AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 16, 1999
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO ___________________
COMMISSION FILE NO. 0-25053
THEGLOBE.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
STATE OF DELAWARE 14-1781422
------------------------------- -------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
120 BROADWAY
NEW YORK, NEW YORK 10271
--------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 894-3600
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
31 WEST 21ST STREET
NEW YORK, NEW YORK 10010
---------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
The number of shares outstanding of the Registrant's Common Stock,
$.001 par value (the "Common Stock"), as of August 11, 1999 was 26,529,718.
<PAGE>
theglobe.com, inc.
FORM 10-Q
INDEX
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 1
Condensed Consolidated Balance Sheets at
June 30, 1999 (unaudited) and December 31, 1998 1
Unaudited Condensed Consolidated Statements of
Operations for the three and six months ended
June 30, 1999 and 1998 2
Unaudited Condensed Consolidated Statements of
Cash Flows for the six months ended June 30, 1999
and 1998 3
Notes to Unaudited Condensed Consolidated Financial
Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Qualitative and Quantitative Disclosures about Market
Risk 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings II-1
Item 2. Changes in Securities and Use of Proceeds II-2
Item 3. Defaults Upon Senior Securities II-2
Item 4. Submission of Matters to a Vote of Security Holders II-2
Item 5. Other Information II-2
Item 6. Exhibits and Reports on Form 8-K II-2
A. Exhibits
B. Reports on Form 8-K
Signatures II-3
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
theglobe.com, inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
--------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 77,855,242 $ 29,250,572
Short-term investments............... 906,472 898,546
Accounts receivable, net............. 2,879,491 2,004,875
Prepaids and other current assets.... 634,996 678,831
--------------- --------------
Total current assets............. 82,276,201 32,832,824
Property and equipment, net............ 8,248,701 3,562,559
Goodwill and other intangible
assets, net.......................... 63,182,341 --
Restricted investments................. 3,584,109 1,734,495
--------------- --------------
Total assets..................... $ 157,291,352 $ 38,129,878
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................... $ 2,940,452 $ 2,614,445
Accrued expenses..................... 1,070,452 817,463
Accrued compensation................. 913,492 691,279
Deferred revenue..................... 1,099,266 673,616
Current installments of obligations
under capital leases............... 1,600,401 1,026,728
Current portion of long-term debt.... 234,319 --
--------------- --------------
Total current liabilities........ 7,858,382 5,823,531
Long-term debt......................... 2,443,882 --
Obligations under capital leases,
excluding current installments....... 2,631,934 2,005,724
Deferred rent.......................... 381,282 --
Stockholders' equity:
Common stock......................... 26,528 20,625
Additional paid-in capital........... 183,931,162 50,904,181
Deferred compensation................ (95,413) (128,251)
Accumulated other comprehensive
income............................. (63,662) (50,006)
Accumulated deficit.................. (39,822,743) (20,445,926)
--------------- --------------
Total stockholders' equity....... 143,975,872 30,300,623
Commitments & contingencies............
--------------- --------------
Total liabilities and
stockholders' equity........... $ 157,291,352 $ 38,129,878
=============== ==============
See accompanying notes to unaudited condensed consolidated financial
statements.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
theglobe.com, inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------ -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues...................... $ 4,130,017 $ 779,812 $ 7,321,821 $ 1,173,398
Cost of revenues.............. 1,753,958 265,229 2,950,308 463,275
------------ ------------ ------------ ------------
Gross profit............ 2,376,059 514,583 4,371,513 710,123
Operating expenses:
Sales and marketing......... 3,481,616 3,107,939 5,668,534 4,532,945
Product development......... 2,805,981 165,337 4,919,787 250,869
General and
administrative............ 2,992,649 1,299,108 5,746,680 2,396,716
Amortization of goodwill
and intangible assets..... 6,408,765 -- 7,769,543 --
------------ ------------ ------------ ------------
Total operating
expenses............ 15,689,011 4,572,384 24,104,544 7,180,530
------------ ------------ ------------ ------------
Loss from operations.... (13,312,952) (4,057,801) (19,733,031) (6,470,407)
Interest and other
income, net................. 313,553 217,458 509,179 672,637
------------ ------------ ------------ ------------
Loss before provision
for income taxes...... (12,999,399) (3,840,343) (19,223,852) (5,797,770)
Provision for income taxes.... 107,076 10,475 152,965 26,500
------------ ------------ ------------ ------------
Net loss................ $(13,106,475) $ (3,850,818) $(19,376,817) $ (5,824,270)
============ ============ ============ ============
Basic and diluted net loss
per share................... $ (0.54) $ (1.65) $ (0.85) $ (2.51)
============ ============ ============ ============
Weighted average basic and
diluted shares outstanding.. 24,421,000 2,337,640 22,764,751 2,322,778
============ ============ ============ ============
See accompanying notes to unaudited condensed consolidated financial
statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
theglobe.com, inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
---------------------------------------
1999 1998
---------------------------------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................... $ (19,376,816) $ (5,824,270)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............. 8,674,559 238,411
Non-cash compensation..................... 31,769 --
Deferred compensation..................... 32,838 23,119
Amortization of debt discount............. 65,505 --
Deferred rent............................. 381,282 --
Changes in operating assets and
liabilities, net of effect of
acquisitions:
Accounts receivable, net.................. (554,210) (369,982)
Prepaids and other current assets......... 170,800 (75,847)
Other assets.............................. -- (568,226)
Accounts payable.......................... (364,044) 1,633,521
Accrued expenses.......................... (631,549) 509,505
Accrued compensation...................... 121,279 (998,999)
Deferred revenue.......................... (121,125) 19,063
---------------- ---------------
Net cash used in operating activities...... (11,569,712) (5,413,705)
---------------- ---------------
Cash flows from investing activities:
Purchases of securities..................... (10,796,291) (230,484)
Proceeds from sales of securities........... 10,783,388 3,087,381
Purchases of property and equipment......... (3,410,242) (247,859)
Cash acquired in connection with
acquisitions, net.......................... 691,320 --
Payments of security deposits............... (1,825,509) --
---------------- ---------------
Net cash (used in) provided by investing
activities................................ (4,557,334) 2,609,038
---------------- ---------------
Cash flows from financing activities:
Payments under capital lease obligations.... (599,702) (77,405)
Payments of long-term debt.................. (10,037) --
Proceeds from exercise of common stock
options and warrants....................... 336,699 8,172
Proceeds from issuance of common stock...... 65,013,435 --
--------------- ---------------
Net cash provided by (used in) financing
activities................................ 64,740,395 (69,233)
--------------- ----------------
Net change in cash and cash equivalents...... 48,613,349 (2,873,900)
Effect of exchange rate changes on cash and
cash equivalents............................ (8,679) --
Cash and cash equivalents at beginning of
period...................................... 29,250,572 5,871,291
--------------- ---------------
Cash and cash equivalents at end of period... $ 77,855,242 $ 2,997,391
=============== ===============
Supplemental disclosure of noncash
transactions:
Equipment acquired under capital leases... $ 1,632,801 $ 836,648
=============== ===============
See accompanying notes to unaudited condensed consolidated
financial statements.
</TABLE>
3
<PAGE>
theglobe.com, inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
theglobe.com, inc. (the "Company" or "theglobe") was incorporated in May
1995 (inception) and commenced operations on that date. theglobe operates
an online network with members and users in the United States and abroad.
Users are able to personalize their online experience by publishing their
own content and interacting with others having similar interests. The
Company's primary revenue source is the sale of advertisements with
additional revenues generated through the sale of sponsorship placements
within the Company's website, the sale of merchandise through the Company's
on-line store, electronic commerce revenue shares, development fees and, to
a lesser extent, 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) Unaudited Interim Condensed Consolidated Financial Information
The unaudited interim condensed consolidated financial statements of the
Company as of June 30, 1999 and for the three and six months ended June 30,
1999 and 1998 included herein have been prepared in accordance with the
instructions for Form 10-Q under the Securities Exchange Act of 1934, as
amended, and Article 10 of Regulation S-X under the Securities Act of 1933,
as amended. Certain information and note disclosures normally included in
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations relating to interim consolidated financial
statements.
In the opinion of management, the accompanying unaudited interim condensed
consolidated financial statements reflect all adjustments, consisting only
of normal recurring adjustments, necessary to present fairly the financial
position of the Company at June 30, 1999, the results of their operations
for three and six months ended June 30, 1999 and 1998 and their cash flows
for the six months ended June 30, 1999 and 1998.
The results of operations for such periods are not necessarily indicative
of results expected for the full year or for any future period. These
financial statements should be read in conjunction with the audited
financial statements as of December 31, 1998, and for the three years then
ended and related notes included in the Company's Form 10-K filed with the
Securities and Exchange Commission.
(c) Principles of Consolidation
The Company's unaudited condensed consolidated financial statements as of
and for the three and six months ended June 30, 1999 include (i) the
consolidated accounts of the Company (prior to the acquisitions of
factorymall.com, inc. and Attitude Network, Ltd.) (ii) the consolidated
accounts of shop.theglobe.com, (formerly known as factorymall.com, inc),
from February 1, 1999 and (iii) the consolidated accounts of Attitude
Network, Ltd. from April 9, 1999. The unaudited condensed consolidated
financial statements for the prior year periods include only the accounts
of theglobe. All significant intercompany balances and transactions have
been eliminated.
4
<PAGE>
(d) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the condensed consolidated financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
(e) Short-term Investments
Short-term investments are classified as available-for-sale and are
available to support current operations or to take advantage of other
investment opportunities. These investments primarily consist of corporate
bonds which are stated at their estimated fair value based upon publicly
available market quotes. Unrealized gains and losses are computed on the
basis of specific identification and are included in stockholders' equity.
