of our common stock. Mr. Halperin paid
$25,001 for the series B preferred stock issued in December 1995 and
$25,000 for the series C preferred stock issued in November 1996. Upon
our initial public offering, shares of the series B and the series C
preferred stock were converted into 23,810 and 6,250 shares of our
common stock.
(3) Mr. Horowitz paid $3,111 in 1997 in connection with the exercise of
options for 15,972 shares of our common stock. Mr. Horowitz paid
$52,000 for his series B preferred stock issued in December 1995 and
$50,000 for the series C preferred stock issued in November 1996. Upon
our initial public offering, shares of the series B and series C
preferred stock were converted into 50,000 and 12,500 shares of our
common stock.
(4) Mr. Krizelman paid $2,184 for his 525,000 shares of common stock
issued in May 1995 and $3,500 for the series A preferred stock issued
in November 1995. Upon our initial public offering, shares of the
series A preferred stock were converted into 22,455 shares of common
stock.
(5) Mr. Paternot paid $2,496 for his 600,000 shares of common stock issued
in May 1995.
All of our directors and executive officers are also parties to
registration rights agreements with us which are described under
"Description of Capital Stock--Registration Rights." We also
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have entered into indemnification agreements with our directors and
officers. See "Management--Indemnification Agreements."
Concurrently with our initial public offering, we sold 555,556 shares
of our common stock to some of our officers and directors, their relatives
and their business associates at the same price paid per share in the
initial public offering. See "Principal Stockholders."
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to the
beneficial ownership of our common stock as of April 9, 1999 and as
adjusted to reflect the sale of the shares offered hereby, by each of the
following:
o each person who is known by us to beneficially own 5% or more of
our common stock;
o each of our directors;
o each of our executive officers;
o all directors and executive officers as a group;
o each selling stockholder owning more than 1% of our common stock;
and
o other selling stockholders, each owning less than 1% of our
common stock.
The table below sets forth the selling stockholders. The total amount
of shares to be sold in the table represents the amount of shares we expect
may be sold in the offering. We are currently contacting other stockholders
who may sell shares in the offering to determine whether or not they want
to participate in the offering. If the selling stockholders collectively
sell less than 2,000,000 shares in the offering, we will sell the
difference in order for the total shares of common stock to be sold in the
offering to be 4,000,000 shares.
Unless otherwise indicated, the address of each person named in the
table below is theglobe.com, inc., 31 West 21st Street, New York, New York
10010. The amounts and percentage of common stock beneficially owned are
reported on the basis of regulations of the Securities and Exchange
Commission governing the determination of beneficial ownership of
securities. Under the rules of the Commission, a person is deemed to be a
"beneficial owner" of a security if that person has or shares "voting
power," which includes the power to vote or to direct the voting of such
security, or "investment power," which includes the power to dispose of or
to direct the disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which that person has a right to
acquire beneficial ownership within 60 days. Under these rules, more than
one person may be deemed a beneficial owner of the same securities and a
person may be deemed to be a beneficial owner of securities as to which
such person has no economic interest. The information set forth in the
following table (1) assumes that the over-allotment option by the
underwriters has not been exercised and (2) excludes any shares purchased
in the offering by the respective beneficial owner:
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<TABLE>
<CAPTION>
Number of Shares Number of Number of Shares
Beneficially Owned Shares to be Beneficially Owned
Before the Offering Sold in the After the Offering
--------------------- ------------------------
Name Number Percentage Offering Number Percentage
- ----------------------------- --------- ---------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Dancing Bear Investments,
Inc. (1)................... 6,046,774 44.9%
Michael S. Egan (2)........ 6,123,024 45.3
Todd V. Krizelman (3)...... 877,431 7.5
Stephan J. Paternot (4).... 929,976 7.9
Dean S. Daniel (5)......... 0 *
Edward A. Cespedes (6)..... 56,250 *
Francis T. Joyce (7)....... 0 *
Rosalie V. Arthur (8)...... 51,250 *
Henry C. Duques (9)........ 6,250 *
Robert M. Halperin (10).... 99,853 *
David H. Horowitz (11)..... 114,583 1.0
H. Wayne Huizenga (12)..... 6,250 *
All directors and executive
officers as a group (11
persons) (13).............. 8,264,867 58%
OTHER SELLING STOCKHOLDERS
We currently expect that selling stockholders will sell up to 2
million shares in this offering. We are currently in the process of
contacting our stockholders who possess registration rights to determine
the stockholders who desire to include their shares in this offering and to
determine the amount of any such shares which will be included.
-----------------
* Less than one percent
(1) Includes: (1) 1,773,009 shares of our common stock issuable upon
exercise of warrants at $2.91 per share and (2) 250,000 shares of our
common stock issuable upon exercise of warrants held by persons other
than Dancing Bear Investments but as to which Dancing Bear Investments
has voting power upon exercise under a stockholders' agreement.
Dancing Bear Investments' mailing address is 333 East Las Olas Blvd.,
Ft. Lauderdale, FL 33301.
(2) Includes the following shares that Mr. Egan is deemed to beneficially
own as the controlling investor of Dancing Bear Investments: (1)
1,773,009 shares of our common stock issuable upon exercise of
warrants at $2.91 per share, (2) 250,000 shares of our common stock
issuable upon exercise of warrants held by persons other than Mr. Egan
but as to which Mr. Egan has voting power upon exercise under a
stockholders' agreement, and (3) 41,250 shares of common stock
issuable upon exercise of options that are currently exercisable.
Excludes 118,750 shares of common stock issuable upon
exercise of options that will not be exercisable within 60 days of
April 9, 1999. Mr. Egan's mailing address is c/o our company.
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(3) Includes (1) 229,976 shares of our common stock issuable upon exercise
of options that are currently exercisable and (2) 100,000 shares of
our common stock issuable upon exercise of warrants. Excludes 100,250
shares of our common stock issuable upon exercise of options that will
not be exercisable within 60 days of April 9, 1999. Mr. Krizelman's
mailing address is c/o our company.
(4) Includes (1) 229,976 shares of our common stock issuable upon exercise
of options that are currently exercisable and (2) 100,000 shares of
our common stock issuable upon exercise of warrants. Excludes 100,250
shares of our common stock issuable upon exercise of options that will
not be exercisable within 60 days of April 9, 1999. Mr. Paternot's
mailing address is care of our company.
(5) Excludes 112,500 shares of our common stock issuable upon exercise of
options that will not be exercisable within 60 days of April 9, 1999.
(6) Includes (1) 31,250 shares of our common stock issuable upon exercise
of options that are currently exercisable, and (2) 25,000 shares of
our common stock issuable upon exercise of warrants. Excludes 22,500
shares of our common stock issuable upon exercise of options that will
not be exercisable within 60 days of April 9, 1999.
(7) Excludes 112,500 shares of our common stock issuable upon exercise of
options that will not be exercisable within 60 days of April 9, 1999.
(8) Includes (1) 21,250 shares of our common stock issuable upon exercise
of options that are currently exercisable, and (2) 25,000 shares of
our common stock upon exercise of warrants. Excludes (1) 22,500 shares
of our common stock issuable upon exercise of options that will not be
exercisable within 60 days of April 9, 1999 and (2) shares held by
Dancing Bear Investments for which Ms. Arthur serves as an officer and
a director, and as to which Ms. Arthur disclaims beneficial ownership.
(9) Includes 6,250 shares of our common stock issuable upon exercise of
options that are currently exercisable. Excludes 18,750 shares of our
common stock issuable upon exercise of options that will not be
exercisable within 60 days of April 9, 1999.
(10) Includes 27,085 shares of our common stock issuable upon exercise of
options that are currently exercisable. Excludes 33,957 shares of our
common stock issuable upon exercise of options that are not currently
exercisable. Excludes 90,180 shares of our common stock owned by Mr.
Halperin's children for which he has a power of attorney but as to
which he disclaims beneficial ownership.
(11) Includes 36,111 shares of our common stock issuable upon exercise of
options that are currently exercisable. Excludes 26,667 shares of our
common stock issuable upon exercise of options that are not currently
exercisable.
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(12) Includes 6,250 shares of our common stock issuable upon exercise of
options that are exercisable within 60 days of April 9, 1999. Excludes
22,500 shares of our common stock issuable upon exercise of options
that are not exercisable within 60 days of April 8, 1999.
(13) See footnotes 2 through 13 above.
</TABLE>
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DESCRIPTION OF CAPITAL STOCK
Our Fourth Amended and Restated Certificate of Incorporation provides
that our authorized capital stock consists of 100 million shares of common
stock and three million shares of preferred stock, par value $.001 per
share. As of April 9, 1999 there were 11,447,963 shares of common stock
outstanding. Our preferred stock is convertible into shares of common stock
at any time.
The following descriptions of our capital stock do not purport to be
complete and are qualified in their entirety by the provisions of our
certificate and our by-laws, which are included as exhibits to our
registration statement, and by the provisions of applicable law.
COMMON STOCK
As of April 9, 1999, 11,447,963 shares of our common stock were
outstanding. As of March 10, 1999, there were approximately 146 holders of
our common stock. All of the issued and outstanding shares of our common
stock are fully paid and non-assessable. Each holder of shares of our
common stock is entitled to one vote per share on all matters to be voted
on by stockholders generally, including the election of directors. There
are no cumulative voting rights.
The holders of our common stock are entitled to dividends and other
distributions as may be declared from time to time by our board of
directors out of legally available funds, if any. See "Price Range of Our
Common Stock and Dividend Policy." Upon our liquidation, dissolution or
winding up, the holders of shares of our common stock would be entitled to
share ratably in the distribution of all of our assets remaining available
for distribution after satisfaction of all our liabilities and the payment
of the liquidation preference of any outstanding preferred stock as
described below.
The holders of our common stock have no preemptive or other
subscription rights to purchase shares of our stock, nor are holders
entitled to the benefits of any redemption or sinking fund provisions.
PREFERRED STOCK
As of April 9, 1999, we had no shares of preferred stock outstanding.
Our board of directors has the authority, without further action by our
stockholders, to issue preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions of any series, including
dividend rights, conversion rights, voting rights, terms of redemption,
liquidation preferences and the number of shares constituting any series or
the designation of that series. Preferred stock could thus be issued
quickly with terms calculated to delay or prevent a change of control or to
serve as an entrenchment device for incumbent management. The issuance of
preferred stock may have the effect of decreasing the market price of our
common stock, and may adversely affect the voting and other rights of the
holders of our common stock.
WARRANTS
As of April 9, 1999, we had issued and outstanding warrants to
purchase 2,055,759 shares of our common stock, with some possible
anti-dilution adjustments, at a weighted average
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exercise price of approximately $3.16 per share. The warrants may be
exercised at any time on or before August 13, 2004. After expiration of the
exercise period, the holder of the warrants will have no future rights to
exercise the warrants.
RIGHTS AGREEMENT
Our board of directors adopted a Rights Agreement. Under the Rights
Agreement:
o our board of directors declared a dividend of one preferred stock
purchase right (a "Right") for each outstanding share of our
common stock; and
o each Right entitles the registered holder to purchase from us one
one-thousandth of a share of a new series of junior participating
preferred stock, par value $.001 per share (the "Junior Preferred
Stock"), at a price to be determined by our board of directors,
per one one-thousandth of a share (the "Purchase Price"), with
adjustment.
The description and terms of the Rights are described in a Rights Agreement
between us and the designated Rights Agent. The description presented below
is intended as a summary only and is qualified in its entirety by reference
to the Rights Agreement, a form of which has been filed as an exhibit to our
registration statement. See "Where You Can Find More Information."
The Rights are attached to all certificates representing outstanding
shares of our common stock, and no separate Right Certificates were
distributed. The Rights will separate from the shares of our common stock
as soon as one of the following two events occur:
o a public announcement that, without the prior consent of our
board of directors, a person or group (an "Acquiring Person"),
including any affiliates or associates of that person or group,
acquired beneficial ownership of securities having 15% or more of
the voting power of all our outstanding voting securities.
Dancing Bear Investments, Michael S. Egan, Todd V. Krizelman,
Stephan J. Paternot or any entities controlled by these persons
are not included in the definition of Acquiring Person; and
o ten business days, or a later date as our board of directors may
determine, following the commencement of, or announcement of an
intention that remains in effect for five business days to make,
a tender offer or exchange offer that would result in any person
or group becoming an Acquiring Person.
We refer to the earlier of these dates as the "Distribution Date." The
first date of public announcement that a person or group has become an
Acquiring Person is the "Stock Acquisition Date."
Until the Distribution Date, Rights will be transferred with and only
with the shares of our common stock. In addition, until the Distribution
Date, or earlier redemption or expiration, of the Rights:
o new common stock certificates issued upon transfer or new
issuance of shares of common stock will contain a notation
incorporating the Rights Agreement by reference; and
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o the surrender for transfer of any certificates for shares of
common stock outstanding, even without a notation, will also
constitute the transfer of the Rights associated with the shares
of common stock represented by the certificate.
As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Right Certificates") will be mailed to
holders of record of the shares of common stock as of the close of business
on the Distribution Date, and to each initial record holder of various
shares of common stock issued after the Distribution Date. The separate
Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date and will
expire at 5:00 P.M., New York, New York time, on the tenth anniversary of
the date of issuance, unless earlier redeemed by us as described below.
If any person becomes an Acquiring Person, except by a Permitted Offer
as defined below, each holder of a Right will have, under the terms of the
Rights Agreement, the right (the "Flip-In Right") to receive upon exercise
the number of shares of common stock, or, in the discretion of our board of
directors, the number of one-thousandths of a share of Junior Preferred
Stock, or, in some circumstances, our other securities, having a value
immediately before the triggering event equal to two times the Purchase
Price. Notwithstanding the description above, following the occurrence of
the event described above, all Rights that are, or generally were,
beneficially owned by any Acquiring Person or any affiliate or associate of
an Acquiring Person will be null and void.
A "Permitted Offer" is a tender or exchange offer for all outstanding
shares of common stock which is at a price and on terms determined, before
the purchase of shares under the tender or exchange offer, by a majority of
Disinterested Directors, as defined below, to be adequate, taking into
account all factors that the Disinterested Directors deem relevant, and
otherwise in our best interests and our stockholders' best interest, other
than the person or any affiliate or associate on whose behalf the offer is
being made, taking into account all factors that the Disinterested
Directors may deem relevant.
"Disinterested Directors" are our directors who are not our officers
and who are not Acquiring Persons or affiliates or associates of Acquiring
Persons, or representatives of any of them.
If, at any time following the Stock Acquisition Date,
o we are acquired in a merger or other business combination
transaction in which the holders of all of the outstanding shares
of common stock immediately before the consummation of the
transaction are not the holders of all of the surviving
corporation's voting power; or
o more than 50% of our assets or earning power is sold or
transferred with or to an Interested Stockholder; or
o if in the transaction all holders of shares of common stock are
not offered the same consideration as any other person;
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then each holder of a Right, except Rights which previously have been
voided as described above, shall afterwards have the right (the "Flip-Over
Right") to receive, upon exercise, shares of common stock of the acquiring
company having a value equal to two times the Purchase Price. The holder of
a Right will continue to have the Flip-Over Right whether or not the holder
exercises or surrenders the Flip-In Right.
The Purchase Price payable, and the number of one-thousandths of a
share of Junior Preferred Stock or other securities issuable, upon exercise
of the Rights may be adjusted from time to time to prevent dilution in the
event of any one of the following:
o a stock dividend on, or a subdivision, combination or
reclassification of, the shares of Junior Preferred Stock;
o the grant to holders of the shares of Junior Preferred Stock of
various rights or warrants to subscribe for or purchase shares of
Junior Preferred Stock at a price, or securities convertible into
shares of Junior Preferred Stock with a conversion price, less
than the then current market price of the shares of Junior
Preferred Stock; or
o the distribution to holders of the shares of Junior Preferred
Stock of evidences of indebtedness or assets, excluding regular
quarterly cash dividends, or of subscription rights or warrants,
other than those referred to above.
The Purchase Price payable, and the number of one-thousandths of a
share of Junior Preferred Stock or other securities issuable, upon exercise
of the Rights may also be adjusted in the event of a stock split of the
shares of common stock, or a stock dividend on the shares of common stock
payable in shares of common stock, or subdivisions, consolidations or
combinations of the shares of common stock occurring, in any case, before
the Distribution Date.
With some exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1%
in the Purchase Price. No fractional one-thousandths of a share of Junior
Preferred Stock will be issued and, instead, an adjustment in cash will be
made based on the market price of the shares of Junior Preferred Stock on
the last trading day before the date of exercise.
At any time before the earlier to occur of (1) a person becoming an
Acquiring Person or (2) the expiration of the Rights, we may redeem the
Rights in whole, but not in part, at a price of $.001 per Right (the
"Redemption Price"), which redemption shall be effective upon the action of
our board of directors. Additionally, we may redeem the then outstanding
Rights in whole, but not in part, at the Redemption Price at any one of the
following times:
o after the triggering of the Flip-In Right and before the
expiration of any period during which the Flip-In Right may be
exercised in connection with a merger or other business
combination transaction or series of transactions involving us in
which all holders of shares of our common stock are not offered
the same consideration but not involving an Interested
Stockholder, as defined in the Rights Agreement;
o following an event giving rise to, and the expiration of the
exercise period for, the Flip-in Right if and for as long as no
person beneficially owns securities representing 15% or more of
the voting power of our voting securities; and
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o when the Acquiring Person reduces his ownership below 5% in
transactions not involving us.
The redemption of Rights described above shall be effective only as of the
time when the Flip-in Right is not exercisable, and in any event, only
after 10 business days' prior notice. Upon the effective date of the
redemption of the Rights, the right to exercise the Rights will terminate
and the only right of the holders of Rights will be to receive the
Redemption Price.
The shares of Junior Preferred Stock purchasable upon exercise of the
Rights will be non-redeemable and junior to any other series of preferred
stock we may issue, unless otherwise provided in the terms of the stock.
Each share of Junior Preferred Stock will have a preferential quarterly
dividend in an amount equal to 1,000 times the dividend declared on each
share of common stock, but in no event less than $1. In the event of
liquidation, the holders of Junior Preferred Stock will receive a minimum
preferred liquidation payment equal to the greater of $1 or 1,000 times the
payment made per each share of common stock. Each share of Junior Preferred
Stock will have 1,000 votes, voting together with the shares of common
stock. In the event of any merger, consolidation or other transaction in
which shares of common stock are exchanged, each share of Junior Preferred
Stock will be entitled to receive 1,000 times the amount and type of
consideration received per share of common stock. The rights of the Junior
Preferred Stock as to dividends, liquidation and voting, and in the event
of mergers and consolidations, are protected by customary anti-dilution
provisions. Fractional shares of Junior Preferred Stock will be issuable;
however, we may elect to distribute depositary receipts in lieu of
fractional shares. In lieu of fractional shares other than fractions that
are multiples of one one-thousandth of a share, an adjustment in cash will
be made based on the market price of the Junior Preferred Stock on the last
trading date before the date of exercise.
Until a Right is exercised, the holder will have no rights as our
stockholder, including, without limitation, the right to vote or to receive
dividends. While the distribution of the Rights was not taxable to our
stockholders, stockholders may, depending upon the circumstances, recognize
taxable income should the Rights become exercisable or upon the occurrence
of some subsequent events.
The Rights have various anti-takeover effects. The Rights will cause
substantial dilution to a person or group of persons that attempts to
acquire us on terms not approved by our board of directors. The Rights
should not interfere with any merger or other business combination approved
by our board of directors before the time that a person or group has
acquired beneficial ownership of 15% or more of our common stock since the
Rights may be redeemed by us at the Redemption Price until that time.
"Interested Stockholder" means any Acquiring Person or any of their
affiliates or associates, or any other person in which an Acquiring Person
or their affiliates or associates have in excess of 5% of the total
combined economic or voting power, or any person acting in concert or on
behalf of any Acquiring Person or their affiliates or associates.
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REGISTRATION RIGHTS
Investor Rights Agreement. Under the terms of an Investor Rights
Agreement, dated as of August 13, 1997, holders of 25% of all of the common
stock converted from our series B, series C, series D and series E
preferred stock or purchased upon the exercise of warrants originally
exercisable for Series E preferred stock, or 50% of the registrable
securities issued or issuable in respect of our series B and series C
preferred stock, have the right to require us to file a registration
statement covering all or part of their shares. Holders of an aggregate of
5,473,735 shares of our common stock, including 2,023,009 shares issuable
upon the exercise of warrants, may exercise these registration rights up to
four times under the Investor Rights Agreement at our expense, subject the
following restrictions:
o we will not be obligated to register the shares if the holders
propose to sell the securities at an aggregate price to the
public of less than $5 million;
o we are not required to effect more than one demand registration
on behalf of the holders in any 12 calendar month period;
o we may defer registration for up to 120 days if our board of
directors determines that it would be seriously detrimental to us
and our stockholders to register the registrable securities at
the requested time;
o no demand registration statement will be effected within 90 days
of the effective date of this offering or any subsequent public
offering; and
o we are not required in most cases to pay the registration
expenses for any requested registration that is subsequently
withdrawn by the requesting holders.
Holders of registrable securities have piggyback rights to include
their shares in a registration statement filed by us for purposes of a
public offering. An underwriter participating in these offerings may limit
the number of shares offered, and the number shall be allocated first to
us, then generally to holders of registrable securities under this
agreement and other agreements on a pro rata basis. We have the right to
terminate or withdraw any registration and will bear the expenses of any
registration we withdraw. We are not obligated further after we have
effected five registrations for holders of registrable securities.
Under the Investor Rights Agreement, holders of registrable securities
have agreed with us to lock-up periods of up to seven days before and 90
days after the effective date of any registration statement filed in
connection with an underwritten public offering. Any right described in
this section may be amended and waived by our written consent and the
written consent of holders of a majority of the registrable securities. All
registration rights under the Investor Rights Agreement terminate on
November 12, 2001.
Registration Rights Agreement. Under the terms of a Registration
Rights Agreement, dated September 1, 1998, with Dancing Bear Investments,
various holders of series A preferred Stock and Messrs. Krizelman and
Paternot and us, we have granted registration rights similar to the rights
granted under the Investor Rights Agreement. Holders of 25% of all of the
registrable securities covered by the Registration Rights Agreement, or 50%
of the total number of shares of common stock originally issued as series A
preferred stock, have the right to require us to file a registration
statement covering all or part of their shares. Holders of a majority of
these shares also have registration rights for their shares under the
Investor Rights Agreement described
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above. These holders have the right to require us to file up to four
registration statements covering their shares, subject to the same
restrictions set forth above under the description of the Investor Rights
Agreement. Piggyback rights and lock-up periods are substantially the same
as under the Investor Rights Agreement. The holders of registrable
securities will cease to have registration rights at the time they are sold
to the public pursuant to a registration statement or Rule 144 under the
Securities Act of 1933.
Azazz Registration Rights. On February 1, 1999, we entered into a
registration rights agreement with various Azazz shareholders granting them
registration rights with respect to shares of our common stock issued to
them in connection with the acquisition. Under the agreement, we are
required to use our commercially reasonable best efforts to file a shelf
registration statement with the SEC within twenty days after we received
completed audited financial statements for Azazz. We are obligated to use
our commercially reasonable best efforts to cause the shelf registration
statement to be declared and remain effective for a period of twenty
business days or such shorter period as all of the registrable securities
have been sold.
We have the right on one or more occasions to delay the filing or
effectiveness of the shelf registration statement, or, if it has been
declared effective, to suspend the distribution of the Azazz shareholders'
acquisition common stock issued to Azazz shareholders for three reasons:
o we file a registration statement covering any of our securities
to be issued by us or for resale by our other stockholders in a
public offering;
o we determine in our reasonable judgment that the filing,
declaration of effectiveness or continued effectiveness of the
shelf registration statement would require us to disclose a
material business transaction, as defined below; or
o we determine in our reasonable judgment that pro forma and/or
historical financial statements are required to be filed with the
SEC as a result of any material business transaction are not
available at that time.
A material business transaction is any proposed or consummated
financing, reorganization or recapitalization, or pending or consummated
negotiations relating to a merger, consolidation, acquisition or similar
transaction or other business transaction, or other material event, the
disclosure of which would otherwise adversely affect us. If we delay the
shelf registration on account of a public offering as described above, the
delay period begins on the fifth business day after our notice to the Azazz
shareholders of the filing, and ends on the closing of the offering,
subject to the lock-up described below. If we delay the shelf registration
statement for any other reason, the delay period begins and ends on the
dates specified in our notices to the Azazz shareholders. At the end of any
delay period, we will use our commercially reasonable best efforts to file
and cause to be declared effective a shelf registration statement, or
reinstate the Azazz shareholders' ability to distribute our common stock
under a shelf registration statement, generally
o within ten business days following the end of a delay period on
account of a public offering; and
o within five business days following the end of a delay period
caused by a material business transaction, as described above.
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If we file a shelf registration statement covering these shares and
keep it effective for twenty business days, we have no further obligations
under the registration rights agreement and the registration rights of
these holders terminate.
Under the registration rights agreement, holders of our common stock
received in this transaction have agreed to be subject to lock-up periods
of up to seven days before and ninety days after the effective date of a
registration statement covering shares of our common stock in any
underwritten public offering, including this offering. No holder has any
piggyback registration rights under the agreement.
Attitude Network Registration Rights. On April 9, 1998, we entered
into a registration rights agreement with various Attitude Network
shareholders granting them registration rights with respect to shares of
our common stock issued to them in connection with the acquisition. Under
the agreement, the former Attitude Network shareholders have piggyback
rights to include the same percentage of their registrable securities in a
registration statement filed by us for purposes of a public offering as
other shareholders of ours in the aggregate include in the registration
statement. These holders are entitled to piggyback rights in this offering
and the next two registration statements filed by us that become effective.
Additionally, the holders will cease to have registration rights at the
time their shares are sold or are eligible to be sold to the public
pursuant to a registration statement or Rule 144. None of the holders have
any right to include their shares in any over-allotment option in
connection with a registration statement.
We have the right to terminate, withdraw, or delay any registration
initiated by us and will bear the expenses of any registration we withdraw.
Under the agreement, these holders have agreed with us to lock-up
periods of up to seven days before and 90 days following the effective date
of any registration statement filed in connection with an underwritten
public offering, including this offering.
LIMITATION OF DIRECTOR LIABILITY
Our Certificate limits the liability of our directors to us and our
stockholders to the fullest extent permitted by Delaware law. Specifically,
our directors will not be personally liable for money damages for breach of
fiduciary duty as a director, except for liability
o for any breach of the director's duty of loyalty to us or our
stockholders;
o for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
o under Section 174 of the Delaware General Corporation Law, which
concerns unlawful payments of dividends, stock purchases or
redemptions; and
o for any transaction from which the director derived an improper
personal benefit.
DELAWARE LAW AND VARIOUS CHARTER AND BY-LAWS PROVISIONS
Delaware Law. We must comply with the provisions of Section 203 of the
Delaware General Corporation Law. In general, Section 203 prohibits a
publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three
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years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner.
A "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder.
An "interested stockholder" is a person who, together with affiliates and
associates, owns, or, in some cases, within three years prior, did own, 15%
or more of the corporation's voting stock. Under Section 203, a business
combination between the Company and an interested stockholder is prohibited
unless it satisfies one of the following three conditions:
o our board of directors must have previously approved either the
business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
o upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of our voting stock outstanding at
the time the transaction commenced, excluding, for purposes of
determining the number of shares outstanding, shares owned by (1)
persons who are directors and also officers and (2) employee
stock plans, in some instances; and
o the business combination is approved by our board of directors
and authorized at an annual or special meeting of the
stockholders by the affirmative vote of the holders of at least
66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Special Meetings. Our by-laws provide that special meetings of
stockholders for any purpose or purposes can be called only upon the
request of our chairman of the board, our president, our board of
directors, or the holders of shares entitled to at least a majority of the
votes at the meeting.
Amendment of Our By-Laws. To adopt, repeal, alter or amend the
provisions of our by-laws, our by-laws require either the affirmative vote
of the holders of at least a majority of the voting power of all of the
issued and outstanding shares of our capital stock entitled to vote on the
matter or by our board of directors.
Advance Notice Provisions for Stockholder Nominations and Proposals.
Our by-laws establish advance notice procedures for stockholders to make
nominations of candidates for election as directors, or bring other
business before an annual meeting of our stockholders.
These procedures provide that only persons who are nominated by or at
the direction of our board of directors, or by a stockholder who has given
timely written notice to our secretary before the meeting at which
directors are to be elected, will be eligible for election as one of our
directors. Further, these procedures provide that at an annual meeting, the
only business that may be conducted is the business that has been specified
in the notice of the meeting given by, or at the direction of, our board or
by a stockholder who has given timely written notice to our secretary of
such stockholder's intention to bring that business before the meeting.
Under these procedures, notice of stockholder nominations to be made
or business to be conducted at an annual meeting must be received by us not
less than 60 days nor more than 90 days before the date of the meeting, or,
if less than 70 days' notice or prior public disclosure of the
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date of the meeting is given or made to the stockholders, the 10th day
following the earlier of (1) the day notice was mailed or (2) the day
public disclosure was made. Under these procedures, notice of a stockholder
nomination to be made at a special meeting at which directors are to be
elected must be received by us not later than the close of business on the
tenth day following the day on which notice of the date of the special
meeting was mailed or public disclosure of the date of the special meeting
was made, whichever occurs first.
Under our by-laws, a stockholder's notice nominating a person for
election as a director must contain specific information about the proposed
nominee and the nominating stockholder. If our chairman determines that a
nomination was not made in the manner described in our by-laws, the
nomination will be disregarded. Similarly, a stockholder's notice proposing
the conduct of business must contain specific information about the
business and about the proposing stockholder. If our chairman determines
that business was not properly brought before the meeting in the manner
described in our by-laws, the business will not be conducted.
By requiring advance notice of nominations by stockholders, our
by-laws afford our board an opportunity to consider the qualifications of
the proposed nominee and, to the extent deemed necessary or desirable by
our board, to inform stockholders about these qualifications. By requiring
advance notice of other proposed business, our by-laws also provide an
orderly procedure for conducting annual meetings of stockholders and, to
the extent deemed necessary or desirable by our board, provides our board
with an opportunity to inform stockholders, before meetings, of any
business proposed to be conducted at the meetings, together with any
recommendations as to our board's position regarding action to be taken
with respect to the business, so that stockholders can better decide
whether to attend a meeting or to grant a proxy regarding the disposition
of any business.
Although our certificate does not give our board any power to approve
or disapprove stockholder nominations of the election of directors or
proposals for action, the foregoing provisions may have the effect of
precluding a contest for the election of directors or the consideration of
stockholder proposals if the proper procedures are not followed, and of
discouraging or deterring a third party from conducting a solicitation of
proxies to elect its own slate of directors or to approve its own proposal,
without regard to whether consideration of these nominees or proposals
might be harmful or beneficial to us and our stockholders.
WRITTEN CONSENT PROVISIONS
Our by-laws provide that any action required or permitted to be taken
by the holders of capital stock at any meeting of our stockholders may be
taken without a meeting only by the holders of outstanding capital stock
having not less than the minimum number of votes that would be necessary to
authorize or take the action at a meeting at which all shares entitled to
vote were present and voted.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American
Stock Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock, including shares
issuable upon the exercise of stock options, in the public market after the
lapse of the restrictions described below, or the perception that these
sales may occur, could materially adversely affect the prevailing market
prices for our common stock and our ability to raise equity capital in the
future. Limited information is currently available and no prediction can be
made as to the timing or amount of future sales of shares, or the effect,
if any, that future sales of shares, or the availability of shares for
future sale, will have on the market price of our common stock prevailing
from time to time. See "Risk Factors--Shares Eligible for Future Sale."
Upon consummation of the offerings, we will have approximately
13,447,963 outstanding shares of our common stock, and 1,838,979 shares of
our common stock issuable upon exercise of outstanding options and we have
an additional 497,527 shares of common stock reserved for issuance under
such plans. See "Management--Executive Compensation." In addition,
2,055,759 shares of our common stock will be issuable upon exercise of
outstanding warrants. Of the outstanding shares, the 2,000,000 newly issued
shares of our common stock issued by us and sold in this offering and the
2,000,000 shares of our outstanding common stock sold by selling
stockholders in this offering will be immediately eligible for sale in the
public market without restriction or further registration under the
Securities Act, unless purchased by or issued to any of our "affiliates"
under the Securities Act of 1933.
All of the shares of our common stock outstanding before our initial
public offering are "restricted securities" as the term is defined under
Rule 144. These shares were issued in private transactions not involving a
public offering and may not be sold in the absence of registration other
than under Rule 144, 144(k) or 701 promulgated under the Securities Act of
1933 or another exemption from registration.
In general, under Rule 144 as currently in effect, any of our
affiliates or any person, or persons whose shares are aggregated under Rule
144, who has beneficially owned shares of our common stock which are
treated as restricted securities for at least one year would be entitled to
sell within any three-month period a number of shares that does not exceed:
o the greater of 1% of the outstanding shares of our common stock,
which would be approximately 134,480 shares based upon the number
of shares outstanding after the offerings, or
o the reported average weekly trading volume in the common stock
during the four weeks preceding the date on which notice of the
sale was filed under Rule 144.
Sales under Rule 144 must comply with sale restrictions and notice
requirements and to the availability of current public information
concerning us. In addition, our affiliates must comply with the
restrictions and requirements of Rule 144, other than the one-year holding
period requirements, to sell shares of our common stock that are not
restricted securities, such as common stock acquired by affiliates in
market transactions. Furthermore, if a period of at least two years has
elapsed from the date restricted securities were acquired from us or our
affiliates, a holder of restricted securities who is not an affiliate at
the time of the sale and who has not been an affiliate for at least three
months before the sale would be entitled to sell the shares
-100-
<PAGE>
immediately without regard to the volume, manner of sale, notice and public
information requirements of Rule 144.
Holders of virtually all of our outstanding common stock have various
demand registration rights with respect to the shares of our common stock,
under some circumstances and with some conditions, to require us to
register their shares of our common stock under the Securities Act of 1933,
and various rights to participate in any future registration of our
securities. These rights are limited by the 180-day lock-up arrangement
described below. We are not required to effect more than one demand
registration on behalf of these holders in any twelve calendar month
period. Under the agreements by which the registration rights were granted,
holders of registrable securities have agreed to lock-up periods of not
more than seven days before and 90 days after the effective date of any
subsequent prospectus.
We have filed two registration statements on Form S-8 covering the
majority of shares issuable under our option plans, which will make those
shares freely tradable upon issuance. In the near future, we intend to file
an additional registration statement on Form S-8 for the balance of any
shares issuable under our option plans which have not yet been registered.
This registration statement became effective immediately upon filing and
shares covered by this registration statement will be eligible for sale in
the public markets, limited by any applicable lock-up agreements and Rule
144 limitations applicable to affiliates.
Additionally, in connection with our initial public offering in
November 1998, we and all of our directors and officers and certain of our
other stockholders have agreed that, with some exceptions, without the
prior written consent of Bear, Stearns & Co. Inc., not to, directly or
indirectly, issue, sell, offer or agree to sell, grant any option for the
sale, pledge, make any short sale, establish an open "put equivalent
position" within the meaning of Rule 16a-1(h) under the Securities Exchange
Act of 1934, or otherwise dispose of any shares of our common stock, or
securities convertible into, exercisable for or exchangeable for our common
stock or of any of our subsidiaries until 180 days from November 12, 1998.
Bear, Stearns & Co. Inc. may, however, in its sole discretion and at any
time without notice, release all or any portion of the shares subject to
lock-up agreements.
In connection with this offering, we and all of our directors and
officers will enter into agreements providing that we will not, for a
period of 90 days after the date of this prospectus, enter into any of the
transactions referred to in the preceding paragraph without the prior
written consent of Bear, Stearns & Co. Inc. The foregoing agreements shall
not apply to:
o in our case, the shares of common stock to be sold in this
offering;
o the issuance of any shares of our common stock upon the exercise
of an option or warrant or the conversion of a security
outstanding on the date of this prospectus and referred to in
this prospectus;
o in our case, any shares of our common stock issued or options to
purchase our common stock granted under our existing employee
benefit plans referred to in this prospectus;
o the pledge by some of our directors and some of the directors of
Dancing Bear Investments or our affiliates or affiliates of
Dancing Bear Investments of shares of our
-101-
<PAGE>
common stock to a financial institution in connection with a bona fide
financing transaction;
o transfers of shares of our common stock to immediate family
members or trusts for the benefit of these family members as long
as the transferee enters into a similar lock-up agreement;
o the transfer of all or part of any warrants held by Dancing Bear
Investments on the date of this prospectus to any employee of
Dancing Bear Investments, any of our employees, Michael S. Egan
or a family transferee of Michael S. Egan, as long as each
transferee has executed a similar lock-up agreement; and
o subject to specified limitations, shares of our common stock issued
by us in connection with any merger, recapitalization,
consolidation or acquisition by us or our subsidiaries.
-102-
<PAGE>
UNDERWRITING
The underwriters of the offering named below, for whom Bear, Stearns &
Co. Inc., is acting as representative, have severally agreed with us,
subject to the terms and conditions of the underwriting agreement, the form
of which has been filed as an exhibit to the registration statement on Form
S-1 of which this prospectus is a part, to purchase from us and the selling
stockholders the aggregate number of shares of common stock set forth
opposite their respective names below:
Underwriter Number of Shares
----------- ----------------
Bear, Stearns & Co. Inc..................
NationsBanc Montgomery Securities LLC....
Volpe Brown Whelan & Company.............
Wit Capital Corporation..................
---------
4,000,000
Total.................................... =========
The underwriting agreement provides that the obligations of the
several underwriters are subject to approval of certain legal matters by
counsel and to various other conditions. We and the selling stockholders
have agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act, and where such
indemnification is unavailable, to contribute to payments that the
underwriters may be required to make in respect of such liabilities. The
nature of the underwriters' obligations is such that they are committed to
purchase and pay for all of the above shares of common stock if any are
purchased.
If the underwriters sell more than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
600,000 shares from us to cover such sales. They may exercise that option
for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in the same proportion as set
forth in the table above.
We and all of our directors and officers have agreed that, subject to
certain exceptions, for a period of 90 days from the date of this
prospectus, without the prior written consent of Bear, Stearns & Co. Inc.,
we will not, directly or indirectly, issue, sell, offer or agree to sell,
grant any option for the sale of, pledge, make any short sale, establish an
open "put equivalent position" within the meaning of Rule 16a-1(h) under
the Exchange Act or otherwise dispose of any shares of our common stock (or
securities convertible into, exercisable for or exchangeable for our common
stock) of our company or of any of our subsidiaries.
The following table shows the per share and total underwriting
discounts and commissions to be paid to the underwriters by us and by the
selling stockholders. These amounts are shown assuming both no exercise and
full exercise of the underwriters' option to purchase additional shares.
-103-
<PAGE>
--------------------------
No Exercise Full Exercise
----------- -------------
Paid by us
----------
Per share..................... $ $
Total......................... $ $
Paid by Selling Stockholders
----------------------------
Per share..................... $ $
Total......................... $ $
Shares sold by the underwriters to the public will initially be
offered at the public offering price set forth on the cover of this
prospectus. Any shares sold by the underwriters to securities dealers may
be sold at a discount of up to $ per share from the public offering price.
Any such securities dealers may resell any shares purchased from the
underwriters to certain other brokers or dealers at a discount of up to $
per share from the public offering price. If all the shares are not sold at
the offering price, the representative may change the offering price and
the other selling terms.
In connection with the offering, certain persons participating in the
offering may purchase and sell shares of common stock in the open market.
These transactions may include short sales, stabilizing transactions and
purchases to cover positions created by short sales. Short sales involve
the sale by the underwriters of a greater number of shares than they are
required to purchase in the offering. Stabilizing transactions consist of
certain bids or purchases made for the purpose of preventing or retarding a
decline in the market price of the common stock while the offering is in
progress. The underwriters also may impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of the
underwriting discount received by it because the representative has
repurchased shares sold by or for the account of such underwriter in
stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or
otherwise affect the market price of the common stock. As a result, the
price of the common stock may be higher than the price that otherwise might
exist in the open market. If these activities are commenced, they may be
discontinued by the underwriters at any time. These transactions may be
effected on the Nasdaq National Market, in the over-the-counter market or
otherwise.
A Prospectus in electronic format is being made available on an
Internet web site maintained by Wit Capital. In addition, all dealers
purchasing shares from Wit Capital in this offering have agreed to make a
prospectus in electronic format available on web sites maintained by each
of these dealers.
Certain persons participating in this offering may also engage in
passive market making transactions in the common stock on the Nasdaq
National Market. Passive market making consists of displaying bids on the
Nasdaq National Market limited by the prices of independent market makers
and effecting purchases limited by such prices and in response to order
flow. Rule 103 of Regulation M promulgated by the Commission limits the
amount of net purchases that each passive market maker may make and the
displayed size of each bid.
-104-
<PAGE>
Passive market making may stablize the market price of the common
stock at a level above that which might otherwise prevail in the open
market and, if commenced, may be discontinued at any time.
The representative of the underwriters has advised us that Bear,
Stearns & Co. Inc., NationsBanc Montgomery Securities LLC and Volpe Brown
Whelan & Company each currently acts as a market maker for our common stock
and currently intends to continue to act as a market maker following this
offering. Since the average daily trading volume of our common stock
exceeds $1 million and our public float exceeds $150 million, the
provisions of Regulation M permit such underwriters to continue market
making activities during the period of the offering. However, the
underwriters are not obligated to do so and may discontinue any market
making at any time.
We estimate that our share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately $ .
We are paying the expenses of the selling stockholders, other than all
applicable stock transfer taxes, fees of counsel for the selling
stockholders and commissions, concessions and discounts of brokers, dealers
or other agents.
-105-
<PAGE>
LEGAL MATTERS
The validity of the shares of our common stock offered by this
prospectus will be passed upon for us by Fried, Frank, Harris, Shriver &
Jacobson (a partnership including professional corporations), New York, New
York. Various partners and employees of Fried, Frank, Harris, Shriver &
Jacobson have, collectively, approximately 2,000 shares of our common
stock. Various legal matters in connection with the offering will be passed
upon for the underwriters by Morrison & Foerster LLP, New York, New York.
EXPERTS
Our balance sheets as of December 31, 1998 and 1997 and the related
statements of operations, stockholders' equity and cash flows for the three
years in the period ended December 31, 1998 and the balance sheets of
factorymall.com, inc. as of December 31, 1998 and 1997 and the related
statements of operations, stockholders' equity (deficit) and cash flows for
the years ended December 31, 1998 and 1997 and the period from April 26,
1996 (inception) to December 31, 1996 have been included in reliance on the
reports of KPMG LLP, independent accountants, given on the authority of
that firm as experts in auditing and accounting.
The consolidated balance sheets of Attitude Network, Ltd. and its
subsidiary as of December 31, 1998 and 1997 and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for
the years ended December 31, 1998 and 1997 have been included in reliance
on the reports of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of that firm as experts in auditing and accounting.
The report of PricewaterhouseCoopers LLP covering the December 31, 1998 and
1997 financial statements contains an explanatory paragraph that states
that the Company's recurring losses from operations raise substantial doubt
about the entity's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from
the outcome of that uncertainty.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission. You may read
and copy any reports, statements or other information on file at the
Commission's public reference room in Washington, D.C. You can request
copies of those documents, upon payment of a duplicating fee, by writing to
the Commission.
We have filed a registration statement on Form S-1 with the
Commission. This prospectus' which forms a part of that registration
statement, does not contain all of the information included in the
registration statement. Certain information is omitted and you should refer
to the registration statement and its exhibits. With respect to references
made in this prospectus to any contract or other document, such references
are not necessarily complete and you should refer to the exhibits attached
to the registration statement for copies of the actual contract or
document. You may review a copy of the registration statement at the
Commission's public reference room in Washington, D.C., and at the
Commission's regional offices in Chicago, Illinois and New York, New York.
Please call the Commission at 1-800-SEC-0330 for further information on the
operation of the public reference rooms. Our Commission filings and the
-106-
<PAGE>
registration statement can also be reviewed by accessing the Commission's
Internet site at http://www.sec.gov.
-107-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
THEGLOBE.COM, INC. FINANCIAL STATEMENTS
Report of Independent Accountants F-3
Balance Sheets at December 31, 1998 and 1997 F-4
Statements of Operations for the years ended December
31, 1998, 1997 and 1996 F-5
Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996 ` F-6
Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996 F-7
Notes to Financial Statements F-8
Schedule of Valuation and Qualifying Accounts Exhibit 99.1
THEGLOBE.COM, INC. UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Consolidated Financial
Information F-25
Unaudited Pro Forma Condensed Consolidated Balance
Sheet as of December 31, 1998 F-27
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 1998 F-28
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements as of and for the year ended
December 31, 1998 F-29
FACTORYMALL.COM, INC. FINANCIAL STATEMENTS
Report of Independent Accountants F-31
Balance Sheets at December 31, 1998 and 1997 F-32
F-1
<PAGE>
Statements of Operations for the years ended
December 31, 1998 and 1997 and the period from
April 25, 1996 (inception) to December 31, 1996 F-33
Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1998 and 1997 and the period
from April 25, 1996 (inception) to December 31, 1996 F-34
Statements of Cash Flows for the years ended
December 31, 1998 and 1997 and the period from
April 25, 1996 (inception) to December 31, 1996 F-35
Notes to Financial Statements F-36
ATTITUDE NETWORK, LTD. FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants F-42
Consolidated Balance Sheets at December 31, 1998 and 1997 F-43
Consolidated Statements of Operations for the years
ended December 31, 1998 and 1997 F-44
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1998 and 1997 F-45
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997 F-46
Notes to Consolidated Financial Statements F-47
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
theglobe.com, inc.:
We have audited the accompanying balance sheets of theglobe.com, inc.
as of December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. In connection with our audits of the
financial statements, we also have audited the financial statement schedule
as listed in the accompanying index. These financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of theglobe.com,
inc. as of December 31, 1998 and 1997, and the results of its operations
and cash flows for each of the years in the three-year period ended
December 31, 1998 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
New York, New York
February 20, 1999
F-3
<PAGE>
<TABLE>
<CAPTION>
THEGLOBE.COM, INC.
BALANCE SHEETS
DECEMBER 31,
-------------------------
1998 1997
----------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................... $29,250,572 $5,871,291
Short-term investments....................................... 898,546 13,003,173
Accounts receivable, less allowance for doubtful accounts of
$300,136 and $12,000 in 1998 and 1997, respectively........ 2,004,875 254,209
Prepaids and other current assets............................ 678,831 --
----------- -----------
Total current assets..................................... 32,832,824 19,128,673
Property and equipment, net...................................... 3,562,559 325,842
Restricted investments........................................... 1,734,495 --
Other assets..................................................... -- 7,657
----------- -----------
Total assets................................................. $38,129,878 $19,462,172
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $2,614,445 $ 396,380
Accrued expense.............................................. 817,463 325,454
Accrued compensation......................................... 691,279 1,148,999
Deferred revenue............................................. 673,616 113,290
Current installments of obligations under capital leases..... 1,026,728 27,174
----------- ---------
Total current liabilities................................ 5,823,531 2,011,297
Obligations under capital leases, excluding current installments. 2,005,724 98,826
Stockholders' equity:
Preferred Stock, 3,000,000 shares authorized:
Convertible preferred stock, Series A through E, $0.001
par value; 2,900,001 shares authorized; -0- and
1,449,995.5, shares issued and outstanding at December 31,
1998 and 1997, respectively; aggregate liquidation
preference of -0- and $21,886,110 at December 31, 1998 and
1997, respectively......................................... -- 1,450
Common stock, $0.001 par value; 100,000,000 shares
authorized; 10,312,256 and 1,154,271 shares issued and
outstanding at December 31, 1998 and 1997 respectively..... 10,312 1,154
Additional paid-in capital................................... 50,914,494 21,866,965
Deferred compensation........................................ (128,251) (76,033)
Net unrealized loss on securities............................ (50,006) (41,201)
Accumulated deficit.......................................... (20,445,926) (4,400,286)
----------- -----------
Total stockholders' equity............................... 30,300,623 17,352,049
Commitments......................................................
