<PAGE>
As filed with the Securities and Exchange Commission on May 3, 1999
Registration No. 333-76153
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
AMENDMENT NO. 1
To
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
theglobe.com, inc.
(Exact name of registrant as specified in its charter)
Delaware 7310 14-1781422
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
----------------
31 West 21st Street
New York, New York 10010
(212) 886-0800
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
Todd V. Krizelman
Stephan J. Paternot
theglobe.com, inc.
31 West 21st Street
New York, New York 10010
(212) 886-0800
(Name, address, including zip code, and telephone number, including area code,
of co-agents for service)
----------------
Copies to:
Valerie Ford Jacob, Esq. Allen L. Weingarten, Esq.
Stuart H. Gelfond, Esq. Morrison & Foerster LLP
Fried, Frank, Harris, Shriver & 1290 Avenue of the Americas
Jacobson New York, New York 10104
One New York Plaza (212) 468-8000
New York, New York 10004
(212) 859-8000
----------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after the effective date of the registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the registration statement for the same
offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed Proposed
Maximum Maximum Amount of
Title of Each Class of Securities Amount To Be Offering Price Aggregate Registration
to be Registered Registered(1) Per Unit Offering Price Fee(2)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par 9,200,000 $39.82 $366,298,000 $101,831
value(3)............... shares
- ---------------------------------------------------------------------------------------------
</TABLE>
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(1) Amount to be registered is determined pursuant to Rule 416 regarding stock
splits.
(2) Estimated pursuant to Rule 457(c) solely for the purpose of calculating
the registration fee.
(3) The Common Stock offered hereby includes Preferred Stock Purchase Rights
(the "Rights"). The Rights will be associated and trade with the Common
Stock. The value, if any, of the Rights will be reflected in the market
price of the Common Stock.
----------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. The +
+information in this preliminary prospectus is not an offer to sell nor does +
+it seek an offer to buy these securities in any jurisdiction where the offer +
+or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 3, 1999
PRELIMINARY PROSPECTUS
[ART]
8,000,000 Shares
(after giving effect to a 2 for 1 stock split effective May 14, 1999)
Common Stock
-----------
This is a public offering of 8,000,000 shares of common stock of theglobe.com,
inc. We are selling 4,000,000 shares of common stock and the selling
stockholders identified in this prospectus are selling 4,000,000 shares. All
information in this prospectus gives effect to a 2 for 1 stock split effective
on May 14, 1999. We will not receive any of the proceeds from the shares of the
common stock sold by the selling stockholders.
The underwriters have an option to purchase a maximum of 1,200,000 additional
shares of common stock from one of the selling stockholders or, at such
stockholder's option, from us to cover over-allotments of shares.
Our common stock is traded on the Nasdaq National Market under the symbol
"TGLO." On April 29, 1999, the last reported sale price of our common stock was
$55.375 ($27.69 after giving effect to the May 14, 1999 2 for 1 stock split)
per share.
-----------
See "Risk Factors" beginning on page 8 to read about risks that you should
consider before buying shares of our common stock.
-----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public offering price............................................... $ $
Underwriting discount............................................... $ $
Proceeds, before expenses, to us.................................... $ $
Proceeds, before expenses, to the selling stockholders.............. $ $
</TABLE>
-----------
The underwriters are severally underwriting the shares being offered in this
prospectus. The underwriters expect to deliver the shares against payment in
New York, New York on , 1999.
-----------
Bear, Stearns & Co. Inc.
NationsBanc Montgomery Securities LLC
Volpe Brown Whelan & Company
Wit Capital Corporation
as e-Manager(TM)
The date of this prospectus is , 1999.
<PAGE>
"Think of it as an interactive 'Nightline'
where there is one issue, but no host
and everyone who tunes in is a guest."
--David Chen, The New York Times, September 19, 1997
[logo]the globe.com
[screen views]
10.2 million users*
Features and Services Entertainment Chat Business
Travel Shopping Games Romance Discussion Forums
Technology E-mail Stock Quotes and Personal Publishing
Homepages
created by
members of [screen view] [screen view] [screen view] [screen view]
theglobe.com
Read about our recent acquisitions. See inside back cover
*Source: DoubleClick, as audited by ABC Interactive (March 1999).
Does not include Attitude Network users.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary............................. 4
Risk Factors........................ 8
Cautionary Notice Regarding Forward
Looking Statements................. 25
How We Intend to Use the Proceeds
from the Offering.................. 26
Dividend Policy..................... 26
Price Range of Our Common Stock..... 27
Capitalization...................... 28
Dilution............................ 29
Selected Financial Data............. 30
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 31
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business............................. 38
Management........................... 55
Certain Relationships and Related
Transactions........................ 67
Principal and Selling Stockholders... 69
Description of Capital Stock......... 71
Shares Eligible for Future Sale...... 78
United States Federal Tax
Considerations for Non-United States
Holders............................. 80
Underwriting......................... 83
Legal Matters........................ 85
Experts.............................. 85
Where You Can Find More Information.. 85
Index to Financial Statements........ F-1
</TABLE>
----------------
This prospectus includes statistical data regarding the Internet industry. We
obtained or derived the data from sources including:
. ABC Interactive, a provider of independent third-party audits and
industry-developed standards for web site and other online advertising.
. DoubleClick Inc., a global Internet advertising solutions company that
centralizes advertising planning, execution, control, tracking and
reporting for online media companies.
. International Data Corporation, a provider of market information and
strategic information for the information technology industry.
. Jupiter Communications, LLC, a media research firm focusing on the
Internet industry.
Although we believe that the data are generally correct, the data are
inherently imprecise. Accordingly, you should not place undue reliance on the
data.
----------------
You should rely only on the information contained in this prospectus. We have
not authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. We are not making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business and financial condition may
have changed since that date.
3
<PAGE>
SUMMARY
The following summary contains basic information about our company. This
summary may not contain all of the information that is important to you. You
should carefully read this entire document, the financial statements and the
other documents to which we refer for a more complete understanding of this
offering. Unless otherwise indicated or unless the context otherwise requires,
all information in this prospectus (1) reflects no exercise of the
underwriters' over-allotment option and (2) gives effect to the 2 for 1 stock
split that will be distributed to stockholders on May 14, 1999.
Our Business
theglobe.com is one of the world's leading online networks with nearly 2.5
million members in the United States and abroad who have registered on our web
site and provided us with personal information. In March 1999, approximately
10.2 million individuals visited our web site, according to DoubleClick, as
audited by ABC Interactive. Approximately 40% of our monthly traffic originates
from abroad, reflecting our site's international appeal. Our web site is a
destination on the Internet where users are able to personalize their online
experience by publishing their own content and interacting with others having
similar interests. We facilitate this interaction by providing various free
services, including home page building, discussion forums, chat rooms, e-mail
and electronic commerce. Additionally, we provide our users with news, business
information, real time stock quotes, weather, movie and music reviews, multi-
player gaming and personals. By satisfying our users' personal and practical
needs, we seek to become our users' online home.
We generate revenues primarily by selling advertisements, sponsorship
placements within our site, development fees and, to a lesser extent, from
electronic commerce revenues. In the first four months of 1999, we had
approximately 200 advertisers, including Coca Cola, Hewlett Packard, Hilton,
LEGO, Office Max, 3Com and Visa. In February 1999, we acquired factorymall.com,
an online department store doing business as Azazz.com which sells a variety of
name brand products directly to consumers. We have integrated Azazz.com into
our electronic commerce site, now known as "shop.theglobe.com." In April 1999,
we acquired Attitude Network, a provider of online entertainment content whose
web sites include Happy Puppy, Games Domain and Kids Domain, three leading web
sites serving game enthusiasts.
Our site currently has ten themes of interest. Within each theme is a
combination of content, electronic commerce and interactive services. Content
is both user generated and professional. We have several professional content
relationships. These include CBS Marketwatch, CNET, E! Online, Fox Sports,
Reuters, Thomson Investors Network, UPI, and Variety. Electronic commerce is
woven contextually throughout themes. For example, within the Sports theme a
user will find sports equipment for sale, while in the Business theme a user
will find products directed at the business professional. Interactive services
such as chat, discussion forums, and surveys are paired with content to promote
usage.
Members are also encouraged to generate their own webpages and aggregate in
online communities. We do not limit the number of communities which our members
can join and members are free to leave at any time. Because of this,
communities are dynamic and evolve as members' interests change.
The unique community focus of our site offers us several advantages that
include:
.member loyalty;
.member-developed content; and
.targeted advertising.
4
<PAGE>
Our goal is to be the leading online network. We seek to attain this goal
through the following key strategies:
.improve user experience;
.develop brand identity and awareness;
.further develop electronic commerce;
.implement acquisition, joint venture and alliance strategy;
.expand globally; and
.enhance membership services.
We were incorporated in May 1995 in the State of Delaware. Our principal
executive offices are located at 31 West 21st Street, New York, New York 10010,
and our telephone number is (212) 886-0800.
Recent Developments
Based on preliminary information as to the results of operations for the
three months ended March 31, 1999, we had revenues of approximately $3.2
million compared with revenues of approximately $394,000 for the three months
ended March 31, 1998. This represents an increase of approximately $2.8
million. Gross profit for the three months ended March 31, 1999 was
approximately $1.9 million with a gross margin of 59% compared with a gross
profit of $181,000 and gross margin of 46% for the three months ended March 31,
1998. The period to period increase in revenues was primarily due to an
increase in the number of advertisers as well as an increase in the average
contract duration and dollar value. The growth in the number of advertisers is
attributable to an increase in the number of users and the launch of an
advertising campaign in the first quarter of 1998.
Operating expenses (excluding cost of revenues) for the three months ended
March 31, 1999 were approximately $8.3 million compared to approximately $2.6
million for the three months ended March 31, 1998. Net loss for the three
months ended March 31, 1999 was approximately $6.3 million compared to
approximately $2.0 million for the three months ended March 31, 1998. Included
in operating expenses for the three months ended March 31, 1999 was
amortization of purchased intangibles of $1.4 million in connection with our
acquisition of Azazz which are being amortized over a period of two to three
years. The other increases in operating expenses were partially due to a
significant increase in product development as a result of the redesign of our
web site. The largest component of product development costs were personnel
costs associated with the development, testing and upgrades to our web site.
The increase in operating expenses was also partially due to an increase in
sales and marketing expenses. The increase in these expenses was mostly due to
the growth in our sales force and the continued efforts to promote our branding
and marketing strategy. General and administrative expenses also increased as a
result of an increase in headcount and related expenses in order to support our
growth.
Net loss per share for the three months ended March 31, 1999 was $0.30
compared to $0.38 for the three months ended March 31, 1998. Per share amounts
for the periods were impacted by an increase in the weighted average number of
shares outstanding from approximately 5.2 million shares for the three months
ended March 31, 1998 to approximately 21.1 million shares for the three months
ended March 31, 1999.
5
<PAGE>
The Offering
The share amounts throughout the document give effect to the 2 for 1 stock
split that will be distributed to stockholders on May 14, 1999.
<TABLE>
<S> <C>
Common stock offered by us....... 4,000,000 shares (1)
Common stock offered by the
selling stockholders............ 4,000,000 shares (2)
Common stock outstanding after
this offering................... 26,898,746 shares (1) (3)
Use of proceeds.................. For general corporate purposes, including
working capital, expansion of our sales and
marketing capabilities, brand name
promotions, potential acquisitions and
improvements in our web site. See "How We
Intend to Use the Proceeds from the
Offering." We will not receive any proceeds
from the sale of common stock by the selling
stockholders.
Nasdaq Symbol.................... TGLO
</TABLE>
- --------
(1) The underwriters have an over-allotment option to purchase an additional
1,200,000 shares solely to cover over-allotment options. If the
underwriters elect to exercise this option, Dancing Bear Investments, our
largest stockholder, may elect to sell shares to satisfy all or a part of
this option. If Dancing Bear Investments does not elect to sell the full
amount of shares to be sold upon exercise, theglobe will sell the shares.
(2) This represents the estimated amount of shares that we expect the selling
stockholders to sell in the offering. See "Principal and Selling
Stockholders."
(3) Based on the number of shares of common stock outstanding as of April 29,
1999, which is inclusive of the shares issued in connection with the
Azazz.com and Attitude Network, Ltd. acquisitions. Excludes:
. 4,111,534 shares of common stock issuable upon the exercise of
outstanding warrants to acquire common stock at a weighted average
exercise price of approximately $1.58 per share;
. 4,167,952 shares of common stock issuable upon the exercise of stock
options that would be outstanding after the offering at a weighted
average exercise price of $8.78 per share;
. 881,654 shares of common stock reserved for future issuance under the
1998 and 1995 stock option plans; and
. 400,000 shares of common stock reserved for future issuance under the
1999 Employee Stock Purchase Plan.
See "Capitalization," "Management--Executive Compensation," "Description of
Capital Stock" and the financial statements and the related notes appearing
elsewhere in this prospectus.
6
<PAGE>
SUMMARY FINANCIAL DATA
(Dollars in thousands, except per share data)
The following table summarizes the financial data for our business. You
should read the following information in conjunction with the financial
statements and related financial statement notes appearing elsewhere in this
prospectus. See "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year Ended
May 1, 1995 December 31,
(inception) through ----------------------------------
December 31, 1995 1996 1997 1998
------------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues.............. $ 27 $ 229 $ 770 $ 5,510
Gross profit.......... 14 113 347 3,271
Loss from operations.. (66) (772) (3,883) (16,859)
Net loss.............. (66) (750) (3,584) (16,046)
Basic and diluted net
loss per share (1)... $ (0.03) $ (0.33) $ (1.56) $ (3.37)
Weighted average
shares outstanding
used in basic and
diluted per share
outstanding (1)...... 2,250,000 2,250,000 2,293,546 4,762,280
</TABLE>
- --------
(1) Weighted average shares do not include any common stock equivalents because
inclusion of common stock equivalents would have been anti-dilutive. See
the financial statements and related financial statement notes appearing
elsewhere in this prospectus for the determination of shares used in
computing basic and diluted loss per share.
The following table indicates a summary of our balance sheet at December 31,
1998:
. on an actual basis;
. on a pro forma basis giving effect to (1) the acquisition of Azazz.com
and (2) the acquisition of Attitude Network, Ltd.;
. on a pro forma as adjusted basis to reflect the pro forma events
described above and the receipt of the estimated net proceeds from the
sale of 4,000,000 shares of common stock, after deducting the estimated
underwriting discounts and commissions and offering expenses. Please see
"How We Intend to Use the Proceeds from the Offering," "Capitalization,"
and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(In Thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents and short-term
investments................................... $30,149 $ 32,569 $136,428
Working capital................................ 27,009 28,271 132,130
Total assets................................... 38,130 111,803 215,662
Capital lease obligations, excluding current
installments.................................. 2,006 2,022 2,022
Stockholders' equity........................... 30,301 99,905 203,764
</TABLE>
7
<PAGE>
RISK FACTORS
An investment in our common stock is risky. Before investing, you should
carefully consider the following risk factors together with all of the other
information included in this prospectus.
Our limited operating history makes financial forecasting difficult.
theglobe was founded in May 1995. Accordingly, we have a limited operating
history for you to use in evaluating us and our prospects. Our prospects
should be considered in light of the risks encountered by companies in the
early stages of development, particularly companies operating in new and
rapidly evolving markets like the Internet. We may not successfully address
these risks. For example, we may not be able to:
. maintain and increase levels of user and member traffic on our web site;
. maintain and increase the percentage of our advertising inventory sold;
. adapt to meet changes in our markets and competitive developments;
. develop or acquire content for our services;
. generate electronic commerce-related revenues; and
. identify, attract, retain and motivate qualified personnel.
Revenue growth in prior periods may not be indicative of future growth.
We achieved significant revenue growth in 1998. Our limited operating
history makes prediction of future growth difficult. Accurate predictions of
future growth are also difficult because of the rapid changes in our markets.
Accordingly, investors should not rely on past revenue growth rates as a
prediction of future growth.
We anticipate increased operating expenses and expect to continue to incur
losses.
To date, we have not been profitable, and we expect that we will continue to
incur net losses for the foreseeable future. We had net losses of
approximately $750,200 for 1996, $3.6 million for 1997, and $16.0 million for
1998 ($46.3 million on a pro forma basis). Our estimated net loss for the
first quarter of 1999 was approximately $6.3 million. As of December 31, 1998,
we had an accumulated deficit of approximately $20.4 million. The principal
causes of our losses are likely to continue to be:
. increased general and administrative expenses;
. costs resulting from enhancement of our services;
. significant increases in operating expenses in the next several years,
especially in the areas of sales and marketing;
. increased expenses necessary to maintain and develop brand identity;
. growth of our sales force;
. expansion of our business facilities; and
. failure to generate sufficient revenue in light of increased costs.
We will need to generate significantly increased revenues to achieve
profitability, particularly if we are unable to adjust our expenses in light
of any earnings shortfall. We cannot assure you that we will ever achieve or
sustain profitability.
8
<PAGE>
Our quarterly operating results fluctuate and vary by season.
Our quarterly revenues, expenses and operating results have varied
significantly in the past and are likely to vary significantly from quarter to
quarter in the future. As a result, quarter to quarter comparisons of our
revenues and operating results may not be meaningful. In addition, due to our
limited operating history and our new and unproven business model, we cannot
predict our future revenues or results of operations accurately. It is likely
that in one or more future quarters our operating results will fall below the
expectation of securities analysts and investors. If this happens, the trading
price of our common stock would almost certainly be materially and adversely
affected.
The factors which will cause our quarterly operating results to fluctuate
include:
. the level of traffic on our web site;
. the overall demand for Internet advertising and electronic commerce;
. the addition or loss of advertisers and electronic commerce partners on
our web site;
. usage of the Internet;
. seasonal trends in advertising and electronic commerce sales and member
usage;
. capital expenditures and other costs relating to the expansion of our
operations;
. the incurrence of costs relating to acquisitions; and
. the timing and profitability of acquisitions, joint ventures and
strategic alliances.
We derive a substantial portion of our revenues from the sale of advertising
under short-term contracts. These contracts average one to three months in
length. As a result, our quarterly revenues and operating results are, to a
significant extent, dependent on advertising revenues from contracts entered
into within the quarter, and on our ability to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. We believe that
advertising sales in traditional media, such as television and radio, generally
are lower in the first and third calendar quarters. If the Internet transitions
from an emerging to a more developed form of media, these same patterns may
develop in Internet advertising sales. Internet advertising expenditures may
also develop a different seasonality pattern. Traffic levels on our site and
the Internet have typically declined during the summer and year-end vacation
and holiday periods.
In addition to selling advertising, an increasing portion of our revenues may
be generated from electronic commerce through our Azazz subsidiary. We also
have existing electronic commerce arrangements with third parties for the sale
of merchandise on our web site which are terminable upon short notice. As a
result, our revenues from electronic commerce may fluctuate significantly from
period to period depending on the level of demand for electronic commerce on
our site and the continuation of our electronic commerce arrangements.
We depend on our members for content and promotion.
We depend substantially upon member involvement for content and word-of-mouth
promotion. Particularly, we depend upon the voluntary efforts of some highly
motivated members who are most active in developing content to attract other
Internet users to our site. This member involvement reduces the need for us to
spend funds on content development and site promotion. However, we cannot
assure you that these members will continue to effectively generate significant
content or promote our site. Our business may be materially and adversely
affected if 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
9
<PAGE>
things, develop and market products and services that achieve broad market
acceptance by our users, advertisers and electronic commerce vendors. We must
also develop significant electronic commerce revenues by marketing products
directly to users and having users purchase products through our site. We
cannot assure you that any Internet community, including our site, will achieve
broad market acceptance. We also cannot assure you that our business model will
be successful, that it will sustain revenue growth or that it will be
profitable.
Additionally, the market for our products and services is new, rapidly
developing and characterized by an increasing number of market entrants. As is
typical of most new and rapidly evolving markets, demand and market acceptance
for recently introduced products and services are highly uncertain and risky.
Moreover, because this market is new and rapidly evolving, we cannot predict
our future growth rate, if any. If this market fails to develop, develops more
slowly than expected or becomes saturated with competitors, or if our products
and services do not achieve or sustain market acceptance, our business would be
materially and adversely affected.
Our acquisitions or joint ventures entail numerous risks and uncertainties.
As part of our business strategy, we review acquisition prospects or joint
ventures that we expect to complement our existing business, increase our
traffic, augment the distribution of our community, enhance our technological
capabilities or increase our electronic commerce revenues. On February 1, 1999,
we acquired Azazz.com to develop electronic commerce retailing on our site. On
April 9, 1999, we acquired Attitude Network to add two leading game enthusiast
web sites to our entertainment theme. We have been approached from time to time
to consider and evaluate potential business combinations, either involving
potential investments in our common stock, or other business combinations or
joint ventures, or our acquisition of other companies. If consummated, any such
transaction could result in a change of control of our company or could
otherwise be material to our business or to your investment in our common
stock. We are currently in discussions or negotiations for various of these
kinds of transactions, some of which may be material, but we have not reached
any binding agreements. These transactions may or may not be consummated. Our
future acquisitions or joint ventures could result in numerous risks and
uncertainties, including:
. potentially dilutive issuances of equity securities, which may be freely
tradable in the public market;
. large and immediate write-offs;
. the incurrence of debt and contingent liabilities or amortization
expenses related to goodwill and other intangible assets;
. difficulties in the assimilation of operations, personnel, technologies,
products and information systems of the acquired companies;
. the diversion of management's attention from other business concerns;
. the risks of entering geographic and business markets in which we have no
or limited prior experience, such as electronic commerce retailing;
. the risk that an acquired business will not perform as expected; and
. risks associated with international expansion.
We may be unsuccessful in developing brand awareness; brand identity is
critical to us.
We believe that establishing and maintaining awareness of "theglobe.com"
brand name is critical to attracting and expanding our member base, the traffic
on our web site and advertising and electronic commerce relationships. If we
fail to promote and maintain our brand or our brand value is diluted, our
business, operating results and financial condition could be materially
adversely affected. The importance of brand recognition will increase because
low barriers to entry continue to result in an increased number of web sites.
To promote our brand, we may be required to continue to increase our financial
commitment to creating and
10
<PAGE>
maintaining brand awareness. We may not generate a corresponding increase in
revenues to justify these costs. Additionally, if members, other Internet
users, advertisers and customers do not perceive our community experience to be
of high quality, or if we introduce new services or enter into new business
ventures that are not favorably received by these parties, the value of our
brand could be diluted.
We rely substantially on advertising revenues.
We derive a substantial portion of our revenues from the sale of
advertisements on our web site. We expect to continue to do so for the
foreseeable future. During 1998, advertising revenues represented 89% of our
net revenues. Our business model and revenues are highly dependent on the
amount of traffic on our site. The level of traffic on our site determines the
amount of advertising inventory we can sell. Our ability to generate
significant advertising revenues depends, in part, on our ability to create new
advertising programs without diluting the perceived value of our existing
programs. Our ability to generate advertising revenues will also depend, in
part, on the following:
. advertisers' acceptance of the Internet as an attractive and sustainable
medium;
. advertisers' willingness to pay for advertising on the Internet at
current rates;
. the development of a large base of users of our products and services;
. our level of traffic;
. the effective development of web site content that attracts users having
demographic characteristics attractive to advertisers; and
. price competition among web sites.
We cannot assure you that the market for Internet advertising will continue
to emerge or become sustainable. If the Internet advertising market develops
slower than we expect, our business performance would be materially adversely
affected. To date, substantially all our advertising contracts have been for
terms averaging one to three months in length, with relatively few longer term
advertising contracts. Additionally, our advertising customers may object to
the placement of their advertisements on some members' personal homepages, the
content of which they deem undesirable. For any of the foregoing reasons, we
cannot assure you that our current advertisers will continue to purchase
advertisements on our site. We also compete with traditional advertising media,
including television, radio, cable and print, for a share of advertisers' total
advertising budgets. This results in significant pricing pressures on our
advertising rates, which could have a material adverse effect on us.
We rely on third parties over whom we have limited control to manage the
placement of advertising on our web site.
The process of managing advertising within a large, high-traffic web site
such as ours is an increasingly important and complex task. We license our
advertising management system from DoubleClick, Inc. under an agreement
expiring April 15, 2000. DoubleClick may terminate the agreement upon 30 days'
notice (1) if we breach the agreement or (2) if DoubleClick reasonably
determines that we have used their advertising management system in a manner
that could damage their technology or which reflects unfavorably on
DoubleClick's reputation. No assurance can be given that DoubleClick would not
terminate the agreement. Any termination and replacement of DoubleClick's
service could disrupt our ability to manage our advertising operations.
Additionally, we have entered into a contract with Engage Technologies, Inc.
for the license of proprietary software to manage the placement of
advertisement on our web site. This software is still being implemented and our
relationship under the contract has not yet been material. There can be no
assurance that this software will effectively manage the placement of
advertisements on our web site and that errors will not occur.
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To the extent that we encounter system failures or material difficulties in
the operation of our advertising management systems, we may
. be unable to deliver banner advertisements and sponsorships through our
site; and
. be required to provide additional impressions to our advertisers after
the contract term.
Our obligations to provide additional impressions would displace saleable
advertising inventory. This would reduce revenues and could have a material
adverse effect on us.
We depend substantially on our key personnel.
Our performance is substantially dependent on the continued service of our
senior management and key technical personnel, all of whom have only worked
together for a short time. In particular, our success depends on the continued
efforts of our senior management team, especially our Co-Chief Executive
Officers, Co-Presidents, and co-founders, Todd V. Krizelman and Stephan J.
Paternot. We do not carry key person life insurance on any of our personnel.
The loss of the services of any of our executive officers or other key
employees would likely have a material adverse effect on our business.
We depend on highly qualified technical and managerial personnel.
Our future success also depends on our continuing ability to attract, retain
and motivate highly qualified technical and managerial personnel. Our business
plan requires us to increase our employee base significantly over the next 12
months. Competition for employees in our industry is intense. We may be unable
to attract, assimilate or retain highly qualified technical and managerial
personnel in the future. Wages for managerial and technical employees are
increasing and are expected to continue to increase in the future. We have from
time to time in the past experienced, and we expect to continue to experience
in the future, difficulty in hiring and retaining highly skilled employees with
appropriate qualifications. If we are unable to attract and retain the
technical and managerial personnel necessary to support the growth of our
business, our business would likely be materially and adversely affected.
We may not effectively manage our growth; our management team is inexperienced
in the management of a large public company.
Our recent growth has placed significant strains on our resources. To manage
our future growth, we must continue to implement and improve our operational
and financial software systems and expand and train our employee base. Some of
our key employees were hired during 1998, including our Chief Operating
Officer, who joined us in August 1998 and our Chief Financial Officer, who
joined us in July 1998. In addition, our Director of Marketing, Director of
Advertising Sales, General Counsel, Director of Business Development, Director
of Communications and Director of Human Resources each have been with us for
less than two years. Furthermore, the members of our current senior management,
other than the Chairman, have not had any previous experience managing a public
company or a large operating company. Accordingly, we cannot assure you that:
. we will be able to effectively manage the expansion of our operations;
. our key employees will be able to work together effectively as a team to
successfully manage our growth;
. we will be able to hire, train and manage our growing employee base;
. our systems, procedures or controls will be adequate to support our
operations; and
. our management will be able to achieve the rapid execution necessary to
fully exploit the market opportunity for our products and services.
Our inability to manage growth effectively could have a material adverse
effect on our business.
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Our Chairman and Vice President of Corporate Development have other interests
and time commitments; we have conflicts of interest with some of our directors.
Because our Chairman and our Vice President of Corporate Development are
officers or employees of other companies, we will have to compete for their
time. Michael S. Egan is our Chairman. Mr. Egan serves as the Chairman of our
board of directors and as an executive officer with primary responsibility for
day-to-day strategic planning and financing arrangements. Mr. Egan also is the
controlling investor of Dancing Bear Investments, an entity controlled by Mr.
Egan, which is our majority stockholder. Edward A. Cespedes is our Vice
President of Corporate Development with primary responsibility for corporate
development opportunities including mergers and acquisitions. Mr. Cespedes also
serves as a Managing Director of Dancing Bear Investments. Messrs. Egan and
Cespedes have not committed to devote any specific percentage of their business
time with us. Accordingly, we compete with Dancing Bear Investments and related
entities for their time. 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. See "Business--Other Products and Services--Premier Partners."
We have begun advertising electronic commerce arrangements with entities
controlled by Mr. Egan and by AutoNation, Inc., an entity affiliated with H.
Wayne Huizenga, one of our directors. These arrangements were not the result of
arm's-length negotiations, but we believe that the terms of these arrangements
are on comparable terms as if they were entered into with unaffiliated third
parties. Due to their relationships with their related entities, Messrs. Egan,
Cespedes and Huizenga will have an inherent conflict of interest in making any
decision related to transactions between their related entities and us. We
intend to review related party transactions in the future on a case-by-case
basis. See "Certain Relationships and Related Transactions."
We may not be able to keep up with rapid technological and other changes.
The markets in which we compete are characterized by:
. rapidly changing technology;
. evolving industry standards;
. frequent new service and product announcements, introductions and
enhancements; and
. changing consumer demands.
We may not be able to keep up with these rapid changes. In addition, these
market characteristics are heightened by the emerging nature of the Internet
and the apparent need of companies from varying industries to offer Internet-
based products and services. As a result, our future success depends on our
ability to adapt to rapidly changing technologies and standards. We will also
need to continually improve the performance, features and reliability of our
services in response to competitive services and product offerings and the
evolving demands of the marketplace. In addition, the widespread adoption of
new Internet, networking or telecommunications technologies or other
technological changes could require us to incur substantial expenditures to
modify our services or infrastructure and could fundamentally affect the nature
of our business.
We have capacity constraint and system development risks.
A key element of our strategy is to generate a high volume of user traffic.
Our ability to attract advertisers and to achieve market acceptance of our
products and services and our reputation depend significantly upon the
performance of our network infrastructure, including our server, hardware and
software. Any system failure, including network, software or hardware failure,
that causes an interruption in our service or a decrease in responsiveness of
our web site could result in reduced traffic and reduced revenue, and could
impair our reputation. Our web site must accommodate a high volume of traffic
and deliver frequently updated information. Our web site has in the past and
may in the future experience slower response times for a variety of reasons,
including system failures and an increase in the volume of user traffic on our
web site. Accordingly,
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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 production servers 24 hours-per-day,
seven days-per-week, neither Exodus, Frontier nor Telehouse guarantees that our
Internet access will be uninterrupted, error-free or secure. Our operations
depend on the ability to protect our systems against damage from unexpected
events, including fire, power loss, water damage, telecommunications failures
and vandalism. Any disruption in our Internet access could have a material
adverse effect on us. In addition, computer viruses, electronic break-ins or
other similar disruptive problems could also materially adversely affect our
web site. Our reputation and theglobe.com brand could be materially and
adversely affected by any problems to our site. Our insurance policies may not
adequately compensate us for any losses that may occur due to any failures or
interruptions in our systems. We do not presently have any secondary off-site
systems or a formal disaster recovery plan.
In addition, our users depend on Internet service providers, online service
providers and other web site operators for access to our web sites. Many of
them have experienced significant outages in the past, and could experience
outages, delays and other difficulties due to system failures unrelated to our
systems. Moreover, the Internet infrastructure may not be able to support
continued growth in its use. Furthermore, we depend on hardware suppliers for
prompt delivery, installation and service of equipment used to deliver our
products and services. Any of these problems could materially adversely affect
our business.
Hackers may attempt to penetrate our security system; online security breaches
could harm our business.
Consumer and supplier confidence in our web site depends on maintaining
relevant security features. Substantial or ongoing security breaches on our
system or other Internet-based systems could significantly harm our business.
We incur substantial expenses protecting against and remedying security
breaches. Security breaches also could damage our reputation and expose us to a
risk of loss or litigation. Experienced programmers or "hackers" have
successfully penetrated our system and we expect that these attempts will
continue to occur from time to time. Because a hacker who is able to penetrate
our network security could misappropriate proprietary information or cause
interruptions in our products and services, we may have to expend significant
capital and resources to protect against or to alleviate problems caused by
these hackers. Additionally, we may not have a timely remedy against a hacker
who is able to penetrate our network security. Such security breaches could
materially adversely affect our company. In addition, the transmission of
computer viruses resulting from hackers or otherwise could expose us to
significant liability. Our insurance policies carry low coverage limits, which
may not be adequate to reimburse us for losses caused by security breaches. We
also face risks associated with security breaches affecting third parties with
whom we have relationships.
Competition for members, users and advertisers, as well as competition in the
electronic commerce market is intense and is expected to increase
significantly.
The market for members, users and Internet advertising among web sites is new
and rapidly evolving. Competition for members, users and advertisers, as well
as competition in the electronic commerce market, is
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intense and is expected to increase significantly. Barriers to entry are
relatively insubstantial and we believe we will face competitive pressures
from many additional companies both in the United States and abroad.
Accordingly, pricing pressure on advertising rates will increase in the future
which could have a material adverse effect on us. All types of web sites
compete for users. Competitor web sites include community sites, as well as
"gateway" or "portal" sites and various other types of web sites. We believe
that the principal competitive factors in attracting users to a site are:
. functionality of the web site;
. brand recognition;
. member affinity and loyalty;
. broad demographic focus;
. open access for visitors;
. critical mass of users, particularly for community-type sites; and
. services for users.
We compete for users, advertisers and electronic commerce marketers with the
following types of companies:
. other online community web sites, such as GeoCities, which has agreed to
be acquired by Yahoo!; Tripod and AngelFire, subsidiaries of Lycos; and
Xoom.com;
. search engines and other Internet "portal" companies, such as Excite,
InfoSeek, Lycos and Yahoo!;
. online content web sites, such as CNET, ESPN.com and ZDNet.com;
. publishers and distributors of television, radio and print, such as CBS,
NBC and CNN/Time Warner;
. general purpose consumer online services, such as America Online and
Microsoft Network;
. web sites maintained by Internet service providers, such as AT&T
WorldNet, EarthLink and MindSpring;
. electronic commerce web sites, such as Amazon.com, Etoys and CDnow; and
. other web sites serving game enthusiasts, including Ziff Davis' Gamespot
and CNET's Gamecenter.
Additional competitive factors specific to attracting advertisers include
the ability to offer targeted audiences and the overall cost effectiveness of
the advertising medium we offer. We will also need to continue to increase
significantly our user base and traffic to compete effectively.
Many of our competitors, including other community sites, have announced
that they are contemplating developing Internet navigation services and are
attempting to become "gateway" or "portal" sites through which users may enter
the web. In the event these companies develop successful "portal" sites, we
could lose a substantial portion of our user traffic. Furthermore, many non-
community sites are seeking to develop community aspects in their sites.
Many of our existing and potential competitors, including companies
operating web directories and search engines, and traditional media companies,
have the following advantages:
. longer operating histories in the Internet market;
. greater name recognition;
. larger customer bases; and
. 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-
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financed companies, such as Microsoft and America Online. For example, Excite
has agreed to be acquired by At Home, America Online agreed to acquire Netscape
and Lycos announced a transaction in which USA Networks would merge its online
and retailing assets, which include Ticketmaster-CitySearch Online, with Lycos.
In addition, there has been other significant consolidation in the industry.
This consolidation may continue in the future. We could face increased
competition in the future from traditional media companies, including cable,
newspaper, magazine, television and radio companies. A number of these large
traditional media companies, including Disney, CBS and NBC, have been active in
Internet related activities. Those competitors may be able to undertake more
extensive marketing campaigns for their brands and services, adopt more
aggressive advertising pricing policies and make more attractive offers to
potential employees, distribution partners, electronic commerce companies,
advertisers and third-party content providers. Furthermore, our existing and
potential competitors may develop sites that are equal or superior in quality
to, or that achieve greater market acceptance than, our site. We cannot assure
you that advertisers may not perceive our competitors' sites as more desirable
than ours.
To compete with other web sites, we plan to develop and introduce new
features and functions, such as increased capabilities for user personalization
and interactivity. We also plan to develop and introduce new products and
services, such as new content targeted for specific user groups with particular
demographic and geographic characteristics. These improvements will require us
to spend significant funds and may require the development or licensing of
increasingly complex technologies. Enhancements of or improvements to our web
site may contain undetected programming errors that require significant design
modifications, resulting in a loss of customer confidence and user support and
a decrease in the value of our brand name. Our failure to effectively develop
and produce new features, functions, products and services could affect our
ability to compete with other web sites. This could have a material adverse
effect on us.
Web browsers offered by Netscape and Microsoft also increasingly incorporate
prominent search buttons that direct traffic to competing services. These
features could make it more difficult for Internet users to find and use our
product and services. In the future, Netscape, Microsoft and other browser
suppliers may also more tightly integrate products and services similar to ours
into their browsers or their browsers' pre-set home page. Additionally,
entities that sponsor or maintain high-traffic web sites or that provide an
initial point of entry for Internet viewers, such as the Regional Bell
Operating Companies, cable companies or Internet service providers, such as
Microsoft and America Online, offer and can be expected to consider further
development, acquisition or licensing of Internet search and navigation
functions that compete with us. These competitors could also take actions that
make it more difficult for viewers to find and use our products and services.
Additionally, the electronic commerce market is new and rapidly evolving, and
we expect competition among electronic commerce merchants to increase
significantly. Because the Internet allows consumers to easily compare prices
of similar products or services on competing web sites and there are low
barriers to entry for potential competitors, gross margins for electronic
commerce transactions may narrow in the future. Many of the products that we
sell on our web site may be sold by the maker of the product directly or by
other web sites. Competition among Internet retailers, our electronic commerce
partners and product makers may have a material adverse effect on our ability
to generate revenues through electronic commerce transactions or from these
electronic commerce partners. See also "Business--Competition."
We depend on the continued growth in the use and commercial viability of the
web.
Our market is new and rapidly evolving. Our business is substantially
dependent upon the continued rapid growth in the use of the Internet and
electronic commerce on the Internet becoming more widespread. Commercial use of
the Internet is relatively new. Web usage may be inhibited for a number of
reasons, including:
. inadequate network infrastructure;
. security and authentication concerns with respect to transmission over
the Internet of confidential information, including credit card numbers,
or other personal information;
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. ease of access;
. inconsistent quality of service;
. availability of cost-effective, high-speed service; and
. bandwidth availability.
If the Internet develops as a commercial medium more slowly than we expect,
it will adversely affect our business. Additionally, if web usage grows, the
Internet infrastructure may not be able to support the demands placed on it by
this growth or its performance and reliability may decline. Web sites have
experienced interruptions in their service as a result of outages and other
delays occurring throughout the Internet network infrastructure. If these
outages or delays frequently occur in the future, web usage, as well as usage
of our web site, could grow more slowly or decline. Also, the Internet's
commercial viability may be significantly hampered due to:
. delays in the development or adoption of new operating and technical
standards and performance improvements required to handle increased
levels of activity;
. increased government regulation; and
. insufficient availability of telecommunications services which could
result in slower response times and adversely affect usage of the
Internet.
We may be materially adversely affected if electronic commerce does not
become a viable source of significant revenues for theglobe.com. In addition,
our electronic commerce business may result in significant liability claims
against us.
In the first quarter of 1999, we acquired Azazz, which is a direct marketer
of products over the Internet. However, we have limited experience in the sale
of products online and the development of relationships with manufacturers and
suppliers of these products. We also face many uncertainties which may affect
our ability to generate electronic commerce revenues, including:
. our ability to obtain new customers at a reasonable cost, retain
existing customers and encourage repeat purchases;
. the likelihood that both online and retail purchasing trends may rapidly
change;
. the level of product returns;
. merchandise shipping costs and delivery times;
. our ability to manage inventory levels;
. our ability to secure and maintain relationships with vendors;
. the possibility that our vendors may sell their products through other
sites; and
. intense competition for electronic commerce revenues.
Accordingly, we cannot assure you that electronic commerce transactions will
provide a significant or sustainable source of revenues or profits.
Additionally, due to the ability of consumers to easily compare prices of
similar products or services on competing web sites, gross margins for
electronic commerce transactions may narrow in the future and, accordingly,
our revenues and profits from electronic commerce arrangements may be
materially negatively impacted. If use of the Internet for electronic commerce
does not continue to grow, our business and financial condition would be
materially and adversely affected.
Additionally, consumers may sue us if any of the products that we sell are
defective, fail to perform properly or injure the user. Some of our agreements
with manufacturers contain provisions intended to limit our exposure to
liability claims. However, these limitations may not prevent all potential
claims. Liability claims could require us to spend significant time and money
in litigation or to pay significant damages. As a result, any claims, whether
or not successful, could seriously damage our reputation and our business.
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Internet advertising may not prove as effective as traditional media.
The Internet advertising market is new and rapidly evolving. We cannot yet
gauge its effectiveness as compared to traditional advertising media. Many of
our current or potential advertising partners have little or no experience
using the Internet for advertising purposes and they have allocated only a
limited portion of their advertising budgets to Internet advertising. The
adoption of Internet advertising, particularly by those entities that have
historically relied upon traditional media, requires the acceptance of a new
way of conducting business, exchanging information and advertising products and
services. Advertisers that have traditionally relied upon other advertising
media may be reluctant to advertise on the Internet or find it less effective.
No standards have been widely accepted to measure the effectiveness of
Internet advertising or to measure the demographics of our user base.
Additionally, no standards have been widely accepted to measure the number of
members, unique users or page views related to a particular site. We cannot
assure you that any standards will become available in the future or that
standards will accurately measure our users or the full range of user activity
on our site. If standards do not develop, advertisers may not advertise on the
Internet. In addition, we depend on third parties to provide these measurement
services. These measurements are often based on sampling techniques or other
imprecise measures and may materially differ from each other and from our
estimates. We cannot assure you that advertisers will accept our or other
parties' measurements. The rejection by advertisers of these measurements could
have a material adverse effect on our business and financial condition.
The sale of Internet advertising is subject to intense competition that has
resulted in a wide variety of pricing models, rate quotes and advertising
services. For example, advertising rates may be based on the number of user
requests for additional information made by clicking on the advertisement,
known as "click throughs," or on the number of times an advertisement is
displayed to a user, known as "impressions." Our contracts with advertisers
typically guarantee the advertiser a minimum number of impressions. To the
extent that minimum impression levels are not achieved for any reason,
including the failure to obtain the expected traffic, our contracts with
advertisers may require us to provide additional impressions after the contract
term, which may adversely affect the availability of our advertising inventory.
This could have a material adverse effect on us.
Our revenues could be materially adversely affected if we are unable to adapt
to other pricing models for Internet advertising if they are adopted. It is
difficult to predict which, if any, pricing models for Internet advertising
will emerge as the industry standard. This makes it difficult to project our
future advertising rates and revenues. Additionally, it is possible that
Internet access providers may, in the future, act to block or limit various
types of advertising or direct solicitations, whether at their own behest or at
the request of users. Moreover, "filter" software programs that limit or
prevent advertising from being delivered to an Internet user's computer are
available. Widespread adoption of this software could adversely affect the
commercial viability of Internet advertising.
We depend on third parties to increase traffic on our site and to provide
software and products.
We are dependent on various web sites that provide direct links to our site.
These web sites may not attract significant numbers of users and we may not
receive a significant number of additional users from these relationships. We
also enter into agreements with advertisers, electronic commerce marketers or
other third-party web sites that require us to exclusively feature these
parties in particular areas or on particular pages of our site. These
exclusivity agreements may limit our ability to enter into other relationships.
Our agreements with third party sites do not require future minimum commitments
to use our services or provide access to our site and may be terminated at the
convenience of the other party. Moreover, we do not have agreements with a
majority of the web sites that provide links to our site. These sites may
terminate their links at any time. Many companies we may pursue for strategic
relationships offer competing services. As a result, these competitors may be
reluctant to enter into strategic relationships with us. Our business could be
materially adversely affected if we do not establish and maintain strategic
relationships on commercially reasonable terms or if any of our strategic
relationships do not result in increased traffic on our web site.
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Additionally, we cannot assure you that we will be able to maintain
relationships with third parties that supply us with software or products that
are crucial to our success, or that these software or products will be able to
sustain any third-party claims or rights against their use. Furthermore, we
cannot assure you that the software, services or products of those companies
that provide access or links to our services or products will achieve market
acceptance or commercial success. Accordingly, we cannot assure you that our
existing relationships will result in sustained business partnerships,
successful service or product offerings or the generation of significant
revenues for us.
We may need to raise additional funds, including through the issuance of debt.
We believe that the net proceeds from this offering, together with our
current cash and cash equivalents, will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for our existing
business for at least twelve months. We expect that we will continue to
experience negative operating cash flow for the foreseeable future as a result
of significant spending on advertising and infrastructure. Accordingly, we may
need to raise additional funds in a timely manner in order to:
. fund our anticipated expansion;
. develop new or enhanced services or products;
. respond to competitive pressures;
. acquire complementary products, businesses or technologies; and
. 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 adverse effected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
We rely on intellectual property and proprietary rights.
We regard substantial elements of our web site and underlying technology as
proprietary and attempt to protect them by relying on intellectual property
laws and restrictions on disclosure. We also generally enter into
confidentiality agreements with our employees and consultants. In connection
with our license agreements with third parties we generally seek to control
access to and distribution of our technology and other proprietary information.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use our proprietary information without authorization or
to develop similar technology independently. Thus, we cannot assure you that
the steps taken by us will prevent misappropriation or infringement of our
proprietary information which could have a material adverse effect on our
business. In addition, our competitors may independently develop similar
technology, duplicate our products or design around our intellectual property
rights.