Realized gains, realized losses and declines in value, judged to be
other-than-temporary, are included in 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 June 30, 1999, the Company had gross unrealized losses of
$62,936 and gross unrealized gains of $7,953 from its short-term
investments. As of December 31, 1998, the Company had gross unrealized
losses of $50,006 from its short-term investments.
(f) Goodwill and Other Intangible Assets
Goodwill and all other intangible assets are being amortized on a
straight-line basis over their expected period of benefit ranging from two
to three years (three years for goodwill). Goodwill and other intangible
assets are stated net of total accumulated amortization of $7,769,543
million at June 30, 1999. The Company did not have goodwill and other
intangible assets for the three and six months ended June 30, 1998.
(g) Revenue Recognition
The Company's revenues are derived principally from the sale of
advertisements under short-term contracts. To date, the duration of the
Company's advertising commitments has generally averaged from one to three
months. Advertising revenues are recognized ratably in the period in which
the advertisement is displayed, provided that no significant Company
obligations remain and collection of the resulting receivable is probable.
Company obligations typically include the guarantee of a minimum number of
"impressions" or times that an advertisement appears in pages viewed by the
users of the Company's online properties.
The Company also derived other revenues from the sale of sponsorship
placements within the Company's website, sales of merchandise from the
Company's on-line department store acquired in connection with the
acquisition of factorymall.com, inc., e-commerce revenue shares and the
sales of membership service fees for enhanced services. The Company
recognizes development fees related to the sale of sponsorship placements
on the Company's website as revenue once the related development activities
have been performed. The Company recognizes revenue from the sale of
merchandise from its on-line store when the products are shipped to
customers. The Company provides an allowance for sales returns, which has
been insignificant to date. Revenues from the Company's share of the
proceeds from its e-commerce partners' sales are recognized upon
notification from its partners of sales attributable to the Company's site.
Membership service fees are deferred and recognized ratably over the term
of the subscription period. Other revenues accounted for 11.8% and 14.1%,
and 8.5% and 10.8% of revenues for the three and six months ended June 30,
1999 and 1998, respectively.
The Company trades advertisements on its web properties in exchange for
advertisements on the Internet sites of other companies. Barter revenues
and expenses are recorded at the fair market value of services provided or
received, whichever is more determinable in the circumstances. Revenue from
barter transactions is recognized as income when advertisements are
delivered on the Company's web properties. Barter expense is included in
sales and marketing and is recognized when the Company's advertisements are
run on other companies' web properties, which is typically in the same
period when the barter revenue is recognized. Barter revenues represented
9% and 7%, respectively, of total revenues for the three and six months
ended June 30, 1999 and 3% of revenues for the three and six months ended
June 30 1998.
5
<PAGE>
(h) Net Loss Per Common Share
The Company adopted SFAS No. 128, "Computation of Earnings Per Share,"
during the year ended December 31, 1997. In accordance with SFAS No. 128
and the SEC Staff Accounting Bulletin No. 98, basic earnings per share are
computed using the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflect the potential
dilution that could occur if the weighted average number of common shares
outstanding for the period included common equivalent shares. Common
equivalent shares consist of the incremental common shares issuable upon
the conversion of convertible preferred stock (using the if-converted
method) and shares issuable upon the exercise of stock options and warrants
(using the Treasury Stock method); common equivalent shares are excluded
from the calculation if their effect is anti-dilutive. Pursuant to SEC
Staff Accounting Bulletin No. 98, common stock and convertible preferred
stock issued for nominal consideration, prior to the anticipated effective
date of an initial public offering (an "IPO"), are required to be included
in the calculation of basic and diluted net loss per share, as if they were
outstanding for all periods presented. To date, the Company has not had any
issuances or grants for nominal consideration.
Diluted loss per share has not been presented separately, as the
outstanding stock options, warrants and contingent stock purchase warrants
are anti-dilutive for each of the periods presented.
Diluted net loss per common share for the three and six months ended June
30, 1999 and 1998 does not include the effects of options to purchase
4,553,988 and 1,400,742 shares of Common Stock, respectively; 4,011,534 and
3,522,732 Common Stock warrants, respectively; and -0- and 9,906,654 shares
of convertible preferred stock on an "as if" converted basis for the three
and six months ended June 30, 1998.
(i) Recent Accounting Pronouncements
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
did not have a material impact on our condensed consolidated financial
statements contained herein.
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, 2000. This statement does not apply to the Company as the
Company currently does not have any derivative instruments or hedging
activities.
(j) Stock Split
On May 14, 1999, the Company effected a 2-for-1 stock split to all
shareholders of record as of May 3, 1999. All share and per share
information in the accompanying consolidated financial statements has been
retroactively restated to reflect the effect of the stock split.
(k) Reclassifications
Certain reclassifications have been made to prior year's financial
statements to conform to the current year's presentation.
(2) ACQUISITIONS
a) factorymall.com, inc.
On February 1, 1999, theglobe formed Nirvana Acquisition Corp. ("Nirvana"),
a Washington corporation and a wholly-owned subsidiary of theglobe. Nirvana
was merged with and into factorymall.com, inc., a Washington corporation
d/b/a Azazz.com, ("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, Nirvana, and
factorymall and certain shareholders thereof.
6
<PAGE>
As a result of the merger, factorymall became a wholly-owned subsidiary of
theglobe. factorymall operates Azazz.com, a leading interactive
department store. Subsequent to the acquisition, factorymall was re-named
shop.theglobe.com.
The consideration paid by theglobe in connection with the merger consisted
of approximately 614,000 newly issued shares of Common Stock of theglobe.
In addition, options to purchase shares of factorymall's common stock,
without par value, were exchanged for options to purchase approximately
82,034 shares of theglobe's Common Stock. Warrants to purchase shares of
factorymall common stock were exchanged for warrants to purchase
approximately 18,810 shares of theglobe's common stock. theglobe also
assumed certain bonus obligations of factorymall triggered in connection
with the merger that resulted in the issuance by theglobe of approximately
73,728 shares of theglobe's common stock and payment by theglobe 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
$22,776,000. Of this amount, approximately $126,000 of the purchase price
was allocated to net tangible assets. The historical carrying amounts of
such net tangible assets approximated their fair values. The purchase price
in excess of the fair value of the net tangible assets assumed in the
amount of $22,650,000 was allocated to goodwill and certain identified
intangible assets and is being amortized on a straight line basis over its
estimated useful life of 2 to 3 years (3 years for goodwill), the expected
period of benefit.
b) Attitude Network, Ltd.
On April 5, 1999, theglobe formed Bucky Acquisition Corp. ("Bucky"), a
Delaware corporation and a wholly-owned subsidiary of theglobe. Bucky was
merged with and into Attitude Network, Ltd., a Delaware corporation
("Attitude"), with Attitude as the surviving corporation. The merger was
effective pursuant to the Agreement and Plan of Merger, dated April 5,
1999, which closed on April 9, 1999, by and among theglobe, Bucky, and
Attitude and certain shareholders thereof. As a result of the merger,
Attitude became a wholly-owned subsidiary of theglobe. Attitude publishes
entertainment websites including Happy Puppy.com and Games Domain.com.
The consideration payable by theglobe in connection with the merger
consists of 1,570,922 newly issued shares of Common Stock of theglobe. In
addition, options to purchase shares of Attitude's common stock were
exchanged for options to purchase approximately 84,760 shares of theglobe
Common Stock. Warrants to purchase shares of Attitude common stock were
exchanged for warrants to purchase approximately 46,706 shares of theglobe
Common Stock. The Company also incurred expenses of approximately $800,000
related to the merger.
The total purchase price for this transaction was approximately
$46,828,000. Of this amount, approximately $208,000 of the purchase price
was allocated to net tangible liabilities. The historical carrying amounts
of such net tangible liabilities approximated their fair values. The
purchase price in excess of the fair value of the net tangible liabilities
assumed in the amount of $47,036,000 was allocated to goodwill and certain
identified intangible assets and is being amortized on a straight line
basis over a its estimated useful life of 3 years, the expected period of
benefit.
The following unaudited pro forma consolidated amounts give effect to the
above described acquisitions as if they had occurred at the beginning of
the respective periods by consolidating the results of operations of the
Company, shop.theglobe.com and Attitude for the three and six months ended
June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1999 1988 1999 1998
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenues........................ $ 4,130,017 $ 1,257,703 $ 7,713,128 $ 2,077,626
Net loss........................ (13,106,475) (11,250,116) (26,798,489) (21,446,600)
Net loss per share-basic and
diluted....................... $ (0.53) $ (2.45) $ (1.13) $ (4.68)
Weighted average shares used in
the basic and diluted net
loss per share calculation.... 24,576,566 4,596,394 23,738,624 4,581,532
</TABLE>
7
<PAGE>
(3) CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents, short-term investments
and trade accounts receivable. The Company maintains cash and cash
equivalents with various domestic financial institutions. The Company
performs periodic evaluations of the relative credit standing of these
institutions. From time to time, the Company's cash balances with any one
financial institution may exceed Federal Deposit Insurance Corporation
insurance limits.
The Company's customers are concentrated in the United States. The Company
performs ongoing credit evaluations and establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of
customers, historical trends and other information; to date, such losses
have been within management's expectations.
For the three and six months ended June 30, 1999 and 1998, there were no
customers that accounted for over 10% of revenues generated by the Company,
or of accounts receivable at June 30, 1999 and December 31, 1998.