----------- -----------
Total liabilities and stockholders' equity............... $38,129,878 $19,462,172
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
THEGLOBE.COM, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
---------- ------------- --------------
<S> <C> <C> <C>
Revenues......................................... $5,509,818 $ 770,293 $ 229,363
Cost of revenues................................. 2,238,871 423,706 116,780
---------- ---------- ---------
Gross profit............................. 3,270,947 346,587 112,583
Operating expenses:
Sales and marketing.......................... 9,298,683 1,248,349 275,947
Product development.......................... 2,632,613 153,667 120,000
General and administrative................... 6,828,134 2,827,591 489,073
Non-recurring charge......................... 1,370,250 -- --
----------- ---------- ---------
Loss from operations..................... (16,858,733) (3,883,020) (772,437)
----------- ----------- ---------
Other income (expense):
Interest and dividend income................. 1,083,400 334,720 25,966
Interest and other expense................... (191,389) -- (3,709)
--------- ---------- ---------
Total other income (expense), net........ 892,011 334,720 22,257
--------- ---------- ---------
Loss before provision for income taxes... (15,966,722) (3,548,300) (750,180)
----------- ---------- ---------
Provision for income taxes....................... 78,918 36,100 --
--------- ---------- ---------
Net loss................................. $(16,045,640) $(3,584,400) $(750,180)
============ =========== =========
Basic and diluted net loss per share............. $ (6.74) $ (3.13) $ (0.67)
========= ========== =========
Weighted average basic and diluted shares
outstanding.................................... 2,381,140 1,146,773 1,125,000
========= ========== =========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
THEGLOBE.COM,INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
OTHER TOTAL
ADDITIONAL COMPRE- STOCK-
CONVERTIBLE PAID-IN DEFERRED HENSIVE ACCUMULATED HOLDERS'
PREFERRED STOCK COMMON STOCK CAPITAL COMPENSATION LOSS DEFICIT EQUITY
------------------ --------------------- ---------- ------------ -------- ------------ -----------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
December 31, 1995.. 1,134,910 $1,135 1,125,000 $1,125 $ 695,163 $ -- $ -- $ (65,706) $ 631,717
Net loss............. -- -- -- -- -- -- -- (750,180) (750,180)
---------
Comprehensive loss... (750,180)
---------
Issuance of Series B
convertible
preferred stock.... 23,810 24 -- -- 24,961 -- -- -- 24,985
Issuance of Series C
convertible
preferred stock.... 221,250 221 -- -- 884,749 -- -- -- 884,970
Deferred compensation -- -- -- -- 25,053 (25,053) -- -- --
Amortization of deferred
compensation....... -- -- -- -- -- 4,000 -- -- 4,000
-------- ------ ---------- ------ ---------- ----------- -------- ------------- -----------
Balance at December
31, 1996........... 1,379,970 1,380 1,125,000 1,125 1,629,926 (21,053) -- (815,886) 795,492
Net loss............. -- -- -- -- -- -- -- (3,584,400) (3,584,400)
Net unrealized loss
on securities...... -- -- -- -- -- -- (41,201) -- (41,201)
-----------
Comprehensive loss... (3,625,601)
-----------
Issuance of Series C
convertible
preferred stock.... 70,000 70 -- -- 279,930 -- -- -- 280,000
Exercise of stock
options............ -- -- 29,271 29 4,478 -- -- -- 4,507
Issuance of Series D
convertible
preferred stock,
net of expense of
$130,464........... 25.5 -- -- -- 19,869,536 -- -- -- 19,869,536
Deferred compensation -- -- -- -- 83,095 (83,095) -- -- --
Amortization of deferred
compensation....... -- -- -- -- -- 28,115 -- -- 28,115
-------- ------ ---------- ------ ---------- ----------- -------- ------------- -----------
Balance at
December 31, 1997.. 1,449,995.5 1,450 1,154,271 1,154 21,866,965 (76,033) (41,201) (4,400,286) 17,352,049
Net loss............. -- -- -- -- -- -- -- (16,045,640)(16,045,640)
Change in net
unrealized loss on
securities......... -- -- -- -- -- -- (8,805) -- (8,805)
----------
Comprehensive loss... (16,054,445)
----------
Deferred compensation -- -- -- -- 118,125 (118,125) -- -- --
Amortization of
deferred
compensation....... -- -- -- -- -- 65,907 -- -- 65,907
Exercise of stock
options............ -- -- 199,083 199 254,818 -- -- -- 255,017
Conversion of
preferred stock in
connection with the
Company's IPO...... (1,449,995.5) (1,450) 5,473,735 5,474 (4,024) -- -- -- --
Issuance of Common
Stock in connection
for services....... -- -- 3,500 3 31,497 -- -- -- 31,500
Issuance of common
stock in connection
with the Company's
IPO, net of
issuance costs of
$4,054,658......... -- -- 3,481,667 3,482 27,276,863 -- -- -- 27,280,345
Transfer of warrants
from significant
shareholder to
officers........... -- -- -- -- 1,370,250 -- -- -- 1,370,250
-------- ------ ---------- ------ ---------- ----------- -------- ------------- ----------
Balance at
December 31, 1998 . -- $ -- 10,312,256 $10,312 $50,914,494 $ (128,251) $(50,006) $(20,445,926) $30,300,623
======== ====== ========== ====== ========== =========== ======== ============= ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
THEGLOBE.COM, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED
DECEMBER 31,
---------------------------------------
1998 1997 1996
------------ ------------ ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(16,045,640) $(3,584,400) $ (750,180)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.............. 715,410 60,210 47,595
Transfer of stock warrants from significant
shareholder to officers.................. 1,370,250 -- --
Issuance of common stock for services...... 31,500 -- --
Amortization of deferred compensation...... 65,907 28,115 4,000
Changes in operating assets and liabilities:
Accounts receivable, net................... (1,750,666) (188,081) (63,103)
Prepaids and other current assets.......... (678,831) 2,377 (2,377)
Other assets............................... 7,657 -- --
Accounts payable........................... 2,218,065 265,902 120,684
Accrued expenses........................... 492,009 310,220 9,635
Accrued compensation....................... (457,720) 1,148,999 --
Deferred revenue........................... 560,326 81,146 32,144
----------- ----------- -----------
Net cash used in operating activities........ (13,471,733) (1,875,512) (601,602)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of securities......................... -- (13,044,374) --
Proceeds from sale of securities............... 12,095,822 -- --
Purchases of property and equipment............ (730,359) (119,984) (138,309)
Payment of security deposits................... (1,734,495) -- --
----------- ----------- -----------
Net cash provided by (used in) investing
activities................................. 9,630,968 (13,164,358) (138,309)
----------- ----------- -----------
Cash flows from financing activities:
Payments under capital lease obligations....... (315,316) -- --
Proceeds from exercise of common stock options. 255,017 4,507 --
Net proceeds from issuance of common stock..... 27,280,345 -- --
Payment of financing costs..................... -- (130,464) --
Proceeds from issuance of convertible preferred
Series A, B and C stock...................... -- 280,000 909,955
Proceeds from issuance of convertible preferred
Series D stock............................... -- 20,000,000 --
----------- ----------- -----------
Net cash provided by financing activities.. 27,220,046 20,154,043 909,955
----------- ----------- -----------
Net change in cash and cash equivalents.... 23,379,281 5,114,173 170,044
Cash and cash equivalents at beginning of period. 5,871,291 757,118 587,074
----------- ----------- -----------
Cash and cash equivalents at end of period....... $29,250,572 $5,871,291 $ 757,118
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest..................................... $ 123,724 $ -- $ 3,709
=========== =========== ===========
Income taxes................................. $ 69,890 $ -- $ --
=========== =========== ===========
Supplemental disclosure of noncash
transactions:..............................
Equipment acquired under capital leases...... $3,221,769 $ 126,000 $ --
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
theglobe.com, inc. (the "Company") was incorporated on May 1, 1995
(inception) and commenced operations on that date. theglobe.com is an
online network with members and users in the United States and abroad.
theglobe.com's users are able to personalize their online experience by
publishing their own content and interacting with others having similar
interests. The Company's primary revenue source is the sale of advertising,
with additional revenues generated through electronic commerce
arrangements, development fees and the sale of membership service fees for
enhanced services.
The Company's business is characterized by rapid technological change,
new product development and evolving industry standards. Inherent in the
Company's business are various risks and uncertainties, including its
limited operating history, unproven business model and the limited history
of commerce on the Internet. The Company's success may depend in part upon
the emergence of the Internet as a communications medium, prospective
product development efforts and the acceptance of the Company's solutions
by the marketplace.
(b) Initial Public Offerings
On November 13, 1998, the Company completed an initial public offering
and concurrent offering directly to certain investors in which it sold
3,481,667 shares of Common Stock, including 381,667 shares in connection
with the exercise of the underwriters' over-allotment option, at $9.00 per
share. Upon the closing of the offerings, all of the Company's preferred
stock, par value $0.001 per share (the "Preferred Stock") automatically
converted into an aggregate of 5,473,735 shares of Common Stock. Net
proceeds from the offerings, after underwriting and placement agent fees of
$2.0 million and offering costs of $2.0 million were $27.3 million.
(c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
F-8
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
(d) Cash and Cash Equivalents
The Company considers all highly liquid securities with original
maturities of three months or less to be cash equivalents. Cash equivalents
at December 31, 1998 were approximately $2,955,044 and at December 31, 1997
were approximately $3,997,000, which consisted of corporate bonds and
mutual funds.
(e) Short-term Investments
Short-term investments are classified as available-for-sale and are
available to support current operations or to take advantage of other
investment opportunities. 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 December 31, 1998, the Company had gross unrealized
losses of $50,006 from its short-term investments. As of December 31, 1997,
the Company had gross unrealized losses of $41,678 and gross unrealized
gains of $477 from its short-term investments.
(f) Property and Equipment
Property and equipment is stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
related assets, generally ranging from three to five years. Equipment under
capital leases is stated at the present value of minimum lease payments and
is amortized using the straight-line method over the shorter of the lease
term or the estimated useful lives of the assets.
(g) Restricted Investments
At December 31, 1998, restricted investments included security
deposits held in certificates of deposit and other interest bearing
accounts as collateral for certain capital lease equipment and office space
leases.
(h) Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which
F-9
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
the carrying amount of the assets exceeds the fair value of the assets. To
date, no such impairment has been recorded.
(i) Income Taxes
The Company accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases for operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in results of operations in the period that the tax change
occurs. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized.
(j) Revenue Recognition
The Company's revenues are derived principally from the sale of banner
advertisements under short-term contracts. To date, the duration of the
Company's advertising commitments has generally averaged from one to 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, electronic commerce revenue shares and sponsorship placements within
the Company's site. Membership service fees are deferred and recognized
ratably over the term of the subscription period. Revenues from the
Company's share of proceeds from its electronic commerce partner's sales
are recognized upon notification from its partners of sales attributable to
the Company's site. The Company also earns additional revenue on
sponsorship contracts for fees relating to the design, coordination, and
integration of the customer's content and links. These development fees are
recognized as revenue once the related activities have been performed.
Other revenues accounted for 11% of revenues for the year ended December
31, 1998, 23% for 1997 and 5% for 1996.
The Company trades advertisements on its web properties in exchange
for advertisements on the Internet sites of other companies. Barter
revenues and expenses are recorded at the fair market value of services
provided or received, whichever is more determinable in the circumstances.
Revenue from barter transactions is recognized as income when
advertisements are delivered on the Company's web properties. Barter
expense is recognized when the Company's advertisements are run on other
companies' web sites, which is typically in the same period when the barter
revenue is recognized. Barter revenues and expenses were approximately
$103,000 for the year ended December 31, 1998, $166,500 for 1997 and $-0-
for 1996.
F-10
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(k) Product Development
Product development expenses include professional fees, staff costs
and related expenses associated with the development, testing and upgrades
to the Company's web site as well as expenses related to its editorial
content and community management and support. Product development costs and
enhancements to existing products are charged to operations as incurred. To
date, completion of a working model of the Company's products and general
release have substantially coincided. As a result, the Company has not
capitalized any software development costs since such costs have not been
significant.
(l) Advertising
Advertising costs are expensed as incurred. Advertising costs totaling
$7.3 million for the year ended December 31, 1998, $1,057,606 for 1997 and
$202,986 for 1996, are included in sales and marketing expenses in the
Company's statements of operations.
(m) Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standard
("SFAS") No. 123, "Accounting for Stock-Based Compensation," which permits
entities to recognize as expense over the vesting period the fair value of
all stock-based awards on the date of grant. Alternatively, SFAS No. 123
allows entities to continue to apply the provisions of Accounting Principle
Board ("APB") Opinion No. 25 and provide pro forma net earnings disclosures
for employee stock option grants if the fair-value-based method defined in
SFAS No. 123 had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
(n) Net Loss Per Common Share
The Company adopted SFAS No. 128, "Computation of Earnings Per Share,"
during the year ended December 31, 1997. In accordance with SFAS No. 128
and the SEC Staff Accounting Bulletin No. 98, basic earnings per share are
computed using the weighted average number of common shares outstanding
during the period. Common equivalent shares consist of the incremental
common shares issuable upon the conversion of the Convertible Preferred
Stock (using the if-converted method) and shares issuable upon the exercise
of stock options and warrants (using the Treasury Stock method); common
equivalent shares are excluded from the calculation if their effect is
anti-dilutive. Pursuant to SEC Staff Accounting Bulletin No. 98, common
stock and convertible preferred stock issued for nominal consideration,
prior to the anticipated effective date of an IPO, are required to be
included in the calculation of basic and diluted net loss per share, as if
they were outstanding for all periods presented. To date, the Company has
not had any issuances or grants for nominal consideration.
F-11
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
Diluted loss per share has not been presented separately, as the
outstanding stock options, warrants and contingent stock purchase warrants
are anti-dilutive for each of the periods presented.
Diluted net loss per common share for the year ended December 31,
1998, 1997 and 1996 does not include the effects of options to purchase
1,415,121, 721,979 and 342,049 shares of common stock, respectively;
2,023,009, 1,761,366 and -0- common stock warrants, respectively; and -0-,
4,953,327 and 1,379,970 shares of convertible preferred stock on an "as if"
converted basis, respectively.
(o) Fair Value of Financial Instruments
The carrying amount of certain of the Company's financial instruments,
including cash, short-term investment, accounts receivable, accounts
payable and accrued expenses, approximate fair value because of their short
maturities. The carrying amount of the Company's capital lease obligations
approximate the fair value of such instruments based upon the implicit
interest rate of the leases.
(p) Recent Accounting Pronouncements
In June 1997, the 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 and have
presented comprehensive income for all periods presented in the Statement
of Shareholders' Equity.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of and Enterprise and Related Information." SFAS No. 131
establishes standards for the way that a public enterprise reports
information about operating segments in annual financial statements, and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997 and
requires statement of earlier periods presented. The Company has determined
that it does not have any separately reporting business segments.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Corporate Software Developed or Obtained for Internal Use", which
establishes guidelines for the accounting for the costs of all computer
software developed or obtained for internal use. We adopted SOP 98-1
effective for the year ended December 31, 1998. The adoption of SOP 98-1 is
not expected to have a material impact on our financial statements.
F-12
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS
No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. This statement does not apply to the Company as the
Company currently does not have any derivative instruments or hedging
activities.
(q) Stock Split
In May 1996, the Company authorized and implemented a ten-for-one
common stock split. In August 1997, the Company authorized and implemented
an additional ten-for-one preferred stock split. In September 1998, the
Company authorized a one-for-two reverse stock split of all common and
preferred stock. All share and per share information in the accompanying
financial statements has been retroactively restated to reflect the effect
of the stock splits and the reverse stock split.
(2) CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents, short-term
investments and trade accounts receivable. The Company invests its cash and
cash equivalents among a diverse group of issuers and instruments. The
Company performs periodic evaluations of these investments. From time to
time, the Company's cash balances with any one financial institution may
exceed Federal Deposit Insurance Corporation insurance limits.
The Company's customers are concentrated in the United States. The
Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral and establishes an
allowance for doubtful accounts based upon factors surrounding the credit
risk of customers, historical trends and other information; to date, such
losses have been within management's expectations.
For the year ended December 31, 1998, there were no customers that
accounted for over 10% of revenues generated by the Company, or of accounts
receivable at December 31, 1998.
For the year ended December 31, 1997, there were no customers that
accounted for over 10% of revenues generated by the Company or of accounts
receivable at December 31, 1997.
For the year ended December 31, 1996, one customer accounted for
approximately 71% of total revenues generated by the Company and 90% of
accounts receivable at December 31, 1996.
F-13
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Computer equipment, including assets under capital leases of
$3,305,598, and $126,000, respectively........................ $4,298,702 $ 421,164
Furniture and fixtures, including assets under capital leases
of $42,171, and $-0-, respectively............................ 88,819 14,230
---------- ---------
4,387,521 435,394
Less accumulated depreciation and amortization, including
amounts related to assets under capital leases of $460,988
and $-0-, respectively....................................... 824,962 109,552
---------- ---------
Total....................................................... $3,562,559 $ 325,842
========== =========
</TABLE>
(4) INCOME TAXES
Income taxes for the year ended December 31, 1998 and 1997 are based
solely on state and local taxes on business and investment capital. The
Company did not incur any income taxes for the year ended December 31,
1996.
The difference between the provision for income taxes computed at the
statutory rate and the reported amount of tax expense (benefit)
attributable to income before income taxes for the years ended December 31,
1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Tax benefit at statutory rates................... $(5,588,353) $(1,218,695) $(257,781)
Increase (reduction) in income taxes resulting
from:
State and local income taxes, net of Federal
income tax benefit......................... (1,665,150) (458,817) (45,131)
Meals and entertainment...................... 13,521 3,266 268
Other, net................................... (44,324) -- --
Valuation allowance adjustment............... 7,363,224 1,710,346 302,644
----------- ----------- -----------
$ 78,918 $ 36,100 $ --
============ ============ ===========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are presented below.
F-14
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................ $13,411,724 $2,018,635
Allowance for doubtful accounts............................. 138,063 5,520
Depreciation................................................ (27,600) --
Issuance of warrants........................................ 630,315 --
Deferred compensation....................................... 45,090 14,773
Other....................................................... 96,600 --
----------- ----------
Total gross deferred tax assets......................... 14,294,192 2,038,928
Less valuation allowance........................................ (14,294,192) (2,038,928)
----------- ----------
Net deferred tax assets................................. $ -- $ --
=========== ==========
</TABLE>
Because of the Company's lack of earnings history, the deferred tax
assets have been fully offset by a valuation allowance. The valuation
allowance for deferred tax assets as of December 31, 1998 was $14,294,192
and as of December 31, 1997 was $2,038,928. The net change in the total
valuation allowance for the year ended December 31, 1998 was $12,255,264
and $1,710,346 for 1997. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and
tax planning strategies in making this assessment. Of the total valuation
allowance of $14,294,192, subsequently recognized tax benefits, if any, in
the amount of $4,892,040 will be applied directly to contributed capital.
At December 31, 1998, the Company had net operating loss carryforwards
available for federal and state income tax purposes of $29.2 million. These
carryforwards expire through 2018 for federal purposes and state purposes.
Under Section 382 of the Internal Revenue Code of 1986, as amended
(the "Code"), the utilization of net operating loss carryforwards may be
limited under the change in stock ownership rules of the Code. As a result
of ownership changes which occurred in August 1997, the Company's operating
tax loss carryforwards and tax credit carryforwards are subject to these
limitations.
(5) CAPITALIZATION
Authorized Shares
In July 1998, the Company amended and restated its certificate of
incorporation. As a result, the total number of shares which the Company is
authorized to issue is 103,000,000 shares: 100,000,000 of these shares are
Common Stock, each having a par value of $0.001; and 3,000,000 shares are
Preferred Stock, each having a par value of $0.001.
F-15
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
Common Stock
The Company issued 199,083 and 29,271 shares of Common Stock in
connection with the exercise of certain stock options in 1998 and 1997,
respectively. In November 1998, the Company issued 3,481,667 shares of
Common Stock in connection with its initial public offering and concurrent
offering. Upon consummation of the offerings, all of the Company's
outstanding Preferred Stock was converted into 5,473,735 shares of Common
Stock.
Convertible Preferred Stock
As of December 31, 1997, the Company had five series of Convertible
Preferred Stock (collectively "Preferred Stock") authorized and of which
only four of the series were outstanding. The holders of the various series
of Preferred Stock generally have the same rights and privileges. Each
class of the Company's Preferred Stock is convertible into Common Stock, as
defined below, and has rights and preferences which are generally more
senior to the Company's Common Stock and are more fully described in the
Company's amended and restated certificate of incorporation.
In 1996, the Company completed a private placement of 221,250 shares
of Series C Preferred Stock at $4.00 per share for an aggregate price of
approximately $885,000, paid in cash.
In April 1997, the Company amended the Series C Preferred Stock
agreement in order to extend the above private placement of Series C
Preferred Stock to April 15, 1997. In connection with this private
placement, the Company issued an additional 70,000 shares of Series C
Preferred Stock at $4.00 per share for an aggregate price of $280,000 in
1997.
In August 1997, the Company authorized and issued 25.5 shares of
Series D Preferred Stock for an aggregate cash amount of $20,000,000 in
connection with the investment by Dancing Bear Investments, Inc., an entity
controlled by the Chairman, which holds a majority interest in the Company.
These shares constituted 51% of the fully diluted capital stock of the
Company at the time of exercise, as defined. In addition to the Series D
Preferred Stock, Dancing Bear Investments, Inc. also received warrants
which provided the right to purchase up to 5 shares of Series E Preferred
Stock representing 10% of the fully diluted capital stock of the Company at
the time of exercise for an aggregate purchase price of $5,882,353, if
exercised in total. In connection with the Dancing Bear investment, two
officers and shareholders of the Company received $500,000 each as signing
bonuses in connection with their employment agreements. Such amounts were
accrued for at that time and were subsequently paid in the first quarter of
1998.
The conversion rate of the Series A, B and C Preferred Stock, as
defined in the original private placement agreements was the quotient
obtained by dividing the applicable series' original issue price by the
applicable series' conversion price. The original issue price and
conversion price
F-16
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
was $0.20 per share for Series A, $1.05 per share for Series B and $4 per
share for Series C, as determined by negotiations among the parties. Each
share of Series D and E Preferred Stock was convertible into an amount of
common representing 1% of the fully diluted capital stock, as defined in
the original private placement agreement. Such conversion features were
determined by negotiations among the parties.
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, as defined, on a pari passu basis, an amount
equal to $0.20 per share for Series A, $1.05 per share for Series B, $4 per
share for Series C, $784,314 per share for Series D and $1,176,471 per
share for Series E, would be paid out of the assets of the Company
available for distribution before any such payments would be made on any
shares of the Company's common shares or any other capital stock of the
Company other than the Preferred Stock, plus any declared but unpaid
dividends.
Upon consummation of the offerings, all of the Company's outstanding
Preferred Stock was converted into 5,473,735 shares of Common Stock.
The following table summarizes the Convertible Preferred Stock
authorized, issued and outstanding and liquidation preferences:
<TABLE>
<CAPTION>
PREFERRED SHARES EQUIVALENT SHARES OF
ISSUED AND OUTSTANDING COMMON STOCK
-------------------------------- -----------------------
SHARES
AUTHORIZED 1998 1997 1998 1997
----------- -------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Series A........................... 1,165,990 -- 582,995 -- 582,995
Series B........................... 1,151,450 -- 575,725 -- 575,725
Series C........................... 582,500 -- 291,250 -- 291,250
Series D........................... 51 -- 25.5 -- 3,503,357
Series E........................... 10 -- -- 2,023,009 1,761,366
--------- ------ ----------- --------- ---------
2,900,001 -- 1,449,995.5 2,023,009 6,714,693
========= ====== =========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
LIQUIDATION LIQUIDATION PREFERENCE
PREFERENCE PER ----------------------
SHARE 1998 1997
-------------- ----------- ----------
<S> <C> <C> <C>
Series A......................................... $ 0.20 -- 116,599
Series B......................................... $ 1.05 -- 604,511
Series C......................................... $ 4.00 -- 1,165,000
Series D......................................... $ 784,313.72 -- 20,000,000
Series E......................................... $1,176,470.60 -- --
-------- ----------
-- 21,886,110
======== ==========
</TABLE>
The number of common shares that the outstanding Series E Warrants are
convertible into upon exercise became fixed as a result of the consummation
of the offerings at 2,023,009 shares. These warrants are immediately
exercisable at approximately $2.91 per share.
F-17
<PAGE>
theglobe.com, inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
(6) NON-RECURRING CHARGE
The Company recorded a non-cash, non-recurring charge of $1,370,250 to
earnings in the third quarter of 1998 in connection with the transfer of
Series E Warrants to acquire 225,000 shares of Common Stock by Dancing Bear
Investments, Inc. (the Company's principal shareholder at the date of
transfer) to certain officers of the Company, at an exercise price of
approximately $2.91 per share. The Company accounted for such transaction
as if it were a compensatory plan adopted by the Company. Accordingly, such
amount was recorded as a non-cash, non-recurring compensation expense in
the Company's statement of operation for services provided by such officers
to the Company with an offsetting increase to additional paid-in capital.
The amount of such non-cash charge was based on the difference between the
fair market value at the time of the transfer ($9 per share) and the
exercise price per warrant of approximately $2.91 per share.
(7) STOCK OPTION PLAN
During 1995, the Company established the 1995 Stock Option Plan, which
was amended (the "Amended Plan") by the Board of Directors in December
1996. Under the Amended Plan, the Board of Directors may issue incentive
stock options or nonqualified stock options to purchase up to 666,000
common shares. Incentive stock options must be granted at the fair market
value of the Company's Common Stock at the date the option is issued.
Nonqualified stock options may be granted to officers, directors,
other employees, consultants and advisors of the Company. The option price
for nonqualified stock options shall be at least 85% of the fair market
value of the Company's Common Stock. The granted options under the amended
plan shall be for periods not to exceed ten years. Incentive options
granted to stockholders who own greater than 10% of the total combined
voting power of all classes of stock of the Company must be issued at 110%
of the fair market value of the stock on the date the options are granted.
In connection with the Dancing Bear Investments investment, the
Company reserved an additional 125,000 shares of its common stock for
issuance upon the exercise of options to be granted in the future under the
Amended Plan.
In July 1998, the Company's 1998 Stock Option Plan (the "1998 Plan")
was adopted by the Board of Directors and approved by the stockholders of
the Company. The 1998 Plan authorized the issuance of 1,200,000 shares of
Common Stock, subject to adjustment as provided in the 1998 Plan. The 1998
Plan provides for the grant of "incentive stock options" intended to
qualify under Section 422 of the Code and stock options which do not so
qualify. The granting of incentive stock options is subject to limitation
as set forth in the 1998 Plan. Directors, officers, employees and
consultants of the Company and its subsidiaries are eligible to receive
grants under the 1998 Plan.
F-18
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
The per share weighted-average fair value of stock options granted
during 1998, 1997 and 1996 was $8.03, $0.32 and $0.16, respectively, on the
date of grant using the option-pricing method with the following
weighted-average assumptions: 1996--risk-free interest rate 6.18%, and an
expected life of two years; 1997--risk-free interest rate 6.00%, and an
expected life of three years; 1998--risk-free interest rate 5.00%, and an
expected life of four years, and a volatility of 150%. As permitted under
the provisions of SFAS No. 123, and based on the historical lack of a
public market for the Company's units, no factor for volatility has been
reflected in the option pricing calculation for 1997 and 1996.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, compensation cost of $65,887, $28,115 and $4,000 has been
recognized for its stock options granted below fair market value in 1998,
1997 and 1996, respectively, in the accompanying financial statements.
Stock option activity during the periods indicated is as follows:
WEIGHTED
AVERAGE
OPTIONS EXERCISE
GRANTED PRICE
------- --------
Outstanding at December 31, 1995........... 175,000 $0.02
Granted.................................... 167,049 $0.12
Exercised.................................. --
Canceled................................... --
----------
Outstanding at December 31, 1996........... 342,049 $0.06
Granted.................................... 411,701 $0.74
Exercised.................................. (29,271) $0.16
Canceled................................... (2,500) $0.82
----------
Outstanding at December 31, 1997........... 721,979 $0.44
Granted.................................... 917,550 $9.02
Exercised.................................. (202,583) $1.26
Canceled................................... (21,825) $0.78
----------
Outstanding at December 31, 1998........... 1,415,121 $5.85
==========
Vested at December 31, 1997................ 397,983
==========
Vested at December 31, 1998................ 347,173
==========
Options available at December 31, 1997..... 39,751
==========
Options available at December 31, 1998..... 344,025
==========
F-19
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
- -------------- ------------- ------------ -------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.02-$0.105 136,431 6.9 years $ 0.04 120,486 $ 0.03
$0.40-$0.70 327,840 8.4 $ 0.67 163,137 $ 0.67
$0.82-$2.78 109,550 9.0 $ 1.66 26,050 $ 0.82
$4.60-$9.00 819,050 9.6 $ 8.80 37,500 $ 9.00
$27.44-$40.44 22,250 9.9 $30.22 -- $ 0.00
--------- -------
1,415,121 347,173
========= =======
</TABLE>
At December 31, 1998, the range of exercise prices and
weighted-average remaining contractual life of outstanding options was
$0.02--$40.44 and 9.03 years, respectively.
The Company applies APB No. 25 in accounting for its stock options
granted to employees and, accordingly, no compensation expense has been
recognized in the financial statements (except for those options issued
with exercise prices less than fair market value at date of grant). Had the
Company determined compensation expense based on the fair value at the
grant date for its stock options issued to employees under SFAS No. 123,
the Company's net loss would have been adjusted to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss--as reported............................. $ 16,045,640 $ 3,584,400 $ 750,180
============ ============ ==========
Net loss--pro forma............................... $ 21,289,917 $ 3,621,373 $ 756,135
============ ============ ==========
Basic net loss per common share--as reported...... $ (6.74) $ (3.13) $ (0.67)
============ ============ ==========
Basic net loss per common share--pro forma........ $ (8.94) $ (3.16) $ (0.67)
============ ============ ==========
</TABLE>
(8) COMMITMENTS
(a) Office Leases
The Company leases several facilities under noncancellable leases for
varying periods through 2014.
Rent expense for the operating leases was $424,494, $81,157 and
$26,181 for the years ended December 31, 1998, 1997 and 1996, respectively.
F-20
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
Future minimum payments under the various office operating leases are
as follows:
YEAR ENDED DECEMBER 31, AMOUNT
- ------------------------ -----------
1999......................................... $1,642,791
2000......................................... 1,645,080
2001......................................... 1,548,246
2002......................................... 1,361,579
2003......................................... 1,361,579
Thereafter................................... 16,068,980
----------
Total minimum lease payments......... $23,628,255
===========
(b) Equipment Leases
The Company's lease obligations are collateralized by CDs and interest
bearing accounts at December 31, 1998. Future minimum lease payments under
noncancellable operating leases (with initial or remaining lease terms in
excess of one year) and future minimum capital lease obligations as of
December 31, 1998 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- ------------------------- ------- ---------
<S> <C> <C>
1999............................................................ $1,353,905 $ 25,158
2000............................................................ 1,316,604 13,073
2001............................................................ 936,191 9,060
2002............................................................ 19,992 7,567
2003............................................................ 1,666 --
---------- ---------
Total minimum lease payments............................ $3,628,358 $ 54,858
========== =========
Less amount representing interest (at rates ranging from 11% to
16.8%)........................................................ 595,906
----------
Present value of minimum capital lease payments................. 3,032,452
----------
Less current installments of obligation under capital leases.... 1,026,728
----------
Obligations under capital leases, excluding current installments $2,005,724
==========
</TABLE>
(c) Employment Agreements
The Company maintains employment agreements expiring in 2001 and 2002,
with four executive officers of the Company. The employment agreements
provide for minimum salary levels, incentive compensation and severance
benefits, among other items.
(9) RELATED PARTY TRANSACTIONS
Certain officers and directors of the Company also serve as officers
and directors of Dancing Bear Investments, Inc.
The Company has entered into an electronic commerce contract with
Republic Industries, Inc. ("Republic"), an entity affiliated with a
Director of the Company, pursuant to which the Company has granted a right
of first negotiation with respect to the exclusive right to engage in or
conduct an automotive "clubsite" on theglobe.com web site through
AutoNation, a subsidiary of
F-21
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
Republic. Additionally, Republic has agreed to purchase advertising from
the Company for a three-year period at a price which will be adjusted to
match any more favorable advertising price quoted to a third party by the
Company, excluding certain short-term advertising rates. In addition, the
Company has entered into an electronic commerce arrangement with
InteleTravel, an entity controlled by the Chairman of the Company, whereby
the Company developed a web community for InteleTravel in order for its
travel agents to conduct business through theglobe.com in exchange for
access to InteleTravel customers for distribution of the Company's products
and services. The Company believes that the terms of the foregoing
arrangements are on comparable terms as if they were entered into with
unaffiliated third parties. As of December 31, 1998, the Company received
$83,300 and $265,000 from Republic and InteleTravel, respectively, in
connection with these arrangements.
STOCKHOLDERS' AGREEMENT
The Chairman, the Co-Chief Executive Officers, a Vice President and a
Director of the Company and Dancing Bear Investments, Inc. (an entity
controlled by the Chairman) entered into a Stockholders' Agreement (the
"Stockholders' Agreement") pursuant to which the Chairman and Dancing Bear
Investments, Inc. or certain entities controlled by the Chairman and
certain permitted transferees (the "Chairman Group") will agree to vote for
certain nominees of the Co-Chief Executive Officers or certain entities
controlled by the Co-Chief Executive Officers and certain permitted
transferees (the "Co-Chief Executive Officer Groups") to the Board of
Directors and the Co-Chief Executive Officer Groups will agree to vote for
the Chairman Group's nominees to the Board, who will represent up to five
members of the Board. Additionally, pursuant to the terms of the
Stockholders' Agreement, the Co-Chief Executive Officers, a Vice President
and a Director have granted an irrevocable proxy to Dancing Bear
Investments, Inc. with respect to any shares that may be acquired by them
pursuant to the exercise of outstanding Warrants transferred to each of
them by Dancing Bear Investments, Inc. Such shares will be voted by Dancing
Bear Investments, Inc., which is controlled by the Chairman, and will be
subject to a right of first refusal in favor of Dancing Bear Investments,
Inc. upon certain private transfers. The Stockholders' Agreement also
provides that if the Chairman Group sells shares of Common Stock and
Warrants representing 25% or more of the Company's outstanding Common Stock
(including the Warrants) in any private sale after the Offerings, the
Co-Chief Executive Officer Groups, a Vice President and a Director of the
Company will be required to sell up to the same percentage of their shares
as the Chairman Group sells. If either the Chairman Group sells shares of
Common Stock or Warrants representing 25% or more of the Company's
outstanding Common Stock (including the Warrants) or the Co-Chief Executive
Officer Groups sell shares or Warrants representing 7% or more of the
shares and Warrants of the Company in any private sale after the Offerings,
each other party to the Stockholders' Agreement, including entities
controlled by them and their permitted transferees, may, at their option,
sell up to the same percentage of their shares.
F-22
<PAGE>
theglobe.com, inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
(10) SUBSEQUENT EVENTS (UNAUDITED)
(a) Acquisitions
factorymall.com, inc.
On February 1, 1999, theglobe.com formed Nirvana Acquisition Corp.
("Merger Sub"), a Washington corporation and a wholly-owned subsidiary of
theglobe.com. Merger Sub was merged with and into factorymall.com, inc., a
Washington corporation d/b/a Azazz ("factorymall"), with factorymall as the
surviving corporation. The merger was effected pursuant to the Agreement
and Plan of Merger, dated February 1, 1999, by and among theglobe.com,
Merger Sub, and factorymall and certain shareholders thereof. As a result
of the Merger, factorymall became a wholly-owned subsidiary of
theglobe.com. factorymall operates Azazz, a leading interactive department
store.
The consideration payable by theglobe.com in connection with the
merger consists of 307,000 newly issued shares of common stock, par value
$0.001, of theglobe.com. In addition, options to purchase shares of
factorymall's common stock, without par value, were exchanged for options
to purchase approximately 41,017 shares of theglobe.com Common Stock.
Warrants to purchase shares of factorymall Common Stock were exchanged for
warrants to purchase approximately 9,405 shares of theglobe.com Common
Stock. theglobe.com also assumed certain bonus obligations of factorymall
triggered in connection with the Merger which will result in the issuance
by theglobe.com of approximately 36,864 shares of theglobe.com Common Stock
and payment by theglobe.com of approximately $451,232 in cash. The Company
also incurred expenses of approximately $694,300 related to the Merger.
The total purchase price for this transaction was approximately $22.8
million. The difference between the fair market value of factorymall's
assets and the purchase price will be accounted for as goodwill and will be
amortized over three years, the expected period of benefit.
Attitude Network, Ltd.
On April 5, 1999, theglobe.com formed Bucky Acquisition Corp. ("Merger
Sub"), a Delaware corporation and a wholly-owned subsidiary of
theglobe.com. Merger Sub was merged with and into Attitude Network, Ltd., a
Delaware corporation ("Attitude"), with Attitude as the surviving
corporation. The merger was effected pursuant to the Agreement and Plan of
Merger, dated April 5, 1999, which closed on April 9, 1999, by and among
theglobe.com, Merger Sub, and Attitude and certain shareholders thereof. As
a result of the Merger, Attitude became a wholly-owned subsidiary of
theglobe.com. Attitude publishes entertainment web sites including Happy
Puppy and Games Domain.
The consideration payable by theglobe.com in connection with the
merger consists of approximately 785,000 newly issued shares of common
stock, par value $0.001, of theglobe.com.
F-23
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
In addition, options to purchase shares of Attitude's common stock, par
value $0.001, were exchanged for options to purchase approximately 42,948
shares of theglobe.com common stock. Warrants to purchase shares of
Attitude common stock were exchanged for warrants to purchase approximately
23,345 shares of theglobe.com common stock. The Company also incurred
expenses of approximately $800,000 related to the Merger.
The total purchase price for this transaction was approximately $46.8
million. The difference between the fair market value of Attitude's assets
and the purchase price will be accounted or as goodwill and will be
amortized over three years, the expected period of benefit.
(b) 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.
200,000 shares of authorized but unissued Company common stock will be
reserved for issuance under the ESPP. The ESPP is subject to stockholder
approval.
(c) Stock Option Plan
In March 1999, the Board of Directors authorized an increase in the
number of shares reserved for issuance under the Company's 1998 Stock
Option Plan from 1,200,000 to 1,700,000.
F-24
<PAGE>
THEGLOBE.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION
ACQUISITION OF FACTORYMALL.COM, INC.
On February 1, 1999, theglobe.com formed Nirvana Acquisition Corp. ("Merger
Sub"), a Washington corporation and a wholly-owned subsidiary of
theglobe.com. Merger Sub was merged with and into factorymall.com, inc., a
Washington corporation d/b/a Azazz ("factorymall"), with factorymall as the
surviving corporation. The merger was effected pursuant to the Agreement
and Plan of Merger, dated February 1, 1999, by and among theglobe.com,
Merger Sub, and factorymall and certain shareholders thereof. As a result
of the Merger, factorymall became a wholly-owned subsidiary of
theglobe.com. factorymall operates Azazz, a leading interactive department
store.
The consideration payable by theglobe.com in connection with the merger
consists of approximately 307,000 newly issued shares of common stock, par
value $0.001, of theglobe.com. In addition, options to purchase shares of
factorymall's common stock, without par value, were exchanged for options
to purchase approximately 41,017 shares of theglobe.com common stock.
Warrants to purchase shares of factorymall common stock were exchanged for
warrants to purchase approximately 9,405 shares of theglobe.com common
stock. theglobe.com also assumed certain bonus obligations of factorymall
triggered in connection with the Merger which will result in the issuance
by theglobe.com of approximately 36,864 shares of theglobe.com common stock
and payment by theglobe.com of approximately $451,232 in cash. The Company
also incurred expenses of approximately $694,300 related to the Merger.
The total purchase price for this transaction was approximately $22.8
million. The difference between the fair market value of factorymall's
assets and the purchase price will be accounted for as goodwill and will be
amortized over three years.
ACQUISITION OF ATTITUDE NETWORK LTD.
On April 5, 1999, theglobe.com formed Bucky Acquisition Corp. ("Merger
Sub"), a Delaware corporation and a wholly-owned subsidiary of
theglobe.com. Merger Sub was merged with and into Attitude Network, Ltd., a
Delaware corporation ("Attitude"), with Attitude as the surviving
corporation. The merger was effected pursuant to the Agreement and Plan of
Merger, dated April 5, 1999, which closed on April 9, 1999 by and among
theglobe.com, Merger Sub, and Attitude and certain shareholders thereof. As
a result of the Merger, Attitude became a wholly-owned subsidiary of
theglobe.com. Attitude publishes entertainment web sites including Happy
Puppy and Games Domain.
The consideration payable by theglobe.com in connection with the merger
consists of approximately 785,000 newly issued shares of common stock, par
value $0.001, of theglobe.com. In addition, options to purchase shares of
Attitude's common stock, par value $0.001, were exchanged for options to
purchase approximately 42,948 shares of theglobe.com common stock. Warrants
to purchase shares of Attitude common stock were exchanged for warrants to
purchase approximately 23,345 shares of theglobe.com common stock. The
Company also incurred expenses of approximately $800,000 related to the
Merger.
F-25
<PAGE>
The total purchase price for this transaction was approximately $46.8
million. The difference between the fair market value of Attitude's assets
and the purchase price will be accounted or as goodwill and will be
amortized over three years, the expected period of benefit.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited Pro Forma Condensed Consolidated Statement of
Operations (the "Pro Forma Statements of Operations") for the year ended
December 31, 1998 gives effect to the acquisition of factorymall and
Attitude (the "Acquisitions") as if it had occurred on January 1, 1998. The
Pro Forma Statement of Operations are based on historical results of
operations of the theglobe.com and the Acquisitions for the year ended
December 31, 1998. The unaudited Pro Forma Condensed Consolidated Balance
Sheet (the "Pro Forma Balance Sheet") gives effect to the Acquisitions as
if the acquisition had occurred on that date.
The unaudited Pro Forma Condensed Consolidated Financial Statements have
been included as required by the rules of the Securities and Exchange
Commission and are provided for informational purposes only. The unaudited
Pro Forma Condensed Consolidated Financial Statements do not purport to be
indicative of the results of operations or financial position that would
have been obtained if the transactions had been effected on the date
indicated or which may be obtained in the future.
The accompanying unaudited Pro Forma Condensed Consolidated Financial
Statements should be read in connection with the historical financial
statements of theglobe.com, inc. which are contained elsewhere in this
prospectus.
F-26
<PAGE>
<TABLE>
<CAPTION>
theglobe.com, inc.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 1998
-------------------------------------------------------------
Attitude
theglobe.com, inc. factorymall.com, inc. Network, Ltd. Adjustments Pro Forma
------------------ --------------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
- ------
Cash and cash equivalents $ 29,250,572 $ 258,438 $ 2,161,513 $ - $ 31,670,523
Short-term investments 898,546 - - - 898,546
Accounts receivable, net 2,004,875 - 406,412 - 2,411,287
Inventory - 34,113 - - 34,113
Prepaids and other current assets 678,831 6,913 - - 685,744
------------ ---------- ----------- -------------- ------------
Total current assets 32,832,824 299,464 2,567,925 35,700,213
Property and equipment, net 3,562,559 270,365 382,277 - 4,215,201
Restricted investments 1,734,495 - 24,308 - 1,758,803
Goodwill and intangible assets - - 1,825,039 22,841,666(a) 70,069,258
45,402,553(b)
------------ ---------- ----------- -------------- ------------
Total assets $ 38,129,878 $ 569,829 $ 4,799,549 $68,244,219 $111,743,475
============ ========== =========== ============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Accounts payable $ 2,614,445 $299,210 $185,127 - $ 3,098,782
Accrued expenses 817,463 128,938 358,668 - 1,305,069
Accrued compensation 691,279 - - - 691,279
Deferred revenue 673,616 - 346,775 - 1,020,391
Current portion of notes payable
to related party 64,767 950,000 (950,000)(d) 64,767
Current portion of long-term debt - - 200,000 - 200,000
Current installments of
obligations under capital leases 1,026,728 22,258 - - 1,048,986
------------ ---------- ----------- -------------- ------------
Total current liabilities 5,823,531 515,173 2,040,570 - 7,429,274
Notes payable to related party,
net of current portion - 103,271 - - 103,271
Long-term debt - - 2,343,171 - 2,343,171
Obligations under capital leases,
excluding current installments 2,005,724 16,502 - - 2,022,226
------------ ---------- ----------- -------------- ------------
Total liabilities 7,829,255 634,946 4,383,741 - 11,897,942
22,776,549(a)
46,768,361(b)
65,117(a) 69,544,910
Stockholders' equity 30,300,623 (65,117) 415,808 (415,808)(b) 30,300,623
------------ ---------- ----------- -------------- ------------
Total liabilities and
stockholders' equity $ 38,129,878 $569,829 $4,799,549 $68,244,219 $111,743,475
============ ========== =========== ============== ============
</TABLE>
F-27
<PAGE>
<TABLE>
<CAPTION>
theglobe.com, inc.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1998
-------------------------------------------------------------
Attitude
theglobe.com, inc. factorymall.com, inc. Network, Ltd. Adjustments Pro Forma
------------------ --------------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ 5,509,818 $ 473,563 $ 1,885,547 $ - $ 7,868,928
Cost of revenues 2,238,871 349,563 903,476 - 3,491,910
------------ ------------ ----------- -------------- ------------
Gross profit 3,270,947 124,000 982,071 4,377,018
Operating expenses:
Sales and marketing 9,298,683 333,415 681,585 - 10,313,683
Product development 2,632,613 223,957 1,860,686 - 4,717,256
General and administrative 6,828,134 673,530 1,644,415 - 9,146,079
Non-recurring charge 1,370,250 - - - 1,370,250
Amortization of intangible
assets - - 1,883,137 7,613,889(a) 24,631,210
- 15,134,184(b) -
------------ ------------ ----------- -------------- ------------
Loss from operations (16,858,733) (1,106,902) (5,087,752) (22,748,073) (45,801,460)
Other income (expense):
Interest and dividend income 1,083,400 8 - - 1,083,408
Interest and other expenses (191,389) (213,573) (1,101,753) - (1,506,715)
------------ ------------ ----------- -------------- ------------
Total other income
(expense), net 892,011 (213,565) (1,101,753) - (423,307)
------------ ------------ ----------- -------------- ------------
Loss before provision
for income taxes (15,966,722) (1,320,467) (6,189,505) (22,748,073) (46,224,767)
------------ ------------ ----------- -------------- ------------
Provision for income taxes 78,918 - - - 78,918
------------ ------------ ----------- -------------- ------------
Net loss $(16,045,640) $ (1,320,467) $(6,189,505) $ (22,748,073) $ (46,303,685)
============ ============ =========== ============== ============
Basic and diluted net loss per
share $ (6.74) $ (13.19)(c)
============ ============
Weighted average basic and
diluted shares outstanding 2,381,140 1,129,102(c) 3,510,242(c)
============ ============== ============
</TABLE>
F-28
<PAGE>
THEGLOBE.COM, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
(1) Pro Forma Adjustments and Assumptions
(a) The Company acquired factorymall.com, inc.("factorymall.com") in
a stock transaction for approximately $22.8 million in February
1999, including costs of acquisition, of which approximately
$22.8 million was allocated to intangible assets. The components
of the purchase price were as follows: $17.4 million for all of
the outstanding common stock, $402,570 for outstanding warrants,
$1.7 million for outstanding options to purchase common stock,
$2.0 million in connection with the retention of certain bonus
obligations of factorymall triggered in connection with the
merger, $451,232 for cash, and the remaining amount was for costs
of the acquisition. Goodwill and other intangible assets will be
amortized over a period of 3 years, the expected period of
benefit. The Pro Forma adjustments reflect twelve months of
amortization expense for the year ended December 31, 1998,
assuming the transaction had occurred on January 1, 1998. The
value of the intangible assets at January 1, 1998 would have been
approximately $22.8 million.
The following represents the allocation of the purchase price
over the historical net book values of the acquired assets and
liabilities of factorymall.com at December 31, 1998, and is for
illustrative pro forma purposes only. Actual fair values will be
based on financial information as of the acquisition date
(February 1, 1999). Assuming the transaction had occurred on
December 31, 1998, the allocation would have been as follows:
factorymall.com, inc.