We pursue the registration of our trademarks in the United States and
internationally. However, effective trademark and other intellectual property
protection may not be available in every country in which our services are
distributed or made available through the Internet. Policing unauthorized use
of our proprietary information is difficult. Legal standards relating to the
validity, enforceability and scope of protection of proprietary rights in
Internet-related businesses are also uncertain and still evolving. We cannot
assure you about the future viability or value of any of our proprietary
rights.
Litigation may be necessary in the future to enforce our intellectual
property rights or to determine the validity and scope of the proprietary
rights of others. Furthermore, we cannot assure you that our business
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activities will not infringe upon the proprietary rights of others, or that
other parties will not assert infringement claims against us, including claims
related to providing hyperlinks to web sites operated by third parties or
providing advertising on a keyword basis that links a specific search term
entered by a user to the appearance of a particular advertisement. Moreover,
from time to time, third parties may assert claims of alleged infringement by
us or our members of their intellectual property rights. Any litigation claims
or counterclaims could impair our business because they could:
. be time-consuming;
. result in costly litigation;
. subject us to significant liability for damages;
. result in invalidation of our proprietary rights;
. divert management's attention;
. cause product release delays; or
. require us to redesign our products or require us to enter into royalty
or licensing agreements that may not be available on terms acceptable to
us, or at all.
We license from third parties various technologies incorporated into our
site. As we continue to introduce new services that incorporate new
technologies, we may be required to license additional technology from others.
We cannot assure you that these third-party technology licenses will continue
to be available to us on commercially reasonable terms. Additionally, we
cannot assure you that the third parties from which we license our technology
will be able to defend our proprietary rights successfully against claims of
infringement. As a result, our inability to obtain any of these technology
licenses could result in delays or reductions in the introduction of new
services or could adversely affect the performance of our existing services
until equivalent technology can be identified, licensed and integrated.
We own the Internet domain names "theglobe.com," "shop.theglobe.com,"
"tglo.com," "azazz.com," "happypuppy.com," "realmx.com," "kidsdomain.com" and
"gamesdomain.com." The regulation of domain names in the United States and in
foreign countries may change. Regulatory bodies could establish additional
top-level domains, appoint additional domain name registrars or modify the
requirements for holding domain names, any or all of which may dilute the
strength of our names. We may not acquire or maintain our domain names in all
of the countries in which our web site may be accessed, or for any or all of
the top-level domain names that may be introduced. The relationship between
regulations governing domain names and laws protecting proprietary rights is
unclear. Therefore, we may not be able to prevent third parties from acquiring
domain names that infringe or otherwise decrease the value of our trademarks
and other proprietary rights. See "Business--Intellectual Property and
Proprietary Rights."
We may face increased government regulation and legal uncertainties in our
industry.
There are an increasing number of federal, state, local and foreign laws and
regulations pertaining to the Internet. In addition, a number of federal,
state, local and foreign legislative and regulatory proposals are under
consideration. Laws or regulations may be adopted with respect to the Internet
relating to liability for information retrieved from or transmitted over the
Internet, online content, user privacy and quality of products and services.
Changes in tax laws relating to electronic commerce could materially effect
our business. Moreover, the applicability to the Internet of existing laws
governing issues such as intellectual property ownership and infringement,
copyright, trademark, trade secret, obscenity, libel, employment and personal
privacy is uncertain and developing. Any new legislation or regulation, or the
application or interpretation of existing laws or regulations, may decrease
the growth in the use of the Internet, may impose additional burdens on
electronic commerce or may alter how we do business. This could decrease the
demand for our services, increase our cost of doing business, increase the
costs of products sold through the Internet or otherwise have a material
adverse effect on our business, results of operations and financial condition.
See "Business--Government Regulation and Legal Uncertainties."
20
<PAGE>
We may be exposed to liability for information retrieved from or transmitted
over the Internet or for products sold over the Internet.
Users may access content on our web site or the web sites of our
distribution partners or other third parties through web site links or other
means, and they may download content and subsequently transmit this content to
others over the Internet. This could result in claims against us based on a
variety of theories, including defamation, obscenity, negligence, copyright,
trademark infringement or the wrongful actions of third parties. Other
theories may be brought based on the nature, publication and distribution of
our content or based on errors or false or misleading information provided on
our web site. Claims have been brought against online services in the past and
we have received inquiries from third parties regarding these matters. The
claims could be material in the future. We could also be exposed to liability
for third party content posted by members on their personal web pages or by
users in our chat rooms or on our bulletin boards.
Additionally, we offer e-mail service, which a third party provides. The e-
mail service may expose us to potential liabilities or claims resulting from
unsolicited e-mail, lost or misdirected messages, fraudulent use of e-mail or
delays in e-mail service. We also enter into agreements with commerce partners
and sponsors under which we are entitled to receive a share of any revenue
from the purchase of goods and services through direct links from our site.
After the Azazz acquisition in February 1999, we also began selling products
directly to consumers. Those arrangements may expose us to additional legal
risks, regulations by local, state, federal and foreign authorities and
potential liabilities to consumers of these products and services, even if we
do not ourselves provide these products or services. We cannot assure you that
any indemnification that may be provided to us in some of these agreements
with these parties will be adequate.
Even if these claims do not result in our liability, we could incur
significant costs in investigating and defending against these claims. The
imposition of potential liability for information carried on or disseminated
through our systems could require us to implement measures to reduce our
exposure to liability. Those measures may require the expenditure of
substantial resources and limit the attractiveness of our services.
Additionally, our insurance policies may not cover all potential liabilities
to which we are exposed.
We may have trouble expanding internationally.
A part of our strategy is to expand into foreign markets. In April 1999, we
acquired Attitude Network, which operates Games Domain and Kids Domain through
a wholly-owned U.K. subsidiary. We have not previously operated
internationally. Additionally, we are not completely familiar with U.K. law
and its ramifications on our business. There can be no assurance that the
Internet or our community model will become widely accepted for advertising
and electronic commerce in any international markets. To expand overseas we
intend to seek to acquire additional web sites and enter into relationships
with foreign business partners. This strategy contains risks, including:
. we may experience difficulty in managing international operations because
of distance, as well as language and cultural differences;
. we or our future foreign business associates may not be able to
successfully market and operate our services in foreign markets;
. 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
. 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:
. unexpected changes in regulatory requirements;
. trade barriers;
21
<PAGE>
. difficulties in staffing and managing foreign operations;
. fluctuations in currency exchange rates and the introduction of the euro;
. longer payment cycles in general;
. problems in collecting accounts receivable;
. difficulty in enforcing contracts;
. political and economic instability;
. seasonal reductions in business activity in certain other parts of the
world; and
. potentially adverse tax consequences.
Various stockholders, individually or in the aggregate, may control us.
Before this offering, Michael S. Egan, our Chairman, beneficially owned or
controlled, directly or indirectly, 12,246,048 shares of our common stock which
in the aggregate represents approximately 45.3% of the outstanding shares of
our common stock. Todd V. Krizelman and Stephen J. Paternot, our Co-Chief
Executive Officers and Co-Presidents, together, beneficially owned 15.4% of our
common stock. After this offering, Mr. Egan will beneficially own or control,
directly or indirectly, approximately 31.73% of our common stock, 27.87% if the
over-allotment option is exercised in full and Dancing Bear Investments, an
entity he controls, determines to sell stock to the underwriters upon such
exercise and 30.55% if the over-allotment option is exercised in full and we
sell stock to the underwriters upon such exercise. Messrs. Krizelman and
Paternot, together, will beneficially own approximately 12.39% of our common
stock after the offering, and 12.39% if the over-allotment option is exercised
and provided by Mr. Egan and 11.87% if the over-allotment option is exercised
and provided by us. These stockholders, if acting together, would be able to
significantly influence all matters requiring approval by our stockholders,
including the election of directors and the approval of mergers or other
business combinations.
Messrs. Egan, Krizelman, Paternot and Edward A. Cespedes and Rosalie V.
Arthur, each of whom is a director of our company, and we have entered into a
stockholders' agreement. As a result of the stockholders' agreement, Mr. Egan
has agreed to vote for up to two nominees of Messrs. Krizelman and Paternot to
the board of directors and Messrs. Krizelman and Paternot have agreed to vote
for the nominees of Mr. Egan to the board, which will be up to five directors.
Consequently, Mr. Egan, Krizelman and Paternot control the ability to elect a
majority of our directors. In addition, collectively Messrs. Egan, Krizelman
and Paternot have the ability to control the outcome of all issues submitted to
a vote of our stockholders requiring majority approval. Additionally, each
party other than Mr. Egan has granted an irrevocable proxy with respect to all
matters subject to a stockholder vote to Dancing Bear Investments, Inc., an
entity controlled by Mr. Egan, for any shares held by that party received upon
the exercise of outstanding warrants for 450,000 shares of our common stock.
The stockholders' agreement also provides for tag-along and drag-along rights
in connection with any private sale of these securities. See "Description of
Capital Stock."
The Year 2000 issue may affect our operations.
Year 2000 issues related to non-compliant information technology systems or
non-information technology systems operated by us or by third parties may
affect us. We have substantially completed an assessment of our internal and
external third-party information technology systems and non-information
technology systems and a test of the information technology systems that
support our web site. At this point in our assessment and testing, we are not
aware of any Year 2000 problems relating to systems operated by us or by third
parties that would have a material effect on our business, without taking into
account our efforts to avoid these problems. Based on our assessment to date,
we do not anticipate that costs associated with remediating our non-compliant
information technology systems or non-information technology systems will be
material, although we cannot assure you that this will be the case. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Impact of the Year 2000."
To the extent that we finalize our assessment without identifying any
material non-compliant information technology systems operated by us or by
third parties, the most reasonably likely worst case Year 2000 scenario is the
failure of one or more of our vendors of hardware or software or one or more
providers of non-
22
<PAGE>
information technology systems to properly identify any Year 2000 compliance
issues and remediate any issues before December 31, 1999. A failure could
prevent us from operating our business, prevent users from accessing our web
site, or change the behavior of advertising customers or persons accessing our
web site. We believe that the primary business risks, in the event of a
failure, would include, but not be limited to:
. lost advertising revenues;
. increased operating costs;
. loss of customers or persons accessing our web site;
. other business interruptions of a material nature; and
. 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:
. quarterly variations in our operating results;
. competitive announcements;
. changes in financial estimates by securities analysts;
. the operating and stock price performance of other companies that
investors may deem comparable to us; and
. 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
12,991,680 shares of common stock held by our stockholders that are "restricted
securities," as that term is defined in Rule 144 of the Securities Act of 1933.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144, 144(k) or 701
under the Securities Act. In connection with our initial public offering, all
of our directors, officers and the holders of a substantial portion of our
stock agreed, with exceptions, that they will not sell any common stock without
the prior consent of Bear, Stearns & Co. Inc. before May 12, 1999. Following
this date, approximately 2,266,760 shares of the restricted securities will be
immediately eligible for sale in the public market under Rule 144 without
volume limitation or further registration under the Securities Act, not
including approximately 10,724,920 shares held by our "affiliates," within the
meaning of the Securities Act. These 10,724,920 shares will be eligible for
public sale subject to volume limitation. In connection with this offering, the
underwriters will require all of our directors, and officers, with the
exception of any shares sold by them in the offering and other specified
exceptions, to agree not to sell any common stock, without the prior consent of
Bear, Stearns & Co. at any time prior to 90 days following the effective date
of this registration statement. Bear, Stearns & Co. Inc. may, however, in its
sole discretion and at any time without notice, release all or any portion of
the shares subject to lock-up agreements.
23
<PAGE>
There are outstanding options to purchase 4,167,952 shares of common stock
which are eligible for sale in the public market from time to time depending on
vesting and the expiration of lock-up agreements. The issuance of these
securities are registered under the Securities Act. In addition, there are
outstanding warrants to purchase up to 4,111,534 shares of our common stock
upon exercise.
Substantially all of our stockholders holding restricted securities,
including shares issuable upon the exercise of warrants to purchase our common
stock, are entitled to registration rights under various conditions. See
"Principal and Selling Stockholders" and "Description of Capital Stock."
Anti-takeover provisions affecting us could prevent or delay a change of
control.
Provisions of our charter, by-laws and stockholder rights plan and provisions
of applicable Delaware law may:
. have the effect of delaying, deferring or preventing a change in control
of our company;
. discourage bids of our common stock at a premium over the market price;
or
. adversely affect the market price of, and the voting and other rights of
the holders of, our common stock.
We must follow Delaware laws that could have the effect of delaying,
deterring or preventing a change in control of our company. One of these laws
prohibits us from engaging in a business combination with any interested
stockholder for a period of three years from the date the person became an
interested stockholder, unless various conditions are met. In addition,
provisions of our charter and by-laws, and the significant amount of common
stock held by our executive officers, directors and affiliates, could together
have the effect of discouraging potential takeover attempts or making it more
difficult for stockholders to change management. See "Description of Capital
Stock--Delaware Law and Various Charter and By-laws Provisions."
We do not expect to pay cash dividends.
We do not anticipate paying any cash dividends in the foreseeable future.
Our management can spend most of the proceeds from this offering in ways with
which stockholders might not agree.
Our management can spend most of the proceeds from this offering in ways with
which the stockholders might not agree. We cannot predict that the proceeds
will be invested to yield a favorable return. See "How We Intend to Use the
Proceeds from the Offering."
As a new investor, you will experience immediate and substantial dilution.
Investors purchasing shares of common stock in the offering will incur
immediate and substantial dilution in net tangible book value per share of the
common stock from the offering price of $22.72 per share. To the extent
outstanding options or warrants to purchase common stock are exercised, there
will be further dilution. See "Dilution."
24
<PAGE>
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward looking statements that have been made under
the provisions of the Private Securities Litigation Reform Act of 1995. Words
such as "anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates," and variations of these words and similar expressions are intended
to identify forward-looking statements. We have based these statements on our
current expectations about future events. Although we believe that our
expectations about future events are reasonable, we cannot assure you that
these expectations will be achieved. Important factors which would cause our
actual results to differ materially from the forward-looking statements in this
prospectus are described in the "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" and
elsewhere in this prospectus. We urge you to carefully consider these factors.
We caution you that any forward-looking statements are not guarantees of future
performance and involve significant risks and uncertainties, and that actual
results may differ materially from those projected in the forward-looking
statements as a result of various factors. All forward-looking statements
attributable to us are expressly qualified in their entirety by the foregoing
cautionary statement.
25
<PAGE>
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING
The estimated net proceeds to us from the sale of the 4,000,000 shares of
common stock we are offering are estimated to be $103.9 million at an assumed
split-adjusted public offering price of $27.69 per share, the price on April
29, 1999, after deducting the estimated underwriting discount and offering
expenses. Our net proceeds will be approximately $135.4 million if the
underwriters' over-allotment option is exercised in full and Dancing Bear
Investments declines to sell shares to cover such over-allotment. We will not
receive any proceeds from the sale of the shares that the selling stockholders
are selling.
We expect to use the net proceeds for general corporate purposes, including
working capital, expansion of our sales and marketing capabilities, brand name
promotions, potential acquisitions and improvements in our web site. The
amounts we actually spend for these purposes may vary significantly and will
depend on a number of factors, including our future revenue and cash generated
by operations and the other factors described under "Risk Factors." In the
ordinary course of business, we evaluate potential acquisitions of businesses,
technologies and product offerings or minority investments in businesses.
However, we have no current agreements with respect to any such acquisitions or
investments. Pending use of the net proceeds, we intend to invest them in
short-term, interest-bearing, investment grade securities. Therefore, we will
have broad discretion in the way we use the net proceeds. See "Our management
can spend most of the proceeds from this offering in ways with which
stockholders might not agree."
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common stock. We
currently intend to retain our future earnings, if any, to fund the development
and growth of our business and, therefore, do not anticipate paying any cash
dividends in the foreseeable future. The declaration and payment of dividends
by us are subject to the discretion of the board of directors. Any future
determination to pay dividends will depend on our results of operations,
financial condition, capital requirements, contractual restrictions and other
factors deemed relevant by the board of directors.
26
<PAGE>
PRICE RANGE OF OUR COMMON STOCK
Our common stock trades on the Nasdaq National Market under the symbol
"TGLO." All information in this section gives effect to the 2 for 1 stock split
effective May 14, 1999. The following table sets forth the range of high and
low closing sales prices of our common stock for the periods indicated:
<TABLE>
<CAPTION>
Fiscal 1998 High Low
----------- ------ ------
<S> <C> <C>
Quarter ended December 31, 1998
(from November 13, 1998)................................... $31.75 $13.72
<CAPTION>
Fiscal 1999
-----------
<S> <C> <C>
First Quarter............................................... $33.53 $15.75
</TABLE>
On April 29, 1999, the last reported sale price for our common stock on the
Nasdaq National Market was a split-adjusted $27.69 per share. The market price
for our stock is highly volatile and fluctuates in response to a wide variety
of factors. See "Risk Factors--Our stock price is volatile."
27
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998:
. on an actual basis;
. on a pro forma basis giving effect to (1) the acquisition of Azazz.com
and (2) the acquisition of Attitude Network, Ltd.;
. on a pro forma as adjusted basis to reflect the pro forma events
described above and the receipt of the estimated net proceeds from the
sale of 4,000,000 shares of common stock, after deducting the estimated
underwriting discounts and commissions and offering expenses. See "How We
Intend to Use the Proceeds from the Offering."
You should read this information together with our financial statements and
the notes to those statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Notes payable-related party, net of current
portion....................................... $ -- $ 103 $ 103
Long-term debt................................. -- 2,343 2,343
Obligations under capital leases, excluding
current installments.......................... 2,006 2,022 2,022
Stockholders' equity:
Preferred Stock, 3,000,000 shares authorized:
Convertible preferred stock, Series A
through E, $0.001 par value; 2,900,001
shares authorized; -0- shares issued and
outstanding................................. -- -- --
Common stock, $0.001 par value: 100,000,000
shares authorized;
20,624,512 shares issued and outstanding,
actual; 22,882,716 and 26,882,716 shares
issued and outstanding, pro forma and pro
forma as adjusted, respectively(1).......... 21 23 27
Additional paid-in capital................... 50,904 120,506 224,361
Deferred compensation........................ (128) (128) (128)
Net unrealized loss on available-for-sale
securities.................................. (50) (50) (50)
Accumulated deficit.......................... (20,446) (20,446) (20,446)
-------- -------- --------
Total stockholders' equity................... 30,301 99,905 203,764
-------- -------- --------
Total capitalization....................... $ 32,307 $104,373 $208,232
======== ======== ========
</TABLE>
- --------
(1) Excludes:
. 4,111,534 shares of our common stock issuable upon the exercise of
outstanding warrants at a weighted average exercise price of
approximately $1.58 per share;
. 4,167,952 shares of our common stock issuable upon the exercise of stock
options that would be outstanding at a weighted average exercise price of
$8.78 per share; and
. 881,654 shares of our common stock reserved for future issuance under our
1998 and 1995 stock option plans;
. 400,000 shares of common stock reserved for future issuance under the
1999 Employee Stock Purchase Plan.
Also excludes the 1,200,000 shares which may be issued by us upon exercise of
the over-allotment option if Dancing Bear Investments declines to sell shares
to cover such over-allotment.
See "Capitalization," "Management--Executive Compensation," "Description of
Capital Stock" and the financial statements and related financial statement
notes appearing elsewhere in this prospectus.
28
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1998 was
approximately $29.8 million, or approximately $1.30 per share of common stock.
Pro forma net tangible book value per share represents the amount of total
tangible assets less total liabilities, divided by the pro forma number of
shares of common stock outstanding after giving effect to:
. the acquisition of Azazz.com; and
. the acquisition of Attitude Network, Ltd.
After giving effect to the sale of the common stock offered by us hereby and
after deducting the estimated underwriting discount and offering expenses
payable by us, our pro forma net tangible book value, as adjusted, as of
December 31, 1998, would have been approximately $133,635,025, or $4.97 per pro
forma share of common stock. This represents an immediate increase in net
tangible book value of $3.67 per share to existing stockholders and an
immediate dilution in net tangible book value of $22.72 per share to new
investors of common stock in this offering. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $27.69
Pro forma net tangible book value per share prior to this
offering................................................... $1.30
Increase per share attributable to new investors............ 3.67
-----
Adjusted pro forma net tangible book value per share after
the offering............................................... 4.97
------
Dilution per share to new investors......................... $22.72
======
</TABLE>
If the public offering price is higher or lower, the dilution to the new
investors will be greater or less, respectively.
29
<PAGE>
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
The selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and notes to those statements and other financial
information included elsewhere in this prospectus. The statement of operations
data for the years ended December 31, 1996, 1997 and 1998 and the consolidated
balance sheet data as of December 31, 1997 and 1998 are derived from the
audited financial statements of theglobe.com included in this prospectus. The
balance sheet data as of December 31, 1995 and 1996 and the statement of
operations data for the period for May 1, 1995 (inception) to December 31, 1995
are derived from the audited financial statements of theglobe.com not included
herein. The historical results presented here are not necessarily indicative of
future results.
<TABLE>
<CAPTION>
May 1, 1995
(inception)
through Year Ended December 31,
December 31, ----------------------------------
1995 1996 1997 1998
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues...................... $ 27 $ 229 $ 770 $ 5,510
Cost of revenue............... 13 116 423 2,239
---------- ---------- ---------- ----------
Gross profit.................. 14 113 347 3,271
Operating expenses:
Sales and marketing......... 1 276 1,248 9,299
Product development......... 60 120 154 2,633
General and administrative.. 19 489 2,828 6,828
Non-recurring charge........ -- -- -- 1,370
---------- ---------- ---------- ----------
Total operating expenses...... 80 885 4,230 20,130
---------- ---------- ---------- ----------
Loss from operations.......... (66) (772) (3,883) (16,859)
Interest income (expense),
net.......................... -- 22 335 892
Loss before provision for
income taxes................. (66) (750) (3,548) (15,967)
---------- ---------- ---------- ----------
Provision for income taxes.... -- -- 36 79
---------- ---------- ---------- ----------
Net loss...................... $ (66) $ (750) $ (3,584) $ (16,046)
========== ========== ========== ==========
Basic and diluted net loss per
share (1).................... $ (0.03) $ (0.33) $ (1.56) $ (3.37)
========== ========== ========== ==========
Weighted average shares
outstanding used in basic and
diluted per share
calculation(1)............... 2,250,000 2,250,000 2,293,546 4,762,280
========== ========== ========== ==========
<CAPTION>
December 31,
-----------------------------------------------
1995 1996 1997 1998
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents and
short-term investments....... $ 587 $ 757 $ 18,874 $ 30,149
Working capital............... 575 648 17,117 27,009
Total assets.................. 647 973 19,462 38,130
Capital lease obligations,
excluding current
installments................. -- -- 99 2,006
Total stockholders' equity.... 632 795 17,352 30,301
</TABLE>
- --------
(1) Weighted average shares do not include any common stock equivalents because
inclusion of common stock equivalents would have been anti-dilutive. See
the financial statements and related financial statement notes appearing
elsewhere in this prospectus for the determination of shares used in
computing pro forma basic and diluted loss per share.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Our web site is one of the world's leading online networks with nearly 2.3
million members in the United States and abroad. In December 1998, over 9.3
million unique users visited our site. Our web site is a destination on the
Internet where users are able to personalize their online experience by
publishing their own content and interacting with others having similar
interests. We facilitate this interaction by providing various free services,
including home page building, discussion forums, chat rooms, e-mail and
electronic commerce. Additionally, we provide our users with news, business
information, real time stock quotes, weather, movie and music reviews, multi-
player gaming and personals. By satisfying our users' personal and practical
needs, we seek to become our users' online home. Our primary revenue source is
the sale of advertising, with additional revenues generated through electronic
commerce, development fees and, to a lesser extent, the sale of membership
service fees for enhanced services.
We were incorporated in May 1995. For the period from inception through
December 1995, we had minimal sales and our operating activities related
primarily to the development of the necessary computer infrastructure and
initial planning and development. Operating expenses in 1995 were minimal.
During 1996, we continued the foregoing activities and also focused on
recruiting personnel, raising capital and developing programs to attract and
retain members. In 1997, we
. moved our headquarters to New York City;
. expanded our membership base from less than 250,000 to almost 1 million;
. improved and upgraded our services;
. expanded our production staff;
. built an internal sales department; and
. began active promotion of theglobe.com web site to increase market
awareness.
During 1998, revenues and operating expenses increased as we placed a greater
emphasis on building our advertising revenues and memberships by expanding our
sales force and promoting theglobe.com brand.
To date, our revenues have been derived principally from the sale of
advertisements and sponsorship placements within our site, and to a lesser
extent, from subscription and electronic commerce revenues. Electronic commerce
revenues have not been significant to date, but are expected to increase with
the acquisition of Azazz, and as our existing electronic commerce arrangements
grow and new arrangements are entered into. Advertising revenues constituted
89%, 77% and 95% of total revenues for the years ended December 31, 1998, 1997
and 1996. We sell a variety of advertising packages to clients, including
banner advertisements, event sponsorship, and targeted and direct response
advertisements. Our advertising revenues are derived principally from short-
term advertising arrangements. These arrangements average one to three months.
We generally guarantee a minimum number of impressions for a fixed fee.
Advertising revenues are recognized ratably in the period in which the
advertisement is displayed, if no significant company obligations remain and
collection of the resulting receivable is probable. Payments received from
advertisers before displaying their advertisements on our web site are recorded
as deferred revenues and are recognized as revenue ratably when the
advertisement is displayed. To the extent minimum guaranteed impression levels
are not met, we defer recognition of the corresponding revenues until
guaranteed levels are achieved.
In addition to advertising revenues, we derive other revenues primarily from
our membership service fees, electronic commerce revenue, development fees and
sponsorship placements within our site. Subscription fees are recognized over
the membership term. A number of recent arrangements with our premier
electronic commerce partners provide us with a share of any sales resulting
from direct links from our web site. We
31
<PAGE>
recognize revenues from our share of the proceeds from our electronic commerce
partners' sales upon notification from our partners of sales attributable to
our web site. To date, revenues from electronic commerce arrangements have not
been significant. In addition, in 1999 we began direct electronic commerce
sales to users. We also earn additional revenue on sponsorship contracts for
fees relating to the design, coordination, and integration of the customer's
content and links. We recognize these development fees as revenue once the
related activities have been performed.
We incurred net losses of approximately $16.0 million in 1998, $3.6 million
in 1997 and $750,200 in 1996. At December 31, 1998, we had an accumulated
deficit of $20.4 million. We recorded deferred compensation of approximately
$118,100 in 1998, $83,100 in 1997 and $25,000 in 1996 in connection with the
grant of various stock options to employees, representing the difference
between the deemed value of our common stock for accounting purposes and the
exercise price of the options at the date of grant. This amount is presented as
a reduction of stockholders' equity and is being amortized over the vesting
period of the applicable options, generally three to five years. Amortization
of deferred stock compensation is allocated to the general and administrative
expense line identified on the statement of operations consistent with the
classification of the related personnel.
In addition, we incurred a charge of approximately $1.4 million to earnings
in the third quarter of 1998 in connection with the transfer of warrants to
acquire 450,000 shares of common stock by Dancing Bear Investments, Inc., which
was our principal shareholder at the date of transfer, to some of our officers
at approximately $1.45 per share. The amount of this non-cash charge was based
on the difference between the fair market value of our stock at the date of
transfer ($4.50 per share) and the exercise price of the warrant of
approximately $1.45 per share. This expense was classified separately in the
statement of operations as a non-recurring charge.
Recent Developments
Based on preliminary information as to the results of operations for the
three months ended March 31, 1999, we had revenues of approximately $3.2
million compared with revenues of approximately $394,000 for the three months
ended March 31, 1998. This represents an increase of approximately $2.8
million. Gross profit for the three months ended March 31, 1999 was
approximately $1.9 million with a gross margin of 59% compared with a gross
profit of $181,000 and gross margin of 46% for the three months ended March 31,
1998. The period to period increase in revenues was primarily due to an
increase in the number of advertisers as well as an increase in the average
contract duration and dollar value. The growth in the number of advertisers is
attributable to an increase in the number of users and the launch of an
advertising campaign in the first quarter of 1998.
Operating expenses (excluding cost of revenues) for the three months ended
March 31, 1999 were approximately $8.3 million compared to approximately $2.6
million for the three months ended March 31, 1998. Net loss for the three
months ended March 31, 1999 was approximately $6.3 million compared to
approximately $2.0 million for the three months ended March 31, 1998. Included
in operating expenses for the three months ended March 31, 1999 was
amortization of purchased intangibles of $1.4 million in connection with our
acquisition of Azazz which are being amortized over a period of two to three
years. The other increases in operating expenses were partially due to a
significant increase in product development as a result of the redesign of our
web site. The largest component of product development costs were personnel
costs associated with the development, testing and upgrades to our web site.
The increase in operating expenses was also partially due to an increase in
sales and marketing expenses. The increase in these expenses was mostly due to
the growth in our sales force and the continued efforts to promote our branding
and marketing strategy. General and administrative expenses also increased as a
result of an increase in headcount and related expenses in order to support our
growth.
Net loss per share for the three months ended March 31, 1999 was $0.30
compared to $0.38 for the three months ended March 31, 1998. Per share amounts
for the periods were impacted by an increase in the weighted
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average number of shares outstanding from approximately 5.2 million shares for
the three months ended March 31, 1998 to approximately 21.1 million shares for
the three months ended March 31, 1999.
Results of Operations
Revenues. Revenues increased to approximately $5.5 million in 1998 as
compared to $770,300 in 1997 and $229,400 in 1996. The year to year growth
resulted from an increase in (1) the number of advertisers and the average
commitment per advertiser, (2) our web site traffic, (3) the number of our
sales people and (4) marketing and advertising expenditures. Advertising
revenues were approximately $4.9 million or 89% of total revenues in 1998,
$592,400 or 77% of total revenues in 1997 and $216,800 or 95% of total revenues
in 1996. In 1998, we significantly increased our sales force and began a
marketing campaign to promote theglobe.com web site. We anticipate that
advertising revenues will continue to account for a substantial share of our
total revenues for the foreseeable future. Other revenues were derived from
membership service fees, development fees, electronic commerce revenue shares
and sponsorship placements within our web site. At December 31, 1998, we had
deferred revenues of approximately $673,600. Barter revenues were approximately
2% of total revenues for 1998, 22% for 1997 and 0% for 1996.
Cost of Revenues. Cost of revenues consist primarily of Internet connection
charges, web site equipment leasing costs, depreciation, maintenance, barter
advertising expenses, staff costs and related expenses of operations personnel.
Gross margins were 59% in 1998, 45% in 1997 and 49% in 1996. The increase in
gross margin was primarily due to an increase in revenues relative to the
increase in cost of revenues. The absolute dollar increase in cost of revenues
was due to an increase in Internet connection costs to support the increase in
web site traffic, as well as an increase in equipment costs, depreciation and
staff costs required to support the expansion of our site and services. In
addition, we recorded barter advertising expenses during 1998 and 1997, which
was equivalent to the barter advertising revenues recorded in the same period.
The gross margins exclusive of the barter transactions were 60% in 1998 and 57%
in 1997. In 1996, we did not enter into any barter transactions. During the
fourth quarter of 1998, we moved our web site hosting functions to a separate
facility in Staten Island, New York. The new facility will allow us to support
our expanded services and content.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of salaries and related expenses of sales and marketing personnel, commissions,
advertising and public relations expenses. Sales and marketing expenses were
approximately $9.3 million or 169% of total revenues in 1998, $1.2 million or
162% of total revenues in 1997, and $275,900 or 120% of total revenues in 1996.
The year-to-year increase in sales and marketing expenses was primarily
attributable to expansion of our online and print advertising, public relations
and other promotional expenditures, as well as increased sales and marketing
personnel and related expenses required to implement our marketing strategy.
Sales and marketing expenses also increased as a result of our decision to
shift our advertising to an internal sales department in the second quarter of
1997.
Product Development Expenses. Product development expenses include
professional fees, staff costs and related expenses associated with the
development, testing and upgrades to our web site as well as expenses related
to its editorial content and community management and support. Product
development expenses were approximately $2.6 million or 48% of total revenues
in 1998, $153,700 or 20% of total revenues in 1997, and $120,000 or 52% of
total revenues in 1996. The increase in absolute dollars in product development
expenses was primarily attributable to increased staffing levels required to
support our web site and to enhance its content and features. Product
development expenses also increased as a result of the launch of our web site
redesign in November 1998. We intend to continue recruiting and hiring
experienced product development personnel and to make additional investments in
product development.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related costs for general corporate
functions, including finance, human resources, facilities and legal, along with
professional fees and bad debt expense and other corporate expenses. General
and administrative expenses were approximately $6.8 million or 124% of total
revenues in 1998, $2.8 million or 367% of total revenues in
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1997, and $489,100 or 213% of total revenues in 1996. The absolute dollar
increase in these expenses was primarily due to increased salaries and related
expenses associated with our management's employment contracts, hiring of
additional personnel, and increases in professional fees and travel. The
increased salaries also reflect the highly competitive nature of hiring in the
new media industry. We expect that we will incur additional general and
administrative expenses as we hire additional personnel and incur additional
costs related to the growth of our business and operation as a public company,
including directors' and officers' liability insurance, investor relations
programs and professional service fees. Accordingly, we anticipate that general
and administrative expenses will continue to increase in absolute dollars.
Non-recurring charges. We recorded a non-recurring, non-cash charge of
approximately $1.4 million in the third quarter of 1998. This charge was in
connection with the transfer of outstanding warrants to acquire 450,000 shares
of common stock by Dancing Bear Investments, which was our principal
shareholder at the time of the transfer, to some of our officers. There was no
similar charge in 1997 or 1996.
Other Income (expense). Other income (expense) includes interest income from
our cash and investments, interest expenses related to our capital lease
obligations, and realized gains and losses from sale of short-term investments.
The year-to-year increase in interest and dividend income was due to a higher
average cash, cash equivalent and investment balance as a result of the
proceeds received from the issuance of shares of our preferred stock in the
third quarter of 1997, and the issuance of common stock in connection with our
initial public offering in November 1998.
Interest and other expense increased in 1998 due to new capital lease
obligations. We entered into our first capital lease in late December 1997. As
a result, interest expense from capital lease obligations did not begin until
1998.
Income Taxes. Income taxes were approximately $78,900 in 1998, $36,100 in
1997 and -0- in 1996. These income taxes were based solely on state and local
taxes on business and investment capital. These taxes increased from year to
year due to an increase in our average equity balance. The average equity
balance increased as a result of the proceeds received from our issuance of
shares of preferred stock in the third quarter of 1997, and our issuance of
common stock in connection with our initial public offering in November 1998.
Our effective tax rate differs from the statutory federal income tax rate,
primarily as a result of the uncertainty regarding our ability to utilize net
operating loss carryforwards. Due to the uncertainty surrounding the timing or
realization of the benefits of our net operating loss carryforwards in future
tax returns, we have placed a 100% valuation allowance against our deferred tax
assets. As of December 31, 1998, we had approximately $29.2 million of federal
and state net operating loss carryforwards for tax reporting purposes available
to offset future taxable income. Our federal net operating loss carryforwards
will expire beginning in 2001 through 2018, if not utilized. The Tax Reform Act
of 1986 imposes substantial restrictions on the utilization of net operating
losses and tax credits in the event of an "ownership change" of a corporation.
Due to the change in our ownership interests in the third quarter of 1997, as
defined in the Internal Revenue Code, future utilization of our net operating
loss carryforwards will be affected by limitations or annual restrictions.
Liquidity and Capital Resources
As of December 31, 1998, we had approximately $29.3 million in cash and cash
equivalents and approximately $898,500 in marketable securities. Net cash used
in operating activities was approximately $13.5 million in 1998, $1.9 million
in 1997 and $601,600 in 1996. The increase in net cash used in 1998 resulted
primarily from an increase in our expenses which resulted in increased net
operating losses. In addition we had a higher level of receivables due to
increased revenues and an increase in prepaid expenses. These items were
partially offset by an increase in accounts payable and deferred revenues. The
1997 increase in net cash used was primarily due to an increase in net
operating loss and a higher account receivable balance. These items were
partially offset by the timing of payments associated with our 1997 accrued
bonuses paid in the first quarter of 1998, as well as an increase in accounts
payable and accrued expenses.
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Net cash provided (used) in investing activities was approximately $9.6
million in 1998, $(13.2) million in 1997 and $(138,300) in 1996. Net cash
provided by investing activities in 1998 was primarily related to the sales of
short-term investments to finance our working capital needs. These sales were
partially offset by approximately $1.7 million in security deposits required
for capital leases and the purchase of property and equipment in connection
with the build out of our infrastructure. Net cash used in investing activities
in 1997 was primarily related to the purchase of securities with the proceeds
from our private placement in the third quarter of 1997. Cash used in investing
activities in 1996 was related to the purchase of property and equipment.
Net cash provided by financing activities was approximately $27.2 million in
1998, $20.2 million in 1997 and $910,000 in 1996. Net cash provided by
financing activities during 1998 consisted primarily of $27.3 million from the
issuance of 3,481,667 shares of common stock in connection with our initial
public offering in November 1998. The net cash provided by financing activities
in 1997 consisted primarily of approximately $20.3 million from preferred stock
issuances. These amounts were partially offset by approximately $130,500 in
financing costs related to the private placements. The approximately $910,000
of net cash provided in 1996 was from our private placements of preferred
stock.
On February 1, 1999, we purchased factorymall.com, an interactive department
store doing business as Azazz.com, which is being integrated into our
electronic commerce site, known as "shop.theglobe.com." We expect to invest an
aggregate of up to approximately $3.8 million of working capital in 1999 to
support the future operations of shop.theglobe.com. On April 9, 1999, we
purchased Attitude Network, an online provider of entertainment content. We
expect to invest an aggregate of up to approximately $3.5 million of working
capital in 1999 to support the future operations of Attitude Network.
Our capital requirements depend on numerous factors, including market
acceptance of our services, the amount of resources we devote to investments in
our web site, the resources we devote to marketing and selling our services and
our brand promotions and other factors. We have experienced a substantial
increase in our capital expenditures and lease arrangements since our inception
consistent with the growth in our operations and staffing, and we anticipate
that this will continue for the foreseeable future. Additionally, we will
continue to evaluate possible investments in businesses, products and
technologies, and we plan to expand our sales force. We believe that the net
proceeds from the offering, together with our current cash and cash
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. See "Risk Factors--We may need to raise additional funds,
including through the issuance of debt."
Impact of the Year 2000
The Year 2000 issue is the potential for system and processing failures of
date-related data and the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the Year 2000. This could result in system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
State of Readiness. We may be affected by Year 2000 issues related to non-
compliant information technology systems or non-information technology systems
operated by us or by third parties. We have substantially completed an
assessment of our internal and external third-party information technology
systems and non-information technology systems and a test of the information
technology systems that support our web site. At this point in our assessment
and testing, we are not aware of any Year 2000 problems relating to systems we
or third parties operate that would have a material effect on our business or
financial condition, without taking into account our efforts to avoid these
problems. However, we cannot assure you that there will be no Year 2000
problems.
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Our information technology systems consist of software developed either in-
house or purchased from third parties, and hardware purchased from vendors. We
have contacted our principal vendors of hardware and software. All of those
contacted vendors have notified us that the hardware and software that they
supplied to us is Year 2000 compliant.
We have also substantially completed an assessment of our non-information
technology systems which we have identified as possibly having Year 2000
issues. At this point in our assessment, we are not aware of any Year 2000
problems relating to these systems which would have a material effect on our
business or financial condition, without taking into account our efforts to
avoid these problems.
Our information technology systems and other business resources rely on
information technology systems and non-information technology systems provided
by service providers and therefore may be vulnerable to those service
providers' failure to remediate their own Year 2000 issues. These service
providers include those for our network and e-mail services and landlords for
our leased office spaces. We have contacted these principal service providers
and we have been notified that the information technology and non-information
technology systems which they provide to us are Year 2000 compliant.
Cost. Based on our assessment to date, we do not anticipate that costs
associated with remediating our non-compliant systems will be material.
Risks. To the extent that our assessment is finalized without identifying any
material non-compliant information technology or non-information technology
systems operated by us or by third parties, the most reasonably likely worst
case Year 2000 scenario is the failure of one or more of our vendors of
hardware or software or one or more providers of non-information technology
systems to properly identify any Year 2000 compliance issues and remediate any
issues before the end of the second quarter of 1999. A failure could prevent us
from operating our business, prevent users from accessing our web site or
change the behavior of advertising customers or persons accessing our web site.
We believe that the primary business risks, in the event of a failure, would
include but not be limited to:
. lost advertising revenues;
. increased operating costs;
. loss of customers or persons accessing our web site;
. other business interruptions of a material nature; and
. claims of mismanagement, misrepresentation, or breach of contract.
Contingency Plan. As discussed above, we are engaged in an ongoing Year 2000
assessment and testing. Following the completion of the assessment, we plan to
conduct a full-scale Year 2000 simulation of our information technology systems
by the end of the second quarter of 1999. The results of this simulation and
our assessment will be taken into account in determining the nature and extent
of any contingency plans.
Effects of Inflation
Due to relatively low levels of inflation in 1996, 1997 and 1998, inflation
has not had a significant effect on our results of operations since inception.
Impact of Recently Issued Accounting Standards
We adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" as of January 1, 1998. SFAS
No. 130 requires us to report in our financial statements, in addition to our
net income (loss), comprehensive income (loss), which includes all changes in
equity during a period from non-owner sources including, as applicable, foreign
currency items, minimum pension liability adjustments and unrealized gains and
losses on investments in debt and equity
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securities. We adopted SFAS 130 as of December 31, 1997 and have presented
comprehensive income for all periods presented in the Statement of
Shareholders' Equity.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosure About Segments of an Enterprise and Related Information."
SFAS No. 131 establishes standards for the way that public business enterprises
report information about operating segments. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. We have determined that we do not have any separately reportable
business segments.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which establishes
guidelines for the accounting for the costs of all computer software developed
or obtained for internal use. We adopted SOP 98-1 effective for the year ended
December 31, 1998. The adoption of SOP 98-1 is not expected to have a material
impact on our financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. The statement is not expected to affect us as we do not have any
derivative instruments or hedging activities.
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BUSINESS
Overview
theglobe.com is one of the world's leading online networks with nearly 2.5
million members in the United States and abroad. In March 1999, approximately
10.2 million individuals visited our web site. Our web site is a destination on
the Internet where users are able to personalize their online experience by
publishing their own content and interacting with others having similar
interests. We facilitate this interaction by providing various free services,
including home page building, discussion forums, chat rooms, e-mail and
electronic commerce. Additionally, we provide our users with news, business
information, real time stock quotes, weather, movie and music reviews, multi-
player gaming and personals. By satisfying our users' personal and practical
needs, we seek to become our users' online home.
We generate revenues primarily by selling advertisements, sponsorship
placements within our site, development fees and, to a lesser extent, from
electronic commerce revenues. In the first four months of 1999, we had
approximately 200 advertisers, including Coca Cola, Hewlett Packard, Hilton,
LEGO, Office Max, 3Com and Visa. In February 1999, we acquired factorymall.com,
an online department store doing business as Azazz.com which sells a variety of
name brand products directly to consumers. We have integrated Azazz.com into
our electronic commerce site, now known as "shop.theglobe.com." In April 1999,
we acquired Attitude Network, a provider of online entertainment content whose
web sites include Happy Puppy, Games Domain and Kids Domain, three leading web
sites serving game enthusiasts. Attitude Network offers innovative and current
entertainment content that capitalizes on the web's unique graphical and
interactive capabilities.
Since our founding, we have experienced strong growth. Approximately 10.2
million individuals visited our site in March 1999, according to DoubleClick,
as audited by ABC Interactive. We have nearly 2.5 million members in the United
States and abroad who have registered with us and provided us personal
information. Approximately 40% of our monthly traffic originates from abroad,
reflecting our site's international appeal.
About Our Industry
The rapid adoption of the Internet as a means to gather information,
communicate, interact and be entertained, combined with the vast proliferation
of web sites, has made the Internet an important new mass medium. The
International Data Corporation estimates that the number of web users exceeded
97 million in 1998, and will grow to over 319 million by 2002. The Internet
enables advertisers to target advertising campaigns utilizing sophisticated
databases of information on the users of various sites and to directly generate
revenues from these users through online transactions. As a result, the
Internet has become a new means to advertise and market products and services.
With the volume of sites and vast abundance of information available on the
Internet, users are increasingly seeking an online home where they can interact
with others with similar interests and quickly find information, products and
services related to a particular interest or need. Community sites were
developed as a solution to the challenges posed by the Internet's growth and
complexity. Community sites also offer a single convenient location where users
have access to electronic commerce, content and user interaction. As a result,
we must offer a wide scope of services ranging from e-mail accounts, chat
rooms, news, and entertainment services, among other features. By satisfying
the needs of their users, online communities seek to establish a close
relationship with their audience. As a result, we believe that users tend to be
loyal to and spend more time online at community sites.