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
June 30, December 31,
1999 1998
------------ ------------
(unaudited)
Computer equipment, including assets
under capital leases of $4,937,999
and $3,305,598, respectively......... $ 8,177,527 $ 4,298,702
Furniture and fixtures, including
assets under capital leases of
$42,171 and $42,171, respectively.... 1,018,488 88,819
Leasehold improvements................. 1,250,448 --
--------------- --------------
10,446,463 4,387,521
Less accumulated depreciation and
amortization, including amounts
related to assets under capital
leases of $984,861 and $460,998,
respectively......................... 2,197,762 824,962
--------------- --------------
Total......................... $ 8,248,701 $ 3,562,559
=============== ==============
(5) LONG-TERM DEBT
Upon acquisition of Attitude, the Company assumed a non interest bearing
obligation payable to the former owner of the happypuppy.com website, which
was acquired by Attitude prior to its acquisition by the Company. The
obligation is to be repaid based upon 5% of the Company's gross revenue
related to the happypuppy.com website, less certain costs directly
associated with such website. The payments required by the agreement are
also subject to specific minimum amounts payable each year. The principal
amount of the obligation as of April 9, 1999, the date the Company acquired
Attitude was $5,079,738. As of June 30, 1999, the obligation payable (as of
the acquisition date) was recorded at its net present value, assuming a 9%
interest rate, and has been reduced by principal payments totaling $10,037.
The unamortized discount as of June 30, 1999 was $2,687,839.
8
<PAGE>
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....................................................... 300,000
2004 & thereafter.......................................... 3,719,701
-----------
5,069,701
Less discount.............................................. (2,425,819)
-----------
2,643,882
Less current portion....................................... (200,000)
-----------
$ 2,443,882
===========
In addition to the $200,000 of short term debt related to the Attitude
acquisition, the Company acquired short-term notes payable of $34,419
related to its acquisition of factorymall.
(6) STOCKHOLDERS' EQUITY
Common Stock
In February 1999, the Company issued 687,728 shares of its Common Stock in
connection with the acquisition of factorymall, which currently conducts
its operations under the name shop.theglobe.com.
In April, 1999, the Company issued 1,570,922 shares of its Common Stock in
connection with the acquisition of Attitude.
In May 1999, the Company completed an offering of 3,500,000 shares of its
Common Stock in a secondary public offering at an offering price of $20 per
share. Net proceeds to the Company totaled $65.0 million, after
underwriting discounts of $3.5 million and offering costs of $1.5 million.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income as of June 30, 1999 is comprised of
$54,983 of net unrealized losses related to the Company's short term
investments and $8,679 related to the foreign currency translation of a
wholly owned subsidiary of Attitude which was acquired by the Company in
April of 1999. The $50,006 as of December 31, 1998 represents the Company's
net unrealized losses related to its short term investments.
Comprehensive net loss was $13,112,157 and $19,390,473 for the three and
six months ended June 30, 1999, respectively and $3,852,027 and $5,812,716
for the three and six months ended June 30, 1998, respectively.
(7) 1998 STOCK OPTION PLAN
The Company's 1998 Stock Option Plan (the "1998 Plan") was adopted by the
Board of Directors on July 15, 1998, and approved by the stockholders of
the Company as of July 15, 1998. The 1998 Plan provides for the grant of
"incentive stock options" intended to qualify under Section 422 of the Code
and stock options which do not so qualify. The granting of incentive stock
options is subject to limitation as set forth in the 1998 Plan. Directors,
officers, employees and consultants of the Company are eligible to receive
grants under the 1998 Plan. The 1998 Plan authorizes the issuance of
2,400,000 shares of Common Stock, subject to adjustment as provided in the
1998 Plan. In March 1999 the Board of Directors authorized an increase in
the number of shares reserved for issuance under the Company's 1998 Plan
from 2,400,000 to 3,400,000.
9
<PAGE>
(8) EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan ("ESPP") was adopted by the
Board of Directors in February 1999. The ESPP will provide eligible
employees of the Company the opportunity to apply a portion of their
compensation to the purchase of shares of the Company at a 15% discount.
The Company has reserved 400,000 authorized but unissued shares of Common
Stock for issuance under the ESPP. The ESPP was approved by the
shareholders in May 1999.
(9) CONTINGENCIES
On May 13, 1999, Accursed Toys, Inc. filed a complaint in the United States
District Court for the Middle District of Florida relating to the
acquisition of Attitude. The lawsuit alleges that the Company, Attitude and
others have engaged in various acts of unfair competition, false
advertising and deceptive trade practices, as well as breach of contract,
interference with contractual relations, fraud and misrepresentation. The
suit seeks actual and consequential damages and a preliminary and permanent
injunction prohibiting the operation of the Company's happypuppy.com
website. The Company owes Accursed Toys (the former owner of the
happypuppy.com website) approximately $5.0 million to be paid over the next
seventeen (17) years. Accursed Toys alleges that this amount is currently
due and payable. As of June 30, 1999, the unaudited condensed consolidated
financial statements of the Company reflect a long-term liability at its
net present value of approximately $2.6 million in respect to this
obligation. The Company believes that these allegations are without merit
and plans to vigorously defend these allegations. The Company believes that
it is unlikely that the ultimate disposition of this claim will have a
material adverse effect on the Company's consolidated financial condition
or results of operations.
On May 14, 1999, two principals of Accursed Toys, Inc. filed a complaint in
the United States District Court for the Eastern District of Virginia. The
lawsuit alleges that Attitude engaged in various acts of unfair
competition, false advertising, interference with contractual relations,
fraud and misrepresentation. The suit seeks actual and consequential
damages and a preliminary and permanent injunction prohibiting the
operation of the Company's happypuppy.com website. On August 6, 1999 the
court granted Attitude's motion to dismiss the complaint, but gave the
plaintiff opportunity to amend the complaint. The Company believes that
these allegations are without merit and plans to vigorously defend these
allegations. The Company believes that it is unlikely that the ultimate
disposition of this claim will have a material adverse effect on the
Company's consolidated financial condition or results of operations.
On May 20, 1999, Fortune Casuals LLC filed a complaint in the United States
District Court for the Central District of California alleging that the
Company infringes Fortune Casuals LLC's state and federal trademark rights
with respect to the GLOBE mark. The Company believes that these allegations
are without merit and plans to vigorously defend these allegations. The
Company believes that it is unlikely that the ultimate disposition of this
claim will have a material adverse effect on the Company's consolidated
financial condition or results of operations.
On July 1, 1999, the Company filed a complaint in Supreme Court of the
State of New York, County of New York. The lawsuit alleges that
Stockplayer.com, Inc. breached advertising services agreements with the
Company by failing to pay for advertising services performed by the
Company. On August 13, 1999, Stockplayer.com, inc. filed its answer denying
that it breached these advertising services agreements. The answer also
alleges that the Company breached alleged express and implied warranties in
connection with certain information provided by the Company to
Stockplayer.com. Stockplayer.com alleges that it has been damaged in an
amount not less than $5,000,000. Based on our preliminary analysis, the
Company believes that these allegations are without merit and plans to
vigorously defend these allegations. The Company believes that it is
unlikely that this claim will have a material adverse effect on the
Company's consolidated financial condition or results of operations.
From time to time the Company is subject to legal proceedings and claims
arising in the ordinary course of business. In the opinion of management,
the ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial condition or results of
operations.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained herein constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended
(the "Securities Act") and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). These forward-looking statements can
be identified by the use of predictive, future-tense or forward-looking
terminology, such as "believes," "anticipates," "expects," "estimates,"
"plans," "may," "intends," "will," or similar terms. These statements
appear in a number of places in this report and include statements
regarding the intent, belief or current expectations of the Company, its
directors or its officers with respect to, among other things: (i) trends
affecting the Company's financial condition or results of operations, (ii)
the Company's business and growth strategies, (iii) the Internet and
Internet commerce and (iv) the Company's financing plans. Investors are
cautioned that any such forward-looking statements are not guarantees of
future performance and involve significant risks and uncertainties, and
that actual results may differ materially from those projected in the
forward-looking statements as a result of various factors set forth under
"Risk Factors" and elsewhere in this report. The following discussion of
the financial condition and results of operations of the Company should
also be read in conjunction with the financial statements and notes related
thereto included elsewhere in this report.
OVERVIEW
theglobe operates an online network with members and users in the United
States and abroad. Users are able to personalize their online experience by
publishing their own content and interacting with others having similar
interests. We facilitate this interaction by providing various free
services, including home page building, discussion forums, chat, on-line
calendars and address books, e-mail and electronic commerce. Additionally,
we provide our users with news, business information, real time stock
quotes, weather, movie and music reviews, multi-player gaming, horoscopes
and personals. By satisfying our users' personal and practical needs, we
seek to become our users' online home. Our primary revenue source is the
sale of advertisements with additional revenues generated through the sale
of sponsorship placements within our website, the sale of merchandise
through our on-line store, electronic commerce revenue shares, 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 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 brand.
11
<PAGE>
In November 1998, the Company completed an initial public offering of
approximately 7.0 million shares of its $.001 par value Common Stock. The
initial offering price was $4.50 per share and resulted in net proceeds of
$27.3 million, after underwriting discounts of $2.1 million and offering
costs of $2.1 million.
On February 1, 1999, we acquired factorymall, an online department store
then doing business as Azazz.com, which sells a variety of name brand
products directly to consumers. We have integrated Azazz.com into our
electronic commerce site, and it has been re-named "shop.theglobe.com."
In April 1999, we acquired Attitude, a provider of online entertainment
content whose websites include Happy Puppy.com, Games Domain.com and Kids
Domain.com, three leading websites serving game enthusiasts.
In May 1999, we completed an offering of 3,500,000 shares of Common Stock
in a secondary public offering at an offering price of $20 per share. Net
proceeds totaled $65.0 million, after underwriting discounts of $3.5
million and offering costs of $1.5 million.
To date, our primary revenue source has been the sale of advertisements
with additional revenues generated through the sale of sponsorship
placements within our website, the sale of merchandise through our on-line
store, electronic commerce revenue shares, development fees and, to a
lesser extent, the sale of membership service fees for enhanced services.