---------------------------
Assets acquired:
Cash 258,438
Inventory 34,113
Other assets 6,913
Computer equipment, furniture
and office equipment 270,365
Goodwill and intangibles 22,841,666
Liabilities assumed (634,946)
---------------------------
Purchase price 22,776,549
===========================
The Pro Forma adjustment reconciles the historical balance sheet
of factorymall.com at December 31, 1998 to the allocated purchase
price assuming the transaction had occurred on December 31, 1998.
F-29
<PAGE>
THEGLOBE.COM, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
(b) The Company acquired Attitude Network, Ltd. ("Attitude") in a
stock transaction for approximately $46.8 million in April 1999,
including costs of acquisition, of which approximately $45.4
million was allocated to intangible assets. The components of the
purchase price were as follows: $43.1 million for all of the
outstanding common stock, $1 million for outstanding warrants,
$1.8 million for outstanding options to purchase common stock,
and the remaining amount was for costs of the acquisition.
Goodwill and other intangible assets will be amortized over a
period of 3 years, the expected period of benefit. The Pro Forma
adjustments reflect twelve months of amortization expense for the
year ended December 31, 1998, assuming the transaction had
occurred on January 1, 1998. The value of the intangible assets
at January 1, 1998 would have been approximately $45.4 million.
The following represents the allocation of the purchase price
over the historical net book values of the acquired assets and
liabilities of Attitude at December 31, 1998, and is for
illustrative pro forma purposes only. Actual fair values will be
based on financial information as of the acquisition date (April
9, 1999). Assuming the transaction had occurred on December 31,
1998, the allocation would have been as follows:
Attitude Network, Ltd.
---------------------------
Assets acquired:
Cash 2,161,513
Accounts receivable, net 406,412
Other assets 24,308
Computer equipment, furniture
and office equipment 382,277
Goodwill and intangibles 47,227,592
Liabilities assumed (3,433,741)
---------------------------
Purchase price 46,768,361
===========================
The Pro Forma adjustment reconciles the historical balance sheet
of Attitude at December 31, 1998 to the allocated purchase price
assuming the transaction had occurred on December 31, 1998.
(c) The pro forma basic net loss per common share is computed by
dividing the net loss by the weighted average number of common
shares outstanding. The calculation of the weighted average
number of shares outstanding assumes that the 343,916 of the
Company's common stock issued in its acquisition of
factorymall.com and the 785,186 of the Company's common stock
issued in its acquisition of Attitude Network, Ltd. were
outstanding for the entire period.
(d) The pro forma adjustment reflects the conversion of convertible
demand notes into shares of theglobe.com's common stock as
stipulated in the merger agreement.
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
factorymall.com, inc.:
We have audited the accompanying balance sheets of factorymall.com, inc. as
of December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the years ended December
31, 1998 and 1997 and the period from April 25, 1996 (inception) to
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of factorymall.com, inc.
as of December 31, 1998 and 1997, and the results of its operations and its
cash flows for the years ended December 31, 1998 and 1997 and the period
from April 25, 1996 (inception) to December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Seattle, Washington
March 5, 1999
F-31
<PAGE>
<TABLE>
<CAPTION>
FACTORYMALL.COM, INC.
(dba azazz!)
Balance Sheets
December 31, 1998 and 1997
ASSETS
1998 1997
-------------- --------------
<S> <C> <C>
Current assets:
Cash $ 258,438 42,286
Inventory 34,113 6,608
Prepaid expenses and other current assets 6,913 38,136
-------------- --------------
299,464 87,030
Total current assets
Computer equipment, furniture and office equipment, net 270,365 43,634
-------------- --------------
$ 569,829 130,664
Total assets ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 299,210 46,219
Accrued expenses 128,938 9,858
Current portion of capital lease obligations 22,258 17,917
Current portion of notes payable to related parties 64,767 --
-------------- --------------
515,173 73,994
Total current liabilities
Capital lease obligations, net of current portion 16,502 20,533
Notes payable to related parties, net of current portion 103,271 --
-------------- --------------
634,946 94,527
Total liabilities -------------- --------------
Stockholders' equity (deficit):
Preferred stock, no par value. Authorized 5,000,000 shares;
no shares issued and outstanding -- --
Common stock, no par value. Authorized 25,000,000 shares;
issued and outstanding 11,315,671 shares in 1998 and
9,950,000 shares in 1997 1,494,551 546,000
Additional paid-in capital 562,825 --
Deferred stock compensation (292,163) --
Accumulated deficit (1,830,330) (509,863)
-------------- --------------
Total stockholders' equity (deficit) (65,117) 36,137
-------------- --------------
Total liabilities and stockholders' equity (deficit) $ 569,829 130,664
============== ==============
See accompanying notes to financial statements.
</TABLE>
F-32
<PAGE>
<TABLE>
<CAPTION>
FACTORYMALL.COM, INC.
(dba azazz!)
Statements of Operations
Years ended December 31, 1998 and 1997 and the period
from April 25, 1996 (inception) to December 31, 1996
1998 1997 1996
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Net sales $ 473,563 70,656 --
Cost of sales 349,563 53,314 --
--------------------- --------------------- ---------------------
Gross profit 124,000 17,342 --
Sales and marketing expense 333,415 94,997 --
Research and development expense 223,957 82,852 8,500
General and administrative expense 673,530 211,062 131,462
Loss from operations (1,106,902) (371,569) (139,962)
--------------------- --------------------- ---------------------
Other income (expense):
Interest expense (213,573) -- --
Other income, net 8 1,668 --
--------------------- --------------------- ---------------------
Total other income (expense) (213,565) 1,668 --
--------------------- --------------------- ---------------------
Net loss $ (1,320,467) (369,901) (139,962)
====================== ===================== =====================
See accompanying notes to financial statements.
</TABLE>
F-33
<PAGE>
<TABLE>
<CAPTION>
FACTORYMALL.COM, INC.
(dba azazz!)
Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1998 and 1997 and the period
from April 25, 1996 (inception) to December 31, 1996
COMMON STOCK ADDITIONAL DEFERRED TOTAL
----------------- PAID-IN STOCK ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY (DEFICIT)
------ ------ ------- ------------ ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balances at April 25, 1996 (inception) -- $ -- -- -- -- --
Issuance of common stock 9,000,000 100,000 -- -- -- 100,000
Net loss -- -- -- -- (139,962) (139,962)
--------- --------- --------- --------- --------- --------
Balances at December 31, 1996 9,000,000 100,000 -- -- (139,962) (39,962)
Issuance of common stock 927,000 400,000 -- -- -- 400,000
Conversion of note payable 23,000 46,000 -- -- -- 46,000
Net loss -- -- -- -- (369,901) (369,901)
-------- -------- -------- -------- -------- --------
Balances at December 31, 1997 9,950,000 546,000 -- -- (509,863) 36,137
Issuance of common stock 705,671 529,251 -- -- -- 529,251
Issuance of warrants in connection with
convertible debt -- -- 190,000 -- -- 190,000
Conversion of notes payable to common stock 416,000 312,000 -- -- -- 312,000
Exercise of warrants 200,000 100,000 -- -- -- 100,000
Exercise of stock options 44,000 7,300 -- -- -- 7,300
Deferred stock compensation -- -- 372,825 (372,825) -- --
Amortization of deferred stock compensation -- -- -- 80,662 -- 80,662
Net loss -- -- -- -- (1,320,467) (1,320,467)
---------- ---------- ------- -------- --------- ----------
Balances at December 31, 1998 11,315,671 $1,494,551 562,825 (292,163) (1,830,330) (65,117)
========== ========== ======= ======== ========= ==========
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
<TABLE>
<CAPTION>
FACTORYMALL.COM, INC.
(dba azazz!)
Statements of Cash Flows
Years ended December 31, 1998 and 1997 and the period
from April 25, 1996 (inception) to December 31, 1996
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,320,467) (369,901) (139,962)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 45,476 15,459 3,808
Stock compensation expense 80,662 -- --
Accrued interest expense converted into common
stock 190,000 -- --
Change in certain assets and liabilities:
Inventory (27,505) (4,628) (1,980)
Prepaid expenses and other current assets 31,223 (28,799) (9,337)
Accounts payable 252,991 34,462 11,757
Accrued expenses 131,080 9,858 --
------- ------- -------
Net cash used in operating activities (616,540) (343,549) (135,714)
------- ------- -------
Cash used in investing activities - purchase of computer
equipment, furniture and office equipment (235,570) (2,627) (7,642)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of notes payable 151,790 -- 46,000
Proceeds from issuance of convertible notes payable 300,000 -- --
Repayment of capital lease obligations (20,079) (11,538) (2,644)
Proceeds from exercise of warrants 100,000 -- --
Proceeds from exercise of stock options 7,300 -- --
Proceeds from issuance of common stock 529,251 400,000 100,000
--------- ------- -------
Net cash provided by financing activities 1,068,262 388,462 143,356
--------- ------- -------
Net increase in cash 216,152 42,286 --
Cash at beginning of period 42,286 -- --
------- ------- -------
Cash at end of period $ 258,438 42,286 --
=========== ======= =======
Supplemental schedule of cash flow information - cash paid
during the period for interest $ 4,219 3,108 337
=========== ======= =======
Supplemental schedule of noncash investing and financing
activities:
Computer equipment acquired through capital lease $ 20,389 17,606 35,026
obligations =========== ======= =======
Notes payable and accrued interest converted to
common stock 312,000 46,000 --
=========== ======= =======
</TABLE>
See accompanying notes to financial statements
F-35
<PAGE>
FACTORYMALL.COM, INC.
(dba azazz!)
Notes to Financial Statements
Years ended December 31, 1998 and 1997 and the period
from April 25, 1996 (inception) to December 31, 1996
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
factorymall.com, inc. (Company) (dba azazz!) is a retailer on the
Internet. The Company was incorporated in the State of Washington
on April 25, 1996. Through its Internet web site (www.azazz.com),
the Company allows customers to purchase various consumer goods.
Inherent in the Company's business are various risks and
uncertainties, including its limited operating history and the
limited history of commerce on the Internet. Future revenues from
the Company's services are dependent on the continued growth and
acceptance of the Internet and use of the Internet for various
commercial transactions.
(b) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(c) INVENTORIES
Inventories consist of finished goods which are valued at the
lower of cost or market (net realizable value) on a first-in,
first-out basis.
(d) COMPUTER EQUIPMENT, FURNITURE AND OFFICE EQUIPMENT
Computer equipment, furniture and office equipment are stated at
cost. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets. Computer equipment
is depreciated over an estimated useful life of three years.
Furniture and office equipment is depreciated over an estimated
useful life of five years.
(e) REVENUE RECOGNITION
The Company recognizes revenue from product sales, net of any
discounts, when the products are shipped to customers. Outbound
shipping and handling charges are included in net sales. The
Company provides an allowance for sales returns, which has been
insignificant, based on historical experience.
F-36
<PAGE>
FACTORYMALL.COM, INC.
(dba azazz!)
Notes to Financial Statements
Years ended December 31, 1998 and 1997 and the period
from April 25, 1996 (inception) to December 31, 1996
(f) ADVERTISING COSTS
The cost of advertising is expensed as incurred. In 1998 and
1997, the Company incurred advertising expense of $93,066 and
$17,739, respectively, which is included in sales and marketing
expense. The Company incurred no advertising costs in 1996.
(g) INCOME TAXES
The Company is an S corporation for Federal income tax purposes.
Consequently, taxable income or loss of the Company is attributed
to the Company's stockholders and no provision for income taxes
has been reflected in the accompanying financial statements. Pro
forma income tax information has not been provided. Had the
Company been taxed as a C corporation, any income tax benefit as
a result of the losses incurred by the Company would have been
fully offset by the establishment of a valuation allowance for
deferred tax assets.
(h) STOCK-BASED COMPENSATION
The Company accounts for its stock option plans for employees in
accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations. As such, compensation expense
related to employee stock options is recorded only if, on the
date of grant, the fair value of the underlying stock exceeds the
exercise price. The Company follows the disclosure-only
requirements of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, which
allows entities to continue to apply the provisions of APB
Opinion No. 25 for transactions with employees and provide pro
forma disclosures of operating results as if the fair value based
method of accounting in SFAS No. 123 had been applied to employee
stock option grants.
(i) IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported
at the lower of their carrying amount or fair value less costs to
sell.
(j) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for the Company's cash, accounts payable,
notes payable and capital lease obligations approximate fair
value.
F-37
<PAGE>
FACTORYMALL.COM, INC.
(dba azazz!)
Notes to Financial Statements
Years ended December 31, 1998 and 1997 and the period
from April 25, 1996 (inception) to December 31, 1996
(2) COMPUTER EQUIPMENT, FURNITURE AND OFFICE EQUIPMENT
Computer equipment, furniture and office equipment consist of the
following at December 31:
1998 1997
--------------- -------------
Computer equipment $ 309,269 57,651
Furniture and office equipment 25,839 5,250
--------------- -------------
335,108 62,901
Less accumulated depreciation 64,743 19,267
--------------- -------------
Net computer equipment,
furniture and office equipment $ 270,365 43,634
=============== =============
(3) COMMITMENTS
(a) OPERATING LEASES
The Company leases its offices under an operating lease agreement
expiring in February 1999. Minimum lease payments required in
1999 under this lease total $4,000. The Company also rents
warehouse space under a month-to-month arrangement. Rent expense
totaled $27,056, $24,000 and $5,772 for the years ended December
31, 1998 and 1997 and the period from April 25, 1996 (inception)
to December 31, 1996, respectively.
(b) CAPITAL LEASES
The Company leases computer equipment under capital leases.
Future minimum lease payments under capital leases are as
follows:
1999 $ 25,678
2000 12,994
2001 4,821
-------------
43,493
Less amounts representing interest at 9.3% to 14.0% 4,733
-------------
38,760
Less current portion 22,258
-------------
$ 16,502
=============
F-38
<PAGE>
FACTORYMALL.COM, INC.
(dba azazz!)
Notes to Financial Statements
Years ended December 31, 1998 and 1997 and the period
from April 25, 1996 (inception) to December 31, 1996
(c) PORTAL COMMITMENTS
The Company has agreements with certain Internet portal companies
to purchase advertising on their Internet web sites in 1999.
Total commitments under these contracts are approximately
$85,000.
(4) NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties include the following:
Note payable to stockholder, payable monthly in
installments of $4,896, including interest at 12%,
secured by computer equipment $ 147,449
Note payable to officer, payable monthly in
installments of $969, including interest at 12%,
secured by computer equipment 20,589
------------
168,038
Less current portion 64,767
------------
$ 103,271
============
Subsequent to December 31, 1998, the notes were repaid as part of the
sale of the Company.
(5) STOCKHOLDERS' EQUITY
(a) CONVERTIBLE NOTES PAYABLE
In March 1998, the Company issued $300,000 of convertible notes
payable. The notes carried an annual interest rate of 12% and
matured in July 1998. In addition, the Company issued the
noteholders warrants to purchase 600,000 shares of common stock
at $0.50 per share. The fair value of the warrants was $190,000
which was determined using a Black-Scholes pricing model with the
following assumptions--fair market value of the underlying stock
of $0.50 per share, expected life of five years, expected
volatility of 70%, and a risk-free interest rate of 5.6%. The
value of the warrants was recorded as a discount on the
convertible notes payable and amortized to interest expense in
1998. In 1998, 200,000 warrants were exercised. At December 31,
1998, 400,000 warrants remained outstanding.
In July 1998, the noteholders elected to convert the notes
payable to common stock. The total principal and accrued interest
of $312,000 outstanding was converted into 416,000 shares of
common stock at $0.75 per share.
In 1996, the Company issued a $46,000 convertible note payable.
This note was converted into 92,000 shares of common stock in
1997 at $0.50 per share.
F-39
<PAGE>
FACTORYMALL.COM, INC.
(dba azazz!)
Notes to Financial Statements
Years ended December 31, 1998 and 1997 and the period
from April 25, 1996 (inception) to December 31, 1996
(b) STOCK OPTION PLAN
In 1998, the Company adopted a stock option plan (the Plan) that
provides for the issuance of incentive and nonqualified stock
options to officers, directors, employees, and consultants to
acquire 1,500,000 shares of the Company's common stock.
The Board of Directors determines the terms and conditions of
options granted under the Plan, including the exercise price and
vesting schedule. The exercise price for qualified incentive
stock options shall not be less than the fair market value of the
underlying stock at the date of grant, and have terms no longer
than ten years from the date of grant. Options granted generally
vest over periods ranging from 18 months to four years.
Under APB 25, compensation expense is measured as the excess of
the fair value of the underlying stock over the exercise price on
the date of grant. Had stock compensation expense for the
Company's stock option plan been determined based on the fair
value methodology under SFAS 123, the Company's 1998 net loss
would have increased to the following pro forma amount:
Net loss:
As reported $ (1,320,407)
Pro forma (1,327,492)
The weighted average fair value of options granted in 1998 was
$0.36. The fair value for these options was estimated at the date
of grant using the minimum value method which takes into account
(1) the fair value of the underlying stock at the grant date, (2)
the exercise price, (3) an expected life of five years, (4) no
dividends, and (5) a risk-free interest rate of 5.4%.
Compensation expense recognized in providing pro forma
disclosures may not be representative of the effects on net
income or loss for future years.
A summary of stock option activity under the Plan is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------------
SHARES WEIGHTED
AVAILABLE NUMBER AVERAGE
FOR GRANT OF SHARES EXERCISE PRICE
---------------- ---------------- ---------------
<S> <C> <C> <C>
Balances at December 31, 1997 -- -- $ --
Plan adoption 1,500,000 -- --
Options granted (1,500,000) 1,500,000 0.50
Options exercised -- (44,000) 0.16
---------------- ---------------- ---------------
Balances at December 31, 1998 -- 1,456,000 $ 0.51
================ ================ ===============
</TABLE>
F-40
<PAGE>
FACTORYMALL.COM, INC.
(dba azazz!)
Notes to Financial Statements
Years ended December 31, 1998 and 1997 and the period
from April 25, 1996 (inception) to December 31, 1996
The Company issued additional options to acquire 183,900 shares
of the Company's common stock during 1998. Subsequent to
year-end, the Board of Directors approved the issuance of these
options and amended the Plan to provide for the issuance of
incentive and nonqualified stock options to acquire an additional
500,000 shares of the Company's common stock.
The following table summarizes information about stock options
outstanding under the Plan at December 31, 1998:
<TABLE>
OUTSTANDING OPTIONS OPTIONS EXERCISABLE
---------------------------- ----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------- ------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.50 1,371,000 4.5 years $ 0.50 223,250 $ 0.50
0.75 85,000 4.7 years 0.75 2,313 0.75
------------- ------------ ------------- ------------ -------------
1,456,000 4.6 years 0.51 225,563 0.50
============= ============ ============= ============ =============
</TABLE>
(6) SUBSEQUENT EVENT
In February 1999, the Company entered into an agreement to merge the
Company with Nirvana Acquisition Corporation (a wholly-owned
subsidiary of theglobe.com). All issued and outstanding options to
purchase common stock of the Company vested fully on the acquisition
date and were converted into options to purchase common stock of
theglobe.com at a specified conversion rate. As a result of the
acquisition, certain employees received a percentage of the sale
proceeds, as provided for under the terms of their employment
contracts.
F-41
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Attitude Network, Ltd.
Naples, Florida
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity
(deficit), and cash flows present fairly, in all material respects, the
financial position of Attitude Network, Ltd. and its subsidiary (the
"Company") at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the two years ended December
31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements
in accordance with generally accepted auditing standards, which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note
15 to the consolidated financial statements, the Company has suffered
recurring losses from operations which raises substantial doubt about its
ability to continue as a going concern. As discussed in Note 16 to the
consolidated financial statements, on April 9, 1999 the Company merged with
a wholly owned subsidiary of theglobe.com, inc. whereby the stockholders of
the Company exchanged their common stock for shares of common stock of
theglobe.com, inc. at a specified conversion rate. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ PricewaterhouseCoopers LLP
March 19, 1999, except for Note 16,
for which the date is April 9, 1999
F-42
<PAGE>
<TABLE>
<CAPTION>
ATTITUDE NETWORK, LTD.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<S> <C> <C>
ASSETS 1998 1997
---- ----
Current assets:
Cash $ 2,171,513 $ 83,318
Accounts receivable, less allowance for doubtful accounts of
$200,000 and $96,473 at December 31, 1998 and
1997, respectively 406,412 546,993
------- -------
Total current assets 2,567,925 630,311
--------- -------
Property and equipment, net 382,277 453,081
Intangible assets, net 1,825,039 3,706,919
Deposits 24,308 13,799
------------ ------------
Total assets $ 4,799,549 $ 4,804,110
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 185,127 $ 647,784
Accrued expenses 385,668 1,680,636
Deferred revenue 346,775 300,000
Convertible notes payable to directors 950,000 -
Current portion of long-term debt 200,000 137,615
--------- ---------
Total current liabilities 2,040,570 2,766,035
Long-term debt 2,343,171 2,293,536
--------- ---------
Total liabilities 4,383,741 5,059,571
--------- ---------
Commitments and contingencies (Note 14)
Stockholders' equity (deficit):
Preferred stock, $.0l par value, 5,000 shares authorized, no shares
issued and outstanding - -
Common stock, $.001 par value, 20,000,000 shares authorized,
13,114,457 and 11,446,352 shares issued and outstanding
at December 31, 1998 and 1997, respectively 13,115 11,446
Additional paid-in capital 17,542,540 10,683,250
Accumulated deficit (17,139,972) (10,950,467)
Accumulated other comprehensive income 125 310
Total stockholders' equity (deficit) 415,808 (255,461)
----------- -----------
Total liabilities and stockholders' equity $ 4,799,549 $ 4,804,110
============ ============
</TABLE>
F-43
<PAGE>
<TABLE>
<CAPTION>
ATTITUDE NETWORK, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, 1998 AND 1997
1998 1997
---- ----
<S> <C> <C>
Sales $ 1,885,547 $ 2,474,537
Cost of sales 903,476 1,325,662
----------- -----------
Gross profit 982,071 1,148,875
----------- -----------
Operating expenses:
Selling and marketing 681,585 1,609,202
Product development 1,860,686 2,520,090
General and administrative 1,644,415 1,484,360
Amortization 1,883,137 1,320,098
----------- -----------
Total operating expenses 6,069,823 6,933,750
----------- -----------
Operating loss (5,087,752) (5,784,875)
Nonoperating income (expense):
Gain on sale of website - 200,000
Interest expense (1,101,753) (250,076)
Litigation settlement - (1,395,000)
----------- -----------
Net loss $(6,189,505) $(7,229,951)
=========== ===========
</TABLE>
F-44
<PAGE>
<TABLE>
<CAPTION>
ATTITUDE NETWORK, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
DECEMBER 31, 1998 AND 1997
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER STOCKHOLDERS'
--------------- ------------- PAID-IN ACCUMULATED COMPREHENSIVE EQUITY
SHARES PAR VALUE SHARES PAR VALUE CAPITAL DEFICIT INCOME (DEFICIT)
------ --------- ------ --------- ------- ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996 - $ - 9,447,520 $ 9,448 $ 4,914,342 $(3,720,516) $ - $ 1,203,274
Issuance of shares of common
stock for acquisition - - 1,000,000 1,000 2,499,000 - - 2,500,000
Issuance of shares of common
stock - - 666,667 667 1,999,333 - - 2,000,000
Issuance of shares of common
stock - - 330,665 330 1,264,576 - - 1,264,906
Conversion of debt to common
stock - - 1,500 1 5,999 - - 6,000
Comprehensive income (loss)
Foreign currency translation - - - - - - 310 310
Net loss - - - - - (7,229,951) - (7,229,951)
----------
Total comprehensive income
(loss) (7,229,951)
-------- -------- ---------- ---------- ---------- ---------- ---------- ----------
Balances, December 31, 1997 - - 11,446,352 11,446 10,683,250 (10,950,467) 310 (255,461)
Issuance of shares of common
stock - - 250,000 250 999,750 - - 1,000,000
Issuance of shares of common
stock - - 259,939 260 999,750 - - 1,000,010
Exercise of common stock options
for shares - - 26,500 27 11,899 - - 11,926
Issuance of shares of common
stock for legal settlement - - 465,000 465 1,394,535 - - 1,395,000
Issuance of shares of common
stock, net of issue cost - - 666,666 667 1,909,326 - - 1,909,993
Issuance of 400,000 common stock
warrants - - - - 798,920 - - 798,920
Stock option expense - - - - 745,110 - - 745,110
Comprehensive income (loss)
Foreign currency translation - - - - - - (185) (185)
Net loss - - - - - (6,189,505) - (6,189,505)
-----------
Total comprehensive
income(loss) (6,189,690)
-------- -------- ---------- ---------- ---------- ---------- ---------- ----------
Balances, December 31, 1998 - $ - 13,114,457 $13,115 $10,683,250 $(10,950,467) $ 310 $ 415,808
======== ======== ========== ========== ========== =========== ========= ============
</TABLE>
F-45
<PAGE>
<TABLE>
<CAPTION>
ATTITUDE NETWORK, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1998 AND 1997
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (6,189,505) $(7,229,951)
------------ -----------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 120,594 84,790
Amortization 1,883,137 1,320,098
Amortization of discount on note payable 262,020 262,360
Non-cash interest related to warrant valuation 798,920 -
Stock options expense 745,110 -
Provision for bad debts 103,527 253,521
Gain on sale of website - (200,000)
(Gain) loss on sale of property and equipment (4,316) 22,055
Changes in assets and liabilities:
Decrease in inventory - 7,047
Increase (decrease) in accounts receivable 37,054 (304,096)
Increase in other assets (11,766) (10,207)
Increase (decrease) in accounts payable (462,657) 403,378
Increase in accrued expenses 73,032 1,606,509
Increase in deferred revenue 46,775 297,517
------ -------
Total adjustments 3,591,430 3,742,972
--------- ---------
Net cash used in operating activities (2,598,075) (3,486,979)
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (47,174) (341,047)
Cash received from sale of property and equipment 1,700 14,111
Cash received from sale of website - 200,000
Acquisition, net of cash acquired - (59,128)
------- -------
Net cash used in investing activities (45,474) (186,064)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 4,000,003 3,270,906
Stock issuance costs (90,000) -
Proceeds from exercise of stock option 11,926 -
Proceeds from directors notes 950,000 -
Payments on long-term debt (150,000) (179,100)
-------- --------
Net cash provided by financing activities 4,721,929 3,091,806
--------- ---------
Effect of exchange rate changes on cash (185) 3,172
------- -----
Net increase (decrease) in cash 2,078,195 (578,065)
Cash at beginning of period 83,318 661,383
--------- -------
Cash at end of period $ 2,161,513 $ 83,318
============ ===========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
In 1997, common stock was issued in satisfaction of amounts payable to a
vendor in the amount of $6,000.
In 1997, 1,000,000 shares of common stock were issued to acquire
Kaleidoscope Network, Ltd. (see Note 3).
In 1998, 465,000 shares of common stock were issued to settle litigation
accrued for at December 31, 1997 for $1,395,000.
F-46
<PAGE>
ATTITUDE NETWORK, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------
1. ORGANIZATION
Attitude Network, Ltd. (the Company) was formed in January 1995 to
establish, develop and deliver customized website programming to
narrowly defined target audiences. The Company seeks to support its
markets by providing advertising supported online entertainments. Its
audiences include but are not limited to the on-line games market.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of Attitude Network, Ltd. and its wholly owned subsidiary,
Kaleidoscope Network, Ltd. All material intercompany transactions have
been eliminated in consolidation.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is provided on the straight-line basis over
the estimated useful lives of the related assets.
Major improvements and betterments of property are capitalized.
Maintenance, repairs and minor improvements are charged to expense in
the period incurred. Upon the sale or other disposition of property,
the cost and related accumulated depreciation are removed from the
accounts and any gain or loss is reflected in income.
INTANGIBLE ASSETS
The costs of web rights purchased by the Company are being amortized
on the straight-line method over the estimated useful life of three
years. The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. To date, no such
impairment has been recorded.
IMPLEMENTATION OF SFAS 130
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income," effective for fiscal periods
beginning after December 15, 1997. The new standard requires that
comprehensive income, which includes net income, as well as certain
changes in assets and liabilities recorded in common equity, be
reported in the financial statements. The Company adopted SFAS No. 130
during the year ended December 31, 1998.
F-47
<PAGE>
ATTITUDE NETWORK, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Company's
foreign operations are measured using local currency as the functional
currency. Current assets and liabilities of these operations are
translated to the U.S. dollar at the exchange rate in effect at
year-end. Income statement accounts are translated at the average rate
of exchange prevailing during the year. Translation adjustments
arising from differences in exchange rates from period to period are
recorded in accumulated comprehensive income. Realized gains and
losses resulting from foreign currency transactions are included in
the statement of operations.
DEFERRED REVENUE
Deferred revenue represents amounts received by the Company related to
future services to be provided.
REVENUE RECOGNITION
Website advertising revenue is earned by providing advertisers with a
space on the Company's website to promote products. The Company's
advertising revenues are derived principally from short-term
advertising contracts in which the Company guarantees a minimum number
of impressions (a view of an advertisement by a consumer) for a fixed
fee. Advertising revenues are recognized ratably over the term of the
contract. Hotel discount revenue represents revenue earned by the
Company for reservations booked through their hotel discount web page
and is recognized in the month earned. Revenue received in connection
with an agreement between the Company and a telephone company, whereby
the Company has agreed to develop, deliver, install and operate a
computer-based games service designed for the telephone company is
recognized on a monthly basis in accordance with the agreement.
The Company trades advertisements on its website in exchange for
advertisements on the internet sites of other companies. Barter
revenues and expenses are recorded at the fair market value of
services provided or received, whichever is more determinable in the
circumstances. Revenue from barter transactions is recognized as
advertisements are delivered on the Company's website. Barter expense
is recognized as cost of sales when the Company's advertisements are
run on other companies web sites, which is typically in the same
period when the barter revenue is recognized.
COST OF SALES
Cost of sales includes communication/on-line costs associated with
connecting the Company's website with servers, costs incurred for
website audits, barter expense and other direct costs.
F-48
<PAGE>
ATTITUDE NETWORK, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PRODUCT DEVELOPMENT
The costs to develop and maintain the Company's web sites are being
expensed as incurred.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
1998 presentation.
3. ACQUISITION
In February 1997, the Company acquired all of the issued and
outstanding shares of Kaleidoscope Networks Limited, a company
registered in England, for an aggregate purchase price of
approximately $2.6 million. The purchase consisted primarily of an
internet worldwide games website including all software,
documentation, licenses, contracts and contract rights, and property
rights necessary to operate the website. The acquisition was funded
through the issuance of 1,000,000 shares of the Company's common
stock, stock options for the purchase of an additional 100,000 shares
of common stock and cash payments of approximately $106,000. The
acquisition has been accounted for using the purchase method of
accounting. Substantially all of the purchase price was allocated to
the website intangible asset.
F-49
<PAGE>
ATTITUDE NETWORK, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Computers and office equipment $ 612,962 $ 571,276
Furniture and fixtures 17,165 16,480
Leasehold improvements 3,200 3,200
----- -----
633,327 590,956
Less accumulated depreciation (251,050) (137,875)
-------- --------
$ 382,277 $ 453,081
============= ==============
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Website rights $ 5,119,515 $ 5,119,515
Organization costs 15,326 15,326
Other 1,257 -
-------- --------
5,136,098 5,134,841
Accumulated amortization (3,311,059) (1,427,922)
---------- ----------
$ 1,825,039 $ 3,706,919
============== ==============
</TABLE>
F-50
<PAGE>
ATTITUDE NETWORK, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------
6. LEASES
The Company leases certain equipment and office space under operating
type leases. Future minimum payments under these leases are as
follows:
1999 $ 62,085
2000 60,876
2001 63,311
2002 6,809
---- -----
$ 213,081
=======
Rental expense for the years ended December 31, 1998 and 1997 was
approximately $132,000 and $193,000, respectively.
7. CONVERTIBLE NOTES PAYABLE TO DIRECTORS
During 1998, the Company borrowed $950,000 from various directors of
the Company. These notes are due on demand and accrue interest at
8.5%. The notes feature a conversion right at the option of the
holder, which may be exercised in the event the Company is sold. The
conversion right allows the holder to convert the note into stock of
the new or surviving entity at a price equal to the per share
transaction price. Most of the notes include detachable warrants for a
total of 400,000 shares of common stock at an exercise price of $1.00
per share. The warrants expire in 2003. A value of approximately
$800,000 was assigned to the warrants (additional paid-in capital)
based on the difference between the fair market value of the stock at
date of issuance ($3.00) and the exercise price of $1.00. Since the
notes are demand notes, the entire value assigned to the warrants was
charged to interest expense in 1998.
8. LONG-TERM DEBT
The Company's long-term debt consisted of the following at December
31:
1998 1997
Non-interest bearing obligation
payable to a corporation related
to the purchase of an internet
worldwide website $ 2,543,171 $ 2,431,151
=========== ===========
F-51
<PAGE>
ATTITUDE NETWORK, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------
8. LONG-TERM DEBT, CONTINUED
The obligation is to be repaid based on 5% of the Company's gross
revenues related to the website, less certain costs directly
associated with the website. The payments required by the agreement
are also subject to specific minimum amounts payable per year. In the
event of an initial public offering by the Company, the total unpaid
amount of the obligation would become due and payable. The $5.6
million obligation has been recorded at its present value, assuming a
9% interest rate, and has been reduced by $150,000 and $179,000 of
payments made by the Company in 1998 and 1997, respectively. The
unamortized discount was $2,556,829 and $2,818,849 as of December 31,
1998 and 1997, respectively.
The minimum principal amounts payable over the next five years under
this agreement are as follows:
1999 $ 200,000
2000 250,000
2001 300,000
2002 300,000
2003 3,000,000
Thereafter 3,750,000
----------------
5,100,000
Less Discount (2,556,829)
----------------
2,543,171
Less current portion (200,000)
----------------
$ 2,343,171
===============
9. INCOME TAXES
No provision for federal or state income taxes has been made for the
years ended December 31, 1998 and 1997, since the Company reported a
loss for both financial reporting and income tax purposes.
The Company had available approximately $10,556,000 of net operating
loss carryforwards to reduce future taxable income as of December 31,
1998. The utilization of the net operating loss
F-52
<PAGE>
ATTITUDE NETWORK, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------
9. INCOME TAXES, CONTINUED
carryforwards, which begin to expire in the year 2012, will be subject
to limitations as a result of a more than 50% change in ownership of
the Company in 1997 (See Note 10).
The tax effects of the temporary differences that gave rise to the
deferred tax balances at December 31, 1998 and 1997 were the
following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 3,972,000 $ 2,719,000
Allowance for doubtful accounts 81,000 130,000
Start-up expenditures 193,000 280,000
Amortization of intangible assets 524,000 --
Other 136,000 131,000
Valuation allowance (4,906,000) (3,222,600)
---------- ----------
-- 37,400
Deferred liability:
Amortization of intangible assets -- (37,400)
---------- ----------
Net deferred tax asset $ -- $ --
============= ============
</TABLE>
The Company provides for a valuation allowance on deferred tax assets
since utilization is uncertain.
10. STOCKHOLDERS' EQUITY
In February 1997, Maricopa Investment Corporation, an unaffiliated
company, purchased all the outstanding shares held by a shareholder of
the Company and subscribed to the Company for an additional 666,667
shares of common stock at $3.00 per share. In total, these purchases
represent approximately 42% of the shares outstanding.
F-53
<PAGE>
ATTITUDE NETWORK, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------
10. STOCKHOLDERS' EQUITY, CONTINUED
In February 1997, the Company also issued 1,000,000 shares of common
stock to acquire Kaleidoscope Networks, Ltd. (see Note 3). As part of
this acquisition agreement, the Company entered into an additional
agreement with the sellers whereby, upon notice from the sellers at
any time in the five-year period following the 18th month from the
date of the agreement, the Company shall be required to purchase up to
500,000 shares of common stock owned by the sellers at a purchase
price of $2.50 per share. Five years following the 36th month from the
date of this agreement, the sellers may give notice and the Company
may be required to purchase up to an additional 500,000 shares of
common stock owned by the seller at a purchase price of $2.50 per
share. This agreement shall terminate upon the ninth anniversary from
the date of this agreement.
The above transactions exceeded 50% of the outstanding shares of the
Company.
During 1997, the Company issued to certain directors and unrelated
parties 330,665 shares of common stock at $4.00 per share. In November
1997, the Company issued 1,500 shares of common stock in exchange for
forgiveness of a $6,000 payable to a vendor.
During 1998, the Company sold 1,166,666 shares to various investors at
prices ranging from $3.00 - $4.00 per share for total proceeds of
approximately $4,000,000. The sale of 666,666 shares included
anti-dilution provisions, as well as a shareholder rights agreement,
which provides for certain future registration rights.
In September 1998, the Company issued 465,000 shares in connection
with the settlement of a lawsuit filed in December 1997. The lawsuit
related to claims for a 10.75% equity interest in the Company and
unspecified other damages by a media service and editorial management
company who had previously been party to a memorandum of understanding
with certain of the Company's stockholders, officers, and directors.
The settlement was accrued for at December 31, 1997.
11. STOCK OPTION PLAN
Effective July 1, 1996, the Company adopted the 1996 Stock Option Plan
(the Plan) available for grant to eligible employees and eligible
participants to purchase up to 1,200,000 shares of the Company's
common stock. The Plan is administered by a committee appointed by the
Board of Directors or by the Board of Directors if each member of the
committee is eligible to receive stock options or if the members of
the committee have been eligible to receive stock options for a period
of one year prior to their services on the committee. The Board of
Directors or a committee shall administer the Plan, select the
eligible employees and eligible participants to whom options will be
granted, determine the number of shares subject to any such options
and interpret, construe and implement the provisions of the Plan. The
Board of Directors or the committee shall also determine the price to
be paid for the shares upon exercise of each option, the period within
which each option may be exercised, and the terms and conditions of
each option.
F-54
<PAGE>
ATTITUDE NETWORK, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------
11. STOCK OPTION PLAN, CONTINUED
The option exercise price will be equal to 100% of market value on the
day the option is granted (110% in the case of a 10% owner of the
Company), as determined by the Board of Directors or the committee. No
option shall be exercisable after ten years from the date of the grant
of the option, and shares subject to the option granted to a 10% owner
shall not be exercisable after five years from the date of grant of
the option. The Plan expires on July 1, 2006.
Compensation expense resulting from stock options is measured at the
grant date based upon the difference between the exercise price and
the market value of the common stock. All stock options granted in
1997 were granted at an exercise price equal to the market value at
the date of grant. During 1998 the Company granted 192,200 stock
options at $.45 that were not in accordance with the 1996 stock option
plan as they were not granted at fair market value. The aggregate
compensation cost related to these $.45 stock options granted in the
year ended December 31, 1998 was $449,310. Additionally, expense of
$295,800 was recognized in connection with options granted to a
non-employee who performed financial advisory services for the Company
in 1998.
A summary of the stock option activity is presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
------ -----
<S> <C> <C>
Outstanding as of December 31, 1996 790,000 $ 1.02
Options granted 305,000 2.90
Forfeited (145,000) 2.86
-------- ----
Outstanding as of December 31, 1997 950,000 1.46
Options granted 377,200 1.65
Exercised (26,500) 0.45
Forfeited (295,350) 1.59
-------- ----
Outstanding as of December 31, 1998 1,005,350 $ 1.52
========= =======
</TABLE>
The Company applies APB Opinion No.25 and related interpretation in
accounting for its Plan. Statement of Financial Accounting Standards
No.123 "Accounting for Stock-Based Compensation" (SFAS No.123)
requires compensation expense measured as the excess of the fair value
of the underlying stock over the exercise price on the date of grant.
Pro forma disclosures as if the Company had adopted the cost recognition
requirements under SFAS No. 123 are not presented as the effects were
immaterial.
F-55
<PAGE>
ATTITUDE NETWORK, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------
The weighted average fair value of options-granted in 1998 was $1.79.
The fair value for these option was estimated at the date of granting
using the minimum value method which takes into account (1) the fair
value of the underlying stock at the grant date, (2) the exercise
price, (3) weighted average expected life of 5.70 years, (4) no
dividends, and (5) a weighted average risk-free interest rate of
5.76%. Compensation expense recognized in providing pro forma
disclosures may not be representative of the effects on net income or
loss for future years.
The following table summarizes information about stock options
outstanding under the Plan at December 31, 1998:
WEIGHTED
AVERAGE
REMAINING
EXERCISE NUMBER CONTRACTUAL NUMBER
PRICES OUTSTANDING LIFE EXERCISABLE
-------- ----------- ----------- -----------
$ 0.45 254,100 3.1 years 254,100
0.70 510,000 7.5 years 385,000
2.50 100,000 7.5 years 100,000
3.00 81,250 7.5 years 22,000
4.00 50,000 7.5 years
5.00 10,000 7.5 years 10,000
----------- ----------- -----------
1,005,350 6.9 years 771,100
=========== =========== ===========
F-56
<PAGE>
ATTITUDE NETWORK, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------
12. RISKS AND UNCERTAINTIES
The Company has derived revenues of approximately $300,000 and
$256,000 in 1998 and 1997, respectively, from one customer, which
approximates 16% and 10%, respectively, of total revenue. The
Company's accounts receivable also includes $200,000 and $87,850
receivable from this customer, which represents 49% and 14% of total
accounts receivable as of December 31, 1997 and 1998, respectively.
The Company maintains cash balances at a financial institution located
in Southwest Florida in excess of the $100,000 insured by the Federal
Deposit Insurance Corporation. The Company has not experienced any
losses in such accounts and believes it is not exposed to any
significant credit risk on cash balances.
13. RELATED PARTY TRANSACTIONS
Accounts payable as of December 31, 1998 and 1997 includes $29,396 and
$64,346, respectively, which is payable to employees, individuals and
organizations related to the Company.
The Company has an agreement under which total payments of $155,000
have been made each year to the chief executive officer in 1998 and
1997, which includes a bonus of $35,000 for 1998 and 1997. The
agreement extends through July 1999 and provides for monthly payments
of $10,000 with a provision for a discretionary bonus to be determined
by the Company's Board of Directors.
The Company had a consulting agreement with one of its directors,
under which $105,000 was paid in 1997. The consulting agreement
expired in October 1997.
The Company rents its office space in Florida on a month-to-month
basis as a subtenant of a Company controlled by a member of its Board
of Directors. It also receives certain office support services. These
rents and support services are priced on a pass-through basis without
mark-up, and totaled approximately $13,000 and $15,000 in 1998 and
1997, respectively.
14. COMMITMENTS AND CONTINGENCIES
In March 1998, the Company entered into an agreement with MacMillan
Digital Publishing USA (MacMillan) to create and operate a website
designed to serve as an on-line resource for the gaming market. The
Company is primarily responsible for the operation of the website and
MacMillan will pay the Company a commission on product sales related
to the website. The terms of the agreement commenced upon execution.
The agreement will terminate May 31, 1999, and is renewable for
successive one-year terms.
As discussed in Note 10, the Company has issued a put option to the
former owners of Kaleidoscope Networks Limited.
F-57
<PAGE>
ATTITUDE NETWORK, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------
14. COMMITMENTS AND CONTINGENCIES, CONTINUED
The Company is a defendant in various legal proceedings, which
occurred in the ordinary course of business. In the opinion of
management, the ultimate settlement of such legal proceedings will not
have a material adverse impact on the Company's financial statements.
15. GOING CONCERN
Since inception, the Company has incurred significant operating
losses. These losses have been financed primarily through the issuance
of common stock and loans from directors. The ability of the Company
to continue as a going concern is dependent upon additional funding
and/or attaining profitable operations. The financial statements do
not include any adjustments that might be necessary if the Company is
unable to continue as a going concern. See Note 16.
16. SUBSEQUENT EVENT
On April 9, 1999 the Company merged with a wholly owned subsidiary of
theglobe.com, inc. wherby the stockholders of the Company exchanged
their common stock for shares of common stock of theglobe.com, inc. at
a specified conversion rate. Management believes the merger will
result in sufficient funds to continue operating activities. The
shares issued in connection with the Kaleidoscope Networks, Ltd.
acquisition, subject to a put option, were exchanged as part of the
merger and thus the put option terminated.
F-58
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table shows the expenses, other than underwriting
discounts and commissions, to be incurred in connection with the sale and
distribution of securities being registered by the Company. Except for the
SEC registration fee, the Nasdaq Listing Fee and the NASD Filing Fee, all
amounts are estimated.
SEC Registration Fee..................................... $101,831
Nasdaq Listing Fee....................................... *
NASD Filing Fee.......................................... *
Blue Sky Fees and Expenses............................... *
Legal Fees and Expenses.................................. *
Accounting Fees and Expenses............................. *
Printing Expenses........................................ *
Miscellaneous Expenses................................... *
--------
Total................................................. $ *
========
- -------------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "DGCL")
provides that a corporation may indemnify directors and officers as well as
other employees and individuals against expenses (including attorneys'
fees), judgments, fines, and amounts paid in settlement in connection with
specified actions, suits, proceedings whether civil, criminal,
administrative, or investigative (other than action by or in the right of
the corporation -- a "derivative action"), if they acted in good faith and
in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful.
A similar standard is applicable in the case of derivative actions, except
that indemnification only extends to expenses (including attorneys' fees)
incurred in connection with the defense or settlement of such action, and
the statute requires court approval before there can be any indemnification
where the person seeking indemnification has been found liable to the
corporation. The statute provides that it is not exclusive of other
indemnification that may be granted by a corporation's charter, by-laws,
disinterested director vote, stockholder vote, agreement, or otherwise.
Article VI of the By-Laws requires the Company to indemnify any person
who was or is a party or is threatened to be made a party to or is involved
(including, without limitation, as a witness) in any threatened, pending or
completed action, suit, arbitration, alternative dispute mechanism,
investigation, administrative hearing or any other proceeding, whether
civil, criminal, administrative or investigative (other than an action by
or in the right of the Company) brought by reason of the fact that he or
she is or was a director or officer of the Company, or, while a
II-1
<PAGE>
director or officer of the Company, is or was serving at the request of the
Company as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, including service with respect to an
employee benefits plan against expenses (including attorneys' fees,
judgments, fines, excise taxes under the Employee Retirement Income
Security Act of 1974, penalties and amounts paid in settlement) incurred by
him or her in connection with such action, suit or proceeding if he or she
acted in good faith and in a manner he or she reasonably believed to be in
or not opposed to the best interests of the Company, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
or her conduct was unlawful.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not
be personally liable to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability
for (i) any breach of the director's duty of loyalty to the corporation or
its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) payment of
unlawful dividends or unlawful stock purchases or redemptions, or (iv) any
transaction from which the director derived an improper personal benefit.
Article VI of the Company's Fourth Amended and Restated Certificate of
Incorporation (the "Certificate") provides that to the fullest extent that
the DGCL, as it now exists or may hereafter be amended, permits the
limitation or elimination of the liability of directors, a director of the
Company shall not be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director. Any amendment to or
repeal of, or adoption of any provision of the Certificate inconsistent
with, such Article VI shall not adversely affect any right or protection of
a director of the Company for or with respect to any acts or omissions of
such director occurring prior to such amendment or repeal.
The Company has entered into indemnification agreements with its
directors and officers substantially in the form attached to this
registration statement as Exhibit 10.4. These agreements provide, in
general, that the Company will indemnify such directors and officers for,
and hold them harmless from and against, any and all amounts paid in
settlement or incurred by, or assessed against, such directors and officers
arising out of or in connection with the service of such directors and
officers as a director or officer of the Company or its Affiliates (as
defined therein) to the fullest extent permitted by Delaware law.
The Company maintains directors' and officers' liability insurance
which provides for payment, on behalf of the directors and officers of the
Company and its subsidiaries, of certain losses of such persons (other than
matters uninsurable under law) arising from claims, including claims
arising under the Securities Act, for acts or omissions by such persons
while acting as directors or officers of the Company and/or its
subsidiaries, as the case may be.
The Underwriting Agreement (the form of which is filed as Exhibit 1.1
hereto) provides for indemnification by the Underwriters of the Company and
its officers and directors for certain liabilities arising under the
Securities Act or otherwise.