Advertising. Jupiter Communications estimates that spending on Internet
advertising in the United States will grow from $1.9 billion in 1998 to $7.7
billion in 2002. The Internet provides advertisers with targeting tools not
available from traditional advertising media. The interactive nature of the
Internet and the development of click-through advertising banners and other
feedback tools enable advertisers to measure
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impression levels, establish a dialogue with users and receive real-time direct
feedback from their target audiences. Such feedback provides advertisers with
an effective means to measure the attractiveness of their offerings among
targeted audiences and make modifications to their advertising campaigns on
short notice.
Community sites are generally able to provide advertisers significantly more
information regarding consumers than other web sites because they collect
detailed demographic data and facilitate the development of user-created
affinity groups. One way community sites foster affinity groups is by providing
focused third party content, such as business information or entertainment. The
ability to target advertisements to broad audiences, specific regional
populations, affinity groups or individuals makes community web site
advertising a highly versatile and effective tool for delivering customized and
cost-effective messages.
One indicator of the Internet's popularity as an advertising medium is the
growing number and diversity of Internet advertisers. Most early Internet
advertisers were technology and Internet-related companies. Today, a growing
number of Internet advertisers consist of traditional, consumer product and
service companies. The diverse audience accessing community sites has made such
sites especially attractive to consumer product and service companies
advertising on the Internet.
Electronic commerce and Direct Marketing. The Internet has become a
significant marketplace for buying and selling goods and services. Jupiter
Communications estimates that the amount of goods or services purchased in
online consumer transactions will grow from approximately $7.1 billion in 1998
to approximately $41.1 billion in 2002. Improvements in security, interface
design and transaction-processing technologies have facilitated an increase in
online consumer transactions. Early adopters of such improvements include:
. online merchants offering broad product catalogs, such as books, music
CDs and toys;
. those seeking distribution efficiencies, such as PCs, flowers and
groceries; and
. those offering products and services with competitive pricing, such as
automobiles and mortgages.
We believe that online communities provide businesses an attractive environment
for selling products and services by providing direct access to users with like
interests. For the members of the communities, we believe that providing the
opportunity to make purchases is both a convenience and a complimentary
service.
The Internet allows marketers to collect meaningful demographic information
and feedback from consumers, and to rapidly respond to this information with
new messages. This offers a significant new opportunity for businesses to
increase the effectiveness of their direct marketing campaigns. In traditional
media, a significant portion of all advertising budgets are spent on direct
marketing because of its effectiveness. However, the effectiveness of direct
marketing campaigns is dependent upon the quality of consumer data used to
develop and place consumer advertisements. In addition to providing detailed
demographic data, community web site participants indicate their areas of
personal interest by self-selecting themselves into affinity groups. This added
level of information provides direct marketers an important tool to target
potential customers more accurately. Accordingly, advertisers are able to
improve their direct marketing campaigns which may translate into higher sales.
theglobe.com
Todd V. Krizelman and Stephan J. Paternot created theglobe.com to take
advantage of the demand for online destinations that allow users to develop
their own identities and establish relationships with users with similar
interests. Our site provides breadth and depth in content and commerce and
pairs this with user interaction. It is this combination that attracts and
retains users. Our site has ten "Themes of Interest":
. Arts . News
. Business . Romance
. Entertainment . Sports
. Life . Technology
. Metro . Travel
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Within each theme is a combination of content, electronic commerce and
interactive services. Content is both user generated as well as professional.
We have several professional content relationships. These include CBS
Marketwatch, Reuters, CNET, UPI, Variety, Thomson Investors Network, E! Online,
and Fox Sports. Electronic commerce is woven contextually throughout themes.
For example, within the Sports theme a user will find sports equipment for
sale, while in the Business theme the user would find products directed at the
business professional. Interactive services such as chat, discussion forums,
and surveys are paired with content to promote usage.
Members are also encouraged to generate their own webpages and aggregate in
online communities. We do not limit the number of communities which our members
can join and members are free to leave at any time. Because of this,
communities are dynamic and evolve as members' interests change.
The unique community focus of our site offers us several advantages that
include:
. Member Loyalty. Because we provide a homepage for our members, members
develop loyalty to our site and to the communities in which they
participate. We believe that this translates into more frequent usage by
members and longer stays at our site.
. Member-Developed Content. Users develop the majority of the content on
our site on a voluntary basis for the benefit of all of our users. As a
result, we avoid some of the costs associated with content development.
. Third-Party Content. We have a number of arrangements with third party
content providers who place original or proprietary information on our
site in exchange for payment to us or a share of revenues generated from
the sale of advertising attributable to this content. As a result, we
avoid the costs associated with developing additional content.
. Targeted Advertising. We allow advertisers to target their advertisements
based on both demographic information and affinity group affiliations.
Our volume of user traffic, frequency and average length of use also draw
advertisers to our site. Our ability to reach users across a wide variety
of interest areas has made our site attractive to technology companies
and traditional consumer product and service companies. As of December
31, 1998, approximately 70% of our advertisers were branded consumer
product and service companies.
Our Business Strategy
Our goal is to be the leading online network. We seek to attain this goal
through the following key strategies:
Improve User Experience. We will continue efforts to improve user experience
on our site by:
. launching new services to enhance our community;
. personalizing our site to the preferences of individual members;
. simplifying user interfaces and otherwise improving the ease of use;
. improving customer support;
. developing loyalty programs to reward members for increased usage;
. expanding the suite of personal publishing/web site building tools; and
. creating additional opportunities for participating in existing affinity
groups, and expanding the number of affinity groups.
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Develop Brand Identity and Awareness. We intend to expand our presence as a
mass market site by building brand awareness. We plan to continue to allocate a
significant portion of our resources to develop our brand in the same fashion
as traditional consumer product and service companies. We believe that
establishing brand awareness among consumers is instrumental in attracting new
members to our site. It may also attract media buyers who tend to favor well-
known and trusted companies. To build its brand within the games industry,
Attitude Network's Happy Puppy is a major participant in industry related
events and gives out awards to reflect users' selections of best games.
Further Develop Electronic Commerce. We intend to increase our electronic
commerce revenues by (1) selling select products directly to consumers through
the integration of Azazz into our web site and (2) indirectly selling products
to consumers through increasing the number of electronic commerce partners who
establish virtual storefronts in the shop.theglobe.com site.
We believe that integrating Azazz with our existing electronic commerce
business should enhance our users' overall shopping experience. The principles
behind shop.theglobe.com are convenience, diversity in product selection, and
enhanced service, with a live personal shopper available to assist members. The
acquisition enables us to directly offer a broad array of products, attractive
prices and premium customer service. Currently, shop.theglobe.com has 18
departments, including kidsworld, home, office, sports and jewelry, each
offering a variety of name brand merchandise. In particular, we will
differentiate ourselves from competitors by offering Azazz's "personal shopper"
application which enables customers to communicate directly with a live
customer service representative during each step of the online shopping
process.
Acquisition, Joint Venture and Alliance Strategy. We review acquisition
candidates and joint ventures in the ordinary course of business, some of which
may be material. Our focus is to seek transactions that would complement our
existing business, increase our traffic, augment the distribution of our
community, enhance our technological capabilities or increase our electronic
commerce revenues. We have been approached from time to time to consider and
evaluate potential business combinations, either involving potential
investments in our common stock or other business combinations or joint
ventures, or our acquisition of other companies. If consummated, any such
transaction could result in a change of control of our company or could
otherwise be material to our business or to your investment in our common
stock. We are currently in discussions or negotiations to acquire one or more
companies in various transactions, some of which may be material, but we have
not reached any binding agreements. These transactions may or may not be
consummated.
Expand Globally. We believe that significant opportunities exist to
capitalize on the growth of the Internet internationally. We are pursuing
strategic relationships with international companies to exploit cross-
marketing, co-branding and promotional opportunities. Approximately 40% of our
monthly traffic is generated by users outside of the United States. Users
outside of the United States are able to communicate and publish on our site in
their own languages. We have also received prominent press coverage in Europe,
Asia and Australia. Attitude Network's Games Domain site is based in
Birmingham, England and receives traffic at mirror sites in Russia, Greece,
South Africa and Portugal.
Enhance Membership Services. We offer additional Internet services, including
increased storage space for building home pages. To attract a wider subscriber
base, we intend to develop new membership programs offering premium content,
shopping clubs and entertainment services.
Our Products and Services
We provide users with the following products and services:
Free Services. We provide a range of free services to our members including:
. business and technology news;
. real-time stock quotes and portfolio services;
. "my globe" personalized home pages;
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. classified listings;
. a marketplace where members can purchase a variety of products and
services;
. home page building;
. discussion forums;
. chat rooms; and
. e-mail.
By satisfying our users' personal and practical needs, we seek to become our
users' online home. Our primary revenue source is the sale of advertising, with
additional revenues generated through electronic commerce. We derive electronic
commerce revenues in shop.theglobe.com through merchandise sales by partners,
and, beginning in April 1999, from direct merchandise sales. We believe that
the addition of Azazz's broad array of products, attractive prices and premium
customer service to the shop.theglobe.com site will significantly enhance the
shopping experience for our millions of monthly users.
Premier Partners. We have relationships with premier partners who pay a fixed
monthly fee, generally from $5,000 to $100,000 per month, and often a
percentage of sales, to receive prominent placement in the shop.theglobe.com
site and on our site. Premier partner agreements typically run for a period of
six months to three years. In some instances, premier partners pay us a share
of the sales over a particular threshold amount from users directed to them
from our site. Premier partners include:
. Lowestfare.com. Lowestfare.com offers discounted airline, car and hotel
reservations, vacation packages and cruises. Lowestfare.com has entered
into a three-year agreement with us to be our exclusive provider of
travel-related services. They also provide us with content, including
weather, mapping, destination information and voice response e-mail. We
provide Lowestfare.com with advertising and Marketplace exposure on the
shop.theglobe.com site.
. AutoNation. AutoNation owns the largest chain of new vehicle dealerships
in the United States and operates a chain of used car megastores under
the AutoNation USA brand name. We provide AutoNation preferred placement
in our auto category under a three-year agreement.
. Cyberian Outpost. Cyberian Outpost sells computer hardware, software and
accessories directly to consumers online. We have entered into a six
month arrangement with Cyberian Outpost to be our exclusive online
computer hardware retailer.
. Boxlot. We have entered into a two year relationship with Boxlot.com to
provide a customized, co-branded person to person auction service for
theglobe.com. The co-branded auction service will be integrated
throughout each of theglobe.com theme areas. Boxlot has agreed to pay us
up to $2.3 million over the term of the agreement.
. Music HQ. We have entered into a 1 year partnership with Music HQ, Inc.
to promote its music and movie retail online properties, www.musichq.com
and www.dvdflix.com, on shop.theglobe.com and throughout the
Entertainment theme on our site. Music HQ has agreed to pay us $1.2
million over the term of the agreement.
Member Subscriptions. We offer additional Internet services through premium
membership packages. For example, these packages provide additional storage
space and the ability to host limited commercial activity.
Corporate Alliances and Relationships
We have a number of relationships with partners and content providers to
provide our users with a full suite of web services. These arrangements provide
us with a cost-effective method for increasing our services without incurring
significant capital expenditures. Examples include:
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. Business and Finance. By providing free real-time stock quotes, stock
screening analysis and portfolio tools from the Thomson Financial Network
and stock market editorial analysis and daily articles from CBS
MarketWatch, we are able to assist our users in planning and tracking
their investment decisions.
. Entertainment. Through entertainment news and gossip from E! Online and
Variety, and music reviews and commentary from SonicNet, we offer our
users multiple viewpoints on the latest events in the entertainment
industry.
. Online Calendar and Address Book. We license Visto's Briefcase
application for use on our site, which permits our users to manage all of
their appointments and contact information through our site.
. Other Key Services. We provide sports highlights and scores from Fox
Sports, employment, real estate and automobile classified listings from
Classified Warehouse and weather forecasts from AccuWeather.
Additionally, we have recently partnered with Big Network, a provider of
classic games, to augment the new games theme that is expected to be launched
on theglobe.com site in the second quarter of 1999.
Advertising Customers
With approximately 10.2 million unique users as of March 1999, and nearly 2.5
million members in the United States and abroad, we have attracted mass market
consumer product companies as well as technology-related businesses to
advertise on our site. We believe that our community site is well positioned to
capture a portion of the growing number of consumer product and service
companies advertising online.
Our advertising clients enter into short term agreements, which typically
last one to three months. Our clients generally receive a guaranteed number of
impressions for a fixed fee. In 1998, no single advertiser accounted for more
than 10% of total revenues and approximately 70% of our advertisers were repeat
customers. In the first four months of 1999, approximately 200 advertising
clients advertised on our site. Some of our advertising clients include:
<TABLE>
<S> <C> <C> <C>
American Express Hilton LEGO Polygram
AT&T Intel Levi's Sony
BellSouth J. Crew Microsoft 3Com
Coca Cola Kellogg's Brands Office Depot USWest
Dunkin' Donuts Kodak Office Max Visa
Hewlett Packard Lee Jeans Pepsi
</TABLE>
The following advertisers have purchased advertising on Attitude Network:
Arizona Jeans IBM Silicon Graphics
Electronic Arts Oracle Toys "R" Us
Hasbro
Advertising Sales and Design
We seek to distinguish ourselves from our competition by creating unique
advertising and sponsorship opportunities designed to build brand loyalty for
our corporate sponsors by seamlessly integrating their advertising messages
into our content. We can deliver advertising to specific targets within our
site's themed content areas, allowing advertisers to single out and effectively
deliver their messages to their respective target audiences. For example, a
company can target an advertisement solely to males or females over 24 years of
age coming to our Business Theme area from Latin America. We believe that
sophisticated targeting is a critical element for capturing worldwide
advertising budgets for the Internet. Additionally, we intend to expand the
amount and type of demographic information we collect from our members, which
will allow us to offer more specific data to our advertising clients.
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While our competition generally provides banner advertising as its primary
advertising option, we offer an assortment of advertising options for our
clients. We work with our advertising customers to meet their needs. We offer
advertisers:
. Banner advertising . Sweepstakes
. Button advertising . Content development
. Text links . Affinity packages for advertising
partners
. Pop-up advertisements
. Direct marketing and lead
. Log out links to full page generation, if users have opted
advertisements in to these programs
. Various sponsorship programs . Market research for advertising
campaigns
We have an internal sales organization of approximately 25 professionals.
These professionals focus on both selling advertisements on our web site and
developing long-term strategic relationships with clients. A significant
portion of our sales personnel's income is commission based. We have sales
offices in New York City, Chicago and San Francisco and intend to open
additional sales offices in selected markets around the world.
Attitude Network has a particular expertise in online promotions. As an
example, Happy Puppy was one of only three web sites selected by Gillette to
promote the October 1998 introduction of the Mach3 razor. The promotion
featured a fast action shaving game created by Attitude Network and a game
oriented contest through which entrants could win copies of the most popular
games. A total of 25 sponsor promotions were run by Attitude Network during
1998.
Marketing and Promotions
In 1998, we committed approximately $7.3 million to advertising in
traditional offline media and in online media. In March 1998, we launched our
advertising campaign through television, print, billboards, buses, telephone
kiosks, online media, and other marketing efforts. These efforts were aimed at:
. generating additional traffic to our site;
.building and defining a desirable online destination in the minds of
present and potential online consumers; and
. creating a strong and viable brand within the Internet and advertising
industries.
We intend to continue to commit a significant part of our budget to marketing
our brand.
Technology
Our strategy is to operate our business through the application of existing
technologies. The various features of our online environment are implemented
using a combination of off-the-shelf and proprietary software components.
Whenever possible, we favor licensing and integrating "best-of-breed"
technology from industry leaders, including Oracle, Sun Microsystems and
Microsoft. We believe that this component approach is more manageable, reliable
and scalable than single-source solutions. In addition, our emphasis on
commercial components accelerates our development time. We believe that this is
an advantage in our rapidly evolving market.
In addition to being scalable, our system has many redundancies, which
benefit us if part of our system is down. Our servers are connected to the
Internet through a combination of links provided through three separate
carriers, AppliedTheory, UUNET and AT&T. This approach to connectivity allows
us to continue operations in the event of a failure in any carrier. We plan to
continue to upgrade our systems as necessary for our business plan. Our system
allows us to roll out upgrades incrementally on an as-needed basis.
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To efficiently manage our system, we have developed highly automated methods
of monitoring the performance of each system component. If any subsystem fails,
the failed subsystem is taken out of service and requests are distributed among
the remaining operational systems. We have also developed tools to perform
routine management tasks such as log processing and content updates in an
automated, remote-controlled fashion. We believe that our investment in
automation lessens the need for the additional personnel that would otherwise
be required to support the system as it grows.
In the fourth quarter of 1998 and the first quarter of 1999, we relocated our
data processing systems and servers to the New York Teleport in Staten Island,
New York under a three year lease with Telehouse International Corporation. The
New York Teleport facility provides security, electricity and premises for our
systems. The facility has four independent battery-operated power supplies, as
well as four independent diesel generators designed to provide power to these
systems within seconds of a power surge. If required, the diesel generators can
supply the data center's power for several days. Telehouse International
Corporation does not guarantee that our Internet access will be uninterrupted,
error-free or secure.
We maintain server equipment related to shop.theglobe.com at Exodus
Communications, Inc.'s facility in Seattle, Washington. Additionally, we
maintain computer hardware, servers and operations relating to Attitude Network
in Herndon, Virginia, which are hosted by Frontier GlobalCenter, and in London,
England which are hosted by Telehouse International. Each of Exodus, Frontier
and Telehouse provides and manages power, environmentals and connectivity to
the Internet through multiple links on a 24 hour-a-day, seven days per week
basis. Neither Exodus, Frontier, nor Telehouse guarantees that our Internet
access will be uninterrupted, error-free or secure.
Competition
The market for members, users and Internet advertising among web sites is new
and rapidly evolving. We expect the intense competition for members, users and
advertisers, as well as competition in the electronic commerce market, to
increase significantly. Barriers to entry are relatively insubstantial and we
face competitive pressures from many additional companies both in the United
States and abroad. See "Risk Factors--Competition for members, users and
advertisers, as well as competition in the electronic commerce market, is
intense and is expected to increase significantly."
All types of web sites compete for users. Competitor web sites include
community sites, as well as "gateway" or "portal" sites and various other types
of web sites. We believe that the principal competitive factors in attracting
users to a site are:
. functionality of the web site;
. brand recognition;
. member affinity and loyalty;
. broad demographic focus;
. open access for visitors;
. critical mass of users, particularly for community-type sites; and
. services for users.
We compete for users, advertisers and electronic commerce customers with:
. other online community web sites, such as GeoCities, which has agreed to
be acquired by Yahoo!, Tripod and AngelFire, subsidiaries of Lycos, and
Xoom.com;
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. search engines and other Internet "portal" companies, such as Excite,
InfoSeek, Lycos and Yahoo!;
. online content web sites, such as CNET, ESPN.com and ZDNet.com;
. publishers and distributors of television, radio and print, such as CBS,
NBC and CNN/Time Warner;
. general purpose consumer online services, such as America Online and
Microsoft Network;
. web sites maintained by Internet service providers, such as AT&T
WorldNet, EarthLink and MindSpring;
. electronic commerce web sites, such as Amazon.com, Etoys and CDnow; and
. other web sites serving game enthusiasts, including Ziff Davis' Gamespot
and CNET's Gamecenter.
Many of our existing competitors, as well as a number of potential new
competitors, have the following advantages:
. longer operating histories in the Internet market;
. greater name recognition;
. larger customer bases; and
. significantly greater financial, technical and marketing resources.
In addition, providers of Internet tools and services, including community-
type sites, may be acquired by, receive investments from, or enter into other
commercial relationships with larger, well-established and well-financed
companies, such as Microsoft and America Online. For example, Excite has
agreed to be acquired by At Home, America Online acquired Netscape and Lycos
announced a transaction in which USA Networks would merge its online and
retailing assets, which include Ticketmaster-CitySearch Online, with Lycos. In
addition, there has been other significant consolidation in the industry. This
consolidation may continue in the future. We could face increased competition
in the future from traditional media companies, including cable, newspaper,
magazine, television and radio companies. A number of these large traditional
media companies, including Disney, CBS and NBC, have been active in Internet-
related activities.
Many of our competitors, including other community sites, have announced
that they are contemplating developing Internet navigation services and are
attempting to become "gateway" or "portal" sites through which users may enter
the Web. In the event these companies develop successful "portal" sites, we
could lose a substantial portion of our user traffic. Furthermore, many non-
community sites are seeking to develop community aspects in their sites. Web
browsers offered by Netscape and Microsoft also increasingly incorporate
prominent search buttons that direct traffic to competing services. These
features could make it more difficult for Internet users to find and use our
product and services. In the future, Netscape, Microsoft and other browser
suppliers may also more tightly integrate products and services similar to
ours into their browsers or their browsers' pre-set home page. Additionally,
entities that sponsor or maintain high-traffic web sites or that provide an
initial point of entry for Internet viewers, such as the Regional Bell
Operating Companies, cable companies or Internet Service Providers, such as
Microsoft and America Online, offer and can be expected to consider further
development, acquisition or licensing of Internet search and navigation
functions that compete with us. These competitors could also take actions that
make it more difficult for viewers to find and use our products and services.
We believe that the number of Internet companies relying on Internet-based
advertising revenue, as well as the number of advertisers on the Internet and
the number of users, will increase substantially in the future. We believe
that the principal competitive factors in attracting advertisers include the
following:
. amount of traffic on a web site;
. brand recognition;
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. customer service;
. the demographics of members and users of a web site;
. the ability to offer targeted audiences; and
. the overall cost effectiveness of the advertising medium offered.
In addition, many of our current advertising customers and strategic partners
have established collaborative relationships with some of our existing and
potential competitors. Accordingly, we will likely face increased competition.
We also compete with traditional advertising media, including television,
radio, cable and print, for a share of advertisers' total advertising budgets.
This will result in increased pricing pressures on our advertising rates, which
could have a material adverse effect on us. See "Risk Factors--We rely
substantially on advertising revenues."
Additionally, the electronic commerce market is new and rapidly evolving, and
we expect the intense competition among electronic commerce merchants to
increase significantly. We generate substantially all of our electronic
commerce revenues from our electronic commerce partners in our Marketplace. In
the future, we expect to generate electronic commerce revenues through our
Azazz acquisition. Because the Internet allows consumers to easily compare
prices of similar products or services on competing web sites and there are low
barriers to entry for potential competitors, gross margins for electronic
commerce transactions may narrow further in the future. Competition among
Internet retailers or among our electronic commerce partners may have a
material adverse effect on our ability to generate revenues through electronic
commerce transactions or from these electronic commerce partners.
Intellectual Property and Proprietary Rights
We regard substantial elements of our site and underlying technology as
proprietary. We attempt to protect them by relying on intellectual property
laws. We also generally enter into confidentiality agreements with our
employees and consultants and in connection with our license agreements with
third parties. We also seek to control access to and distribution of our
technology, documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our proprietary information without authorization or to develop similar
technology independently.
We pursue the registration of our trademarks in the United States and
internationally. Our efforts include:
. the registration of a United States trademark for the globe;
. the filing of United States trademark applications for theglobe.com,
theglobe.com logo, TGLO, A Whole New Life Awaits You, globeDirect and
globeStores;
. the submission of trademark applications for theglobe.com logo in
Australia, Brazil, Canada, China, the European Union, Hong Kong, Israel,
Japan, New Zealand, Norway, Russian Federation, Singapore, South Africa,
Switzerland and Taiwan; and
. the submission of trademark applications for A Whole New Life Awaits You
in the European Union and Switzerland.
Additionally, Attitude Network has filed applications to register some of its
trademarks in the United States, including "Attitude Network" and "Happy
Puppy." Notice of Allowance has been received from the United States Patent and
Trademark Office on "Happy Puppy." Kaleidoscope Networks Limited, the wholly
owned subsidiary of Attitude Network, has registered the mark "GD Games Domain"
in the United Kingdom.
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Effective trademark, service mark, copyright and trade secret protection may
not be available in every country in which our services are distributed or made
available through the Internet. Policing unauthorized use of our proprietary
information is difficult. See "Risk Factors--We rely on intellectual property
and proprietary rights."
Government Regulation and Legal Uncertainties
We are subject to laws and regulations that are applicable to various
Internet activities. There are many legislative and regulatory proposals under
consideration by federal, state, local and foreign governments and agencies,
including matters relating to:
. online content;
. Internet privacy;
. Internet taxation;
. access charges;
. liability for information retrieved from or transmitted over the
Internet;
. domain names;
. database protection;
. unsolicited commercial email messages;
. online gambling; and
. jurisdiction.
New regulations may increase our costs of compliance and doing business,
decrease the growth in Internet use, decrease the demand for our services or
otherwise have a material adverse effect on our business.
Online Content. Online content restrictions cover many areas, including
indecent or obscene content and gambling. Several federal and state statutes
prohibit the transmission of indecent or obscene information and content,
including sexually explicit information and content. The constitutionality of
some of these statutes is unclear at this time. For example, on the one hand in
1997 the Supreme Court of the United States held that selected parts of the
federal Communications Decency Act of 1996 imposing criminal penalties for
transmitting indecent and patently offensive content were unconstitutional. On
the other hand, many other provisions of the Communications Decency Act,
including those relating to obscenity, however, remain in effect. For example,
on April 19, 1999, the Supreme Court summarily affirmed a lower court decision
holding that selected parts of the Communications Decency Act imposing criminal
penalties for transmitting indecent comments or images with an intent to annoy
was constitutional, as long as those comments or images were also obscene.
Prior to the Supreme Court's decision in 1997, a federal district court in New
York held that some provisions of the New York penal law modeled on the
Communications Decency Act violated the Constitution. A companion provision of
that law, however, was subsequently upheld. Since the Supreme Court's decision
in 1997, a federal district court in New Mexico held that a provision of the
New Mexico penal law purporting to make it unlawful to disseminate over the
Internet information that is harmful to minors violated the Constitution.
The Child Online Protection Act became effective on November 20, 1998. It
requires web sites engaged in the business of the commercial distribution of
material that is deemed to be obscene or harmful to minors to restrict minors'
access to this material. However, the Child Online Protection Act exempts from
liability telecommunications carriers, Internet service providers and companies
involved in the transmission, storage, retrieval, hosting, formatting or
translation of third-party communications where these companies do not select
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or alter the third-party material. On February 1, 1999, a federal district
court in Pennsylvania entered a preliminary injunction preventing enforcement
of the harmful-to-minors portion of the act. The provisions of the act relating
to obscenity, however, remain in effect. On April 2, 1999, the Justice
Department appealed the federal district court's decision to the Third Circuit
Court of Appeals. We cannot predict the ultimate outcome or effect of this
litigation or the effect that the Child Online Protection Act may have on our
business.
On January 19, 1999, the Children's Internet Protection Act, a bill that
would require public libraries and schools to use Internet filters to block
access to pornography and other materials deemed harmful to children, was
introduced in the Senate. We cannot predict whether this legislation or any
similar legislation will be enacted, and if enacted, what effect it could have
on our business.
The U.S. Department of Justice and some state Attorneys General have
intensified their efforts in taking action against businesses that operate
Internet gambling activities. In the last Congress, the Senate passed the
Internet Gambling Prohibition Act, which, if enacted, would have prohibited
placing or receiving a bet via the Internet in any state. A similar bill has
been introduced in the current Congress. We cannot predict whether similar
legislation will be enacted in the current Congress. Even in the absence of new
legislation directed specifically at Internet-based gambling, existing federal
and state statutes criminalize some gambling activities. During 1998, online
gambling advertisers accounted for under ten percent of our advertising
revenues. The enactment of any legislation in the United States or abroad that
limits or prevents businesses from operating online gambling would likely have
an adverse effect on our advertising revenue.
Some states, including New York and California, have enacted laws or adopted
regulations that expressly or as a matter of judicial interpretation apply
various consumer fraud and false advertising requirements to parties who
conduct business over the Internet. The constitutionality and the
enforceability of some of these statutes is unclear at this time. For example,
in 1997, a federal district court held that a Georgia criminal statute violated
the Constitution when it prohibited Internet transmissions that falsely
identify the sender or use trade names or logos that would falsely state or
imply that the sender was legally authorized to use them.
Internet Privacy. In October 1998, the Children's Online Privacy Protection
Act was signed into law. The law directs the FTC to develop regulations
governing the collection of data from children by commercial web site
operators. On April 20, 1999, the FTC issued its proposed regulations. The
proposed rules, which are subject to public comment would, if adopted, apply to
commercial web sites directed to, or that knowingly collect information from,
children under 13. With certain exceptions, these sites would have to obtain
parental consent before collecting, using, or disclosing personal information
from children. With certain exceptions, this consent would have to be
verifiable. Under the proposed rule, web site operators would select among a
number of ways of implementing this requirement. Among the possible options
identified in the proposed rule are: (1) a consent form to be signed by the
parent and returned to the operator by postal mail or facsimile, (2) the use of
a credit card by the parent, (3) a toll-free telephone number that parents
could call, or (4) an e-mail accompanied by a valid digital signature. Under
the proposed rule, web sites must give parents a choice as to whether their
child's information can be disclosed to third parties, and give parents a
chance to prevent further use or future collection of personal information from
their child. Parents must also, upon request, be given a means of reviewing the
personal information collected from their child. The statute includes a "safe
harbor" program for industry groups or others who wish to create self-
regulatory programs to govern participants' compliance. The proposed rule
outlines the process by which industry groups and others may obtain
certification of their guidelines.
Separately, the Federal Trade Commission Act prohibits unfair and deceptive
practices in and affecting commerce. The FTC Act authorizes the FTC to seek
injunctive and other relief for violations of the FTC Act, and provides a basis
for government enforcement of fair information practices. For instance, failure
to comply with a stated privacy policy may constitute a deceptive practice in
some circumstances and the FTC would have authority to pursue the remedies
available under the Act for any violations. Furthermore, in some circumstances,
information practices may be inherently deceptive or unfair, regardless of
whether the entity has publicly adopted any privacy policies.
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In June 1998, the FTC released a report analyzing the effectiveness of self-
regulation as a means of protecting consumer privacy on the Internet. The
report concluded that industry self-regulation had not been adequate. The
report listed four core information practices that the FTC believes must be
part of any privacy protection effort: notice, choice, access and security.
The FTC has indicated that in the absence of effective self-regulation, it may
support federal legislation to address consumer privacy concerns. We cannot
assure you that the FTC's actions in this area will not adversely affect our
ability to collect demographic and personal information from members, which
could have an adverse affect on our ability to attract advertisers. This could
have a material adverse effect on us.
The FTC has begun investigations into the privacy practices of companies
that collect information on the Internet. For example, on February 12, 1999,
the FTC made final a consent order with one of our competitors in connection
with that competitor's online collection of personally identifiable data and
its subsequent use of that data.
We are continuing to review our practices in light of the recent FTC
activity and the enactment of the Children's Online Privacy Protection Act. As
part of our ongoing review, we now require parental consent before allowing
children 12 and younger to become members on our web site and to post any data
in our chat rooms, forums, and similar discussion groups. We cannot predict
the exact form of the regulations that the FTC may adopt. Accordingly, we
cannot assure you that our current practices will comply with the regulatory
scheme which the FTC ultimately adopts or that we will not have to make
significant changes to comply with such laws.
Some industry groups and other organizations have proposed, or are in the
process of proposing, various voluntary standards regarding the treatment of
data collected over the Internet. In order to improve user and member
confidence in theglobe.com web site, we recently revised our user agreement
and privacy policy and became a licensee of the TRUSTe Privacy Program. As a
TRUSTe licensee, we have agreed to adhere to certain established privacy
principles at theglobe.com web site as well as to comply with TRUSTe's
oversight and consumer resolution process. theglobe.com web site privacy
policy now sets forth what personal information is being collected, how it
will be used, with whom it will be shared, who is gathering the information,
what options the user has, what security procedures are in place to prevent
misuse or loss, and how users can correct information to control its
dissemination. We may choose to join other organizations that require us to
comply with other privacy principles. We may incur expenses in obtaining the
endorsement of these organizations or in altering our current policies to
comply with these privacy principles. We cannot assure you that the adoption
of voluntary standards will preclude any legislative or administrative body
from taking governmental action regarding Internet privacy.
At the international level, the European Union adopted a directive that
requires EU member countries to impose restrictions on the collection and use
of personal data, effective October 25, 1998. Among other provisions, the
directive generally requires member countries to prevent the transfer of
personally-identifiable data to countries that do not offer equivalent privacy
protections. At present, the EU has indicated that the United States does not
provide protections equivalent to that of the directive. The directive could,
among other things, affect United States companies that collect information
over the Internet from individuals in EU member countries, and may impose
restrictions that are more stringent than current Internet privacy standards
in the United States. In response to the directive, on November 4, 1998, the
U.S. Department of Commerce published for comment a set of safe harbor
principles regarding privacy protection for personally identifiable data.
These principles were revised on April 19, 1999. The Commerce Department
proposed that organizations that come within the safe harbor would be presumed
to maintain an adequate level of privacy protection and could continue to
receive personal data transfers from EU member countries. The draft safe
harbor provides for:
. notice regarding the organization's intended use of personal data;
. the opportunity for an individual to choose how the organization or a
third party will use personal information;
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. requirements regarding the security and integrity of personal data and
access by an individual to data regarding that individual; and
. mechanisms for ensuring an organization's compliance with the privacy
principles.
The Commerce Department and the EU are engaged in ongoing discussions about
the application of the directive to United States companies. The Commerce
Department has indicated that it hopes to complete an agreement with the EU by
June 21, 1999. We cannot assure you that this directive will not materially
adversely affect our business.
Any additional legislation or regulations relating to consumer privacy or
the application or interpretation of existing laws and regulations could
affect the way in which we are allowed to conduct our business, especially
those aspects that contemplate the collection or use of our members' personal
information.
Internet Taxation. Governments at the federal, state and local level, and
some foreign governments, have made a number of proposals that would impose
additional taxes on the sale of goods and services and various other Internet
activities. In 1998, the federal Internet Tax Freedom Act was signed into law,
placing a three-year moratorium on state and local taxes on Internet access
and on multiple or discriminatory taxes on electronic commerce. However, this
moratorium exempts existing state or local laws. The statute also creates a
commission to study several Internet taxation issues. We cannot assure you
that future laws imposing taxes or other regulations on Internet commerce
would not substantially impair the growth of Internet commerce and as a result
materially adversely affect our business.
The Clinton Administration has stated that the United States will advocate
in the World Trade Organization and other appropriate international
organizations that the Internet be declared a tariff-free environment whenever
it is used to deliver products and services. In addition, the Clinton
Administration has stated that the government should impose no new taxes on
Internet commerce, but rather that taxation should be consistent with
established principles of international taxation, should avoid inconsistent
national tax jurisdictions and double taxation and should be simple to
administer and easy to understand. However, we cannot assure you that foreign
countries will not seek to tax Internet transactions.
Access Charges. Several telecommunications carriers are supporting
regulation of the Internet by the FCC in the same manner that the FCC
regulates other telecommunications services. These carriers have alleged that
the growing popularity and use of the Internet has burdened the existing
telecommunications infrastructure, resulting in interruptions in phone
service. Incumbent local exchange telephone carriers have in the past
petitioned the FCC to regulate Internet service providers in a manner similar
to long-distance telephone carriers and to impose interstate access charges on
Internet service providers. In May 1997, however, the FCC confirmed that
Internet service providers will continue to be exempt from interstate access
charges. In August 1998, the Eighth Circuit Court of Appeals upheld the FCC's
authority to maintain the exemption. On February 25, 1999, the FCC adopted an
order concerning payment by incumbent local exchange carriers of reciprocal
compensation for dial-up calls to Internet service providers that obtain their
local telephone service from competitive local exchange carriers. The FCC
found that Internet traffic is largely interstate, and therefore subject to
the FCC's jurisdiction, because end user calls to Internet service providers
do not terminate at the Internet service providers' servers, but continue to
Internet locations that often are outside the state or country in which the
call originates. Although the FCC stated that the order does not require
Internet service providers to pay access charges for calls placed through
their services, the order does provide further support for a possible,
ultimate finding that access charges must be paid for at least some categories
of Internet services, such as Internet-based voice telephony. If the FCC were
to withdraw the exemption or take other action responding to
telecommunications carrier concerns, the costs of communicating through the
Internet could increase substantially, potentially slowing the growth in
Internet use. This could decrease demand for our services or increase our cost
of doing business.
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<PAGE>
Liability for Information Retrieved from or Transmitted over the
Internet. Materials may be downloaded and publicly distributed over the
Internet by the Internet services operated or facilitated by us or by the
Internet access providers with which we have relationships. These third-party
activities could result in potential claims against us for defamation,
negligence, copyright or trademark infringement or other claims based on the
nature and content of these materials. The Communications Decency Act of 1996
provides that no provider or user of an interactive computer service shall be
treated as the publisher or speaker of any information provided by another
information content provider.
Future legislation or regulations or court decisions may hold us liable for
listings and other content accessible through our web site, for content and
materials posted by members on their respective personal web pages, for
hyperlinks from or to the personal web pages of members, or through content and
materials posted in our chat rooms or bulletin boards. Liability might arise
from claims alleging that, by directly or indirectly providing hyperlinks to
web sites operated by third parties or by providing hosting services for
members' sites, we are liable for copyright or trademark infringement or other
wrongful actions by these third parties. If any material on our web site
contains informational errors, someone might sue us for losses incurred in
reliance on the erroneous information. We attempt to reduce our exposure to
potential liability through, among other things, provisions in member
agreements, user policies, insurance and disclaimers. However, the
enforceability and effectiveness of these measures are uncertain.
In October 1998, the Digital Millennium Copyright Act, whose Title II
contains the Internet Copyright Infringement Liability Clarification Act, was
signed into law. This statute provides that, under some circumstances, a
service provider would not be liable for any monetary relief, and would be
subject to limited injunctive relief, for claims of infringement, based on
copyright materials transmitted by users over its digital communications
network or stored on its systems or under the control of or connected to its
systems. This statute also provides that, under some circumstances, a service
provider would not be liable for any claim if the service provider acted in
good faith to remove access to the infringing material. With respect to
infringement caused by storing material on a system or network, in order to
benefit from the protections of the act, a service provider must appoint a
designated agent to receive notifications of claimed infringement and must
provide information about that agent to the U.S. Copyright Office and to the
public in a publicly accessible place on the service. We have appointed a
designated agent to receive notifications of claimed infringement on the
globe.com web site, have provided that information to the Copyright Office, and
made it available to the public on the site.
A third party provides our e-mail service. This relationship exposes us to
potential claims, including claims resulting from unsolicited e-mail or
"spamming," lost or misdirected messages, illegal or fraudulent use of e-mail
or interruptions or delays in e-mail service. Some states have adopted laws
that address spamming. Other states, including New York, are considering, or
have considered, similar legislation. For example, California has adopted a law
permitting electronic mail service providers to sue parties who initiate
unsolicited commercial messages in violation of its e-mail policy, if the
initiator has notice of that policy. California also requires unsolicited e-
mail advertisements to include opt-out instructions with a toll-free telephone
number or a valid return address in the e-mail and requires senders of
unsolicited e-mail advertisements to honor opt-out requests. California also
imposes criminal penalties on parties who knowingly use Internet domain name of
another party to send one or more messages where such messages damage or cause
damage to a computer, computer system, or computer network. Similarly, on April
12, 1999, Virginia enacted a law that, effective July 1, 1999, will make it a
crime to send unsolicited bulk e-mail containing false message headers or to
sell software designed to do so and would impose civil penalties for injuries
caused by unsolicited bulk e-mail. Washington has adopted a law that allows
recipients of unsolicited e-mail containing false headers and misleading
subject lines to bring lawsuits seeking damages of up to $500.00 for
unsolicited commercial e-mail messages. Potential liability for information
disseminated through our systems could lead us to implement measures to reduce
our exposure to liability. This could require the expenditure of substantial
resources and limit the attractiveness of our services. We attempt to reduce
our exposure to potential liability through, among other things, provisions in
member agreements, user policies and disclaimers. However, the enforceability
and effectiveness of these measures are uncertain.
52
<PAGE>
We sell products directly to consumers and we also enter into agreements with
commerce partners and sponsors under which we are entitled to receive a share
of the revenue from the purchase of goods and services through direct links
from our site. These arrangements may expose us to additional legal risks,
including potential liabilities to consumers by virtue of our involvement in
providing access to these products or services, even if we do not ourselves
provide these products or services. Some of our agreements with these parties
provide that these parties will indemnify us against liabilities. However, we
cannot assure you that this indemnification will be enforceable or adequate.
Although we carry general liability insurance, our insurance may not cover all
potential claims or liabilities to which we are exposed. Any imposition of
liability that is not covered by insurance could have a material adverse effect
on our business.
The increased attention on liability issues relating to information retrieved
or transmitted over the Internet and legislative and administrative proposals
in this area could decrease the growth of Internet use. This could decrease the
demand for our services. We may also incur significant costs in investigating
and defending against these claims.
Domain Names. Domain names are the user's Internet addresses. Domain names
have been the subject of significant trademark litigation in the United States.
We have registered the domain names "theglobe.com," "shop.theglobe.com,"
"tglo.com," "azazz.com," "happypuppy.com," "realmx.com," "kidsdomain.com" and
"gamesdomain.com." We cannot assure you that third parties will not bring
claims for infringement against us for the use of these names. Moreover,
because domain names derive value from the individual's ability to remember the
names, we cannot assure you that our domain names will not lose their value if,
for example, users begin to rely on mechanisms other than domain names to
access online resources.
The current system for registering, allocating and managing domain names has
been the subject of litigation and proposed regulatory reform. We cannot assure
you that our domain names will not lose their value, or that we will not have
to obtain entirely new domain names in addition to or in place of our current
domain names.
Jurisdiction. Our facilities are located primarily in New York. However, due
to the global reach of the Internet it is possible that the governments of
other states and foreign countries might attempt to regulate Internet activity
and our transmissions. Additionally, we have recently acquired web sites which
are based in the United Kingdom and are subject to regulation under U.K. law.
Consequently, foreign countries may take action against us for violations of
their laws. We cannot assure you that violations of these laws will not be
alleged or charged by state or foreign governments and that these laws will not
be modified, or new laws enacted, in the future. Any actions of this type could
have a material adverse effect on our business.
Other. America Online has recently disclosed that the Department of Labor is
investigating the applicability of the Fair Labor Standards Act to its
Community Leader program. AOL's Community Leaders perform tasks such as
answering questions from subscribers, supervising chat rooms and enforcing
community rules. AOL has stated that it believes its Community Leader program
reflects industry practices, that its Community Leaders are volunteers, not
employees, and that its actions comply with law. AOL has also stated that it is
cooperating with the DOL, but is unable to predict the outcome of the DOL's
investigation. We have also implemented a community leader program. The AOL
program may differ in a number of respects from our program. For this and other
reasons, we cannot predict the outcome of this investigation or its effect on
our business.
Employees
As of April 9, 1999, we had approximately 210 full-time employees, including
approximately 50 in sales and marketing, 110 in production, 35 in finance and
administration and 15 in technology. Our future success depends, in part, on
our ability to continue to attract, retain and motivate highly qualified
technical and management personnel. Competition for these persons is intense.
From time to time, we also employ independent contractors to support our
research and development, marketing, sales and support and administrative
organizations. Our employees are not represented by any collective bargaining
unit and we have never experienced a work stoppage. We believe that our
relations with our employees are good.
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<PAGE>
Facilities
Our headquarters are located in a leased facility in New York City and
consist of approximately 20,000 square feet of office space, a majority of
which is under a lease with approximately six months remaining. We have also
entered into two six-month leases for a total of 3,943 square feet of office
space in New York City. We intend to relocate our headquarters in the second
quarter of 1999 to a larger facility and have entered into a fifteen-year lease
for approximately 47,000 square feet of commercial space in New York City for
this purpose. We lease approximately 1,200 square feet of office space in San
Francisco for our West Coast sales office. In connection with our acquisition
of Azazz, we assumed a month-to-month lease for approximately 4,000 square feet
of office space in Kirkland, Washington. We expect to enter into a sublease for
approximately 14,100 square feet of office space in downtown Seattle. In
connection with our acquisition of Attitude Network, we assumed a month-to-
month lease for approximately 750 square feet in Naples, Florida and
approximately 3,000 square feet in New York, New York. We believe that
additional commercial space will be available for lease at market rates. Our
principal web server equipment and operations are maintained by our personnel
at the New York Teleport facility in Staten Island, New York under a Data
Center Space Lease with Telehouse International Corporation of America for
2,800 square feet of commercial space for a term of three years. Web server
equipment relating to shop.theglobe.com is located with and maintained by
Exodus Communications, Inc. in Seattle, Washington. Additionally, we maintain
computer hardware, servers and operations relating to Attitude Network in
Herndon, Virginia, which are hosted by Frontier, GlobalCenter, and in London,
England which are hosted by Telehouse International.
Legal Proceedings
From time to time we are named in claims arising in the ordinary course of
business. Currently, no legal proceedings or claims are pending against or
involve us that, in the opinion of management, could reasonably be expected to
have a material adverse effect on us.