Electronic commerce revenues have not been significant to date. Advertising
revenues constituted 88.2% and 85.9% of total revenues for the three and
six months ended June 30, 1999 and 91.5% and 89.2% of total revenues for
the three and six months ended June 30, 1998. We sell a variety of
advertising packages to clients, including banner advertisements, event
sponsorship, and targeted and direct response advertisements. Our
advertising revenues are derived principally from short-term advertising
arrangements, averaging one to three months. We generally guarantee a
minimum number of impressions for a fixed fee. Advertising revenues are
recognized ratably in the period in which the advertisement is displayed,
provided that no significant company obligations remain and collection of
the resulting receivable is probable. Payments received from advertisers
prior to displaying their advertisements on the site are recorded as
deferred revenues and are recognized as revenue ratably when the
advertisement is displayed. To the extent minimum guaranteed impression
levels are not met, we defer recognition of the corresponding revenues
until guaranteed levels are achieved.
In addition to advertising revenues, we derive other revenues primarily
from our membership service fees, electronic commerce revenue, development
fees and sponsorship placements within our site. Membership service 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 website. 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 website. To date, revenues from electronic commerce arrangements
have not been significant. We also earn additional revenue on sponsorship
contracts for fees relating to the design, coordination, and integration of
the customer's content and links. We recognize these development fees as
revenue once the related development activities have been performed.
RESULTS OF OPERATIONS
Revenues
Revenues increased to $4.1 million and $7.3 million for the three and six
months ended June 30, 1999, respectively, as compared with $0.8 million and
$1.2 million for the three and six months ended June 30, 1998,
respectively. The period to period growth in revenues for both the three
and six months ended resulted from an increase in (1) the number of
advertisers as well as the average commitment per advertiser, (2) our
website traffic and (3) the number of sales people. Advertising revenues
for the three and six months ended June 30, 1999 were $3.6 million and $6.3
million, respectively, which represented 88.2% and 85.9%, respectively, of
total revenues. Advertising revenues for the three and six months ended
June 30, 1998 were $0.7 million and $1.0 million, respectively, which
represented 91.5% and 89.2%, respectively, of total revenues. We anticipate
that advertising revenues will continue to account for a substantial share
of our total revenues for the foreseeable future. Other revenues were
derived from membership service fees, development fees, electronic commerce
revenue shares and sponsorship placements within our website. At June 30,
1999, we had deferred revenues of approximately $1.1 million as compared
with deferred revenues of $0.7
12
<PAGE>
million at December 31, 1999. Barter revenues represented 9% and 7%,
respectively, of total revenues for the three and six months ended June 30,
1999 and 3% and 3% of revenues for the three and six months ended June 30
1998.
Cost of Revenues
Cost of revenues consist primarily of Internet connection charges, staff
costs and related expenses of operations personnel, depreciation and
maintenance of website equipment as well as the costs of merchandise sold
and shipping and handling fees in connection with our on-line store. Gross
margins were 58% and 60%, respectively, for the three and six months ended
June 30, 1999 and 66% and 61%, respectively, for the three and six months
ended June 30, 1998. The decrease in the gross margins for both the three
and six months ended June 30, 1999 as compared to the same period in 1998
is, in part, attributed to increased costs of merchandise sold and shipping
and handling fees as a result of the factorymall acquisition. Additionally,
the decrease in margins is attributed to the duplication of Internet
connection costs resulting from the Attitude acquisition which the Company
plans to eliminate in the fourth quarter of 1999. The absolute dollar
increase in cost of revenues was due to an increase in Internet connection
costs to support the increase in website traffic, as well as an increase in
equipment costs, cost of merchandise, depreciation and staff costs required
to support the expansion of our site and services.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries and related
expenses of sales and marketing personnel, commissions, advertising, public
relations expenses, other marketing-related expenses and barter expense.
Sales and marketing expenses were $3.5 million and $5.7 million for the
three and six months ended June 30, 1999, respectively, as compared with
sales and marketing expenses of $3.1 million and $4.5 million for the three
and six months ended June 30, 1998, respectively. The period to period
increase in sales and marketing expenses in absolute dollars was primarily
attributable to increased sales and marketing personnel and related
expenses required to implement our branding and marketing strategy. We
expect sales and marketing expenses to increase over the next few quarters
as the Company increases advertising expenditures as part of our effort to
increase brand awareness and drive traffic to our sites.
Product Development Expenses
Product development expenses include professional fees, staff costs and
related expenses associated with the development, testing and upgrades to
our website as well as expenses related to its editorial content and
community management and support. Product development expenses were $2.8
million and $4.9 million for the three and six months ended June 30, 1999,
respectively, as compared with product development expenses of $0.2 million
and $0.3 million for the three and six months ended June 30, 1998,
respectively. The increase in product development expenses was primarily
attributable to increased staffing levels required to support the growth in
our website and to enhance its content and features. In addition, product
development expenses increased as a result of our acquisitions of
factorymall and Attitude. We intend to continue recruiting and hiring
experienced product development personnel and to make additional
investments in product development.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and
related costs for general corporate functions, including finance, human
resources, facilities and legal, along with professional fees and other
corporate expenses. General and administrative expenses were $3.0 million
and $5.7 million for the three and six months ended June 30, 1999,
respectively, as compared with general and administrative expenses of $1.3
million and $2.4 million for the three and six months ended June 30, 1998,
respectively. The absolute dollar increase in these expenses was primarily
due to increased salaries and related expenses associated with increased
staffing in order to build our basic infrastructure along with increases in
professional fees and travel. The increased salaries also reflect the
highly competitive nature of hiring in the new media industry. The increase
was also due to costs associated with operating as a public company, such
as directors' and officers' liability insurance, investor relations
programs and professional service fees. We expect that we will incur
additional general and administrative expenses as we hire additional
personnel and incur additional costs related to the growth of the business.
Accordingly, we anticipate that general and administrative expenses will
continue to increase in absolute dollars.
Amortization of Goodwill and Intangible Assets
13
<PAGE>
We recorded amortization of $6.4 million and $7.8 million for the three and
six months ended June 30, 1999, respectively. This amortization is in
connection with the acquisitions of factorymall in February 1999 and
Attitude in April 1999. The goodwill and purchased intangibles of
approximately $71.0 million related to these acquisitions is being
amortized over the expected period of benefit ranging from two to three
years (three years for goodwill). There was no similar charge for the same
periods in 1998.
Interest and Other Income, net
Interest and other income, net includes interest income from our cash and
investments, interest expenses related to our capital lease obligations and
amortization of debt discounts. Other income was $0.3 million and $0.5
million for the three and six months ended June 30, 1999, respectively, as
compared to $0.2 million and $0.7 million for the three and six months
ended June 30, 1998, respectively. The period to period increase for the
three months ended is attributed to increased interest income resulting
from the net proceeds of our initial public offering and our secondary
offering of our Common Stock offset by increased interest expenses related
to an increase in the assumption of capital lease obligations and the
amortization of the debt discount related to Attitude's long-term debt. The
period to period decrease for the six months ended is attributed to
increased interest expenses related to the assumption of additional capital
leases and the amortization of the debt discount related to Attitude's
long-term debt.
Income Taxes
Income taxes for the three and six months ended June 30, 1999 were $107,000
and $153,000, respectively, and $10,000 and $27,000 for the three and six
months ended June 30, 1998. The income taxes were based solely on state and
local taxes on business and investment capital. The increase from the prior
year for both the three and six month periods is a result of our initial
and secondary public offerings which, in turn, increased our capital
structure. Our effective tax rate differs from the statutory federal income
tax rate, primarily as a result of the uncertainty regarding our ability to
utilize our net operating loss carryforwards. Due to the uncertainty
surrounding the timing or realization of the benefits of our net operating
loss carryforwards in future tax returns, we have placed a valuation
allowance against our otherwise recognizable deferred tax assets. As of
December 31, 1998, we had approximately $29.2 million of federal net
operating loss carryforwards for tax reporting purposes available to offset
future taxable income. Our federal net operating loss carryforwards expire
beginning 2001 through 2018, if not utilized. The Tax Reform Act of 1986
imposes substantial restrictions on the utilization of net operating losses
and tax credits in the event of an "ownership change" of a corporation. Due
to the change in our ownership interests in the third quarter of 1997, as
defined in the Internal Revenue Code of 1986, as amended (the "Code"),
future utilization of our net operating loss carryforwards will be subject
to certain limitations or annual restrictions.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, we had approximately $77.9 million in cash and cash
equivalents and approximately $.9 million in marketable securities. Net
cash used in operating activities was $11.6 million and $5.4 million for
the six months ended June 30, 1999 and 1998, respectively. The increase in
net cash used resulted primarily from an increase in our net cash operating
losses exclusive of amortization expense related to our acquisitions of
factorymall and Attitude.
Net cash (used in) provided by investing activities was ($4.6) million and
$2.6 million for the six months ended June 30, 1999 and 1998, respectively.
Net cash used in investing activities for the six months ended June 30,
1999 was primarily related to increased capital expenditures and security
deposits related to the pending re-location of our corporate offices. These
expenditures were partially offset by the net cash received in connection
with the acquisitions of factorymall and Attitude. For the six months ended
June 30, 1998, the net cash provided by investing activities was primarily
related to the sale of short-term investments in order to finance our
operating expenses.
Net cash provided by (used in) financing activities was approximately $64.7
million and ($0.1) million for the six months ended June 30, 1999 and 1998,
respectively. Net cash provided by financing activities for the six months
ended June 30, 1999 consisted
14
<PAGE>
primarily of proceeds received in connection with our secondary offering of
3.5 million shares of the Company's Common Stock and proceeds received from
the exercise of Common Stock options and warrants partially offset by
payments under our capital lease obligations. For the six months ended June
30, 1998, cash used in financing activities was related to the payment of
capital lease obligations.