II-2
<PAGE>
Item 15. Recent Sales of Unregistered Securities
All sales, unless otherwise noted, were made in reliance on Section
4(2) of the Securities Act and/or Regulation D or Rule 701 promulgated
under the Securities Act and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to the Registrant that the shares were being acquired for
investment.
<TABLE>
<CAPTION>
DATE OF TITLE OF NUMBER OF CONSIDERATION
PURCHASER ISSUANCE SECURITIES SHARES RECEIVED ($)
- --------- -------- ---------- --------- -------------
<S> <C> <C> <C> <C>
Alce Partners, L.P. 12/22/95 Series B Preferred 95,240 100,002
Bergendahl, Anders 9/7/95 Series A Preferred 79,815 15,750
12/22/95 Series B Preferred 47,620 50,001
11/13/96 Series C Preferred 7,500 30,000
Bergendahl, Mia 9/7/95 Series A Preferred 79,815 15,750
12/22/95 Series B Preferred 23,810 25,000.50
Cayuga Venture Fund 11/13/96 Series C Preferred 6,250 25,000
David Duffield Trust 12/22/95 Series B Preferred 95,240 100,002
11/13/96 Series C Preferred 62,500 250,000
3/15/97 Series C Preferred 62,500 250,000
de Selliers,
Baudouin 11/13/96 Series C Preferred 12,500 50,000
Ganem, Bruce 11/13/96 Series C Preferred 3,750 15,000
3/15/97 Series C Preferred 3,750 15,000
GC&H Investments 12/22/95 Series B Preferred 23,810 25,000.50
Grey, Nicki 11/16/95 Series A Preferred 3,215 500
Grinstead, Simon 11/16/95 Series A Preferred 53,215 10,500
Halperin, Mark R. 12/22/95 Series B Preferred 23,810 25,000.50
11/13/96 Series C Preferred 6,250 25,000
Halperin Dow,
Peggy Anne 12/22/95 Series B Preferred 23,810 25,000.50
11/13/96 Series C Preferred 6,250 25,000
Halperin, Philip W. 12/22/95 Series B Preferred 23,810 25,000.50
11/13/96 Series C Preferred 6,250 25,000
Halperin, Robert M. 12/22/95 Series B Preferred 23,810 25,000.50
11/13/96 Series C Preferred 6,250 25,000
5/29/98 Common Stock 42,708 8,171.88
Hirsch, Jason 11/16/95 Series A Preferred 19,245 3,000
Horowitz, David 12/22/95 Series B Preferred 50,000 52,500
11/13/96 Series C Preferred 12,500 50,000
6/19/97 Common Stock 15,972 3,111.06
Huret Family Trust 11/13/96 Series C Preferred 6,250 25,000
Karlsson, Bengt 11/13/96 Series C Preferred 25,000 100,000
Krizelman, Allen 9/7/95 Series A Preferred 75,845 15,000
Krizelman, Susan 11/16/95 Series A Preferred 6,415 1,000
Krizelman, Todd 5/26/95 Common Stock 525,000 2,184
11/16/95 Series A Preferred 22,455 3,500
Leavitt
Investments, L.P. 11/13/96 Series C Preferred 37,500 150,000
Maconie, Andrew 11/16/95 Series A Preferred 3,215 513.70
Miller, Dan 11/13/96 Series C Preferred 18,750 75,000
Muckstadt, Jack 11/13/96 Series C Preferred 3,750 15,000
3/15/97 Series C Preferred 3,750 15,000
Muller, Georges 1/22/96 Series B Preferred 23,810 25,000.50
Paternot, Jacques 9/7/95 Series A Preferred 16,425 3,000
12/22/95 Series B Preferred 6,665 6,998.25
Paternot, Madeleine 11/16/95 Series A Preferred 1,285 205.48
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
DATE OF TITLE OF NUMBER OF CONSIDERATION
PURCHASER ISSUANCE SECURITIES SHARES RECEIVED ($)
- --------- -------- ---------- --------- -------------
<S> <C> <C> <C> <C>
Paternot, Monica 11/16/95 Series A Preferred 1,930 308.22
Paternot, Stephan 5/26/95 Common Stock 600,000 2496
Paternot, Thierry 11/16/95 Series A Preferred 3,215 513.70
12/22/95 Series B Preferred 19,050 20,002.50
Paternot, Yves 9/7/95 Series A Preferred 88,690 17,000
12/22/95 Series B Preferred 23,810 25,000.50
S. Knight Pond Trust 9/7/95 Series A Preferred 128,215 26,500
12/22/95 Series B Preferred 71,430 75,001.50
Tuli, John 1/1/97 Common Stock 13,299 1396.34
(1) In August 1997, the Company issued and sold to Dancing Bear
Investments (i) 25.5 shares of Series D Preferred Stock which
converted into 4,023,765 shares of Common Stock upon consummation of
the Company's initial public offering in November 1998 and (ii)
Warrants to purchase 2,023,009 shares of Common Stock of the Company
at the time of exercise for an aggregate price of $5,882,353. The
aggregate consideration for such transaction was $20 million.
(2) In connection with the acquisition of factorymall.com on February 1,
1999, we issued 343,916 shares of our common stock and assumed
options to purchase approximately 41,017 shares of our common stock.
Such options have an aggregate exercise price of approximately
$928,950. In addition, we assumed warrants to purchase 9,405 shares
of our common stock at an aggregate exercise price of approximately
$200,000.
(3) On April 9, 1999 we issued 785,186 shares of our common stock in
connection with the acquisition of Attitude Network, Ltd. We also
assumed options to purchase 42,948 shares of our common stock at an
aggregate exercise price of $955,605. Additionally, we assumed
warrants to purchase 23,345 shares of our common stock at an
aggregate exercise price of $400,000.
</TABLE>
II-4
<PAGE>
Item 16. Exhibits and financial statement schedules
(a) Exhibits
The following Exhibits are attached hereto and incorporated herein by
reference:
1.1 Form of Underwriting Agreement*****
2.1 Agreement and Plan of Merger dated as of February 1, 1999
by and among theglobe.com, inc., Nirvana Acquisition Corp.,
factorymall.com, inc. d/b/a Azazz, and certain selling
stockholders thereof.**
2.2 Agreement and Plan of Merger dated as of April 5, 1999 by
and among theglobe.com, inc., Bucky Acquisition Corp.,
Attitude Network Ltd. and certain stockholders thereof.
3.1 Form of Fourth Amended and Restated Certificate of
Incorporation of the Company*
3.2 Form of By-Laws of the Company*
4.1 Second Amended and Restated Investor Rights Agreement
among the Company and certain equity holders of the
Company, dated as of August 13, 1997*
4.2 Amendment No. 1 to Second Amended and Restated Investor
Rights Agreement among the Company and certain equity
holders of the Company, dated as of August 31, 1998***
4.3 Amendment No. 2 to Second Amended and Restated Investor
Rights Agreement among the Company and certain equity
holders of the Company, dated as of April 9, 1999.
4.4 Registration Rights Agreement, dated as of September 1,
1998***
4.5 Amendment No. 1 to Registration Rights Agreement, dated as
of April 9, 1999.
4.6 Specimen certificate representing shares of Common Stock of
the Company*
4.7 Amended and Restated Warrant to Acquire Shares of Common
Stock*
4.8 Form of Rights Agreement, by and between the Company and
American Stock Transfer & Trust Company as Rights Agent*
4.9 Registration Rights Agreement among the Company and
certain equity holders of the Company, dated February 1,
1999, in connection with the acquisition of
factorymall.com.***
4.10 Registration Rights Agreement among the Company and
certain shareholders of the Company, dated April 9, 1999,
in connection with the acquisition of Attitude Network.
II-5
<PAGE>
5.5 Opinion of Fried, Frank, Harris, Shriver & Jacobson*****
9.1 Stockholders' Agreement by and among Dancing Bear
Investments, Inc., Michael Egan, Todd V. Krizelman, Stephan
J. Paternot, Edward A. Cespedes and Rosalie V. Arthur,
dated as of February 14, 1999***
10.1 Employment Agreement dated August 13, 1997, by and between
the Company and Todd V. Krizelman*
10.2 Employment Agreement dated August 13, 1997, by and
between the Company and Stephan J. Paternot*
10.3 Employment Agreement dated July 13, 1998, by and between
the Company and Francis T. Joyce*
10.4 Form of Indemnification Agreement between the Company and
each of its Directors and Executive Officers*
10.5 Lease Agreement dated January 14, 1997 between the
Company and Fifth Avenue West Associates L.P.*
10.6 Lease Agreement dated January 12, 1999 between the
Company and Broadpine Realty Holding Company, Inc.***
10.7 1998 Stock Option Plan, as amended
10.8 1995 Stock Option Plan*
10.9 factorymall.com, inc. 1998 Stock Option Plan****
10.10 Form of Nonqualified Stock Option Agreement with James
McGoodwin, Kevin McKeown and Mark Tucker****
10.11 Attitude Network Ltd. Stock Option Plan*****
10.12 Form of Employee Stock Purchase Plan***
10.13 D.A.R.T. Service Agreement dated April 15, 1997*+
10.14 Amendment dated as of May 1, 1998, to original D.A.R.T.
Service Agreement dated April 15, 1997*+
10.15 License Agreement between the Company and Engage
Technologies, Inc. dated October 31, 1998.***++
10.16 Employment Agreement dated August 31, 1998, by and
between the Company and Dean Daniels*
10.17 Agreement between the Company, Republic Industries, Inc.,
and Michael S. Egan, dated August 12, 1998, regarding the
conduct of automotive clubsites on theglobe.com*+
10.18 Data Center Space Lease between Telehouse International
Corporation of America and the Company, dated August 24,
1998*
10.19 Travel Services Alliance Agreement between the Company
and Lowestfare.com, dated as of September 15, 1998*+
II-6
<PAGE>
10.20 Boxlot Agreement*****
10.21 Music HQ Agreement*****
11.1 Computation of Loss Per Share
23.1 Consent of Fried, Frank, Harris, Shriver & Jacobson
(included in Exhibit 5.1)*****
23.2 Consents of KPMG LLP
23.3 Consent of PricewaterhouseCoopers LLP
23.4 Consent of ABC Interactive*
23.5 Consent of DoubleClick, Inc.
23.6 Consent of Jupiter Communications, LLC
23.7 Consent of International Data Corporation
27.1 Financial Data Schedule
99.1 Valuation and Qualifying Accounts
- -------------------------
* Incorporated by reference from our registration statement on Form S-1
(Registration No. 333-59751).
** Incorporated by reference from our report on Form 8-K filed on
February 16, 1999.
*** Incorporated by reference from our report on Form 10-K filed on March,
1999.
**** Incorporated by reference from our Registration Statement on Form S-8
(No. 333-75503), filed on April 1, 1999.
***** To be filed by amendment.
+ Confidential treatment granted as to parts of this document.
++ Confidential treatment requested.
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) to provide to the Underwriters at the closing specified in the
Underwriting Agreements, certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to
each purchaser.
(2) that insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in
II-7
<PAGE>
the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer,
or controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the questions whether such indemnification by them is against
public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
(3) that for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933, shall be
deemed to be part of this registration statement as of the time it was
declared effective; and
(4) that for purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus filed shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on the 9th day of April 1999.
theglobe.com, inc.
By: /s/ Todd Krizelman
-----------------------------
Todd Krizelman
Co-Chief Executive Officer
and Co-President
By: /s/ Stephan Paternot
-----------------------------
Stephan Paternot
Co-Chief Executive Officer,
Co-President and Secretary
-----------------------------------
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the persons whose signatures
appear below, constitute and appoint Michael Egan, Todd Krizelman and
Stephan Paternot, and each of them as their true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for them and in their names, places, and steads, in any and
all capacities, to sign the Registration Statement to be filed in
connection with the public offering of common stock of theglobe.com, inc.
and any and all amendments (including post-effective amendments) to the
Registration Statement, and any subsequent registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and
to file the same, with all exhibits thereto, and the other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as they might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or
their or his or her substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
II-9
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Michael Egan April 9, 1999
- --------------------------
Michael Egan Chairman
/s/ Todd Krizelman April 9, 1999
- -------------------------- Co-Chief Executive Officer,
Todd Krizelman Co-President and Director
Co-Chief Executive Officer,
/s/ Stephan Paternot Co-President, Secretary and April 9, 1999
- -------------------------- Director
Stephan Paternot
/s/ Frank Joyce Vice President and Chief April 9, 1999
- -------------------------- Financial Officer (Principal
Frank Joyce Accounting Officer)
/s/ Edward Cespedes April 9, 1999
- --------------------------
Edward Cespedes Director
/s/ Rosalie Arthur April 9, 1999
- --------------------------
Rosalie Arthur Director
- -------------------------- ___________, 1999
Henry C. Duques Director
/s/ Robert Halperin April 9, 1999
- --------------------------
Robert Halperin Director
/s/ David H. Horowitz April 9, 1999
- --------------------------
David H. Horowitz Director
/s/ H. Wayne Huizenga April 9, 1999
- ---------------------------
H. Wayne Huizenga Director
<PAGE>
II-10
Exhibit 2.2
AGREEMENT AND PLAN OF MERGER
DATED AS OF
APRIL 5, 1999
BY AND AMONG
THEGLOBE.COM, INC.,
BUCKY ACQUISITION CORP.,
ATTITUDE NETWORK LTD.
AND
CERTAIN STOCKHOLDERS THEREOF
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of April 5, 1999 (this
"Agreement"), by and among theglobe.com, inc., a Delaware corporation
("theglobe"), Bucky Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of theglobe ("Merger Sub"), Attitude Network Ltd.,
a Delaware corporation (the "Company"), and those stockholders of the
Company that are executing and delivering counterparts hereto
(collectively, the "Sellers"). theglobe, Merger Sub, the Company and the
Sellers are sometimes referred to herein, individually, as a "Party," and
collectively, as the "Parties."
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of theglobe, Merger
Sub and the Company have each determined that the merger of Merger Sub with
and into the Company (the "Merger") upon the terms and subject to the
conditions set forth in this Agreement is fair to and in the best interests
of their respective corporations and stockholders and have approved the
Merger and this Agreement;
WHEREAS, the Boards of Directors of the Company and Merger Sub
have each recommended the adoption of this Agreement and the Merger to
their respective stockholders in accordance with the Delaware General
Corporation Law, as amended (the "DGCL");
WHEREAS, in accordance with the terms of this Agreement, holders
of the common stock, par value $0.001 per share of the Company (the
"Company Common Stock" or "Company Shares") will receive common stock, par
value $0.001 per share of theglobe ("theglobe Common Stock" or "theglobe
Shares"); and
WHEREAS, it is intended that, for federal income tax purposes,
the Merger will qualify as a reorganization under Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"), and the rules and
regulations promulgated thereunder, and it is further intended that
theglobe Common Stock to be issued in the Merger will be issued in a
transaction exempt from registration under the Securities Act of 1933 (the
"Securities Act") and the qualification requirements of any state "blue
sky" laws.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained in this Agreement, and intending to be
legally bound hereby, the Parties agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. At the Effective Time (as defined in Section
1.2(b)) and subject to and upon the terms and conditions of this Agreement
and in accordance with the DGCL, Merger Sub shall be merged with and into
the Company and the separate corporate existence of Merger Sub shall cease.
The Company shall continue as the surviving corporation (sometimes referred
to herein as the "Surviving Corporation") in the Merger, and as of the
Effective Time shall be a wholly-owned subsidiary of theglobe and shall
continue to be governed by the laws of the State of Delaware. The Merger
shall have the effects specified in the DGCL.
Section 1.2 The Closing; Effective Time. (a) The closing of the Merger
(the "Closing") shall take place (i) at the offices of Fried, Frank,
Harris, Shriver & Jacobson, One New York Plaza, New York, New York, 10004,
at 10:00 A.M. local time, on the second business day following the date on
which the last to be satisfied or waived of the conditions set forth in
Article VI (other than those conditions that by their nature are to be
satisfied at the Closing, but subject to the satisfaction or, where
permitted, waiver of those conditions) shall be satisfied or waived in
accordance with this Agreement or (ii) at such other place, time and/or
date as theglobe and the Company shall agree (the date of the Closing, the
"Closing Date"); provided, however, that the Parties shall use their
reasonable best efforts to cause the Closing Date to occur on or before
April 6, 1999.
(b) On the Closing Date, theglobe, the Company and Merger
Sub shall cause a certificate of merger (the "Certificate of Merger") in
respect of the Merger to be properly executed and filed with the Secretary
of State of the State of Delaware. The Merger shall become effective at
such time at which the Certificate of Merger shall have been duly filed
with the Secretary of State of the State of Delaware or at such later time
reflected in the Certificate of Merger as shall have been agreed by
theglobe and the Company in accordance with the DGCL (the time that the
Merger becomes effective, the "Effective Time").
Section 1.3 Subsequent Actions. If, at any time after the Effective
Time, the Surviving Corporation shall consider or be advised that any
deeds, bills of sale, assignments, assurances or any other actions or
things are necessary or desirable to continue, vest, perfect or confirm of
record the Surviving Corporation's right, title or interest in, to or under
any of the rights, properties, privileges, franchises or assets of either
of the constituent corporations of the Merger, or otherwise to carry out
the intent of this Agreement, the officers and directors of the Surviving
Corporation shall be authorized to execute and deliver, in the name and on
behalf of either of the constituent corporations of the Merger, all such
deeds, bills of sale, assignments and assurances and to take and do, in the
name and on behalf of each such constituent corporation or otherwise, all
such other actions and things as may be necessary or desirable to continue,
vest, perfect or confirm of record any and all right, title and interest
in, to and under such rights, properties, privileges, franchises or assets
in the Surviving Corporation or otherwise to carry out the intent of this
Agreement.
Section 1.4 Certificate of Incorporation; Bylaws; Directors and
Officers of the Surviving Corporation. Unless otherwise agreed by theglobe
and the Company prior to the Closing, at the Effective Time:
(a) The certificate of incorporation of the Surviving
Corporation shall be amended to read in its entirety as set forth in
Exhibit 1.4(a);
(b) The bylaws of Merger Sub as in effect immediately prior
to the Effective Time shall be the bylaws of the Surviving Corporation
until thereafter amended in accordance with applicable Law (as defined in
Section 3.6(a)) and the certificate of incorporation of the Surviving
Corporation;
(c) The officers of Merger Sub immediately prior to the
Effective Time shall be the officers of the Surviving Corporation until
their successors are elected or appointed and qualified or until their
resignation or removal; and
(d) The directors of Merger Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation until
their successors are elected or appointed and qualified or until their
resignation or removal.
ARTICLE II
MERGER CONSIDERATION
Section 2.1 Treatment of Capital Stock. The manner and basis of
converting the shares of Company Common Stock and shares of common stock of
Merger Sub, by virtue of the Merger and without any action on the part of
any Person thereof, shall be as set forth in this Article II.
Section 2.2 Conversion of Company Common Stock. (a) At the Effective
Time, by virtue of the Merger and without any action on the part of any
Person, each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time (collectively, the "Outstanding
Shares") other than those held in the treasury of the Company ("Excluded
Shares") and any Dissenting Shares (as defined in Section 2.7) and all
rights in respect thereof, shall forthwith cease to exist and be converted
into the right to receive the Merger Consideration Per Share (as defined in
Section 2.5(a)), subject to the provisions of Section 8.4.
(b) Except as otherwise provided in this Agreement,
commencing immediately after the Effective Time, each certificate which,
immediately prior to the Effective Time, represented issued and outstanding
shares of Company Common Stock shall evidence the right to receive shares
of theglobe Common Stock on the basis set forth in this Agreement.
Section 2.3 Cancellation of Excluded Shares. At the Effective Time,
each Excluded Share, by virtue of the Merger and without any action on the
part of any Person, shall be canceled and retired, and no shares of stock
or other securities of theglobe or the Surviving Corporation shall be
issuable, and no payment or other consideration shall be made or paid in
respect of such Excluded Shares.
Section 2.4 Conversion of Common Stock of Merger Sub. At the Effective
Time, by virtue of the Merger and without any action on the part of any
Person, each share of common stock of Merger Sub issued and outstanding
immediately prior to the Effective Time, and all rights in respect thereof,
shall forthwith cease to exist and be converted into one validly issued,
fully paid and nonassessable share of common stock of the Surviving
Corporation.
Section 2.5 Merger Consideration. (a) The "Merger Consideration Per
Share" shall be the fraction of one share of theglobe Common Stock equal to
the quotient of (x) the Aggregate Consideration divided by (y) the Fully
Diluted Company Shares (each as defined in Section 2.5(b)).
(b) For purposes of this Agreement, the following terms
shall have the meanings set forth below:
(i) "Aggregate Consideration" shall mean the number of
shares of theglobe Common Stock equal to the quotient of (x) divided
by (y), where (x) equals (A) the sum of (1) $43,000,000 plus (2) the
Aggregate Exercise Price less (B) the sum of (1) the Non-Permitted
Indebtedness Amount plus (2) the Invoiced Transaction Costs plus (3)
the Bonus Amounts (such amount calculated pursuant to this clause (x),
the "Aggregate Dollar Consideration"), and (y) equals the Reference
Share Price.
(ii) "Aggregate Exercise Price" shall mean the
aggregate exercise price of all Options (as defined in Section
2.8(a)), Warrants (as defined in Section 2.8(b)) and other securities
convertible into or exchangeable for Company Common Stock (including
the Demand Notes (as defined in Section 2.5(b)(v))) (collectively,
"Convertible Securities") outstanding immediately prior to the
Effective Time (which shall not include Convertible Securities being
exercised in connection with the Merger) other than any such
Convertible Securities with a per share exercise price that is greater
than the Reference Share Price. For purposes of calculating the
exercise price of the Demand Notes, the Demand Notes shall be deemed
to have an exercise price of $0.
(iii) "Bonus Amounts" shall mean the aggregate amount
of all obligations of the Company and the Subsidiary (as defined in
Section 3.4(a)) incurred in connection with bonuses and other
compensation arrangements arising out of the transactions contemplated
by this Agreement (other than amounts arising out of the employment
agreements referenced in Section 6.1(h) or any acceleration of the
vesting of any Options).
(iv) "Fully Diluted Company Shares" shall mean the sum
of (1) the number of shares of Company Common Stock outstanding
immediately prior to the Effective Time (which shall include for this
purpose any shares issued upon exercise of any Convertible Securities
in connection with the Merger) plus (2) the number of shares of
Company Common Stock issuable upon the exercise of any Convertible
Securities with a per share exercise price less than the Reference
Share Price outstanding immediately prior to the Effective Time and
not being exercised in connection with the Merger. For purposes of
calculating the Fully Diluted Company Shares, the Demand Notes shall
be deemed to be convertible into a number of shares of Company Common
Stock based on the proportion that the total amount of Indebtedness
under the Demand Notes outstanding immediately prior to the Effective
Time bears to the Aggregate Dollar Consideration (such number of
shares, the "Demand Note Company Shares").
(v) "Indebtedness" shall mean, without duplication, the
outstanding principal amount of, and all interest, penalties, premiums
and other amounts accrued in respect of, (1) all indebtedness for
borrowed money of the Company or the Subsidiary, whether or not
recourse to the Company or the Subsidiary, (2) every obligation of the
Company or the Subsidiary evidenced by bonds, debentures, notes or
other similar instruments, including, without limitation, the Demand
Promissory Notes listed on Exhibit 2.5(b)(v) hereto (the "Demand
Notes") and amounts owing pursuant to the Conveyance Agreement (as
defined in Section 2.5(b)(viii)), (3) every reimbursement obligation
of the Company or the Subsidiary with respect to letters of credit
(including standby letters of credit only to the extent drawn upon),
bankers' acceptances or similar facilities issued for the account of
the Company or the Subsidiary, (4) every obligation of the Company or
the Subsidiary issued or assumed as the deferred purchase price of
property or services (but excluding trade accounts payable or accrued
liabilities arising in the ordinary course of business), (5) every
capital lease obligation of the Company or the Subsidiary, and (6)
every obligation of the type referred to in clauses (1) through (5) of
another Person and all dividends of another Person the payment of
which, in either case, the Company or the Subsidiary has guaranteed or
for which the Company or the Subsidiary is responsible or liable,
directly or indirectly, jointly or severally, as obligor, guarantor or
otherwise.
(vi) "Non-Permitted Indebtedness Amount" shall mean the
aggregate amount of Indebtedness as of the close of business on the
day immediately preceding the Closing Date, excluding all amounts
owing pursuant to the Conveyance Agreement, dated as of August 1,
1996, between Accursed Toys, Inc. and the Company (the "Conveyance
Agreement") to the extent the unpaid amounts under such Conveyance
Agreement are less than or equal to $5,079,737.90, and excluding all
amounts owing pursuant to the Demand Notes.
(vii) "Reference Share Price" shall mean the average
closing price of theglobe Common Stock on the NASDAQ National Market
for the fifteen trading days immediately preceding the date of this
Agreement.
(viii) "Transaction Costs" shall mean all fees and
expenses of financial, legal, accounting and other advisors retained
by the Company or the Subsidiary and all other out-of-pocket costs of
the Company or the Subsidiary incurred prior to or at the Effective
Time in connection with the transactions contemplated hereby; and
"Invoiced Transaction Costs" shall mean any Transaction Costs with
respect to which the Company or the Subsidiary has received a written
invoice prior to the Closing Date. The Sellers and the Company agree
that the Invoiced Transaction Costs shall not exceed $250,000 in the
aggregate.
(c) theglobe shall issue to each holder (a "Stockholder") of
a stock certificate which immediately prior to the Effective Time
represented Outstanding Shares other than Excluded Shares or Dissenting
Shares (a "Certificate"), the number of shares of theglobe Common Stock
equal to the number of shares of Company Common Stock represented by such
Certificate multiplied by the Merger Consideration Per Share upon receipt
by theglobe of the Certificate and a completed and duly executed letter of
transmittal in the form of Exhibit 2.5(c)(i) (a "Letter of Transmittal");
provided, that the number of shares issued and delivered to a Seller shall
be reduced by the number of Escrowed Shares allocable to such Seller.
Within 15 days following the Closing Date, the Company shall mail a Letter
of Transmittal to all holders of certificates representing Company Common
Stock together with the notice of action of Stockholders by written consent
in accordance with Section 228 of the DGCL. Each Seller has delivered an
executed Accredited Investor Questionnaire in the form of Exhibit
2.5(c)(ii) on or prior to the date hereof.
(d) The Company and the Sellers shall deliver to theglobe no
later than the close of business on the business day immediately preceding
the Closing Date a certificate (the "Closing Certificate") setting forth
(i) the Aggregate Consideration, (ii) the Merger Consideration Per Share,
(iii) the number of Outstanding Shares, (iv) the total number of shares of
Company Common Stock issuable upon the exercise of any Convertible
Securities and the per share exercise price of each such Convertible
Security, (v) the Aggregate Exercise Price, (vi) the Non-Permitted
Indebtedness Amount, (vii) the Bonus Amounts, (viii) the number of Demand
Note Company Shares and (ix) the Invoiced Transaction Costs, in each case
together with reasonable backup thereto.
Section 2.6 Cash in Lieu of Fractional Shares. Notwithstanding
anything in this Agreement to the contrary, no certificates or scrip
evidencing fractional shares of theglobe Common Stock shall be issued upon
the surrender for exchange of Certificates, and such fractional share
interests will not entitle the owner thereof to vote or to any rights of a
stockholder of theglobe. In lieu of any such fractional shares, each holder
of Company Shares upon surrender of a Certificate for exchange pursuant to
this Article II shall be paid an amount in cash (without interest), rounded
to the nearest cent, determined by multiplying (x) the Reference Share
Price by (y) the fractional interest to which such holder would otherwise
be entitled (after taking into account all Certificates held by such
holder). Any payment received by a holder of Company Shares with respect to
fractional share interests is merely intended to provide a mechanical
rounding off of, and is not separately bargained for, consideration.
Section 2.7 Dissenter's Rights. Notwithstanding any provision of this
Agreement to the contrary, any shares of Company Common Stock that are
issued and outstanding immediately prior to the Effective Time and which
are held by a holder who has not voted such shares in favor of the Merger
nor consented thereto in writing and who shall have delivered a written
demand for appraisal of such shares in the manner provided by the DGCL and
who, as of the Effective Time, shall not have effectively withdrawn or lost
such right to appraisal ("Dissenting Shares") shall be entitled to such
rights (but only such rights) as are granted by Section 262 of the DGCL.
Each holder of Dissenting Shares who becomes entitled to payment for such
Dissenting Shares pursuant to Section 262 of the DGCL shall receive payment
therefor from the Surviving Corporation in accordance with the DGCL;
provided, however, that (i) if any such holder of Dissenting Shares shall
have failed to establish his entitlement to appraisal rights as provided in
Section 262 of the DGCL, (ii) if any such holder of Dissenting Shares shall
have effectively withdrawn his demand for appraisal of such shares or lost
his right to appraisal and payment for his Shares under Section 262 of DGCL
or (iii) if neither any holder of Dissenting Shares nor the Surviving
Corporation shall have filed a petition demanding a determination of the
value of all Dissenting Shares within the time provided in Section 262 of
the DGCL, such holder shall forfeit the right to appraisal of such
Dissenting Shares and each such Dissenting Share shall be converted and
exchanged in accordance with Section 2.2. The Company shall give theglobe
(i) prompt notice of any written demands for appraisal of any shares of
Company Common Stock, withdrawals of such demands, and any other
instruments served pursuant to the DGCL and received by the Company which
relate to any such demand for appraisal; and (ii) the opportunity to
participate in all negotiations and proceedings which take place prior to
the Effective Time with respect to any demands for appraisal. The Company
shall not, except with the prior written consent of theglobe, voluntarily
make any payment with respect to any demands for appraisal of Company
Common Stock or offer to settle or settle any such demands.
Section 2.8 Option and Warrant Rollovers. (a) Each option, whether
vested or not vested, exercisable for shares of Company Common Stock (an
"Option") outstanding at the Effective Time shall, at the Effective Time,
be assumed by theglobe and shall thereafter constitute an option to
acquire, on the same terms and conditions as were applicable under such
assumed Option immediately prior to the Effective Time, a number of shares
of theglobe Common Stock equal to the product of the Merger Consideration
Per Share multiplied by the number of shares of Company Common Stock
subject to such Option immediately prior to the Effective Time, with an
exercise price per share of theglobe Common Stock (rounded up to the
nearest $.001) equal to the aggregate exercise price for the shares of
Company Common Stock subject to such Option immediately prior to the
Effective Time divided by the number of full shares of theglobe Common
Stock purchasable pursuant to such Option immediately following the
Effective Time; provided, however, that the number of shares of theglobe
Common Stock that may be purchased upon exercise of such Option shall not
include any fractional shares and, upon the last such exercise of such
Option, theglobe shall pay to the holder thereof an amount of cash equal to
such fraction multiplied by the Reference Share Price. theglobe shall
assume the obligations of the Company under the Company's 1996 Stock Option
Plan and shall comply with the terms thereof.
(b) Each warrant, whether vested or not vested, exercisable
for shares of Company Common Stock (a "Warrant") outstanding at the
Effective Time shall, at the Effective Time, be assumed by theglobe and
shall thereafter constitute a warrant to acquire, on the same terms and
conditions as were applicable under such assumed Warrant immediately prior
to the Effective Time, a number of shares of theglobe Common Stock equal to
the product of the Merger Consideration Per Share multiplied by the number
of shares of Company Common Stock subject to such Warrant immediately prior
to the Effective Time, with an exercise price per share (rounded up to the
nearest $.001) equal to the aggregate exercise price for the shares of
Company Common Stock subject to such Warrant immediately prior to the
Effective Time divided by the number of full shares of theglobe Common
Stock purchasable pursuant to such Warrant immediately following the
Effective Time; provided, however, that the number of shares of theglobe
Common Stock that may be purchased upon exercise of such Warrant shall not
include any fractional shares and, upon the last such exercise of such
Warrant, theglobe shall pay to the holder thereof an amount of cash equal
to such fraction multiplied by the Reference Share Price.
Section 2.9 Closing of Transfer Books. From and after the Effective
Time, the stock transfer books of the Company shall be closed and no
transfer of Company Common Stock shall thereafter be made.
Section 2.10 Restructuring. Notwithstanding anything in this Agreement
to the contrary, theglobe may, in its sole discretion, restructure the
Merger so as to substitute theglobe or any wholly-owned subsidiary of
theglobe for Merger Sub as one of the constituent corporations in the
Merger and so that the Company shall merge with theglobe or such other
wholly-owned subsidiary, with theglobe, the Company or such other
wholly-owned subsidiary continuing as the surviving corporation in the
Merger; provided, however, that no such change shall change the amount or
kind of consideration to be issued to holders of shares of Company Common
Stock as provided for in this Agreement. In the event of such
restructuring, the Parties shall promptly enter into any amendment to this
Agreement necessary or desirable to provide for such restructuring and in
connection therewith the Company and the Sellers shall reasonably cooperate
with theglobe by providing such customary representations as shall be
requested by theglobe supporting the qualification of such restructuring as
a reorganization under Section 368 of the Code.
Section 2.11 Distributions With Respect to Unexchanged Shares. No
dividends or other distributions declared or made after the date of this
Agreement with respect to theglobe Common Stock with a record date after
the Effective Time will be paid to the holder of any unsurrendered
Certificate with respect to the shares of theglobe Common Stock represented
thereby until the holder of record of such Certificate shall surrender such
Certificate. Subject to applicable Law, following surrender of any such
Certificate, there shall be paid to the record holder of the Certificates
representing whole shares of theglobe Common Stock issued in exchange
therefor, without interest, at the time of such surrender, the amount of
any such dividends or other distributions with a record date after the
Effective Time payable with respect to such whole shares of theglobe Common
Stock.
Section 2.12 Transfers of Ownership. If any certificate for shares of
theglobe Common Stock is to be issued in a name other than that in which
the Certificate surrendered in exchange therefor is registered, it will be
a condition of the issuance thereof that the Certificate so surrendered
will be properly endorsed and otherwise in proper form for transfer and
that the Person (as defined in Section 9.3(a)) requesting such exchange
will have paid to theglobe or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares
of theglobe Common Stock in any name other than that of the registered
holder of the Certificate surrendered or established to the satisfaction of
theglobe or any agent designated by it that such tax has been paid or is
not payable.
Section 2.13 No Liability. Notwithstanding anything to the contrary in
this Agreement, none of theglobe, the Surviving Corporation or any other
Party shall be liable to a holder of shares of theglobe Common Stock or
Company Common Stock for any amount properly paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
Section 2.14 Lost, Stolen or Destroyed Certificates. In the event any
Certificates evidencing shares of Company Common Stock shall have been
lost, stolen or destroyed, theglobe shall issue in exchange for such lost,
stolen or destroyed Certificates, upon the making of an affidavit of that
fact by the holder thereof, the appropriate number of shares of theglobe
Common Stock and the appropriate amount of cash in lieu of fractional
shares, if any, as may be required pursuant to Section 2.6; provided, that
theglobe may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
Certificates to indemnify theglobe (including through the posting of a
bond) against any loss or cost incurred by or claim that may be made
against theglobe or the Surviving Corporation with respect to the
Certificates alleged to have been lost, stolen or destroyed.
Section 2.15 Restricted Securities. The shares of theglobe Common
Stock issued in connection with the Merger will be "restricted securities"
under the Securities Act and Rule 144 promulgated thereunder and may only
be sold or otherwise transferred pursuant to an effective registration
statement under the Securities Act or an exemption from the registration
requirements of the Securities Act. It is understood that the certificates
evidencing the shares of theglobe Common Stock issued in connection with
the Merger will bear one or both of the following legends:
(a) "These securities have not been registered under the
Securities Act of 1933, as amended. They may not be sold, offered for sale,
pledged or hypothecated in the absence of a registration statement in
effect with respect to the securities under such Act or an opinion of
counsel satisfactory to the Company that such registration is not required
or unless sold pursuant to Rule 144 of such Act."
(b) Any legend required by applicable state Law.
(c) Any legend required by Regulation S promulgated under
the Securities Act ("Regulation S").
Section 2.16 Registration Rights. Holders of theglobe Common Stock
issued pursuant to this Agreement (including Persons to whom shares of
theglobe Common Stock may be issuable pursuant to Section 2.8(b) upon the
exercise of Warrants and pursuant to Section 5.17 upon conversion of the
Demand Notes) shall, as of the Effective Time, be entitled to certain
registration rights with respect to such shares as provided in the
Registration Rights Agreement to be executed and delivered by theglobe at
the Closing (the "Registration Rights Agreement") the form of which is set
forth in Exhibit 2.16 hereto, upon execution of the Registration Rights
Agreement by such holders.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF
THE COMPANY AND THE SELLERS
The Company and each of the Sellers each hereby jointly and
severally represents and warrants to theglobe and Merger Sub as of the date
of this Agreement and as of the Closing Date as follows:
Section 3.1 Organization. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware and has the requisite corporate power and authority to carry on
its business as it is now being conducted. The Company is duly qualified
and licensed as a foreign corporation to do business, and is in good
standing (and has paid all relevant franchise or analogous taxes), in each
jurisdiction where the character of its assets owned or held under lease or
the nature of its business makes such qualification necessary, except where
the failure to be so qualified and in good standing would not, individually
or in the aggregate, be material. The minute books (containing the records
of meetings of stockholders, the Board of Directors, and any committees of
the Board of Directors), the stock record and certificate books of the
Company contain true, complete and accurate records of all corporate
actions taken at any such meetings and other corporate governance matters,
the stock ownership of the Company and the transfer of the shares of its
capital stock since the date of inception of the Company. Schedule 3.1
lists each of the directors and officers of the Company.
Section 3.2 Authority. Each of the Sellers and the Company has the
requisite right, power and authority (and, in the case of the Sellers that
are natural persons, legal capacity) to enter into this Agreement and any
Ancillary Documents to which it is a party and to carry out its obligations
hereunder and thereunder. This Agreement has been, and each of the
Ancillary Documents to which it is a party has been or will be, duly and
validly executed and delivered by each of the Sellers and the Company and
constitutes, and each of the Ancillary Documents to which it is a party
constitutes, or will upon execution and delivery constitute, a valid and
binding obligation of such Person, enforceable against such Person in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, moratorium or other similar laws
affecting creditors rights generally or by general principles of equity.
All proceedings or other actions on the part of the Company and each Seller
necessary to authorize this Agreement or any of the Ancillary Documents to
which it is a party and the transactions contemplated hereby or thereby
have been taken. Each Seller is an "accredited" investor as defined in Rule
501 of the rules and regulations promulgated under the Securities Act.
Section 3.3 Capitalization; Title to Shares. The authorized capital
stock of the Company consists of 20,000,000 shares of Company Common Stock,
of which 13,114,457 shares are issued and outstanding, and 5,000 shares of
Preferred Stock, of which no shares are issued and outstanding. The full
name and address of each Stockholder, and the number of shares of Company
Common Stock owned by such Stockholder, is set forth on Schedule 3.3. All
the issued and outstanding shares of Company Common Stock are validly
issued, fully paid and nonassessable and those shares of Company Common
Stock held by the Sellers are owned free and clear of any lien, pledge,
charge, assessment, security interest, mortgage, claim, option, easement,
imperfection of title, tenancy or other legal or equitable right of others,
or other encumbrance of any character whatsoever (including, without
limitation, right of first refusal) (each an "Encumbrance"). Except as set
forth on Schedule 3.3, there are no shares of capital stock of the Company
authorized, issued or outstanding, and there are no outstanding Options,
Warrants, or other Convertible Securities, subscriptions, rights
(including, without limitation, preemptive rights), stock-based or
stock-related awards or other contracts, agreements or arrangements (or
Commitments (as defined in Section 3.8(a)) with respect to issuance or
grant of any of the foregoing) to which the Company or any of the Sellers
is a party or by which the Company or any of the Sellers may be bound of
any character relating, or obligating the Company or the Sellers, to issue,
grant, award, transfer or sell, or based on the value of, any issued or
unissued shares of Company's capital stock or other securities of the
Company. Except as set forth on Schedule 3.3, there are no voting trusts,
proxies or other agreements or understandings to which the Company or any
of the Sellers is a party with respect to the voting of capital stock of
the Company. Each Stockholder that is an officer or director of the Company
or of the Subsidiary, and each Stockholder that holds 10% or more of the
issued and outstanding shares of Company Common Stock as of the date hereof
or as of the Closing Date, is a Seller.
Section 3.4 Subsidiaries. (a) The Company does not own, directly or
indirectly, any equity or other ownership interest in any Person other than
Kaleidoscope Networks Limited, a company registered in England and Wales
#30573775 (the "Subsidiary"). Except as set forth on Schedule 3.4(a),
neither the Company nor the Subsidiary is a party to any Commitment to
purchase or provide funds to or make any investment (in the form of a loan,
capital contribution or otherwise) in any Person.
(b) The authorized capital stock of the Subsidiary consists
of 1,000 shares of common stock, one pound sterling per share, of the
Subsidiary, of which 200 shares are issued and outstanding. All such issued
and outstanding shares are owned by the Company and are duly authorized and
validly issued and are fully paid or credited as fully paid, free and clear
of all Encumbrances. There are no outstanding options, warrants, or other
convertible or exchangeable securities, subscriptions, rights (including,
without limitation, preemptive rights), stock-based or stock-related awards
or other contracts, agreements or arrangements (or Commitments with respect
to issuance of any of the foregoing) to which the Subsidiary is a party or
by which the Subsidiary may be bound of any character relating, or
obligating the Subsidiary, to issue, grant, award, transfer or sell, or
based on the value of, any issued or unissued shares of the Subsidiary's
capital stock.
(c) The Subsidiary is duly organized, validly existing and
in good standing under the laws of England and Wales and has the requisite
corporate power and authority to carry on its business as it is now being
conducted. The Subsidiary is duly qualified and licensed as a foreign
corporation to do business, and is in good standing (and has paid all
relevant franchise or analogous taxes), in each jurisdiction where the
character of its assets owned or held under lease or the nature of its
business makes such qualification necessary, except where the failure to be
so qualified and in good standing would not, individually or in the
aggregate, be material.
Section 3.5 Financial Statements. (a) Schedule 3.5 sets forth (1) the
unaudited consolidated balance sheet of the Company and the Subsidiary as
of December 31, 1998 (the "1998 Balance Sheet"), and the related
consolidated statement of operations, of changes in stockholders' equity
(deficit) and of cash flows for the 12-month period then ended, including
the notes thereto, and (2) the audited consolidated balance sheets of the
Company and the Subsidiary as of December 31, 1997 and December 31, 1996
and the related consolidated statements of operations, of changes in
stockholders' equity (deficit) and of cash flows for the 12-month periods
then ended, including the notes thereto (the financial statements referred
to in clauses (1) and (2) collectively, the "Financial Statements"). The
Financial Statements as of and for the period ended December 31, 1998 are
referred to herein as the "1998 Financial Statements." The Financial
Statements (i) are in accordance with the books and records of the Company
and the Subsidiary, (ii) fairly present the financial position, results of
operations and cash flows of the Company and the Subsidiary taken as a
whole in all material respects as of the respective dates and for the
respective periods referred to therein and (iii) were prepared in
accordance with generally accepted United States accounting principles
("GAAP"), in effect on the date hereof, applied on a basis consistent with
that of prior years or periods. The books of account and other financial
and corporate records of the Company and the Subsidiary are complete and
correct in all material respects.
(b) All of the Company's and the Subsidiary's inventory
reflected on the 1998 Balance Sheet (the "Inventory") is (or was prior to
the sale thereof) substantially suitable, usable, or (in the case of work
in process and finished goods) salable at market prices in the ordinary
course of business and have been valued at the lower of cost (on a FIFO
basis) or market, in accordance with GAAP. The quantity of the Company's
and the Subsidiary's Inventory on hand at the Closing Date will be at
levels substantially consistent with the requirements of then outstanding
sales Commitments or current sales projections of the Company and the
Subsidiary.
(c) All accounts and notes receivable reflected on the 1998
Balance Sheet and those accounts and notes receivable of the Company and
the Subsidiary acquired or created after the date of the 1998 Balance Sheet
through the Closing Date (collectively, the "Receivables"), (i) were, are
and shall be bona fide accounts receivable created in the ordinary and
usual course of business in connection with bona fide transactions and
consistent with past practice and (ii) have been collected in full or will
be collectible at their face amounts, except to the extent of the allowance
for doubtful accounts reflected on the 1998 Balance Sheet.
Section 3.6 Compliance with Laws; Permits. (a) Except as set forth on
Schedule 3.6(a), each of the Company and the Subsidiary has complied at all
times since inception and presently is in compliance with all foreign and
domestic (federal, state and local) laws, statutes, ordinances, rules,
regulations and bodies of law, including, without limitation, Environmental
Laws (as defined in Section 3.6(b)(ii)) (collectively, "Laws") and Orders
(as defined in Section 3.7(a)) in all material respects. Except as set
forth on Schedule 3.6(a), since the earlier of the Company's inception and
the Subsidiary's inception, none of the Company, the Subsidiary nor any
Seller is aware of, nor have any of them received, any notice of any
alleged material failure to comply with any Law. A complete and correct
list of each material license, permit, consent, registration, certificate,
franchise, approval, order or other authorization of any Governmental
Entity (as defined in Section 3.7 (a)) (each, a "Permit") held by the
Company or the Subsidiary is set forth on Schedule 3.6(a). Except as set
forth on Schedule 3.6(a), the Company and the Subsidiary have all Permits
required for the conduct of its business. All of the Company's and the
Subsidiary's Permits are valid and in full force and effect, and the
Company and the Subsidiary have duly performed and are in compliance with
all of their obligations under such Permits. No event (including without
limitation the execution, delivery and performance of this Agreement and
the consummation of the Merger) has occurred with respect to such Permits
which allows, or after notice or lapse of time or both would allow, the
suspension, limitation, revocation, non-renewal or termination thereof or
would result in any other material impairment of the rights of the Company
in and under any of such Permits, and no terminations thereof or
proceedings to suspend, limit, revoke or terminate any Permit have been
threatened.
(b) (i) None of the Company, the Subsidiary or any Seller
has received any notices, directives, violation reports, actions or claims
or other communications from or by any foreign, federal, state or local
governmental agency or any other Person concerning the Company or the
Subsidiary or any of their predecessors and any Environmental Laws (as
defined in Section 3.6(b)(ii)), including, without limitation, requests to
perform any investigatory or remedial activity, or alleging that, in
connection with Hazardous Materials (as defined in Section 3.6(b)(ii)),
conditions at any real properties owned or leased by the Company or the
Subsidiary or their predecessors have resulted in or caused or threatened
to result in or cause injury or death to any Person or damage to any
property, including, without limitation, damage to natural resources, and,
to the knowledge of the Company and the Sellers, no such notices,
directives, violation reports, actions, claims, assessments or allegations
exist; (ii) neither the Company nor the Subsidiary currently leases,
operates or owns any real properties that are listed or, to the knowledge
of the Company or any Seller, are threatened to be listed on a "Superfund"
list or with respect to which there is any pending proceeding or
investigation under any Environmental Law and, to the knowledge of the
Company and the Sellers, no such proceeding or investigation is threatened;
(iii) throughout the period of operation of any real properties by the
Company and the Subsidiary, the Company and the Subsidiary have operated
and continue to operate such real properties in material compliance with
all Environmental Laws; (iv) to the knowledge of the Company and the
Sellers, no underground or above-ground storage tanks either are, or have
been, located at, on, under, about, or within any of such real properties;
(v) there has been no spill, discharge, release, contamination or cleanup
by the Company or the Subsidiary of any Hazardous Materials used,
generated, treated, stored, disposed of or handled by the Company or the
Subsidiary at such real properties in a manner which would give rise to any
Liability under any Environmental Laws and, to the knowledge of the Company
and the Sellers, no spill, discharge or release or contamination or cleanup
by the Company or the Subsidiary of any Hazardous Materials has occurred on
or to such real properties by any third party in a manner which would give
rise to any Liability under any Environmental Laws; (vi) neither the
Company nor the Subsidiary have used, generated, treated, stored, disposed
of, handled, transported or released any Hazardous Material in a manner
which would give rise to any Liability under any Environmental Laws; (vii)
to the knowledge of the Company and the Sellers, there are no facts,
events, or conditions (including, without limitation, the generation,
treatment, transport, storage, emission, disposal, release or other
placement, deposit or location of any substance) which interfere with or
prevent continued compliance by the Company and the Subsidiary with, or
give rise to any present or potential Liability (including with respect to
past activities) under, any Environmental Laws; and (viii) the Company and
the Subsidiary have obtained, are in compliance with, and have made all
appropriate filings for issuance or renewal of, all applicable Permits
which are required to be obtained under all applicable Environmental Laws,
including, without limitation, those regulating emissions, discharges, or
releases of Hazardous Materials, and all such Permits are in full force and
effect.