54
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth the names, ages and positions of our executive
officers and directors. Our board of directors appoints executive officers. Our
executive officers serve at the discretion of our board. All directors hold
office until the annual meeting of our stockholders following their election or
until their successors are duly elected and qualified.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Michael S. Egan...... 59 Chairman
Todd V. Krizelman.... 25 Co-Chief Executive Officer, Co-President and
Director
Stephan J. Paternot.. 25 Co-Chief Executive Officer, Co-President, Secretary
and Director
Dean S. Daniels...... 41 Vice President and Chief Operating Officer
Edward A. Cespedes... 33 Vice President of Corporate Development and Director
Francis T. Joyce..... 46 Vice President, Chief Financial Officer and
Treasurer
Rosalie V. Arthur.... 40 Director
Henry C. Duques...... 56 Director
Robert M. Halperin... 71 Director
David H. Horowitz.... 70 Director
H. Wayne Huizenga.... 61 Director
</TABLE>
Michael S. Egan. Mr. Egan has served as our Chairman since August 1997. Mr.
Egan serves as the chairman of our board of directors and as an executive
officer with primary responsibility for day-to-day strategic planning and
financing arrangements. Mr. Egan has been the controlling investor of Dancing
Bear Investments, a privately held investment company, since 1996. Dancing Bear
Investments holds a controlling interest in us. From 1986 to 1996, he was the
majority owner and Chairman of Alamo Rent-A-Car, Inc., now a subsidiary of
AutoNation. Mr. Egan began his career with Alamo in 1976 and held various
management and ownership positions during this period until he bought a
controlling interest in 1986. Mr. Egan is also Chairman and Chief Executive
Officer of Certified Vacations, a wholesale tour operator. Mr. Egan is a
director of Florida Panthers Holdings, Inc. and Lowestfare.com, Inc. Mr. Egan
began in the car rental business with Olins Rent-A-Car, where he held various
positions, including President. Before acquiring Alamo, Mr. Egan held various
administrative positions at Yale University and administrative and teaching
positions at the University of Massachusetts at Amherst. Mr. Egan is a graduate
of Cornell University, where he received a Bachelor's degree in Hotel
Administration.
Todd V. Krizelman. Mr. Krizelman co-founded us in the fall of 1994. He is our
Co-Chief Executive Officer and Co-President and has served in various
capacities with us since our founding. Mr. Krizelman graduated from Cornell
University in 1996, where he received a Bachelor's degree in Biology.
Stephan J. Paternot. Mr. Paternot co-founded us in the fall of 1994. He is
our Co-Chief Executive Officer, Co-President and Secretary and has served in
various capacities with us since our founding. Mr. Paternot graduated from
Cornell University in 1996, where he received Bachelor's degrees in Business
and Computer Science.
Dean S. Daniels. Mr. Daniels was appointed our Vice President and Chief
Operating Officer in August 1998. From February 1997 until joining us, Mr.
Daniels served as Vice President and General Manager of CBS New Media, a
subsidiary managing all of CBS Television Network's activity on the Internet.
From March 1996 to February 1997, Mr. Daniels was the Director of Interactive
Services at CBS News. From 1994 to 1996, Mr. Daniels served as Director of
Affiliate News Services at CBS NEWSPATH. From 1992 to 1994, Mr. Daniels
55
<PAGE>
was Director of News of WCBS-TV, a CBS owned television station in New York.
Before that time, Mr. Daniels held various positions at WCBS-TV, including
executive producer, and was the recipient of four Emmy Awards.
Edward A. Cespedes. Mr. Cespedes was appointed Vice President of Corporate
Development in July 1998 and has served as one of our directors since August
1997. As Vice President for Corporate Development, Mr. Cespedes has primary
responsibility for corporate development opportunities including mergers and
acquisitions. Mr. Cespedes is also a Managing Director of Dancing Bear
Investments. Mr. Cespedes joined Dancing Bear Investments at its inception in
1996, where his responsibilities include venture capital investments, mergers
and acquisitions and finance. Before joining Dancing Bear Investments, Mr.
Cespedes served as Director of Corporate Finance for Alamo in 1996, where he
was responsible for general corporate finance in the United States and in
Europe. From 1988 to 1996, Mr. Cespedes worked in the Investment Banking
Division of J.P. Morgan & Company, where he most recently focused on mergers
and acquisitions. Mr. Cespedes received a Bachelor's degree in International
Relations from Columbia University.
Francis T. Joyce. Mr. Joyce was appointed our Vice President, Chief Financial
Officer and Treasurer in July 1998. From 1997 until joining us, Mr. Joyce
served as Chief Financial Officer of the Reed Travel Group, a division of Reed
Elsevier Plc, which is an international publisher of travel information. From
1994 to 1997, Mr. Joyce was the Chief Financial Officer at Alexander Consulting
Group, a division of Alexander & Alexander Services, Inc., an international
professional services firm, which included a human resources consulting firm,
an insurance brokerage unit and an executive planning life insurance unit. From
1988 to 1994, Mr. Joyce worked as a Senior Vice President and controller at
Bates Worldwide, a division of Saatchi & Saatchi Co., an advertising firm. Mr.
Joyce received a Bachelor of Science in Accounting from the University of
Scranton and a Master of Business Administration from Fordham University. He is
a Certified Public Accountant.
Rosalie V. Arthur. Ms. Arthur has served as one of our directors since August
1997. Ms. Arthur is a Senior Managing Director and Vice President of Mergers
and Acquisitions of Dancing Bear Investments. She currently serves on the Board
of Directors of Dancing Bear Investments and several of its affiliated
companies. She also served on the Board of Directors of Alamo and affiliated
entities and Nantucket Nectars. Before joining Dancing Bear Investments, she
served as Chief of Staff and Financial Counselor to the Chairman of Alamo from
1986 to 1996, when the company was sold. Ms. Arthur was the Manager of
Financial Reporting at Sensormatic Electronics Corporation from 1984 to 1986
and worked in the audit department of KPMG Peat Marwick from 1980 to 1984. Ms.
Arthur received her Bachelor of Science in Accounting from the University of
South Florida. She is a Certified Public Accountant.
Henry C. Duques. Mr. Duques has served as one of our directors since
September 1998. Mr. Duques is Chairman and Chief Executive Officer of First
Data Corporation, a position he has held since April 1989. From September 1987
to 1989, he served as President and Chief Executive Officer of the Data Based
Services Group of American Express Travel Related Services Company, Inc., the
predecessor to First Data Corporation. He was Group President of Financial
Services and a member of the board of directors of Automatic Data Processing,
Inc. from 1984 to 1987. Mr. Duques is currently a director of Unisys
Corporation. Mr. Duques holds a Bachelor of Business Administration in
Accounting and an MBA in Accounting and Finance from George Washington
University.
Robert M. Halperin. Mr. Halperin has served as one of our directors since
1995. Mr. Halperin has acted as an advisor to Greylock Management, a venture
capital firm, for the past five years. He is a member of the board of directors
of Avid Technology, Inc. In addition, Mr. Halperin serves on the Board of
Directors of the Associates of Harvard Business School, the Harvard Business
School Publishing Co. and Stanford Health Services and also is a Life Trustee
of the University of Chicago. He is the former Vice Chairman of Raychem
Corporation's Board of Directors and also served as its President and Chief
Operating Officer. Mr. Halperin joined Raychem Corporation in 1957. Mr.
Halperin received a Master of Business Administration degree from Harvard
Business School, and he earned a Bachelor's degree in liberal arts from the
University of Chicago and a Bachelor's degree in Mechanical Engineering from
Cornell University.
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<PAGE>
David H. Horowitz. Mr. Horowitz has served as one of our directors since
December 1995. Mr. Horowitz has acted as an investor and consultant in the
media and communications industries for at least the past five years, and as a
consultant to the American Society of Composers, Authors and Publishers, and a
Lecturer at the Columbia University School of Law. From 1973 to 1984, Mr.
Horowitz was an officer and director of Warner Communications, Inc., and until
1985 he was President and CEO of MTV Networks, Inc. Mr. Horowitz is a graduate
of Columbia University, where he received a Bachelor's degree, and is a
graduate of Columbia Law School.
H. Wayne Huizenga. Mr. Huizenga has served as one of our directors since July
1998. Mr. Huizenga has served as the Chairman of the Board of AutoNation since
August 1995, as its Co-Chief Executive Officer since October 1996 and as its
Chief Executive Officer from August 1995 until October 1996. Mr. Huizenga also
serves as the Chairman of the Board and Chief Executive Officer of Republic
Services, Inc., as the Chairman of the Board of Florida Panthers Holdings,
Inc., as the Chairman of the Board of Extended Stay America, Inc. and a
director of NationsRent, Inc. From September 1994 until October 1995, Mr.
Huizenga served as the Vice Chairman of Viacom Inc., and as the Chairman of the
Board of Blockbuster Entertainment Group, a division of Viacom. From April 1987
through September 1994, Mr. Huizenga served as the Chairman of the Board and
Chief Executive Officer of Blockbuster. In September 1994, Blockbuster merged
into Viacom. In 1971, Mr. Huizenga co-founded Waste Management, Inc. and served
in various capacities, including President, Chief Operating Officer and a
director from its inception until 1984. Mr. Huizenga also owns or controls the
Miami Dolphins professional sports franchise, and Pro Player Stadium, in South
Florida.
Key Employees
The following table sets forth the names and positions of our key employees.
<TABLE>
<CAPTION>
Name Position
---- --------
<C> <S>
Vance Huntley Director of Technology
Esther Loewy Director of
Communications
Will Margiloff Director of
Advertising
Sales
Richard Mass General Counsel
David Tonkin Director of
Human Resources
</TABLE>
Vance Huntley. Vance Huntley joined us in August 1995 as our Director of
Technology. Between 1991 and 1994, Mr. Huntley held software development
positions with Delta-Epsilon Software and the Cornell Institute of Social
Economic Research. In 1994 Mr. Huntley developed a Transmission Electron
Microscopy simulation for the Cornell Materials Science Center while completing
his BS in the Applied & Engineering Physics program at Cornell University. In
1990, Mr. Huntley wrote simulation software at the Lawrence Livermore National
Laboratory Supercomputing Center.
Esther Loewy. Ms. Loewy joined us in May 1997 as our Director of
Communications. Ms. Loewy is responsible for managing the in-house
communications department for the Company and the direction of our media and
public relations. Before joining us, Ms. Loewy was a consultant for the @Cafe
in New York and other media companies from 1995 to 1997. From 1992 to 1995 Ms.
Loewy was a Senior Account Executive at Charles Levine Communication.
Will Margiloff. Mr. Margiloff joined us in March 1998 as our Director of
Advertising Sales. Mr. Margiloff is responsible for the management and
direction of our sales force in New York and San Francisco, and the expansion
of our advertising efforts both domestically and internationally. Before
joining us, from 1997 to 1998 Mr. Margiloff was the Vice President of East
Coast Sales for 24/7 Media. From 1995 to 1998 Mr. Margiloff held the senior
sales management position at software site Jumbo!
Richard W. Mass. Mr. Mass was appointed our General Counsel in September
1998. From 1994 until joining us, Mr. Mass served as a senior attorney
supporting AT&T's Internet services and was also the chief
57
<PAGE>
counsel for Downtown Digital, AT&T's digital production facility that developed
interactive television programming and Web sites. From 1992 to 1994, Mr. Mass
was an attorney at Gray Cary Ware & Freidenrich in Palo Alto, California. From
1991 to 1992, Mr. Mass was a Visiting Assistant Professor of Law at the
University of Miami and from 1987 to 1990 Mr. Mass was an attorney at
Proskauer, Rose, Goetz & Mendelsohn in New York. Mr. Mass received a Bachelor
of Arts in Economics from Williams College and received a law degree from
Stanford Law School.
David Tonkin. Mr. Tonkin joined us in May 1998 as our Director of Human
Resources. Mr. Tonkin is responsible for managing the recruiting, hiring and
human resource administration of all employees at theglobe.com. Before joining
us, from 1995 to 1998 Mr. Tonkin worked as a Senior Resource Manager for
Knowledge Transfer International, responsible for recruiting, developing and
managing consulting staffing services. Before that time, from 1994 to 1995, Mr.
Tonkin worked as Human Resource Manager for NightRider (Alco Management
Service). From 1993 to 1994 Mr. Tonkin worked as Operations Manager for Premier
Shoe Company.
Board Committees
The Audit Committee of our board of directors reviews and monitors our
corporate financial reporting and our internal and external audits. Some of
these tasks include reviewing and monitoring the following:
. our control functions;
. the results and scope of the annual audit and other services provided by
our independent accountants; and
. our compliance with legal matters that have a significant impact on our
financial condition.
The Audit Committee consults with our management and our independent
accountants before the presentation of financial statements to stockholders
and, as appropriate, initiates inquiries into aspects of our financial affairs.
In addition, the Audit Committee has the responsibility to consider and
recommend the appointment of, and to review fee arrangements with, our
independent accountants. The current members of the Audit Committee are Messrs.
Halperin and Horowitz and Ms. Arthur.
The Compensation Committee of our board of directors reviews and makes
recommendations to our board regarding our compensation policies and all forms
of compensation to be provided to our executive officers and directors. Some of
these tasks include reviewing and monitoring the following:
. annual salaries and bonuses; and
. stock option and other incentive compensation arrangements.
In addition, the Compensation Committee reviews bonus and stock compensation
arrangements for all of our other employees. The current members of the
Compensation Committee are Messrs. Egan, Halperin and Horowitz and Ms. Arthur.
Before July 15, 1998, the Compensation Committee consisted of Messrs. Egan,
Halperin, Krizelman and Paternot. Either the entire board or a subcommittee of
the Compensation Committee consisting of Messrs. Horowitz and Halperin approves
stock option grants.
The Nominating Committee of our board of directors makes recommendations to
our board of directors regarding nominees for our board of directors. The
current members of the Nominating Committee are Messrs. Egan, Krizelman and
Paternot and Ms. Arthur.
Executive Officers
Our board of directors appoints our executive officers. Our executive
officers serve at the discretion of our board of directors.
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<PAGE>
Directors' Compensation
Directors who are also our employees receive no compensation for serving on
our board of directors. We intend to reimburse non-employee directors for all
travel and other expenses incurred in connection with attending board of
directors and committee meetings. Non-employee directors are also eligible to
receive automatic stock option grants under our 1998 stock option plan.
Under the 1998 stock option plan each eligible non-employee director as of
July 15, 1998 received an initial grant of options to acquire 50,000 shares of
our common stock. Each director who became an eligible non-employee director
for the first time after July 15, 1998 received an initial grant of options to
acquire 25,000 shares of our common stock. In addition, each eligible non-
employee director will receive an annual grant of options to acquire 7,500
shares of our common stock on the first business day following each of our
annual meeting of shareholders that occurs while the 1998 stock plan is in
effect. All of these stock options will be granted with per share exercise
prices equal to the fair market value of our common stock as of the date of
grant.
Executive Compensation
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid by us to our Chairman,
Co-Chief Executive Officers and our three other most highly compensated
executive officers during the last two fiscal years:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
-------------------------- ---------------------
Name and Principal Number of Securities All Other
Position(1) Year(1) Salary($) Bonus($) Underlying Options(#) Compensation($)(2)
------------------ ------- --------- -------- --------------------- ------------------
<S> <C> <C> <C> <C> <C>
Michael S. Egan(3)..... 1998 -- -- (4) 320,000 --
Chairman 1997 -- -- -- --
Todd V. Krizelman...... 1998 $140,554 -- (4) 300,500 --
Co-Chief Executive
Officer and -- -- 200,000(8) --
Co-President 1997 $ 76,000 $18,750 289,952 $500,000
Stephan J. Paternot.... 1998 $140,554 -- (4) 300,500 --
Co-Chief Executive
Officer, -- -- 200,000(8) --
Co-President and
Secretary 1997 $ 76,000 $18,750 289,952 $500,000
Edward Cespedes(5)..... 1998 $ 83,625 -- (4) 107,500 --
VP Corporate
Development -- -- 50,000(9) --
Francis T. Joyce,
CFO(6)................ 1998 $ 80,769 -- 225,000 --
Dean S. Daniels,
COO(7)................ 1998 $ 80,731 -- 225,000 --
</TABLE>
- --------
(1) We do not have any executive officers other than those named in the table.
Other than Messrs. Krizelman and Paternot, we did not have any other
executive officers whose aggregate salary, bonus and other compensation
exceeded $100,000 during the fiscal year ended December 31, 1997.
(2) Reflects a one-time payment of $500,000 associated with our sale of
preferred stock and warrants to Dancing Bear Investments in August 1997.
(3) Mr. Egan became an executive officer in July 1998. We did not pay Mr. Egan
a base salary in 1998.
(4) Included in long-term compensation are 70,000, 100,000, 100,000 and 50,000
options granted in January 1999 at an exercise price of $15.75 related to
bonuses earned in 1998 for Messrs. Egan, Krizelman, Paternot and Cespedes,
respectively.
(5) Mr. Cespedes became an officer in July 1998.
(6) Mr. Joyce became an officer in July 1998.
(7) Mr. Daniels became an officer in August 1998.
(8) Represents the transfer of 200,000 Series E Warrants from Dancing Bear
Investments, Inc. at an exercise price of approximately $1.45.
(9) Represents the transfer of 50,000 Series E Warrants from Dancing Bear
Investments, Inc. at an exercise price of approximately $1.45.
59
<PAGE>
The following table sets forth, as of December 31, 1998, for each of the
executives listed in the Summary Compensation table (a) the total number of
unexercised options for common stock (exercisable and unexercisable) held and
(b) the value of those options that were in-the-money on December 31, 1998
based on the difference between the closing price of our common stock on
December 31, 1998 and the exercise price of the options on that date.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
1998 YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Stock Options at In-the-Money Stock Options
Fiscal Year-End (#) at Fiscal Year-End ($)(2)
---------------------------------- -----------------------------
Shares
Acquired on Value
Name Exercise (#)(1) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ----------- --------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Michael Egan............ -- -- 12,500 237,500 149,219 2,835,156
Todd Krizelman.......... -- -- 214,976 345,476 3,474,226 4,725,770
Stephan Paternot........ -- -- 214,976 345,476 3,474,226 4,725,770
Edward Cespedes......... -- -- 12,500 45,000 149,219 537,188
Francis T. Joyce........ -- -- -- 225,000 -- 2,804,063
Dean S. Daniels......... -- -- -- 225,000 -- 2,685,938
</TABLE>
- --------
(1) The named executive officers did not exercise any options in 1998.
(2) Based on a per share fair market value of Common Stock equal to $16.44, as
of December 31, 1998.
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
Rates
of Stock Price
Appreciation for
Option
Term(2)
-------------------
Number of Percent of Total
Securities Options
Underlying Granted to
Options Employees in Exercise or Base Expiration
Granted (#)(1) 1998 Price ($/sh) Date 5% 10%
-------------- ---------------- ---------------- -------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael Egan............ 50,000(3) 2.72% 4.50 July 2008 $114,501 $ 358,592
200,000(4) 10.90% 4.50 July 2008 $566,005 $1,434,368
Todd Krizelman.......... 500(5) 0.03% 4.50 July 2008 $ 1,415 $ 3,586
200,000(4) 10.90% 4.50 July 2008 $566,005 $1,434,368
Stephan Paternot........ 500(5) 0.03% 4.50 July 2008 $ 1,415 $ 3,586
200,000(4) 10.90% 4.50 July 2008 $566,005 $1,434,368
Edward Cespedes......... 50,000(3) 2.72% 4.50 July 2008 $141,501 $ 358,592
7,500(6) 0.41% 4.50 July 2008 $ 21,225 $ 53,789
Francis T. Joyce........ 175,000(7) 9.54% 3.83 July 2008 $420,966 $1,066,811
50,000(8) 2.72% 4.50 July 2008 $141,501 $ 358,592
Dean S. Daniels......... 175,000(9) 9.54% 4.50 September 2008 $495,255 $1,255,072
50,000(10) 2.72% 4.50 September 2008 $141,501 $ 358,592
</TABLE>
- --------
(1) In the event of a change in control of the Company, all of these options
become immediately and fully exercisable.
(2) These amounts represent various assumed rates of appreciation only and are
displayed in connection with SEC disclosure rules. Actual gains, if any,
on stock option exercises are dependent on future performance of our
common stock.
(3) One-fourth of these options are exercisable. The remaining three-fourths
will become exercisable with respect to one-third of the shares covered
thereby on July 15 in each of 1999, 2000 and 2001.
60
<PAGE>
(4) These options become exercisable on July 15, 1999.
(5) These options become exercisable on July 24, 1999.
(6) These options become exercisable with respect to one-fourth of the shares
indicated on July 31 in each of 1999, 2000, 2001 and 2002.
(7) These options become exercisable with respect to one-third of the shares
indicated on July 15 in each of 1999, 2000 and 2001.
(8) These options become exercisable with respect to one-seventh of the shares
indicated on July 15 in each of 1999, 2000, 2001, 2002, 2003, 2004 and
2005. However, options covering 25,000 shares have accelerated vesting if
specified financial targets are met in 1999.
(9) These options become exercisable with respect to one-third of the shares
indicated in September in each of 1999, 2000 and 2001.
(10) These options become exercisable with respect to one-seventh of the shares
indicated in September each of 1999, 2000, 2001, 2002, 2003, 2004 and
2005. However, options covering 25,000 shares have accelerated vesting if
specified financial targets are met in 1999.
Employment Agreements
CEO Employment Agreements: On August 13, 1997, we entered into employment
agreements with our co-CEOs, Todd V. Krizelman and Stephan J. Paternot. Each
CEO agreement provides for the following:
. employment as one of our executives;
. an annual base salary of $125,000 with eligibility to receive annual
increases amounting to no less than 15% of the executive's then-base
salary;
. a discretionary annual cash bonus, which will be awarded at our board's
discretion and upon the achievement of target performance objectives
presented in our budget; and
. a right to participate in our stock option plans and all health, welfare,
and other benefit plans provided by us to our most senior executives.
Each of the CEO agreements is for a term expiring on August 13, 2002, with
possible earlier termination as provided in each CEO agreement. Each of the CEO
agreements provides that, in the event of termination by us without cause, the
executive will be entitled to receive from us:
. any earned and unpaid base salary;
. reimbursement for any reasonable and necessary monies advanced or
expenses incurred in connection with the executive's employment;
. a pro-rata portion of the annual bonus for the year of termination; and
. for one year following termination or the remainder of the term of the
CEO agreement, whichever is less, continued salary payments and employee
benefits.
In addition, termination without cause automatically triggers the vesting of
all stock options held by the executive.
In the event of our change in control or a dissolution, each executive may
elect to terminate his employment by delivering a notice within 60 days to us
and receive (1) any earned and unpaid base salary as of the termination date
and (2) an amount reimbursing the executive for expenses incurred on our behalf
before the termination date.
Each CEO agreement contains a provision that the CEO will not compete with us
for a period of five years from the date of each CEO Agreement or, in the case
of termination without cause or after a change in control, the earlier of a
period of one year immediately following termination of employment or five
years from the date of our initial public offering.
61
<PAGE>
Chief Operating Officer Employment Agreement. We have entered into an
employment agreement with Dean S. Daniels. The following are key terms of the
Daniels employment agreement:
. employment as our Chief Operating Officer effective August 31, 1998;
. an annual base salary of not less than $250,000 per year;
. an annual cash bonus of $50,000; and
. stock options to purchase 225,000 shares of our common stock. The options
were granted at an exercise price of $4.50 per share. Of these options,
175,000 will vest with respect to one-third of the shares on each of the
first three anniversaries of the date of grant, and 50,000 will vest with
respect to one-seventh of the shares on each of the first seven
anniversaries of the date of grant. The Daniels employment agreement also
provides for the accelerated vesting of an aggregate of 25,000 of these
options upon our attainment of financial targets in our 1999 fiscal year.
In addition, the Daniels employment agreement is for a term expiring on
August 31, 2001, with possible earlier termination as provided in the Daniels
employment agreement. The Daniels employment agreement provides that, in the
event of termination by us without cause, Mr. Daniels will be entitled to
receive from us:
. any earned and unpaid base salary as of the termination date and salary
continuation during a one-year non-competition period following
termination;
. reimbursement for any and all reasonable monies advanced or expenses
incurred in connection with his employment; and
. his annual bonus for the year of termination.
In addition, termination without cause automatically triggers the vesting of
all options held by Mr. Daniels.
The Daniels employment agreement contains a provision that he will not
compete with us for a period of one year following the date of his termination
of employment.
Chief Financial Officer Employment Agreement. On July 13, 1998, we entered
into an employment agreement with Francis T. Joyce. The following are the key
terms of the Joyce employment agreement:
. employment as our Chief Financial Officer;
. an annual base salary of not less than $200,000 per year with eligibility
to receive annual increases in base salary as determined by our Co-Chief
Executive Officers and Co-Presidents;
. an annual cash bonus of $50,000; and
. Mr. Joyce received a stock option grant to purchase 225,000 shares of our
common stock, 175,000 of which have an exercise price per share equal to
85% of the initial public offering price. As a result, we recorded a
charge for deferred compensation expense of $118,100 in the third quarter
of 1998, representing the difference between the deemed value of our
common stock, the initial public offering price for accounting purposes,
and the exercise price of these options at the date of grant. This amount
is presented as a reduction of stockholders' equity and amortized over
the vesting period of the applicable options. The remaining options were
granted at an exercise price of $4.50 per share. Of these options,
175,000 will vest with respect to one-third of the shares on each of the
first three anniversaries of the date of grant, and 50,000 will vest with
respect to one-seventh of the shares on each of the first seven
anniversaries of the date of grant. The Joyce employment agreement also
provides for the accelerated vesting of an aggregate of 25,000 of these
options upon our attainment of financial targets in our 1999 fiscal year.
62
<PAGE>
In addition, the Joyce employment agreement is for a term expiring on July
13, 2001, with possible earlier termination as provided in the Joyce employment
agreement. The Joyce employment agreement provides that, in the event of
termination by us without cause, Mr. Joyce will be entitled to receive from us:
. any earned and unpaid base salary as of the termination date and salary
continuation during a non-competition period following termination which
will be six months or one year, if we elect to pay Mr. Joyce his salary
during this period;
. reimbursement for any and all monies advanced or expenses incurred in
connection with his employment; and
.a pro rata portion of his annual bonus for the year of termination.
In addition, termination without cause automatically triggers the vesting of
all stock options held by Mr. Joyce.
1998 Stock Option Plan
Our board of directors adopted our 1998 stock option plan on July 15, 1998,
and our stockholders approved it as of July 15, 1998. In March 1999, our board
of directors approved an amendment of our 1998 stock option plan in order to
increase the number of shares authorized for issuance from 2,400,000 to
3,400,000 and to increase the amount of options which may be granted to an
individual during any three consecutive calendar year period, subject to
stockholder approval. The 1998 stock option plan provides for the grant of
incentive stock options intended to qualify under Section 422 of the IRS Code
and stock options which do not so qualify. Our and our subsidiaries' directors,
officers, employees and consultants are eligible to receive grants under the
1998 stock option plan. The 1998 stock option plan also provides for
discretionary stock bonus awards for some community leaders. The 1998 stock
option plan is designed to comply with the requirements for "performance-based
compensation" under Section 162(m) of the IRS Code, and the conditions for
exemption from the short-swing profit recovery rules under Rule 16b-3 under the
Exchange Act.
The purpose of the 1998 stock option plan is to provide an incentive to our
directors, officers, employees and consultants and encourage them to devote
their abilities to the success of our business. The 1998 stock option plan is
administered by and options may be granted by a stock option committee of our
board comprised of two or more "non-employee directors" within the meaning of
Rule 16b-3 and unless otherwise determined by our board of directors, "outside
directors" within the meaning of Section 162(m), who will administer the 1998
stock option plan in our discretion. Generally, the stock option committee has
the right to grant options to eligible participants and to determine the terms
and conditions of option agreements, including the vesting schedule and
exercise price of options. In addition, our directors who are not also
employees are eligible to receive automatic formula option grants as provided
in the 1998 stock option plan. Formula option grants include an initial grant
of options to acquire 50,000 shares to the eligible non-employee directors who
served on our board as of July 15, 1998, and 25,000 shares to eligible non-
employee directors who become directors for the first time after July 15, 1998,
and annual grants of options to acquire 7,500 shares to eligible non-employee
directors on the day following each annual shareholders meeting.
The 1998 stock option plan, as amended, authorizes for issuance 3,400,000
shares of our common stock, with adjustment in the case of changes in
capitalization affecting the options. In January 1999, the compensation
committee of our board of directors approved for grant 100,000 options to each
of Messrs. Krizelman and Paternot, 70,000 options to Mr. Egan, 50,000 options
to Mr. Cespedes and 30,000 options to Ms. Arthur pursuant to the plan as bonus
payments for 1998, all of which were immediately vested. No individual may be
granted options with respect to more than 1,000,000 shares during any three
consecutive calendar year period.
63
<PAGE>
The 1998 stock option plan provides that the term of any option may not
exceed ten years. In the event of a change in control all outstanding options
will become immediately and fully vested. If a participant's employment, or
service as a director, is terminated following a change in control, any options
vested at that time will remain outstanding until the earlier of the first
anniversary of termination and the expiration of the option term.
In the event of a change in capitalization, the stock option committee will
adjust the maximum number and class of shares which may be granted under the
1998 stock option plan or to any individual in any three calendar year period,
the number and class of shares which are subject to any outstanding options and
the purchase price of the option, and the number and class of shares to be
granted to directors as formula option grants.
We issued shares of our common stock to our community leaders under the 1998
stock option plan. Each of our community leaders, as of July 23, 1998, were
issued 22 fully vested shares of our common stock, approximately 7,000 in the
aggregate. As a result, we recorded a charge for compensation expense estimated
at $31,500 in the fourth quarter of 1998 for the value of our common stock
issued to our community leaders.
1995 Stock Option Plan
Our 1995 stock option plan, as amended, was adopted by our board of directors
on May 26, 1995. The 1995 stock option plan provides for the grant of incentive
stock options and non-qualified stock options. Our directors, employees and
consultants and our affiliates are eligible to receive grants under the 1995
stock option plan. The 1995 stock option plan authorizes for issuance 1,582,000
shares of our common stock, with adjustment in the case of changes in
capitalization affecting options. The remaining options under the 1995 stock
option plan may be granted by Messrs. Krizelman and Paternot under the terms of
the 1995 stock option plan.
Azazz.com 1998 stock option plan
Prior to our acquisition of Azazz.com, Azazz.com had established its 1998
Stock Option Plan and granted options to purchase shares of Azazz.com common
stock to its officers, directors, consultants and employees. As a result of our
acquisition of Azazz.com, we assumed the obligations of Azazz.com under its
stock plan, and the outstanding options granted under the plan were converted
into options entitling each option holder to purchase shares of our common
stock. The other terms of the converted options remain unchanged. No additional
grants will be made under the Azazz.com stock plan.
Generally, our compensation committee will administer and interpret the
Azazz.com stock plan and its determinations are final. The compensation
committee has the authority to make amendments or modifications to outstanding
options consistent with the plan's terms.
Except as otherwise provided in an option agreement, in the event of a change
in control of Azazz.com, each converted option that is outstanding at that time
will automatically accelerate so that the converted option will immediately
prior to the date for the change in control be 100% vested and exercisable. The
option will not accelerate, however, if and to the extent that, in connection
with the change in control, it is either assumed by the successor corporation
or replaced with a comparable award for the purchase of shares of the stock of
the successor corporation. Any such converted options held by an officer that
are assumed or replaced in connection with Azazz.com 's change in control and
do not otherwise accelerate at that time will be accelerated in the event that
the officer's employment terminates within two years following the change in
control, unless the officer's employment was terminated by the successor
corporation for cause or by the officer without good reason.
Attitude Network Ltd. 1996 Stock Option Plan
Prior to our acquisition of Attitude Network, it had established the Attitude
Network, Ltd. 1996 Stock Option Plan and granted options to purchase shares of
Attitude Network common stock to its officers, directors, consultants and
employees. As a result of our acquisition of Attitude Network, we assumed the
obligations of Attitude Network under the Attitude Network stock option plan,
and the outstanding options granted under the
64
<PAGE>
plan were converted into options entitling each option holder to purchase
shares of our common stock, instead of Attitude Network common stock. The
other terms of the converted options remain unchanged. No additional grants
will be made under the Attitude Network stock option plan.
Generally, our compensation committee will administer and interpret the
Attitude stock plan and its determinations are final. The compensation
committee has the authority to make amendments or modifications to outstanding
options consistent with the plan's terms.
In the event of a change in control of Attitude Network, our board of
directors must either provide
(a) for the substitution of any converted options outstanding at that time
with options to purchase shares of the successor corporation, or
(b) upon written notice to the optionee that the option must be exercised
within 60 days of the date of such notice or it will be terminated.
401(k) Savings Plan
We have established a savings and profit-sharing plan that qualifies as a
tax-deferred saving plan under Section 401(k) of the IRS Code for some of our
eligible employees. Under the savings plan, participants may contribute up to
15% of their eligible compensation, up to $10,000, in any year on a pre-tax
basis. Employee contributions are fully vested at all times. In addition, we
may, in our discretion, make additional contributions on behalf of
participants. All amounts contributed under the savings plan are invested in
one or more investment accounts administered by the plan administrator.
1999 Employee Stock Purchase Plan
Our board of directors adopted our 1999 Employee Stock Purchase Plan on
February 18, 1999, subject to approval by a majority of our stockholders
present and represented at any special or annual meeting of the stockholders
held within 12 months after adoption of the plan. If the plan is not approved
by a majority of the stockholders, it will not become effective. We intend to
have the plan qualify as an employee stock purchase plan under Section 423 of
the Internal Revenue Code. We will administer the plan in a manner consistent
with the requirements of that section of the Internal Revenue Code.
The purpose of the plan is to strengthen our company by providing our
employees and our subsidiaries' employees the opportunity to acquire a
proprietary interest in our company through the purchase of shares of common
stock at a discount. These purchases will be made through regular payroll
deductions of up to 10% of a participant's gross cash wages, salary and
overtime earnings for each pay period during an offering period. A committee
consisting solely of no fewer than two non-employee directors appointed by our
board will administer the plan.
Each full-time employee who has completed six consecutive months of full-
time employment with us or a subsidiary and who is employed by us or a
subsidiary may participate in the plan with respect to offering periods
beginning after the six-month period. There will be four offering periods to
purchase shares of the common stock during each twelve-month period. On the
first day of each offering period, each participant is deemed to have been
granted an option to purchase a maximum number of shares of common stock the
fair market value of which is equal to
. that percentage of the participant's compensation which the participant
has elected to have withheld multiplied by
. the participant's compensation during the offering period then divided by
. the applicable price at which the shares of common stock are being
offered during that offering period.
65
<PAGE>
The maximum number of shares of common stock that a participant may purchase
during an individual offering period is 4,000. The offering price for shares
for any offering period is the lower of 85% of the closing price of the stock
on the first day or the last day of the offering period. Each participant will
automatically purchase stock on the last day of the offering period with the
accumulated payroll deductions in the participant's account at the time of
purchase and at the offering price for that offering period.
Upon termination of a participant's employment for any reason the
participant's payroll deductions accumulated prior to such termination, if any,
will be applied toward purchasing full shares of common stock in the then-
current offering period. Any cash balance remaining after the purchase of
shares in such offering period will be refunded to him or her and his or her
participation in the plan will be terminated.
In the event of a change in capitalization, appropriate and proportionate
adjustments may be made by the committee in both the number and/or kind of
shares to be purchased under the plan and in their purchase price, and the
number and/or kind of shares to be purchased in the current offering period and
their purchase price. Upon the occurrence of various corporate transactions,
each participant during the offering period will be entitled to receive on the
last day of the offering period, for each share to be purchased as nearly as
reasonably may be determined, the cash, securities and/or property which a
holder of one share of the common stock was entitled to receive upon and at the
time of such transaction.
Other than the 1998 stock option plan and the employment agreements described
above, there are no compensation plans or arrangements in which the co-CEO's or
three other most highly paid executive officers participate that provide for
payments or other benefits in the event of their termination of employment or a
change in control.
Compensation Committee Interlocks and Insider Participation
On July 15, 1998, Michael S. Egan, Robert M. Halperin, David H. Horowitz and
Rosalie V. Arthur were appointed as members of the compensation committee of
our board. Before that date, the compensation committee was comprised of
Messrs. Egan, Halperin, Krizelman and Paternot. Mr. Egan, effective as of July
22, 1998, also serves as one of our executive officers in his role as Chairman.
Mr. Egan is also the controlling investor of Dancing Bear Investments, and Ms.
Arthur is a Senior Managing Director of Dancing Bear Investments. See "Certain
Relationships and Related Transactions-Arrangements with Entities Controlled by
Various Directors and Officers." Although Mr. Egan does not receive a salary
from us, in 1998 we granted stock options to Mr. Egan for 200,000 shares of our
common stock under the 1998 stock option plan, as consideration for his
performance of services in his capacity as an executive officer. Additionally,
in January 1999, we granted stock options to Mr. Egan and Ms. Arthur for 70,000
and 30,000 shares, respectively, as bonus payments for 1998.
Key Man Insurance
We do not have and currently do not intend to purchase key man insurance.
Indemnification Agreements
We have entered into indemnification agreements with our directors and
officers. These agreements provide, in general, that we shall indemnify and
hold harmless directors and officers to the fullest extent permitted by law
against any judgments, fines, amounts paid in settlement, and expenses,
including attorneys' fees and disbursements, incurred in connection with, or in
any way arising out of, any claim, action or proceeding, whether civil or
criminal, against, or affecting, the directors and officers resulting from,
relating to or in any way arising out of, the service of the directors and
officers as our directors and officers.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Arrangements with Entities Controlled by Various Directors and Officers
We entered into an electronic commerce contract with AutoNation, an entity
affiliated with H. Wayne Huizenga, under which we have granted a right of first
negotiation with respect to the exclusive right to engage in or conduct an
automotive "clubsite" on theglobe.com. Additionally, AutoNation has agreed to
purchase advertising from us for a three-year period at a price which will be
adjusted to match any more favorable advertising price quoted to a third party
by us, excluding various short-term advertising rates.
In addition, we have entered into an electronic commerce arrangement with
InteleTravel, an entity controlled by Michael S. Egan, under which we developed
a Web community for InteleTravel in order for its travel agents to conduct
business through our Web site in exchange for access to InteleTravel customers
for distribution of our products and services.
In the past fiscal year, Mr. Egan has served as a director of Certified
Vacations, an entity with which we have recently begun electronic commerce
arrangements. 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
which was entered into prior to Mr. Egan being elected to their board.
We believe that the terms of the foregoing arrangements are on comparable
terms as if they were entered into with unaffiliated third parties. During
1998, we received $83,300 from AutoNation and $265,000 from InteleTravel in
connection with these arrangements.
Stockholders' Agreement
Messrs. Egan, Krizelman, Paternot and Cespedes, Ms. Arthur and Dancing Bear
Investments, an entity controlled by Mr. Egan, entered into a stockholders'
agreement under which Dancing Bear Investments and Mr. Egan, referred to as the
Egan group, agreed to vote for some nominees of the Krizelman and Paternot
groups to our board of directors and the Krizelman and Paternot groups agreed
to vote for the Egan group's nominees to our board, who will represent a
majority of our board.
Additionally, under the terms of the stockholders' agreement, Messrs.
Krizelman, Paternot and Cespedes and Ms. Arthur have granted an irrevocable
proxy to Dancing Bear Investments with respect to any shares that may be
acquired or beneficially owned by them upon the exercise of outstanding
warrants transferred to each of them by Dancing Bear Investments. These shares
will be voted by Dancing Bear Investments, which is controlled by Mr. Egan.
Dancing Bear Investments will have a right of first refusal upon transfer of
these shares.
The stockholders' agreement also provides that if the Egan group sells shares
of our common stock and warrants representing 25% or more of our outstanding
common stock, including the warrants, in any private sale, the Krizelman and
Paternot groups, Mr. Cespedes and Ms. Arthur will be required to sell up to the
same percentage of their shares as the Egan group sells. If the Egan group
sells shares of our common stock or warrants representing 25% or more of our
outstanding common stock, including the warrants, or the Krizelman and Paternot
groups collectively sell shares or warrants representing 7% or more of our
shares and warrants in any private sale, each other party to the stockholders'
agreement, including entities controlled by them and their permitted
transferees, may, at their option, sell up to the same percentage of their
shares.
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<PAGE>
Transactions with Directors, Executive Officers and 5% Stockholders
Since our inception, we have raised capital primarily through the sale of
shares of our common stock and preferred stock. The following table summarizes
the shares of our common stock purchased from us by our executive officers,
directors and 5% stockholders and persons associated with them since our
inception.
<TABLE>
<CAPTION>
Executive Officers, Common
Directors and 5% Stockholders Stock
----------------------------- ----------
<S> <C>
Dancing Bear Investments, Inc. (1)................................... 12,093,548
Michael S. Egan (1).................................................. 12,093,548
Robert M. Halperin (2)............................................... 145,538
David H. Horowitz (3)................................................ 156,944
Todd Krizelman (4)................................................... 1,094,910
Stephan Paternot (5)................................................. 1,200,000
</TABLE>
- --------
(1) 8,047,530 of the shares represents 51 shares of preferred stock which were
converted into 8,047,530 shares of our common stock upon our initial public
offering. 4,046,018 of the shares represents warrants to purchase an
aggregate of 4,046,018 shares of our common stock. Dancing Bear Investments
paid $20 million for its initial investment in the series D preferred stock
and the warrants. Upon our initial public offering, shares of the series D
preferred stock were converted into 8,047,530 shares of our common stock.
Includes the shares that Mr. Egan is deemed to beneficially own as the
controlling investor of Dancing Bear Investments.
(2) Mr. Halperin paid $8,172 in 1998 in connection with the exercise of options
for 85,418 shares of our common stock. Mr. Halperin paid $25,001 for the
series B preferred stock issued in December 1995 and $25,000 for the series
C preferred stock issued in November 1996. Upon our initial public
offering, shares of the series B and the series C preferred stock were
converted into 47,620 and 12,500 shares of our common stock.
(3) Mr. Horowitz paid $3,111 in 1997 in connection with the exercise of options
for 31,944 shares of our common stock. Mr. Horowitz paid $52,000 for his
series B preferred stock issued in December 1995 and $50,000 for the series
C preferred stock issued in November 1996. Upon our initial public
offering, shares of the series B and series C preferred stock were
converted into 100,000 and 25,000 shares of our common stock.
(4) Mr. Krizelman paid $2,184 for his 1,050,000 shares of common stock issued
in May 1995 and $3,500 for the series A preferred stock issued in November
1995. Upon our initial public offering, shares of the series A preferred
stock were converted into 44,910 shares of common stock.
(5) Mr. Paternot paid $2,496 for his 1,200,000 shares of common stock issued in
May 1995.
All of our directors and executive officers are also parties to registration
rights agreements with us which are described under "Description of Capital
Stock--Registration Rights." We also have entered into indemnification
agreements with our directors and officers. See "Management--Indemnification
Agreements."
Concurrently with our initial public offering, we sold 1,111,112 shares of
our common stock to some of our officers and directors, their relatives and
their business associates at the same price paid per share in the initial
public offering. See "Principal Stockholders."
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The table below sets forth information with respect to the beneficial
ownership of our common stock as of April 23, 1999 and as adjusted to reflect
the sale of the shares offered hereby, by each of the following:
. each person who is known by us to beneficially own 5% or more of our
common stock;
. each of our directors;
. each of our executive officers;
. all directors and executive officers as a group;
. each selling stockholder owning more than 1% of our common stock; and
. other selling stockholders, each owning less than 1% of our common stock.
Unless otherwise indicated, the address of each person named in the table
below is theglobe.com, inc., 31 West 21st Street, New York, New York 10010. The
amounts and percentages of common stock beneficially owned are reported on the
basis of regulations of the Securities and Exchange Commission governing the
determination of beneficial ownership of securities. Under the rules of the
Commission, a person is deemed to be a "beneficial owner" of a security if that
person has or shares "voting power," which includes the power to vote or to
direct the voting of such security, or "investment power," which includes the
power to dispose of or to direct the disposition of such security. A person is
also deemed to be a beneficial owner of any securities of which that person has
a right to acquire beneficial ownership within 60 days. Under these rules, more
than one person may be deemed a beneficial owner of the same securities and a
person may be deemed to be a beneficial owner of securities as to which such
person has no economic interest. The information set forth in the following
table (1) assumes that the over-allotment option by the underwriters has not
been exercised and (2) excludes any shares purchased in the offering by the
respective beneficial owner:
<TABLE>
<CAPTION>
Number of Shares Number of Shares
Beneficially Owned Number of Beneficially Owned
Before the Offering Shares to be After the Offering
--------------------- Sold in the ---------------------
Name Number Percentage Offering Number Percentage
---- ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Dancing Bear Invest-
ments, Inc. (1)........ 12,093,548 44.9% 2,400,000(2) 9,693,548 31.3%
Michael S. Egan (3)..... 12,246,048 45.3% 2,400,000(2) 9,846,048 31.7%
Todd V. Krizelman (4)... 1,754,862 7.5% 120,000 1,634,862 5.9%
Stephan J. Paternot
(5).................... 1,859,952 7.9% 80,000 1,779,952 6.5%
Dean S. Daniels (6)..... 0 * 0 0 *
Edward A. Cespedes (7).. 112,500 * 50,000 62,500 *
Francis T. Joyce (8).... 0 * 0 0 *
Rosalie V. Arthur (9)... 102,500 * 50,000 52,500 *
Henry C. Duques (10).... 12,500 * 0 12,500 *
Robert M. Halperin
(11)................... 203,176 * 18,690 184,486 *
David H. Horowitz (12).. 230,556 1.0% 38,860 191,696 *
H. Wayne Huizenga (13).. 12,500 * 0 12,500 *
All directors and
executive officers as a
group (11 persons)
(14)................... 16,534,594 58% 2,757,550 13,770,044 42.1%
53 other selling
stockholders, each of
whom beneficially owns
less than 1% of the
outstanding common
stock prior to the
offering............... 1,919,126 8.38% 1,176,927 742,199 2.8%
</TABLE>
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- --------
* Less than one percent
(1) Includes: (1) 3,546,018 shares of our common stock issuable upon exercise
of warrants at $1.45 per share and (2) 500,000 shares of our common stock
issuable upon exercise of warrants held by persons other than Dancing Bear
Investments but as to which Dancing Bear Investments has voting power upon
exercise under a stockholders' agreement. Dancing Bear Investments'
mailing address is 333 East Las Olas Blvd., Ft. Lauderdale, FL 33301.