On February 1, 1999, we purchased factorymall, an interactive department
store doing business as Azazz.com, which has been integrated into our
electronic commerce site and been re-named "shop.theglobe.com." We expect
to invest an aggregate of up to approximately $3.8 million of working
capital in 1999 to support the future operation of shop.theglobe.com. On
April 9, 1999, we purchased Attitude, an online provider of entertainment
content. We expect to invest an aggregate of up to $3.5 million of working
capital in 1999 to support the future operations of Attitude. In connection
with the Attitude acquisition, the Company assumed a non interest bearing
obligation payable to the former owner of the happypuppy.com website, which
was acquired by Attitude prior to its acquisition by the Company. The
obligation is to be repaid based upon 5% of the Company's gross revenue
related to the happypuppy.com website, less certain costs directly
associated with such website. The payments required by the agreement are
also subject to specific minimum amounts payable each year. The principal
amount of the obligation as of April 9, 1999, the date the Company acquired
Attitude, was $5,079,738.
Our capital requirements depend on numerous factors, including market
acceptance of our services, the amount of resources we devote to
investments in our website, 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
obligations since our inception consistent with the growth in our
operations and staffing, and we anticipate that this will continue for the
foreseeable future. Additionally, we will continue to evaluate possible
investments in businesses, products and technologies, and we plan to expand
our sales force. On May 19, 1999 we completed a secondary public offering
of our Common Stock in which the Company sold 3.5 million shares and
existing shareholders sold an additional 3.4 million shares. The sale of
these shares resulted in net proceeds of $66.5 million prior to offering
costs. We believe that our current cash and cash equivalents will be
sufficient to meet our anticipated cash needs for working capital and
capital expenditures for our existing business for the foreseeable future.
However, we may need to raise funds during 1999 or thereafter to obtain or
operate any additional acquired businesses or joint venture arrangements.
See "Risk Factors--We may need to raise additional funds, including through
the issuance of debt."
IMPACT OF THE YEAR 2000
The Year 2000 issue is the potential for system and processing failures of
date-related data and the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example,
computer programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the Year 2000. This could result in
system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business
activities.
State of Readiness.
We may be affected by Year 2000 issues related to non-compliant information
technology systems or non-information technology systems operated by us or
by third parties. We have substantially completed an assessment of our
internal and external third-party information technology systems and
non-information technology systems and a test of the information technology
systems that support our website. Following the acquisition of factorymall
in February of 1999 and Attitude in April of 1999, we began to assess each
of their internal and external third party information technology systems
and non-information technology systems and integrate those hardware and
software systems into ours. At this point in our assessment testing and
integration, 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
15
<PAGE>
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 estimate that costs associated
with remediating our non-compliant systems will be less than $200,000.
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 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 November 30, 1999. A failure could prevent us
from operating our business, prevent users from accessing our website or
change the behavior of advertising customers or persons accessing our
website. 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 website;
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. We completed an initial simulation of our
information technology systems in the second quarter of 1999. To date, we
are not aware of any Year 2000 problems with systems that we or third
parties operate that would have a material adverse effect on our business
or financial condition. We plan to continue to assess our technology
systems and those operated by third parties in the third and fourth
quarters of 1999 and will take the results into account in determining the
nature and extent of any contingency plans.
EFFECTS OF INFLATION
Due to relatively low levels of inflation in 1996, 1997, 1998 and 1999
inflation has not had a significant effect on our results of operations
since inception.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which
establishes guidelines for the accounting for the costs of all computer
software developed or obtained for internal use. We adopted SOP 98-1
effective for the year ended December 31, 1998. The adoption of SOP 98-1 is
not expected to have a material impact on our consolidated financial
statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS
No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. This statement does not apply to the Company as the
Company currently does not have any derivative instruments or hedging
activities.
16
<PAGE>
RISK FACTORS
OUR LIMITED OPERATING HISTORY MAKES FINANCIAL FORECASTING DIFFICULT.
theglobe was founded in May 1995. Accordingly, we have a limited operating
history for you to use in evaluating us and our prospects. Our prospects
should be considered in light of the risks encountered by companies in the
early stages of development, particularly companies operating in new and
rapidly evolving markets like the Internet. We may not successfully address
these risks. For example, we may not be able to:
o maintain and increase levels of user and member traffic on our
website;
o maintain and increase the percentage of our advertising
inventory sold;
o adapt to meet changes in our markets and competitive
developments;
o develop or acquire content for our services;
o generate electronic commerce-related revenues; and
o identify, attract, retain and motivate qualified personnel.
REVENUE GROWTH IN PRIOR PERIODS MAY NOT BE INDICATIVE OF FUTURE GROWTH.
We achieved significant revenue growth in 1998 and in the first two
quarters of 1999. Our limited operating history makes prediction of future
growth difficult. Accurate predictions of future growth are also difficult
because of the rapid changes in our markets. Accordingly, investors should
not rely on past revenue growth rates as a prediction of future growth.
WE ANTICIPATE INCREASED OPERATING EXPENSES AND EXPECT TO
CONTINUE TO INCUR LOSSES.
To date, we have not been profitable, and we expect that we will continue
to incur net losses for the foreseeable future. We had net losses of
approximately $0.8 million for 1996, $3.6 million for 1997, $16.0 million
for 1998, and $19.4 million for the six months ended June 30, 1999. As of
June 30, 1999, we had an accumulated deficit of approximately $39.8
million. The principal causes of our losses are likely to continue to be:
o increased general and administrative expenses;
o costs resulting from enhancement of our services;
o significant increases in operating expenses in the next several
years, especially in the areas of sales and marketing;
o increased expenses necessary to maintain and develop brand
identity;
o growth of our sales force;
o expansion of our business facilities; and
o failure to generate sufficient revenue in light of increased
costs.
We will need to generate significantly increased revenues to achieve
profitability, particularly if we are unable to adjust our expenses in
light of any revenue 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
17
<PAGE>
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 website;
o the overall demand for Internet advertising and electronic
commerce;
o the addition or loss of advertisers and electronic commerce
partners on our website;
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;
o the timing and profitability of acquisitions, joint ventures
and strategic alliances; and
o system failures that cause an interruption to our site.
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 shop.theglobe.com
subsidiary. We also have existing electronic commerce arrangements with
third parties for the sale of merchandise on our website 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 the products we offer on our site and the continuation
of our electronic commerce arrangements.
WE DEPEND ON OUR MEMBERS FOR CONTENT AND PROMOTION.
We depend substantially upon member involvement for content and
word-of-mouth promotion. Particularly, we depend upon the voluntary efforts
of some highly motivated members who are most active in developing content
to attract other Internet users to our site. This member involvement
reduces the need for us to spend funds on content development and site
promotion. However, we cannot assure you that these members will continue
to effectively generate significant content or promote our site. Our
business may be materially and adversely affected if our most highly active
members become dissatisfied with our services or our focus on the
commercialization of those services or for any other reason stop generating
content that effectively promotes our site.
OUR BUSINESS MODEL IS NEW AND UNPROVEN.
Our business model is new and relatively unproven. This model depends upon
our ability to obtain more than one type of revenue source by using our
community platform. To be successful, we must, among other things, develop
and market products and services that achieve broad market acceptance by
our users, advertisers and electronic commerce vendors. We must also
develop significant electronic commerce revenues by marketing products
directly to users and having users purchase products through our site. We
cannot assure you that any Internet community, including our site, will
achieve broad market acceptance and to be able to generate significant
electronic commerce revenues. We also cannot assure you that our business
model will be successful, that it will sustain revenue growth or that it
will be profitable.
18
<PAGE>
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 factorymall, to develop electronic commerce
retailing on our site. On April 9, 1999, we acquired Attitude to add two
leading game enthusiast websites to our entertainment theme. We have been
approached from time to time to consider and evaluate potential business
combinations, either involving potential investments in our Common Stock,
or other business combinations or joint ventures, or our acquisition of
other companies. If consummated, any such transaction could result in a
change of control of our company or could otherwise be material to our
business or to your investment in our Common Stock. We are currently in
discussions or negotiations for various of these kinds of transactions,
some of which may be material, but we have not reached any binding
agreements. These transactions may or may not be consummated. Our future
acquisitions or joint ventures could result in numerous risks and
uncertainties, including:
o potentially dilutive issuances of equity securities, which may
be freely tradable in the public market;
o large and immediate write-offs;
o the incurrence of debt and contingent liabilities or amortization
expenses related to goodwill and other intangible assets;
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" brand
name is critical to attracting and expanding our member base, the traffic
on our website 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
websites. 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.
19
<PAGE>
We derive a substantial portion of our revenues from the sale of
advertisements on our website. We expect to continue to do so for the
foreseeable future. For the year ended December 31, 1998 and for the six
months ended June 30, 1999, advertising revenues represented 89% and 86%,
respectively, of our total revenues. Our business model and revenues are
highly dependent on the amount of traffic on our site. The level of traffic
on our site determines the amount of advertising inventory we can sell. Our
ability to generate significant advertising revenues depends, in part, on
our ability to create new advertising programs without diluting the
perceived value of our existing programs. Our ability to generate
advertising revenues will also depend, in part, on the following:
o advertisers' acceptance of the Internet as an attractive and
sustainable medium;
o advertisers' willingness to pay for advertising on the Internet
at current rates;
o the development of a large base of users of our products and
services;
o our level of traffic;
o the effective development of website content that attracts
users having demographic characteristics attractive to
advertisers; and
o price competition among websites.
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 WEBSITE.