(ii) For the purposes of this Agreement, the term
"Environmental Laws" shall mean, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. ss.ss.
9601 et seq., the Emergency Planning and Community Right-to-Know Act of
1986, 42 U.S.C. ss.ss. 11001 et seq., the Resource Conservation and
Recovery Act, 42 U.S.C. ss.ss. 6901 et seq., the Toxic Substances Control
Act, 15 U.S.C. ss.ss. 2601 et seq., the Federal Insecticide, Fungicide, and
Rodenticide Act, 7 U.S.C. ss.ss. 136 et seq., the Clean Air Act, 42 U.S.C.
ss.ss. 7401 et seq., the Clean Water Act (Federal Water Pollution Control
Act), 33 U.S.C. ss.ss. 1251 et seq., the Safe Drinking Water Act, 42 U.S.C.
ss.ss. 300f et seq., the Occupational Safety and Health Act, 29 U.S.C.
ss.ss. 641, et seq., the Hazardous Materials Transportation Act, 49 U.S.C.
ss.ss. 1801, et seq., as any of the above statutes have been or may be
amended from time to time, all rules and regulations promulgated pursuant
to any of the above statutes, and any other foreign, federal, state or
local law, statute, ordinance, rule or regulation governing Environmental
Matters, as the same have been or may be amended from time to time,
including any common law cause of action (including, without limitation,
nuisance and trespass causes of action) providing any right or remedy
relating to Environmental Matters, all indemnity agreements and other
contractual obligations (including without limitation leases, asset
purchase agreements and merger agreements) relating to Environmental
Matters, and all applicable judicial and administrative decisions and
Orders relating to Environmental Matters; the term "Hazardous Materials"
shall mean any pollutants, contaminants, substances, materials, wastes,
constituents, compounds, chemicals, natural or man-made elements or forces
(including, without limitation, petroleum or any by-products or fractions
thereof, any form of natural gas, lead, asbestos or asbestos-containing
materials, building construction materials and debris, polychlorinated
biphenyls ("PCBs") or PCB-containing equipment, radon and other radioactive
elements, electromagnetic field and other types of radiation, sonic forces,
infectious, carcinogenic, mutagenic, or etiologic agents, pesticides,
defoliants, explosives, flammables, corrosives and urea formaldehyde foam
insulation) that are regulated by, or may now or in the future form the
basis of Liability under, any Environmental Laws; and the term
"Environmental Matters" shall mean any matter arising out of, relating to,
or resulting from pollution, contamination, protection of the environment,
human health or safety, or health or safety of employees, and any matter
relating to emissions, discharges, disseminations, releases or threatened
releases of Hazardous Materials into the air (indoor or outdoor), surface
water, groundwater, soil, buildings, facilities, real or personal property
or fixtures, or otherwise arising out of, relating to, or resulting from
the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, handling, release or threatened release of Hazardous
Materials.
Section 3.7 Consents; No Violations. (a) Except as set forth on
Schedule 3.7(a), neither the execution, delivery or performance of this
Agreement or the Ancillary Documents by the Company or the Sellers nor the
consummation of the transactions contemplated hereby or thereby will (i)
conflict with, or result in a breach or a violation of, any provision of
the Certificate of Incorporation, as amended, or the Amended and Restated
By-laws or the other organizational documents of the Company or the
Memorandum and Articles of Association or other organizational documents of
the Subsidiary; (ii) constitute, with or without notice or the passage of
time or both, a breach, violation or default, create an Encumbrance, or
give rise to any right of termination, modification, cancellation,
prepayment, suspension, limitation, revocation or acceleration, under (x)
any Law, (y) any judgment, order, injunction, ruling, decree, stipulation
or award of any Governmental Entity or private arbitration panel (each, an
"Order") to which the Company, the Subsidiary or any Seller is subject or
by which the Company, the Subsidiary or any Seller or any of their
respective properties is bound or (z) any Permit or Commitment of any
Seller, the Subsidiary or the Company, or to which they or any of them or
any of their, his or its properties is subject; (iii) require any consent,
approval or authorization of, notification to, filing with, or exemption or
waiver by, any governmental or regulatory authority, agency, court,
commission, body or other governmental entity (each, a "Governmental
Entity") or third party; or (iv) create any Encumbrance upon any of the
assets or properties of the Company or the Subsidiary.
(b) The Company is its own "ultimate parent entity" as
defined in the rules promulgated by the Federal Trade Commission to
implement the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act Rules"), and the Company does not (together with all
entities it controls as determined in accordance with the HSR Act Rules
(including, without limitation, the Subsidiary)) have annual net sales or
total assets equal to or greater than $10,000,000, as calculated in
accordance with the HSR Act Rules.
Section 3.8 Commitments. (a) Schedule 3.8(a) sets forth a true and
complete list of contracts, agreements, understandings, arrangements or
commitments of any nature whatsoever, whether written or oral, including
all amendments thereof and supplements thereto ("Commitments") of the
following types to which (i) the Company or the Subsidiary is a party or
(ii) any Seller is a party in connection with the business or operations of
the Company or the Subsidiary, or, in either case, by or to which the
Company or the Subsidiary or any of their properties may be bound or
subject:
(i) Commitments for the sale of any real or personal
(tangible or intangible) properties other than in the ordinary course
of business, or for the grant of any option or preferential rights to
purchase any such properties;
(ii) Commitments for the construction, modification or
repair of any building, structure or facility or for the incurrence of
any capital expenditures or for the acquisition of fixed assets,
providing for payments in excess of $10,000 in the aggregate;
(iii) Commitments relating to the acquisition by the
Company or the Subsidiary of any operating business or the capital
stock of any other Person that has not been consummated or that has
been consummated but contains representations, covenants, guaranties,
indemnities or other obligations that remain in effect;
(iv) Commitments relating to any Litigation (as defined
in Section 3.15);
(v) Commitments relating to the lending or borrowing of
money, including loan agreements, guarantees of any debt, obligation
or other Liability of any Person, performance bonds, letters of
credit, bankers acceptances and similar instruments or arrangements,
and Commitments otherwise relating to Indebtedness;
(vi) Commitments under which the Company or the
Subsidiary agrees to indemnify any Person;
(vii) Commitments containing covenants of the Company
or the Subsidiary or any successor thereto or any Employee (as defined
in Section 3.20(k)(ii)) not to compete, do business in any line of
business or in any geographical area or with any Person, or to
disclose certain information, or covenants of any other Person not to
compete with the Company or the Subsidiary in any line of business or
in any geographical area or disclose information concerning the
Company or the Subsidiary;
(viii) Commitments pursuant to which the Company or the
Subsidiary leases, subleases, licenses or otherwise has the right to
use any real or personal property;
(ix) Commitments in respect of licenses or other
Commitments relating to Intellectual Property (as defined in Section
3.16(a)) and Commitments relating to retailer relationships,
e-commerce relationships and advertising arrangements;
(x) Commitments in respect of any joint venture,
partnership or other similar arrangement (including, without
limitation, any joint development agreement);
(xi) Commitments with any Governmental Entity;
(xii) Commitments relating to general or special powers
of attorney (whether as grantor or grantee);
(xiii) Commitments with any Employee or consultant
relating to (A) non-disclosure, confidentiality, assignment of
inventions, proprietary rights or non-competition agreements and (B)
severance, bonus or similar arrangements that become operative in
connection with or following the Merger or otherwise;
(xiv) Commitments (other than those specified in any of
clauses (i) through (xiii) of this clause (a)) which relate to or
affect the business, operations or any of the assets or properties of
the Company or the Subsidiary in any way, except those (A) which are
specifically not required to be scheduled pursuant to the provisions
of any of clauses (i) through (xiii) of this paragraph (a), (B) which
are cancellable by the Company or the Subsidiary on 90 days' or less
notice without any penalty or other financial obligation and which
involve payments of less than $10,000 in such 90 day period, or (C)
which involve annual aggregate payments of $10,000 or less; and, in
the case of each of clauses (A), (B) and (C) above, are not material;
and
(xv) Commitments currently in negotiation by the
Company or the Subsidiary of a type which if entered into would be
required to be listed on Schedule 3.8(a) or to be disclosed on any
other Schedule hereto.
(b) True and complete copies of all Commitments listed on
Schedule 3.8(a) have been delivered to theglobe. Except as set forth on
Schedule 3.8(b), all of the Commitments referred to in the preceding
paragraph (a) are valid, binding, in full force and effect and enforceable
in accordance with their terms against the Company, the Subsidiary or the
applicable Sellers (as the case may be), and, to the knowledge of the
Company and the Sellers, against the respective counterparties to such
Commitments. Complete copies (or, if oral, full written descriptions) of
all Commitments required to be so listed, including all amendments thereto,
and complete copies of all standard form Commitments used by the Company or
the Subsidiary in the conduct of their businesses, have been delivered to
theglobe. Except as set forth on Schedule 3.8(b), (i) there is no breach,
violation or default and no event which, with notice or lapse of time or
both, would constitute a breach, violation or default, or give rise to any
Encumbrance or right of termination, modification, cancellation,
prepayment, suspension, limitation, revocation or acceleration, under any
Commitment listed or required to be listed on Schedule 3.8(a) and (ii) none
of the Company, the Subsidiary or, to the knowledge of the Company and the
Sellers, any other party to any of the Commitments listed on Schedule
3.8(a) is in material arrears in respect of the performance or satisfaction
of the terms and conditions on its part to be performed or satisfied under
any of such Commitments and no waiver or indulgence has been granted by any
of the parties thereto.
Section 3.9 Absence of Undisclosed Liabilities. Except as set forth on
Schedule 3.9 or incurred in connection with the transactions contemplated
hereby, neither the Company nor the Subsidiary has any debts, liabilities
or obligations (absolute, accrued, contingent or otherwise) matured or
unmatured ("Liabilities") other than (a) Liabilities which are adequately
reflected, or fully accrued or provided for in the 1998 Financial
Statements or (b) Liabilities arising since December 31, 1998 in the
ordinary course of business consistent (in amount and kind) with past
practice which are not, individually or in the aggregate, material.
Section 3.10 Absence of Certain Changes. Except as set forth on
Schedule 3.10, since December 31, 1998: (i) the respective businesses of
the Company and the Subsidiary have been conducted in the ordinary course
of business consistent with past practice, and (ii) neither the Company nor
the Subsidiary has (a) suffered any change, event or development or series
of changes, events or developments which individually or in the aggregate
has had or could reasonably be expected to have a material adverse effect
on the business, financial condition, operations, results of operations or
prospects of the Company and the Subsidiary taken as a whole; (b) suffered
any damage, destruction or casualty loss to its physical properties
(whether or not covered by insurance) which individually or in the
aggregate has been or could reasonably be expected to be material; (c) been
the subject of any threatened or commenced investigation by a Governmental
Entity or Litigation; (d) except for fair consideration, in the ordinary
course of business and consistent with past practice, canceled or
compromised any debts or waived or permitted to lapse any claims or rights
or sold, transferred or otherwise disposed of any of its properties or
assets; (e) made or committed to make any capital expenditure or commitment
individually in excess of $10,000 or in the aggregate in excess of $50,000;
(f) made any change in any method of accounting or accounting practice; (g)
increased any salaries, wages or employee benefits, paid any bonuses, or
otherwise increased the compensation of any of its officers, directors,
Employees or consultants, other than in the ordinary course of business and
consistent with past practice; (h) declared, set aside or paid any
dividends or made other distributions to any holder of its capital stock or
other securities or redeemed or otherwise acquired any shares of its
capital stock or other equity securities or issued or sold any additional
shares of the capital stock of, or any other equity interests in, the
Company or the Subsidiary, or securities convertible into or exchangeable
for such shares or equity interests; (i) made any loan to or engaged in any
other transaction with any officer, director, Employee, consultant or
shareholder, other than advances to such persons in the ordinary course of
business in connection with travel and other business-related expenses; or
(j) agreed to take any action referred to in this Section 3.10(ii).
Section 3.11 Brokers and Finders; Fees. None of the Company, the
Subsidiary or the Sellers has employed any broker or finder or incurred any
Liability for any brokerage fees, commissions or finders' fees in
connection with the transactions contemplated hereby.
Section 3.12 Real Estate. (a) "Owned Real Property" shall mean the
real property owned by the Company or the Subsidiary, together with all
buildings and other structures, facilities or improvements currently or
hereafter located thereon, all fixtures, systems, equipment and items of
personal property of the Company or the Subsidiary attached or appurtenant
thereto and all easements, licenses, rights and appurtenances relating to
the foregoing. Schedule 3.12(a) sets forth a list of all Owned Real
Property. With respect to the Owned Real Property, (i) the Company or the
Subsidiary has good and marketable title in fee simple to the Owned Real
Property, free and clear of all Encumbrances except for (A) Encumbrances
disclosed in Schedule 3.12(a), (B) liens for taxes not yet due and payable,
and (C) Encumbrances that are not material, (ii) there are no outstanding
options or rights of first refusal in favor of any other party to purchase
the Owned Real Property or any portion thereof or interest therein, (iii)
there are no leases, subleases, licenses, options, rights, concessions or
other agreements affecting any portion of the Owned Real Property, (iv) all
existing water, sewer, gas, electricity, telephone and other utilities
required for the construction, use, occupancy, operation and maintenance of
the Owned Real Property are adequate in all material respects for the use,
occupancy, operation and maintenance thereof, as currently conducted or
currently exists, and (v) the Company or the Subsidiary, as applicable, has
all rights of access necessary for ingress to and egress from the Owned
Real Property from or to public streets.
(b) "Leased Real Property" shall mean the real property
leased or subleased by the Company or the Subsidiary, as tenant, together
with, to the extent leased or subleased by the Company or the Subsidiary,
all buildings and other structures, facilities or improvements currently or
hereafter located thereon, all fixtures, systems, equipment and items of
personal property of the Company or the Subsidiary attached or appurtenant
thereto, and all easements, licenses, rights and appurtenances relating to
the foregoing. Schedule 3.12(b) sets forth a list of all Leased Real
Property. With respect to the Leased Real Property, (i) the Company or the
Subsidiary has good and valid leasehold estates in the Leased Real
Property, free and clear of all Encumbrances, (ii) all existing water,
sewer, gas, electricity, telephone and other utilities required for the
construction, use, occupancy, operation and maintenance of the Leased Real
Property are adequate in all material respects for the use, occupancy,
operation and maintenance thereof, as currently conducted or currently
exists, and (iii) the Company or the Subsidiary, as applicable, has all
rights of access necessary for ingress to and egress from the Leased Real
Property from or to public streets. Except as set forth on Schedule
3.12(b), (A) each such lease or sublease is legal, valid, binding and
enforceable and in full force and effect and (B) the execution and delivery
of this Agreement and the consummation of the transactions contemplated by
this Agreement will not cause a breach or require any third party consent
under any such lease or sublease.
(c) Except as set forth on Schedule 3.12(c), (i) there are
not now nor have there ever been any pending or, to the knowledge of the
Company and the Sellers, threatened condemnation or eminent domain
proceedings or their local equivalent with respect to the Owned Real
Property or the Leased Real Property, (ii) the Owned Real Property, the use
and occupancy thereof by the Company or the Subsidiary, as applicable, and
the conduct of their respective businesses thereon and therein do not
violate any deed restrictions, applicable Law consisting of building codes,
zoning, subdivision or other land use or similar Laws the violation of
which would materially and adversely affect the use, value or occupancy of
any such property or the conduct of such business thereon, (iii) there are
not now nor have there ever been any material violations by the Company,
the Subsidiary or any of the Sellers of any of the restrictions or Laws
described in the foregoing clause (ii), and (iv) none of the structures or
improvements on any of the Owned Real Property encroaches upon real
property of another Person, and no structure or improvement of another
Person encroaches upon any of the Owned Real Property or Leased Real
Property, which would materially interfere with the use thereof in the
ordinary course of business.
Section 3.13 Sufficiency of Assets. The assets, rights, and properties
owned, leased or licensed by the Company and the Subsidiary constitute all
assets, rights, and properties used or held for use in, and necessary to,
the conduct of their businesses as presently conducted or proposed to be
conducted.
Section 3.14 Tangible Property. Except as set forth on Schedule 3.14,
the buildings, facilities, machinery, equipment, furniture, leasehold and
other improvements, fixtures, vehicles, structures, any related items and
other tangible property that are required to properly operate the business
of the Company or the Subsidiary or are individually or in the aggregate
material to the business, financial condition, operations, results of
operations or prospects of the Company and the Subsidiary taken as a whole
(the "Tangible Property") are in good operating condition and repair
(normal wear and tear excepted), free of any material structural or
engineering defects, are being maintained and replaced in accordance with
past practice, and are suitable for their current use. The Company or the
Subsidiary has good and marketable title to, or a valid leasehold interest
in or contractual right to use, all Tangible Property, free and clear of
all Encumbrances except as disclosed in Schedule 3.14.
Section 3.15 Litigation and Orders. There is no claim, demand, notice,
action, suit, proceeding, arbitration, investigation, audit, inquiry or
hearing by or before any Governmental Entity or private arbitration
tribunal ("Litigation") pending or, to the knowledge of the Company and the
Sellers, threatened against, affecting or involving the Company, the
Subsidiary or any of their respective rights or properties, or which seek
to prevent or challenge the transactions contemplated hereby. There are no
unsatisfied judgments against the Company or the Subsidiary or any consent
decrees or other Orders to which the Company or the Subsidiary is subject
or their respective assets or properties are bound.
Section 3.16 Intellectual Property. (a) Except as set forth on
Schedule 3.16(a), the Company or the Subsidiary owns, or licenses or
otherwise possesses legally enforceable rights to use (i) all inventions
(whether patentable or unpatentable and whether or not reduced to
practice), all improvements thereon, and all patents, patent applications
and patent disclosures, together with all reissuances, continuations,
continuations-in-part, revisions, extensions and reexaminations thereof;
(ii) all trademarks, service marks, trade dress, logos, trade names and
corporate names, together with all translations, adaptations, derivations
and combinations thereof and including all goodwill associated therewith,
and all applications, registrations and renewals in connection therewith;
(iii) all copyrightable works, all copyrights and all applications,
registrations and renewals in connection therewith; (iv) all mask works and
all applications, registrations and renewals in connection therewith; (v)
all trade secrets and confidential business information (including ideas,
inventory, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technology,
technical data, designs, drawings, specifications, net lists, schematics,
algorithms, tangible and intangible proprietary information, customer,
supplier and material lists, pricing and cost information and business and
marketing plans and proposals); (vi) all computer software or applications
including data and related documentation (in source code and/or object code
form); (vii) all other proprietary rights; (viii) all copies and tangible
embodiments of the foregoing (in whatever form or medium); and (ix) all
licenses or agreements in connection with the foregoing (collectively,
"Intellectual Property") that have been used in the business of the Company
or the Subsidiary or are used in the business of the Company or the
Subsidiary as currently conducted (collectively, "Company Intellectual
Property"). Neither the Company nor the Subsidiary has (i) licensed any of
the Company Intellectual Property in source code form to any Person or (ii)
entered into any exclusive agreements relating to the Company Intellectual
Property with any Person.
(b) Schedule 3.16(b) lists (i) all patents and patent
applications and all registered trademarks, trade names, and service marks,
trademark applications, service mark applications, registered copyrights,
and registered mask works included in the Company Intellectual Property,
including the jurisdictions in which such Intellectual Property has been
issued or registered or in which any application for such issuance and
registration has been filed; (ii) all unregistered trademarks, trade names,
service marks, copyrights, and mask works included in the Company
Intellectual Property; (iii) all licenses, sublicenses and other agreements
as to which the Company or the Subsidiary is a party and pursuant to which
any Person is authorized to use any Intellectual Property; (iv) all
licenses, sublicenses and other agreements as to which the Company or the
Subsidiary is a party and pursuant to which the Company or the Subsidiary
is authorized to use any third party patents, trademarks or copyrights,
including software (collectively, "Third Party Intellectual Property
Rights") which are incorporated in, are, or form a part of any product of
the Company or the Subsidiary; and (v) all universal resource locators
("URLs") owned or used by the Company or the Subsidiary and any URLs with
respect to which the Company or the Subsidiary has any rights.
(c) Other than as set forth on Schedule 3.16(c), no Employee
or consultant or former Employee or consultant of the Company, the
Subsidiary or, to the knowledge of the Company and the Sellers, any other
third party, has interfered with, infringed upon, misappropriated, made
unauthorized use of, disclosed, or otherwise come into conflict with any
Company Intellectual Property, and neither the Company nor the Subsidiary
has brought any action, suit or proceeding for infringement of Company
Intellectual Property or breach of any license or agreement involving
Company Intellectual Property against any third party.
(d) Other than as set forth on Schedule 3.16(d), neither the
Company nor the Subsidiary nor any Employee, consultant or former Employee
or consultant of the Company or the Subsidiary nor, to the knowledge of the
Company and the Sellers, any other third party (but, with respect to such
other third parties, only to an extent that could result directly or
indirectly in Liability to the Company or the Subsidiary), has interfered
with, infringed upon, misappropriated, made unauthorized use, disclosed, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and neither the Company nor the Subsidiary has received any
charge, complaint, claim, demand or notice alleging any such interference,
infringement, misappropriation or violation (including any claim that the
Company or the Subsidiary must license or refrain from using any
Intellectual Property rights of third parties). The continued operation of
the respective businesses of the Company and the Subsidiary as presently
conducted and as presently proposed to be conducted will not interfere
with, infringe upon, misappropriate, or otherwise come into conflict with,
any Intellectual Property rights of third parties. Neither the Company nor
the Subsidiary is, nor will either of them be, as a result of the Company's
execution and delivery of this Agreement or the performance of the
Company's obligations under this Agreement, in breach of any license,
sublicense or other Commitment relating to any Intellectual Property, Third
Party Intellectual Property Rights or Intellectual Property rights of third
parties.
(e) All Company Intellectual Property is valid and
subsisting. Each item of Company Intellectual Property will be owned or
available for use by the Company or the Subsidiary on identical terms and
conditions immediately subsequent to the Effective Time. Except as set
forth in Schedule 3.16(e), the Company or the Subsidiary has taken
reasonably appropriate action to maintain and protect each item of Company
Intellectual Property, including, where necessary, appropriate steps to
protect and preserve confidentiality.
(f) With respect to each item of Company Intellectual
Property (and any item of Intellectual Property underlying Company
Intellectual Property pursuant to a license, sublicense, agreement or
permission), except as set forth in Schedule 3.16(f):
(i) no action, suit, proceeding, hearing,
investigation, charge, complaint, claim or demand is pending or, to
the knowledge of the Company and the Sellers, threatened which
challenges the legality, validity, enforceability, use or ownership of
the item and such item is not subject to any outstanding Order;
(ii) in the case of Company Intellectual Property, the
Company or the Subsidiary possesses all right, title and interest in
and to the item, free and clear of any Encumbrance;
(iii) in the case of Company Intellectual Property,
each license, sublicense, agreement or permission covering the item is
legal, valid, binding, enforceable and in full force and effect;
(iv) in the case of Company Intellectual Property, each
license, sublicense, agreement or permission covering the item will
continue to be legal, valid, binding, enforceable and in full force
and effect on identical terms immediately subsequent to the Effective
Time;
(v) in the case of Company Intellectual Property,
neither the Company nor the Subsidiary is, and to the knowledge of the
Company and the Sellers no other Person is, in breach or default of
any license, sublicense, agreement or permission covering the item,
and no event has occurred which with notice or lapse of time or both
would constitute a breach or default or permit termination,
modification or acceleration thereunder;
(vi) in the case of Company Intellectual Property, no
party to any license, sublicense, agreement or permission has
repudiated any material provision thereof;
(vii) with respect to any sublicense relating to the
item of Company Intellectual Property, the representations and
warranties set forth in subsections (iii) through (vi) are true and
correct with respect to the underlying license;
(viii) with respect to each license, sublicense,
agreement or permission, neither the Company nor the Subsidiary has
granted any sublicense or similar right with respect to the license,
sublicense, agreement or permission; and
(ix) neither the Company nor the Subsidiary has ever
agreed to indemnify any Person for or against any interference,
infringement, or misappropriation with respect to any item of
Intellectual Property.
(g) The Company and the Subsidiary have secured (or, at the
Closing, will secure) valid written assignments from all consultants and
Employees who contributed to the creation or development of the Company
Intellectual Property of the rights to such contributions that the Company
or the Subsidiary do not already own by operation of law.
(h) The Company and the Subsidiary have taken reasonable
steps to protect and preserve the confidentiality of all Company
Intellectual Property not otherwise protected by patents, patent
applications or copyrights ("Confidential I.P. Information"). All use,
disclosure or appropriation of Confidential I.P. Information owned by the
Company or the Subsidiary by or to a third party has been pursuant to the
terms of a written agreement between the Company or the Subsidiary and such
third party. All use, disclosure or appropriation of Confidential I.P.
Information not owned by the Company or the Subsidiary has been pursuant to
the terms of a written agreement between the Company or the Subsidiary and
the owner of such Confidential I.P. Information, or is otherwise lawful.
(i) The Company has made available to theglobe copies of the
current versions of all material proprietary software, in Source Code (as
defined below) and object code forms, that are used or are proposed to be
used in the respective businesses of the Company or the Subsidiary,
together with all material documentation used in connection therewith
("Software"). "Source Code" means the complete and current version of the
source code and all source documentation to enable theglobe to exercise the
foregoing license above.
Section 3.17 Year 2000 Compliance. The Software, computers and other
hardware and systems used by the Company or the Subsidiary will not require
expenditures on the part of the Company and the Subsidiary in excess of
$25,000, in the aggregate, in order to: (a) accurately process date
information before, during and after January 1, 2000, including, but not
limited to, accepting date input, providing date output and performing
calculations on dates or portions of dates; (b) function accurately and
without interruption before, during and after January 1, 2000 without any
change in operations associated with the advent of the new century; (c)
respond to two digit year date input in a way that resolves the ambiguity
as to century in a disclosed, defined and predetermined manner; and (d)
store and provide output of date information in ways that are unambiguous
as to century. The Company and the Subsidiary have contacted their
principal vendors of hardware and software and other Persons with whom the
Company or the Subsidiary have material business relationships and all such
vendors and other Persons have notified the Company or the Subsidiary that
their hardware or software is Year 2000 compliant to the extent affecting
the Company or the Subsidiary, and, to the knowledge of the Company and the
Sellers, the hardware and software of such vendors or other Persons is Year
2000 compliant except in ways that will not adversely affect the Company or
the Subsidiary.
Section 3.18 Taxes. (a) Except as set forth in Schedule 3.18:
(i) The Company and the Subsidiary have duly filed all
Tax Returns (as defined in Section 3.18(c)) required to have been
filed by the Company or the Subsidiary in a timely manner (taking into
account all lawful extensions of due dates), all of which Tax Returns
are true and complete in all material respects;
(ii) all Taxes (as defined in Section 3.18(c)) required
to have been paid by the Company or the Subsidiary have been paid.
Adequate reserves have been established in the 1998 Balance Sheet for
the payment of all Taxes of the Company and the Subsidiary that are
attributable to the period ending on December 31, 1998 that are not
yet due and payable; and adequate reserves have been or will be
established in the books and records of the Company and the Subsidiary
for the payment of all Taxes of the Company and the Subsidiary that
are attributable to the period beginning after December 31, 1998 and
ending on the Closing Date that are not yet due and payable;
(iii) the Company and the Subsidiary have complied with
all applicable Laws relating to the withholding of Taxes (including
withholding of Taxes pursuant to Sections 1441 and 1442 of the Code or
similar provisions under any foreign Laws), and have, within the time
and within the manner prescribed by Law, withheld and paid over to the
proper governmental entities all amounts required to be withheld and
paid over under all applicable Laws in connection with amounts paid or
owing to any employee, independent contractor, creditor, shareholder
or other third party;
(iv) no outstanding waivers or comparable consents
regarding the application of the statute of limitations with respect
to any Taxes or Tax Returns of the Company or the Subsidiary have been
given by or on behalf of the Company or the Subsidiary;
(v) neither the Company nor the Subsidiary has
requested an extension of time within which to file any Tax Return in
respect of any fiscal year which has not since been filed;
(vi) neither the Company nor the Subsidiary nor any of
the Sellers has taken or agreed to take any action that would prevent
or impede the Merger from qualifying as a reorganization under Section
368 of the Code. The Company, the Subsidiary and the Sellers have not
failed to take any action which, if such action were not taken, would
prevent or impede the Merger from qualifying as a reorganization under
Section 368 of the Code;
(vii) for taxable years for which the applicable
statute of limitations has not expired (A) there is no Litigation
pending or, to the knowledge of the Company and the Sellers,
threatened, with respect to any Liability for Taxes for which the
Company or the Subsidiary could be liable, (B) no taxing authority in
a jurisdiction where the Company or the Subsidiary do not file Tax
Returns has made a claim, assertion or threat that such non-filing
entity is or may be subject to taxation by such jurisdiction, (C)
there are no Tax rulings, requests for rulings, or closing agreements
relating to the Company or the Subsidiary which could affect the
Liability for Taxes of the Company or the Subsidiary for any period
(or portion of a period) after the date hereof, (D) any adjustment of
Taxes of the Company or the Subsidiary made by the Internal Revenue
Service (the "IRS") in any examination which is required to be
reported to the appropriate state, local or foreign taxing authorities
has been reported, and any additional Taxes due with respect thereto
have been paid, and (E) neither the Company nor the Subsidiary has
agreed and is not required to include in income any adjustment
pursuant to Section 481 or 482 of the Code (or analogous provisions of
foreign, state or local Law) which could affect the Liability for
Taxes of the Company or the Subsidiary for any period (or portion of a
period) after the date hereof, and the IRS (or other taxing authority)
has not proposed, and, to the knowledge of the Company and the
Sellers, is not considering, any such adjustment which could have such
an effect;
(viii) the states, territories and jurisdictions
(whether foreign or domestic) in which the Company or the Subsidiary
has filed income, franchise, sales and use Tax Returns are set forth
in Schedule 3.18;
(ix) none of the assets of the Company or the
Subsidiary (A) is property that is required to be treated as being
owned by any other Person pursuant to the "safe harbor lease"
provisions of Section 168(f)(8) of the Internal Revenue Code of 1954,
(B) is "tax-exempt use property" within the meaning of Code Section
168(h), or (C) directly or indirectly secures any debt the interest of
which is tax exempt under Code Section 103(a);
(x) except as reflected as a liability for deferred
Income Taxes on the 1998 Balance Sheet, no item of income or gain
reported by the Company or the Subsidiary for financial accounting
purposes in any pre-Closing period is required to be included in
taxable income for a post-Closing period;
(xi) no power of attorney has been granted by or with
respect to the Company or the Subsidiary with respect to any matter
relating to Taxes;
(xii) all Tax deficiencies which have been claimed,
proposed or assessed against the Company or the Subsidiary have been
fully paid or finally settled;
(xiii) neither the Company nor the Subsidiary has filed
a consent pursuant to Section 341(f) of the Code (or any predecessor
provision);
(xiv) neither the Company nor the Subsidiary is
obligated by any Commitment to indemnify any other Person with respect
to Taxes; neither the Company nor the Subsidiary is now nor has it
ever been a party to or bound by any Commitment (including, without
limitation, any arrangement required or permitted by applicable Law
(including pursuant to Treasury Regulation Section 1.1502-6 or any
analogous provision of state, local or foreign Law) and including any
Tax sharing agreement) which (i) requires the Company or the
Subsidiary to make any Tax payment to or for the account of any other
Person, (ii) affords any other Person the benefit of any net operating
loss, net capital loss, investment Tax credit, foreign Tax credit,
charitable deduction or any other credit or Tax attribute which could
reduce Taxes (including, without limitation, deductions and credits
related to alternative minimum Taxes) of the Company or the Subsidiary
or (iii) requires or permits the transfer or assignment of income,
revenues, receipts or gains to the Company or the Subsidiary from any
other Person;
(xv) there are no liens with respect to Taxes upon any
of the properties or assets, real or personal, tangible or intangible,
of the Company or the Subsidiary (other than Encumbrances for Taxes
not yet due);
(xvi) each of the Company and the Subsidiary is not and
has not been since its inception a "United States Real Property
Holding Corporation" within the meaning of Section 897 of the Code.
(b) The Company has previously made available to theglobe
complete and accurate copies of each of: (i) all audit reports, revenue
agent's reports and other written assertions of deficiencies or other
liabilities for Taxes of the Company or the Subsidiary issued by any
Governmental Entity with respect to past periods for which the limitations
period has not run, letter rulings and Technical Advice Memoranda relating
to federal, state, local and foreign Taxes due from or with respect to the
Company or the Subsidiary, (ii) all Tax Returns filed by the Company or the
Subsidiary and (iii) any closing agreements entered into by the Company or
the Subsidiary with any taxing authority. The Company will promptly deliver
to theglobe all Tax materials with respect to the foregoing for all Tax
matters arising after the date hereof.
(c) For purposes of this Agreement, (i) "Tax" (and, with
correlative meaning, "Taxes") means any federal, state, local or foreign
income, gross receipts, property, sales, use, license, excise, franchise,
employment, payroll, premium, withholding, alternative or added minimum, ad
valorem, inventory, transfer or excise tax, or any other tax, custom, duty,
governmental fee or other like assessment or charge of any kind whatsoever,
together with any interest, penalty or addition to tax, imposed by any
Governmental Entity, and includes, without limitation, any taxes of another
Person, including taxes owing under a contract, as transferee or successor,
under Treas. Reg. ss. 1.1502-6 or analogous provision of state, foreign or
local law or otherwise, (ii) "Tax Return" means any return, report or
similar statement required to be filed with respect to any Tax (including
any attached schedules), including, without limitation, any information
return, claim for refund, amended return or declaration of estimated Tax,
and (iii) "Income Tax" or "Income Taxes" means any federal, state, local or
foreign income, franchise or similar Tax and in each instance any interest,
penalties or additions to tax attributable to such Tax.
Section 3.19 Insurance. Schedule 3.19 sets forth a list of all
policies or binders of fire, liability, product liability, workers
compensation, vehicular and other insurance held by or on behalf of the
Company or the Subsidiary, including the amounts of such insurance and
annual premiums with respect thereto. Such policies and binders are in full
force and effect. The Company and the Subsidiary have each obtained and
maintained in full force and effect insurance with responsible and
reputable insurance companies or associations in such amounts, on such
terms, with such deductibles, and covering such risks, as is customarily
carried by reasonably prudent Persons conducting businesses or owning
assets similar to those of the Company and the Subsidiary, and have
maintained in full force and effect liability insurance against claims for
personal injury or death or property damage occurring in connection with
the activities of the Company and the Subsidiary, or any properties owned,
occupied or controlled by it in such amount as is customarily carried by
reasonably prudent Persons conducting businesses or owning assets similar
to those of the Company and the Subsidiary. There is no default with
respect to any provision contained in any such policy or binder, nor has
the Company or the Subsidiary failed to give any notice or present any
claim under any such policy or binders in due and timely fashion. There are
no outstanding claims by the Company or the Subsidiary in excess of normal
retentions that are not covered under any such policies or binders and
there has not occurred any event that might reasonably form the basis of
any claim in excess of normal retentions that is not covered against or
relating to the Company or the Subsidiary that is not covered by any of
such policies or binders. No notice of cancellation or non-renewal of any
such policies or binders has been received by the Company or the
Subsidiary.
Section 3.20 Employee Benefits. (a) Schedule 3.20(a) contains a true
and complete list of each Company Employee Plan (as defined in Section
3.20(k)) and each Employee Agreement (as defined in Section 3.20(k)).
Neither the Company nor the Subsidiary has any plan or commitment to
establish any new Company Employee Plan, to enter into any Employee
Agreement or to modify or to terminate any Company Employee Plan or
Employee Agreement.
(b) The Company has made available, or has caused to be made
available, to theglobe current, accurate and complete copies of all
documents embodying or relating to each Company Employee Plan and each
Employee Agreement.
(c) Each of the Company and the Subsidiary has performed all
obligations required to be performed by it under each Company Employee Plan
and Employee Agreement. Each Company Employee Plan has been established and
maintained in accordance with its terms and in compliance with all
applicable Laws and Orders. No Company Employee Plan is an "employee
pension benefit plan" as defined in Section 3(2) of ERISA (as defined in
Section 3.20(k)), or a Multiemployer Plan (as defined in Section 3.20(k)).
There is no Litigation pending or, to the knowledge of the Company and the
Sellers, threatened or anticipated (other than routine claims for benefits)
with respect to any Company Employee Plan or Employee Agreement or by any
Employee (as defined in Section 3.20(k)) with respect to the Company or the
Subsidiary. Each Company Employee Plan can be amended, terminated or
otherwise discontinued without Liability to the Company or the Subsidiary.
No Company Employee Plan is under audit or investigation by the IRS, the
Department of Labor, the PBGC (as defined in Section 3.20(k)(viii)) or
other Governmental Entity, and to the knowledge of the Company and the
Sellers, no such audit or investigation is threatened. No Liability under
any Company Employee Plan has been funded nor has any such obligation been
satisfied with the purchase of a contract from an insurance company as to
which the Company or the Subsidiary has received notice that such insurance
company is insolvent or is in rehabilitation or any similar proceeding.
(d) Except as set forth on Schedule 3.20(d), neither the
Company nor the Subsidiary maintains or contributes to any Company Employee
Plan which provides, or has any Liability to provide, life insurance,
medical, severance or other employee welfare benefits to any Employee upon
his retirement or termination of employment, except as may be required by
Section 4980B of the Code and Sections 601 through 609 of ERISA.
(e) The execution of, and performance of the transactions
contemplated by, this Agreement will not (either individually, in the
aggregate or upon the occurrence of any additional or subsequent events)
(i) constitute an event that will or may result in any payment (whether of
severance pay or otherwise), acceleration of benefits, forgiveness of
indebtedness, vesting or distribution of benefits, increase in benefits or
obligation to fund benefits with respect to any Employee, or (ii) result in
the triggering or imposition of any restrictions or limitations on the
right of the Company, the Subsidiary or theglobe to amend or terminate any
Company Employee Plan. No payment or benefit which will or may be made by
the Company, the Subsidiary, theglobe, the Sellers or any of their
respective Affiliates with respect to any Employee may be characterized as
an "excess parachute payment" within the meaning of Section 280G(b)(1) of
the Code which is contingent on the change in ownership of the Company
resulting from the Merger. Except as expressly set forth in Schedule
3.20(e), no officer, director or Employee of the Company, nor any
Stockholder, is entitled to any "sale bonus payment," "retention payment,"
or any other payment or benefit in connection with, or as a result of, the
transactions contemplated by this Agreement.
(f) Each of the Company and the Subsidiary is in compliance
in all material respects with all applicable Laws (domestic and foreign)
respecting employment, employment practices, labor, terms and conditions of
employment, wages and hours, withholding taxes, unemployment compensation
and Social Security.
(g) No work stoppage or labor strike against the Company or
the Subsidiary by Employees is pending or, to the knowledge of the Company
and the Sellers, threatened. Each of the Company and the Subsidiary (i) is
not involved in or, to the knowledge of the Company and the Sellers,
threatened with any labor dispute, grievance, or Litigation relating to
labor matters and (ii) is not presently, nor has it been in the past a
party to, or bound by, any collective bargaining, union or similar
Commitment, nor is any such Commitment currently being negotiated by the
Company or the Subsidiary. No Employees are currently or while employed by
the Company or the Subsidiary have ever been represented by any labor union
with respect to their employment by the Company or the Subsidiary and to
the knowledge of the Company and the Sellers, no activities the purpose of
which is to achieve such representation of all or some of such Employees
are threatened or ongoing.
(h) With respect to each Welfare Plan (as defined in Section
3.20(k)(ix)), all benefit claims incurred (including claims incurred but
not reported) by Employees thereunder for which the Company or the
Subsidiary is, or will become, liable are (i) insured pursuant to a
contract of insurance whereby the insurance company bears all risk of loss
with respect to such claims; (ii) covered under a contract with a health
maintenance organization (an "HMO") pursuant to which the HMO bears all
Liability for such claims, or (iii) reflected as a Liability or accrued for
on the 1998 Balance Sheet.
(i) Neither the Company nor the Subsidiary has any ERISA
Affiliates, nor has it ever had any ERISA Affiliates.
(j) To the knowledge of the Company and the Sellers, no key
Employee or group of Employees have any plans to terminate employment with
the Company.
(k) For purposes of this Agreement,
(i) "Company Employee Plan" shall mean each Employee
Plan (other than an Employee Agreement) to which the Company or the
Subsidiary has or may have any Liability, contingent or otherwise.
(ii) "Employee" shall mean each current, former, or
retired employee, officer, consultant, advisor, independent
contractor, agent or director of the Company or the Subsidiary.
(iii) "Employee Agreement" shall mean each management,
employment, severance, change of control, consulting, non-compete,
confidentiality, or similar Commitment between the Company or the
Subsidiary and any Employee pursuant to which the Company or the
Subsidiary has or may have any Liability.
(iv) "Employee Plan" shall mean each plan, trust,
program, policy, payroll practice, contract, agreement or other
arrangement providing for compensation, severance, termination pay,
performance awards, stock or stock-related awards, fringe benefits or
other employee benefits of any kind, whether formal or informal,
funded or unfunded, written or oral and whether or not legally
binding.
(v) "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended from time to time, and all applicable
rules and regulations thereunder.
(vi) "ERISA Affiliate" shall mean each business or
entity which is a member of a "controlled group of corporations,"
under "common control" or a member of an "affiliated service group"
with the Company within the meaning of Sections 414(b), (c) or (m) of
the Code, or required to be aggregated with the Company under Section
414(o) of the Code, or is under "common control" with the Company,
within the meaning of Section 4001(a)(14) of ERISA.
(vii) "Multiemployer Plan" shall mean any Employee Plan
which is a "multiemployer plan," as defined in Section 3(37) or
4001(a)(3) of ERISA.
(viii) "PBGC" shall mean the Pension Benefit Guaranty
Corporation.
(ix) "Welfare Plan" shall mean each Company Employee
Plan that is an "employee welfare benefit plan" within the meaning of
Section 3(1) of ERISA.
Section 3.21 Personnel Information. Schedule 3.21 contains a list of
all individuals employed by the Company or the Subsidiary and all directors
and independent contractors providing material services to the Company or
the Subsidiary in connection with the operation of the business thereof.
Section 3.22 Affiliate Relationships. Except as set forth on Schedule
3.22, no (i) officer or director of the Company or the Subsidiary or
Stockholder, (ii) spouse, former spouse, child, parent, parent of a spouse,
sibling or grandchild of any of the Persons described in clause (i), or
(iii) trust, partnership or corporation in which any of the Persons
described in clause (i) or (ii) has or has had a direct or indirect
interest, (A) has or has had an interest in any entity which furnishes or
sells or proposes to furnish or sell services or products to the Company or
the Subsidiary, (B) has or has had any interest in any entity that
purchases from or sells or furnishes to the Company or the Subsidiary any
products or services, or (C) has or has had an interest in (including,
without limitation, as a party to) any Commitment to which the Company or
the Subsidiary is a party or which otherwise is required to be disclosed in
Schedule 3.8(a); provided, that ownership of no more than one percent of
the outstanding voting stock of a publicly traded corporation shall not be
deemed an "interest in any entity" for purposes of this Section 3.22.
Section 3.23 No Termination of Business Relationship. None of the
Persons with which the Company or the Subsidiary has a material business
relationship has given notice or other indication of any intention to
cancel or otherwise terminate a business relationship with the Company or
the Subsidiary and, to the knowledge of the Company and the Sellers, no
event has occurred or failed to occur (including, without limitation, the
transactions contemplated hereby) which would precipitate the cancellation
or termination of, or entitle any such entity or customer to terminate,
such a business relationship.
Section 3.24 Disclosure. No statement (including the representations,
warranties and covenants) made by the Company and the Sellers contained in
this Agreement, the Schedules and Exhibits to this Agreement, the Ancillary
Documents, or the documents, written statements or certificates furnished
or to be furnished to theglobe or Merger Sub or their representatives
pursuant hereto or in connection with the transactions contemplated hereby
constitutes an untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein or
therein not misleading. The projections contained in materials provided by
the Company or any Sellers to theglobe or its representatives were prepared
in good faith and at the time prepared there was a reasonable basis for
such projections and the assumptions made in connection therewith. Except
as set forth on Schedule 3.24, to the knowledge of the Company and the
Sellers, there has been no event or occurrence since the date such
projections were prepared that would cause the Company or any Seller to
believe that there is not on the date hereof and at the Effective Time a
reasonable basis for such projections and the assumptions made in
connection therewith assuming for this purpose that such projections were
made on the date hereof or immediately prior to the Effective Time, as
applicable.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THEGLOBE
theglobe represents and warrants to the Company and the Sellers
as of the date of this Agreement and as of the Closing Date as follows:
Section 4.1 Organization. theglobe is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware and has the requisite corporate power and authority to carry on
its business as it is now being conducted. Merger Sub is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware and has the requisite corporate power and authority to
carry on its business as it is now being conducted. Each of theglobe and
Merger Sub is duly qualified and licensed as a foreign corporation to do
business, and is in good standing (and has paid all relevant franchise or
analogous taxes), in each jurisdiction where the character of its assets
owned or held under lease or the nature of its business makes such
qualification necessary, except where the failure to be so qualified and in
good standing would not, individually or in the aggregate, have a material
adverse effect on the ability of theglobe and Merger Sub to perform their
obligations under this Agreement.
Section 4.2 Authority. Each of theglobe and Merger Sub has the
requisite right, power and authority to enter into this Agreement and any
Ancillary Documents to which it is a party and to carry out its obligations
hereunder and thereunder. This Agreement has been, and each Ancillary
Document to which theglobe and Merger Sub are parties will be, duly and
validly executed and delivered by theglobe and Merger Sub and constitute or
will constitute, as the case may be, a valid and binding obligation of
theglobe and Merger Sub, enforceable against them in accordance with its
terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, moratorium or other similar laws affecting
creditors' rights generally or by general principles of equity. All
corporate proceedings or other actions on the part of each of theglobe and
Merger Sub necessary to authorize this Agreement or any of the Ancillary
Documents to which it is a party and the transactions contemplated hereby
and thereby have been taken.
Section 4.3 Merger Sub's Operations. Merger Sub was formed solely for
the purpose of engaging in the transactions contemplated hereby and has not
(i) engaged in any business activities, (ii) conducted any operations other
than in connection with the transactions contemplated hereby or (iii)
incurred any Liabilities other than in connection with the transactions
contemplated hereby.
Section 4.4 Capitalization; Title to Shares. (a) The authorized
capital stock of theglobe consists of 100,000,000 shares of theglobe Common
Stock and 3,000,000 shares of preferred stock, $0.001 per share, of which
10,662,771 shares of theglobe Common Stock and no shares of preferred stock
were issued and outstanding as of March 31, 1999. All the issued and
outstanding shares of theglobe Common Stock are validly issued, fully paid
and nonassessable. Except pursuant to this Agreement and except as
disclosed in theglobe SEC Reports (as defined in Section 4.7(a)) and
Schedule 4.4(a), there are no shares of capital stock of theglobe
authorized and there are no outstanding subscriptions, options, warrants,
rights, stock-based or stock-related awards or convertible or exchangeable
securities or other agreements to which theglobe is a party of any
character relating to, or obligating theglobe to issue, grant, award,
transfer or sell, any issued or unissued shares of theglobe's capital stock
or other securities of theglobe. Except as disclosed in theglobe SEC
Reports, there are no voting trusts, proxies or other agreements or
understandings to which theglobe is a party with respect to the voting of
capital stock of theglobe. theglobe has full corporate power and authority
to deliver theglobe Shares to the Stockholders pursuant to the Merger and
to transfer to the Stockholders good and valid title to theglobe Shares.