(2) If the underwriters' over-allotment option is exercised in full, Dancing
Bear Investments may at its option elect to sell up to 600,000 of its
shares of common stock to satisfy such option. To the extent Dancing Bear
Investments does not elect to sell all of such shares, theglobe will sell
newly issued shares to the underwriters to satisfy such option.
(3) Includes the following shares that Mr. Egan is deemed to beneficially own
as the controlling investor of Dancing Bear Investments: (1) 3,546,018
shares of our common stock issuable upon exercise of warrants at $1.45 per
share and (2) 500,000 shares of our common stock issuable upon exercise of
warrants held by persons other than Mr. Egan but as to which Mr. Egan has
voting power upon exercise under a stockholders' agreement. Also includes
(1) 82,500 shares of common stock issuable upon exercise of options that
are currently exercisable, (2) 56,000 shares of common stock held by
certain trusts for the benefit of Mr. Egan's children, as to which he
disclaims beneficial ownership, and (3) 14,000 shares of our common stock
held by Mr. Egan's wife, as to which he disclaims beneficial ownership.
Excludes 237,500 shares of common stock issuable upon exercise of options
that will not be exercisable within 60 days of April 23, 1999. Mr. Egan's
mailing address is c/o our company.
(4) Includes (1) 459,952 shares of our common stock issuable upon exercise of
options that are currently exercisable and (2) 200,000 shares of our
common stock issuable upon exercise of warrants. Excludes 200,500 shares
of our common stock issuable upon exercise of options that will not be
exercisable within 60 days of April 23, 1999. Mr. Krizelman's mailing
address is c/o our company.
(5) Includes (1) 459,952 shares of our common stock issuable upon exercise of
options that are currently exercisable and (2) 200,000 shares of our
common stock issuable upon exercise of warrants. Excludes 200,500 shares
of our common stock issuable upon exercise of options that will not be
exercisable within 60 days of April 23, 1999. Mr. Paternot's mailing
address is care of our company.
(6) Excludes 225,000 shares of our common stock issuable upon exercise of
options that will not be exercisable within 60 days of April 23, 1999.
(7) Includes (1) 62,500 shares of our common stock issuable upon exercise of
options that are currently exercisable, and (2) 50,000 shares of our
common stock issuable upon exercise of warrants. Excludes 45,000 shares of
our common stock issuable upon exercise of options that will not be
exercisable within 60 days of April 23, 1999.
(8) Excludes 225,000 shares of our common stock issuable upon exercise of
options that will not be exercisable within 60 days of April 23, 1999.
(9) Includes (1) 42,500 shares of our common stock issuable upon exercise of
options that are currently exercisable, (2) 50,000 shares of our common
stock issuable upon exercise of warrants, and (3) 10,000 shares of our
common stock. Excludes (1) 45,000 shares of our common stock issuable upon
exercise of options that will not be exercisable within 60 days of April
23, 1999, and (2) shares held by Dancing Bear Investments for which Ms.
Arthur serves as an officer and a director, and as to which Ms. Arthur
disclaims beneficial ownership.
(10) Includes 12,500 shares of our common stock issuable upon exercise of
options that are currently exercisable. Excludes 37,500 shares of our
common stock issuable upon exercise of options that will not be
exercisable within 60 days of April 23, 1999.
(11) Includes 57,640 shares of our common stock issuable upon exercise of
options that are currently exercisable. Excludes 64,444 shares of our
common stock issuable upon exercise of options that are not currently
exercisable. Excludes 180,360 shares of our common stock owned by Mr.
Halperin's children for which he has a power of attorney but as to which
he disclaims beneficial ownership.
(12) Includes 73,612 shares of our common stock issuable upon exercise of
options that are currently exercisable. Excludes 51,944 shares of our
common stock issuable upon exercise of options that are not currently
exercisable.
(13) Includes 12,500 shares of our common stock issuable upon exercise of
options that are exercisable within 60 days of April 23, 1999. Excludes
45,000 shares of our common stock issuable upon exercise of options that
are not exercisable within 60 days of April 23, 1999.
(14) See footnotes 2 through 13 above.
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DESCRIPTION OF CAPITAL STOCK
Our Fourth Amended and Restated Certificate of Incorporation provides that
our authorized capital stock consists of 100 million shares of common stock and
three million shares of preferred stock, par value $.001 per share. As of April
29, 1999 there were 22,898,746 shares of common stock outstanding. Our
preferred stock is convertible into shares of common stock at any time.
The following descriptions of our capital stock do not purport to be complete
and are qualified in their entirety by the provisions of our certificate and
our by-laws, which are included as exhibits to our registration statement, and
by the provisions of applicable law.
Common Stock
As of April 29, 1999, 22,898,746 shares of our common stock were outstanding.
As of March 10, 1999, there were approximately 146 holders of our common stock.
All of the issued and outstanding shares of our common stock are fully paid and
non-assessable. Each holder of shares of our common stock is entitled to one
vote per share on all matters to be voted on by stockholders generally,
including the election of directors. There are no cumulative voting rights.
The holders of our common stock are entitled to dividends and other
distributions as may be declared from time to time by our board of directors
out of legally available funds, if any. See "Price Range of Our Common Stock
and Dividend Policy." Upon our liquidation, dissolution or winding up, the
holders of shares of our common stock would be entitled to share ratably in the
distribution of all of our assets remaining available for distribution after
satisfaction of all our liabilities and the payment of the liquidation
preference of any outstanding preferred stock as described below.
The holders of our common stock have no preemptive or other subscription
rights to purchase shares of our stock, nor are holders entitled to the
benefits of any redemption or sinking fund provisions.
Preferred Stock
As of April 29, 1999, we had no shares of preferred stock outstanding. Our
board of directors has the authority, without further action by our
stockholders, to issue preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions of any series, including
dividend rights, conversion rights, voting rights, terms of redemption,
liquidation preferences and the number of shares constituting any series or the
designation of that series. Preferred stock could thus be issued quickly with
terms calculated to delay or prevent a change of control or to serve as an
entrenchment device for incumbent management. The issuance of preferred stock
may have the effect of decreasing the market price of our common stock, and may
adversely affect the voting and other rights of the holders of our common
stock.
Warrants
As of April 29, 1999, we had issued and outstanding warrants to purchase
4,111,534 shares of our common stock, with some possible anti-dilution
adjustments, at a weighted average exercise price of approximately $1.58 per
share. The warrants may be exercised at any time on or before August 13, 2004.
After expiration of the exercise period, the holder of the warrants will have
no future rights to exercise the warrants.
Rights Agreement
Our board of directors adopted a Rights Agreement. Under the Rights
Agreement:
. our board of directors declared a dividend of one preferred stock
purchase right (a "Right") for each outstanding share of our common
stock; and
. each Right entitles the registered holder to purchase from us one one-
thousandth of a share of a new series of junior participating preferred
stock, par value $.001 per share (the "Junior Preferred Stock"), at a
price to be determined by our board of directors, per one one-thousandth
of a share (the "Purchase Price"), with adjustment.
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The description and terms of the Rights are described in a Rights Agreement
between us and the designated Rights Agent. The description presented below is
intended as a summary only and is qualified in its entirety by reference to the
Rights Agreement, a form of which has been filed as an exhibit to our
registration statement. See "Where You Can Find More Information."
The Rights are attached to all certificates representing outstanding shares
of our common stock, and no separate Right Certificates were distributed. The
Rights will separate from the shares of our common stock as soon as one of the
following two events occur:
. a public announcement that, without the prior consent of our board of
directors, a person or group (an "Acquiring Person"), including any
affiliates or associates of that person or group, acquired beneficial
ownership of securities having 15% or more of the voting power of all our
outstanding voting securities. Dancing Bear Investments, Michael S. Egan,
Todd V. Krizelman, Stephan J. Paternot or any entities controlled by
these persons are not included in the definition of Acquiring Person; and
. ten business days, or a later date as our board of directors may
determine, following the commencement of, or announcement of an intention
that remains in effect for five business days to make, a tender offer or
exchange offer that would result in any person or group becoming an
Acquiring Person.
We refer to the earlier of these dates as the "Distribution Date." The first
date of public announcement that a person or group has become an Acquiring
Person is the "Stock Acquisition Date."
Until the Distribution Date, Rights will be transferred with and only with
the shares of our common stock. In addition, until the Distribution Date, or
earlier redemption or expiration, of the Rights:
. new common stock certificates issued upon transfer or new issuance of
shares of common stock will contain a notation incorporating the Rights
Agreement by reference; and
. the surrender for transfer of any certificates for shares of common stock
outstanding, even without a notation, will also constitute the transfer
of the Rights associated with the shares of common stock represented by
the certificate.
As soon as practicable following the Distribution Date, separate certificates
evidencing the Rights ("Right Certificates") will be mailed to holders of
record of the shares of common stock as of the close of business on the
Distribution Date, and to each initial record holder of various shares of
common stock issued after the Distribution Date. The separate Right
Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date and will expire at
5:00 P.M., New York, New York time, on the tenth anniversary of the date of
issuance, unless earlier redeemed by us as described below.
If any person becomes an Acquiring Person, except by a Permitted Offer as
defined below, each holder of a Right will have, under the terms of the Rights
Agreement, the right (the "Flip-In Right") to receive upon exercise the number
of shares of common stock, or, in the discretion of our board of directors, the
number of one-thousandths of a share of Junior Preferred Stock, or, in some
circumstances, our other securities, having a value immediately before the
triggering event equal to two times the Purchase Price. Notwithstanding the
description above, following the occurrence of the event described above, all
Rights that are, or generally were, beneficially owned by any Acquiring Person
or any affiliate or associate of an Acquiring Person will be null and void.
A "Permitted Offer" is a tender or exchange offer for all outstanding shares
of common stock which is at a price and on terms determined, before the
purchase of shares under the tender or exchange offer, by a majority of
Disinterested Directors, as defined below, to be adequate, taking into account
all factors that the Disinterested Directors deem relevant, and otherwise in
our best interests and our stockholders' best interest, other than the person
or any affiliate or associate on whose behalf the offer is being made, taking
into account all factors that the Disinterested Directors may deem relevant.
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<PAGE>
"Disinterested Directors" are our directors who are not our officers and who
are not Acquiring Persons or affiliates or associates of Acquiring Persons, or
representatives of any of them.
If, at any time following the Stock Acquisition Date,
. we are acquired in a merger or other business combination transaction in
which the holders of all of the outstanding shares of common stock
immediately before the consummation of the transaction are not the
holders of all of the surviving corporation's voting power; or
. more than 50% of our assets or earning power is sold or transferred with
or to an Interested Stockholder; or
. if in the transaction all holders of shares of common stock are not
offered the same consideration as any other person;
then each holder of a Right, except Rights which previously have been voided as
described above, shall afterwards have the right (the "Flip-Over Right") to
receive, upon exercise, shares of common stock of the acquiring company having
a value equal to two times the Purchase Price. The holder of a Right will
continue to have the Flip-Over Right whether or not the holder exercises or
surrenders the Flip-In Right.
The Purchase Price payable, and the number of one-thousandths of a share of
Junior Preferred Stock or other securities issuable, upon exercise of the
Rights may be adjusted from time to time to prevent dilution in the event of
any one of the following:
. a stock dividend on, or a subdivision, combination or reclassification
of, the shares of Junior Preferred Stock;
. the grant to holders of the shares of Junior Preferred Stock of various
rights or warrants to subscribe for or purchase shares of Junior
Preferred Stock at a price, or securities convertible into shares of
Junior Preferred Stock with a conversion price, less than the then
current market price of the shares of Junior Preferred Stock; or
. the distribution to holders of the shares of Junior Preferred Stock of
evidences of indebtedness or assets, excluding regular quarterly cash
dividends, or of subscription rights or warrants, other than those
referred to above.
The Purchase Price payable, and the number of one-thousandths of a share of
Junior Preferred Stock or other securities issuable, upon exercise of the
Rights may also be adjusted in the event of a stock split of the shares of
common stock, or a stock dividend on the shares of common stock payable in
shares of common stock, or subdivisions, consolidations or combinations of the
shares of common stock occurring, in any case, before the Distribution Date.
With some exceptions, no adjustment in the Purchase Price will be required
until cumulative adjustments require an adjustment of at least 1% in the
Purchase Price. No fractional one-thousandths of a share of Junior Preferred
Stock will be issued and, instead, an adjustment in cash will be made based on
the market price of the shares of Junior Preferred Stock on the last trading
day before the date of exercise.
At any time before the earlier to occur of (1) a person becoming an Acquiring
Person or (2) the expiration of the Rights, we may redeem the Rights in whole,
but not in part, at a price of $.001 per Right (the "Redemption Price"), which
redemption shall be effective upon the action of our board of directors.
Additionally, we may redeem the then outstanding Rights in whole, but not in
part, at the Redemption Price at any one of the following times:
. after the triggering of the Flip-In Right and before the expiration of
any period during which the Flip-In Right may be exercised in connection
with a merger or other business combination transaction or series of
transactions involving us in which all holders of shares of our common
stock are not offered the same consideration but not involving an
Interested Stockholder, as defined in the Rights Agreement;
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<PAGE>
. following an event giving rise to, and the expiration of the exercise
period for, the Flip-in Right if and for as long as no person
beneficially owns securities representing 15% or more of the voting power
of our voting securities; and
. when the Acquiring Person reduces his ownership below 5% in transactions
not involving us.
The redemption of Rights described above shall be effective only as of the
time when the Flip-in Right is not exercisable, and in any event, only after 10
business days' prior notice. Upon the effective date of the redemption of the
Rights, the right to exercise the Rights will terminate and the only right of
the holders of Rights will be to receive the Redemption Price.
The shares of Junior Preferred Stock purchasable upon exercise of the Rights
will be non-redeemable and junior to any other series of preferred stock we may
issue, unless otherwise provided in the terms of the stock. Each share of
Junior Preferred Stock will have a preferential quarterly dividend in an amount
equal to 1,000 times the dividend declared on each share of common stock, but
in no event less than $1. In the event of liquidation, the holders of Junior
Preferred Stock will receive a minimum preferred liquidation payment equal to
the greater of $1 or 1,000 times the payment made per each share of common
stock. Each share of Junior Preferred Stock will have 1,000 votes, voting
together with the shares of common stock. In the event of any merger,
consolidation or other transaction in which shares of common stock are
exchanged, each share of Junior Preferred Stock will be entitled to receive
1,000 times the amount and type of consideration received per share of common
stock. The rights of the Junior Preferred Stock as to dividends, liquidation
and voting, and in the event of mergers and consolidations, are protected by
customary anti-dilution provisions. Fractional shares of Junior Preferred Stock
will be issuable; however, we may elect to distribute depositary receipts in
lieu of fractional shares. In lieu of fractional shares other than fractions
that are multiples of one one-thousandth of a share, an adjustment in cash will
be made based on the market price of the Junior Preferred Stock on the last
trading date before the date of exercise.
Until a Right is exercised, the holder will have no rights as our
stockholder, including, without limitation, the right to vote or to receive
dividends. While the distribution of the Rights was not taxable to our
stockholders, stockholders may, depending upon the circumstances, recognize
taxable income should the Rights become exercisable or upon the occurrence of
some subsequent events.
The Rights have various anti-takeover effects. The Rights will cause
substantial dilution to a person or group of persons that attempts to acquire
us on terms not approved by our board of directors. The Rights should not
interfere with any merger or other business combination approved by our board
of directors before the time that a person or group has acquired beneficial
ownership of 15% or more of our common stock since the Rights may be redeemed
by us at the Redemption Price until that time.
"Interested Stockholder" means any Acquiring Person or any of their
affiliates or associates, or any other person in which an Acquiring Person or
their affiliates or associates have in excess of 5% of the total combined
economic or voting power, or any person acting in concert or on behalf of any
Acquiring Person or their affiliates or associates.
Registration Rights
Investor Rights Agreement. Under the terms of an Investor Rights Agreement,
dated as of August 13, 1997, holders of 25% of all of the common stock
converted from our series B, series C, series D and series E preferred stock or
purchased upon the exercise of warrants originally exercisable for Series E
preferred stock, or 50% of the registrable securities issued or issuable in
respect of our series B and series C preferred stock, have the right to require
us to file a registration statement covering all or part of their shares.
Holders of an aggregate of 10,947,470 shares of our common stock, including
4,046,018 shares issuable upon the exercise of warrants, may exercise these
registration rights up to four times under the Investor Rights Agreement at our
expense, subject the following restrictions:
. we will not be obligated to register the shares if the holders propose to
sell the securities at an aggregate price to the public of less than $5
million;
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. we are not required to effect more than one demand registration on behalf
of the holders in any 12 calendar month period;
. we may defer registration for up to 120 days if our board of directors
determines that it would be seriously detrimental to us and our
stockholders to register the registrable securities at the requested
time;
. no demand registration statement will be effected within 90 days of the
effective date of this offering or any subsequent public offering; and
. we are not required in most cases to pay the registration expenses for
any requested registration that is subsequently withdrawn by the
requesting holders.
Holders of registrable securities have piggyback rights to include their
shares in a registration statement filed by us for purposes of a public
offering, including this registration statement. An underwriter participating
in these offerings may limit the number of shares offered, and the number shall
be allocated first to us, then generally to holders of registrable securities
under this agreement and other agreements on a pro rata basis. We have the
right to terminate or withdraw any registration and will bear the expenses of
any registration we withdraw. We are not obligated further after we have
effected five registrations for holders of registrable securities.
Under the Investor Rights Agreement, holders of registrable securities have
agreed with us to lock-up periods of up to seven days before and 90 days after
the effective date of any registration statement filed in connection with an
underwritten public offering. Any right described in this section may be
amended and waived by our written consent and the written consent of holders of
a majority of the registrable securities. All registration rights under the
Investor Rights Agreement terminate on November 12, 2001.
Registration Rights Agreement. Under the terms of a Registration Rights
Agreement, dated September 1, 1998, with Dancing Bear Investments, various
holders of series A preferred Stock and Messrs. Krizelman and Paternot and us,
we have granted registration rights similar to the rights granted under the
Investor Rights Agreement. Holders of 25% of all of the registrable securities
covered by the Registration Rights Agreement, or 50% of the total number of
shares of common stock originally issued as series A preferred stock, have the
right to require us to file a registration statement covering all or part of
their shares. Holders of a majority of these shares also have registration
rights for their shares under the Investor Rights Agreement described above.
These holders have the right to require us to file up to four registration
statements covering their shares, subject to the same restrictions set forth
above under the description of the Investor Rights Agreement. Piggyback rights
and lock-up periods are substantially the same as under the Investor Rights
Agreement. The holders of registrable securities will cease to have
registration rights at the time they are sold to the public pursuant to a
registration statement or Rule 144 under the Securities Act of 1933.
Attitude Network and Azazz Registration Rights. We entered into registration
rights agreements, as amended, with various Azazz and Attitude Network
shareholders granting them registration rights with respect to shares of our
common stock issued to them in connection with the acquisitions. Under these
agreements, the former Azazz and Attitude Network shareholders have piggyback
rights to include the same percentage of their registrable securities in a
registration statement filed by us for purposes of a public offering as other
shareholders of ours in the aggregate include in the registration statement.
The former Azazz shareholders own approximately 353,303 registrable shares of
common stock and the former Attitude Network shareholders own approximately
808,732 registrable shares of common stock. These holders are entitled to
piggyback rights in this offering and the next two registration statements
filed by us that become effective. Additionally, the holders will cease to have
registration rights at the time their shares are sold or are eligible to be
sold to the public pursuant to a registration statement or Rule 144. None of
the holders have any right to include their shares in any over-allotment option
in connection with a registration statement. See "Principal and Selling
Stockholders."
We have the right to terminate, withdraw, or delay any registration initiated
by us and will bear the expenses of any registration we withdraw.
Under the agreement, these holders have agreed with us to lock-up periods of
up to seven days before and 90 days following the effective date of any
registration statement filed in connection with an underwritten public
offering, including this offering.
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Limitation of Director Liability
Our Certificate limits the liability of our directors to us and our
stockholders to the fullest extent permitted by Delaware law. Specifically, our
directors will not be personally liable for money damages for breach of
fiduciary duty as a director, except for liability
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law, which concerns
unlawful payments of dividends, stock purchases or redemptions; and
. for any transaction from which the director derived an improper personal
benefit.
Delaware Law and Various Charter and By-Laws Provisions
Delaware Law. We must comply with the provisions of Section 203 of the
Delaware General Corporation Law. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner.
A "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns,
or, in some cases, within three years prior, did own, 15% or more of the
corporation's voting stock. Under Section 203, a business combination between
the Company and an interested stockholder is prohibited unless it satisfies one
of the following three conditions:
. our board of directors must have previously approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of our voting stock outstanding at the time the transaction
commenced, excluding, for purposes of determining the number of shares
outstanding, shares owned by (1) persons who are directors and also
officers and (2) employee stock plans, in some instances; and
. the business combination is approved by our board of directors and
authorized at an annual or special meeting of the stockholders by the
affirmative vote of the holders of at least 66 2/3% of the outstanding
voting stock that is not owned by the interested stockholder.
Special Meetings. Our by-laws provide that special meetings of stockholders
for any purpose or purposes can be called only upon the request of our chairman
of the board, our president, our board of directors, or the holders of shares
entitled to at least a majority of the votes at the meeting.
Amendment of Our By-Laws. To adopt, repeal, alter or amend the provisions of
our by-laws, our by-laws require either the affirmative vote of the holders of
at least a majority of the voting power of all of the issued and outstanding
shares of our capital stock entitled to vote on the matter or by our board of
directors.
Advance Notice Provisions for Stockholder Nominations and Proposals. Our by-
laws establish advance notice procedures for stockholders to make nominations
of candidates for election as directors, or bring other business before an
annual meeting of our stockholders.
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These procedures provide that only persons who are nominated by or at the
direction of our board of directors, or by a stockholder who has given timely
written notice to our secretary before the meeting at which directors are to be
elected, will be eligible for election as one of our directors. Further, these
procedures provide that at an annual meeting, the only business that may be
conducted is the business that has been specified in the notice of the meeting
given by, or at the direction of, our board or by a stockholder who has given
timely written notice to our secretary of such stockholder's intention to bring
that business before the meeting.
Under these procedures, notice of stockholder nominations to be made or
business to be conducted at an annual meeting must be received by us not less
than 60 days nor more than 90 days before the date of the meeting, or, if less
than 70 days' notice or prior public disclosure of the date of the meeting is
given or made to the stockholders, the 10th day following the earlier of (1)
the day notice was mailed or (2) the day public disclosure was made. Under
these procedures, notice of a stockholder nomination to be made at a special
meeting at which directors are to be elected must be received by us not later
than the close of business on the tenth day following the day on which notice
of the date of the special meeting was mailed or public disclosure of the date
of the special meeting was made, whichever occurs first.
Under our by-laws, a stockholder's notice nominating a person for election as
a director must contain specific information about the proposed nominee and the
nominating stockholder. If our chairman determines that a nomination was not
made in the manner described in our by-laws, the nomination will be
disregarded. Similarly, a stockholder's notice proposing the conduct of
business must contain specific information about the business and about the
proposing stockholder. If our chairman determines that business was not
properly brought before the meeting in the manner described in our by-laws, the
business will not be conducted.
By requiring advance notice of nominations by stockholders, our by-laws
afford our board an opportunity to consider the qualifications of the proposed
nominee and, to the extent deemed necessary or desirable by our board, to
inform stockholders about these qualifications. By requiring advance notice of
other proposed business, our by-laws also provide an orderly procedure for
conducting annual meetings of stockholders and, to the extent deemed necessary
or desirable by our board, provides our board with an opportunity to inform
stockholders, before meetings, of any business proposed to be conducted at the
meetings, together with any recommendations as to our board's position
regarding action to be taken with respect to the business, so that stockholders
can better decide whether to attend a meeting or to grant a proxy regarding the
disposition of any business.
Although our certificate does not give our board any power to approve or
disapprove stockholder nominations of the election of directors or proposals
for action, the foregoing provisions may have the effect of precluding a
contest for the election of directors or the consideration of stockholder
proposals if the proper procedures are not followed, and of discouraging or
deterring a third party from conducting a solicitation of proxies to elect its
own slate of directors or to approve its own proposal, without regard to
whether consideration of these nominees or proposals might be harmful or
beneficial to us and our stockholders.
Written Consent Provisions
Our by-laws provide that any action required or permitted to be taken by the
holders of capital stock at any meeting of our stockholders may be taken
without a meeting only by the holders of outstanding capital stock having not
less than the minimum number of votes that would be necessary to authorize or
take the action at a meeting at which all shares entitled to vote were present
and voted.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock, including shares issuable
upon the exercise of stock options, in the public market after the lapse of the
restrictions described below, or the perception that these sales may occur,
could materially adversely affect the prevailing market prices for our common
stock and our ability to raise equity capital in the future. Limited
information is currently available and no prediction can be made as to the
timing or amount of future sales of shares, or the effect, if any, that future
sales of shares, or the availability of shares for future sale, will have on
the market price of our common stock prevailing from time to time. See "Risk
Factors--Shares Eligible for Future Sale."
Upon consummation of the offerings, we will have approximately 26,898,746
outstanding shares of our common stock, and 4,167,952 shares of our common
stock issuable upon exercise of outstanding options and we have an additional
881,654 shares of common stock reserved for issuance under such plans. See
"Management--Executive Compensation." In addition, 4,111,534 shares of our
common stock will be issuable upon exercise of outstanding warrants. Of the
outstanding shares, the 6,963,334 shares issued in our initial public offering,
the 4,000,000 newly issued shares of our common stock issued by us and sold in
this offering the 4,000,000 shares of our outstanding common stock sold by
selling stockholders in this offering will be immediately eligible for sale in
the public market without restriction or further registration under the
Securities Act, unless purchased by or issued to any of our "affiliates" under
the Securities Act of 1933. Substantially all of the other shares of our common
stock outstanding are "restricted securities" as the term is defined under Rule
144. These shares were issued in private transactions not involving a public
offering and may not be sold in the absence of registration other than under
Rule 144, 144(k) or 701 promulgated under the Securities Act of 1933 or another
exemption from registration. All of the restricted securities other than the
2,258,754 shares issued in the Azazz and Attitude Network acquisitions have
been held for at least one year.
In general, under Rule 144 as currently in effect, any of our affiliates or
any person, or persons whose shares are aggregated under Rule 144, who has
beneficially owned shares of our common stock which are treated as restricted
securities for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed:
. the greater of 1% of the outstanding shares of our common stock, which
would be approximately 268,987 shares based upon the number of shares
outstanding after the offerings, or
. the reported average weekly trading volume in the common stock during the
four weeks preceding the date on which notice of the sale was filed under
Rule 144.
Sales under Rule 144 must comply with sale restrictions and notice
requirements and to the availability of current public information concerning
us. In addition, our affiliates must comply with the restrictions and
requirements of Rule 144, other than the one-year holding period requirements,
to sell shares of our common stock that are not restricted securities, such as
common stock acquired by affiliates in market transactions. Furthermore, if a
period of at least two years has elapsed from the date restricted securities
were acquired from us or our affiliates, a holder of restricted securities who
is not an affiliate at the time of the sale and who has not been an affiliate
for at least three months before the sale would be entitled to sell the shares
immediately without regard to the volume, manner of sale, notice and public
information requirements of Rule 144.
Holders of substantially all of our outstanding restricted common stock have
various demand registration rights with respect to the shares of our common
stock, under some circumstances and with some conditions, to require us to
register their shares of our common stock under the Securities Act of 1933, and
various rights to participate in any future registration of our securities. See
"Description of Capital Stock--Registration Rights." The 2,000,000 shares of
common stock being offered by the selling stockholders hereunder have been
registered pursuant to the registration rights. These rights are limited by the
90-day lock-up arrangement described below. We are not required to effect more
than one demand registration on behalf of these holders in any twelve calendar
month period. Under the agreements by which the registration rights were
granted, holders of registrable securities have agreed to lock-up periods of
not more than seven days before and 90 days after the effective date of any
registration statement filed in connection with a public underwritten equity
offering. theglobe may waive these lock-up restrictions in its sole discretion
at any time without notice.
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We have filed registration statements on Form S-8 covering substantially all
of shares issuable under our option plans, which will make those shares freely
tradable upon issuance. In the near future, we intend to file an additional
registration statement on Form S-8 for the balance of any shares issuable under
our option plans which have not yet been registered. This registration
statement became effective immediately upon filing and shares covered by this
registration statement will be eligible for sale in the public markets, limited
by any applicable lock-up agreements and Rule 144 limitations applicable to
affiliates.
Additionally, in connection with our initial public offering in November
1998, we and all of our directors and officers and certain of our other
stockholders have agreed that, with some exceptions, without the prior written
consent of Bear, Stearns & Co. Inc., not to, directly or indirectly, issue,
sell, offer or agree to sell, grant any option for the sale, pledge, make any
short sale, establish an open "put equivalent position" within the meaning of
Rule 16a-1(h) under the Securities Exchange Act of 1934, or otherwise dispose
of any shares of our common stock, or securities convertible into, exercisable
for or exchangeable for our common stock or of any of our subsidiaries until
180 days from November 12, 1998.
In connection with this offering, we, the selling stockholders and all of our
directors and officers will enter into agreements providing that we will not,
for a period of 90 days after the date of this prospectus (the "Lock-Up
Period"), enter into any of the transactions referred to in the preceding
paragraph without the prior written consent of Bear, Stearns & Co. Inc. The
foregoing agreements shall not apply to:
. in our case, the shares of common stock to be sold in this offering;
. the issuance of any shares of our common stock upon the exercise of an
option or warrant or the conversion of a security outstanding on the date
of this prospectus and referred to in this prospectus;
. in our case, any shares of our common stock issued or options to purchase
our common stock granted under our existing employee benefit plans
referred to in this prospectus;
. the pledge by some of our directors and some of the directors of Dancing
Bear Investments or our affiliates or affiliates of Dancing Bear
Investments of shares of our common stock to a financial institution in
connection with a bona fide financing transaction;
. transfers of shares of our common stock to immediate family members or
trusts for the benefit of these family members as long as the transferee
enters into a similar lock-up agreement;
. the transfer of all or part of any warrants held by Dancing Bear
Investments on the date of this prospectus to any employee of Dancing
Bear Investments, any of our employees, Michael S. Egan or a family
transferee of Michael S. Egan, as long as each transferee has executed a
similar lock-up agreement;
. the transfer by Dancing Bear Investments to entities under common control
with Dancing Bear Investments, as long as each transferee has executed a
similar lock-up agreement; and
. subject to specified limitations, shares of our common stock issued by us
in connection with any merger, recapitalization, consolidation or
acquisition by us or our subsidiaries; provided that the persons
receiving the common stock agree to a similar lock-up.
Bear Stearns may, however, in its sole discretion and at any time without
notice, release all or any portion of the shares subject to lock-up agreement.
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<PAGE>
UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS
The following is a general discussion of material U.S. federal income and
estate tax consequences of the ownership and disposition of our common stock
applicable to Non-U.S. Holders. A "Non-U.S. Holder" is a person other than:
. an individual who is a citizen or resident of the U.S.,
. a corporation, partnership or other entity created or organized in the
U.S. or under the laws of the U.S. or of any political subdivision
thereof, other than a partnership treated as foreign under U.S. Treasury
regulations,
. an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of source, and
. a trust, in general, if it is subject to the primary supervision of a
court within the U.S. and the control of one or more U.S. persons.
An individual may, subject to certain exceptions, be treated as a resident of
the U.S. for U.S. federal income tax purposes, instead of a non-resident, by,
among other things, being present in the U.S. for at least 31 days in the
calendar year and for a total of at least 183 days during a three-year period
ending in the current calendar year--counting for these purposes all of the
days present in the current year, one-third of the days present in the
immediately preceding year, and one-sixth of the days present in the second
preceding year. Such residents are subject to tax as if they were U.S.
citizens.
This discussion does not consider:
. U.S. state and local or non-U.S. tax consequences,
. specific facts and circumstances that may be relevant to a particular
Non-U.S. Holder's tax position, including, if the Non-U.S. Holder is a
partnership, that the U.S. tax consequences of holding and disposing of
our common stock may be affected by certain determinations made at the
partner level,
. the tax consequences for the shareholders, partners or beneficiaries of a
Non-U.S. Holder,
. special tax rules that may apply to certain Non-U.S. Holders, including
without limitation, banks, insurance companies, dealers in securities and
traders in securities, or
. special tax rules that may apply to a Non-U.S. Holder that holds our
common stock as part of a "straddle," "hedge" or "conversion transaction."
The following discussion is based on provisions of the U.S. Internal Revenue
Code of 1986, as amended, applicable Treasury regulations, and administrative
and judicial interpretations as of the date of this prospectus, all of which
may change retroactively or prospectively. The following summary is for general
information. Each Non-U.S. Holder should consult a tax advisor regarding the
U.S. federal tax consequences of holding and disposing of our common stock, as
well as any tax consequences under the laws of any U.S. state, local or other
U.S. or non-U.S. taxing jurisdiction.
Dividends
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. Should we pay dividends, dividends paid to a Non-U.S.
Holder of common stock generally will be subject to withholding of U.S. federal
income tax at a 30% rate or such lower rate which an applicable income tax
treaty specifies. Non-U.S. Holders should consult their tax advisors regarding
their entitlement to benefits under a relevant income tax treaty.
Dividends that are effectively connected with a Non-U.S. Holder's conduct of
a trade or business in the U.S. (or, if an income tax treaty applies,
attributable to a permanent establishment, or, in the case of an individual, a
"fixed base" in the U.S., as provided in such treaty) ("U.S. trade or business
income") are
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<PAGE>
generally subject to U.S. federal income tax on a net income basis at regular
graduated rates, but generally are not subject to the 30% withholding tax if
the Non-U.S. Holder files the appropriate U.S. Internal Revenue Service form
with the payer. Any U.S. trade or business income received by a Non-U.S. Holder
that is a corporation may, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate or such lower rate which an
applicable income tax treaty specifies.
Dividends paid prior to 2000 to an address in a foreign country are presumed,
absent actual knowledge to the contrary, to be paid to a resident of that
country for purposes of the withholding discussed above and for purposes of
determining the applicability of an income tax treaty rate. For dividends paid
after 1999:
. a Non-U.S. Holder of common stock that claims the benefit of an income
treaty rate generally will be required to satisfy applicable certification
and other requirements.
. in the case of common stock held by a foreign partnership, the
certification requirement will generally be applied to the partners of the
partnership, and the partnership will be required to provide certain
information, including a U.S. taxpayer identification number.
. look-through rules will apply to tiered partnerships.
A Non-U.S. Holder of common stock that is eligible for a reduced rate of U.S.
withholding tax under an income tax treaty may obtain a refund or credit of any
excess amounts withheld by filing an appropriate claim for a refund with the
U.S. Internal Revenue Service.
Disposition of Common Stock
A Non-U.S. Holder generally will not be subject to U.S. federal income tax in
respect of gain recognized on a disposition of common stock unless:
. the gain is U.S. trade or business income, in which case the branch
profits tax described above may also apply to a corporate Non-U.S. Holder,
. the Non-U.S. Holder is an individual who holds the common stock as a
capital asset within the meaning of Section 1221 of the U.S. Internal
Revenue Code, is present in the United States for more than 182 days in
the taxable year of the disposition and meets certain other requirements,
. the Non-U.S. Holder is subject to tax under provisions of U.S. tax law
applicable to certain U.S. expatriates, or
. we are or have been a "U.S. real property holding corporation" for U.S.
federal income tax purposes at any time during the shorter of the five-
year period ending on the date of disposition and the Non-U.S. Holder's
holding period for the common stock.
The tax relating to stock in a "U.S. real property holding corporation" will
not apply to a Non-U.S. Holder whose holdings, actual and constructive, at all
times during the applicable period, amount to 5% or less of the common stock,
provided that the common stock is regularly traded on an established securities
market. Generally, a corporation is a "U.S. real property holding corporation"
if the fair market value of its "U.S. real property interests" equals or
exceeds 50% of the sum of the fair market value of its worldwide real property
interests and its other assets used or held for use in a trade or business. We
believe that we have not been and are not, and we do not anticipate becoming, a
"U.S. real property holding corporation" for U.S. federal income tax purposes.
Federal Estates Taxes
Common stock owned or treated as owned by an individual who is a Non-U.S.
Holder at the time of death will be included in the individual's gross estate
for U.S. federal estate tax purposes and may be subject to U.S. federal estate
tax, unless an applicable estate tax treaty provides otherwise.
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Information Reporting Requirements and Backup Withholding Tax
We must report annually to the U.S. Internal Revenue Service and to each Non-
U.S. Holder the amount of the dividends paid to that holder and any tax
withheld with respect to those dividends. These information reporting
requirements apply regardless of whether withholding is required. Copies of the
information returns reporting those dividends and withholding may also be made
available, under an applicable income tax treaty or agreement, to the tax
authorities in the country in which the Non-U.S. Holder resides.
Under certain circumstances, U.S. Treasury regulations require information
reporting and backup withholding at a rate of 31% on certain payments on common
stock. Under currently applicable law, Non-U.S. Holders of common stock
generally will be exempt from these information reporting requirements and from
backup withholding on dividends paid prior to 2000 to an address outside the
U.S. For dividends paid after 1999, however, a Non-U.S. Holder of common stock
that fails to certify its Non-U.S. Holder status in accordance with applicable
U.S. Treasury regulations may be subject to backup withholding at a rate of 31%
on payments of dividends.
The payment of the proceeds of the disposition of common stock by or through
the U.S. office of a broker generally will be subject to information reporting
and backup withholding at a rate of 31% unless the holder certifies its status
as a Non-U.S. Holder under penalties of perjury or otherwise establishes an
exemption. The payment of the proceeds of the disposition by a Non-U.S. Holder
of common stock by or through a non-U.S. office of a non-U.S. broker will not
be subject to backup withholding or information reporting unless the non-U.S.
broker is a "U.S. related person." In the case of the payment of proceeds from
disposition of common stock by or through a non-U.S. office of a broker that is
a U.S. person or a "U.S. related person," information reporting, but currently
not backup withholding, on the payment applies unless, in general, the holder
certifies its status as a Non-U.S. Holder under penalties of perjury or the
broker has documentary evidence in its files that the holder is a Non-U.S.
Holder and the broker has no actual knowledge to the contrary. For this
purpose, a "U.S. related person" is:
. a "controlled foreign corporation" for U.S. federal income tax purposes,
. a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year preceding
the payment, or for such part of the period that the broker has been in
existence, is derived from activities that are effectively connected with
the conduct of a U.S. trade or business, or
. effective after 1999, a foreign partnership if, at any time during the
taxable year, (A) at least 50% of the capital or profits interest in which
is owned by U.S. persons, or (B) that is engaged in a U.S. trade or
business.
Effective after 1999, backup withholding may apply to the payment of
disposition proceeds by or through a non-U.S. office of a broker that is a U.S.
person or a "U.S. related person" unless certain certification requirements are
satisfied or an exemption is otherwise established and the broker has no actual
knowledge that the holder is a U.S. person. Non-U.S. Holders should consult
their own tax advisors regarding the application of the information reporting
and backup withholding rules to them, including changes to these rules that
will become effective after 1999.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be refunded or credited against the holder's U.S. federal
income tax liability, if any, if the required information is furnished to the
U.S. Internal Revenue Service.
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UNDERWRITING
The underwriters of the offering named below, for whom Bear, Stearns & Co.
Inc., is acting as representative, have severally agreed with us, subject to
the terms and conditions of the underwriting agreement, the form of which has
been filed as an exhibit to the registration statement on Form S-1 of which
this prospectus is a part, to purchase from us and the selling stockholders the
aggregate number of shares of common stock set forth opposite their respective
names below:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Bear, Stearns & Co. Inc............................................
NationsBanc Montgomery Securities LLC..............................
Volpe Brown Whelan & Company.......................................
Wit Capital Corporation............................................
---------
Total............................................................ 8,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of certain legal matters by counsel and to
various other conditions. We and the selling stockholders have agreed to
indemnify the several underwriters against certain liabilities, including
liabilities under the Securities Act, and where such indemnification is
unavailable, to contribute to payments that the underwriters may be required to
make in respect of such liabilities. The nature of the underwriters'
obligations is such that they are committed to purchase and pay for all of the
above shares of common stock if any are purchased.
If the underwriters sell more than the total number set forth in the table
above, the underwriters have an option to buy up to an additional 1,200,000
shares to cover such sales from Dancing Bear Investments, an entity controlled
by Michael Egan, or at Dancing Bear Investments' option, from us. The
underwriters may exercise that option for 30 days. If any shares are purchased
pursuant to this option, the underwriters will severally purchase shares in the
same proportion as set forth in the table above.
We, the selling stockholders and all of our directors and officers have
agreed that, subject to certain exceptions, for a period of 90 days from the
date of this prospectus, without the prior written consent of Bear, Stearns &
Co. Inc., which may be waived, we will not, directly or indirectly, issue,
sell, offer or agree to sell, grant any option for the sale of, pledge, make
any short sale, establish an open "put equivalent position" within the meaning
of Rule 16a-1(h) under the Exchange Act or otherwise dispose of any shares of
our common stock (or securities convertible into, exercisable for or
exchangeable for our common stock) of our company or of any of our
subsidiaries.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by us and by the selling
stockholders. These amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares.
<TABLE>
<CAPTION>
No Full
Exercise Exercise
-------- --------
<S> <C> <C>
Paid by us
Per share.................................................. $ $
Total...................................................... $ $
Paid by Selling Stockholders
Per share.................................................. $ $
Total...................................................... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the public offering price set forth on the cover of this prospectus. Any shares
sold by the underwriters to securities dealers may be sold at a discount of up
to $ per share from the public offering price. Any such securities dealers
may resell any shares purchased from the underwriters to certain other brokers
or dealers at a discount of up to $ per share from the public offering
price. If all the shares are not sold at the offering price, the representative
may change the offering price and the other selling terms.
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In connection with the offering, certain persons participating in the
offering may purchase and sell shares of common stock in the open market. These
transactions may include short sales, stabilizing transactions and purchases to
cover positions created by short sales. Short sales involve the sale by the
underwriters of a greater number of shares than they are required to purchase
in the offering. Stabilizing transactions consist of certain bids or purchases
made for the purpose of preventing or retarding a decline in the market price
of the common stock while the offering is in progress. The underwriters also
may impose a penalty bid. This occurs when a particular underwriter repays to
the underwriters a portion of the underwriting discount received by it because
the representative has repurchased shares sold by or for the account of such
underwriter in stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
A Prospectus in electronic format is being made available on an Internet web
site maintained by Wit Capital. In addition, all dealers purchasing shares from
Wit Capital in this offering have agreed to make a prospectus in electronic
format available on web sites maintained by each of these dealers. Other than
the prospectus in electronic format, the information on such web site and any
information contained on any other web site maintained by Wit Capital is not
part of this prospectus or the registration statement of which this prospectus
forms a part, has not been approved and/or endorsed by us or any underwriter in
such capacity and should not be relied on by prospective investors.
Certain persons participating in this offering may also engage in passive
market making transactions in the common stock on the Nasdaq National Market.
Passive market making consists of displaying bids on the Nasdaq national market
limited by the prices of independent market makers and affecting purchases
limited by such prices and in response to order flow. Rule 103 of Regulation M
promulgated by the Commission limits the amount of net purchases that each
passive market maker may make and the displayed size of each bid.
Passive market making may stabilize the market price of the common stock at a
level above that which might otherwise prevail in the open market and, if
commenced, may be discontinued at any time.
The representative of the underwriters has advised us that Bear, Stearns &
Co. Inc., NationsBanc Montgomery Securities LLC and Volpe Brown Whelan &
Company each currently acts as a market maker for our common stock and
currently intends to continue to act as a market maker following this offering.
Since the average daily trading volume of our common stock exceeds $1 million
and our public float exceeds $150 million, the provisions of Regulation M
permit such underwriters to continue market making activities during the period
of the offering. However, the underwriters are not obligated to do so and may
discontinue any market making at any time.
We estimate that our share of the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $ . We are
paying the expenses of the selling stockholders, all applicable stock transfer
taxes, fees of counsel for the selling stockholders and commissions,
concessions and discounts of brokers, dealers or other agents.