The process of managing advertising within a large, high-traffic website
such as ours is an increasingly important and complex task. We license our
advertising management system from DoubleClick, Inc. under an agreement
expiring April 15, 2000. DoubleClick may terminate the agreement upon 30
days' notice (1) if we breach the agreement or (2) if DoubleClick
reasonably determines that we have used their advertising management system
in a manner that could damage their technology or which reflects
unfavorably on DoubleClick's reputation. No assurance can be given that
DoubleClick would not terminate the agreement. Any termination and
replacement of DoubleClick's service could disrupt our ability to manage
our advertising operations. Additionally, we have entered into a contract
with Engage Technologies, Inc. for the license of proprietary software to
manage the placement of advertisements on our website. This software has
been 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 website 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.
20
<PAGE>
Our obligations to provide additional impressions would displace saleable
advertising inventory. This would reduce revenues and could have a material
adverse effect on us.
WE DEPEND SUBSTANTIALLY ON OUR KEY PERSONNEL.
Our performance is substantially dependent on the continued service of our
senior management and key technical personnel, all of whom have only worked
together for a short time. In particular, our success depends on the
continued efforts of our senior management team, especially our Co-Chief
Executive Officers, Co-Presidents, and co-founders, Todd V. Krizelman and
Stephan J. Paternot. We do not carry key person life insurance on any of
our personnel. The loss of the services of any of our executive officers or
other key employees would likely have a material adverse effect on our
business.
WE DEPEND ON HIGHLY QUALIFIED TECHNICAL AND MANAGERIAL PERSONNEL.
Our future success also depends on our continuing ability to attract,
retain and motivate highly qualified technical and managerial personnel.
Our business plan requires us to increase our employee base 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 PUBLIC COMPANY.
Our recent growth has placed significant strains on our resources. To
manage our future growth, we must continue to implement and improve our
operational and financial software systems and expand and train our
employee base. Some of our key employees were hired during 1998, including
our Chief Operating Officer, who joined us in August 1998 and our Chief
Financial Officer, who joined us in July 1998. In addition, our Director of
Marketing, Director of Advertising Sales, General Counsel, Director of
Business Development, Director of Communications and Director of Human
Resources each have been with us for less than two years. Furthermore, the
members of our current senior management, other than the Chairman, have not
had any previous experience managing a public company or a large operating
company. Accordingly, we cannot assure you that:
o we will be able to effectively manage the expansion of our
operations;
o our key employees will be able to work together effectively as
a team to successfully manage our growth;
o we will be able to hire, train and manage our growing employee
base;
o our systems, procedures or controls will be adequate to support
our operations; and
o our management will be able to achieve the rapid execution
necessary to fully exploit the market opportunity for our
products and services.
Our inability to manage growth effectively could have a material adverse
effect on our business.
OUR CHAIRMAN AND VICE PRESIDENT OF CORPORATE DEVELOPMENT HAVE OTHER
INTERESTS AND TIME COMMITMENTS; WE HAVE CONFLICTS OF INTEREST WITH
SOME OF OUR DIRECTORS.
Because our Chairman and our Vice President of Corporate Development are
officers or employees of other companies, we will have to compete for their
time. Michael S. Egan is our Chairman. Mr. Egan serves as the Chairman of
our board of directors and as an executive officer with primary
responsibility for day-to-day strategic planning and financing
arrangements. Mr. Egan also
21
<PAGE>
is the controlling investor of Dancing Bear Investments, Inc., an entity
controlled by Mr. Egan, which is our largest stockholder. Edward A.
Cespedes is our Vice President of Corporate Development with primary
responsibility for corporate development opportunities including mergers
and acquisitions. Mr. Cespedes also serves as a Managing Director of
Dancing Bear Investments. Messrs. Egan and Cespedes have not committed to
devote any specific percentage of their business time with us. Accordingly,
we compete with Dancing Bear Investments and Messr. Egan's other related
entities for their time. In April 1999, Mr. Egan was appointed to the board
of directors of Lowestfare.com, an entity with which we have a premier
partner relationship.
We have begun advertising and electronic commerce arrangements with
entities controlled by Mr. Egan and by AutoNation, Inc., an entity
affiliated with H. Wayne Huizenga, one of our directors. These arrangements
were not the result of arm's-length negotiations, but we believe that the
terms of these arrangements are on comparable terms as if they were entered
into with unaffiliated third parties. Due to their relationships with their
related entities, Messrs. Egan, Cespedes and Huizenga will have an inherent
conflict of interest in making any decision related to transactions between
their related entities and us. We intend to review related party
transactions in the future on a case-by-case basis.
WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL AND OTHER CHANGES.
The markets in which we compete are characterized by:
o rapidly changing technology;
o evolving industry standards;
o frequent new service and product announcements, introductions
and enhancements; and
o changing consumer demands.
We may not be able to keep up with these rapid changes. In addition, these
market characteristics are heightened by the emerging nature of the
Internet and the apparent need of companies from varying industries to
offer Internet-based products and services. As a result, our future success
depends on our ability to adapt to rapidly changing technologies and
standards. We will also need to continually improve the performance,
features and reliability of our services in response to competitive
services and product offerings and the evolving demands of the marketplace.
In addition, the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could
require us to incur substantial expenditures to modify our services or
infrastructure and could fundamentally affect the nature of our business.
WE HAVE CAPACITY CONSTRAINT AND SYSTEM DEVELOPMENT RISKS.
A key element of our strategy is to generate a high volume of user traffic.
Our ability to attract advertisers and to achieve market acceptance of our
products and services and our reputation depend significantly upon the
performance of our network infrastructure, including our server, hardware
and software. Any system failure, including network, software or hardware
failure, that causes an interruption in our service or a decrease in
responsiveness of our website could result in reduced traffic and reduced
revenue, and could impair our reputation. Our website must accommodate a
high volume of traffic and deliver frequently updated information. Our
website 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 website. 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, 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
22
<PAGE>
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 website. Our
reputation and theglobe 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 website operators for access to our websites. Many of
them have experienced significant outages in the past, and could experience
outages, delays and other difficulties due to system failures unrelated to
our systems. Moreover, the Internet infrastructure may not be able to
support continued growth in its use. Furthermore, we depend on hardware
suppliers for prompt delivery, installation and service of equipment used
to deliver our products and services. Any of these problems could
materially adversely affect our business.
HACKERS MAY ATTEMPT TO PENETRATE OUR SECURITY SYSTEM; ONLINE SECURITY
BREACHES COULD HARM OUR BUSINESS.
Consumer and supplier confidence in our website 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 websites 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 websites compete
for users. Competitor websites include community sites, as well as
"gateway" or "portal" sites and various other types of websites. We believe
that the principal competitive factors in attracting users to a site are:
o functionality of the website;
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 websites, such as GeoCities, which was
acquired by Yahoo!; Tripod and AngelFire,
23
<PAGE>
subsidiaries of Lycos; and Xoom.com;
o search engines and other Internet "portal" companies, such as
Excite@Home, InfoSeek, Lycos and Yahoo!;
o online content websites, 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 websites maintained by Internet service providers, such as AT&T
WorldNet, EarthLink and MindSpring;
o electronic commerce websites, such as Amazon.com, Etoys and
CDNow; and
o other websites serving game enthusiasts, including Ziff Davis'
Gamespot and CNET's Gamecenter.
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 merged with At Home, America Online acquired Netscape and Xoom
announced a transaction in which NBC would merge some of its online assets
with Xoom. In addition, there has been other significant consolidation in
the industry. This consolidation may continue in the future. We could face
increased competition in the future from traditional media companies,
including cable, newspaper, magazine, television and radio companies. A
number of these large traditional media companies, including Disney, CBS
and NBC, have been active in Internet related activities. Those competitors
may be able to undertake more extensive marketing campaigns for their
brands and services, adopt more aggressive advertising pricing policies and
make more attractive offers to potential employees, distribution partners,
electronic commerce companies, advertisers, third-party content providers
and acquisition targets. Furthermore, our existing and potential
competitors may develop sites that are equal or superior in quality to, or
that achieve greater market acceptance than, our site. We cannot assure you
that advertisers may not perceive our competitors' sites as more desirable
than ours.
To compete with other websites, 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 website 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 websites. 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
24
<PAGE>
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 websites 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 websites 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 website may be sold by the maker of the
product directly or by other websites. Competition among Internet
retailers, our electronic commerce partners and product makers may have a
material adverse effect on our ability to generate revenues through
electronic commerce transactions or from these electronic commerce
partners.
WE DEPEND ON THE CONTINUED GROWTH IN THE USE AND COMMERCIAL
VIABILITY OF THE WEB.
Our market is new and rapidly evolving. Our business is substantially
dependent upon the continued rapid growth in the use of the Internet and
electronic commerce on the Internet becoming more widespread. Commercial
use of the Internet is relatively new. Web usage may be inhibited for a
number of reasons, including:
o inadequate network infrastructure;
o security and authentication concerns with respect to
transmission over the Internet of confidential information,
including credit card numbers, or other personal information;
o ease of access;
o inconsistent quality of service;
o availability of cost-effective, high-speed service; and
o bandwidth availability.
If the Internet develops as a commercial medium more slowly than we expect,
it will adversely affect our business. Additionally, if web usage grows,
the Internet infrastructure may not be able to support the demands placed
on it by this growth or its performance and reliability may decline.
Websites 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 website, 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. IN ADDITION,
OUR ELECTRONIC COMMERCE BUSINESS MAY RESULT IN SIGNIFICANT LIABILITY CLAIMS
AGAINST US.
In the first quarter of 1999, we acquired shop.theglobe.com, 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:
25
<PAGE>
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 websites, gross margins for
electronic commerce transactions which are narrower than for advertising
businesses may further narrow in the future and, accordingly, our revenues
and profits from electronic commerce arrangements may be materially
negatively impacted. If use of the Internet for electronic commerce does
not continue to grow, our business and financial condition would be
materially and adversely affected.