(b) theglobe owns all of the issued and outstanding capital
stock of Merger Sub. There are no options, warrants, or other convertible
or exchangeable securities, subscriptions, rights (including, without
limitation, preemptive rights), stock-based or stock-related awards or
other contracts, agreements or arrangements (or Commitments with respect to
issuance of any of the foregoing) to which Merger Sub is a party or by
which Merger Sub may be bound of any character relating, or obligating
Merger Sub, to issue, grant, award, transfer or sell, or based on the value
of, any issued or unissued shares of Merger Sub capital stock.
Section 4.5 Securities of theglobe. The shares of theglobe Common
Stock to be issued pursuant to this Agreement have been duly authorized for
issuance, and such securities, when issued and delivered to the Company's
Stockholders, will be validly issued, fully paid and nonassessable free and
clear of all Encumbrances except as contemplated by this Agreement.
Section 4.6 Consents; No Violations. Except as set forth on Schedule
4.6, neither the execution, delivery or performance of this Agreement or
the Ancillary Documents by theglobe or Merger Sub nor the consummation of
the transactions contemplated hereby or thereby will (a) conflict with, or
result in a breach or a violation of, any provision of the charter or
bylaws of theglobe or Merger Sub; (b) constitute, with or without notice or
the passage of time or both, a breach, violation or default, create an
Encumbrance, or give rise to any right of termination, modification,
cancellation, prepayment, suspension, limitation, revocation or
acceleration, under (i) any Law, (ii) any Order to which theglobe or Merger
Sub is subject or by which theglobe, Merger Sub or any of their respective
properties are bound or (iii) any Permit or Commitment of theglobe or
Merger Sub, or to which theglobe, Merger Sub or any of their respective
properties are subject; (c) require any consent, approval or authorization
of, notification to, filing with, or exemption or waiver by, any
Governmental Entity or third party; or (d) create any Encumbrance upon any
of the assets or properties of theglobe or Merger Sub; except any such
conflict, breach, violation, default, creation or requirement described in
any of clauses (a), (b), (c) or (d) that would not have a material adverse
effect on theglobe's or Merger Sub's ability to consummate the transactions
contemplated by this Agreement or the Ancillary Documents.
Section 4.7 SEC Reports; Financial Statements. (a) theglobe has timely
filed all forms, reports and documents (including all Exhibits, Schedules
and Annexes thereto) required to be filed by it with the Securities and
Exchange Commission (the "SEC") since November 12, 1998, including any
amendments or supplements thereto (collectively, including any such forms,
reports and documents filed after the date hereof, "theglobe SEC Reports").
theglobe SEC Reports as of their respective filing dates (i) were in all
material respects in accordance with the requirements of the Securities Act
or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as
the case may be, and the rules and regulations promulgated thereunder, and
(ii) did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order
to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(b) The financial statements, including all related notes
and schedules, contained in theglobe SEC Reports (or incorporated therein
by reference) fairly present in all material respects, the consolidated
financial position of theglobe and its consolidated subsidiaries as at the
respective dates thereof and the consolidated results of operations,
retained earnings and cash flows of theglobe and its consolidated
subsidiaries for the respective periods indicated, in each case in
accordance with GAAP applied on a consistent basis throughout the periods
involved (except for changes in accounting principles disclosed in the
notes thereto) and the rules and regulations of the SEC, except that
interim financial statements are subject to normal year-end adjustments
which are not and are not expected to be, individually or in the aggregate,
material in amount and do not include certain notes which may be required
by GAAP but which are not required by Form 10-Q of the Exchange Act.
Section 4.8 Absence of Certain Changes. Since December 31, 1998, there
has not occurred any event which would have a material adverse effect on
the ability of theglobe or Merger Sub to perform their obligations under
this Agreement.
Section 4.9 Taxes. Neither theglobe nor Merger Sub has taken or agreed
to take any action that would prevent or impede the Merger from qualifying
as a reorganization under Section 368 of the Code. Neither theglobe nor
Merger Sub has failed to take any action which, if such actions were not
taken, would prevent or impede the Merger from qualifying as a
reorganization under Section 368 of the Code.
Section 4.10 Litigation. Except as disclosed in theglobe SEC Reports
filed prior to the date hereof, there is no Litigation pending or, to the
knowledge of theglobe, threatened, against theglobe or Merger Sub or any of
their properties or assets, except for Litigation which would not,
individually or in the aggregate, reasonably be expected to have a material
adverse effect on the ability of theglobe or Merger Sub to perform their
obligations under this Agreement.
Section 4.11 Board Action. The Boards of Directors of theglobe and the
Merger Sub have approved this Agreement, the Ancillary Documents and the
transactions contemplated hereby and thereby, including the Merger.
Section 4.12 Brokers and Finders. Neither theglobe nor Merger Sub has
employed any broker or finder or incurred any Liability for any brokerage
fees, commissions or finders' fees in connection with the transactions
contemplated hereby.
Section 4.13 Accounting Matters. Neither theglobe nor Merger Sub has
taken or agreed to take any action that would prevent theglobe from
accounting for the business combination to be effected by the Merger as a
pooling-of-interests for accounting purposes.
ARTICLE V
COVENANTS
Section 5.1 No Solicitation. From the date of this Agreement until the
Closing, other than in connection with the transactions contemplated
hereby, neither the Company nor any Seller shall solicit, propose or
facilitate (including by way of providing information regarding the
Company, the Subsidiary or their respective businesses to any Person),
directly or indirectly, any inquiries, discussions, offers or proposals
for, continue or enter into negotiations looking toward, or enter into or
consummate any agreement or understanding in connection with any offer or
proposal regarding, any purchase or other acquisition of all or any portion
of the Company or the Subsidiary, the business or assets of the Company or
the Subsidiary (other than the ordinary course of business sale of
inventory or replacement of assets), or any of the equity securities
(whether newly issued or currently outstanding) of the Company or the
Subsidiary, or any merger, business combination or recapitalization
involving the Company, the Subsidiary or their respective businesses, other
than as expressly contemplated or permitted by this Agreement; and the
Company and the Sellers shall cause the Subsidiary and the officers,
directors, Employees, representatives, agents and Affiliates of the Company
and the Subsidiary to refrain from engaging in any of the above activities
that the Company is restricted from engaging in. The Company shall promptly
notify theglobe orally and in writing of any such inquiries, discussions,
offers or proposals (including, without limitation, the terms and
conditions of any such offers or proposals, any amendments or revisions,
and the identity of the Person making any of the foregoing), and shall keep
theglobe promptly and fully informed of the status and terms of any such
inquiry, discussion, offer or proposal.
Section 5.2 Interim Operations. (a) Unless theglobe otherwise agrees
in writing and except as otherwise expressly contemplated by this
Agreement, between the date of this Agreement and the Closing, the Company
shall, and the Sellers shall cause the Company and the Subsidiary to, (i)
conduct the business of the Company and the Subsidiary only in the ordinary
course and consistent with past practice; (ii) use reasonable best efforts
to preserve and maintain their assets and properties and the current
relationships of the Company and the Subsidiary with their respective
customers, suppliers, advertisers, distributors, agents, officers and
Employees and other Persons with which the Company and the Subsidiary have
significant business relationships; (iii) use reasonable best efforts to
maintain all of the material assets owned or used by the Company and the
Subsidiary in the ordinary course of business consistent with past
practice; (iv) continue capital expenditures substantially in accordance
with the timing and amounts forecast for capital expenditures as set forth
in the schedule of capital expenditures previously provided by the Company
to theglobe; (v) maintain insurance in full force and effect substantially
comparable in amount, scope and coverage to that in effect on the date of
this Agreement; (vi) use reasonable best efforts to preserve the goodwill
and ongoing operations of the business of the Company and the Subsidiary;
(vii) maintain the books and records of the Company and the Subsidiary in
the usual, regular and ordinary manner, on a basis consistent with past
practice; (viii) perform and comply in all material respects with its
Commitments; and (ix) comply in all material respects with applicable Laws.
(b) Except as expressly contemplated by this Agreement,
between the date of this Agreement and the Closing, the Company will not,
and the Sellers will cause the Company and the Subsidiary not to, do any of
the following without the prior written consent of theglobe:
(i) create any Encumbrance on any material properties
or assets (whether tangible or intangible) of the Company or the
Subsidiary;
(ii) (A) other than inventory in the ordinary course of
business, sell, assign, transfer, lease or otherwise dispose of or
agree to sell, assign, transfer, lease or otherwise dispose of any
assets of the Company or the Subsidiary or (B) cancel any indebtedness
owed to the Company or the Subsidiary;
(iii) merge or consolidate with any Person;
(iv) acquire assets or capital stock of or other equity
interests in any Person;
(v) (A) issue, incur, create, assume or otherwise
become liable for any Indebtedness, (B) assume, grant, guarantee or
endorse, or make any other accommodation or arrangement making the
Company or the Subsidiary responsible for, any Liabilities of any
other Person, (C) make any loans, advances or capital contributions
to, or investments in, any Person or (D) repay any amounts owing under
any Indebtedness;
(vi) change any method of accounting or accounting
practice used by the Company or the Subsidiary;
(vii) (A) enter into or adopt or amend any existing
Commitment relating to severance, (B) enter into or adopt or amend any
existing severance plan, (C) enter into or adopt or amend any
Commitment with any Employee or any Company Employee Plan (including,
without limitation, the plans, programs, agreements and arrangements
referred to in Section 3.20), (D) grant any options or awards pursuant
to equity-based plans, or (E) grant any increases in compensation
(except compensation increases associated with promotions and annual
reviews in the ordinary course of business, which such compensation
increases shall be subject to the prior written approval of theglobe,
which approval shall not be unreasonably withheld);
(viii) make any change in the Company's or the
Subsidiary's Tax accounting methods, any new election with respect to
Taxes or any modification or revocation of any existing election with
respect to Taxes or settle or otherwise dispose of any Tax audit,
dispute, or other Tax proceeding, in each case without theglobe's
express written consent thereto.
(ix) accelerate or delay the purchase of supplies or
inventory, the shipment or sale of inventory, the collection of
accounts or notes receivable or the payment of accounts or notes
payable or accrued liabilities or expenses or otherwise operate the
respective businesses of the Company and the Subsidiary, in each case,
in a manner that would be inconsistent with past practice;
(x) except as set forth in Schedule 5.2(b)(x), engage
in any transaction with any of the Stockholders or any of their
Affiliates;
(xi) enter into, modify, terminate, amend, or waive,
release or assign any rights or claims with respect to any Commitment
other than in the ordinary course of business consistent with past
practice;
(xii) allow the lapse of any rights of ownership or use
by the Company or the Subsidiary of any Company Intellectual Property
right;
(xiii) repurchase, redeem or otherwise acquire or
exchange any share of Company Common Stock, issue or sell any
additional shares of the capital stock of, or other equity interests
in, the Company or the Subsidiary, or issue or sell any securities
convertible into or exchangeable for such shares or equity interests,
or issue or grant any options, warrants, calls, subscription rights or
other rights of any kind to acquire additional shares of such capital
stock, such other equity interests or such securities;
(xiv) amend the Company's Certificate of Incorporation,
as amended, or Amended and Restated Bylaws or the Subsidiary's
Memorandum and Articles of Association or equivalent organizational
documents of either the Company or the Subsidiary;
(xv) declare, set aside, make or pay any dividend or
other distribution (whether in cash, stock or property or any
combination thereof);
(xvi) take any action that is reasonably likely to
result in the representations and warranties set forth in Article III
becoming false or inaccurate in any material respect as of the Closing
Date; or
(xvii) agree to take any of the actions referred to in
this Section 5.2(b).
Section 5.3 Tax Provisions. (a) Except as required by Law, the
Sellers, theglobe, and the Surviving Corporation will treat the Merger as a
reorganization under Section 368 of the Code for all Tax purposes. Except
as required by Law or this Agreement (including, without limitation,
payments with respect to dissenter's rights), neither the Sellers, nor
theglobe, nor the Surviving Corporation will take any action or fail to
take action after the Effective Time that will prevent or impede the Merger
from qualifying as a reorganization under Section 368 of the Code.
(b) All transfer, transfer gains, documentary, sales, use,
stamp, registration and other similar Taxes and fees (including any
penalties, interest, additions to tax, and costs and expenses relating to
such Taxes) incurred in connection with the Merger shall be borne by the
Sellers. The Sellers, at their own expense, shall file all necessary Tax
Returns and other documentation with respect to all such transfer, transfer
gains, documentary, sales, use, stamp, registration and other Taxes and
fees. The Surviving Corporation shall cooperate with the Sellers in the
preparation of such Tax Returns.
Section 5.4 Access and Information. (a) From the date hereof until the
Closing, each of the Company and the Sellers shall, and shall cause the
Subsidiary and the officers, directors, Employees and agents of the Company
and the Subsidiary to, afford to theglobe and its officers, directors,
Employees, counsel, accountants, advisors, representatives and agents
access to the officers, Employees, agents, customers, suppliers, properties
and offices and other facilities of the Company and the Subsidiary, and to
the Company's and the Subsidiary's books and records (including, without
limitation, Tax Returns and work papers of the Company's auditors) and
Commitments, and shall furnish theglobe and such others all financial,
operating, technical and other data and information which theglobe, through
its officers, directors, employees, counsel, accountants, advisors,
representatives or agents, may from time to time reasonably request.
(b) In connection with the continuing operation of the
business of the Company and the Subsidiary between the date of this
Agreement and the Closing, the Company shall, and shall cause the
Subsidiary to, use all reasonable best efforts to consult in good faith on
a regular and frequent basis with representatives of theglobe to report
material operational developments and the general status of ongoing
operations. The Company and the Sellers acknowledge that any such
consultation shall not constitute a waiver by theglobe of any rights it may
have under this Agreement and that theglobe shall not have any Liability or
responsibility for any actions of the Company, the Subsidiary or any of
their officers, directors, Employees, agents or Affiliates with respect to
matters which are the subject of such consultations.
Section 5.5 Consents. The Parties agree to cooperate in obtaining any
consents of any third parties necessary or desirable to any Party in
connection with the transactions contemplated hereunder (each, a
"Consent"). The Parties agree that in the event such a Consent is not
obtained prior to the Closing and the Closing occurs, the Sellers will,
subsequent to the Closing, cooperate with theglobe and the Surviving
Corporation in attempting to obtain the Consent.
Section 5.6 Best Efforts. Subject to the terms and conditions in this
Agreement, each of the Parties shall use its reasonable best efforts to
take promptly, or cause to be taken, all actions and to do promptly, or
cause to be done, all things necessary, proper or advisable under
applicable Laws to consummate and make effective the transactions
contemplated hereby and to cause the conditions to the Merger to be
satisfied.
Section 5.7 Notice. During the period from the date hereof to the
Closing, each Party shall give prompt written notice to the other Parties
of (a) the occurrence, or failure to occur, of any event which occurrence
or failure would cause or be likely to cause any representation or warranty
of the Party giving notice contained in this Agreement to be untrue or
inaccurate in any material respect at any time from the date hereof to the
Closing, or (b) any failure of the Party giving notice to comply with or
satisfy any covenant, condition or agreement to be complied with or
satisfied by such Party hereunder; provided, however, that the delivery of
any notice pursuant to this Section 5.7 shall not limit or otherwise affect
the remedies available hereunder to the Parties receiving notice, or modify
in any way any disclosure made in this Agreement or the Schedules hereto as
of the date hereof.
Section 5.8 No Solicitation. Each of the Sellers agrees that for a
period of three years following the Closing it shall not, without the prior
written consent of the Company, directly or indirectly solicit for
employment, including, without limitation, recommending to any subsequent
employer the solicitation for employment of, or hire, any Employee of the
Company or the Subsidiary.
Section 5.9 Further Assurances. After the Closing, each of the Parties
will, at the request of any other Party (a "Requesting Party"), execute,
acknowledge and deliver to such Requesting Party all such further
assignments, conveyances, endorsements, deeds, powers of attorney, consents
and other documents and take such other action as a Requesting Party may
reasonably request to consummate the transactions contemplated hereby.
Section 5.10 Obligations of the Sellers. Each of the Sellers agrees to
cause the Company to perform each of its covenants and agreements contained
in this Agreement and the Ancillary Documents to be performed prior to or
at the Effective Time, and to be responsible for any breach by the Company
thereof.
Section 5.11 Confidentiality. Each of the Sellers agrees that no
Seller will disclose any Confidential Information after the date hereof to
any third party. "Confidential Information" shall mean any information
relating to the Company, the Subsidiary or theglobe which is in the
possession of any Seller or its Affiliates on the date hereof or on the
Closing Date, other than information which is or becomes available to the
public (other than as a result of the disclosure by such Sellers or any of
its Affiliates of such information in contravention of the covenants set
forth in this Section 5.11). The covenants and agreements contained in this
Section 5.11 shall expire on the fifth anniversary of the Closing Date.
Section 5.12 Preparation of Information Statement. As soon as
practicable after the execution of this Agreement, theglobe shall prepare,
with the cooperation of the Company and the Sellers, an Information
Statement (the "Information Statement") to be distributed to the
Stockholders (other than the Sellers) which shall constitute a disclosure
document for the offer and sale of the shares of theglobe Common Stock to
be received by the Stockholders in the Merger. theglobe, the Company and
each of the Sellers shall each use reasonable efforts to cause the
Information Statement to comply with applicable federal and state
securities laws. The Company agrees to provide promptly to theglobe such
information concerning its business and financial statements and affairs
and otherwise as, in the reasonable judgment of theglobe or its counsel,
may be required or appropriate for inclusion in the Information Statement,
or in any amendments or supplements thereto, and the Company further agrees
to cause its counsel and auditors to cooperate with theglobe's counsel and
auditors in the preparation of the Information Statement. The Company and
each of the Sellers will promptly advise theglobe orally and in writing if
at any time prior to the Effective Time any of them shall obtain knowledge
of any facts that might make it necessary or appropriate to amend or
supplement the Information Statement in order to make the statements
contained in or incorporated by reference therein not misleading or to
comply with applicable law.
Section 5.13 Comfort Letter; Consents of Auditors. The Company and the
Sellers shall cause PriceWaterhousecoopers LLP to deliver, on a timely
basis, (i) all necessary consents to the inclusion of the Financial
Statements in all filings of theglobe with the SEC and (ii) a "comfort"
letter customary form.
Section 5.14 Listing Application. As soon as reasonably practicable
following the Effective Time, theglobe shall prepare and submit to the
Nasdaq National Market a listing application covering the shares of
theglobe Common Stock issuable in the Merger, and shall use its reasonable
best efforts to obtain approval for the listing of such shares, subject to
official notice of issuance.
Section 5.15 Director and Officer Indemnification. theglobe agrees
that all rights to indemnification or exculpation now existing in favor of
the Employees, directors or officers of the Company and the Subsidiary (the
"Company Indemnified Parties") as provided in the Certificate of
Incorporation, as amended, or the Amended and Restated By-laws of the
Company or the Memorandum and Articles of Association of the Subsidiary
shall continue in full force and effect for a period of not less than two
years from the Effective Time; provided, however, that, in the event any
claim or claims are asserted or made within such two-year period, all
rights to indemnification in respect of any such claim or claims shall
continue until disposition of any and all such claims. Notwithstanding
anything in the first sentence of this Section 5.15 to the contrary, there
shall be no obligation on the part of the Surviving Corporation or theglobe
to indemnify or exculpate any Company Indemnified Party for any matter
arising out of the Merger or any matter with respect to which the Sellers
have indemnification obligations pursuant to this Agreement.
Section 5.16 Representation Letters. The Sellers agree to cause the
Company's and the Subsidiary's management to promptly deliver to theglobe
management representation or similar letters requested by the Company or
theglobe or their accountants in connection with the delivery of audit
reports and comfort letters.
Section 5.17 Demand Notes. The Sellers shall cause each holder of a
Demand Note to exercise simultaneously with the Effective Time its right to
have the Demand Notes held by such holder repaid in shares of theglobe
Common Stock in accordance with the original terms of such Demand Notes,
which shall result in the delivery to the holder of each Demand Note of an
amount of shares of theglobe Common Stock equal to the product of the
number of Demand Note Company Shares deemed allocable to the Demand Notes
held by such holder multiplied by the Merger Consideration Per Share. Such
delivery shall be in full satisfaction of all amounts owing and all other
obligations of the Company and theglobe arising under and with respect to
the Demand Notes, and such delivery shall be deemed made at the Closing and
the holder of the Demand Notes shall be deemed to be the record holder of
such shares for all purposes. The Sellers shall deliver each Demand Note at
the Closing, at which each such Demand Note shall be cancelled.
Section 5.18 Termination of Certain Agreements. The Company and each
of the Sellers that is a party to any of (i) the Voting Trust Agreement,
dated November 10, 1998, by and among, Fog Studios, Inc., the Company and
David C. Rae, (ii) the Common Stock Purchase Agreement, dated as of
December 30, 1998, by and among the Company, David Rae, Maricopa Investment
Corporation, Ensign Trading Company, Frank Crothers, and Edward Miller, and
the purchasers listed on Exhibit A thereto, (iii) the Investors' Rights
Agreement, dated as of December 30, 1998, by and among the Company and the
investors listed on Exhibit A thereto, (iv) the Shareholders Agreement,
dated as of November 26, 1996, by and among the Company and the other
parties signatory thereto, (v) the Put Agreement, dated as of February 6,
1997, by and between the Company and David Jonathan Hardy Stanworth, (vi)
the Put Agreement, dated as of February 6, 1997, by and between the Company
and David F. Sparkes, (vii) the Put Agreement, dated as of February 6,
1997, by and between the Company and Jonathan Roy, or (viii) the Share
Purchase Agreement, dated February 6, 1997, David Jonathan Hardy Stanworth
and David F. Sparkes, agree that effective simultaneously with the
Effective Time (each, a "Terminating Agreement"), each such agreement to
which it is a party (including all obligations of the Company thereunder)
shall terminate and be of no further force and effect.
5.19 Conveyance Agreement. The Company and Sellers agree to obtain an
agreement from Accursed Toys, Inc. in form and substance satisfactory to
theglobe confirming that the consummation of the transactions contemplated
hereby shall not cause any acceleration of the Company's obligations under
the Conveyance Agreement (the "Accursed Confirmation Agreement").
ARTICLE VI
CONDITIONS
Section 6.1 Conditions to Obligations of theglobe and Merger Sub. The
obligations of theglobe and Merger Sub to consummate the Merger and the
other transactions contemplated by this Agreement shall be subject to the
satisfaction or waiver at or prior to the Effective Time of each of the
following conditions:
(a) Representations and Warranties. Each representation and
warranty of the Company and each Seller contained in this Agreement shall
be true and correct in all material respects (without giving effect to any
materiality (or correlative meaning) qualifications included in such
representations and warranties) when made and on and as at the Effective
Time (except to the extent such representations and warranties shall have
been expressly made as of an earlier date, in which case such
representations and warranties shall have been true and correct as of such
earlier date) with the same force and effect as if made on and as at the
Effective Time.
(b) Agreements and Covenants. The Company and each Seller
shall have performed in all material respects each agreement and covenant
required by this Agreement to be performed by them at or before the
Effective Time.
(c) Certificates. theglobe shall have received a certificate
of the Sellers certifying that the conditions set forth in paragraphs (a)
and (b) above have been satisfied.
(d) Consents. All Consents necessary or desirable in
connection with any item disclosed or required to be disclosed pursuant to
clauses (ii)(z), (iii) or (iv) of Section 3.7(a) shall have been obtained
or given.
(e) Stockholder Consent. The holders of at least 90% of the
outstanding shares of the Company Common Stock shall have executed (and not
subsequently revoked their consent pursuant to) an action of stockholders
by written consent pursuant to Section 228 of the DGCL adopting this
Agreement and approving the Merger in accordance with Section 251 of the
DGCL (the "Stockholder Consent") and the Stockholder Consent shall have
been delivered to theglobe, provided that theglobe shall have the right at
any time to lower the 90% threshold, but not below the minimum amount
required for such consent pursuant to the DGCL.
(f) No Prohibitions. No statute, rule or regulation or order
of any court or administrative agency shall be in effect which prohibits
theglobe or Merger Sub from consummating the transactions contemplated
hereby.
(g) No Material Adverse Change. Since December 31, 1998, the
Company shall not have suffered any material adverse change in the
business, assets liabilities, results of operations or prospects of the
Company.
(h) Employment Agreements. Each of the persons listed on
Schedule 6.1(h) shall have executed and delivered an Employment Agreement
in form and substance satisfactory to theglobe.
(i) Opinion of the Company's Counsel. theglobe shall have
received an opinion, on and dated the Closing Date, from Buchanan
Ingersoll, outside counsel to the Company, in form and substance reasonably
satisfactory to theglobe.
(j) Blue Sky Approvals. theglobe shall have obtained all
necessary blue sky approvals for the issuance of the theglobe Common Stock
pursuant to the Merger.
(k) Secretary's Certificate. The Company shall have
delivered to theglobe a certificate of its Secretary certifying as to:
(i) the Stockholder Consent and resolutions of the
Company's Board of Directors authorizing the execution, delivery and
performance of this Agreement and the execution, delivery and
performance of all other agreements, documents and transactions
contemplated hereby; and
(ii) the incumbency of its officers executing this
Agreement and the Ancillary Documents.
(l) Escrow Agreement. The Company, each of the Sellers and
the Escrow Agent shall have executed the Escrow Agreement.
(m) Demand Notes. Each of the Demand Notes shall have been
repaid for shares of theglobe Common Stock in accordance with Section 5.17
and the terms of such Demand Note.
(n) Regulation S. Each Stockholder who is not a "U.S.
person" within the meaning of Regulation S shall have executed and
delivered to theglobe a letter in the form attached as Exhibit 6.1(n)
hereto. theglobe shall be entitled to place legends as specified in such
letters on the certificates representing any shares of theglobe Common
Stock to be received by such Stockholders pursuant to the terms of this
Agreement, and to issue appropriate stop transfer instructions to the
transfer agent for theglobe Common Stock consistent with the terms of such
letters.
(o) Intellectual Property Rights. Each of the persons listed
on Schedule 6.1(o) hereto shall have executed and delivered an assignment
of intellectual property rights in the form attached as Exhibit 6.1(o)
hereto.
(p) Certain Terminations. Agreements terminating each of the
Terminating Agreements in form and substance satisfactory to theglobe shall
have been executed and delivered by the parties thereto and shall be in
full force and effect at the Effective Time.
(q) Accursed Toys Confirmation Agreement. The Accursed
Confirmation Agreement shall have been executed and delivered by Accursed
Toys, Inc. and the Company and shall be in full force and effect at the
Effective Time.
Section 6.2 Conditions to Obligations of the Company and the Sellers.
The obligations of the Company and the Sellers to consummate the Merger and
the other transactions contemplated by this Agreement shall be subject to
the satisfaction or waiver at or prior to the Effective Time of each of the
following conditions:
(a) Representations and Warranties. Each representation and
warranty of theglobe and Merger Sub contained in this Agreement shall be
true and correct in all material respects (without giving effect to any
materiality (or correlative meaning) qualifications included in such
representations and warranties) when made and on and as at the Effective
Time (except to the extent such representations and warranties shall have
been expressly made as of an earlier date, in which case such
representations and warranties shall have been true and correct as of such
earlier date) with the same force and effect as if made on and as at the
Effective Time.
(b) Agreements and Covenants. Each of theglobe and Merger
Sub shall have performed in all material respects each of its agreements
and covenants required by this Agreement to be performed by them at or
before the Effective Time.
(c) Certificates. The Company shall have received a
certificate of theglobe certifying that the conditions set forth in
paragraphs (a) and (b) above have been satisfied.
(d) No Prohibition. No statute, rule or regulation or order
of any court or administrative agency shall be in effect which prohibits
the Company or the Sellers from consummating the transactions contemplated
hereby.
(e) Secretary's Certificate. Each of theglobe and Merger Sub
shall have delivered to the Company a certificate of its secretary
certifying as to:
(i) resolutions of its Board of Directors authorizing
the execution, delivery and performance of this Agreement and the
execution, delivery and performance of all other agreements, documents
and transactions contemplated hereby; and
(ii) the incumbency of its officers executing this
Agreement and the Ancillary Documents.
(f) Escrow Agreement. theglobe, Merger Sub and the Escrow
Agent shall have executed the Escrow Agreement.
(g) Registration Rights Agreement. theglobe shall have
executed and delivered the Registration Rights Agreement.
ARTICLE VII
TERMINATION
Section 7.1 Termination. This Agreement may be terminated at any time
before the Effective Time (except as otherwise provided) as follows:
(a) by mutual written consent of each of theglobe and the
Company;
(b) by either the Company or theglobe, if the Effective Time
shall not have occurred on or before April 30, 1999 (the "Termination
Date").
(c) by either the Company or theglobe, if there shall have
been a breach by the other (or any Affiliate of the other) of any of its
(x) representations or warranties contained in this Agreement, which breach
would result in the failure to satisfy one or more of the conditions set
forth in Section 6.1(a) (in the case of a breach by the Company or any of
its Affiliates) or Section 6.2(a) (in the case of a breach by theglobe or
any of its Affiliates), or (y) covenants or agreements contained in this
Agreement, which breach would result in the failure to satisfy one or more
of the conditions set forth in Section 6.1(b) (in the case of a breach by
the Company or any of its Affiliates) or Section 6.2(b) (in the case of a
breach by theglobe or any of its Affiliates), and in any such case such
breach shall be incapable of being cured or, if capable of being cured,
shall not have been cured within 15 days after written notice thereof shall
have been received by the Party alleged to be in breach.
Section 7.2 Effect of Termination and Abandonment. In the event of
termination of this Agreement pursuant to this Article VII, this Agreement
shall become void and of no effect with no Liability on the part of any
Party (or of any of its representatives); provided, however, that no such
termination shall relieve the defaulting or breaching Party (whether or not
it is the terminating Party hereto) from any Liability to any other Party
hereto; and provided, further, that Sections 5.11, 9.2, 9.8 and 9.9 and
this Section 7.2 shall survive the termination of this Agreement.
ARTICLE VIII
INDEMNIFICATION
Section 8.1 Survival. The representations and warranties of the
Parties contained herein or in any Ancillary Document shall expire,
together with any associated right of indemnification, on the second
anniversary of the Closing Date, except that the representations and
warranties set forth in Sections 3.6(b), 3.18 and 3.20(i) shall survive
until 30 days following the expiration of the applicable statute of
limitations (including any extensions thereof) and the representations and
warranties set forth in Section 3.3 shall not expire. After the expiration
of such periods, any claim by a Party based upon any such representation or
warranty shall be of no further force and effect, except to the extent a
Party has asserted a claim in accordance with this Article VIII for breach
of any such representation or warranty prior to the expiration of such
period, in which event any representation or warranty to which such claim
relates shall survive with respect to such claim until such claim is
resolved as provided in this Article VIII. All covenants and agreements of
the Parties shall survive the Closing until performed in accordance with
their terms.
Section 8.2 Indemnification by theglobe. (a) From and after the
Closing Date, theglobe shall indemnify, defend and hold harmless the
Sellers and their Affiliates (collectively, the "Sellers Indemnified
Group") from and against all Liabilities, losses, damages, penalties,
claims (including third-party claims, whether or not meritorious), costs,
interest, judgments, fines, amounts paid in settlement and expenses
(including, without limitation, reasonable attorney's fees, whether
incurred in connection with a claim for indemnification hereunder or in
connection with any third party claim) (collectively, "Losses") incurred or
suffered by any member of the Sellers Indemnified Group based upon,
resulting from or arising out of (i) the breach of any representation or
warranty of theglobe or Merger Sub contained in this Agreement or any of
the Ancillary Documents or (ii) the breach of any covenant or agreement of
theglobe or Merger Sub contained in this Agreement or any of the Ancillary
Documents.
(b) theglobe's indemnification obligations pursuant to
Section 8.2(a)(i) shall be effective only after the amount of Losses, in
the aggregate, incurred by the Seller Indemnified Group exceed $250,000,
and if such aggregate liabilities exceed $250,000, theglobe shall be liable
for all such Losses, subject to the following sentence, but only to the
extent such Losses exceed the initial $250,000. The maximum amount
recoverable by the Seller Indemnified Group, in the aggregate, under
Section 8.2(a)(i) shall be the aggregate number of shares of theglobe
Common Stock issuable in connection with the Merger or the repayment of the
Demand Notes (collectively, the "Issuable Shares"). theglobe shall make
indemnification payments pursuant to this Section 8.2 in the form of
theglobe Common Stock, and any such shares shall be valued at the Reference
Share Price.
(c) The Sellers each acknowledge and agree that, except (i)
as expressly otherwise provided herein or (ii) to the extent any Losses
incurred by such Party result from any fraudulent misrepresentation by
theglobe, the Seller Indemnified Group's sole and exclusive monetary remedy
with respect to any and all claims based upon, resulting from or arising
out of the breach of this Agreement or any Ancillary Document by theglobe
or Merger Sub or (following the Effective Time) the Company shall be
pursuant to the indemnification provisions of this Article VIII (including,
without limitation, Section 8.1).
Section 8.3 Indemnification by the Sellers. (a) From and after the
Closing Date, each of the Sellers, jointly and severally, shall indemnify,
defend and hold harmless theglobe, Merger Sub, the Surviving Corporation,
the Subsidiary and each of their respective Affiliates, officers,
directors, employees, members, agents, successors, transferees and assigns
(collectively, "theglobe Indemnified Group") from and against all Losses
incurred or suffered by any member of theglobe Indemnified Group based
upon, resulting from or arising out of (i) the breach of any representation
or warranty of any of the Sellers or the Company contained in this
Agreement or any of the Ancillary Documents, (ii) the breach of any
covenant or agreement of any of the Sellers (provided, however, that in no
event will any Seller be liable for any breach of the covenants contained
in Section 5.8 of this Agreement by any other Seller) or the Company (but
with respect to the Company only for breaches of covenants and agreements
to be performed prior to or at the Effective Time) contained in this
Agreement or any of the Ancillary Documents, (iii) any Indebtedness, other
than pursuant to the Conveyance Agreement and any portion of the
Non-Permitted Indebtedness Amount (including Indebtedness pursuant to the
Demand Notes) for which the Aggregate Consideration was reduced, incurred
prior to or at the Effective Time which remains outstanding at the
Effective Time (the Losses to include the dollar amount of any such
Indebtedness), (iv) the exercise of dissenters' rights by holders of
Dissenting Shares (the Losses to include the entire amount of any payments
required to be made by the Company in respect of dissenters' rights), (v)
any inaccuracies in the Closing Certificate, (vi) any claims relating to
shares of Company Common Stock issued, and warrants, options or other
equity awards granted, by the Company, and (vii) any claims relating to or
involving the treatment of any Options granted prior to the Closing Date as
"incentive stock options" within the meaning of Section 422 of the Code.
(b) The Sellers' indemnification obligations pursuant to
Section 8.3(a)(i) shall be effective only after the amount of Losses, in
the aggregate, incurred by theglobe Indemnified Group exceed $250,000 (the
"Basket"), and if such aggregate liabilities exceed the Basket the Sellers
shall be liable for the dollar value of such liabilities in excess of the
Basket, but only to the extent such Losses exceed the Basket. The Basket
shall not be applicable to a breach of the representations and warranties
in Sections 3.3, 3.6(b), 3.18 and 3.20(i). The maximum amount recoverable,
in the aggregate, under Section 8.3(a)(i) from any Seller shall be an
amount in cash equal to the product of (x) the Issuable Shares issued to
such Seller multiplied by (y) the Reference Share Price (each, a "Seller
Cap"); provided, however, that the Seller Caps shall not be applicable to
amounts recoverable as a result of a breach of the representations and
warranties contained in Sections 3.3, 3.6(b), 3.18 and 3.20(i).
(c) The materiality (or correlative meaning) qualifications
included in the representations and warranties set forth in Article III
shall have no effect on any provisions in this Section 8.3 concerning the
indemnities of the Seller with respect to such representations and
warranties, each of which is given as though there were no materiality
qualification for purposes of such indemnities.
(d) The Company and theglobe each acknowledge and agree
that, except (i) as expressly otherwise provided herein or (ii) to the
extent any Losses incurred by such Party result from any fraudulent
misrepresentation by the Sellers or (prior to or at the Effective Time) the
Company, theglobe Indemnified Group's sole and exclusive economic remedy
with respect to any and all claims based upon, resulting from or arising
out of the breach of this Agreement or any Ancillary Document by the
Sellers or (prior to or at the Effective Time) the Company shall be
pursuant to the indemnification provisions of this Article VIII.
Section 8.4 Escrow. (a) The number of shares of theglobe Common Stock
delivered to the Sellers at or following the Effective Time pursuant to
Section 2.5(c) or Section 5.19 shall be reduced on a pro rata basis by an
aggregate number of shares equal to ten percent of the Issuable Shares (the
"Escrowed Shares"). The Escrowed Shares shall be held in escrow pursuant to
an Escrow Agreement in the form attached as Exhibit 8.4 hereto (the "Escrow
Agreement"). At the Effective Time, theglobe shall deposit the Escrowed
Shares with the escrow agent (the "Escrow Agent") pursuant to the terms of
the Escrow Agreement. For such period of time that the Escrowed Shares are
held in Escrow, the Seller shall have all rights with respect to the voting
of such shares in connection with all matters coming before a vote of the
holders of shares of theglobe Common Stock.
(b) Notwithstanding anything in this Article VIII to the
contrary, any claim by a member of theglobe Indemnified Group for
indemnification against any Seller shall first be satisfied by recourse to
the Escrowed Shares. Any claim by a member of theglobe Indemnified Group
for indemnification shall be made by giving written notice in accordance
with the terms of Section 8.5. In accordance with the terms of the Escrow
Agreement, the Escrow Agent shall release to the member of theglobe
Indemnified Group Escrowed Shares, as applicable, having an aggregate value
(with shares valued at the Closing Share Price) equal to the Losses, if
any, ultimately allowed under such claim. theglobe shall thereupon retire
(and hold in treasury) or cancel such released shares and, if the member of
theglobe Indemnified Group with respect to such Losses is not theglobe, pay
or cause to be paid such Losses to such member of theglobe Indemnified
Group.
(c) For purposes of this Section 8.4 and the Escrow
Agreement, in view of the fact that successful claims for indemnification
will ultimately have the effect of reducing the number of shares issuable
to the Sellers, David Rae shall act as the representative and
attorney-in-fact (the "Representative") on behalf of himself and all of the
other Sellers, subject to the provisions of Section 8.4(d). The
Representative shall keep the Sellers reasonably informed of his decisions
of a material nature. The Representative is authorized to take any action
deemed by him appropriate or reasonably necessary to carry out the
provisions of, and is authorized to act on behalf of, the Sellers for all
purposes related to this Article VIII, including the acceptance of service
of process upon the Sellers and the acceptance or compromise of claims for
indemnification, and all decisions and actions of the Representative shall
be binding and conclusive upon the Sellers and may be relied upon by
theglobe Indemnified Parties and the Escrow Agent as the decision and
action of all of the Sellers.
(d) The Representative shall not be liable to any of the
Sellers for any error of judgment, act done or omitted by him in good
faith, or mistake of fact or Law unless caused by his own gross negligence
or willful misconduct. In taking any action or refraining from taking any
action whatsoever the Representative shall be protected in relying upon any
notice, paper or other document reasonably believed by him to be genuine,
or upon any evidence reasonably deemed by him to be sufficient. The
Representative may consult with counsel in connection with his duties and
shall be fully protected in any act taken, suffered or permitted by him in
good faith in accordance with the advice of counsel. The Representative
shall not be responsible for determining or verifying the authority of any
Person acting or purporting to act on behalf of any party to this Agreement
or the Escrow Agreement.
Section 8.5 Indemnification Procedure. (a) The party seeking
indemnification under this Agreement (the "Indemnified Party") shall
promptly notify the party from which indemnification is being sought (the
"Indemnifying Party") (or, if indemnification is sought pursuant to the
Escrow Agreement, the Representative and the Escrow Agent) of the facts and
circumstances upon which the Indemnified Party intends to base a claim for
indemnification hereunder ("Notices"). Notice shall in all events be
considered prompt if given (1) no later than 15 days after the Indemnified
Party learns of the facts upon which it will claim such indemnification or
(2) if earlier, in sufficient time to allow the Indemnifying Party to
exercise its rights pursuant to this Article VIII; provided, however, that
the failure to provide such Notice of claims promptly (so long as a notice
of claims is given before the date on which the applicable representation
or warranty ceases to survive) shall not affect the obligations of the
Indemnifying Party hereunder except to the extent the Indemnifying Party is
prejudiced thereby. The Indemnifying Party shall have the right, at its own
cost, to participate jointly in the defense of any third-party claim,
demand, lawsuit or other proceeding in connection with which the
Indemnified Party has claimed indemnification hereunder, and may elect (the
"Election") to take over the defense of such claim within 10 business days
following Notice thereof upon its written unconditional acknowledgment of
its obligation to indemnify the Indemnified Party with respect to such
claim; provided, however, that theglobe shall be permitted, at its option,
to require that the Sellers shall not take over the defense of any claim
brought by any Person with which theglobe or the Surviving Corporation has
a material business relationship against any member of theglobe Indemnified
Group for which indemnification is available pursuant to this Article VIII,
and upon exercise of such option such member of theglobe Indemnified Group
shall defend such claim, subject to the following conditions: (i) the
Sellers shall be entitled, in their discretion and at their expense, to
engage counsel and to participate in any discussions, meetings,
negotiations and other communications which may be held or conducted
between such member of theglobe Indemnified Group and such customer or
supplier, or their respective counsels, with respect to such claim; (ii)
such member of theglobe Indemnified Group shall consult with the
Representative before making or communicating to such customer or supplier,
or its counsel, any decisions concerning such member's strategy or position
with respect to the defense of such claim; and (iii) such member of
theglobe Indemnified Group shall not settle or otherwise dispose of such
claim without the consent of the Representative. If the Indemnifying Party
makes an Election, (x) it shall keep the Indemnified Party informed as to
the status of the applicable matter and shall send promptly copies of all
pleadings to the Indemnified Party, (y) with respect to any issue involved
in such claim, it shall have the sole right, with respect to claims or
portions of claims seeking monetary damages only, to settle or otherwise
dispose of such claim on such terms as it, in its sole discretion, shall
deem appropriate; provided, however, that the consent of the Indemnified
Party to the settlement or disposition shall be required if such settlement
or disposition shall result in or would reasonably be expected to result in
any Liability to, equitable relief against or adverse business effect on
the Indemnified Party, which consent shall not be unreasonably withheld or
delayed, and (z) the Indemnified Party shall have the right to participate
jointly in the defense of such claim, but shall do so at its own cost not
subject to reimbursement. If the Indemnifying Party does not elect to take
over the defense of a third-party claim, the Indemnified Party shall have
the right to contest, compromise or settle such claim in the exercise of
its reasonable judgment.
(b) Notwithstanding any provision of this Article VIII to
the contrary, with respect to any third-party claim or demand that the
Indemnifying Party is defending, the Indemnified Party shall have the right
to retain separate counsel to represent it and the Indemnifying Party shall
pay the fees and expenses of such separate counsel if the Indemnified Party
receives and certifies to the Indemnified Party that it has received advice
of counsel to the effect that there exist sufficient conflicts that make it
reasonably necessary or appropriate for separate counsel to represent the
Indemnified Party and the Indemnifying Party.
(c) The amounts for which an Indemnifying Party shall be
liable under Sections 8.2 and 8.3 of this Agreement shall be net of any
insurance proceeds received by the Indemnified Party (less the costs of
collection of such insurance proceeds) compensating the Indemnified Party
for Losses of the Indemnified Party for which the Indemnifying Party would
otherwise be liable pursuant to this Article VIII.
ARTICLE IX
MISCELLANEOUS
Section 9.1 Public Announcements. No Party shall make any public
statements, including, without limitation, any press releases, with respect
to this Agreement and the transactions contemplated hereby without the
prior written consent of the Company and theglobe, except as may be
required by Law.
Section 9.2 Notices. All notices and other communications given or
made pursuant hereto shall be in writing and shall be deemed to have been
duly given or made as of the date of receipt and shall be delivered
personally or mailed by registered or certified mail (postage prepaid,
return receipt requested), sent by overnight courier or sent by telecopy
(with a hard copy following), to the applicable Party at the following
addresses or telecopy numbers (or at such other address or telecopy number
for a Party as shall be specified by like notice):
(a) if to the Company or any Seller or other Stockholder:
Attitude Network, Ltd.
10621 Airport Pulling Road North, Suite 5
Naples, Florida 34108
Attention: Mr. David Rae
Telecopy No.: (941) 513-9555
With a copy to:
Cheffy Passidomo Wilson and Johnson
821 Fifth Street South
Suite 200
Naples, Florida 34102
Attention: Ed Cheffy, Esq.
Kevin Carmichael, Esq.
Telecopy No.: (941) 436-1535
and a copy to:
Buchanan Ingersoll, P.C.
Nationsbank, Suite 2100
100 S.E. 2nd Street
Miami, Florida 33131
Attention: Ralph B. Bekkevold, Esq.
Telecopy No.: (305) 347-4089
(b) if to theglobe or Merger Sub:
theglobe.com, inc.
31 West 21st Street
New York, New York 10010
Attention: Mr. Todd V. Krizelman
Telecopy No.: (212) 367-8604
With a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attention: Valerie Ford Jacob, Esq.
Lawrence N. Barshay, Esq.
Telecopy No.: (212) 859-4000
Section 9.3 Certain Definitions; Certain Interpretations. (a) For
purposes of this Agreement, the following terms shall have the following
meanings:
"Affiliate" of a Person means a Person that
directly or indirectly, through one or more intermediaries, controls,
is controlled by, or is under common control with, the first mentioned
Person. Each of the Company and the Subsidiary shall be deemed to be
an Affiliate of the Sellers and the Stockholders before the Effective
Time and an Affiliate of theglobe after the Effective Time.
"Ancillary Documents" shall mean all Commitments,
certificates and other documents delivered simultaneously with this
Agreement or to be delivered at the Closing in connection with the
transactions contemplated hereby including, without limitation, the
Employment Agreements.
"control" (including the terms "controlled by" and
"under common control with") means the possession, direct or indirect,
of the power to direct or cause the direction of the management and
policies of a Person, whether through the ownership of stock, as
trustee or executor, by contract or credit arrangement or otherwise.
"Person" shall mean an individual, a corporation,
a limited liability company, a partnership, an association, a trust or
any other entity or organization, including a Governmental Entity.
(b) Whenever the words "include," "includes" or "including"
are used in this Agreement, they shall be understood to be followed by the
words "without limitation" if such words are not already present. The words
"to the knowledge of the Company and the Sellers" and words of similar
import shall mean the knowledge of any officer of the Company or the
Subsidiary or any Seller.
(c) All pronouns used herein shall be deemed to refer to the
masculine, feminine or neuter gender as the context requires.
Section 9.4 Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 9.5 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of
law or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic
or legal substance of the transactions contemplated hereby is not affected
in any manner materially adverse to any Party. Upon a determination that
any term or other provision is invalid, illegal or incapable of being
enforced, the Parties shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the Parties as closely as
possible in an acceptable manner to the end that the transactions
contemplated hereby are fulfilled to the maximum extent possible.
Section 9.6 Entire Agreement; No Third-Party Beneficiaries. This
Agreement, constitutes the entire agreement and supersedes any and all
other prior agreements and undertakings, both written and oral, among the
Parties, or any of them, with respect to the subject matter hereof and,
except as specifically set forth herein, does not and is not intended to,
confer upon any Person other than the Parties any rights or remedies
hereunder.
Section 9.7 Assignment. Except as otherwise set forth herein, this
Agreement shall not be assigned by any Party by operation of law or
otherwise without the express written consent of each of the other Parties.
Section 9.8 Governing Law. This Agreement shall be governed by and
construed in accordance with, the laws of the State of New York without
regard to the conflicts of laws provisions thereof, provided that the
provisions of Article II relating to the form of Merger shall be governed
by the applicable provisions of the DGCL. Each of the Parties irrevocably
and unconditionally consents to submit to the exclusive jurisdiction of the
courts of the State of New York and the courts of the United States of
America each located in the Borough of Manhattan in the City of New York
for any Litigation arising out of or relating to this Agreement or the
Merger or any of the other transactions contemplated hereby (and agrees not
to commence any Litigation relating hereto except in these courts), and
further agrees that service of any process, summons, notice or document by
U.S. registered mail to its respective address set forth in Section 9.2
shall be effective service of process for any Litigation brought against it
in any such court. Each of the Parties hereby irrevocably and
unconditionally waives any objection to the laying of venue of any
Litigation arising out of this Agreement or the Merger or any of the other
transactions contemplated hereby in the courts of the State of New York or
the courts of the United States of America located in the Borough of
Manhattan in the City of New York and hereby further irrevocably and
unconditionally waives and agrees not to plead or claim in any such court
that any such Litigation brought in any such court has been brought in an
inconvenient forum. Each of the Parties hereby irrevocably and
unconditionally waives any right it may have to trial by jury in connection
with any Litigation arising out of or relating to this Agreement, the
Merger or any of the other transactions contemplated hereby or thereby.