From time to time, our underwriters have or may provide financial advisory
services to us for which they will receive customary fees.
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LEGAL MATTERS
The validity of the shares of our common stock offered by this prospectus
will be passed upon for us by Fried, Frank, Harris, Shriver & Jacobson (a
partnership including professional corporations), New York, New York. Various
partners and employees of Fried, Frank, Harris, Shriver & Jacobson have,
collectively, approximately 4,000 shares of our common stock. Various legal
matters in connection with the offering will be passed upon for the
underwriters by Morrison & Foerster LLP, New York, New York.
EXPERTS
Our balance sheets as of December 31, 1998 and 1997 and the related
statements of operations, stockholders' equity and cash flows for the three
years in the period ended December 31, 1998 and the balance sheets of
factorymall.com, inc. as of December 31, 1998 and 1997 and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
years ended December 31, 1998 and 1997 and the period from April 26, 1996
(inception) to December 31, 1996 have been included in reliance on the reports
of KPMG LLP, independent accountants, given on the authority of that firm as
experts in auditing and accounting.
The consolidated balance sheets of Attitude Network, Ltd. and its subsidiary
as of December 31, 1998 and 1997 and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the years ended
December 31, 1998 and 1997 have been included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in auditing and accounting. The report of
PricewaterhouseCoopers LLP covering the December 31, 1998 and 1997 financial
statements contains an explanatory paragraph that states that the Company's
recurring losses from operations raise substantial doubt about the entity's
ability to continue as a going concern. The consolidated financial statements
do not include any adjustments that might result from the outcome of that
uncertainty.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any reports, statements or other information on file at the Commission's public
reference room in Washington, D.C. You can request copies of those documents,
upon payment of a duplicating fee, by writing to the Commission.
We have filed a registration statement on Form S-1 with the Commission. This
prospectus' which forms a part of that registration statement, does not contain
all of the information included in the registration statement. Certain
information is omitted and you should refer to the registration statement and
its exhibits. With respect to references made in this prospectus to any
contract or other document, such references are not necessarily complete and
you should refer to the exhibits attached to the registration statement for
copies of the actual contract or document. You may review a copy of the
registration statement at the Commission's public reference room in Washington,
D.C., and at the Commission's regional offices in Chicago, Illinois and New
York, New York. Please call the Commission at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Our Commission
filings and the registration statement can also be reviewed by accessing the
Commission's Internet site at http://www.sec.gov.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
THEGLOBE.COM, INC. FINANCIAL STATEMENTS
Report of Independent Accountants........................................ F-2
Balance Sheets at December 31, 1998 and 1997............................. F-3
Statements of Operations for the years ended December 31, 1998, 1997 and
1996.................................................................... F-4
Statements of Stockholders' Equity for the years ended December 31, 1998,
1997 and 1996........................................................... F-5
Statements of Cash Flows for the years ended December 31, 1998, 1997 and
1996.................................................................... F-6
Notes to Financial Statements............................................ F-7
THEGLOBE.COM, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION
Unaudited Pro Forma Condensed Consolidated Financial Information......... F-21
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of December
31, 1998................................................................ F-23
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1998........................................ F-24
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
as of and for the year ended December 31, 1998.......................... F-25
FACTORYMALL.COM, INC. FINANCIAL STATEMENTS
Report of Independent Accountants........................................ F-27
Balance Sheets at December 31, 1998 and 1997............................. F-28
Statements of Operations for the years ended December 31, 1998 and 1997
and the period from April 25, 1996 (inception) to December 31, 1996..... F-29
Statements of Stockholders' Equity (Deficit) for the years ended December
31, 1998 and 1997 and the period from April 25, 1996 (inception) to
December 31, 1996....................................................... F-30
Statements of Cash Flows for the years ended December 31, 1998 and 1997
and the period from April 25, 1996 (inception) to December 31, 1996..... F-31
Notes to Financial Statements............................................ F-32
ATTITUDE NETWORK, LTD. FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants....................... F-37
Consolidated Balance Sheets at December 31, 1998 and 1997................ F-38
Consolidated Statements of Operations for the years ended December 31,
1998 and 1997........................................................... F-39
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1998 and 1997........................................ F-40
Consolidated Statements of Cash Flows for the years ended December 31,
1998 and 1997........................................................... F-41
Notes to Consolidated Financial Statements............................... F-42
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
theglobe.com, inc.:
We have audited the accompanying balance sheets of theglobe.com, inc. as of
December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. In connection with our audits of the financial
statements, we also have audited the financial statement schedule as listed in
the accompanying index. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of theglobe.com, inc. as of
December 31, 1998 and 1997, and the results of its operations and cash flows
for each of the years in the three-year period ended December 31, 1998 in
conformity with generally accepted accounting principles. Also in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
/s/ KPMG LLP
New York, New York
February 20, 1999
F-2
<PAGE>
theglobe.com, inc.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.......................... $29,250,572 $ 5,871,291
Short-term investments............................. 898,546 13,003,173
Accounts receivable, less allowance for doubtful
accounts of $300,136 and $12,000 in 1998 and 1997,
respectively...................................... 2,004,875 254,209
Prepaids and other current assets.................. 678,831 --
----------- -----------
Total current assets............................. 32,832,824 19,128,673
Property and equipment, net.......................... 3,562,559 325,842
Restricted investments............................... 1,734,495 --
Other assets......................................... -- 7,657
----------- -----------
Total assets..................................... $38,129,878 $19,462,172
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................................... $ 2,614,445 $ 396,380
Accrued expense.................................... 817,463 325,454
Accrued compensation............................... 691,279 1,148,999
Deferred revenue................................... 673,616 113,290
Current installments of obligations under capital
leases............................................ 1,026,728 27,174
----------- -----------
Total current liabilities........................ 5,823,531 2,011,297
Obligations under capital leases, excluding current
installments........................................ 2,005,724 98,826
Stockholders' equity:
Preferred Stock, 3,000,000 shares authorized:
Convertible preferred stock, Series A through E,
$0.001 par value; 2,900,001 shares authorized; -0-
and 2,899,991, shares issued and outstanding at
December 31, 1998 and 1997, respectively;
aggregate liquidation preference of -0- and
$21,886,110 at December 31, 1998 and 1997,
respectively...................................... -- 2,900
Common stock, $0.001 par value; 100,000,000 shares
authorized; 20,624,512 and 2,308,542 shares issued
and outstanding at December 31, 1998 and 1997
respectively...................................... 20,625 2,309
Additional paid-in capital......................... 50,904,181 21,864,360
Deferred compensation.............................. (128,251) (76,033)
Net unrealized loss on securities.................. (50,006) (41,201)
Accumulated deficit................................ (20,445,926) (4,400,286)
----------- -----------
Total stockholders' equity....................... 30,300,623 17,352,049
Commitments -- --
----------- -----------
Total liabilities and stockholders' equity....... $38,129,878 $19,462,172
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
theglobe.com, inc.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1998 1997 1996
------------ ----------- ---------
<S> <C> <C> <C>
Revenues................................ $ 5,509,818 $ 770,293 $ 229,363
Cost of revenues........................ 2,238,871 423,706 116,780
------------ ----------- ---------
Gross profit.......................... 3,270,947 346,587 112,583
Operating expenses:
Sales and marketing................... 9,298,683 1,248,349 275,947
Product development................... 2,632,613 153,667 120,000
General and administrative............ 6,828,134 2,827,591 489,073
Non-recurring charge.................. 1,370,250 -- --
------------ ----------- ---------
Loss from operations................ (16,858,733) (3,883,020) (772,437)
------------ ----------- ---------
Other income (expense):
Interest and dividend income.......... 1,083,400 334,720 25,966
Interest and other expense............ (191,389) -- (3,709)
------------ ----------- ---------
Total other income (expense), net... 892,011 334,720 22,257
------------ ----------- ---------
Loss before provision for income
taxes.............................. (15,966,722) (3,548,300) (750,180)
------------ ----------- ---------
Provision for income taxes.............. 78,918 36,100 --
------------ ----------- ---------
Net loss............................ $(16,045,640) $(3,584,400) $(750,180)
============ =========== =========
Basic and diluted net loss per share.... $ (3.37) $ (1.56) $ (0.33)
============ =========== =========
Weighted average basic and diluted
shares outstanding..................... 4,762,280 2,293,546 2,250,000
============ =========== =========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
theglobe.com, inc.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible
preferred stock Common stock
------------------ ------------------
Other
Additional Compre- Total
paid-in Deferred hensive Accumulated stockholders'
Shares Amount Shares Amount capital compensation Loss deficit equity
---------- ------ ---------- ------- ----------- ------------ -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
December 31,
1995............ 2,269,820 $2,270 2,250,000 $ 2,250 $ 692,903 $ -- $ -- $ (65,706) $ 631,717
Net loss......... -- -- -- -- -- -- -- (750,180) (750,180)
-----------
Comprehensive
loss............ (750,180)
-----------
Issuance of
Series B
convertible
preferred
stock........... 47,620 48 -- -- 24,937 -- -- -- 24,985
Issuance of
Series C
convertible
preferred
stock........... 442,500 442 -- -- 884,528 -- -- -- 884,970
Deferred
compensation.... -- -- -- -- 25,053 (25,053) -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- 4,000 -- -- 4,000
---------- ------ ---------- ------- ----------- --------- -------- ------------ -----------
Balance at
December 31,
1996............ 2,759,940 2,760 2,250,000 2,250 1,627,421 (21,053) -- (815,886) 795,492
Net loss......... -- -- -- -- -- -- -- (3,584,400) (3,584,400)
Net unrealized
loss on
securities...... -- -- -- -- -- -- (41,201) -- (41,201)
-----------
Comprehensive
loss............ (3,625,601)
-----------
Issuance of
Series C
convertible
preferred
stock........... 140,000 140 -- -- 279,860 -- -- -- 280,000
Exercise of stock
options......... -- -- 58,542 59 4,448 -- -- -- 4,507
Issuance of
Series D
convertible
preferred stock,
net of expense
of $130,464..... 51 -- -- -- 19,869,536 -- -- -- 19,869,536
Deferred
compensation.... -- -- -- -- 83,095 (83,095) -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- 28,115 -- -- 28,115
---------- ------ ---------- ------- ----------- --------- -------- ------------ -----------
Balance at
December 31,
1997............ 2,899,991 2,900 2,308,542 2,309 21,864,360 (76,033) (41,201) (4,400,286) 17,352,049
Net loss......... -- -- -- -- -- -- -- (16,045,640) (16,045,640)
Change in net
unrealized loss
on securities... -- -- -- -- -- -- (8,805) -- (8,805)
-----------
Comprehensive
loss............ (16,054,445)
-----------
Deferred
compensation.... -- -- -- -- 118,125 (118,125) -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- 65,907 -- -- 65,907
Exercise of stock
options......... -- -- 398,166 398 254,619 -- -- -- 255,017
Conversion of
preferred stock
in connection
with the
Company's IPO... (2,899,991) (2,900) 10,947,470 10,947 (8,047) -- -- -- --
Issuance of
Common Stock in
connection for
services........ -- -- 7,000 7 31,493 -- -- -- 31,500
Issuance of
common stock in
connection with
the Company's
IPO, net of
issuance costs
of $4,054,658... -- -- 6,963,334 6,964 27,273,381 -- -- -- 27,280,345
Transfer of
warrants from
significant
shareholder to
officers........ -- -- -- -- 1,370,250 -- -- -- 1,370,250
---------- ------ ---------- ------- ----------- --------- -------- ------------ -----------
Balance at
December 31,
1998............ -- $ -- 20,624,512 $20,625 $50,904,181 $(128,251) $(50,006) $(20,445,926) $30,300,623
========== ====== ========== ======= =========== ========= ======== ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
theglobe.com, inc.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1998 1997 1996
------------ ----------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................... $(16,045,640) $(3,584,400) $(750,180)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization...... 715,410 60,210 47,595
Transfer of stock warrants from
significant shareholder to
officers.......................... 1,370,250 -- --
Issuance of common stock for
services.......................... 31,500 -- --
Amortization of deferred
compensation...................... 65,907 28,115 4,000
Changes in operating assets and
liabilities:
Accounts receivable, net........... (1,750,666) (188,081) (63,103)
Prepaids and other current assets.. (678,831) 2,377 (2,377)
Other assets....................... 7,657 -- --
Accounts payable................... 2,218,065 265,902 120,684
Accrued expenses................... 492,009 310,220 9,635
Accrued compensation............... (457,720) 1,148,999 --
Deferred revenue................... 560,326 81,146 32,144
------------ ----------- ---------
Net cash used in operating
activities.......................... (13,471,733) (1,875,512) (601,602)
------------ ----------- ---------
Cash flows from investing activities:
Purchase of securities................. -- (13,044,374) --
Proceeds from sale of securities....... 12,095,822 -- --
Purchases of property and equipment.... (730,359) (119,984) (138,309)
Payment of security deposits........... (1,734,495) -- --
------------ ----------- ---------
Net cash provided by (used in)
investing activities.............. 9,630,968 (13,164,358) (138,309)
------------ ----------- ---------
Cash flows from financing activities:
Payments under capital lease
obligations........................... (315,316) -- --
Proceeds from exercise of common stock
options............................... 255,017 4,507 --
Net proceeds from issuance of common
stock................................. 27,280,345 -- --
Payment of financing costs............. -- (130,464) --
Proceeds from issuance of convertible
preferred Series A, B and C stock..... -- 280,000 909,955
Proceeds from issuance of convertible
preferred Series D stock.............. -- 20,000,000 --
------------ ----------- ---------
Net cash provided by financing
activities.......................... 27,220,046 20,154,043 909,955
------------ ----------- ---------
Net change in cash and cash
equivalents......................... 23,379,281 5,114,173 170,044
Cash and cash equivalents at beginning of
period.................................. 5,871,291 757,118 587,074
------------ ----------- ---------
Cash and cash equivalents at end of
period.................................. $ 29,250,572 $ 5,871,291 $ 757,118
============ =========== =========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest............................. $ 123,724 $ -- $ 3,709
============ =========== =========
Income taxes......................... $ 69,890 $ -- $ --
============ =========== =========
Supplemental disclosure of noncash
transactions:
Equipment acquired under capital
leases.............................. $ 3,221,769 $ 126,000 $ --
============ =========== =========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
theglobe.com, inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
(1) Organization and Summary of Significant Accounting Policies
(a) Description of Business
theglobe.com, inc. (the "Company") was incorporated on May 1, 1995
(inception) and commenced operations on that date. theglobe.com is an online
network with members and users in the United States and abroad. theglobe.com's
users are able to personalize their online experience by publishing their own
content and interacting with others having similar interests. The Company's
primary revenue source is the sale of advertising, with additional revenues
generated through electronic commerce arrangements, development fees and the
sale of membership service fees for enhanced services.
The Company's business is characterized by rapid technological change, new
product development and evolving industry standards. Inherent in the Company's
business are various risks and uncertainties, including its limited operating
history, unproven business model and the limited history of commerce on the
Internet. The Company's success may depend in part upon the emergence of the
Internet as a communications medium, prospective product development efforts
and the acceptance of the Company's solutions by the marketplace.
(b) Initial Public Offerings
On November 13, 1998, the Company completed an initial public offering and
concurrent offering directly to certain investors in which it sold 6,963,334
shares of Common Stock, including 763,334 shares in connection with the
exercise of the underwriters' over-allotment option, at $4.50 per share. Upon
the closing of the offerings, all of the Company's preferred stock, par value
$0.001 per share (the "Preferred Stock") automatically converted into an
aggregate of 10,947,470 shares of Common Stock. Net proceeds from the
offerings, after underwriting and placement agent fees of $2.0 million and
offering costs of $2.0 million were $27.3 million.
(c) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
(d) Cash and Cash Equivalents
The Company considers all highly liquid securities with original maturities
of three months or less to be cash equivalents. Cash equivalents at December
31, 1998 were approximately $2,955,044 and at December 31, 1997 were
approximately $3,997,000, which consisted of corporate bonds and mutual funds.
(e) Short-term Investments
Short-term investments are classified as available-for-sale and are available
to support current operations or to take advantage of other investment
opportunities. These investments are corporate bonds, commercial paper and
corporate bond funds which are stated at their estimated fair value based upon
publicly available market quotes. Unrealized gains and losses are computed on
the basis of specific identification and are included in stockholders' equity.
Realized gains, realized losses and declines in value, judged to be other-than-
temporary, are included in other income. There were no material gross realized
gains or losses from sales of securities in the periods presented. The costs of
securities sold are based on the specific-identification method and interest
earned is included in interest income. As of December 31, 1998, the Company had
gross unrealized losses of $50,006 from its short-term investments. As of
December 31, 1997, the Company had gross unrealized losses of $41,678 and gross
unrealized gains of $477 from its short-term investments.
F-7
<PAGE>
theglobe.com, inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(f) Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Equipment under capital leases is
stated at the present value of minimum lease payments and is amortized using
the straight-line method over the shorter of the lease term or the estimated
useful lives of the assets.
(g) Restricted Investments
At December 31, 1998, restricted investments included security deposits held
in certificates of deposit and other interest bearing accounts as collateral
for certain capital lease equipment and office space leases.
(h) Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. To date, no such
impairment has been recorded.
(i) Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases for operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in results of operations in
the period that the tax change occurs. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized.
(j) Revenue Recognition
The Company's revenues are derived principally from the sale of banner
advertisements under short-term contracts. To date, the duration of the
Company's advertising commitments has generally averaged from one to three
months. Advertising revenues are recognized ratably in the period in which the
advertisement is displayed, provided that no significant Company obligations
remain and collection of the resulting receivable is probable. Company
obligations typically include the guarantee of a minimum number of
"impressions" or times that an advertisement appears in pages viewed by the
users of the Company's online properties.
The Company also derived other revenues from its membership service fees,
electronic commerce revenue shares and sponsorship placements within the
Company's site. Membership service fees are deferred and recognized ratably
over the term of the subscription period. Revenues from the Company's share of
proceeds from its electronic commerce partner's sales are recognized upon
notification from its partners of sales attributable to the Company's site. The
Company also earns additional revenue on sponsorship contracts for fees
relating to the design, coordination, and integration of the customer's content
and links. These development fees are recognized as revenue once the related
activities have been performed. Other revenues accounted for 11% of revenues
for the year ended December 31, 1998, 23% for 1997 and 5% for 1996.
F-8
<PAGE>
theglobe.com, inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
The Company trades advertisements on its web properties in exchange for
advertisements on the Internet sites of other companies. Barter revenues and
expenses are recorded at the fair market value of services provided or
received, whichever is more determinable in the circumstances. Revenue from
barter transactions is recognized as income when advertisements are delivered
on the Company's web properties. Barter expense is recognized when the
Company's advertisements are run on other companies' web sites, which is
typically in the same period when the barter revenue is recognized. Barter
revenues and expenses were approximately $103,000 for the year ended December
31, 1998, $166,500 for 1997 and $-0- for 1996.
(k) Product Development
Product development expenses include professional fees, staff costs and
related expenses associated with the development, testing and upgrades to the
Company's web site as well as expenses related to its editorial content and
community management and support. Product development costs and enhancements to
existing products are charged to operations as incurred. To date, completion of
a working model of the Company's products and general release have
substantially coincided. As a result, the Company has not capitalized any
software development costs since such costs have not been significant.
(l) Advertising
Advertising costs are expensed as incurred. Advertising costs totaling $7.3
million for the year ended December 31, 1998, $1,057,606 for 1997 and $202,986
for 1996, are included in sales and marketing expenses in the Company's
statements of operations.
(m) Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standard ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," which permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 allows entities to
continue to apply the provisions of Accounting Principle Board ("APB") Opinion
No. 25 and provide pro forma net earnings disclosures for employee stock option
grants if the fair-value-based method defined in SFAS No. 123 had been applied.
The Company has elected to continue to apply the provisions of APB Opinion No.
25 and provide the pro forma disclosure provisions of SFAS No. 123.
(n) Net Loss Per Common Share
The Company adopted SFAS No. 128, "Computation of Earnings Per Share," during
the year ended December 31, 1997. In accordance with SFAS No. 128 and the SEC
Staff Accounting Bulletin No. 98, basic earnings per share are computed using
the weighted average number of common shares outstanding during the period.
Common equivalent shares consist of the incremental common shares issuable upon
the conversion of the Convertible Preferred Stock (using the if-converted
method) and shares issuable upon the exercise of stock options and warrants
(using the Treasury Stock method); common equivalent shares are excluded from
the calculation if their effect is anti-dilutive. Pursuant to SEC Staff
Accounting Bulletin No. 98, common stock and convertible preferred stock issued
for nominal consideration, prior to the anticipated effective date of an IPO,
are required to be included in the calculation of basic and diluted net loss
per share, as if they were outstanding for all periods presented. To date, the
Company has not had any issuances or grants for nominal consideration.
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.
F-9
<PAGE>
theglobe.com, inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
Diluted net loss per common share for the year ended December 31, 1998, 1997
and 1996 does not include the effects of options to purchase 2,830,242,
1,443,958 and 684,098 shares of common stock, respectively; 4,046,018,
3,522,732 and -0- common stock warrants, respectively; and -0-, 9,906,654 and
2,759,940 shares of convertible preferred stock on an "as if" converted basis,
respectively.
(o) Fair Value of Financial Instruments
The carrying amount of certain of the Company's financial instruments,
including cash, short-term investment, accounts receivable, accounts payable
and accrued expenses, approximate fair value because of their short maturities.
The carrying amount of the Company's capital lease obligations approximate the
fair value of such instruments based upon the implicit interest rate of the
leases.
(p) Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." This statement establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. Comprehensive
income generally represents all changes in shareholders' equity during the
period except those resulting from investments by, or distributions to,
shareholders. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented. We
adopted SFAS 130 as of December 31, 1997 and have presented comprehensive
income for all periods presented in the Statement of Shareholders' Equity.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
and Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that a public enterprise reports information about operating segments
in annual financial statements, and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997 and requires statement of earlier periods presented.
The Company has determined that it does not have any separately reporting
business segments.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Corporate Software Developed or Obtained for Internal Use", which establishes
guidelines for the accounting for the costs of all computer software developed
or obtained for internal use. We adopted SOP 98-1 effective for the year ended
December 31, 1998. The adoption of SOP 98-1 is not expected to have a material
impact on our financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. This statement does not apply to the Company as the Company currently
does not have any derivative instruments or hedging activities.
(q) Stock Split
In May 1996, the Company authorized and implemented a ten-for-one common
stock split. In August 1997, the Company authorized and implemented an
additional ten-for-one preferred stock split. In September 1998, the Company
authorized a one-for-two reverse stock split of all common and preferred stock.
All share and per share information in the accompanying financial statements
has been retroactively restated to reflect the effect of the stock splits and
the reverse stock split. See Note 10 regarding an additional two-for-one stock
split that will be effective once the split occurs on May 14, 1999.
F-10
<PAGE>
theglobe.com, inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(2) Concentration of Credit Risk
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents, short-term investments and
trade accounts receivable. The Company invests its cash and cash equivalents
among a diverse group of issuers and instruments. The Company performs periodic
evaluations of these investments. From time to time, the Company's cash
balances with any one financial institution may exceed Federal Deposit
Insurance Corporation insurance limits.
The Company's customers are concentrated in the United States. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally does not require collateral and establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of customers,
historical trends and other information; to date, such losses have been within
management's expectations.
For the year ended December 31, 1998, there were no customers that accounted
for over 10% of revenues generated by the Company, or of accounts receivable at
December 31, 1998.
For the year ended December 31, 1997, there were no customers that accounted
for over 10% of revenues generated by the Company or of accounts receivable at
December 31, 1997.
For the year ended December 31, 1996, one customer accounted for
approximately 71% of total revenues generated by the Company and 90% of
accounts receivable at December 31, 1996.
(3) Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Computer equipment, including assets under capital
leases of $3,305,598, and $126,000, respectively.... $4,298,702 $421,164
Furniture and fixtures, including assets under
capital leases of $42,171, and $-0-, respectively... 88,819 14,230
---------- --------
4,387,521 435,394
Less accumulated depreciation and amortization,
including amounts related to assets under capital
leases of $460,988 and $-0-, respectively........... 824,962 109,552
---------- --------
Total.............................................. $3,562,559 $325,842
========== ========
</TABLE>
(4) Income Taxes
Income taxes for the year ended December 31, 1998 and 1997 are based solely
on state and local taxes on business and investment capital. The Company did
not incur any income taxes for the year ended December 31, 1996.
F-11
<PAGE>
theglobe.com, inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
The difference between the provision for income taxes computed at the
statutory rate and the reported amount of tax expense (benefit) attributable to
income before income taxes for the years ended December 31, 1998, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Tax benefit at statutory rates............ $(5,588,353) $(1,218,695) $(257,781)
Increase (reduction) in income taxes
resulting from:
State and local income taxes, net of
Federal income tax benefit............. (1,665,150) (458,817) (45,131)
Meals and entertainment................. 13,521 3,266 268
Other, net.............................. (44,324) -- --
Valuation allowance adjustment.......... 7,363,224 1,710,346 302,644
----------- ----------- ---------
$ 78,918 $ 36,100 $ --
=========== =========== =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1998 and 1997 are presented below.
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $13,411,724 $2,018,635
Allowance for doubtful accounts...................... 138,063 5,520
Depreciation......................................... (27,600) --
Issuance of warrants................................. 630,315 --
Deferred compensation................................ 45,090 14,773
Other................................................ 96,600 --
----------- ----------
Total gross deferred tax assets.................... 14,294,192 2,038,928
Less valuation allowance............................... (14,294,192) (2,038,928)
----------- ----------
Net deferred tax assets............................ $ -- $ --
=========== ==========
</TABLE>
Because of the Company's lack of earnings history, the deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance for
deferred tax assets as of December 31, 1998 was $14,294,192 and as of December
31, 1997 was $2,038,928. The net change in the total valuation allowance for
the year ended December 31, 1998 was $12,255,264 and $1,710,346 for 1997. In
assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Of the total valuation
allowance of $14,294,192, subsequently recognized tax benefits, if any, in the
amount of $4,892,040 will be applied directly to contributed capital.
At December 31, 1998, the Company had net operating loss carryforwards
available for federal and state income tax purposes of $29.2 million. These
carryforwards expire through 2018 for federal purposes and state purposes.
Under Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), the utilization of net operating loss carryforwards may be limited
under the change in stock ownership rules of the Code. As a result of ownership
changes which occurred in August 1997, the Company's operating tax loss
carryforwards and tax credit carryforwards are subject to these limitations.
F-12
<PAGE>
theglobe.com, inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(5) Capitalization
Authorized Shares
In July 1998, the Company amended and restated its certificate of
incorporation. As a result, the total number of shares which the Company is
authorized to issue is 103,000,000 shares: 100,000,000 of these shares are
Common Stock, each having a par value of $0.001; and 3,000,000 shares are
Preferred Stock, each having a par value of $0.001.
Common Stock
The Company issued 398,166 and 58,542 shares of Common Stock in connection
with the exercise of certain stock options in 1998 and 1997, respectively. In
November 1998, the Company issued 6,963,334 shares of Common Stock in
connection with its initial public offering and concurrent offering. Upon
consummation of the offerings, all of the Company's outstanding Preferred Stock
was converted into 10,947,470 shares of Common Stock.
Convertible Preferred Stock
As of December 31, 1997, the Company had five series of Convertible Preferred
Stock (collectively "Preferred Stock") authorized and of which only four of the
series were outstanding. The holders of the various series of Preferred Stock
generally have the same rights and privileges. Each class of the Company's
Preferred Stock is convertible into Common Stock, as defined below, and has
rights and preferences which are generally more senior to the Company's Common
Stock and are more fully described in the Company's amended and restated
certificate of incorporation.
In 1996, the Company completed a private placement of 442,500 shares of
Series C Preferred Stock at $2.00 per share for an aggregate price of
approximately $885,000, paid in cash.
In April 1997, the Company amended the Series C Preferred Stock agreement in
order to extend the above private placement of Series C Preferred Stock to
April 15, 1997. In connection with this private placement, the Company issued
an additional 140,000 shares of Series C Preferred Stock at $2.00 per share for
an aggregate price of $280,000 in 1997.
In August 1997, the Company authorized and issued 51 shares of Series D
Preferred Stock for an aggregate cash amount of $20,000,000 in connection with
the investment by Dancing Bear Investments, Inc., an entity controlled by the
Chairman, which holds a majority interest in the Company. These shares
constituted 51% of the fully diluted capital stock of the Company at the time
of exercise, as defined. In addition to the Series D Preferred Stock, Dancing
Bear Investments, Inc. also received warrants which provided the right to
purchase up to 5 shares of Series E Preferred Stock representing 10% of the
fully diluted capital stock of the Company at the time of exercise for an
aggregate purchase price of $5,882,353, if exercised in total. In connection
with the Dancing Bear investment, two officers and shareholders of the Company
received $500,000 each as signing bonuses in connection with their employment
agreements. Such amounts were accrued for at that time and were subsequently
paid in the first quarter of 1998.
The conversion rate of the Series A, B and C Preferred Stock, as defined in
the original private placement agreements was the quotient obtained by dividing
the applicable series' original issue price by the applicable series'
conversion price. The original issue price and conversion price was $0.10 per
share for Series A, $0.525 per share for Series B and $2 per share for Series
C, as determined by negotiations among the parties. Each share of Series D and
E Preferred Stock was convertible into an amount of common representing 1% of
the fully diluted capital stock, as defined in the original private placement
agreement. Such conversion features were determined by negotiations among the
parties.
F-13
<PAGE>
theglobe.com, inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, as defined, on a pari passu basis, an amount equal
to $0.10 per share for Series A, $0.525 per share for Series B, $4 per share
for Series C, $392,156.86 per share for Series D and $588,235.30 per share for
Series E, would be paid out of the assets of the Company available for
distribution before any such payments would be made on any shares of the
Company's common shares or any other capital stock of the Company other than
the Preferred Stock, plus any declared but unpaid dividends.
Upon consummation of the offerings, all of the Company's outstanding
Preferred Stock was converted into 10,947,470 shares of Common Stock.
The following table summarizes the Convertible Preferred Stock authorized,
issued and outstanding and liquidation preferences:
<TABLE>
<CAPTION>
Preferred Shares Equivalent Shares of
Issued and Outstanding Common Stock
------------------------- --------------------
Shares
Authorized 1998 1997 1998 1997
---------- ---- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Series A...................... 1,165,990 -- 1,165,990 -- 1,165,990
Series B...................... 1,151,450 -- 1,151,450 -- 1,151,450
Series C...................... 582,500 -- 582,500 -- 582,500
Series D...................... 51 -- 51 -- 7,006,714
Series E...................... 10 -- -- 4,046,018 3,522,732
--------- --- --------- --------- ----------
2,900,001 -- 2,899,991 4,046,018 13,429,386
========= === ========= ========= ==========
<CAPTION>
Liquidation
Preference
---------------
Liquidation
Preference Per
Share 1998 1997
-------------- ---- ----------
<S> <C> <C> <C>
Series A...................................... $ 0.10 -- 116,599
Series B...................................... $ 0.525 -- 604,511
Series C...................................... $ 2.00 -- 1,165,000
Series D...................................... $392,156.86 -- 20,000,000
Series E...................................... $588,235.30 -- --
--- ----------
-- 21,886,110
=== ==========
</TABLE>
The number of common shares that the outstanding Series E Warrants are
convertible into upon exercise became fixed as a result of the consummation of
the offerings at 4,046,018 shares. These warrants are immediately exercisable
at approximately $1.45 per share.
(6) Non-Recurring Charge
The Company recorded a non-cash, non-recurring charge of $1,370,250 to
earnings in the third quarter of 1998 in connection with the transfer of Series
E Warrants to acquire 450,000 shares of Common Stock by Dancing Bear
Investments, Inc. (the Company's principal shareholder at the date of transfer)
to certain officers of the Company, at an exercise price of approximately $1.45
per share. The Company accounted for such transaction as if it were a
compensatory plan adopted by the Company. Accordingly, such amount was recorded
as a non-cash, non-recurring compensation expense in the Company's statement of
operation for services provided by such officers to the Company with an
offsetting increase to additional paid-in capital. The amount of such non-cash
charge was based on the difference between the fair market value at the time of
the transfer ($4.50 per share) and the exercise price per warrant of
approximately $1.45 per share.
F-14
<PAGE>
theglobe.com, inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(7) Stock Option Plan
During 1995, the Company established the 1995 Stock Option Plan, which was
amended (the "Amended Plan") by the Board of Directors in December 1996. Under
the Amended Plan, the Board of Directors may issue incentive stock options or
nonqualified stock options to purchase up to 1,332,000 common shares. Incentive
stock options must be granted at the fair market value of the Company's Common
Stock at the date the option is issued.
Nonqualified stock options may be granted to officers, directors, other
employees, consultants and advisors of the Company. The option price for
nonqualified stock options shall be at least 85% of the fair market value of
the Company's Common Stock. The granted options under the amended plan shall be
for periods not to exceed ten years. Incentive options granted to stockholders
who own greater than 10% of the total combined voting power of all classes of
stock of the Company must be issued at 110% of the fair market value of the
stock on the date the options are granted.
In connection with the Dancing Bear Investments investment, the Company
reserved an additional 250,000 shares of its common stock for issuance upon the
exercise of options to be granted in the future under the Amended Plan.
In July 1998, the Company's 1998 Stock Option Plan (the "1998 Plan") was
adopted by the Board of Directors and approved by the stockholders of the
Company. The 1998 Plan authorized the issuance of 2,400,000 shares of Common
Stock, subject to adjustment as provided in the 1998 Plan. The 1998 Plan
provides for the grant of "incentive stock options" intended to qualify under
Section 422 of the Code and stock options which do not so qualify. The granting
of incentive stock options is subject to limitation as set forth in the 1998
Plan. Directors, officers, employees and consultants of the Company and its
subsidiaries are eligible to receive grants under the 1998 Plan.
The per share weighted-average fair value of stock options granted during
1998, 1997 and 1996 was $4.02, $0.16 and $0.08, respectively, on the date of
grant using the option-pricing method with the following weighted-average
assumptions: 1996--risk-free interest rate 6.18%, and an expected life of two
years; 1997--risk-free interest rate 6.00%, and an expected life of three
years; 1998--risk-free interest rate 5.00%, and an expected life of four years,
and a volatility of 150%. As permitted under the provisions of SFAS No. 123,
and based on the historical lack of a public market for the Company's units, no
factor for volatility has been reflected in the option pricing calculation for
1997 and 1996.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, compensation cost of $65,887, $28,115 and $4,000 has been
recognized for its stock options granted below fair market value in 1998, 1997
and 1996, respectively, in the accompanying financial statements.
F-15
<PAGE>
theglobe.com, inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Weighted
Options average
granted exercise price
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1995...................... 350,000 $0.01
Granted............................................... 334,098 $0.06
Exercised............................................. --
Canceled.............................................. --
---------
Outstanding at December 31, 1996...................... 684,098 $0.03
Granted............................................... 823,402 $0.37
Exercised............................................. (58,542) $0.08
Canceled.............................................. (5,000) $0.41
---------
Outstanding at December 31, 1997...................... 1,443,958 $0.22
Granted............................................... 1,835,100 $4.51
Exercised............................................. (405,166) $0.63
Canceled.............................................. (43,650) $0.39
---------
Outstanding at December 31, 1998...................... 2,830,242 $2.93
---------
Vested at December 31, 1997........................... 795,966
=========
Vested at December 31, 1998........................... 694,346
=========
Options available at December 31, 1997................ 79,502
=========
Options available at December 31, 1998................ 688,050
=========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Exercise Number Average Exercise
Exercise Price Outstanding Contractual Life Price Outstanding Price
-------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.01-$0.0525........... 272,862 6.9 years $ 0.02 240,972 $0.02
$0.20-$0.35............. 655,680 8.4 $ 0.33 326,274 $0.33
$0.41-$1.39............. 219,100 9.0 $ 0.83 52,100 $0.41
$2.30-$4.50............. 1,638,100 9.6 $ 4.40 75,000 $4.50
$13.72-$20.22........... 44,500 9.9 $15.11 -- $0.00
--------- -------
2,830,242 694,346
========= =======
</TABLE>
At December 31, 1998, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $0.01-20.22 and 9.03
years, respectively.
F-16
<PAGE>
theglobe.com, inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
The Company applies APB No. 25 in accounting for its stock options granted to
employees and, accordingly, no compensation expense has been recognized in the
financial statements (except for those options issued with exercise prices less
than fair market value at date of grant). Had the Company determined
compensation expense based on the fair value at the grant date for its stock
options issued to employees under SFAS No. 123, the Company's net loss would
have been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- --------
<S> <C> <C> <C>
Net loss--as reported................... $16,045,640 $3,584,400 $750,180
=========== ========== ========
Net loss--pro forma..................... $21,289,917 $3,621,373 $756,135
=========== ========== ========
Basic net loss per common share--as
reported............................... $ (3.37) $ (1.56) $ (0.33)
=========== ========== ========
Basic net loss per common share--pro
forma.................................. $ (4.47) $ (1.58) $ (0.34)
=========== ========== ========
</TABLE>
(8) Commitments
(a) Office Leases
The Company leases several facilities under noncancelable leases for varying
periods through 2014.
Rent expense for the operating leases was $424,494, $81,157 and $26,181 for
the years ended December 31, 1998, 1997 and 1996, respectively.
Future minimum payments under the various office operating leases are as
follows:
<TABLE>
<CAPTION>
Year ended December 31, Amount
----------------------- -----------
<S> <C>
1999............................................................ $ 1,642,791
2000............................................................ 1,645,080
2001............................................................ 1,548,246
2002............................................................ 1,361,579
2003............................................................ 1,361,579
Thereafter...................................................... 16,068,980
-----------
Total minimum lease payments.................................... $23,628,255
===========
</TABLE>
(b) Equipment Leases
The Company's lease obligations are collateralized by CDs and interest
bearing accounts at December 31, 1998. Future minimum lease payments under
noncancellable operating leases (with initial or remaining lease terms in
excess of one year) and future minimum capital lease obligations as of December
31, 1998 are:
<TABLE>
<CAPTION>
Capital Operating
Year ending December 31, Leases Leases
------------------------ ---------- ---------
<S> <C> <C>
1999.................................................. $1,353,905 $25,158
2000.................................................. 1,316,604 13,073
2001.................................................. 936,191 9,060
2002.................................................. 19,992 7,567
2003.................................................. 1,666 --
---------- -------
Total minimum lease payments.......................... $3,628,358 $54,858
========== =======
Less amount representing interest (at rates ranging
from 11% to 16.8%)................................... 595,906
----------
Present value of minimum capital lease payments....... 3,032,452
----------
Less current installments of obligation under capital
leases............................................... 1,026,728
----------
Obligations under capital leases, excluding current
installments......................................... $2,005,724
==========
</TABLE>
F-17
<PAGE>
theglobe.com, inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(c) Employment Agreements
The Company maintains employment agreements expiring in 2001 and 2002, with
four executive officers of the Company. The employment agreements provide for
minimum salary levels, incentive compensation and severance benefits, among
other items.
(9) Related Party Transactions
Certain officers and directors of the Company also serve as officers and
directors of Dancing Bear Investments, Inc.
The Company has entered into an electronic commerce contract with Republic
Industries, Inc. ("Republic"), an entity affiliated with a Director of the
Company, pursuant to which the Company has granted a right of first negotiation
with respect to the exclusive right to engage in or conduct an automotive
"clubsite" on theglobe.com web site through AutoNation, a subsidiary of
Republic. Additionally, Republic has agreed to purchase advertising from the
Company for a three-year period at a price which will be adjusted to match any
more favorable advertising price quoted to a third party by the Company,
excluding certain short-term advertising rates. In addition, the Company has
entered into an electronic commerce arrangement with InteleTravel, an entity
controlled by the Chairman of the Company, whereby the Company developed a web
community for InteleTravel in order for its travel agents to conduct business
through theglobe.com in exchange for access to InteleTravel customers for
distribution of the Company's products and services. The Company believes that
the terms of the foregoing arrangements are on comparable terms as if they were
entered into with unaffiliated third parties. As of December 31, 1998, the
Company received $83,300 and $265,000 from Republic and InteleTravel,
respectively, in connection with these arrangements.
Stockholders' Agreement
The Chairman, the Co-Chief Executive Officers, a Vice President and a
Director of the Company and Dancing Bear Investments, Inc. (an entity
controlled by the Chairman) entered into a Stockholders' Agreement (the
"Stockholders' Agreement") pursuant to which the Chairman and Dancing Bear
Investments, Inc. or certain entities controlled by the Chairman and certain
permitted transferees (the "Chairman Group") will agree to vote for certain
nominees of the Co-Chief Executive Officers or certain entities controlled by
the Co-Chief Executive Officers and certain permitted transferees (the "Co-
Chief Executive Officer Groups") to the Board of Directors and the Co-Chief
Executive Officer Groups will agree to vote for the Chairman Group's nominees
to the Board, who will represent up to five members of the Board. Additionally,
pursuant to the terms of the Stockholders' Agreement, the Co-Chief Executive
Officers, a Vice President and a Director have granted an irrevocable proxy to
Dancing Bear Investments, Inc. with respect to any shares that may be acquired
by them pursuant to the exercise of outstanding Warrants transferred to each of
them by Dancing Bear Investments, Inc. Such shares will be voted by Dancing
Bear Investments, Inc., which is controlled by the Chairman, and will be
subject to a right of first refusal in favor of Dancing Bear Investments, Inc.
upon certain private transfers. The Stockholders' Agreement also provides that
if the Chairman Group sells shares of Common Stock and Warrants representing
25% or more of the Company's outstanding Common Stock (including the Warrants)
in any private sale after the Offerings, the Co-Chief Executive Officer Groups,
a Vice President and a Director of the Company will be required to sell up to
the same percentage of their shares as the Chairman Group sells. If either the
Chairman Group sells shares of Common Stock or Warrants representing 25% or
more of the Company's outstanding Common Stock (including the Warrants) or the
Co-Chief Executive Officer Groups sell shares or Warrants representing 7% or
more of the shares and Warrants of the Company in any private sale after the
Offerings, each other party to the Stockholders' Agreement, including entities
controlled by them and their permitted transferees, may, at their option, sell
up to the same percentage of their shares.
F-18
<PAGE>
theglobe.com, inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(10) Subsequent Events (Unaudited)
(a) Acquisitions
factorymall.com, inc.
On February 1, 1999, theglobe.com formed Nirvana Acquisition Corp. ("Merger
Sub"), a Washington corporation and a wholly-owned subsidiary of theglobe.com.
Merger Sub was merged with and into factorymall.com, inc., a Washington
corporation d/b/a Azazz ("factorymall"), with factorymall as the surviving
corporation. The merger was effected pursuant to the Agreement and Plan of
Merger, dated February 1, 1999, by and among theglobe.com, Merger Sub, and
factorymall and certain shareholders thereof. As a result of the Merger,
factorymall became a wholly-owned subsidiary of theglobe.com. factorymall
operates Azazz, a leading interactive department store.
The consideration payable by theglobe.com in connection with the merger
consists of 614,000 newly issued shares of common stock, par value $0.001, of
theglobe.com. In addition, options to purchase shares of factorymall's common
stock, without par value, were exchanged for options to purchase approximately
82,034 shares of theglobe.com Common Stock. Warrants to purchase shares of
factorymall Common Stock were exchanged for warrants to purchase approximately
18,810 shares of theglobe.com Common Stock. theglobe.com also assumed certain
bonus obligations of factorymall triggered in connection with the Merger which
will result in the issuance by theglobe.com of approximately 73,728 shares of
theglobe.com Common Stock and payment by theglobe.com of approximately $451,232
in cash. The Company also incurred expenses of approximately $694,300 related
to the Merger.
The total purchase price for this transaction was approximately $22.8
million. The difference between the fair market value of factorymall's assets
and the purchase price will be accounted for as goodwill and will be amortized
over two to three years, the expected period of benefit.
Attitude Network, Ltd.
On April 5, 1999, theglobe.com formed Bucky Acquisition Corp. ("Merger Sub"),
a Delaware corporation and a wholly-owned subsidiary of theglobe.com. Merger
Sub was merged with and into Attitude Network, Ltd., a Delaware corporation
("Attitude"), with Attitude as the surviving corporation. The merger was
effected pursuant to the Agreement and Plan of Merger, dated April 5, 1999,
which closed on April 9, 1999, by and among theglobe.com, Merger Sub, and
Attitude and certain shareholders thereof. As a result of the Merger, Attitude
became a wholly-owned subsidiary of theglobe.com. Attitude publishes
entertainment web sites including Happy Puppy and Games Domain.
The consideration payable by theglobe.com in connection with the merger
consists of approximately 1,570,000 newly issued shares of common stock, par
value $0.001, of theglobe.com. In addition, options to purchase shares of
Attitude's common stock, par value $0.001, were exchanged for options to
purchase approximately 84,760 shares of theglobe.com common stock. Warrants to
purchase shares of Attitude common stock were exchanged for warrants to
purchase approximately 46,706 shares of theglobe.com common stock. The Company
also incurred expenses of approximately $800,000 related to the Merger.
The total purchase price for this transaction was approximately $46.8
million. The difference between the fair market value of Attitude's assets and
the purchase price will be accounted or as goodwill and will be amortized over
three years, the expected period of benefit.