Additionally, consumers may sue us if any of the products that we sell are
defective, fail to perform properly or injure the user. Some of our
agreements with manufacturers contain provisions intended to limit our
exposure to liability claims. However, these limitations may not prevent
all potential claims. Liability claims could require us to spend
significant time and money in litigation or to pay significant damages. As
a result, any claims, whether or not successful, could seriously damage our
reputation and our business.
INTERNET ADVERTISING MAY NOT PROVE AS EFFECTIVE AS TRADITIONAL MEDIA.
The Internet advertising market is new and rapidly evolving. We cannot yet
gauge its effectiveness as compared to traditional advertising media. Many
of our current or potential advertising partners have little or no
experience using the Internet for advertising purposes and they have
allocated only a limited portion of their advertising budgets to Internet
advertising. The adoption of Internet advertising, particularly by those
entities that have historically relied upon traditional media, requires the
acceptance of a new way of conducting business, exchanging information and
advertising products and services. Advertisers that have traditionally
relied upon other advertising media may be reluctant to advertise on the
Internet or find it less effective.
No standards have been widely accepted to measure the effectiveness of
Internet advertising or to measure the demographics of our user base.
Additionally, no standards have 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,
that standards will accurately measure our users or the full range of user
activity on our site or that measurement services will accurately report
our user activity based on their standards. 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.
26
<PAGE>
Our revenues could be materially adversely affected if we are unable to
adapt to other pricing models for Internet advertising if they are adopted.
It is difficult to predict which, if any, pricing models for Internet
advertising will emerge as the industry standard. This makes it difficult
to project our future advertising rates and revenues. Additionally, it is
possible that Internet access providers may, in the future, act to block or
limit various types of advertising or direct solicitations, whether at
their own behest or at the request of users. Moreover, "filter" software
programs that limit or prevent advertising from being delivered to an
Internet user's computer are available. Widespread adoption of this
software could adversely affect the commercial viability of Internet
advertising.
WE DEPEND ON THIRD PARTIES TO INCREASE TRAFFIC ON OUR
SITE AND TO PROVIDE SOFTWARE AND PRODUCTS.
We are dependent on various websites that provide direct links to our site.
These websites 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 websites 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 websites 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 website.
Additionally, we cannot assure you that we will be able to maintain
relationships with third parties that supply us with software or products
that are crucial to our success, or that these software or products will be
able to sustain any third-party claims or rights against their use.
Furthermore, we cannot assure you that the software, services or products
of those companies that provide access or links to our services or products
will achieve market acceptance or commercial success. Accordingly, we
cannot assure you that our existing relationships will result in sustained
business partnerships, successful service or product offerings or the
generation of significant revenues for us.
WE MAY NEED TO RAISE ADDITIONAL FUNDS, INCLUDING THROUGH
THE ISSUANCE OF DEBT.
We believe that the net proceeds from our secondary offering, together with
our current cash and cash equivalents, will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for our
existing business for the foreseeable future. However, we may need to raise
additional funds during 1999 or thereafter to obtain or operate any
additional acquired businesses or joint venture arrangements. We expect
that we will continue to experience negative operating cash flow for the
foreseeable future as a result of significant spending on advertising and
infrastructure. Accordingly, we may need to raise additional funds in a
timely manner in order to:
o fund our anticipated expansion;
o develop new or enhanced services or products;
o respond to competitive pressures;
o acquire complementary products, businesses or technologies; and
o enter into joint ventures.
If we raise additional funds through the issuance of equity or convertible
debt securities, the percentage ownership of our stockholders will be
reduced. Stockholders may experience additional dilution and these
securities may have rights senior to those of the holders of our Common
Stock. We do not have any contractual restrictions on our ability to incur
debt. Any indebtedness could contain covenants which restrict our
operations. We cannot assure you that additional financing will be
available on terms favorable to us, or at all. If adequate funds are not
available or are not available on acceptable terms, our business could be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
27
<PAGE>
WE RELY ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.
We regard substantial elements of our website 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 websites 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. See note 9 and Item 1 in Part II. Any litigation claims or
counterclaims could impair our business because they could:
o be time-consuming;
o result in costly litigation;
o subject us to significant liability for damages;
o result in invalidation of our proprietary rights;
o divert management's attention;
o cause product release delays; or
o require us to redesign our products or require us to enter
into royalty or licensing agreements that may not be available
on terms acceptable to us, or at all.
We license from third parties various technologies incorporated into our
site. As we continue to introduce new services that incorporate new
technologies, we may be required to license additional technology from
others. We cannot assure you that these third-party technology licenses
will continue to be available to us on commercially reasonable terms.
Additionally, we cannot assure you that the third parties from which we
license our technology will be able to defend our proprietary rights
successfully against claims of infringement. As a result, our inability to
obtain any of these technology licenses could result in delays or
reductions in the introduction of new services or could adversely affect
the performance of our existing services until equivalent technology can be
identified, licensed and integrated.
We own the Internet domain names "theglobe.com," "shop.theglobe.com,"
"globelists.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 website 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.
28
<PAGE>
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 affect our business. Moreover, the
applicability to the Internet of existing laws governing issues such as
intellectual property ownership and infringement, copyright, trademark,
trade secret, obscenity, libel, employment and personal privacy is
uncertain and developing. Any new legislation or regulation, or the
application or interpretation of existing laws or regulations, may decrease
the growth in the use of the Internet, may impose additional burdens on
electronic commerce or may alter how we do business. This could decrease
the demand for our services, increase our cost of doing business, increase
the costs of products sold through the Internet or otherwise have a
material adverse effect on our business, results of operations and
financial condition.
WE MAY BE EXPOSED TO LIABILITY FOR INFORMATION RETRIEVED
FROM OR TRANSMITTED OVER THE INTERNET OR FOR PRODUCTS
SOLD OVER THE INTERNET.
Users may access content on our website or the websites of our distribution
partners or other third parties through website links or other means, and
they may download content and subsequently transmit this content to others
over the Internet. This could result in claims against us based on a
variety of theories, including defamation, obscenity, negligence,
copyright, trademark infringement or the wrongful actions of third parties.
Other theories may be brought based on the nature, publication and
distribution of our content or based on errors or false or misleading
information provided on our website. 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 factorymall 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, which operates the Games Domain.com and Kids Domain.com
websites 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 websites 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
29
<PAGE>
successfully market and operate our services in foreign markets;
o because of substantial anticipated competition, it will be
necessary to implement our business strategy quickly in
international markets to obtain a significant share of the
market; and
o we do not have the content or services necessary to substantially
expand our operations in many foreign markets.
We will unlikely be able to significantly penetrate these markets unless we
gain the relevant content, either through partnerships, other business
arrangements or possibly acquisitions with content-providers in these
markets. There are also risks inherent in doing business on an
international level, including:
o unexpected changes in regulatory requirements;
o trade barriers;
o difficulties in staffing and managing foreign operations;
o fluctuations in currency exchange rates and the introduction
of the euro;
o longer payment cycles in general;
o problems in collecting accounts receivable;
o difficulty in enforcing contracts;
o political and economic instability;
o seasonal reductions in business activity in certain other
parts of the world; and
o potentially adverse tax consequences.
VARIOUS STOCKHOLDERS, INDIVIDUALLY OR IN THE AGGREGATE, MAY CONTROL US.
Michael S. Egan, our Chairman, beneficially owns or controls, directly or
indirectly, 9,834,606 shares of our Common Stock which in the aggregate
represents approximately 32% of the outstanding shares of our common stock.
Todd V. Krizelman and Stephen J. Paternot, our Co-Chief Executive Officers
and Co-Presidents, together, beneficially own approximately 14% of our
Common Stock.
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. 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 400,000 shares of our Common
Stock. The stockholders' agreement also provides for tag-along and
drag-along rights in connection with any private sale of these securities.
THE YEAR 2000 ISSUE MAY AFFECT OUR OPERATIONS.
Year 2000 issues related to non-compliant information technology systems or
non-information technology systems operated by us or by third parties may
affect us. We have substantially completed an assessment of our internal
and external third-party information technology systems and non-information
technology systems and a test of the information technology systems that
support our website. Following the acquisition of factorymall in February
of 1999 and Attitude in April of 1999, we began to assess each of their
internal and external third party information technology systems and
non-information technology systems and integrate those hardware and
software systems into ours. At this point in our assessment, testing and
integration, 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."
30
<PAGE>
To the extent that we finalize our assessment without identifying any
material non-compliant information technology systems operated by us or by
third parties, the most 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 website, or change the behavior of advertising customers
or persons accessing our website. 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 website;
o other business interruptions of a material nature; and
o claims of mismanagement, misrepresentation, or breach of
contract.
Any of these risks could have a material adverse effect on our business.
OUR STOCK PRICE IS VOLATILE.
The trading price of our Common Stock has been volatile and may continue to
be volatile in response to various factors, including:
o quarterly variations in our operating results;
o competitive announcements;
o changes in financial estimates by securities analysts;
o the operating and stock price performance of other companies
that investors may deem comparable to us; and
o news relating to trends in our markets.
The stock market has experienced significant price and volume fluctuations,
and the market prices of technology companies, particularly
Internet-related companies, have been highly volatile. In the past,
following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted
against a company. Litigation, if instituted, whether or not successful,
could result in substantial costs and a diversion of management's attention
and resources, which would have a material adverse effect on our business.
THE SALE OF SHARES ELIGIBLE FOR FUTURE SALE IN THE OPEN
MARKET COULD DEPRESS OUR STOCK PRICE.
Sales of significant amounts of Common Stock in the public market in the
future or the perception that sales will occur could materially and
adversely affect the market price of the Common Stock or our future ability
to raise capital through an offering of our equity securities. There are
approximately 12.0 million 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 and secondary 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 August 18,
1999. Following this date, approximately 2.3 million 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 8,000,978 shares held
by our "affiliates", within the meaning of the Securities Act. These
8,000,978 shares will be eligible for public sale subject to volume
limitation.