Section 9.9 Transaction Costs. All Transaction Costs other than
Invoiced Transaction Costs which reduced the Aggregate Consideration shall
be paid by the Sellers. All fees and expenses of financial, legal,
accounting and other advisors retained by the Sellers and other
out-of-pocket costs of the Sellers incurred in connection with the
transactions contemplated hereby shall be paid by the Sellers. All fees and
expenses of financial, legal, accounting and other advisors retained by
theglobe and other out-of-pocket costs of theglobe incurred in connection
with the transactions contemplated hereby shall be paid by theglobe.
Section 9.10 Amendments. This Agreement may be amended at any time
before the Effective Time but only pursuant to a writing executed and
delivered by theglobe and the Company and only in accordance with the
provisions of applicable Law.
Section 9.11 Counterparts. This Agreement may be executed in one or
more counterparts, and by the different Parties in separate counterparts,
each of which when executed shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
theglobe.com, inc.
By: /s/ Edward A. Cespedes
-----------------------------------
Name: Edward A. Cespedes
Title: Vice President
BUCKY ACQUISITION CORP.
By: /s/ Edward A. Cespedes
-----------------------------------
Name: Edward A. Cespedes
Title: Treasurer and Secretary
ATTITUDE NETWORK LTD.
By: /s/ David C. Rae
-----------------------------------
Name: David C. Rae
Title: Chief Executive Officer
SELLERS:
/s/ David C. Rae
--------------------------------------
David C. Rae
/s/ Kim Brown
--------------------------------------
Kim Brown
/s/ Frank J. Crothers
--------------------------------------
Frank J. Crothers
/s/ Edward M. Miller
--------------------------------------
Edward M. Miller
/s/ David Mobley
--------------------------------------
David Mobley
MARICOPA INVESTMENT CORPORATION
By: /s/ David M. Mobely
-----------------------------------
Name: David M. Mobley
Title:
CARIBBEAN CHILDREN'S FOUNDATION, LTD.
By: /s/ Edward Miller
-----------------------------------
Name: Edward Miller
Title: Investment Advisor
ENSIGN TRADING CORPORATION
By: /s/ David M. Mobley
-----------------------------------
Name: David M. Mobley
Title:
Exhibit 4.3
FORM OF
AMENDMENT NO. 2
TO SECOND AMENDED AND RESTATED
INVESTOR RIGHTS AGREEMENT
THEGLOBE.COM, INC.
April 9, 1999
<PAGE>
AMENDMENT NO. 2 TO SECOND AMENDED AND RESTATED
INVESTOR RIGHTS AGREEMENT
This AMENDMENT NO. 2 TO SECOND AMENDED AND RESTATED INVESTOR
RIGHTS AGREEMENT (the "Second Amendment") is entered into as of the 9th day
of April 1999, by and among theglobe.com, inc., a Delaware corporation (the
"Company"), and the Investors, as defined in the Second Amended and
Restated Investor Rights Agreement, as amended (the "Agreement").
Capitalized items used herein and not otherwise defined shall have the
meanings ascribed thereto in the Agreement.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Investors hold registration and information rights
pursuant to the Agreement;
WHEREAS, the Investors, with the written consent of the Company, have
amended certain provisions of the Agreement pursuant to Amendment No. 1 to
Second Amended and Restated Investor Rights Agreement, dated August 31,
1998 (the "First Amendment"); and
WHEREAS, pursuant to Section 2.10 of the Agreement, the Holders of a
majority in interest of the Registrable Securities desire to amend certain
provisions of Section 2 of the Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt of
which is hereby acknowledged, the parties hereto agree as follows:
I. The Investors hereby waive on behalf of all of the Holders any
violation of the Agreement which may occur by the Company failing to notify
the Holders prior to filing a Registration Statement on Form S-1 during
April 1999.
II. Paragraph (a)(iii) of Section 2.1 of the Agreement is hereby
deleted in its entirety and is replaced with the following:
(iii) Notwithstanding the provisions of paragraphs (i) and
(ii) above, no such registration statement or opinion of counsel
shall be necessary for a transfer by a Holder which is (A) a
partnership to its partners or former partners in accordance with
partnership interests, (B) a corporation to its shareholders in
accordance with their interest in the corporation, (C) a limited
liability company to its members or former members in accordance
with their interest in the limited liability company, or (D) to
the Holder's family member or trust for the benefit of an
individual Holder or such Holder's family member, provided the
transferee will be subject to the terms of this Section 2.1 to
the same extent as if he were an original Holder hereunder.
The first paragraph of Section 2.2 of the Agreement, which has been
amended by the First Amendment, is hereby deleted in its entirety and is
replaced with the following:
2.2 PIGGYBACK REGISTRATIONS. The Company shall notify
all Holders in writing within five (5) days following the
filing of any registration statement under the Securities
Act for purposes of a public offering of securities (other
than non-convertible debt securities) of the Company
(excluding registration statements relating to employee
benefit plans or with respect to corporate reorganizations
or shares issued in connection with any merger or
acquisition (which shall include any resale registration
statement for such issued shares and any acquisition shelf
registration statement for shares which may be issued in
connection with any merger or acquisition transaction),
including other transactions under Rule 145 of the
Securities Act) and will afford each such Holder an
opportunity to include in such registration statement all or
part of such Registrable Securities held by such Holder.
Each Holder desiring to include in any such registration
statement all or any part of the Registrable Securities held
by it shall, within ten (10) days after the above-described
notice from the Company, so notify the Company in writing.
Such notice shall state the maximum number of Registrable
Securities intended to be included in such registration and
the intended method of disposition of the Registrable
Securities by such Holder. If a Holder decides not to
request inclusion of all of its Registrable Securities in
any registration statement thereafter filed by the Company,
such Holder shall nevertheless continue to have the right to
include any Registrable Securities in any subsequent such
registration statement or registration statements as may be
filed by the Company with respect to offerings of its
securities, all upon the terms and conditions set forth
herein.
Paragraph (a) of Section 2.2 of the Agreement, which has been amended
by the First Amendment, is hereby deleted in its entirety and is replaced
with the following:
(a) UNDERWRITING. If the registration statement under
which the Company gives notice under this Section 2.2 is for
an underwritten offering, the Company shall so advise the
Holders. In such event, the right of any such Holder to be
included in a registration pursuant to this Section 2.2
shall be conditioned upon such Holder's participation in
such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent
provided herein except that such Holder shall not be
permitted to withdraw such Holder's shares from any
underwriting pursuant to the registration statement
following the fifth day prior to the printing of the
preliminary prospectus related to such registration
statement. Each Holder proposing to distribute its
Registrable Securities through such underwriting shall enter
into a custody agreement and power of attorney authorizing
the Company or an employee thereof to act as the Holder's
attorney-in-fact to sell the Registrable Securities to be
offered by such Holders and to execute on the Holder's
behalf (x) an underwriting agreement in customary form with
the underwriter or underwriters selected for such
underwriting by the Company and (y) any other closing
certificates or similar documents requested by the
underwriter. The custody agreement may contain such other
terms as are customary for this type and shall require the
Holder to deposit its shares of Common Stock being
registered with the custodian for the time periods specified
in the custody agreement. Each Holder agrees that its shares
will be sold at the same price as the other selling
stockholders (and the Company, if applicable) in the
offering under the registration statement. If any Holder is
or will be unable to deliver any document (including any
underwriting agreement, legal opinions or closing
certificates) reasonably required by the underwriters to
register such Registrable Securities, then the Company shall
have no obligation to include such Registrable Securities in
such registration. Notwithstanding any other provision of
the Agreement, if the underwriter determines in good faith
that marketing factors require a limitation of the number of
shares to be underwritten, the number of shares that may be
included in the underwriting shall be allocated as follows:
first, to the Company for its own account; and second, to
any Holder or other stockholder of the Company who has
registration rights, each on a pro rata basis in accordance
with the terms of their respective Agreements providing for
registration rights with the Company. No such reduction
shall reduce the securities being offered by the Company for
its own account to be included in the registration and
underwriting.
Section 2.11 of the Agreement is hereby deleted in its entirety and is
replaced with the following:
2.11 "MARKET STAND-OFF" AGREEMENT. In the case of any
underwritten public offering by the Company of shares of
Common Stock, whether for its own account or for the account
of any stockholder of the Company, each Holder agrees that,
during a period of seven (7) days prior to and ninety (90)
days following the effective date of a registration
statement filed in connection with such offering, such
Holder will not, without the prior written consent of the
Company, sell or otherwise transfer or dispose of any shares
of Common Stock (or other securities) of the Company held by
each such Holder (other than those included in the
registration). The Company shall give notice of such
restriction in the manner set forth in Section 4.7. Upon the
request of the underwriters for any underwritten public
offering of Common Stock of the Company referred to above,
each Holder hereby agrees to deliver a "lock-up" or "market
stand-off" agreement signed by such Holder which is
equivalent in substance to the agreement set forth in this
Section 2.11 addressed to such underwriter. Any such
underwriter shall expressly be deemed to be a third party
beneficiary of this Section 2.11.
The obligations described in this Section 2.11 shall
not apply to (i) transfers to a Holder's family member or
trust for the benefit of an individual Holder or such
Holder's family member made in accordance with Section
2.1(a)(iii) hereof; or (ii) a registration relating solely
to employee benefit plans on Form S-1 or Form S-8 or similar
forms that may be promulgated in the future, or a
registration relating solely to shares issued in an
acquisition or pursuant to a Commission Rule 145 transaction
(including the registration for resale of securities issued
in a Rule 145 transaction or other acquisition transaction)
on Form S-1 or Form S-4 under the Securities Act or similar
forms that may be promulgated in the future, unless in any
such case such registration is in connection with an
underwritten public offering. The Company may impose
stop-transfer instructions with respect to the shares of
Common Stock (or other securities) subject to the foregoing
restriction until the end of such restrictive period.
[Remainder of page intentionally left blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment No. 2 to Second Amended and Restated Investor Rights Agreement as
of the date set forth above.
theglobe.com, inc. Dancing Bear Investments, Inc.
By: By:
------------------------------ ------------------------------
Todd V. Krizelman Name: Michael Egan
Co-Chief Executive Officer and Title:
Co-President
Robert Halperin
By: -----------------------------
------------------------------
Stephan J. Paternot
Co-Chief Executive Officer,
Co-President and Secretary
David Horowitz
-----------------------------
Exhibit 4.5
FORM OF
AMENDMENT NO. 1
TO
REGISTRATION RIGHTS AGREEMENT
THEGLOBE.COM, INC.
April 9, 1999
<PAGE>
AMENDMENT NO. 1 TO
REGISTRATION RIGHTS AGREEMENT
This AMENDMENT NO. 1 TO REGISTRATION RIGHTS AGREEMENT (the
"Amendment") is entered into as of the 9th day of April 1999, by and among
theglobe.com, inc., a Delaware corporation (the "Company"), Dancing Bear
Investments, Inc. ("Egan"), Todd v. Krizelman, Stephan J. Paternot and the
Series A Investors, as defined in the Registration Rights Agreement, dated
September 1, 1998 (the "Agreement"). Capitalized items used herein and not
otherwise defined shall have the meanings ascribed thereto in the
Agreement.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Holders hold registration and information rights pursuant
to the Agreement; and
WHEREAS, pursuant to Section 2.10 of the Agreement, the Holders of a
majority in interest of the Registrable Securities desire to amend certain
provisions of Section 2 of the Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt of
which is hereby acknowledged, the parties hereto agree as follows:
I. The Investors hereby waive on behalf of all of the Holders any
violation of the Agreement which may occur by the Company failing to notify
the Holders prior to filing a Registration Statement on Form S-1 during
April 1999.
II. The first paragraph of Section 2.1 of the Agreement is hereby
deleted in its entirety and is replaced with the following:
2.1 PIGGYBACK REGISTRATIONS. The Company shall notify
all Holders in writing within five (5) days following the
filing of any registration statement under the Securities
Act for purposes of a public offering of securities (other
than non-convertible debt securities) of the Company
(including, but not limited to, registration statements
relating to secondary offerings of securities of the
Company, but excluding registration statements relating to
employee benefit plans or with respect to corporate
reorganizations or shares issued in connection with any
merger or acquisition (which shall include any resale
registration statement for such issued shares and any
acquisition shelf registration statement for shares which
may be issued in connection with any merger or acquisition
transaction), including other transactions under Rule 145 of
the Securities Act) and will afford each such Holder an
opportunity to include in such registration statement all or
part of such Registrable Securities held by such Holder.
Each Holder desiring to include in any such registration
statement all or any part of the Registrable Securities held
by it shall, within ten (10) days after the above-described
notice from the Company, so notify the Company in writing.
Such notice shall state the maximum number of Registrable
Securities intended to be included in such registration and
the intended method of disposition of the Registrable
Securities by such Holder. If a Holder decides not to
request inclusion of all of its Registrable Securities in
any registration statement thereafter filed by the Company,
such Holder shall nevertheless continue to have the right to
include any Registrable Securities in any subsequent such
registration statement or registration statements as may be
filed by the Company with respect to offerings of its
securities, all upon the terms and conditions set forth
herein.
Paragraph 2.1(a) of the Agreement is hereby deleted in its entirety
and is replaced with the following:
(a) UNDERWRITING. If the registration statement under
which the Company gives notice under this Section 2.1 is for
an underwritten offering, the Company shall so advise the
Holders. In such event, the right of any such Holder to be
included in a registration pursuant to this Section 2.1
shall be conditioned upon such Holder's participation in
such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent
provided herein except that such Holder shall not be
permitted to withdraw such Holder's shares from any
underwriting pursuant to the registration statement
following the fifth day prior to the printing of the
preliminary prospectus related to such registration
statement or as otherwise provided in the custody agreement.
Each Holder proposing to distribute its Registrable
Securities through such underwriting shall enter into a
custody agreement and power of attorney, authorizing the
Company or an employee thereof to act as the Holder's
attorney-in-fact to (i) sell the Registrable Securities to
be offered by such Holders and (ii) execute on the Holder's
behalf (x) an underwriting agreement in customary form with
the underwriter or underwriters selected for such
underwriting by the Company and (y) any other closing
certificates or similar documents requested by the
underwriter. The custody agreement may contain such other
terms as are customary for this type and shall require the
Holder to deposit its shares of Common Stock being
registered with the custodian for the time periods specified
in the custody agreement. Each Holder agrees that its shares
will be sold at the same price as the other selling
stockholders (and the Company, if applicable) in the
offering under the registration statement. If any Holder is
or will be unable to deliver any document (including any
underwriting agreement, legal opinions or closing
certificates) reasonably required by the underwriters in
connection with the sale of such Registrable Securities,
including, but not limited to legal opinions and other
closing certificates, then the Company shall have no
obligation to include such Registrable Securities in such
registration. Notwithstanding any other provision of the
Agreement, if the underwriter determines in good faith that
marketing factors require a limitation of the number of
shares to be underwritten, the number of shares that may be
included in the underwriting shall be allocated as follows:
first, to the Company for its own account; and second, to
any Holder or other stockholder of the Company who has
registration rights, each on a pro rata basis in accordance
with the terms of their respective agreement providing for
registration rights with the Company. No such reduction
shall reduce the securities being offered by the Company for
its own account to be included in the registration and
underwriting.
Section 2.10 of the Agreement is hereby deleted in its entirety and is
replaced with the following:
2.10 "MARKET STAND-OFF" AGREEMENT. In the case of any
underwritten public offering by the Company of shares of
Common Stock, whether for its own account or for the account
of any stockholder of the Company, each Holder agrees that,
during a period of seven (7) days prior to and ninety (90)
days following the effective date of a registration
statement filed in connection with such offering, such
Holder will not, without the prior written consent of the
Company, sell or otherwise transfer or dispose of any shares
of Common Stock (or other securities) of the Company held by
each such Holder (other than those included in the
registration). The Company shall give notice of such
restriction in the manner set forth in Section 4.7. Upon the
request of the underwriters for any underwritten public
offering of Common Stock of the Company referred to above,
each Holder hereby agrees to deliver a "lock-up" or "market
stand-off" agreement signed by such Holder which is
equivalent in substance to the agreement set forth in this
Section 2.10 addressed to such underwriter. Any such
underwriter shall expressly be deemed to be a third party
beneficiary of this Section 2.10.
The obligations described in this Section 2.10 shall
not apply to (i) transfers to a Holder's family member or
trust for the benefit of an individual Holder or family
member, or (ii) a registration relating solely to employee
benefit plans on Form S-1 or Form S-8 or similar forms that
may be promulgated in the future, or a registration relating
solely to shares issued in an acquisition or pursuant to a
Commission Rule 145 transaction (including the registration
for resale of securities issued in a Rule 145 transaction or
other acquisition transaction) on Form S-1 or Form S-4 under
the Securities Act or similar forms that may be promulgated
in the future, unless in any such case such registration is
in connection with an underwritten public offering. The
Company may impose stop-transfer instructions with respect
to the shares of Common Stock (or other securities) subject
to the foregoing restriction until the end of such
restrictive period.
[Remainder of page intentionally left blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment No. 1 to Registration Rights Agreement as of the date set forth
above.
theglobe.com, inc. Dancing Bear Investments, Inc.
By: By:
------------------------------ ------------------------------
Name: Name: Michael Egan
Title: Title:
By:
------------------------------ ------------------------------
Name: Robert Halperin
Title:
------------------------------
David Horowitz
------------------------------
Todd V. Krizelman
------------------------------
Stephan J. Paternot
Exhibit 4.10
FORM OF
REGISTRATION RIGHTS AGREEMENT
THEGLOBE.COM, INC.
APRIL __, 1999
<PAGE>
TABLE OF CONTENTS
PAGE
1. DEFINITIONS............................................................1
2. REGISTRATION; RESTRICTIONS ON TRANSFER.................................3
2.1 Restrictions on Transfer.........................................3
2.2 Piggyback Registrations..........................................4
2.3 Registration Expenses............................................6
2.4 Certain Covenants................................................7
2.5 Termination of Registration Rights...............................9
2.6 Delay of Registration............................................9
2.7 Indemnification..................................................9
2.8 Rule 144 Reporting..............................................12
2.9 "Market Stand Off" Agreement....................................12
3. CONFIDENTIALITY.......................................................13
4. GENERAL...............................................................13
4.1 Governing Law...................................................13
4.2 Survival........................................................14
4.3 Successors and Assigns..........................................14
4.4 Severability....................................................14
4.5 Amendment and Waiver............................................14
4.6 Delays or Omissions.............................................15
4.7 Notices.........................................................15
4.8 Attorneys'Fees..................................................15
4.9 Headings........................................................15
4.10 Entire Agreement................................................15
4.11 Counterparts....................................................16
4.12 Third-Party Beneficiaries.......................................16
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is entered into
as of the __ day of April, 1999, by and among theglobe.com, inc., a
Delaware corporation (the "Company"), and the Persons listed on Exhibit A
hereto executing and delivering counterparts hereto.
WHEREAS, pursuant to the Agreement and Plan of Merger, dated April __,
1999 (the "Merger Agreement"), by and among the Company, Bucky Acquisition
Corp., Attitude Network Ltd. (the "Acquired Company") and certain other
Persons, pertaining to the acquisition by the Company of the Acquired
Company, the Company has agreed to provide certain registration rights to
the Holders as set forth herein; and
WHEREAS, the parties desire to set forth their agreement as to the
registration rights of the Holders;
NOW, THEREFORE, the parties hereto, in consideration of the foregoing,
the mutual covenants and agreements hereinafter set forth, and other good
and valuable consideration the receipt and sufficiency of which hereby are
acknowledged, agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the
following respective meanings:
"ACQUIRED COMPANY" shall have the meaning set forth in the recitals
hereto.
"AUDITED FINANCIAL STATEMENTS" shall mean the balance sheets,
statements of operations, statements of stockholders' equity and statements
of cash flows, including without limitation any pro forma financial
statements, of the Company, the Acquired Company, any other Person, the
combined (i.e., pooled) entity constituting the Company and the Acquired
Company, and any other Person for accounting purposes, or otherwise, and
any notes relating to any of the foregoing, that are required in the
Company's judgment in order to meet the requirements of Regulation S-X of
the Securities Act or other federal laws applicable to the Company in
connection with any Registration Statement contemplated hereby, covering
any time period required in the Company's judgment by such securities laws,
prepared in accordance with United States Generally Accepted Accounting
Principles consistently applied and audited by a nationally recognized
independent accounting firm selected by the Company, which firm has
executed an unqualified opinion related to, and has consented to the
inclusion of, such financial statements in any such Registration Statement.
"COMMON STOCK" shall mean the common stock, par value $.001 per share,
of the Company.
"COMPETITOR" shall mean any Person engaged in, or owning or
controlling, a business competing with any business competing with the
Company, including, without limitation, a business operating an Internet
Web Site, an online e-commerce or gaming business or a virtual Web site.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations of
the Commission thereunder, all as the same shall be in effect at the time.
References to a particular section of the Securities Exchange Act of 1934,
as amended, shall include a reference to the comparable section, if any, of
any such similar federal statute.
"FAMILY MEMBER" shall mean an individual's spouse, natural and
adoptive children, siblings, parents and grandparents.
"HOLDER" shall mean any Person listed on Exhibit A hereto who owns of
record Registrable Securities or Warrants and who has executed a
counterpart signature page to this Agreement, or any assignee of record of
Registrable Securities or Warrants held by such Person in accordance with
Section 4.3 hereof.
"MERGER AGREEMENT" shall have the meaning set forth in the recitals
hereto.
"PERSON" shall mean any individual, corporation, limited liability
company, partnership, trust or association, or any other entity or
organization, including any government entity.
"PIGGYBACK REGISTRATION STATEMENT" shall have the meaning set forth in
Section 2.2.
"REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration
effected by preparing and filing a registration statement in compliance
with the Securities Act, and the declaration or ordering of effectiveness
of such registration statement or document.
"REGISTRABLE SECURITIES" shall mean (i) shares of Common Stock issued
pursuant to the Merger Agreement; (ii) any Common Stock issued upon
exercise of the Warrants, to the extent permitted to be included in the
Registration Statement by the SEC; and (iii) any Common Stock issued as a
dividend or other distribution with respect to, or in exchange for or in
replacement of, such above-described securities. As to any particular
Registrable Securities, such securities shall cease to be Registrable
Securities when (a) a Registration Statement with respect to the sale of
such securities shall have become effective under the Securities Act and
shall have remained effective for the Effective Period, (b) they may be
sold by the Holder thereof pursuant to Rule 144 or any successor rule under
the Securities Act, (c) they shall have been otherwise transferred, new
certificates for them not bearing a legend restricting further transfer
under the Securities Act shall have been delivered by the Company and
subsequent public distribution of them shall not require registration of
them under the Securities Act, or (d) they shall have ceased to be
outstanding.
"REGISTRATION STATEMENT" shall mean a registration statement of the
Company, filed with the Commission on an appropriate form, including any
registration statement filed pursuant to the provisions of this Agreement,
including the prospectus included therein, all amendments and supplements
thereto (including post-effective amendments) and all exhibits and material
incorporated by reference therein.
"SEC" or "COMMISSION" shall mean the Securities and Exchange
Commission.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
References to a particular section of the Securities Act of 1933, as
amended, shall include a reference to the comparable section, if any, of
any such similar federal statute.
"TRANSFER" shall have the meaning set forth in Section 2.1.
"WARRANTS" shall mean warrants for common stock of the Acquired
Company which were assumed by the Company pursuant to the Merger Agreement
and are exercisable for shares of Common Stock.
2. REGISTRATION; RESTRICTIONS ON TRANSFER.
2.1 RESTRICTIONS ON TRANSFER.
(a) Each Holder agrees not to make any sale, offer for sale,
pledge or other disposition (collectively, a "Transfer") of all or any
portion of Registrable Securities or Warrants unless and until:
(i) There is then in effect a Registration Statement under
the Securities Act covering such proposed Transfer and such Transfer is
made in accordance with such Registration Statement; or
(ii) (A) The transferee has agreed in a letter addressed to
the Company to be bound by this Agreement, (B) such Holder shall have
notified the Company, in advance of the proposed Transfer, of the name and
address of the proposed transferee and shall have furnished the Company
with a detailed statement of the circumstances surrounding such proposed
Transfer, (C) the transferee is not a Competitor of the Company and (D) if
requested by the Company, such Holder shall have furnished the Company with
an opinion of counsel, reasonably satisfactory to the Company, that such
Transfer will not require registration of such shares under the Securities
Act.
(b) Notwithstanding the provisions of paragraphs (i) and (ii) of
clause (a) above, no such Registration Statement or opinion of counsel
shall be necessary for a Transfer by a Holder to the Holder's Family
Members or trusts for the benefit of an individual Holder or such Holder's
Family Members, provided, however, that such Holder shall have notified the
Company in advance of the proposed Transfer, the name and address of the
proposed transferee, and such transferee agrees in a letter addressed to
the Company to be bound by all of the provisions of this Agreement to the
same extent as if such transferee were the transferor prior to any
transfer.
(c) In the case of any Transfer or exercise of a Warrant, the
Holder shall deliver evidence reasonably satisfactory to the Company that
such Holder (or, in the case of a Transfer, the transferee) is an
"accredited investor" within the meaning of that term as defined in Rule
501 promulgated under the Securities Act.
(d) Each certificate representing Registrable Securities or
Warrants shall be stamped or otherwise imprinted with the following
legends:
(i) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO
THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS
NOT REQUIRED."
(ii) ANY LEGEND REQUIRED BY APPLICABLE STATE SECURITIES
LAWS.
(e) The Company shall promptly reissue certificates without the
legend specified in Section 2.1(b)(i) at the request of any Holder who has
obtained an opinion of counsel (which counsel may be counsel to the
Company, but the Company shall not be required to have its counsel deliver
such opinion) or other evidence in each case reasonably acceptable to the
Company to the effect that the Registrable Securities or Warrants proposed
to be disposed of may lawfully be so disposed of without registration,
qualification or legend.
(f) Any legend endorsed on a certificate representing Registrable
Securities or Warrants pursuant to applicable state securities laws and the
stop-transfer instructions with respect to such Registrable Securities
shall be removed upon receipt by the Company of an order of the appropriate
blue sky authority authorizing such removal.
2.2 PIGGYBACK REGISTRATIONS. The Company shall notify all Holders for
whom it has current addresses in writing within ten (10) days following the
filing of a registration statement (a "Piggyback Registration Statement")
under the Securities Act for purposes of a public offering of securities of
the Company being registered for sale by other selling stockholders of
theglobe (excluding registration statements relating to employee benefit
plans or with respect to corporate reorganizations or shares issued or sold
in connection with an acquisition, including transactions under Rule 145 of
the Securities Act) and will afford each such Holder an opportunity to
include in the Piggyback Registration Statement the percentage of
Registrable Securities held by such Holder equal to the percentage of all
shares of Common Stock held by stockholders other than Holders that are
eligible for inclusion in such registration statement pursuant to
applicable registration rights (without regard to any limitations on the
number of shares permitted to be included in the proposed registration
statement) that are actually being included in such registration statement
(the "Applicable Percentage") . Each Holder desiring to include in any such
registration statement all or any part of the Registrable Securities held
by it shall, within five (5) days after receipt of the above-described
notice from the Company, so notify the Company in writing. Such notice from
the Holder shall state the maximum number of Registrable Securities
intended to be included in such registration. Notwithstanding anything in
this Agreement to the contrary, (i) each Holder shall have rights to
include Registrable Securities only in the first three Piggyback
Registration Statements that become effective following the date hereof,
and (ii) for purposes of determining the Applicable Percentage and the
amount of Registrable Securities of any Holder that may be included in a
Piggyback Registration Statement (including, without limitation, for
purposes of the penultimate sentence of clause (a) below), the
overallotment option, if any, relating to such Registration Statement shall
not be taken into account, and the Holders shall have no right to
participate in any such overallotment option and shall have no right to
include additional shares within a Registration Statement because of the
exercise or potential exercise of any such overallotment option.
(a) UNDERWRITING. If a Piggyback Registration Statement is for an
underwritten offering, the Company shall so advise the Holders. In such
event, the right of any such Holder to be included in a registration
pursuant to this Section 2.2 shall be conditioned upon such Holder's
participation in such underwriting on the same terms and conditions as the
other participating selling stockholders and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein;
except that each such Holder shall agree that such Holder shall not be
permitted to withdraw such Holder's shares from any underwriting pursuant
to the Piggyback Registration Statement following the fifth day prior to
the printing of the preliminary prospectus related to such Registration
Statement. Each Holder proposing to distribute its Registrable Securities
through such underwriting shall enter into a custody agreement and power of
attorney, authorizing the Company or specific employees thereof to among
other things (i) sell the Registrable Securities to be offered by such
Holders at the price agreed to by the attorney-in-fact and (ii) execute on
the Holder's behalf (x) an underwriting agreement in customary form with
the underwriter or underwriters selected for such underwriting by the
Company and (y) any other closing certificates or similar documents
requested by the underwriters. The custody agreement shall contain such
other terms as are customary for agreements of this type and shall require
the Holder to deposit its shares of Common Stock being registered with the
custodian for the time periods specified in the custody agreement. Each
Holder agrees that its shares will be sold at the same price as the other
selling stockholders (and the Company, if applicable) in the offering
pursuant to the Piggyback Registration Statement. If any Holder is or will
be unable to deliver any document reasonably required by the underwriters
in connection with the sale of such Registrable Securities, including, but
not limited to an executed underwriting agreement and legal opinions and
other closing certificates, then the Company shall have no obligation to
include such Registrable Securities in such registration. The Company is
not required to obtain any legal opinions on behalf of any Holder. If the
underwriter determines in good faith that marketing factors require a
limitation of the number of shares to be underwritten, the number of shares
that may be included in the underwriting shall be allocated as follows:
first, to the Company for its own account; and second, to the other
stockholders of the Company participating in the offering and to the
Holders on the basis of a recalculated Applicable Percentage. No such
reduction shall reduce the securities being offered by the Company for its
own account to be included in the registration and underwriting.
(b) RIGHT TO TERMINATE OR DELAY REGISTRATION. The Company shall
have the right to terminate, withdraw or delay any registration initiated
by it under this Section 2.2 prior to the effectiveness of such
registration, whether or not any Holder has elected to include securities
in such registration, in which event the Company shall give written notice
to all Holders of record of Registrable Securities. The expenses of such
withdrawn registration shall be borne by the Company in accordance with
Section 2.3 hereof.
2.3 REGISTRATION EXPENSES. (a) All expenses incident to the Company's
performance of or compliance with this Agreement shall be borne by the
Company, regardless of whether a Piggyback Registration Statement becomes
effective, including without limitation:
(i) all registration and filing fees and expenses;
(ii) fees and expenses relating to compliance with federal
securities and state "blue sky" securities laws;
(iii) expenses of printing (including printing certificates
for the Registrable Securities and prospectuses), messenger and delivery
services and telephone charges;
(iv) fees and disbursements of counsel for the Company and
fees and disbursements of up to $10,000 for one counsel for all of the
Holders of the Registrable Securities selling such securities pursuant to a
Piggyback Registration Statement;
(v) all application and filing fees in connection with
listing the Registrable Securities on a national securities exchange or
automated quotation system pursuant to the requirements hereof;
(vi) all fees and disbursements of independent certified
public accountants of the Company (including the expenses of any special
audit required by or incident to such performance); and
(vii) such other reasonable and customary expenses as may be
at such time customarily borne by the issuer, which such reasonable and
customary expenses shall not be deemed to include any underwriter or agent
discounts, commissions or applicable transfer taxes attributable to the
sale of Registrable Securities, all of which shall be borne by the Holders.
The Company shall, in any event, bear its internal expenses
(including, without limitation, all salaries and expenses of its officers
and employees performing legal or accounting duties), the expense of any
annual audit, and the fees and expenses of any Person, including special
experts, retained by the Company. Notwithstanding the provisions of this
Section 2.3, each Holder shall pay registration expenses if and to the
extent required by applicable law.
2.4 CERTAIN COVENANTS. Whenever required to effect the registration of
any Registrable Securities under a Piggyback Registration Statement
pursuant to this Agreement, the Company shall:
(a) Prepare and file with the SEC such amendments and
post-effective amendments to the Piggyback Registration Statement and the
prospectus used in connection therewith as may be necessary to comply with
the provisions of the Securities Act with respect to the sale of all
securities covered by such registration statements, and otherwise comply
with the provisions of the Securities Act with respect to the disposition
of all securities covered by the Piggyback Registration Statement in
accordance with the intended method or methods of distribution by the
sellers thereof as set forth in such Registration Statement or supplements
to the related prospectus;
(b) Furnish to counsel for the selling Holders named in the
Piggyback Registration Statement or related prospectus, after filing with
the SEC, copies of such Registration Statement or prospectus included
therein or any amendments or supplements to such Registration Statement or
prospectus, which documents will be subject to the review and comment of
such counsel for a period of time as is reasonably appropriate under the
circumstances, determined in the sole discretion of the Company (it being
acknowledged that such period shall be at least three (3) business days in
the case of an initial draft of the Registration Statement and such shorter
time as may be appropriate in the case of any supplements or amendments
thereto), and the Company agrees to reasonably consider such comments in
preparing any amendment or supplement to the Piggyback Registration
Statement or related prospectus;
(c) Furnish (without charge) to counsel for the selling Holders,
one copy of the Piggyback Registration Statement, each amendment and
supplement thereto (in each case including all exhibits) and furnish to the
Holders such number of copies of the prospectus included in such Piggyback
Registration Statement, including each preliminary prospectus, in
conformity with the requirements of the Securities Act, and such other
documents as they may reasonably request in order to facilitate the
disposition of Registrable Securities owned by them;
(d) Use all reasonable commercial efforts to register or qualify
the Registrable Securities covered by the Piggyback Registration Statement
under such securities or blue sky laws of such States of the United States
of America where any exemption is not available as shall be reasonably
requested by the Holders, provided that the Company shall not be required
in connection therewith or as a condition thereto to qualify generally to
do business as a foreign corporation, to pay taxes in any jurisdiction
where it would not but for the requirements of this Agreement be obligated
to be so qualified, to consent to general service of process or to pay
taxes in any such state or jurisdiction;
(e) Promptly notify counsel for the Holders selling Registrable
Securities covered by the Piggyback Registration Statement: (i) when the
Registration Statement, any pre-effective amendment, the prospectus or any
prospectus supplement related thereto or post-effective amendment to the
Registration Statement has been filed and, with respect to the Registration
Statement or any post-effective amendment, when the same has become
effective; (ii) of any request by the SEC or state securities authority for
amendments or supplements to the Registration Statement or the prospectus
related thereto or for additional information; (iii) of the issuance by the
SEC of any stop order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for such purpose; and (iv)
of the receipt by the Company of any notification with respect to the
suspension of the qualification of any Registrable Securities for sale
under the securities or blue sky laws of any jurisdiction or the initiation
of any proceeding for such purpose;
(f) Comply with all applicable rules and regulations of the SEC,
and make generally available to the Holders, as soon as reasonably
practicable after the effective date of a Piggyback Registration Statement
(and in any event within sixteen (16) months thereafter), an earnings
statement (which need not be audited) covering the period of at least
twelve (12) consecutive months beginning with the first day of the
Company's first calendar quarter after the effective date of the
Registration Statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act and Rule 158 thereunder;
(g) Cause all Registrable Securities covered by the Piggyback
Registration Statement to be listed on the Nasdaq National Market or
principal securities exchange on which similar securities issued by the
Company are then listed, if the listing of such Registrable Securities is
then permitted under the rules of such exchange;
(h) Provide and cause to be maintained a transfer agent and
registrar for all Registrable Securities covered by the Piggyback
Registration Statement not later than the effective date of such
Registration Statement; and
(i) Cooperate with the selling Holders of Registrable Securities
to facilitate the timely preparation and delivery of certificates not
bearing any restrictive legends representing the Registrable Securities to
be sold, and cause such Registrable Securities to be issued in such
denominations and registered in such names in accordance with the
instructions of the selling Holders of Registrable Securities.
No Holder may include any of its Registrable Securities in a
Registration Statement pursuant to this Agreement unless and until such
Holder furnishes to the Company in writing, as soon as practicable after
the date hereof but in no event later than five (5) days after receipt of
notice from the Company of the filing of the Registration Statement, the
information specified in Item 507 or 508 of Regulation S-K promulgated
under the Securities Act, as applicable, for use in connection with the
Registration Statement or prospectus or preliminary prospectus included
therein. Each selling Holder agrees to promptly furnish such information
and any additional information required to be disclosed in order to make
the information previously furnished to the Company by such Holder not
materially misleading.
The Company shall not be required to effect a registration pursuant to
this Agreement in any particular jurisdiction in which the Company would be
required to qualify to do business as a foreign corporation or to pay taxes
wherein it would not but for the requirements of this Agreement be
obligated to be so qualified or to consent to general service of process or
pay taxes in any such state or jurisdiction effecting such registration,
qualification or compliance.
2.5 TERMINATION OF REGISTRATION RIGHTS. All registration rights
granted to a Holder under this Section 2 shall terminate and be of no
further force and effect upon the earlier of: (i) such time as the
securities of the Company held by a Holder cease to be Registrable
Securities, as defined herein, and (ii) such time as the third effective
Piggyback Registration Statement shall have become effective.
2.6 DELAY OF REGISTRATION. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration
as the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 2.
2.7 INDEMNIFICATION. In the event any Registrable Securities are
included in a Registration Statement under Section 2.2:
(a) Indemnification by the Company. To the extent permitted by
law, the Company will indemnify and hold harmless each Holder, the
partners, officers and directors of each Holder, if any, who control such
Holder within the meaning of the Securities Act or the Exchange Act,
against any and all losses, claims, damages, liabilities or expenses
whatsoever as incurred (including but not limited to reasonable attorneys'
fees and any and all reasonable expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in
settlement of any claim or litigation), joint or several, to which they may
become subject under the Securities Act, the Exchange Act or other federal
or state law, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof), arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact
contained in such Registration Statement or final prospectus contained
therein or any amendments or supplements thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that the Company shall not be
liable in any case to the extent that any loss, claim, damage, liability or
expense (or action or proceeding in respect thereof) arises out of or is
based upon any such untrue statement or alleged untrue statement or
omission or alleged omission made therein in reliance upon and in
conformity with written information furnished expressly for use in
connection with such registration by such Holder, partner, officer,
director, or controlling person of such Holder, and provided, further, that
the Company shall not be liable to any Person who participates in the
offering or sale of Registrable Securities or any other Person, if any, who
controls such Person, in any such case if any such loss, claim, damage,
liability or expense (or action or proceeding in respect thereof) arises
out of such Person's failure to send or give a copy of the final prospectus
or amendment or supplement thereto, as the same may be then supplemented or
amended, to the Person asserting an untrue statement or alleged untrue
statement or omission or alleged omission at or prior to the written
confirmation of the sale of Registrable Securities to such Person if such
statement or omission was corrected in such final prospectus so long as
such final prospectus, and any amendments or supplements thereto, have been
furnished to such Person participating in the offering or sale of
Registrable Securities.
(b) Indemnification by the Holders. To the extent permitted by
law, each Holder will, if Registrable Securities held by such Holder are
included in such Registration Statement, indemnify and hold harmless the
Company, each of its directors, its officers, and each Person, if any, who
controls the Company within the meaning of the Securities Act, and any
other Holder selling securities under such Registration Statement or any of
such other Holder's partners, directors or officers, if any, who control
such Holder, against any losses, claims, damages, liabilities or expenses
(including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and
all amounts paid in settlement of any claim or litigation), severally, to
which the Company or any such director, officer, controlling Person, or
other such Holder, partner, director, or officer, if any, or controlling
such other Holder may become subject under the Securities Act, the Exchange
Act or other federal or state law, insofar as such losses, claims, damages,
liabilities or expenses (or actions or proceedings in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement for
registration of the Registrable Securities, or final prospectus contained
therein or any amendments or supplements thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent (and only to the extent)
that such losses, claims, damages, liabilities or expenses (or actions or
proceedings in respect thereof) arise out of or are based upon any such
untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon and in conformity with written
information furnished to the Company by such Holder expressly for use in
connection with such registration.
(c) Notices of Claims, etc. Promptly after receipt by an
indemnified party of notice of the commencement of any action or proceeding
involving a claim referred to in the preceding subdivisions of this Section
2.7, such indemnified party will, if a claim in respect thereof is to be
made against an indemnifying party, give written notice to the latter of
the commencement of such action; provided, however, that the failure of any
indemnified party to give notice as provided herein shall not relieve the
indemnifying party of its obligations under the preceding subdivisions of
this Section 2.7, except to the extent that the indemnifying party is
prejudiced by such failure to give notice. In case any such action is
brought against an indemnified party, and it notifies an indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein, and, to the extent it may elect by written notice
delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof.
Notwithstanding the foregoing, the indemnified party shall have the right
to employ its own counsel in any such case, but the fees and expenses of
such counsel shall be at the expense of such indemnified party unless (i)
the employment of such counsel shall have been authorized in writing by the
indemnifying party in connection with the defense of such action, (ii) the
indemnifying party shall not have employed counsel to have charge of the
defense of such action within a reasonable time after notice of
commencement of the action, or (iii) such indemnified party shall have
reasonably concluded that there may be defenses available to it which are
different from or additional to those available to the indemnifying party
(in which case the indemnifying party shall not have the right to direct
the defense of such action on behalf of the indemnified party), in any of
which events such fees and expenses shall be borne by the indemnifying
party. In no event shall the indemnifying party be liable for fees and
expenses of more than one counsel (in addition to any local counsel)
separate from its own counsel for all indemnified parties in connection
with any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances,
and which counsel shall be approved by the indemnifying party, whose
approval shall not be unreasonably withheld. No indemnifying party shall be
liable for any settlement of any action or proceeding effected without its
written consent, which consent shall not be unreasonably withheld. No
indemnifying party shall, without the consent of the indemnified party,
consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in
respect of such claim or litigation.
(d) Contribution. If the indemnification provided for in this
Section 2.7 is held by a court of competent jurisdiction to be unavailable
to an indemnified party with respect to any losses, claims, damages,
liabilities or expenses (including but not limited to attorneys' fees and
any and all expenses whatsoever incurred in investigating, preparing or
defending against any litigation, commenced or threatened, or any claim
whatsoever, and any and all amounts paid in settlement of any claim or
litigation), joint or several, of the nature contemplated by such
indemnification provision, the indemnifying party, in lieu of indemnifying
such indemnified party thereunder, shall to the extent permitted by
applicable law contribute to the amount paid or payable by such indemnified
party as a result of such loss, claim, damage, liability or expense (or
action or proceeding in respect thereof) in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on the
one hand and of the indemnified party on the other in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses (or actions or proceedings in respect thereof), as
well as any other relevant equitable considerations. The relative fault of
the indemnifying party and of the indemnified party shall be determined by
a court of law by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission to state a
material fact relates to information supplied by the indemnifying party or
by the indemnified party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement
or omission; provided that, in no event shall any contribution by a Holder
hereunder exceed the net proceeds from the offering received by such
Holder. No Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation. In addition, no Person shall be obligated to contribute
hereunder any amounts in payment for any settlement of any action or claim
effected without such Person's consent, which consent shall not be
unreasonably withheld.
(e) Survival of Indemnification. The obligations of the Company
and the Holders under this Section 2.7 shall survive completion of any
offering of Registrable Securities in a Registration Statement pursuant to
Section 2.2.
(f) Other Indemnification. Indemnification and contribution
similar to that specified in the preceding subdivisions of this Section 2.7
(with appropriate modifications) shall be given by the Company and each
seller of Registrable Securities with respect to any required registration
or other qualification of securities under any federal or state law or
regulation of any governmental authority other than the Securities Act.
2.8 RULE 144 REPORTING. With a view to making available to the Holders
the benefits of certain rules and regulations of the SEC which may permit
the sale of the Registrable Securities to the public without registration,
the Company agrees to use its commercially reasonable best efforts to:
(a) Make and keep public information available, as those terms
are understood and defined in SEC Rule 144 or any similar or analogous rule
promulgated under the Securities Act; and
(b) File with the SEC, in a timely manner, all reports and other
documents required of the Company under the Exchange Act.
2.9 "MARKET STAND OFF" AGREEMENT. In the case of any underwritten
public offering by the Company of shares of Common Stock, whether for its
own account or for the account of any stockholder of the Company, each
Holder agrees that, during a period of seven (7) days prior to and ninety
(90) days following the effective date of a Registration Statement filed in
connection with such offering, such Holder will not, without the prior
written consent of the Company, directly or indirectly, offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase
any option or contract to sell, grant any option, right or warrant for the
sale of, or otherwise dispose of or transfer any shares of Common Stock or
any securities convertible into or exchangeable or exercisable for Common
Stock, whether now owned or hereafter acquired by such Holder or with
respect to which such Holder has or hereafter acquires the power of
disposition, or enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly,
the economic consequence of ownership of the Common Stock, whether any such
swap or transaction is to be settled by delivery of Common Stock or other
securities, in cash or otherwise. The Company shall give notice of such
restriction in the manner set forth in Section 4.7. Upon the request of the
underwriters for any underwritten public offering of Common Stock of the
Company referred to above, each Holder hereby agrees to deliver a "lock-up"
or "market stand-off" agreement signed by such Holder which is equivalent
in substance to the agreement set forth in this Section 2.9 addressed to
such underwriter. Any such underwriter shall expressly be deemed to be a
third party beneficiary of this Section 2.9.
The obligations described in this Section 2.9 shall not apply to a
registration relating solely to employee benefit plans or similar forms
that may be promulgated in the future, or a registration relating solely to
a Rule 145 transaction (including the registration for resale of securities
issued in a Rule 145 transaction) on Form S-4 under the Securities Act or
similar forms that may be promulgated in the future, unless in any such
case such registration is in connection with an underwritten public
offering. The Company may impose stop-transfer instructions with respect to
the shares of Common Stock (or other securities) subject to the foregoing
restriction until the end of such restrictive period.
3. CONFIDENTIALITY.
(a) Each Holder agrees not to disclose to any third party or use
Confidential Information (as hereinafter defined) of the Company for its
own use or for any purpose except to evaluate and enforce its current
equity investment in the Company. Each Holder shall undertake to treat such
Confidential Information in a manner consistent with the treatment of its
own information of similar proprietary nature and agrees that it shall
protect the confidentiality of Confidential Information. Each transferee of
any Holder who receives Confidential Information shall agree to be bound by
such provisions.
(b) "Confidential Information" means any notices given by the
Company pursuant to the terms of this Agreement and any other information
disclosed by the Company either directly or indirectly in a writing stamped
"Confidential" or "Proprietary" or, if disclosed orally, which is promptly
confirmed in writing to be Confidential Information. Confidential
Information does not include information, technical data or know-how which
(i) is generally known or publicly available not as a result of any action
or inaction of a Holder; (ii) is disclosed to a Holder on a
non-confidential basis by a third party having a legal right to disclose
such information; or (iii) is approved for release by written authorization
of the Company. The provisions of this Section shall not apply to the
extent that a Holder is required to disclose Confidential Information
pursuant to any law, statute, rule or regulation or any legal process or
order of any court, provided that the Holder shall notify the Company of
any such required disclosure as promptly as possible and shall cooperate
with the Company in order to limit the scope of any order or service of
legal process requiring disclosure of such Confidential Information.