F-19
<PAGE>
theglobe.com, inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(b) Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan ("ESPP") was adopted by the Board
of Directors in February 1999. The ESPP will provide eligible employees of the
Company the opportunity to apply a portion of their compensation to the
purchase of shares of the Company at a 15% discount. 400,000 shares of
authorized but unissued Company common stock will be reserved for issuance
under the ESPP. The ESPP is subject to stockholder approval.
(c) Stock Option Plan
In March 1999, the Board of Directors authorized an increase in the number of
shares reserved for issuance under the Company's 1998 Stock Option Plan from
2,400,000 to 3,400,000.
(d) Stock Split
On April 8, 1999, the Company announced a two-for-one stock split that is
payable May 14, 1999 to shareholders of record as of May 3, 1999. Such stock
split will be effective once the split occurs on May 14, 1999. All share and
per share information in the accompanying financial statements has been
retroactively restated to reflect the effect of the stock split.
F-20
<PAGE>
theglobe.com, inc.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
Acquisition of FactoryMall.com, Inc.
On February 1, 1999, theglobe.com formed Nirvana Acquisition Corp. ("Merger
Sub"), a Washington corporation and a wholly-owned subsidiary of theglobe.com.
Merger Sub was merged with and into factorymall.com, inc., a Washington
corporation d/b/a Azazz ("factorymall"), with factorymall as the surviving
corporation. The merger was effected pursuant to the Agreement and Plan of
Merger, dated February 1, 1999, by and among theglobe.com, Merger Sub, and
factorymall and certain shareholders thereof. As a result of the Merger,
factorymall became a wholly-owned subsidiary of theglobe.com. factorymall
operates Azazz, a leading interactive department store.
The consideration payable by theglobe.com in connection with the merger
consists of approximately 614,000 newly issued shares of common stock, par
value $0.001, of theglobe.com. In addition, options to purchase shares of
factorymall's common stock, without par value, were exchanged for options to
purchase approximately 82,034 shares of theglobe.com common stock. Warrants to
purchase shares of factorymall common stock were exchanged for warrants to
purchase approximately 18,810 shares of theglobe.com common stock. theglobe.com
also assumed certain bonus obligations of factorymall triggered in connection
with the Merger which will result in the issuance by theglobe.com of
approximately 73,728 shares of theglobe.com common stock and payment by
theglobe.com of approximately $451,232 in cash. The Company also incurred
expenses of approximately $694,300 related to the Merger.
The total purchase price for this transaction was approximately $22.8
million. The difference between the fair market value of factorymall's assets
and the purchase price will be accounted for as goodwill and will be amortized
over two to three years, the expected period of benefit.
Acquisition of Attitude Network Ltd.
On April 5, 1999, theglobe.com formed Bucky Acquisition Corp. ("Merger Sub"),
a Delaware corporation and a wholly-owned subsidiary of theglobe.com. Merger
Sub was merged with and into Attitude Network, Ltd., a Delaware corporation
("Attitude"), with Attitude as the surviving corporation. The merger was
effected pursuant to the Agreement and Plan of Merger, dated April 5, 1999,
which closed on April 9, 1999, by and among theglobe.com, Merger Sub, and
Attitude and certain shareholders thereof. As a result of the Merger, Attitude
became a wholly-owned subsidiary of theglobe.com. Attitude publishes
entertainment web sites including Happy Puppy and Games Domain.
The consideration payable by theglobe.com in connection with the merger
consists of approximately 1,570,000 newly issued shares of common stock, par
value $0.001, of theglobe.com. In addition, options to purchase shares of
Attitude's common stock, par value $0.001, were exchanged for options to
purchase approximately 84,760 shares of theglobe.com common stock. Warrants to
purchase shares of Attitude common stock were exchanged for warrants to
purchase approximately 46,706 shares of theglobe.com common stock. The Company
also incurred expenses of approximately $800,000 related to the Merger.
The total purchase price for this transaction was approximately $46.8
million. The difference between the fair market value of Attitude's assets and
the purchase price will be accounted or as goodwill and will be amortized over
three years, the expected period of benefit.
Unaudited Pro Forma Condensed Consolidated Financial Statements
The accompanying unaudited Pro Forma Condensed Consolidated Statement of
Operations (the "Pro Forma Statements of Operations") for the year ended
December 31, 1998 gives effect to the acquisition of factorymall and Attitude
(the "Acquisitions") as if it had occurred on January 1, 1998. The Pro Forma
F-21
<PAGE>
Statement of Operations are based on historical results of operations of the
theglobe.com and the Acquisitions for the year ended December 31, 1998. The
unaudited Pro Forma Condensed Consolidated Balance Sheet (the "Pro Forma
Balance Sheet") gives effect to the Acquisitions as if the acquisition had
occurred on that date.
The unaudited Pro Forma Condensed Consolidated Financial Statements have been
included as required by the rules of the Securities and Exchange Commission and
are provided for informational purposes only. The unaudited Pro Forma Condensed
Consolidated Financial Statements do not purport to be indicative of the
results of operations or financial position that would have been obtained if
the transactions had been effected on the date indicated or which may be
obtained in the future.
The accompanying unaudited Pro Forma Condensed Consolidated Financial
Statements should be read in connection with the historical financial
statements of theglobe.com, inc. which are contained elsewhere in this
prospectus.
F-22
<PAGE>
theglobe.com, inc.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------
Attitude
theglobe.com, inc. factorymall.com, inc. Network, Ltd. Adjustments Pro Forma
------------------ --------------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents............ $29,250,572 $258,438 $2,161,513 $ -- $ 31,670,523
Short-term investments.. 898,546 -- -- -- 898,546
Accounts receivable,
net.................... 2,004,875 -- 406,412 -- 2,411,287
Inventory............... -- 34,113 -- -- 34,113
Prepaids and other
current assets......... 678,831 6,913 -- -- 685,744
----------- -------- ---------- ----------- ------------
Total current assets... 32,832,824 299,464 2,567,925 35,700,213
Property and equipment,
net.................... 3,562,559 270,365 382,277 -- 4,215,201
Restricted investments.. 1,734,495 -- 24,308 -- 1,758,803
Goodwill and intangible
assets................. -- -- 1,825,039 22,841,666 (a) 70,128,533
45,461,828 (b)
----------- -------- ---------- ----------- ------------
Total assets........... $38,129,878 $569,829 $4,799,549 $68,303,494 $111,802,750
=========== ======== ========== =========== ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accounts payable........ $ 2,614,445 $299,210 $ 185,127 -- $ 3,098,782
Accrued expenses........ 817,463 128,938 358,668 -- 1,305,069
Accrued compensation.... 691,279 -- -- -- 691,279
Deferred revenue........ 673,616 -- 346,775 -- 1,020,391
Current portion of notes
payable to related
party.................. 64,767 950,000 (950,000)(d) 64,767
Current portion of long-
term debt.............. -- -- 200,000 -- 200,000
Current installments of
obligations under
capital leases......... 1,026,728 22,258 -- -- 1,048,986
----------- -------- ---------- ----------- ------------
Total current
liabilities........... 5,823,531 515,173 2,040,570 (950,000) 7,429,274
Notes payable to related
party, net of current
portion................ -- 103,271 -- -- 103,271
Long-term debt.......... -- -- 2,343,171 -- 2,343,171
Obligations under
capital leases,
excluding current
installments........... 2,005,724 16,502 -- -- 2,022,226
----------- -------- ---------- ----------- ------------
Total liabilities...... 7,829,255 634,946 4,383,741 (950,000) 11,897,942
22,776,549 (a)
46,827,636 (b)
65,117 (a) 69,604,185
Stockholders' equity.... 30,300,623 (65,117) 415,808 (415,808)(b) 30,300,623
----------- -------- ---------- ----------- ------------
Total liabilities and
stockholders' equity.. $38,129,878 $569,829 $4,799,549 $68,303,494 $111,802,750
=========== ======== ========== =========== ============
</TABLE>
F-23
<PAGE>
theglobe.com, inc.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------------------------------
Attitude
Network,
theglobe.com, inc. factorymall.com, inc. Ltd. Adjustments Pro Forma
------------------ --------------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues................ $ 5,509,818 $ 473,563 $ 1,885,547 $ -- $ 7,868,928
Cost of revenues........ 2,238,871 349,563 903,476 -- 3,491,910
------------ ----------- ----------- ------------ ------------
Gross profit........... 3,270,947 124,000 982,071 4,377,018
Operating expenses:
Sales and marketing.... 9,298,683 333,415 681,585 -- 10,313,683
Product development.... 2,632,613 223,957 1,860,686 -- 4,717,256
General and
administrative........ 6,828,134 673,530 1,644,415 -- 9,146,079
Non-recurring charge... 1,370,250 -- -- -- 1,370,250
Amortization of
intangible assets..... -- -- 1,883,137 7,613,889 (a) 24,650,969
-- 15,153,943 (b) --
------------ ----------- ----------- ------------ ------------
Loss from operations... (16,858,733) (1,106,902) (5,087,752) (22,767,832) (45,821,219)
Other income (expense):
Interest and dividend
income................ 1,083,400 8 -- -- 1,083,408
Interest and other
expenses.............. (191,389) (213,573) (1,101,753) -- (1,506,715)
------------ ----------- ----------- ------------ ------------
Total other income
(expense), net........ 892,011 (213,565) (1,101,753) -- (423,307)
------------ ----------- ----------- ------------ ------------
Loss before provision
for income taxes...... (15,966,722) (1,320,467) (6,189,505) (22,767,832) (46,244,526)
------------ ----------- ----------- ------------ ------------
Provision for income
taxes.................. 78,918 -- -- -- 78,918
------------ ----------- ----------- ------------ ------------
Net loss............... $(16,045,640) $(1,320,467) $(6,189,505) $(22,767,832) $(46,323,444)
============ =========== =========== ============ ============
Basic and diluted net
loss per share......... $ (3.37) $ (6.60)(c)
============ ============
Weighted average basic
and diluted shares
outstanding............ 4,762,280 2,258,754 (c) 7,021,034 (c)
============ ============ ============
</TABLE>
F-24
<PAGE>
theglobe.com, inc.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
(1) Pro Forma Adjustments and Assumptions
(a) The Company acquired factorymall.com, inc. ("factorymall.com") in a stock
transaction for approximately $22.8 million in February 1999, including costs
of acquisition, of which approximately $22.8 million was allocated to
intangible assets. The components of the purchase price were as follows: $17.4
million for all of the outstanding common stock, $402,570 for outstanding
warrants, $1.7 million for outstanding options to purchase common stock, $2.0
million in connection with the retention of certain bonus obligations of
factorymall triggered in connection with the merger, $451,232 for cash, and the
remaining amount was for costs of the acquisition. Goodwill and other
intangible assets will be amortized over a period of two or three years, the
expected period of benefit. The Pro Forma adjustments reflect twelve months of
amortization expense for the year ended December 31, 1998, assuming the
transaction had occurred on January 1, 1998. The value of the intangible assets
at January 1, 1998 would have been approximately $22.8 million.
The following represents the allocation of the purchase price over the
historical net book values of the acquired assets and liabilities of
factorymall.com at December 31, 1998, and is for illustrative pro forma
purposes only. Actual fair values will be based on financial information as of
the acquisition date (February 1, 1999). Assuming the transaction had occurred
on December 31, 1998, the allocation would have been as follows:
<TABLE>
<CAPTION>
factorymall.com, inc.
---------------------
<S> <C>
Assets acquired:
Cash.................... 258,438
Inventory............... 34,113
Other assets.............. 6,913
Computer equipment, fur-
niture and office
equipment.............. 270,365
Goodwill and intangi-
bles................... 22,841,666
Liabilities assumed..... (634,946)
----------
Purchase price.......... 22,776,549
==========
</TABLE>
The Pro Forma adjustment reconciles the historical balance sheet of
factorymall.com at December 31, 1998 to the allocated purchase price assuming
the transaction had occurred on December 31, 1998.
(b) The Company acquired Attitude Network, Ltd. ("Attitude") in a stock
transaction for approximately $46.8 million in April 1999, including costs of
acquisition, of which approximately $45.4 million was allocated to intangible
assets. The components of the purchase price were as follows: $43.1 million for
all of the outstanding common stock, $1 million for outstanding warrants, $1.8
million for outstanding options to purchase common stock, and the remaining
amount was for costs of the acquisition. Goodwill and other intangible assets
will be amortized over a period of 3 years, the expected period of benefit. The
Pro Forma adjustments reflect twelve months of amortization expense for the
year ended December 31, 1998, assuming the transaction had occurred on January
1, 1998. The value of the intangible assets at January 1, 1998 would have been
approximately $45.4 million.
F-25
<PAGE>
theglobe.com, inc.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION--(Continued)
The following represents the allocation of the purchase price over the
historical net book values of the acquired assets and liabilities of Attitude
at December 31, 1998, and is for illustrative pro forma purposes only. Actual
fair values will be based on financial information as of the acquisition date
(April 9, 1999). Assuming the transaction had occurred on December 31, 1998,
the allocation would have been as follows:
<TABLE>
<CAPTION>
Attitude Network, Ltd.
----------------------
<S> <C>
Assets acquired:
Cash.............................................. 2,161,513
Accounts receivable, net.......................... 406,412
Other assets...................................... 24,308
Computer equipment, furniture and office equip-
ment............................................. 382,277
Goodwill and intangibles.......................... 47,286,867
Liabilities assumed................................. (3,433,741)
----------
Purchase price.................................... 46,827,636
==========
</TABLE>
The Pro Forma adjustment reconciles the historical balance sheet of Attitude
at December 31, 1998 to the allocated purchase price assuming the transaction
had occurred on December 31, 1998.
(c) The pro forma basic net loss per common share is computed by dividing the
net loss by the weighted average number of common shares outstanding. The
calculation of the weighted average number of shares outstanding assumes that
the 687,832 of the Company's common stock issued in its acquisition of
factorymall.com and the 1,570,922 of the Company's common stock issued in its
acquisition of Attitude Network, Ltd. were outstanding for the entire period.
(d) The pro forma adjustment reflects the conversion of convertible demand
notes into shares of theglobe.com's common stock as stipulated in the merger
agreement.
F-26
<PAGE>
Independent Auditors' Report
The Board of Directors
factorymall.com, inc.:
We have audited the accompanying balance sheets of factorymall.com, inc. as
of December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the years ended December 31,
1998 and 1997 and the period from April 25, 1996 (inception) to December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of factorymall.com, inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years ended December 31, 1998 and 1997 and the period from April
25, 1996 (inception) to December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Seattle, Washington
March 5, 1999
F-27
<PAGE>
FACTORYMALL.COM, INC.
(dba azazz!)
BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- --------
<S> <C> <C>
Assets
Current assets:
Cash.................................................. $ 258,438 42,286
Inventory............................................. 34,113 6,608
Prepaid expenses and other current assets............. 6,913 38,136
----------- --------
Total current assets................................ 299,464 87,030
Computer equipment, furniture and office equipment,
net.................................................... 270,365 43,634
----------- --------
Total assets........................................ $ 569,829 130,664
=========== ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable...................................... $ 299,210 46,219
Accrued expenses...................................... 128,938 9,858
Current portion of capital lease obligations.......... 22,258 17,917
Current portion of notes payable to related parties... 64,767 --
----------- --------
Total current liabilities........................... 515,173 73,994
Capital lease obligations, net of current portion....... 16,502 20,533
Notes payable to related parties, net of current
portion................................................ 103,271 --
----------- --------
Total liabilities................................... 634,946 94,527
----------- --------
Stockholders' equity (deficit):
Preferred stock, no par value. Authorized 5,000,000
shares; no shares issued and outstanding............. -- --
Common stock, no par value. Authorized 25,000,000
shares; issued and outstanding 11,315,671 shares in
1998 and 9,950,000 shares in 1997.................... 1,494,551 546,000
Additional paid-in capital............................ 562,825 --
Deferred stock compensation........................... (292,163) --
Accumulated deficit................................... (1,830,330) (509,863)
----------- --------
Total stockholders' equity (deficit)................ (65,117) 36,137
----------- --------
Total liabilities and stockholders' equity
(deficit).......................................... $ 569,829 130,664
=========== ========
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
FACTORYMALL.COM, INC.
(dba azazz!)
STATEMENTS OF OPERATIONS
Years ended December 31, 1998 and 1997 and the period from
April 25, 1996 (inception) to December 31, 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- -------- --------
<S> <C> <C> <C>
Net sales...................................... $ 473,563 70,656 --
Cost of sales.................................. 349,563 53,314 --
----------- -------- --------
Gross profit................................. 124,000 17,342 --
Sales and marketing expense.................... 333,415 94,997 --
Research and development expense............... 223,957 82,852 8,500
General and administrative expense............. 673,530 211,062 131,462
Loss from operations......................... (1,106,902) (371,569) (139,962)
----------- -------- --------
Other income (expense):
Interest expense............................... (213,573) -- --
Other income, net.............................. 8 1,668 --
----------- -------- --------
Total other income (expense)................. (213,565) 1,668 --
----------- -------- --------
Net loss..................................... $(1,320,467) (369,901) (139,962)
=========== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
FACTORYMALL.COM, INC.
(dba azazz!)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1998 and 1997 and the period from
April 25, 1996 (inception) to December 31, 1996
<TABLE>
<CAPTION>
Common stock Additional Deferred Total
--------------------- paid-in stock Accumulated stockholders'
Shares Amount capital compensation deficit equity (deficit)
---------- ---------- ---------- ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balances at April 25,
1996 (inception)....... -- $ -- -- -- -- --
Issuance of common
stock.................. 9,000,000 100,000 -- -- -- 100,000
Net loss................ -- -- -- -- (139,962) (139,962)
---------- ---------- ------- -------- ---------- ----------
Balances at December 31,
1996................... 9,000,000 100,000 -- -- (139,962) (39,962)
Issuance of common
stock.................. 927,000 400,000 -- -- -- 400,000
Conversion of note
payable................ 23,000 46,000 -- -- -- 46,000
Net loss................ -- -- -- -- (369,901) (369,901)
---------- ---------- ------- -------- ---------- ----------
Balances at December 31,
1997................... 9,950,000 546,000 -- -- (509,863) 36,137
Issuance of common
stock.................. 705,671 529,251 -- -- -- 529,251
Issuance of warrants in
connection with
convertible debt....... -- -- 190,000 -- -- 190,000
Conversion of notes
payable to common
stock.................. 416,000 312,000 -- -- -- 312,000
Exercise of warrants.... 200,000 100,000 -- -- -- 100,000
Exercise of stock
options................ 44,000 7,300 -- -- -- 7,300
Deferred stock
compensation........... -- -- 372,825 (372,825) -- --
Amortization of deferred
stock compensation..... -- -- -- 80,662 -- 80,662
Net loss................ -- -- -- -- (1,320,467) (1,320,467)
---------- ---------- ------- -------- ---------- ----------
Balances at December 31,
1998................... 11,315,671 $1,494,551 562,825 (292,163) (1,830,330) (65,117)
========== ========== ======= ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
FACTORYMALL.COM, INC.
(dba azazz!)
STATEMENTS OF CASH FLOWS
Years ended December 31, 1998 and 1997 and the period from
April 25, 1996 (inception) to December 31, 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................... $(1,320,467) (369,901) (139,962)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation............................. 45,476 15,459 3,808
Stock compensation expense............... 80,662 -- --
Accrued interest expense converted into
common stock............................ 190,000 -- --
Change in certain assets and liabilities:
Inventory.............................. (27,505) (4,628) (1,980)
Prepaid expenses and other current
assets................................ 31,223 (28,799) (9,337)
Accounts payable....................... 252,991 34,462 11,757
Accrued expenses....................... 131,080 9,858 --
----------- -------- --------
Net cash used in operating
activities.......................... (616,540) (343,549) (135,714)
----------- -------- --------
Cash used in investing activities--purchase
of computer equipment, furniture and office
equipment................................... (235,570) (2,627) (7,642)
----------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable.... 151,790 -- 46,000
Proceeds from issuance of convertible notes
payable................................... 300,000 -- --
Repayment of capital lease obligations..... (20,079) (11,538) (2,644)
Proceeds from exercise of warrants......... 100,000 -- --
Proceeds from exercise of stock options.... 7,300 -- --
Proceeds from issuance of common stock..... 529,251 400,000 100,000
----------- -------- --------
Net cash provided by financing
activities.......................... 1,068,262 388,462 143,356
----------- -------- --------
Net increase in cash................. 216,152 42,286 --
Cash at beginning of period.................. 42,286 -- --
----------- -------- --------
Cash at end of period........................ $ 258,438 42,286 --
=========== ======== ========
Supplemental schedule of cash flow
information--cash paid during the period for
interest.................................... $ 4,219 3,108 337
=========== ======== ========
Supplemental schedule of noncash investing
and financing activities:
Computer equipment acquired through capital
lease obligations......................... $ 20,389 17,606 35,026
=========== ======== ========
Notes payable and accrued interest
converted to common stock................. 312,000 46,000 --
=========== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE>
FACTORYMALL.COM, INC.
(dba azazz!)
NOTES TO FINANCIAL STATEMENTS
Years ended December 31, 1998 and 1997 and the period from
April 25, 1996 (inception) to December 31, 1996
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
factorymall.com, inc. (Company) (dba azazz!) is a retailer on the Internet.
The Company was incorporated in the State of Washington on April 25, 1996.
Through its Internet web site (www.azazz.com), the Company allows customers to
purchase various consumer goods.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history and the limited history of commerce on
the Internet. Future revenues from the Company's services are dependent on the
continued growth and acceptance of the Internet and use of the Internet for
various commercial transactions.
(b) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(c) Inventories
Inventories consist of finished goods which are valued at the lower of cost
or market (net realizable value) on a first-in, first-out basis.
(d) Computer Equipment, Furniture and Office Equipment
Computer equipment, furniture and office equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Computer equipment is depreciated over an estimated
useful life of three years. Furniture and office equipment is depreciated over
an estimated useful life of five years.
(e) Revenue Recognition
The Company recognizes revenue from product sales, net of any discounts, when
the products are shipped to customers. Outbound shipping and handling charges
are included in net sales. The Company provides an allowance for sales returns,
which has been insignificant, based on historical experience.
(f) Advertising Costs
The cost of advertising is expensed as incurred. In 1998 and 1997, the
Company incurred advertising expense of $93,066 and $17,739, respectively,
which is included in sales and marketing expense. The Company incurred no
advertising costs in 1996.
(g) Income Taxes
The Company is an S corporation for Federal income tax purposes.
Consequently, taxable income or loss of the Company is attributed to the
Company's stockholders and no provision for income taxes has been reflected in
the accompanying financial statements. Pro forma income tax information has not
been provided.
F-32
<PAGE>
FACTORYMALL.COM, INC.
(dba azazz!)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Had the Company been taxed as a C corporation, any income tax benefit as a
result of the losses incurred by the Company would have been fully offset by
the establishment of a valuation allowance for deferred tax assets.
(h) Stock-Based Compensation
The Company accounts for its stock option plans for employees in accordance
with the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. As such,
compensation expense related to employee stock options is recorded only if, on
the date of grant, the fair value of the underlying stock exceeds the exercise
price. The Company follows the disclosure-only requirements of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, which allows entities to continue to apply the provisions of APB
Opinion No. 25 for transactions with employees and provide pro forma
disclosures of operating results as if the fair value based method of
accounting in SFAS No. 123 had been applied to employee stock option grants.
(i) Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of their carrying amount or fair value
less costs to sell.
(j) Fair Value of Financial Instruments
The carrying amounts for the Company's cash, accounts payable, notes payable
and capital lease obligations approximate fair value.
(2) Computer Equipment, Furniture and Office Equipment
Computer equipment, furniture and office equipment consist of the following
at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- ------
<S> <C> <C>
Computer equipment........................................... $309,269 57,651
Furniture and office equipment............................... 25,839 5,250
-------- ------
335,108 62,901
Less accumulated depreciation................................ 64,743 19,267
-------- ------
Net computer equipment, furniture and office equipment..... $270,365 43,634
======== ======
</TABLE>
(3) Commitments
(a) Operating Leases
The Company leases its offices under an operating lease agreement expiring in
February 1999. Minimum lease payments required in 1999 under this lease total
$4,000. The Company also rents warehouse space under a month-to-month
arrangement. Rent expense totaled $27,056, $24,000 and $5,772 for the years
ended December 31, 1998 and 1997 and the period from April 25, 1996 (inception)
to December 31, 1996, respectively.
F-33
<PAGE>
FACTORYMALL.COM, INC.
(dba azazz!)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(b) Capital Leases
The Company leases computer equipment under capital leases. Future minimum
lease payments under capital leases are as follows:
<TABLE>
<S> <C>
1999................................................................ $25,678
2000................................................................ 12,994
2001................................................................ 4,821
-------
43,493
Less amounts representing interest at 9.3% to 14.0%................. 4,733
-------
38,760
Less current portion................................................ 22,258
-------
$16,502
=======
</TABLE>
(c) Portal Commitments
The Company has agreements with certain Internet portal companies to purchase
advertising on their Internet web sites in 1999. Total commitments under these
contracts are approximately $85,000.
(4) Notes Payable to Related Parties
Notes payable to related parties include the following:
<TABLE>
<S> <C>
Note payable to stockholder, payable monthly in installments of
$4,896, including interest at 12%, secured by computer equipment.. $147,449
Note payable to officer, payable monthly in installments of $969,
including interest at 12%, secured by computer equipment.......... 20,589
--------
168,038
Less current portion............................................... 64,767
--------
$103,271
========
</TABLE>
Subsequent to December 31, 1998, the notes were repaid as part of the sale of
the Company.
(5) Stockholders' Equity
(a) Convertible Notes Payable
In March 1998, the Company issued $300,000 of convertible notes payable. The
notes carried an annual interest rate of 12% and matured in July 1998. In
addition, the Company issued the noteholders warrants to purchase 600,000
shares of common stock at $0.50 per share. The fair value of the warrants was
$190,000 which was determined using a Black-Scholes pricing model with the
following assumptions--fair market value of the underlying stock of $0.50 per
share, expected life of five years, expected volatility of 70%, and a risk-free
interest rate of 5.6%. The value of the warrants was recorded as a discount on
the convertible notes payable and amortized to interest expense in 1998. In
1998, 200,000 warrants were exercised. At December 31, 1998, 400,000 warrants
remained outstanding.
F-34
<PAGE>
FACTORYMALL.COM, INC.
(dba azazz!)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In July 1998, the noteholders elected to convert the notes payable to common
stock. The total principal and accrued interest of $312,000 outstanding was
converted into 416,000 shares of common stock at $0.75 per share.
In 1996, the Company issued a $46,000 convertible note payable. This note was
converted into 92,000 shares of common stock in 1997 at $0.50 per share.
(b) Stock Option Plan
In 1998, the Company adopted a stock option plan (the Plan) that provides for
the issuance of incentive and nonqualified stock options to officers,
directors, employees, and consultants to acquire 1,500,000 shares of the
Company's common stock.
The Board of Directors determines the terms and conditions of options granted
under the Plan, including the exercise price and vesting schedule. The exercise
price for qualified incentive stock options shall not be less than the fair
market value of the underlying stock at the date of grant, and have terms no
longer than ten years from the date of grant. Options granted generally vest
over periods ranging from 18 months to four years.
Under APB 25, compensation expense is measured as the excess of the fair
value of the underlying stock over the exercise price on the date of grant. Had
stock compensation expense for the Company's stock option plan been determined
based on the fair value methodology under SFAS 123, the Company's 1998 net loss
would have increased to the following pro forma amount:
<TABLE>
<S> <C>
Net loss:
As reported................................................... $(1,320,407)
Pro forma..................................................... (1,327,492)
</TABLE>
The weighted average fair value of options granted in 1998 was $0.36. The
fair value for these options was estimated at the date of grant using the
minimum value method which takes into account (1) the fair value of the
underlying stock at the grant date, (2) the exercise price, (3) an expected
life of five years, (4) no dividends, and (5) a risk-free interest rate of
5.4%. Compensation expense recognized in providing pro forma disclosures may
not be representative of the effects on net income or loss for future years.
A summary of stock option activity under the Plan is as follows:
<TABLE>
<CAPTION>
Outstanding Options
-------------------------
Shares Weighted
available Number average
for grant of shares exercise price
---------- --------- --------------
<S> <C> <C> <C>
Balances at December 31, 1997.......... -- -- $ --
Plan adoption........................ 1,500,000 -- --
Options granted...................... (1,500,000) 1,500,000 0.50
Options exercised.................... -- (44,000) 0.16
---------- --------- -----
Balances at December 31, 1998.......... -- 1,456,000 $0.51
========== ========= =====
</TABLE>
The Company issued additional options to acquire 183,900 shares of the
Company's common stock during 1998. Subsequent to year-end, the Board of
Directors approved the issuance of these options and amended the Plan to
provide for the issuance of incentive and nonqualified stock options to acquire
an additional 500,000 shares of the Company's common stock.
F-35
<PAGE>
FACTORYMALL.COM, INC.
(dba azazz!)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
under the Plan at December 31, 1998:
<TABLE>
<CAPTION>
Outstanding options Options exercisable
-------------------- --------------------
Weighted
average Weighted Weighted
remaining average average
Exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.50 1,371,000 4.5 years $0.50 223,250 $0.50
0.75 85,000 4.7 years 0.75 2,313 0.75
1,456,000 4.6 years 0.51 225,563 0.50
</TABLE>
(6) Subsequent Event
In February 1999, the Company entered into an agreement to merge the Company
with Nirvana Acquisition Corporation (a wholly-owned subsidiary of
theglobe.com). All issued and outstanding options to purchase common stock of
the Company vested fully on the acquisition date and were converted into
options to purchase common stock of theglobe.com at a specified conversion
rate. As a result of the acquisition, certain employees received a percentage
of the sale proceeds, as provided for under the terms of their employment
contracts.
F-36
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Attitude Network, Ltd.
Naples, Florida
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows present fairly, in all material respects, the financial position of
Attitude Network, Ltd. and its subsidiary (the "Company") at December 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the two years ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 15
to the consolidated financial statements, the Company has suffered recurring
losses from operations which raises substantial doubt about its ability to
continue as a going concern. As discussed in Note 16 to the consolidated
financial statements, on April 9, 1999 the Company merged with a wholly owned
subsidiary of theglobe.com, inc. whereby the stockholders of the Company
exchanged their common stock for shares of common stock of theglobe.com, inc.
at a specified conversion rate. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
March 19, 1999,
except for Note 16,
for which the date is April 9, 1999
F-37
<PAGE>
ATTITUDE NETWORK, LTD.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash............................................. $ 2,161,513 $ 83,318
Accounts receivable, less allowance for doubtful
accounts of $200,000 and $96,473 at December 31,
1998 and 1997, respectively..................... 406,412 546,993
------------ ------------
Total current assets........................... 2,567,925 630,311
------------ ------------
Property and equipment, net........................ 382,277 453,081
Intangible assets, net............................. 1,825,039 3,706,919
Deposits........................................... 24,308 13,799
------------ ------------
Total assets................................... $ 4,799,549 $ 4,804,110
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable................................. $ 185,127 $ 647,784
Accrued expenses................................. 358,668 1,680,636
Deferred revenue................................. 346,775 300,000
Convertible notes payable to directors........... 950,000 --
Current portion of long-term debt................ 200,000 137,615
------------ ------------
Total current liabilities...................... 2,040,570 2,766,035
Long-term debt..................................... 2,343,171 2,293,536
------------ ------------
Total liabilities.............................. 4,383,741 5,059,571
------------ ------------
Commitments and contingencies (Note 14)
Stockholders' equity (deficit):
Preferred stock, $.0l par value, 5,000 shares
authorized, no shares issued and outstanding.... -- --
Common stock, $.001 par value, 20,000,000 shares
authorized, 13,114,457 and 11,446,352 shares
issued and outstanding at December 31, 1998 and
1997, respectively.............................. 13,115 11,446
Additional paid-in capital....................... 17,542,540 10,683,250
Accumulated deficit.............................. (17,139,972) (10,950,467)
Accumulated other comprehensive income........... 125 310
------------ ------------
Total stockholders' equity (deficit)........... 415,808 (255,461)
------------ ------------
Total liabilities and stockholders' equity..... $ 4,799,549 $ 4,804,110
============ ============
</TABLE>
F-38
<PAGE>
ATTITUDE NETWORK, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Sales................................................ $ 1,885,547 $ 2,474,537
Cost of sales........................................ 903,476 1,325,662
----------- -----------
Gross profit..................................... 982,071 1,148,875
----------- -----------
Operating expenses:
Selling and marketing.............................. 681,585 1,609,202
Product development................................ 1,860,686 2,520,090
General and administrative......................... 1,644,415 1,484,360
Amortization....................................... 1,883,137 1,320,098
----------- -----------
Total operating expenses......................... 6,069,823 6,933,750
----------- -----------
Operating loss................................. (5,087,752) (5,784,875)
Nonoperating income (expense):
Gain on sale of website............................ -- 200,000
Interest expense................................... (1,101,753) (250,076)
Litigation settlement.............................. -- (1,395,000)
----------- -----------
Net loss....................................... $(6,189,505) $(7,229,951)
=========== ===========
</TABLE>
F-39
<PAGE>
ATTITUDE NETWORK, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Preferred Stock Common Stock Additional Other Stockholders'
---------------- -------------------- Paid-In Accumulated Comprehensive Equity
Shares Par Value Shares Par Value Capital Deficit Income (Deficit)
------ --------- ---------- --------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1996................... -- $ -- 9,447,520 $ 9,448 $ 4,914,342 $ (3,720,516) $ -- $ 1,203,274
Issuance of shares of
common stock for
acquisition............ -- -- 1,000,000 1,000 2,499,000 -- -- 2,500,000
Issuance of shares of
common stock........... -- -- 666,667 667 1,999,333 -- -- 2,000,000
Issuance of shares of
common stock........... -- -- 330,665 330 1,264,576 -- -- 1,264,906
Conversion of debt to
common stock........... -- -- 1,500 1 5,999 -- -- 6,000
Comprehensive income
(loss)
Foreign currency
translation........... -- -- -- -- -- -- 310 310
Net loss............... -- -- -- -- -- (7,229,951) -- (7,229,951)
-----------
Total comprehensive
income (loss)......... (7,229,641)
--- ----- ---------- ------- ----------- ------------ ----- -----------
Balances, December 31,
1997................... -- -- 11,446,352 11,446 10,683,250 (10,950,467) 310 (255,461)
Issuance of shares of
common stock........... -- -- 250,000 250 999,750 -- -- 1,000,000
Issuance of shares of
common stock........... -- -- 259,939 260 999,750 -- -- 1,000,010
Exercise of common stock
options for shares..... -- -- 26,500 27 11,899 -- -- 11,926
Issuance of shares of
common stock for legal
settlement............. -- -- 465,000 465 1,394,535 -- -- 1,395,000
Issuance of shares of
common stock, net of
issue cost............. -- -- 666,666 667 1,909,326 -- -- 1,909,993
Issuance of 400,000
common stock warrants.. -- -- -- -- 798,920 -- -- 798,920
Stock option expense.... -- -- -- -- 745,110 -- -- 745,110
Comprehensive income
(loss)
Foreign currency
translation........... -- -- -- -- -- -- (185) (185)
Net loss............... -- -- -- -- -- (6,189,505) -- (6,189,505)
-----------
Total comprehensive
income (loss)......... (6,189,690)
--- ----- ---------- ------- ----------- ------------ ----- -----------
Balances, December 31,
1998................... -- $ -- 13,114,457 $13,115 $17,542,540 $(17,139,972) $ 125 $ 415,808
=== ===== ========== ======= =========== ============ ===== ===========
</TABLE>
F-40
<PAGE>
ATTITUDE NETWORK, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss........................................... $(6,189,505) $(7,229,951)
----------- -----------
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation..................................... 120,594 84,790
Amortization..................................... 1,883,137 1,320,098
Amortization of discount on note payable......... 262,020 262,360
Non-cash interest related to warrant valuation... 798,920 --
Stock options expense............................ 745,110 --
Provision for bad debts.......................... 103,527 253,521
Gain on sale of website.......................... -- (200,000)
(Gain) loss on sale of property and equipment.... (4,316) 22,055
Changes in assets and liabilities:
Decrease in inventory.......................... -- 7,047
Increase (decrease) in accounts receivable..... 37,054 (304,096)
Increase in other assets....................... (11,766) (10,207)
Increase (decrease) in accounts payable........ (462,657) 403,378
Increase in accrued expenses................... 73,032 1,606,509
Increase in deferred revenue................... 46,775 297,517
----------- -----------
Total adjustments............................ 3,591,430 3,742,972
----------- -----------
Net cash used in operating activities........ (2,598,075) (3,486,979)
----------- -----------
Cash flow from investing activities
Purchase of property and equipment................. (47,174) (341,047)
Cash received from sale of property and equipment.. 1,700 14,111
Cash received from sale of website................. -- 200,000
Acquisition, net of cash acquired.................. -- (59,128)
----------- -----------
Net cash used in investing activities........ (45,474) (186,064)
----------- -----------
Cash flows from financing activities
Proceeds from issuance of common stock............. 4,000,003 3,270,906
Stock issuance costs............................... (90,000) --
Proceeds from exercise of stock option............. 11,926 --
Proceeds from directors notes...................... 950,000 --
Payments on long-term debt......................... (150,000) (179,100)
----------- -----------
Net cash provided by financing activities.... 4,721,929 3,091,806
----------- -----------
Effect of exchange rate changes on cash.............. (185) 3,172
----------- -----------
Net increase (decrease) in cash...................... 2,078,195 (578,065)
Cash at beginning of period.......................... 83,318 661,383
----------- -----------
Cash at end of period................................ $ 2,161,513 $ 83,318
=========== ===========
</TABLE>
Supplemental disclosure of cash flow information
In 1997, common stock was issued in satisfaction of amounts payable to a
vendor in the amount of $6,000.
In 1997, 1,000,000 shares of common stock were issued to acquire Kaleidoscope
Network, Ltd. (see Note 3).
In 1998, 465,000 shares of common stock were issued to settle litigation
accrued for at December 31, 1997 for $1,395,000.
F-41
<PAGE>
ATTITUDE NETWORK, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. Organization
Attitude Network, Ltd. (the Company) was formed in January 1995 to
establish, develop and deliver customized website programming to narrowly
defined target audiences. The Company seeks to support its markets by
providing advertising supported online entertainments. Its audiences include
but are not limited to the on-line games market.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Attitude Network, Ltd. and its wholly owned subsidiary, Kaleidoscope Network,
Ltd. All material intercompany transactions have been eliminated in
consolidation.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided on the straight-line basis over the estimated useful
lives of the related assets.
Major improvements and betterments of property are capitalized. Maintenance,
repairs and minor improvements are charged to expense in the period incurred.
Upon the sale or other disposition of property, the cost and related
accumulated depreciation are removed from the accounts and any gain or loss is
reflected in income.
Intangible Assets
The costs of web rights purchased by the Company are being amortized on the
straight-line method over the estimated useful life of three years. The
Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. To
date, no such impairment has been recorded.
Implementation of SFAS 130
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," effective for fiscal periods beginning after December 15, 1997. The
new standard requires that comprehensive income, which includes net income, as
well as certain changes in assets and liabilities recorded in common equity,
be reported in the financial statements. The Company adopted SFAS No. 130
during the year ended December 31, 1998.
Foreign Currency Translation
The financial position and results of operations of the Company's foreign
operations are measured using local currency as the functional currency.
Current assets and liabilities of these operations are translated to the U.S.
dollar at the exchange rate in effect at year-end. Income statement accounts
are translated at the average rate of exchange prevailing during the year.
Translation adjustments arising from differences in exchange rates from period
to period are recorded in accumulated comprehensive income. Realized gains and
losses resulting from foreign currency transactions are included in the
statement of operations.
F-42
<PAGE>
ATTITUDE NETWORK, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
Deferred Revenue
Deferred revenue represents amounts received by the Company related to future
services to be provided.
Revenue Recognition
Website advertising revenue is earned by providing advertisers with a space
on the Company's website to promote products. The Company's advertising
revenues are derived principally from short-term advertising contracts in which
the Company guarantees a minimum number of impressions (a view of an
advertisement by a consumer) for a fixed fee. Advertising revenues are
recognized ratably over the term of the contract. Hotel discount revenue
represents revenue earned by the Company for reservations booked through their
hotel discount web page and is recognized in the month earned. Revenue received
in connection with an agreement between the Company and a telephone company,
whereby the Company has agreed to develop, deliver, install and operate a
computer-based games service designed for the telephone company is recognized
on a monthly basis in accordance with the agreement.
The Company trades advertisements on its website in exchange for
advertisements on the internet sites of other companies. Barter revenues and
expenses are recorded at the fair market value of services provided or
received, whichever is more determinable in the circumstances. Revenue from
barter transactions is recognized as advertisements are delivered on the
Company's website. Barter expense is recognized as cost of sales when the
Company's advertisements are run on other companies web sites, which is
typically in the same period when the barter revenue is recognized.
Cost of Sales
Cost of sales includes communication/on-line costs associated with connecting
the Company's website with servers, costs incurred for website audits, barter
expense and other direct costs.
Product Development
The costs to develop and maintain the Company's web sites are being expensed
as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Management's Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 1998
presentation.
F-43
<PAGE>
ATTITUDE NETWORK, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
3. Acquisition
In February 1997, the Company acquired all of the issued and outstanding
shares of Kaleidoscope Networks Limited, a company registered in England, for
an aggregate purchase price of approximately $2.6 million. The purchase
consisted primarily of an internet worldwide games website including all
software, documentation, licenses, contracts and contract rights, and property
rights necessary to operate the website. The acquisition was funded through the
issuance of 1,000,000 shares of the Company's common stock, stock options for
the purchase of an additional 100,000 shares of common stock and cash payments
of approximately $106,000. The acquisition has been accounted for using the
purchase method of accounting. Substantially all of the purchase price was
allocated to the website intangible asset.
4. Property and Equipment
Property and equipment consisted of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Computers and office equipment......................... $ 612,962 $ 571,276
Furniture and fixtures................................. 17,165 16,480
Leasehold improvements................................. 3,200 3,200
--------- ---------
633,327 590,956
Less accumulated depreciation.......................... (251,050) (137,875)
--------- ---------
$ 382,277 $ 453,081
========= =========
</TABLE>
5. Intangible Assets
Intangible assets consisted of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Website rights..................................... $ 5,119,515 $ 5,119,515
Organization costs................................. 15,326 15,326
Other.............................................. 1,257 --
----------- -----------
5,136,098 5,134,841
Accumulated amortization........................... (3,311,059) (1,427,922)
----------- -----------
$ 1,825,039 $ 3,706,919
=========== ===========
</TABLE>
6. Leases
The Company leases certain equipment and office space under operating type
leases. Future minimum payments under these leases are as follows:
<TABLE>
<S> <C>
1999................................................................ $ 62,085
2000................................................................ 60,876
2001................................................................ 63,311
2002................................................................ 26,809
--------
$213,081
========
</TABLE>
Rental expense for the years ended December 31, 1998 and 1997 was
approximately $132,000 and $193,000, respectively.
F-44
<PAGE>
ATTITUDE NETWORK, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
7. Convertible Notes Payable to Directors
During 1998, the Company borrowed $950,000 from various directors of the
Company. These notes are due on demand and accrue interest at 8.5%. The notes
feature a conversion right at the option of the holder, which may be exercised
in the event the Company is sold. The conversion right allows the holder to
convert the note into stock of the new or surviving entity at a price equal to
the per share transaction price. Most of the notes include detachable warrants
for a total of 400,000 shares of common stock at an exercise price of $1.00 per
share. The warrants expire in 2003. A value of approximately $800,000 was
assigned to the warrants (additional paid-in capital) based on the difference
between the fair market value of the stock at date of issuance ($3.00) and the
exercise price of $1.00. Since the notes are demand notes, the entire value
assigned to the warrants was charged to interest expense in 1998.
8. Long-Term Debt
The Company's long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Non-interest bearing obligation payable to a
corporation related to the purchase of an internet
worldwide website................................... $2,543,171 $2,431,151
========== ==========
</TABLE>
The obligation is to be repaid based on 5% of the Company's gross revenues
related to the website, less certain costs directly associated with the
website. The payments required by the agreement are also subject to specific
minimum amounts payable per year. In the event of an initial public offering by
the Company, the total unpaid amount of the obligation would become due and
payable. The $5.6 million obligation has been recorded at its present value,
assuming a 9% interest rate, and has been reduced by $150,000 and $179,000 of
payments made by the Company in 1998 and 1997, respectively. The unamortized
discount was $2,556,829 and $2,818,849 as of December 31, 1998 and 1997,
respectively.
The minimum principal amounts payable over the next five years under this
agreement are as follows:
<TABLE>
<S> <C>
1999............................................................ $ 200,000
2000............................................................ 250,000
2001............................................................ 300,000
2002............................................................ 300,000
2003............................................................ 300,000
Thereafter...................................................... 3,750,000
-----------
5,100,000
Less Discount................................................... (2,556,829)
-----------
2,543,171
Less current portion............................................ (200,000)
-----------
$ 2,343,171
===========
</TABLE>
9. Income Taxes
No provision for federal or state income taxes has been made for the years
ended December 31, 1998 and 1997, since the Company reported a loss for both
financial reporting and income tax purposes.