31
<PAGE>
There are outstanding options to purchase 4,565,576 shares of Common Stock
which are eligible for sale in the public market from time to time
depending on vesting and the expiration of lock-up agreements. The issuance
of these securities are registered under the Securities Act. In addition,
there are outstanding warrants to purchase up to 4,011,534 shares of our
Common Stock upon exercise. Substantially all of our stockholders holding
restricted securities, including shares issuable upon the exercise of
warrants to purchase our Common Stock, are entitled to registration rights
under various conditions.
ANTI-TAKEOVER PROVISIONS AFFECTING US COULD PREVENT OR DELAY A CHANGE OF
CONTROL.
Provisions of our charter, by-laws and stockholder rights plan and
provisions of applicable Delaware law may discourage, delay or prevent a
merger or other change of control that a stockholder may:
o have the effect of delaying, deferring or preventing a change
in control of our company;
o discourage bids of our Common Stock at a premium over the
market price; or
o adversely affect the market price of, and the voting and other
rights of the holders of, our Common Stock.
We must follow Delaware laws that could have the effect of delaying,
deterring or preventing a change in control of our company. One of these
laws prohibits us from engaging in a business combination with any
interested stockholder for a period of three years from the date the person
became an interested stockholder, unless various conditions are met. In
addition, provisions of our charter and by-laws, and the significant amount
of Common Stock held by our executive officers, directors and affiliates,
could together have the effect of discouraging potential takeover attempts
or making it more difficult for stockholders to change management.
WE DO NOT EXPECT TO PAY CASH DIVIDENDS.
We do not anticipate paying any cash dividends in the foreseeable future.
32
<PAGE>
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk. theglobe.'s accounts receivables are subject, in the normal
course of business, to collection risks. theglobe regularly assesses these
risks and has established policies and business practices to protect
against the adverse effects of collection risks. As a result, theglobe does
not anticipate any material losses in this area.
Interest rate risk. theglobe's investments that are classified as cash and
cash equivalents have maturities of 3 months or less. The globe.com's
short-term investments are in bonds that have fixed interest rates at the
time of purchase. Therefore, changes in the market's interest rates do not
affect the carrying value of our cash equivalents or short term
investments.
33
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 13, 1999, Accursed Toys, Inc. filed a complaint in the United States
District Court for the Middle District of Florida relating to the
acquisition of Attitude. The lawsuit alleges that the Company, Attitude and
others have engaged in various acts of unfair competition, false
advertising and deceptive trade practices, as well as breach of contract,
interference with contractual relations, fraud and misrepresentation. The
suit seeks actual and consequential damages and a preliminary and permanent
injunction prohibiting the operation of the Company's happypuppy.com
website. The Company owes Accursed Toys (the former owner of the
happypuppy.com website) approximately $5.0 million to be paid over the next
seventeen (17) years. Accursed Toys alleges that this amount is currently
due and payable. As of June 30, 1999, the unaudited condensed consolidated
financial statements of the Company reflect a long-term liability at its
net present value of approximately $2.6 million in respect to this
obligation. The Company believes that these allegations are without merit
and plans to vigorously defend these allegations. The Company believes that
it is unlikely that the ultimate disposition of this claim will have a
material adverse effect on the Company's consolidated financial condition
or results of operations.
On May 14, 1999, two principals of Accursed Toys, Inc. filed a complaint in
the United States District Court for the Eastern District of Virginia. The
lawsuit alleges that Attitude engaged in various acts of unfair
competition, false advertising, interference with contractual relations,
fraud and misrepresention. The suit seeks actual and consequential damages
and a preliminary and permanent injunction prohibiting the operation of the
Company's happypuppy.com website. On August 6, 1999 the court granted
Attitude's motion to dismiss the complaint, but gave the plaintiff
opportunity to amend the complaint. The Company believes that these
allegations are without merit and plans to vigorously defend these
allegations. The Company believes that it is unlikely that the ultimate
disposition of this claim will have a material adverse effect on the
Company's consolidated financial condition or results of operations.
On May 20, 1999, Fortune Casuals LLC filed a complaint in the United States
District Court for the Central District of California alleging that the
Company infringes Fortune Casuals LLC's state and federal trademark rights
with respect to the GLOBE mark. The Company believes that these allegations
are without merit and plans to vigorously defend these allegations. The
Company believes that it is unlikely that the ultimate disposition of this
claim will have a material adverse effect on the Company's consolidated
financial condition or results of operations.
On July 1, 1999, the Company filed a complaint in Supreme Court of the
State of New York, County of New York. The lawsuit alleges that
Stockplayer.com, Inc. breached advertising services agreements with the
Company by failing to pay for advertising services performed by the
Company. On August 13, 1999, Stockplayer.com,inc. filed its answer denying
that it breached these advertising services agreements. The answer also
alleges that the Company breached alleged express and implied warranties in
connection with certain information provided by the Company to
Stockplayer.com. Stockplayer.com alleges that it has been damaged in an
amount not less than $5,000,000. Based on our preliminary analysis the
Company believes that these allegations are without merit and plans to
vigorously defend these allegations. The Company believes that it is
unlikely that this claim will have a material adverse effect on the
Company's consolidated financial condition or results of operations.
From time to time the Company is subject to legal proceedings and claims
arising in the ordinary course of business. In the opinion of management,
the ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial condition or results of
operations.
II-1
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) SALES OF UNREGISTERED SECURITIES. On April 9, 1999, we acquired
Attitude in exchange for the issuance of approximately 1.57 million shares
of Common Stock. In addition, options and warrants to purchase shares of
Attitude's Common Stock were exchanged for options and warrants to
purchase, respectively, approximately 84,760 and 46,706 shares of
theglobe's Common Stock. The transaction was a private placement exempt
from the registration requirements of the Securities Act of 1933, as
amended, pursuant to Rule 506 of Regulation D, promulgated thereunder.
On May 19, 1999, two holders of warrants exerciseable into shares of Common
Stock notified the Company of the exercise of such warrants. The Company
issued an aggregate of 100,000 shares of Common stock for an aggregate
exercise price of $145,386. The transaction was a private placement exempt
from the registration requirements of the Securities Act of 1933, as
amended, pursuant to Rule 506 of Regulation D, promulgated thereunder.
(d) USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES. During the period
from December 31, 1998 through June 30, 1999, we have used an aggregate of
$16.4 million for investments in our website, including enhancements to our
server and networking infrastructure and the functionality of our website,
and for general corporate purposes including working capital, new office
facilities and expansion of our sales and marketing capabilities and
brand-name promotions. We have also used a portion of such net proceeds for
acquisitions of complementary businesses, services and technology.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We held our Annual Meeting of Stockholders on June 8, 1999. The following
is a brief description of each matter voted upon at the meeting and the
number of votes cast for, withheld, or against and the number of
abstentions with respect to each matter. Each director proposed by the
Company was elected and the two management proposals were approved by the
stockholders.
A. The stockholders re-elected the nine nominees for theglobe's Board of
Directors:
Nominee Shares For Shares Withheld
------- ---------- ---------------
Michael S. Egan 10,202,077 27,676
Todd V. Krizelman 10,202,077 27,676
Stephan J. Paternot 10,202,077 27,676
Edward A. Cespedes 10,202,077 27,676
Rosalie V. Arthur 10,202,077 27,676
Henry C. Duques 10,202,077 27,676
Robert M. Halperin 10,202,077 27,676
David H. Horowitz 10,202,077 27,676
H. Wayne Huizenga 10,202,077 27,676
B. Approval of theglobe's 1998 Stock Option Plan, as amended and
restated:
Shares For Shares Against Shares Abstained Broker Non-Votes
---------- -------------- ---------------- ----------------
6,928,881 449,897 9,785 2,841,190
C. Approval of theglobe's 1999 Employee Stock Purchase Plan:
Shares For Shares Against Shares Abstained Broker Non-Votes
---------- -------------- ---------------- ----------------
7,284,054 95,312 9,197 2,841,190
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit Number Description
-------------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
On April 1, 1999 we filed a Form 8-K/A under Item 7 amending the
original 8-K filed on February 15, 1999 regarding the completion of
the acquisition of factorymall.
On April 9, 1999 we filed a Form 8-K under Item 2 and 7 regarding the
completion of the acquisition of Attitude.
On May 3, 1999 we filed a Form 8-K under Item 5 and 7 announcing our
financial results for the first quarter of 1999.
On June 15, 1999 we filed a Form 8-K under Item 5 and 7 regarding a
clarification of our March 1999 unique user count.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its
behalf by the undersigned thereto duly authorized.
theglobe.com, inc.
/s/ Francis T. Joyce
--------------------
Francis T. Joyce
Vice President, Chief Financial Officer
and Treasurer (Principal Financial and
Accounting Officer)
August 16, 1999
II-3
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.1
FINANCIAL DATA SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 77,855,242
<SECURITIES> 906,472
<RECEIVABLES> 3,771,955
<ALLOWANCES> (892,464)
<INVENTORY> 0
<CURRENT-ASSETS> 82,276,201
<PP&E> 10,446,463
<DEPRECIATION> (2,197,762)
<TOTAL-ASSETS> 157,291,352
<CURRENT-LIABILITIES> 7,858,382
<BONDS> 2,678,201
0
0
<COMMON> 26,528
<OTHER-SE> 143,949,344
<TOTAL-LIABILITY-AND-EQUITY> 157,291,352
<SALES> 7,321,821
<TOTAL-REVENUES> 7,321,821
<CGS> 2,950,308
<TOTAL-COSTS> 27,054,852
<OTHER-EXPENSES> 24,104,544
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (19,223,852)
<INCOME-TAX> 152,965
<INCOME-CONTINUING> (19,376,817)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,376,817)
<EPS-BASIC> (0.85)
<EPS-DILUTED> (0.85)
</TABLE>