4. GENERAL.
4.1 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of New York without giving effect to conflicts
of laws principles. Each of the parties to this Agreement hereby
irrevocably and unconditionally consents to submit to the exclusive
jurisdiction of the courts of the State of New York and the courts of the
United States of America located in the Southern District of the State of
New York for any action, claim or proceeding arising out of or relating to
this Agreement (and agrees not to commence any action, claim or proceeding
relating hereto except in such courts), and further agrees that service of
any process, summons, notice or document by U.S. registered mail to its
respective address shall be effective service of process for any action,
claim or proceeding brought against it in any such court. Each of the
parties to this Agreement hereby irrevocably and unconditionally waives any
objection to the laying of venue of any action, claim or proceeding arising
out of this Agreement in the courts of the State of New York or the courts
of the United States of America located in the State of New York and hereby
further irrevocably and unconditionally waives and agrees not to plead or
claim in any such court that any such action, claim or proceeding brought
in any such court has been brought in an inconvenient forum. Each of the
parties hereto hereby irrevocably and unconditionally waives any right it
may have to trial by jury in connection with any action, claim or
proceeding arising out of or relating to this Agreement.
4.2 SURVIVAL. The provisions of Section 2.7 and Section 3 hereof shall
survive any termination of this Agreement
4.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors, and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
Person who shall be a Holder from time to time in accordance with the terms
of this Agreement.
4.4 SEVERABILITY. In case any provision of the Agreement shall be
invalid, illegal, or unenforceable, the validity, legality, and
enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
4.5 AMENDMENT AND WAIVER.
(a) Except as otherwise expressly provided herein, this Agreement
may be amended or modified and the observance of any provision hereof may
be waived (either generally or in a particular instance and either
retroactively or prospectively) upon the written consent of the Company and
the Holders of at least a majority in interest of the Registrable
Securities. Any amendment or waiver effected in accordance with this
Section 4.5 shall be binding upon each Holder and the Company.
(b) Except as otherwise expressly provided herein, the
obligations of the Company and the rights of the Holders under this
Agreement may be waived only with the written consent of at least a
majority in interest of the Registrable Securities.
(c) This Agreement may be amended only with the written consent
of the Company to include any additional party as a "Holder."
4.6 DELAYS OR OMISSIONS. It is agreed that no delay or omission to
exercise any right, power or remedy accruing to any Holder, upon any
breach, default or noncompliance of the Company under this Agreement shall
impair any such right, power or remedy, nor shall it be construed to be a
waiver of any such breach, default or noncompliance, or any acquiescence
therein, or of any similar breach, default or noncompliance thereafter
occurring. It is further agreed that any waiver, permit, consent or
approval of any kind or character on any Holder's part of any breach,
default or noncompliance under this Agreement or any waiver on such
Holder's part of any provisions or conditions of this Agreement must be in
writing and shall be effective only to the extent specifically set forth in
such writing. All remedies, either under this Agreement, by law or
otherwise afforded to Holders, shall be cumulative and not alternative.
4.7 NOTICES. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given and received: (i) upon
personal delivery to the party to be notified, (ii) when sent by confirmed
facsimile if sent during normal business hours of the sender; if not, then
on the next business day, (iii) five (5) days after having been sent by
registered or certified mail, return receipt requested, postage prepaid, or
(iv) one (1) day after deposit with a recognized overnight courier,
specifying next day delivery. All communications shall be sent to the party
to be notified at the address as set forth on Exhibit A hereto or at such
other address as such party may designate in writing to the Company in
accordance with this Section 4.7 by ten (10) days' advance written notice
to the other parties hereto.
4.8 ATTORNEYS' FEES. In the event that any dispute among the parties
to this Agreement should result in litigation, the prevailing party in such
dispute shall be entitled to recover from the losing party all fees, costs
and expenses of enforcing any right of such prevailing party under or with
respect to this Agreement, including without limitation, such reasonable
fees and expenses of attorneys and accountants, which shall include,
without limitation, all fees, costs and expenses of appeals.
4.9 HEADINGS. The titles of the sections and subsections of this
Agreement are for convenience of reference only and are not to be
considered in construing the intent of this Agreement.
4.10 ENTIRE AGREEMENT. This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the subject
matter hereof and supersedes all previous negotiations, agreements and
arrangements made between the parties with respect to such subject matter.
4.11 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
4.12 THIRD-PARTY BENEFICIARIES. This Agreement shall inure to the
benefit of and be binding upon the Company and each of the other
signatories hereto and their respective successors and assigns. The
underwriter for an underwritten public offering of the Company shall be
expressly deemed to be a third-party beneficiary of the provisions of such
Section. Other than as expressly set forth in this paragraph, no other
party will be considered a third-party beneficiary of any rights or
benefits created under this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Registration
Rights Agreement as of the date set forth in the first paragraph hereof.
COMPANY: HOLDER:
THEGLOBE.COM, INC.
By: By:
------------------------------ ------------------------------
Todd V. Krizelman
Co-Chief Executive Officer
By:
------------------------------
Stephan J. Paternot
Co-Chief Executive Officer
<PAGE>
EXHIBIT A
SCHEDULE OF POTENTIAL HOLDERS
Name Address Telephone and Facsimile
- ---- ------- -----------------------
Exhibit 10.7
theglobe.com,inc.
1998 STOCK OPTION PLAN
As Amended and Restated March 19, 1999
<PAGE>
theglobe.com,inc.
1998 STOCK OPTION PLAN
1. Purpose.
-------
The purpose of this Plan is to strengthen theglobe.com, inc., a
Delaware corporation (the "Company"), by providing an incentive to its
employees, officers, consultants and directors and thereby encouraging them
to devote their abilities and industry to the success of the Company's
business enterprise. It is intended that this purpose be achieved by
extending to employees (including future employees who have received a
formal written offer of employment), officers, consultants and directors of
the Company and its Subsidiaries an added long-term incentive for high
levels of performance and extraordinary efforts through the grant of
Incentive Stock Options and Nonqualified Stock Options (as each term is
herein defined).
2. Definitions.
-----------
For purposes of the Plan:
2.1 "Adjusted Fair Market Value" means, in the event of a Change
in Control, the greater of (a) the highest price per Share paid to holders
of the Shares in any transaction (or series of transactions) constituting
or resulting in a Change in Control or (b) the highest Fair Market Value of
a Share during the ninety (90) day period ending on the date of a Change in
Control.
2.2 "Affiliate" means any entity, directly or indirectly,
controlled by, controlling or under common control with the Company or any
corporation or other entity acquiring, directly or indirectly, all or
substantially all the assets and business of the Company, whether by
operation of law or otherwise.
2.3 "Agreement" means the written agreement between the Company
and an Optionee evidencing the grant of an Option and setting forth the
terms and conditions thereof.
2.4 "Board" means the Board of Directors of the Company.
2.5 "Cause" means:
(a) for purposes of Section 6.4, the commission of an act of
fraud or intentional misrepresentation or an act of embezzlement,
misappropriation or conversion of assets or opportunities of the Company or
any of its Subsidiaries; and
(b) in the case of an Optionee whose employment with the
Company or a Subsidiary is subject to the terms of an employment agreement
between such Optionee and the Company or Subsidiary, which employment
agreement includes a definition of "Cause", the term "Cause" as used in the
Plan or any Agreement shall have the meaning set forth in such employment
agreement during the period that such employment agreement remains in
effect; and
(c) in all other cases, (i) intentional failure to perform
reasonably assigned duties, (ii) dishonesty or willful misconduct in the
performance of duties, (iii) involvement in a transaction in connection
with the performance of duties to the Company or any of its Subsidiaries
which transaction is adverse to the interests of the Company or any of its
Subsidiaries and which is engaged in for personal profit or (iv) willful
violation of any law, rule or regulation in connection with the performance
of duties (other than traffic violations or similar offenses).
2.6 "Change in Capitalization" means any increase or reduction in
the number of Shares, or any change (including, but not limited to, in the
case of a spin-off, dividend or other distribution in respect of Shares, a
change in value) in the Shares or exchange of Shares for a different number
or kind of shares or other securities of the Company or another
corporation, by reason of a reclassification, recapitalization, merger,
consolidation, reorganization, spin-off, split-up, issuance of warrants or
rights or debentures, stock dividend, stock split or reverse stock split,
cash dividend, property dividend, combination or exchange of shares,
repurchase of shares, change in corporate structure or otherwise.
2.7 A "Change in Control" shall mean the occurrence of any of the
following:
(a) An acquisition (other than directly from the Company) of
any voting securities of the Company (the "Voting Securities") by any
"Person" (as the term person is used for purposes of Section 13(d) or 14(d)
of the Exchange Act), immediately after which such Person has "Beneficial
Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange
Act) of thirty percent (30%) or more of the then outstanding Shares or the
combined voting power of the Company's then outstanding Voting Securities;
provided, however, in determining whether a Change in Control has occurred
pursuant to this Section 2.7(a), Shares or Voting Securities which are
acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not
constitute an acquisition which would cause a Change in Control. A
"Non-Control Acquisition" shall mean an acquisition by (i) an employee
benefit plan (or a trust forming a part thereof) maintained by (A) the
Company or (B) any corporation or other Person of which a majority of its
voting power or its voting equity securities or equity interest is owned,
directly or indirectly, by the Company (for purposes of this definition, a
"Majority-Owned Subsidiary"), (ii) the Company or its Majority-Owned
Subsidiaries, or (iii) any Person in connection with a "Non-Control
Transaction" (as hereinafter defined);
(b) The individuals who, as of date plan is adopted are
members of the Board (the "Incumbent Board"), cease for any reason to
constitute at least two-thirds of the members of the Board; provided,
however, that if the election, or nomination for election by the Company's
common stockholders, of any new director was approved by a vote of at least
two-thirds of the Incumbent Board, such new director shall, for purposes of
the Plan, be considered as a member of the Incumbent Board; provided
further, however, that no individual shall be considered a member of the
Incumbent Board if such individual initially assumed office as a result of
either an actual or threatened "Election Contest" (as described in Rule
14a-11 promulgated under the Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than
the Board (a "Proxy Contest") including by reason of any agreement intended
to avoid or settle any Election Contest or Proxy Contest; or
(c) The consummation of:
(i) A merger, consolidation or reorganization with or
into the Company or in which securities of the Company are issued, unless
such merger, consolidation or reorganization is a "Non-Control
Transaction." A "Non-Control Transaction" shall mean a merger,
consolidation or reorganization with or into the Company or in which
securities of the Company are issued where:
(A) the stockholders of the Company, immediately
before such merger, consolidation or reorganization, own directly or
indirectly immediately following such merger, consolidation or
reorganization, at least sixty percent (60%) of the combined voting power
of the outstanding voting securities of the corporation resulting from such
merger or consolidation or reorganization (the "Surviving Corporation") in
substantially the same proportion as their ownership of the Voting
Securities immediately before such merger, consolidation or reorganization,
(B) the individuals who were members of the
Incumbent Board immediately prior to the execution of the agreement
providing for such merger, consolidation or reorganization constitute at
least two-thirds of the members of the board of directors of the Surviving
Corporation, or a corporation beneficially directly or indirectly owning a
majority of the Voting Securities of the Surviving Corporation, and
(C) no Person other than (1) the Company, (2) any
Majority-Owned Subsidiary, (3) any employee benefit plan (or any trust
forming a part thereof) that, immediately prior to such merger,
consolidation or reorganization, was maintained by the Company or any
Majority-Owned Subsidiary, or (4) any Person who, immediately prior to such
merger, consolidation or reorganization had Beneficial Ownership of thirty
percent (30%) or more of the then outstanding Voting Securities or Shares,
has Beneficial Ownership of thirty percent (30%) or more of the combined
voting power of the Surviving Corporation's then outstanding voting
securities or its common stock.
(ii) A complete liquidation or dissolution of the
Company; or
(iii) The sale or other disposition of all or
substantially all of the assets of the Company to any Person (other than a
transfer to a Majority-Owned Subsidiary or the distribution to the
Company's stockholders of the stock of a Majority-Owned Subsidiary or any
other assets).
Notwithstanding the foregoing, a Change in Control shall not be
deemed to occur solely because any Person (the "Subject Person") acquired
Beneficial Ownership of more than the permitted amount of the then
outstanding Shares or Voting Securities as a result of the acquisition of
Shares or Voting Securities by the Company which, by reducing the number of
Shares or Voting Securities then outstanding, increases the proportional
number of shares Beneficially Owned by the Subject Persons, provided that
if a Change in Control would occur (but for the operation of this sentence)
as a result of the acquisition of Shares or Voting Securities by the
Company, and after such share acquisition by the Company, the Subject
Person becomes the Beneficial Owner of any additional Shares or Voting
Securities which increases the percentage of the then outstanding Shares or
Voting Securities Beneficially Owned by the Subject Person, then a Change
in Control shall occur.
If an Eligible Individual's employment is terminated by the
Company without Cause prior to the date of a Change in Control but the
Eligible Individual reasonably demonstrates that the termination (A) was at
the request of a third party who has indicated an intention or taken steps
reasonably calculated to effect a change in control or (B) otherwise arose
in connection with, or in anticipation of, a Change in Control which has
been threatened or proposed, such termination shall be deemed to have
occurred after a Change in Control for purposes of the Plan provided a
Change in Control shall actually have occurred.
2.8 "Code" means the Internal Revenue Code of 1986, as amended.
2.9 "Committee" means a committee, as described in Section 3.1,
appointed by the Board from time to time to administer the Plan and to
perform the functions set forth herein.
2.10 "Community Leader" means an individual participating in the
formation and dissemination of content on the Company's web site and who
manages communities on the web site, highlights member content,
communicates directly to members and organizes events, as determined from
time to time in the Company's sole discretion.
2.11 "Company" means theglobe.com, inc., a Delaware corporation.
2.12 "Consultant" means any consultant or advisor that qualifies
as an "employee" within the meaning of rules applicable to Form S-8, as in
effect from time to time, of the Securities Act of 1933, as amended.
2.12 "Director" means a director of the Company.
2.13 "Disability" means:
(a) in the case of an Optionee whose employment with the
Company or a Subsidiary is subject to the terms of an employment agreement
between such Optionee and the Company or Subsidiary, which employment
agreement includes a definition of "Disability", the term "Disability" as
used in the Plan or any Agreement shall have the meaning set forth in such
employment agreement during the period that such employment agreement
remains in effect; and
(b) in all other cases, the term "Disability" as used in the
Plan or any Agreement shall mean a physical or mental infirmity which
impairs the Optionee's ability to perform substantially his or her duties
for a period of one hundred eighty (180) consecutive days.
2.14 "Division" means any of the operating units or divisions of
the Company designated as a Division by the Committee.
2.15 "Eligible Director" means a director of the Company who does
not perform services as, or have the responsibilities of, an employee or
officer, and who does not receive compensation or other consideration from
the Company or any Subsidiary, other than in his or her capacity as a
director.
2.16 "Eligible Individual" means any of the following
individuals: (a) any director, officer or employee of the Company or a
Subsidiary, (b) any individual to whom the Company or a Subsidiary has
extended a formal, written offer of employment, or (c) any Consultant.
2.17 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
2.18 "Fair Market Value" on any date means the closing sales
prices of the Shares on such date on the principal national securities
exchange on which such Shares are listed or admitted to trading, or, if
such Shares are not so listed or admitted to trading, the average of the
per Share closing bid price and per Share closing asked price on such date
as quoted on the National Association of Securities Dealers Automated
Quotation System or such other market in which such prices are regularly
quoted, or, if there have been no published bid or asked quotations with
respect to Shares on such date, the Fair Market Value shall be the value
established by the Board in good faith and, in the case of an Incentive
Stock Option, in accordance with Section 422 of the Code.
2.19 "Formula Option" means an Option granted pursuant to Section
6.
2.20 "Incentive Stock Option" means an Option satisfying the
requirements of Section 422 of the Code and designated by the Committee as
an Incentive Stock Option.
2.21 "Nonemployee Director" means a director of the Company who
is a "nonemployee director" within the meaning of Rule 16b-3 promulgated
under the Exchange Act.
2.22 "Nonqualified Stock Option" means an Option which is not an
Incentive Stock Option.
2.23 "Option" means a Nonqualified Stock Option, an Incentive
Stock Option, a Formula Option, or any or all of them.
2.24 "Optionee" means a person to whom an Option has been granted
under the Plan.
2.25 "Outside Director" means a director of the Company who is an
"outside director" within the meaning of Section 162(m) of the Code and the
regulations promulgated thereunder.
2.26 "Parent" means any corporation which is a parent corporation
(within the meaning of Section 424(e) of the Code) with respect to the
Company.
2.27 "Performance-Based Compensation" means any Option that is
intended to constitute "performance-based compensation" within the meaning
of Section 162(m)(4)(C) of the Code and the regulations promulgated
thereunder.
2.28 "Permitted Transferee" means an Optionee's immediate family,
trusts solely for the benefit of such family members and partnerships in
which such family members and/or trusts are the only partners. For this
purpose, "immediate family" of an Optionee means the Optionee's spouse,
parents, children, stepchildren and grandchildren and the spouses of such
parents, children, stepchildren and grandchildren.
2.29 "Plan" means this theglobe.com, inc. 1998 Stock Option Plan,
as amended from time to time.
2.30 "Pooling Transaction" means an acquisition of the Company in
a transaction which is intended to be treated as a "pooling of interests"
under generally accepted accounting principles.
2.31 "Shares" means the Common Stock, par value $0.001 per share,
of the Company.
2.32 "Subsidiary" means any corporation which is a subsidiary
corporation (within the meaning of Section 424(f) of the Code) with respect
to the Company.
2.33 "Successor Corporation" means a corporation, or a parent or
subsidiary thereof within the meaning of Section 424(a) of the Code, which
issues or assumes a stock option in a transaction to which Section 424(a)
of the Code applies.
2.34 "Ten-Percent Stockholder" means an Eligible Individual, who,
at the time an Incentive Stock Option is to be granted to him or her, owns
(within the meaning of Section 422(b)(6) of the Code) stock possessing more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company, or of a Parent or a Subsidiary.
3. Administration.
--------------
3.1 The Plan shall be administered by the Committee, which shall
hold meetings at such times as may be necessary for the proper
administration of the Plan. The Committee shall keep minutes of its
meetings. A quorum shall consist of not fewer than two (2) members of the
Committee and a majority of a quorum may authorize any action. Any decision
or determination reduced to writing and signed by a majority of all of the
members of the Committee shall be as fully effective as if made by a
majority vote at a meeting duly called and held. The Committee shall
consist of at least two (2) Directors and may consist of the entire Board;
provided, however, that (A) if the Committee consists of less than the
entire Board, each member shall be a Nonemployee Director and (B) to the
extent necessary for any Option intended to qualify as Performance-Based
Compensation to so qualify, each member of the Committee, whether or not it
consists of the entire Board, shall be an Outside Director. For purposes of
the preceding sentence, if one or more members of the Committee is not a
Nonemployee Director and an Outside Director but recuses himself or herself
or abstains from voting with respect to a particular action taken by the
Committee, then the Committee, with respect to that action, shall be deemed
to consist only of the members of the Committee who have not recused
themselves or abstained from voting.
3.2 No member of the Committee shall be liable for any action,
failure to act, determination or interpretation made in good faith with
respect to the Plan or any transaction hereunder. The Company hereby agrees
to indemnify each member of the Committee for all costs and expenses and,
to the extent permitted by applicable law, any liability incurred in
connection with defending against, responding to, negotiating for the
settlement of or otherwise dealing with any claim, cause of action or
dispute of any kind arising in connection with any actions in administering
the Plan or in authorizing or denying authorization to any transaction
hereunder.
3.3 Subject to the express terms and conditions set forth herein,
the Committee shall have the power from time to time to:
(a) determine those Eligible Individuals to whom Options
shall be granted under the Plan and the number of such Options to be
granted and to prescribe the terms and conditions (which need not be
identical) of each such Option, including the exercise price per Share
subject to each Option, and make any amendment or modification to any
Agreement consistent with the terms of the Plan;
(b) to construe and interpret the Plan and any Agreements
granted hereunder and to establish, amend and revoke rules and regulations
for the administration of the Plan, including, but not limited to,
correcting any defect or supplying any omission, or reconciling any
inconsistency in the Plan or in any Agreement, in the manner and to the
extent it shall deem necessary or advisable, including so that the Plan
complies with Rule 16b-3 under the Exchange Act, the Code to the extent
applicable and other applicable law, and otherwise to make the Plan fully
effective. All decisions and determinations by the Committee in the
exercise of this power shall be final, binding and conclusive upon the
Company, its Subsidiaries, the Optionees, and all other persons having any
interest therein;
(c) to determine the duration and purposes for leaves of
absence which may be granted to an Optionee on an individual basis without
constituting a termination of employment or service for purposes of the
Plan;
(d) to exercise its discretion with respect to the powers
and rights granted to it as set forth in the Plan; and
(f) generally, to exercise such powers and to perform such
acts as are deemed necessary or advisable to promote the best interests of
the Company with respect to the Plan.
4. Stock Subject to the Plan; Grant Limitations.
--------------------------------------------
4.1 The maximum number of Shares that may be made the subject of
Options granted under the Plan is one million seven hundred thousand
(1,700,000). The maximum number of Shares that may be the subject of
Options granted to any Eligible Individual during any three (3) consecutive
calendar year period may not exceed 250,000 Shares. Upon a Change in
Capitalization, the maximum number of Shares referred to in the first two
sentences of this Section 4.1 shall be adjusted in number and kind pursuant
to Section 10. The Company shall reserve for the purposes of the Plan, out
of its authorized but unissued Shares or out of Shares held in the
Company's treasury, or partly out of each, such number of Shares as shall
be determined by the Board.
4.2 Upon the granting of an Option, the number of Shares
available under Section 4.1 for the granting of further Options shall be
reduced by the number of Shares in respect of which the Option is granted;
provided, however, that if any Option is exercised by tendering Shares,
either actually or by attestation, to the Company as full or partial
payment of the exercise price, the maximum number of Shares available under
Section 4.1 shall be increased by the number of Shares so tendered.
4.3 Whenever any outstanding Option or portion thereof expires,
is canceled, is settled in cash (including the settlement of tax
withholding obligations using Shares) or is otherwise terminated for any
reason without having been exercised or payment having been made in respect
of the entire Option, the Shares allocable to the expired, canceled,
settled or otherwise terminated portion of the Option may again be the
subject of Options granted hereunder.
5. Option Grants for Eligible Individuals.
--------------------------------------
5.1 Authority of Committee. Subject to the provisions of the
Plan, the Committee shall have full and final authority to select those
Eligible Individuals who will receive Options, and the terms and conditions
of the grant to such Eligible Individuals shall be set forth in an
Agreement.
5.2 Exercise Price. The purchase price or the manner in which the
exercise price is to be determined for Shares under each Option shall be
determined by the Committee and set forth in the Agreement; provided,
however, that the exercise price per Share under each Incentive Stock
Option shall not be less than 100% of the Fair Market Value of a Share on
the date the Option is granted (110% in the case of an Incentive Stock
Option granted to a Ten-Percent Stockholder).
5.3 Maximum Duration. Options granted hereunder shall be for such
term as the Committee shall determine, provided that an Incentive Stock
Option shall not be exercisable after the expiration of ten (10) years from
the date it is granted (five (5) years in the case of an Incentive Stock
Option granted to a Ten-Percent Stockholder) and a Nonqualified Stock
Option shall not be exercisable after the expiration of ten (10) years from
the date it is granted; provided, however, that the Committee may provide
that an Option (other than an Incentive Stock Option) may, upon the death
of the Optionee, be exercised for up to one (1) year following the date of
the Optionee's death even if such period extends beyond ten (10) years from
the date the Option is granted. The Committee may, subsequent to the
granting of any Option, extend the term thereof, but in no event shall the
term as so extended exceed the maximum term provided for in the preceding
sentence.
5.4 Vesting. Subject to Section 7.4, each Option shall become
exercisable in such installments (which need not be equal) and at such
times as may be designated by the Committee and set forth in the Agreement.
To the extent not exercised, installments shall accumulate and be
exercisable, in whole or in part, at any time after becoming exercisable,
but not later than the date the Option expires. The Committee may
accelerate the exercisability of any Option or portion thereof at any time.
5.5 Deferred Delivery of Option Shares. The Committee may, in its
discretion, permit Optionees to elect to defer the issuance of Shares upon
the exercise of one or more Nonqualified Stock Options granted pursuant to
the Plan. The terms and conditions of such deferral shall be determined at
the time of the grant of the Option or thereafter and shall be set forth in
the Agreement evidencing the grant.
5.6 Limitations on Incentive Stock Options. To the extent that
the aggregate Fair Market Value (determined as of the date of the grant) of
Shares with respect to which Incentive Stock Options granted under the Plan
and "incentive stock options" (within the meaning of Section 422 of the
Code) granted under all other plans of the Company or its Subsidiaries (in
either case determined without regard to this Section 5.6) are exercisable
by an Optionee for the first time during any calendar year exceeds
$100,000, such Incentive Stock Options shall be treated as Nonqualified
Stock Options. In applying the limitation in the preceding sentence in the
case of multiple Option grants, Options which were intended to be Incentive
Stock Options shall be treated as Nonqualified Stock Options according to
the order in which they were granted such that the most recently granted
Options are first treated as Nonqualified Stock Options.
6. Option Grants for Nonemployee Directors.
---------------------------------------
6.1 Grant. Formula Options shall be granted to Eligible Directors
as follows:
(a) Initial Grant for Current Eligible Directors. Each
person who is an Eligible Director as of July 15, 1998, shall, as of such
date, be granted a Formula Option in respect of 25,000 Shares.
(b) Initial Grant for Subsequent Eligible Directors. Each
Eligible Director who becomes a Director for the first time after July 15,
1998 and while this Plan is in effect, shall, upon becoming a Director, be
granted a Formula Option in respect of 12,500 Shares.
(c) Annual Grant. Each Eligible Director shall be granted a
Formula Option in respect of 3,750 Shares on the first business day after
the annual meeting of the stockholders of the Company in each year that the
Plan is in effect provided that the Eligible Director is a Director on such
date.
All Formula Options shall be evidenced by an Agreement containing
such other terms and conditions not inconsistent with the provisions of the
Plan as determined by the Board; provided, however, that such terms shall
not vary the price, amount or timing of Formula Options provided under this
Section 6, including provisions dealing with vesting, forfeiture and
termination of such Formula Options.
6.2 Purchase Price. The purchase price for Shares under each
Formula Option shall be equal to 100% of the Fair Market Value of such
Shares on the date the Formula Option is granted.
6.3 Vesting. Subject to Section 7.4, (i) each Formula Option
granted pursuant to Section 6.1(a) above to a person who was also a
Director as of August 13, 1997, shall be fully vested and exercisable with
respect to 25% of the Shares subject thereto as of the date of grant, and
with respect to an incremental 25% of the Shares subject thereto on each of
the first three (3) anniversaries of the date of grant, and (ii) each other
Formula Option granted pursuant to this Section 6 shall become fully vested
and exercisable with respect to an incremental 25 % of the Shares subject
thereto on each of the first four anniversaries of the date of grant;
provided, however, in each case, that the Optionee continues to serve as a
Director as of such date of vesting. Notwithstanding the foregoing (i) if
an Optionee's service as a Director terminates for any reason, other than
for Cause, then each Formula Option held by such Optionee shall become
fully and immediately vested and exercisable as of such date of termination
and (ii) if an Optionee's service as a Director terminates for Cause, then
each Formula Option held by such Optionee, whether or not then vested and
exercisable, shall immediately terminate and the Optionee shall have no
further rights in such Formula Option as of such date of termination.
6.4 Duration. Subject to Section 7.4, each Formula Option shall
terminate on the date which is the tenth anniversary of the date of grant
(or if later, the first anniversary of the date of the Director's death if
such death occurs prior to such tenth anniversary), unless terminated
earlier as follows:
(a) If an Optionee's service as a Director terminates for
any reason other than for Cause, the Optionee (or in the event of death, by
the person or persons to whom such rights shall pass by will or the laws of
descent or distribution) may for a period of two (2) years after such
termination exercise his or her Formula Option, after which time the
Formula Option shall automatically terminate in full.
(b) If an Optionee's service as a Director terminates for
Cause, the Formula Option granted to the Optionee hereunder shall
immediately terminate in full and no rights thereunder may be exercised.
7. Terms and Conditions Applicable to All Options.
----------------------------------------------
7.1 Non-Transferability. No Option shall be transferable by the
Optionee otherwise than by will or by the laws of descent and distribution
or, in the case of an Option other than an Incentive Stock Option, pursuant
to a domestic relations order (within the meaning of Rule 16a-12
promulgated under the Exchange Act), and an Option shall be exercisable
during the lifetime of such Optionee only by the Optionee or his or her
guardian or legal representative. Notwithstanding the foregoing, the
Committee may set forth in the Agreement evidencing an Option (other than
an Incentive Stock Option) at the time of grant or thereafter, that the
Option may be transferred to a Permitted Transferee, and for purposes of
the Plan, such Permitted Transferee shall be deemed to be the Optionee. The
terms of an Option shall be final, binding and conclusive upon the
beneficiaries, executors, administrators, heirs and successors of the
Optionee.
7.2 Method of Exercise. The exercise of an Option shall be made
only by a written notice delivered in person or by mail to the Secretary of
the Company at the Company's principal executive office, specifying the
number of Shares to be exercised and, to the extent applicable, accompanied
by payment therefor and otherwise in accordance with the Agreement pursuant
to which the Option was granted. The exercise price for any Shares
purchased pursuant to the exercise of an Option shall be paid, as
determined by the Committee in its discretion, in either of the following
forms (or any combination thereof): (a) cash or (b) the transfer, either
actually or by attestation, to the Company of Shares upon such terms and
conditions as determined by the Committee. In addition, Options may be
exercised through a registered broker-dealer pursuant to such cashless
exercise procedures which are, from time to time, deemed acceptable by the
Committee. Any Shares transferred to the Company (or withheld upon
exercise) as payment of the exercise price under an Option shall be valued
at their Fair Market Value on the day preceding the date of exercise of
such Option. If requested by the Committee, the Optionee shall deliver the
Agreement evidencing the Option to the Secretary of the Company who shall
endorse thereon a notation of such exercise and return such Agreement to
the Optionee. No fractional Shares (or cash in lieu thereof) shall be
issued upon exercise of an Option and the number of Shares that may be
purchased upon exercise shall be rounded to the nearest number of whole
Shares.
7.3 Rights of Optionees. No Optionee shall be deemed for any
purpose to be the owner of any Shares subject to any Option unless and
until (a) the Option shall have been exercised pursuant to the terms
thereof, (b) the Company shall have issued and delivered Shares to the
Optionee, and (c) the Optionee's name shall have been entered as a
stockholder of record on the books of the Company. Thereupon, the Optionee
shall have full voting, dividend and other ownership rights with respect to
such Shares, subject to such terms and conditions as may be set forth in
the applicable Agreement.
7.4 Effect of Change in Control. In the event of a Change in
Control, all Options outstanding on the date of such Change in Control
shall become immediately and fully exercisable. In addition, to the extent
set forth in an Agreement evidencing the grant of an Option, an Optionee
will be permitted to surrender to the Company for cancellation within sixty
(60) days after such Change in Control any Option or portion of an Option
to the extent not yet exercised and the Optionee will be entitled to
receive a cash payment in an amount equal to the excess, if any, of (a) (i)
in the case of a Nonqualified Stock Option, the greater of (A) the Fair
Market Value, on the date preceding the date of surrender, of the Shares
subject to the Option or portion thereof surrendered or (B) the Adjusted
Fair Market Value of the Shares subject to the Option or portion thereof
surrendered or (ii) in the case of an Incentive Stock Option, the Fair
Market Value, on the date preceding the date of surrender, of the Shares
subject to the Option or portion thereof surrendered, over (b) the
aggregate exercise price for such Shares under the Option or portion
thereof surrendered. In the event an Optionee's employment with, or service
as a Director of, the Company and its Subsidiaries terminates following a
Change in Control, each Option held by the Optionee that was exercisable as
of the date of termination of the Optionee's employment or service shall,
notwithstanding any shorter period set forth in the Agreement evidencing
the Option, remain exercisable for a period ending not before the earlier
of (x) the first anniversary of the termination of the Optionee's
employment or service or (y) the expiration of the stated term of the
Option.
8. Stock Bonus for Community Leaders.
---------------------------------
The Committee may grant Shares to Community Leaders from time to
time. The Community Leaders to whom Shares shall be granted, and the number
of Shares so granted, shall be determined by the Committee in its sole
discretion. Any Shares granted under this Section 8 shall be without
consideration to the Company and shall be fully and immediately vested upon
grant.
9. Effect of a Termination of Employment.
-------------------------------------
The Agreement evidencing the grant of each Option shall set forth
the terms and conditions applicable to such Option upon a termination or
change in the status of the employment of the Optionee by the Company or a
Subsidiary or a Division (including a termination or change by reason of
the sale of a Subsidiary or a Division), which, except for Director
Options, shall be as the Committee may, in its discretion, determine at the
time the Option is granted or thereafter.
10. Adjustment Upon Changes in Capitalization.
-----------------------------------------
(a) In the event of a Change in Capitalization, the
Committee shall conclusively determine the appropriate adjustments, if any,
to (i) the maximum number and class of Shares or other stock or securities
with respect to which Options may be granted under the Plan, (ii) the
maximum number and class of Shares or other stock or securities with
respect to which Options may be granted to any Eligible Individual during
any three (3) consecutive calendar year period, (iii) the number and class
of Shares or other stock or securities which are subject to outstanding
Options granted under the Plan and the exercise price therefor, if
applicable and (iv) the number and class of Shares or other securities in
respect of which Director Options are to be granted under Section 6.
(b) Any such adjustment in the Shares or other stock or
securities subject to outstanding Incentive Stock Options (including any
adjustments in the exercise price) shall be made in such manner as not to
constitute a modification as defined by Section 424(h)(3) of the Code and
only to the extent otherwise permitted by Sections 422 and 424 of the Code.
(c) If, by reason of a Change in Capitalization, an Optionee
shall be entitled to exercise an Option with respect to new, additional or
different shares of stock or securities, such new, additional or different
shares shall thereupon be subject to all of the conditions, restrictions
and performance criteria which were applicable to the Shares subject to the
Option prior to such Change in Capitalization.
11. Effect of Certain Transactions.
------------------------------
Subject to Section 7.4 or as otherwise provided in an Agreement,
in the event of (a) the liquidation or dissolution of the Company or (b) a
merger or consolidation of the Company (a "Transaction"), the Plan and the
Options issued hereunder shall continue in effect in accordance with their
respective terms, except that following a Transaction each Optionee shall
be entitled to receive in respect of each Share subject to any outstanding
Options, upon exercise of any Option, the same number and kind of stock,
securities, cash, property or other consideration that each holder of a
Share was entitled to receive in the Transaction in respect of a Share;
provided, however, that such stock, securities, cash, property, or other
consideration shall remain subject to all of the conditions, restrictions
and performance criteria which were applicable to the Options prior to such
Transaction.
12. Interpretation.
--------------
(a) The Plan is intended to comply with Rule 16b-3
promulgated under the Exchange Act and the Committee shall interpret and
administer the provisions of the Plan or any Agreement in a manner
consistent therewith. Any provisions inconsistent with such rule shall be
inoperative and shall not affect the validity of the Plan.
(b) Unless otherwise expressly stated in the relevant
Agreement, each Option (other than Formula Options) granted under the Plan
is intended to be Performance-Based Compensation. The Committee shall not
be entitled to exercise any discretion otherwise authorized hereunder with
respect to such Options if the ability to exercise such discretion or the
exercise of such discretion itself would cause the compensation
attributable to such Options to fail to qualify as Performance-Based
Compensation.
13. Pooling Transactions.
--------------------
Notwithstanding anything contained in the Plan or any Agreement
to the contrary, in the event of a Change in Control which is also intended
to constitute a Pooling Transaction, the Committee shall take such actions,
if any, as are specifically recommended by an independent accounting firm
retained by the Company to the extent reasonably necessary in order to
assure that the Pooling Transaction will qualify as such, including but not
limited to (a) deferring the vesting, exercise, payment, settlement or
lapsing of restrictions with respect to any Option, (b) providing that the
payment or settlement in respect of any Option be made in the form of cash,
Shares or securities of a successor or acquirer of the Company, or a
combination of the foregoing, and (c) providing for the extension of the
term of any Option to the extent necessary to accommodate the foregoing,
but not beyond the maximum term permitted for any Option.
14. Termination and Amendment of the Plan or Modification of Options.
----------------------------------------------------------------
14.1 Plan Amendment or Termination. The Plan shall terminate on
the day preceding the tenth anniversary of the date of its adoption by the
Board and no Option may be granted thereafter. The Board may sooner
terminate the Plan and the Board may at any time and from time to time
amend, modify or suspend the Plan; provided, however, that:
(a) no such amendment, modification, suspension or
termination shall impair or adversely alter any Options theretofore granted
under the Plan, except with the consent of the Optionee, nor shall any
amendment, modification, suspension or termination deprive any Optionee of
any Shares which he or she may have acquired through or as a result of the
Plan; and
(b) to the extent necessary under any applicable law,
regulation or exchange requirement, no amendment shall be effective unless
approved by the stockholders of the Company in accordance with applicable
law, regulation or exchange requirement.
14.2 Modification of Options. No modification of an Option shall
adversely alter or impair any rights or obligations under the Option
without the consent of the Optionee.
15. Non-Exclusivity of the Plan.
---------------------------
The adoption of the Plan by the Board shall not be construed as
amending, modifying or rescinding any previously approved incentive
arrangement or as creating any limitations on the power of the Board to
adopt such other incentive arrangements as it may deem desirable,
including, without limitation, the granting of stock options otherwise than
under the Plan, and such arrangements may be either applicable generally or
only in specific cases.
16. Limitation of Liability.
-----------------------
As illustrative of the limitations of liability of the Company,
but not intended to be exhaustive thereof, nothing in the Plan shall be
construed to:
(a) give any person any right to be granted an Option other
than at the sole discretion of the Committee;
(b) give any person any rights whatsoever with respect to
Shares except as specifically provided in the Plan;
(c) limit in any way the right of the Company or any
Subsidiary to terminate the employment or service of any person at any
time; or
(d) be evidence of any agreement or understanding, expressed
or implied, that the Company will employ any person at any particular rate
of compensation or for any particular period of time.
17. Regulations and Other Approvals; Governing Law.
----------------------------------------------
17.1 Except as to matters of federal law, the Plan and the rights
of all persons claiming hereunder shall be construed and determined in
accordance with the laws of the State of Delaware without giving effect to
conflicts of laws principles thereof.
17.2 The obligation of the Company to sell or deliver Shares with
respect to Options granted under the Plan shall be subject to all
applicable laws, rules and regulations, including all applicable federal
and state securities laws, and the obtaining of all such approvals by
governmental agencies as may be deemed necessary or appropriate by the
Committee.
17.3 The Board may make such changes as may be necessary or
appropriate to comply with the rules and regulations of any government
authority, or to obtain for Eligible Individuals granted Incentive Stock
Options the tax benefits under the applicable provisions of the Code and
regulations promulgated thereunder.
17.4 Each Option is subject to the requirement that, if at any
time the Committee determines, in its discretion, that the listing,
registration or qualification of Shares issuable pursuant to the Plan is
required by any securities exchange or under any state or federal law, or
the consent or approval of any governmental regulatory body is necessary or
desirable as a condition of, or in connection with, the grant of an Option
or the issuance of Shares, no Options shall be granted or payment made or
Shares issued, in whole or in part, unless listing, registration,
qualification, consent or approval has been effected or obtained free of
any conditions as acceptable to the Committee.
17.5 Notwithstanding anything contained in the Plan or any
Agreement to the contrary, in the event that the disposition of Shares
acquired pursuant to the Plan is not covered by a then current registration
statement under the Securities Act of 1933, as amended (the "Securities
Act"), and is not otherwise exempt from such registration, such Shares
shall be restricted against transfer to the extent required by the
Securities Act and Rule 144 or other regulations thereunder. The Committee
may require any individual receiving Shares pursuant to an Option granted
under the Plan, as a condition precedent to receipt of such Shares, to
represent and warrant to the Company in writing that the Shares acquired by
such individual are acquired without a view to any distribution thereof and
will not be sold or transferred other than pursuant to an effective
registration thereof under said Act or pursuant to an exemption applicable
under the Securities Act or the rules and regulations promulgated
thereunder. The certificates evidencing any of such Shares shall be
appropriately amended to reflect their status as restricted securities as
aforesaid.
18. Miscellaneous.
-------------
18.1 Multiple Agreements. The terms of each Option may differ
from other Options granted under the Plan at the same time, or at some
other time. The Committee may also grant more than one Option to a given
Eligible Individual during the term of the Plan, either in addition to, or
in substitution for, one or more Options previously granted to that
Eligible Individual.
18.2 Withholding of Taxes.
(a) At such times as an Optionee recognizes taxable income
in connection with the receipt of Shares hereunder (a "Taxable Event"), the
Optionee shall pay to the Company an amount equal to the federal, state and
local income taxes and other amounts as may be required by law to be
withheld by the Company in connection with the Taxable Event (the
"Withholding Taxes") prior to the issuance of such Shares. The Company
shall have the right to deduct from any payment of cash to an Optionee an
amount equal to the Withholding Taxes in satisfaction of the obligation to
pay Withholding Taxes. The Committee may provide in the Agreement, at the
time of grant or at any time thereafter, that the Optionee, in satisfaction
of the obligation to pay Withholding Taxes, may elect to have withheld a
portion of the Shares then issuable to him or her having an aggregate Fair
Market Value equal to the Withholding Taxes.
(b) If an Optionee makes a disposition, within the meaning
of Section 424(c) of the Code and regulations promulgated thereunder, of
any Share or Shares issued to such Optionee pursuant to the exercise of an
Incentive Stock Option within the two-year period commencing on the day
after the date of the grant or within the one-year period commencing on the
day after the date of transfer of such Share or Shares to the Optionee
pursuant to such exercise, the Optionee shall, within ten (10) days of such
disposition, notify the Company thereof, by delivery of written notice to
the Company at its principal executive office.
18.3 Effective Date. The effective date of the Plan shall be as
determined by the Board, subject only to the approval by the affirmative
vote of the holders of a majority of the securities of the Company present,
or represented, and entitled to vote at a meeting of stockholders duly held
in accordance with the applicable laws of the State of Delaware within
twelve (12) months of the adoption of the Plan by the Board.
EXHIBIT 11.1
<TABLE>
<CAPTION>
loss per share
COMPUTATION OF LOSS PER SHARE
YEAR ENDED
DECEMBER 31,
1998 1997 1996
-------------- ------------- ---------------
<S> <C> <C> <C>
Basic:
Net loss ($ 16,045,640) ($ 3,584,400) ($ 750,180)
Net loss applicable to common
stockholders ($ 16,045,640) ($ 3,584,400) ($ 750,180)
============== ============= ===============
Basic weighted average shares
outstanding 2,381,140 1,146,773 1,125,000
============== ============= ===============
Basic loss per common share ($6.74) ($3.13) ($0.67)
============== ============= ===============
Diluted:
Net loss applicable to common
stockholders ($ 16,045,640) ($ 3,584,400) ($ 750,180)
============== ============= ===============
Basic weighted average shares
outstanding 2,381,140 1,146,773 1,125,000
Net effect of dilutive securities 0 0 0
-------------- ------------- ---------------
Diluted weighted average shares
outstanding 2,381,140 1,146,773 1,125,000
============== ============= ===============
Diluted loss per common share ($6.74) ($3.13) ($0.67)
============== ============= ===============
</TABLE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report dated February 20, 1999, relating to the balance sheets of
theglobe.com, inc. as of December 31, 1998 and 1997, and the related
statements of operations, stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1998, and related
schedule. We also consent to the reference to our firm under the caption
"Experts."
/s/ KPMG LLP
New York, New York
April 9, 1999
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report dated March 5, 1999, with respect to the financial statements of
factorymall.com, inc. as of December 31, 1998 and 1997 and for the period
from inception (April 15, 1996) to December 31, 1996 and for each of the
two years in the period ended December 31, 1998. We also consent to the
reference to our firm under the caption "Experts."
/s/ KPMG LLP
Seattle, Washington
April 9, 1999
Exhibit 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report, which includes an explanatory paragraph indicating substantial
doubt as to the Company's ability to continue as a going concern, dated
March 19, 1999, except for Note 16, for which the date is April 9, 1999, on
our audits of the consolidated financial statements of Attitude Network,
Ltd. and its subsidiary. We also consent to the references to our Firm
under the captions "Experts".
/s/ PricewaterhouseCoopers LLP
Tampa, Florida
April 9, 1999
Exhibit 23.5
[Letterhead of DoubleClick]
April 8, 1999
To Whom It May Concern:
DoubleClick grants permission to theglobe.com to use DoubleClick's name in
theglobe.com's SEC filings, as it pertains to theglobe.com's use of
DoubleClick DART as its ad serving solution.
Sincerely,
/s/ Anthony Risicato
Anthony Risicato
DoubleClick DART
Exhibit 23.6
[Letterhead of Jupiter Communications]
To: Marina Shevyrtalova, Bear Stearns
212-272-3694 (f) 272-3092
From: Marla Kammer, Jupiter Communications
780-6060 ext. 121
RE: Permission
Date: April 8, 1999
Pages: 4
- ------------------------------------------------------------------------
Hi,
Regarding your letter of consent and verification of data, please make the
following changes:
Jupiter Communications estimates that spending on Internet advertising in
the United States will grow from $1.9 billion in 1998 to $7.7 billion in
2002.*
* Does not include direct marketing
Jupiter Communications estimates that the amount of goods or services
purchased in online consumer transactions will grow from approximately $7.1
billion in 1998 to approximately $41.1 billion in 2002.
With these changes, you have Jupiter's permission to use the data in the
S-1 statement.
Thank you,
Marla Kammer
Director of Production
Jupiter Communications
Exhibit 23.7
[Letterhead of IDC]
FAX COVER SHEET
Date: April 9, 1999 Time 12:13 PM
To: Marina Shevyrtalova Phone: 212-272-3594
Bear, Stearns & Company, Inc. FAX: 212-272-3092
From: Michael Carbonneau Phone: 508-935-4299
FAX: 508-935-4700
Re: Quote Approval
Number of pages including cover sheet: 1
Message:
This quote has been approved for Bear Stearns to use in the SEC filing for
the globe.com.
"International Data Corporation estimates that the number of web users,
worldwide, exceeded 142 million in 1998 and will grow to over 398 million
by 2002."
Please call me with any questions. Thanks.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEETS OF THEGLOBE.COM AS OF DECEMBER 31, 1998 AND 1997,
RESPECTIVELY, AND THE RELATED STATEMENTS OF OPERATIONS, STOCKHOLDERS'
EQUITY (DEFICIENCY) AND CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998 AND
1997, RESPECTIVELY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> Dec-31-1998 Dec-31-1997
<PERIOD-START> Jan-01-1998 Jan-01-1997
<PERIOD-END> Dec-31-1998 Dec-31-1997
<CASH> 29,250,572 5,871,291
<SECURITIES> 898,546 13,003,173
<RECEIVABLES> 2,305,011 266,209
<ALLOWANCES> 300,136 12,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 32,832,824 19,128,673
<PP&E> 4,387,521 435,394
<DEPRECIATION> 824,962 109,552
<TOTAL-ASSETS> 38,129,878 19,462,172
<CURRENT-LIABILITIES> 5,823,531 2,011,297
<BONDS> 0 0
0 0
0 1,450
<COMMON> 10,312 1,154
<OTHER-SE> 30,290,311 17,346,840
<TOTAL-LIABILITY-AND-EQUITY> 38,129,878 19,462,172
<SALES> 0 0
<TOTAL-REVENUES> 5,509,818 770,293
<CGS> 0 0
<TOTAL-COSTS> 2,238,871 423,706
<OTHER-EXPENSES> 20,129,680 4,229,607
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 123,724 0
<INCOME-PRETAX> (15,966,722) (3,548,300)
<INCOME-TAX> 78,918 36,100
<INCOME-CONTINUING> (16,045,640) (3,584,400)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (16,045,640) (3,584,400)
<EPS-PRIMARY> (6.74) (3.13)
<EPS-DILUTED> (6.74) (3.13)
</TABLE>
EXHIBIT 99.1
SCHEDULE II
<TABLE>
<CAPTION>
theglobe.com, inc.
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED END
OF PERIOD TO EXPENSE DEDUCTIONS OF PERIOD
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996 $ - $ - $ - $ -
Year ended December 31, 1997 $ - $ 12,000 $ - $ 12,000
Year ended December 31, 1998 $ 12,000 $ 387,878 $ 99,742 $ 300,136
</TABLE>