F-45
<PAGE>
ATTITUDE NETWORK, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
The Company had available approximately $10,556,000 of net operating loss
carryforwards to reduce future taxable income as of December 31, 1998. The
utilization of the net operating loss carryforwards, which begin to expire in
the year 2012, will be subject to limitations as a result of a more than 50%
change in ownership of the Company in 1997 (See Note 10).
The tax effects of the temporary differences that gave rise to the deferred
tax balances at December 31, 1998 and 1997 were the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards................. $ 3,972,000 $ 2,719,000
Allowance for doubtful accounts.................. 81,000 130,000
Start-up expenditures............................ 193,000 280,000
Amortization of intangible assets................ 524,000 --
Other............................................ 136,000 131,000
Valuation allowance.............................. (4,906,000) (3,222,600)
----------- -----------
-- 37,400
Deferred liability:
Amortization of intangible assets................ -- (37,400)
----------- -----------
Net deferred tax asset......................... $ -- $ --
=========== ===========
</TABLE>
The Company provides for a valuation allowance on deferred tax assets since
utilization is uncertain.
10. Stockholders' Equity
In February 1997, Maricopa Investment Corporation, an unaffiliated company,
purchased all the outstanding shares held by a shareholder of the Company and
subscribed to the Company for an additional 666,667 shares of common stock at
$3.00 per share. In total, these purchases represent approximately 42% of the
shares outstanding.
In February 1997, the Company also issued 1,000,000 shares of common stock to
acquire Kaleidoscope Networks, Ltd. (see Note 3). As part of this acquisition
agreement, the Company entered into an additional agreement with the sellers
whereby, upon notice from the sellers at any time in the five-year period
following the 18th month from the date of the agreement, the Company shall be
required to purchase up to 500,000 shares of common stock owned by the sellers
at a purchase price of $2.50 per share. Five years following the 36th month
from the date of this agreement, the sellers may give notice and the Company
may be required to purchase up to an additional 500,000 shares of common stock
owned by the seller at a purchase price of $2.50 per share. This agreement
shall terminate upon the ninth anniversary from the date of this agreement.
The above transactions exceeded 50% of the outstanding shares of the Company.
During 1997, the Company issued to certain directors and unrelated parties
330,665 shares of common stock at $4.00 per share. In November 1997, the
Company issued 1,500 shares of common stock in exchange for forgiveness of a
$6,000 payable to a vendor.
During 1998, the Company sold 1,166,666 shares to various investors at prices
ranging from $3.00--$4.00 per share for total proceeds of approximately
$4,000,000. The sale of 666,666 shares included anti-dilution provisions, as
well as a shareholder rights agreement, which provides for certain future
registration rights.
F-46
<PAGE>
ATTITUDE NETWORK, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
In September 1998, the Company issued 465,000 shares in connection with the
settlement of a lawsuit filed in December 1997. The lawsuit related to claims
for a 10.75% equity interest in the Company and unspecified other damages by a
media service and editorial management company who had previously been party to
a memorandum of understanding with certain of the Company's stockholders,
officers, and directors. The settlement was accrued for at December 31, 1997.
11. Stock Option Plan
Effective July 1, 1996, the Company adopted the 1996 Stock Option Plan (the
Plan) available for grant to eligible employees and eligible participants to
purchase up to 1,200,000 shares of the Company's common stock. The Plan is
administered by a committee appointed by the Board of Directors or by the Board
of Directors if each member of the committee is eligible to receive stock
options or if the members of the committee have been eligible to receive stock
options for a period of one year prior to their services on the committee. The
Board of Directors or a committee shall administer the Plan, select the
eligible employees and eligible participants to whom options will be granted,
determine the number of shares subject to any such options and interpret,
construe and implement the provisions of the Plan. The Board of Directors or
the committee shall also determine the price to be paid for the shares upon
exercise of each option, the period within which each option may be exercised,
and the terms and conditions of each option.
The option exercise price will be equal to 100% of market value on the day
the option is granted (110% in the case of a 10% owner of the Company), as
determined by the Board of Directors or the committee. No option shall be
exercisable after ten years from the date of the grant of the option, and
shares subject to the option granted to a 10% owner shall not be exercisable
after five years from the date of grant of the option. The Plan expires on July
1, 2006.
Compensation expense resulting from stock options is measured at the grant
date based upon the difference between the exercise price and the market value
of the common stock. All stock options granted in 1997 were granted at an
exercise price equal to the market value at the date of grant. During 1998 the
Company granted 192,200 stock options at $.45 that were not in accordance with
the 1996 stock option plan as they were not granted at fair market value. The
aggregate compensation cost related to these $.45 stock options granted in the
year ended December 31, 1998 was $449,310. Additionally, expense of $295,800
was recognized in connection with options granted to a non-employee who
performed financial advisory services for the Company in 1998.
A summary of the stock option activity is presented below:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding as of December 31, 1996.............. 790,000 $1.02
Options granted.................................. 305,000 2.90
Forfeited........................................ (145,000) 2.86
--------- -----
Outstanding as of December 31, 1997.............. 950,000 1.46
Options granted.................................. 377,200 1.65
Exercised........................................ (26,500) 0.45
Forfeited........................................ (295,350) 1.59
--------- -----
Outstanding as of December 31, 1998.............. 1,005,350 $1.52
========= =====
</TABLE>
The Company applies APB Opinion No. 25 and related interpretation in
accounting for its Plan. Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" (SFAS No. 123),
F-47
<PAGE>
ATTITUDE NETWORK, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
requires compensation expense measured as the excess of the fair value of the
underlying stock over the exercise price on the date of grant. Pro forma
disclosures as if the Company had adopted the cost recognition requirements
under SFAS No. 123 are not presented as the effects were immaterial.
The weighted average fair value of options-granted in 1998 was $1.79. The
fair value for these options was estimated at the date of granting using the
minimum value method which takes into account (1) the fair value of the
underlying stock at the grant date, (2) the exercise price, (3) weighted
average expected life of 5.70 years, (4) no dividends, and (5) a weighted
average risk-free interest rate of 5.76%. Compensation expense recognized in
providing pro forma disclosures may not be representative of the effects on net
income or loss for future years.
The following table summarizes information about stock options outstanding
under the Plan at December 31, 1998:
<TABLE>
<CAPTION>
Weighted average
Exercise Number remaining Number
prices outstanding contractual life exercisable
-------- ----------- ---------------- -----------
<S> <C> <C> <C>
$0.45 254,100 3.1 years 254,100
0.70 510,000 7.5 years 385,000
2.50 100,000 7.5 years 100,000
3.00 81,250 7.5 years 22,000
4.00 50,000 7.5 years
5.00 10,000 7.5 years 10,000
--------- --------- -------
1,005,350 771,100
========= =======
</TABLE>
12. Risks and Uncertainties
The Company has derived revenues of approximately $300,000 and $256,000 in
1998 and 1997, respectively, from one customer, which approximates 16% and 10%,
respectively, of total revenue. The Company's accounts receivable also includes
$200,000 and $87,850 receivable from this customer, which represents 49% and
16% of total accounts receivable as of December 31, 1997 and 1998,
respectively.
The Company maintains cash balances at a financial institution located in
Southwest Florida in excess of the $100,000 insured by the Federal Deposit
Insurance Corporation. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risk on cash
balances.
13. Related Party Transactions
Accounts payable as of December 31, 1998 and 1997 includes $29,396 and
$64,346, respectively, which is payable to employees, individuals and
organizations related to the Company.
The Company has an agreement under which total payments of $155,000 have been
made each year to the chief executive officer in 1998 and 1997, which includes
a bonus of $35,000 for 1998 and 1997. The agreement extends through July 1999
and provides for monthly payments of $10,000 with a provision for a
discretionary bonus to be determined by the Company's Board of Directors.
The Company had a consulting agreement with one of its directors, under which
$105,000 was paid in 1997. The consulting agreement expired in October 1997.
F-48
<PAGE>
ATTITUDE NETWORK, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
The Company rents its office space in Florida on a month-to-month basis as a
subtenant of a Company controlled by a member of its Board of Directors. It
also receives certain office support services. These rents and support services
are priced on a pass-through basis without mark-up, and totaled approximately
$13,000 and $15,000 in 1998 and 1997, respectively.
14. Commitments and Contingencies
In March 1998, the Company entered into an agreement with MacMillan Digital
Publishing USA (MacMillan) to create and operate a website designed to serve as
an on-line resource for the gaming market. The Company is primarily responsible
for the operation of the website and MacMillan will pay the Company a
commission on product sales related to the website. The terms of the agreement
commenced upon execution. The agreement will terminate May 31, 1999, and is
renewable for successive one-year terms.
As discussed in Note 10, the Company has issued a put option to the former
owners of Kaleidoscope Networks Limited.
The Company is a defendant in various legal proceedings, which occurred in
the ordinary course of business. In the opinion of management, the ultimate
settlement of such legal proceedings will not have a material adverse impact on
the Company's financial statements.
15. Going Concern
Since inception, the Company has incurred significant operating losses. These
losses have been financed primarily through the issuance of common stock and
loans from directors. The ability of the Company to continue as a going concern
is dependent upon additional funding and/or attaining profitable operations.
The financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern. See Note 16.
16. Subsequent Event
On April 9, 1999 the Company merged with a wholly owned subsidiary of
theglobe.com, inc. whereby the stockholders of the Company exchanged their
common stock for shares of common stock of theglobe.com, inc. at a specified
conversion rate. Management believes the merger will result in sufficient funds
to continue operating activities. The shares issued in connection with the
Kaleidoscope Networks, Ltd. acquisition, subject to a put option, were
exchanged as part of the merger and thus the put option terminated.
F-49
<PAGE>
theglobe.com expands its content and services:
Recent Acquisitions
"In keeping with this vision of community, the globe.com has
been making acquisitions and partnerships to enhance its user
services and jump-start an e-commerce revenue stream."
--Red Herring Online
[Screen views]
Attitude Network
. Games Domain
. Kids Domain
. Happy Puppy
Attitude Network's sites offer millions of
users entertainment content that
capitalizes on the web's unique graphical
and interactive capabilities. Games Domain
is based in Birmingham, England and
receives traffic at mirror sites in Russia,
Greece, South Africa and Portugal. Happy
Puppy is a major participant in industry-
related events, and gives out awards to
reflect users' selections of best games.
Kids Domain features online children's
games, free downloads, contests, and a
magazine section complete with reviews.
Happy Puppy voted among "Best Of The Best Sites"
--Yahoo Internet Life, January 1999
[Screen view]
shop.theglobe.com
In February 1999, we acquired the online department
store Azazz.com (now shop.theglobe.com). Azazz.com
received a four-star rating from bizrate.com, a
customer certified report card. The principles behind
shop.theglobe.com are convenience, diversity in
product selection, and enhanced service, with a live
personal shopper available to assist members.
Currently, shop.theglobe.com has 18 departments
including kidsworld, home, office, sports and jewelry,
each offering a variety of name brand merchandise.
<PAGE>
[LOGO]
theglobe.com
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table shows the expenses, other than underwriting discounts and
commissions, to be incurred in connection with the sale and distribution of
securities being registered by the Company. Except for the SEC registration
fee, the Nasdaq Listing Fee and the NASD Filing Fee, all amounts are estimated.
<TABLE>
<S> <C>
SEC Registration Fee............................................... $101,831
Nasdaq Listing Fee................................................. 17,500
NASD Filing Fee.................................................... 35,500
Blue Sky Fees and Expenses......................................... 6,000
Legal Fees and Expenses............................................ 450,000
Accounting Fees and Expenses....................................... 75,000
Printing Expenses.................................................. 100,000
Miscellaneous Expenses............................................. 15,169
--------
Total............................................................ $800,000
========
</TABLE>
- --------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers as well as other
employees and individuals against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement in connection with specified
actions, suits, proceedings whether civil, criminal, administrative, or
investigative (other than action by or in the right of the corporation--a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such action, and the statue requires court approval
before there can be any indemnification where the person seeking
indemnification has been found liable to the corporation. The statute provides
that it is not exclusive of other indemnification that may be granted by a
corporation's charter, by-laws, disinterested director vote, stockholder vote,
agreement, or otherwise.
Article VI of the By-Laws requires the Company to indemnify any person who
was or is a party or is threatened to be made a party to or is involved
(including, without limitation, as a witness) in any threatened, pending or
completed action, suit, arbitration, alternative dispute mechanism,
investigation, administrative hearing or any other proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) brought by reason of the fact that he or she is or was a
director or officer of the Company, or, while a director or officer of the
Company, is or was serving at the request of the Company as a director or
officer of another corporation, partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefits plan against
expenses (including attorneys' fees, judgments, fines, excise taxes under the
Employee Retirement Income Security Act of 1974, penalties and amounts paid in
settlement) incurred by him or her in connection with such action, suit or
proceeding if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability for (i) any
breach of the director's duty
II-1
<PAGE>
of loyalty to the corporation or its stockholders, (ii) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) payment of unlawful dividends or unlawful stock purchases or
redemptions, or (iv) any transaction from which the director derived an
improper personal benefit.
Article VI of the Company's Fourth Amended and Restated Certificate of
Incorporation (the "Certificate") provides that to the fullest extent that the
DGCL, as it now exists or may hereafter be amended, permits the limitation or
elimination of the liability of directors, a director of the Company shall not
be liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director. Any amendment to or repeal of, or adoption of any
provision of the Certificate inconsistent with, such Article VI shall not
adversely affect any right or protection of a director of the Company for or
with respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
The Company has entered into indemnification agreements with its directors
and officers substantially in the form attached to this registration statement
as Exhibit 10.4. These agreements provide, in general, that the Company will
indemnify such directors and officers for, and hold them harmless from and
against, any and all amounts paid in settlement or incurred by, or assessed
against, such directors and officers arising out of or in connection with the
service of such directors and officers as a director or officer of the Company
or its Affiliates (as defined therein) to the fullest extent permitted by
Delaware law.
The Company maintains directors' and officers' liability insurance which
provides for payment, on behalf of the directors and officers of the Company
and its subsidiaries, of certain losses of such persons (other than matters
uninsurable under law) arising from claims, including claims arising under the
Securities Act, for acts or omissions by such persons while acting as directors
or officers of the Company and/or its subsidiaries, as the case may be.
The Underwriting Agreement (the form of which is filed as Exhibit 1.1 hereto)
provides for indemnification by the Underwriters of the Company and its
officers and directors for certain liabilities arising under the Securities Act
or otherwise.
Item 15. Recent Sales of Unregistered Securities
All sales, unless otherwise noted, were made in reliance on Section 4(2) of
the Securities Act and/or Regulation D or Rule 701 promulgated under the
Securities Act and were made without general solicitation or advertising. The
purchasers were sophisticated investors with access to all relevant information
necessary to evaluate these investments, and who represented to the Registrant
that the shares were being acquired for investment. The following chart sets
forth information regarding some of such sales.
<TABLE>
<CAPTION>
Date of Title of Number of Consideration
Purchaser issuance securities shares received ($)
- --------- -------- ---------- --------- -------------
<S> <C> <C> <C> <C>
Alce Partners, L.P.......... 12/22/95 Series B Preferred 190,480 100,002
Bergendahl, Anders.......... 9/7/95 Series A Preferred 159,630 15,750
12/22/95 Series B Preferred 95,240 50,001
11/13/96 Series C Preferred 15,000 30,000
Bergendahl, Mia............. 9/7/95 Series A Preferred 159,630 15,750
12/22/95 Series B Preferred 47,620 25,000.50
Cayuga Venture Fund......... 11/13/96 Series C Preferred 12,500 25,000
David Duffield Trust........ 12/22/95 Series B Preferred 190,480 100,002
11/13/96 Series C Preferred 125,000 250,000
3/15/97 Series C Preferred 125,000 250,000
de Selliers, Baudouin....... 11/13/96 Series C Preferred 25,000 50,000
Ganem, Bruce................ 11/13/96 Series C Preferred 7,500 15,000
3/15/97 Series C Preferred 7,500 15,000
GC&H Investments............ 12/22/95 Series B Preferred 47,620 25,000.50
Grey, Nicki................. 11/16/95 Series A Preferred 6,430 500
Grinstead, Simon............ 11/16/95 Series A Preferred 106,430 10,500
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Date of Title of Number of Consideration
Purchaser issuance securities shares received ($)
- --------- -------- ---------- --------- -------------
<S> <C> <C> <C> <C>
Halperin, Mark R........ 12/22/95 Series B Preferred 47,620 25,000.50
11/13/96 Series C Preferred 12,500 25,000
Halperin Dow, Peggy
Anne................... 12/22/95 Series B Preferred 47,620 25,000.50
11/13/96 Series C Preferred 12,500 25,000
Halperin, Philip W...... 12/22/95 Series B Preferred 47,620 25,000.50
11/13/96 Series C Preferred 12,500 25,000
Halperin, Robert M...... 12/22/95 Series B Preferred 47,620 25,000.50
11/13/96 Series C Preferred 12,500 25,000
5/29/98 Common Stock 85,416 8,171.88
Hirsch, Jason........... 11/16/95 Series A Preferred 38,490 3,000
Horowitz, David......... 12/22/95 Series B Preferred 100,000 52,500
11/13/96 Series C Preferred 25,000 50,000
6/19/97 Common Stock 31,944 3,111.06
Huret Family Trust...... 11/13/96 Series C Preferred 12,500 25,000
Karlsson, Bengt......... 11/13/96 Series C Preferred 50,000 100,000
Krizelman, Allen........ 9/7/95 Series A Preferred 151,690 15,000
Krizelman, Susan........ 11/16/95 Series A Preferred 12,830 1,000
Krizelman, Todd......... 5/26/95 Common Stock 1,050,000 2,184
11/16/95 Series A Preferred 44,910 3,500
Leavitt Investments,
L.P.................... 11/13/96 Series C Preferred 75,000 150,000
Maconie, Andrew......... 11/16/95 Series A Preferred 6,430 513.70
Miller, Dan............. 11/13/96 Series C Preferred 37,500 75,000
Muckstadt, Jack......... 11/13/96 Series C Preferred 7,500 15,000
3/15/97 Series C Preferred 7,500 15,000
Muller, Georges......... 1/22/96 Series B Preferred 47,620 25,000.50
Paternot, Jacques....... 9/7/95 Series A Preferred 32,850 3,000
12/22/95 Series B Preferred 13,330 6,998.25
Paternot, Madeleine..... 11/16/95 Series A Preferred 2,570 205.48
Paternot, Monica........ 11/16/95 Series A Preferred 3,860 308.22
Paternot, Stephan....... 5/26/95 Common Stock 1,200,000 2,496
Paternot, Thierry....... 11/16/95 Series A Preferred 6,430 513.70
12/22/95 Series B Preferred 38,100 20,002.50
Paternot, Yves.......... 9/7/95 Series A Preferred 177,380 17,000
12/22/95 Series B Preferred 47,620 25,000.50
S. Knight Pond Trust.... 9/7/95 Series A Preferred 256,430 26,500
12/22/95 Series B Preferred 142,860 75,001.50
Tuli, John.............. 1/1/97 Common Stock 26,598 1396.34
</TABLE>
In August 1997, the Company issued and sold to Dancing Bear Investments (i)
51 shares of Series D Preferred Stock which converted into 8,047,530 shares of
Common Stock upon consummation of the Company's initial public offering in
November 1998 and (ii) Warrants to purchase 4,046,018 shares of Common Stock of
the Company at the time of exercise for an aggregate price of $5,882,353. The
aggregate consideration for such transaction was $20 million.
In connection with the acquisition of factorymall.com on February 1, 1999, we
issued 687,832 shares of our common stock and assumed options to purchase
approximately 82,034 shares of our common stock. Such options have an aggregate
exercise price of approximately $928,950. In addition, we assumed warrants to
purchase 18,810 shares of our common stock at an aggregate exercise price of
approximately $200,000.
On April 9, 1999 we issued 1,570,922 shares of our common stock in connection
with the acquisition of Attitude Network, Ltd. We also assumed options to
purchase 84,760 shares of our common stock at an aggregate exercise price of
$955,605. Additionally, we assumed warrants to purchase 46,706 shares of our
common stock at an aggregate exercise price of $400,000.
II-3
<PAGE>
Item 16. Exhibits and financial statement schedules
(a) Exhibits
The following Exhibits are attached hereto and incorporated herein by
reference:
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement*****
2.1 Agreement and Plan of Merger dated as of February 1, 1999 by and among
theglobe.com, inc., Nirvana Acquisition Corp., factorymall.com, inc.
d/b/a Azazz, and certain selling stockholders thereof.**
2.2 Agreement and Plan of Merger dated as of April 5, 1999 by and among
theglobe.com, inc., Bucky Acquisition Corp., Attitude Network Ltd. and
certain stockholders thereof.******
3.1 Form of Fourth Amended and Restated Certificate of Incorporation of the
Company*
3.2 Form of By-Laws of the Company*
4.1 Second Amended and Restated Investor Rights Agreement among the Company
and certain equity holders of the Company, dated as of August 13, 1997*
4.2 Amendment No.1 to Second Amended and Restated Investor Rights Agreement
among the Company and certain equity holders of the Company, dated as of
August 31, 1998***
4.3 Amendment No. 2 to Second Amended and Restated Investor Rights Agreement
among the Company and certain equity holders of the Company, dated as of
April 9, 1999.******
4.4 Form of Amendment No. 3 to Second Amended and Restated Investor Rights
Agreement among the Company and certain equity holders of the Company.
4.5 Registration Rights Agreement, dated as of September 1, 1998***
4.6 Amendment No. 1 to Registration Rights Agreement, dated as of April 9,
1999.******
4.7 Specimen certificate representing shares of Common Stock of the Company*
4.8 Amended and Restated Warrant to Acquire Shares of Common Stock*
4.9 Form of Rights Agreement, by and between the Company and American Stock
Transfer & Trust Company as Rights Agent*
4.10 Registration Rights Agreement among the Company and certain equity
holders of the Company, dated February 1, 1999, in connection with the
acquisition of factorymall.com.***
4.11 Form of Amended and Restated Registration Rights Agreement among the
Company and certain equity holders of the Company in connection with the
acquisition of factorymall.com.
4.12 Registration Rights Agreement among the Company and certain shareholders
of the Company, dated April 9, 1999, in connection with the acquisition
of Attitude Network.******
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson*****
9.1 Stockholders' Agreement by and among Dancing Bear Investments, Inc.,
Michael Egan, Todd V. Krizelman, Stephan J. Paternot, Edward A. Cespedes
and Rosalie V. Arthur, dated as of February 14, 1999***
10.1 Employment Agreement dated August 13, 1997, by and between the Company
and Todd V. Krizelman*
10.2 Employment Agreement dated August 13, 1997, by and between the Company
and Stephan J. Paternot*
10.3 Employment Agreement dated July 13, 1998, by and between the Company and
Francis T. Joyce*
10.4 Form of Indemnification Agreement between the Company and each of its
Directors and Executive Officers*
10.5 Lease Agreement dated January 14, 1997 between the Company and Fifth
Avenue West Associates L.P.*
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
10.6 Lease Agreement dated January 12, 1999 between the Company and Broadpine
Realty Holding Company, Inc.***
10.7 1998 Stock Option Plan, as amended******
10.8 1995 Stock Option Plan*
10.9 factorymall.com, inc. 1998 Stock Option Plan****
10.10 Form of Nonqualified Stock Option Agreement with James McGoodwin, Kevin
McKeown and Mark Tucker****
10.11 Attitude Network Ltd. Stock Option Plan*****
10.12 Form of Employee Stock Purchase Plan***
10.13 D.A.R.T. Service Agreement dated April 15, 1997*+
10.14 Amendment dated as of May 1, 1998, to original D.A.R.T. Service
Agreement dated April 15, 1997*+
10.15 License Agreement between the Company and Engage Technologies, Inc.
dated October 31, 1998.***++
10.16 Employment Agreement dated August 31, 1998, by and between the Company
and Dean Daniels*
10.17 Agreement between the Company, Republic Industries, Inc., and Michael S.
Egan, dated August 12, 1998, regarding the conduct of automotive
clubsites on theglobe.com*+
10.18 Data Center Space Lease between Telehouse International Corporation of
America and the Company, dated August 24, 1998*
10.19 Travel Services Alliance Agreement between the Company and
Lowestfare.com, dated as of September 15, 1998*+
10.20 Boxlot Agreement++
10.21 Music HQ Agreement++
11.1 Computation of Loss Per Share******
23.1 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in Exhibit
5.1)*****
23.2 Consents of KPMG LLP
23.3 Consent of PricewaterhouseCoopers LLP
23.4 Consent of ABC Interactive*
23.5 Consent of DoubleClick, Inc.******
23.6 Consent of Jupiter Communications, LLC******
23.7 Consent of International Data Corporation******
23.8 Consent of Red Herring
23.9 Consent of New York Times
27.1 Financial Data Schedule******
99.1 Valuation and Qualifying Accounts******
</TABLE>
- --------
* Incorporated by reference from our registration statement on Form S-1
(Registration No. 333-59751).
** Incorporated by reference from our report on Form 8-K filed on February
16, 1999.
*** Incorporated by reference from our report on Form 10-K filed on March,
1999.
**** Incorporated by reference from our Registration Statement on Form S-8
(No. 333-75503), filed on April 1, 1999.
***** To be filed by amendment.
****** Previously filed.
+ Confidential treatment granted as to parts of this document.
++ Confidential treatment requested.
II-5
<PAGE>
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) to provide to the Underwriters at the closing specified in the
Underwriting Agreements, certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to
each purchaser.
(2) that insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer, or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer, or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the questions whether such
indemnification by them is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of
such issue.
(3) that for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933, shall be
deemed to be part of this registration statement as of the time it was
declared effective; and
(4) that for purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus filed shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on the 3rd day of May 1999.
theglobe.com, inc.
/s/ Todd Krizelman
By: _________________________________
Todd Krizelman
Co-Chief Executive Officer
and Co-President
/s/ Stephan Paternot
By: _________________________________
Stephan Paternot
Co-Chief Executive Officer,
Co-President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Michael Egan* Chairman May 3, 1999
______________________________________
Michael Egan
/s/ Todd Krizelman Co-Chief Executive May 3, 1999
______________________________________ Officer, Co-President and
Todd Krizelman Director
/s/ Stephan Paternot Co-Chief Executive May 3, 1999
______________________________________ Officer, Co-President,
Stephan Paternot Secretary and Director
Frank Joyce* Vice President and Chief May 3, 1999
______________________________________ Financial Officer
Frank Joyce (Principal Accounting
Officer)
Edward Cespedes* Director May 3, 1999
______________________________________
Edward Cespedes
Rosalie Arthur* Director May 3, 1999
______________________________________
Rosalie Arthur
Director , 1999
______________________________________
Henry C. Duques
Robert Halperin* Director May 3, 1999
______________________________________
Robert Halperin
David H. Horowitz* Director May 3, 1999
______________________________________
David H. Horowitz
H. Wayne Huizenga* Director May 3, 1999
______________________________________
H. Wayne Huizenga
</TABLE>
* By Attorney-in-Fact
II-7
<PAGE>
EXHIBIT 4.4
AMENDMENT No. 3
to Second Amended and Restated
Investor Rights Agreement
theglobe.com, inc.
April ___, 1999
<PAGE>
AMENDMENT NO. 3 TO SECOND AMENDED AND RESTATED
INVESTOR RIGHTS AGREEMENT
This Amendment No. 3 to Second Amended and Restated Investor Rights
Agreement (the "Third Amendment") is entered into as of the ____ day of April
1999, by and among theglobe.com, inc., a Delaware corporation (the "Company"),
and the Investors, as defined in the Second Amended and Restated Investor Rights
Agreement, as amended (the "Agreement"). Capitalized items used herein and not
otherwise defined shall have the meanings ascribed thereto in the Agreement.
W I T N E S S E T H:
-------------------
WHEREAS, the Investors hold registration and information rights pursuant to
the Agreement;
WHEREAS, the Investors, with the written consent of the Company, have
amended certain provisions of the Agreement pursuant to each of Amendment No. 1
to Second Amended and Restated Investor Rights Agreement, dated August 31, 1998
(the "First Amendment"), and Amendment No. 2 to Second Amended and Restated
Investor Rights Agreement, dated April 9, 1999 (the "Second Amendment"); and
WHEREAS, pursuant to Section 2.10 of the Agreement, the Holders of a
majority in interest of the Registrable Securities desire to amend certain
provisions of Section 2 of the Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto agree as follows:
Section 2.9 of the Agreement is hereby deleted in its entirety and is
replaced with the following:
2.9 Assignment of Registration Rights. The rights to cause the
Company to register Registrable Securities pursuant to this Section 2 may
be assigned by a Holder to a transferee or assignee of Registrable
Securities which (i) is a Holder's family member or trust for the benefit
of an individual Holder, or (ii) acquires at least ten thousand (10,000)
shares of Registrable Securities prior to conversion to Common Stock or one
hundred thousand (100,000) shares of Registrable Securities issued upon
conversion of the Shares (as adjusted for stock splits, combinations and
the like that occur after the original issuance of such shares); provided,
however, (A) the transferor shall, within ten (10) days after such
transfer, furnish to the Company written notice of the name and
<PAGE>
address of such transferee or assignee and the securities with respect to
which such registration rights are being assigned, and (B) such transferee
shall agree to be subject to all restrictions set forth in this Agreement;
provided, further, that such transfer shall have been made in compliance
with the Bylaws, as applicable. Additionally, any Holder may transfer or
assign all or a portion of such Holder's right to include Registrable
Securities in a registration statement, after taking into account any
underwriters' cutbacks applicable to such Holder, to any other Holder bound
by the terms of this Agreement.
[Remainder of page intentionally left blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
No. 3 to Second Amended and Restated Investor Rights Agreement as of the date
set forth above.
theglobe.com, inc. Investor
By:______________________________ By:___________________________
Todd V. Krizelman Name:
Co-Chief Executive Officer and Title:
Co-President
By:______________________________
Stephan J. Paternot
Co-Chief Executive Officer,
Co-President and Secretary
<PAGE>
EXHIBIT 4.11
REGISTRATION RIGHTS AGREEMENT
theglobe.com, inc.
APRIL 9, 1999
<PAGE>
TABLE OF CONTENTS
PAGE
1. DEFINITIONS.............................................................. 1
2. REGISTRATION; RESTRICTIONS ON TRANSFER................................... 3
2.1 Restrictions on Transfer............................................ 3
2.2 Piggyback Registrations............................................. 4
2.3 Registration Expenses............................................... 6
2.4 Certain Covenants................................................... 6
2.5 Termination of Registration Rights.................................. 8
2.6 Delay of Registration............................................... 8
2.7 Indemnification..................................................... 8
2.8 Rule 144 Reporting.................................................. 11
2.9 "Market Stand Off" Agreement........................................ 11
3. CONFIDENTIALITY.......................................................... 12
4. GENERAL.................................................................. 13
4.1 Governing Law....................................................... 13
4.2 Survival............................................................ 13
4.3 Successors and Assigns.............................................. 13
4.4 Severability........................................................ 13
4.5 Amendment and Waiver................................................ 13
4.6 Delays or Omissions................................................. 14
4.7 Notices............................................................. 14
4.8 Attorneys' Fees..................................................... 14
4.9 Headings............................................................ 14
4.10 Entire Agreement.................................................... 14
4.11 Counterparts........................................................ 15
4.12 Third-Party Beneficiaries........................................... 15
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is entered into as of
the __ day of April, 1999, by and among theglobe.com, inc., a Delaware
corporation (the "Company"), and the Persons listed on Exhibit A hereto
executing and delivering counterparts hereto.
WHEREAS, pursuant to the Agreement and Plan of Merger, dated April __, 1999
(the "Merger Agreement"), by and among the Company, Bucky Acquisition Corp.,
Attitude Network Ltd. (the "Acquired Company") and certain other Persons,
pertaining to the acquisition by the Company of the Acquired Company, the
Company has agreed to provide certain registration rights to the Holders as set
forth herein; and
WHEREAS, the parties desire to set forth their agreement as to the
registration rights of the Holders;
NOW, THEREFORE, the parties hereto, in consideration of the foregoing, the
mutual covenants and agreements hereinafter set forth, and other good and
valuable consideration the receipt and sufficiency of which hereby are
acknowledged, agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the following
respective meanings:
"Acquired Company" shall have the meaning set forth in the recitals hereto.
"Audited Financial Statements" shall mean the balance sheets, statements of
operations, statements of stockholders' equity and statements of cash flows,
including without limitation any pro forma financial statements, of the Company,
the Acquired Company, any other Person, the combined (i.e., pooled) entity
constituting the Company and the Acquired Company, and any other Person for
accounting purposes, or otherwise, and any notes relating to any of the
foregoing, that are required in the Company's judgment in order to meet the
requirements of Regulation S-X of the Securities Act or other federal laws
applicable to the Company in connection with any Registration Statement
contemplated hereby, covering any time period required in the Company's judgment
by such securities laws, prepared in accordance with United States Generally
Accepted Accounting Principles consistently applied and audited by a nationally
recognized independent accounting firm selected by the Company, which firm has
executed an unqualified opinion related to, and has consented to the inclusion
of, such financial statements in any such Registration Statement.
"Common Stock" shall mean the common stock, par value $.001 per share, of
the Company.
"Competitor" shall mean any Person engaged in, or owning or controlling, a
business competing with any business competing with the Company, including,
without limitation, a
-1-
<PAGE>
business operating an Internet Web Site, an online e-commerce or gaming business
or a virtual Web site.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
or any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time. References to a
particular section of the Securities Exchange Act of 1934, as amended, shall
include a reference to the comparable section, if any, of any such similar
federal statute.
"Family Member" shall mean an individual's spouse, natural and adoptive
children, siblings, parents and grandparents.
"Holder" shall mean any Person listed on Exhibit A hereto who owns of
record Registrable Securities or Warrants and who has executed a counterpart
signature page to this Agreement, or any assignee of record of Registrable
Securities or Warrants held by such Person in accordance with Section 4.3
hereof.
"Merger Agreement" shall have the meaning set forth in the recitals hereto.
"Person" shall mean any individual, corporation, limited liability company,
partnership, trust or association, or any other entity or organization,
including any government entity.
"Piggyback Registration Statement" shall have the meaning set forth in
Section 2.2.
"Register," "registered," and "registration" refer to a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act, and the declaration or ordering of effectiveness of such
registration statement or document.
"Registrable Securities" shall mean (i) shares of Common Stock issued
pursuant to the Merger Agreement; (ii) any Common Stock issued upon exercise of
the Warrants, to the extent permitted to be included in the Registration
Statement by the SEC; and (iii) any Common Stock issued as a dividend or other
distribution with respect to, or in exchange for or in replacement of, such
above-described securities. As to any particular Registrable Securities, such
securities shall cease to be Registrable Securities when (a) a Registration
Statement with respect to the sale of such securities shall have become
effective under the Securities Act and shall have remained effective for the
Effective Period, (b) they may be sold by the Holder thereof pursuant to Rule
144 or any successor rule under the Securities Act, (c) they shall have been
otherwise transferred, new certificates for them not bearing a legend
restricting further transfer under the Securities Act shall have been delivered
by the Company and subsequent public distribution of them shall not require
registration of them under the Securities Act, or (d) they shall have ceased to
be outstanding.
"Registration Statement" shall mean a registration statement of the
Company, filed with the Commission on an appropriate form, including any
registration statement filed pursuant to the provisions of this Agreement,
including the prospectus included therein, all amendments and supplements
thereto (including post-effective amendments) and all exhibits and material
incorporated by reference therein.
-2-
<PAGE>
"SEC" or "Commission" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time. References to a
particular section of the Securities Act of 1933, as amended, shall include a
reference to the comparable section, if any, of any such similar federal
statute.
"Transfer" shall have the meaning set forth in Section 2.1.
"Warrants" shall mean warrants for common stock of the Acquired Company
which were assumed by the Company pursuant to the Merger Agreement and are
exercisable for shares of Common Stock.
2. Registration; Restrictions on Transfer.
2.1 Restrictions on Transfer.
(a) Each Holder agrees not to make any sale, offer for sale, pledge or
other disposition (collectively, a "Transfer") of all or any portion of
Registrable Securities or Warrants unless and until:
(i) There is then in effect a Registration Statement under the
Securities Act covering such proposed Transfer and such Transfer is made in
accordance with such Registration Statement; or
(ii) (A) The transferee has agreed in a letter addressed to the
Company to be bound by this Agreement, (B) such Holder shall have notified the
Company, in advance of the proposed Transfer, of the name and address of the
proposed transferee and shall have furnished the Company with a detailed
statement of the circumstances surrounding such proposed Transfer, (C) the
transferee is not a Competitor of the Company and (D) if requested by the
Company, such Holder shall have furnished the Company with an opinion of
counsel, reasonably satisfactory to the Company, that such Transfer will not
require registration of such shares under the Securities Act.
(b) Notwithstanding the provisions of paragraphs (i) and (ii) of
clause (a) above, no such Registration Statement or opinion of counsel shall be
necessary for a Transfer by a Holder to the Holder's Family Members or trusts
for the benefit of an individual Holder or such Holder's Family Members,
provided, however, that such Holder shall have notified the Company in advance
- -------- -------
of the proposed Transfer, the name and address of the proposed transferee, and
such transferee agrees in a letter addressed to the Company to be bound by all
of the provisions of this Agreement to the same extent as if such transferee
were the transferor prior to any transfer.
(c) In the case of any Transfer or exercise of a Warrant, the Holder
shall deliver evidence reasonably satisfactory to the Company that such Holder
(or, in the case of a Transfer, the transferee) is an "accredited investor"
within the meaning of that term as defined in Rule 501 promulgated under the
Securities Act.
-3-
<PAGE>
(d) Each certificate representing Registrable Securities or Warrants
shall be stamped or otherwise imprinted with the following legends:
(i) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES
UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."
(ii) ANY LEGEND REQUIRED BY APPLICABLE STATE SECURITIES LAWS.
(e) The Company shall promptly reissue certificates without the legend
specified in Section 2.1(b)(i) at the request of any Holder who has obtained an
opinion of counsel (which counsel may be counsel to the Company, but the Company
shall not be required to have its counsel deliver such opinion) or other
evidence in each case reasonably acceptable to the Company to the effect that
the Registrable Securities or Warrants proposed to be disposed of may lawfully
be so disposed of without registration, qualification or legend.
(f) Any legend endorsed on a certificate representing Registrable
Securities or Warrants pursuant to applicable state securities laws and the
stop-transfer instructions with respect to such Registrable Securities shall be
removed upon receipt by the Company of an order of the appropriate blue sky
authority authorizing such removal.
2.2 Piggyback Registrations. The Company shall notify all Holders for whom
it has current addresses in writing within ten (10) days following the filing of
a registration statement (a "Piggyback Registration Statement") under the
Securities Act for purposes of a public offering of securities of the Company
being registered for sale by other selling stockholders of theglobe (excluding
registration statements relating to employee benefit plans or with respect to
corporate reorganizations or shares issued or sold in connection with an
acquisition, including transactions under Rule 145 of the Securities Act) and
will afford each such Holder an opportunity to include in the Piggyback
Registration Statement the percentage of Registrable Securities held by such
Holder equal to the percentage of all shares of Common Stock held by
stockholders other than Holders that are eligible for inclusion in such
registration statement pursuant to applicable registration rights (without
regard to any limitations on the number of shares permitted to be included in
the proposed registration statement) that are actually being included in such
registration statement (the "Applicable Percentage") . Each Holder desiring to
include in any such registration statement all or any part of the Registrable
Securities held by it shall, within five (5) days after receipt of the above-
described notice from the Company, so notify the Company in writing. Such notice
from the Holder shall state the maximum number of Registrable Securities
intended to be included in such registration. Notwithstanding anything in this
Agreement to the contrary, (i) each Holder shall have rights to include
Registrable Securities only in the first three Piggyback Registration Statements
that become effective following the date hereof, and (ii) for
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<PAGE>
purposes of determining the Applicable Percentage and the amount of Registrable
Securities of any Holder that may be included in a Piggyback Registration
Statement (including, without limitation, for purposes of the penultimate
sentence of clause (a) below), the overallotment option, if any, relating to
such Registration Statement shall not be taken into account, and the Holders
shall have no right to participate in any such overallotment option and shall
have no right to include additional shares within a Registration Statement
because of the exercise or potential exercise of any such overallotment option.
(a) Underwriting. If a Piggyback Registration Statement is for an
underwritten offering, the Company shall so advise the Holders. In such event,
the right of any such Holder to be included in a registration pursuant to this
Section 2.2 shall be conditioned upon such Holder's participation in such
underwriting on the same terms and conditions as the other participating selling
stockholders and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein; except that each such Holder shall
agree that such Holder shall not be permitted to withdraw such Holder's shares
from any underwriting pursuant to the Piggyback Registration Statement following
the fifth day prior to the printing of the preliminary prospectus related to
such Registration Statement. Each Holder proposing to distribute its
Registrable Securities through such underwriting shall enter into a custody
agreement and power of attorney, authorizing the Company or specific employees
thereof to among other things (i) sell the Registrable Securities to be offered
by such Holders at the price agreed to by the attorney-in-fact and (ii) execute
on the Holder's behalf (x) an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting by the Company and
(y) any other closing certificates or similar documents requested by the
underwriters. The custody agreement shall contain such other terms as are
customary for agreements of this type and shall require the Holder to deposit
its shares of Common Stock being registered with the custodian for the time
periods specified in the custody agreement. Each Holder agrees that its shares
will be sold at the same price as the other selling stockholders (and the
Company, if applicable) in the offering pursuant to the Piggyback Registration
Statement. If any Holder is or will be unable to deliver any document
reasonably required by the underwriters in connection with the sale of such
Registrable Securities, including, but not limited to an executed underwriting
agreement and legal opinions and other closing certificates, then the Company
shall have no obligation to include such Registrable Securities in such
registration. The Company is not required to obtain any legal opinions on
behalf of any Holder. If the underwriter determines in good faith that
marketing factors require a limitation of the number of shares to be
underwritten, the number of shares that may be included in the underwriting
shall be allocated as follows: first, to the Company for its own account; and
second, to the other stockholders of the Company participating in the offering
and to the Holders on the basis of a recalculated Applicable Percentage. No
such reduction shall reduce the securities being offered by the Company for its
own account to be included in the registration and underwriting.
(b) Right to Terminate or Delay Registration. The Company shall have
the right to terminate, withdraw or delay any registration initiated by it under
this Section 2.2 prior to the effectiveness of such registration, whether or not
any Holder has elected to include securities in such registration, in which
event the Company shall give written notice to all Holders of record of
Registrable Securities. The expenses of such withdrawn registration shall be
borne by the Company in accordance with Section 2.3 hereof.
-5-
<PAGE>
2.3 Registration Expenses. (a) All expenses incident to the Company's
performance of or compliance with this Agreement shall be borne by the Company,
regardless of whether a Piggyback Registration Statement becomes effective,
including without limitation:
(i) all registration and filing fees and expenses;
(ii) fees and expenses relating to compliance with federal
securities and state "blue sky" securities laws;
(iii) expenses of printing (including printing certificates for the
Registrable Securities and prospectuses), messenger and delivery services and
telephone charges;
(iv) fees and disbursements of counsel for the Company and fees and
disbursements of up to $10,000 for one counsel for all of the Holders of the
Registrable Securities selling such securities pursuant to a Piggyback
Registration Statement;
(v) all application and filing fees in connection with listing the
Registrable Securities on a national securities exchange or automated quotation
system pursuant to the requirements hereof;
(vi) all fees and disbursements of independent certified public
accountants of the Company (including the expenses of any special audit required
by or incident to such performance); and
(vii) such other reasonable and customary expenses as may be at such
time customarily borne by the issuer, which such reasonable and customary
expenses shall not be deemed to include any underwriter or agent discounts,
commissions or applicable transfer taxes attributable to the sale of Registrable
Securities, all of which shall be borne by the Holders.
The Company shall, in any event, bear its internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit, and the
fees and expenses of any Person, including special experts, retained by the
Company. Notwithstanding the provisions of this Section 2.3, each Holder shall
pay registration expenses if and to the extent required by applicable law.
2.4 Certain Covenants. Whenever required to effect the registration of any
Registrable Securities under a Piggyback Registration Statement pursuant to this
Agreement, the Company shall:
(a) Prepare and file with the SEC such amendments and post-effective
amendments to the Piggyback Registration Statement and the prospectus used in
connection therewith as may be necessary to comply with the provisions of the
Securities Act with respect to the sale of all securities covered by such
registration statements, and otherwise comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by the
Piggyback Registration Statement in accordance with the intended method or
methods of distribution by the sellers thereof as set forth in such Registration
Statement or supplements to the related prospectus;
-6-
<PAGE>
(b) Furnish to counsel for the selling Holders named in the Piggyback
Registration Statement or related prospectus, after filing with the SEC, copies
of such Registration Statement or prospectus included therein or any amendments
or supplements to such Registration Statement or prospectus, which documents
will be subject to the review and comment of such counsel for a period of time
as is reasonably appropriate under the circumstances, determined in the sole
discretion of the Company (it being acknowledged that such period shall be at
least three (3) business days in the case of an initial draft of the
Registration Statement and such shorter time as may be appropriate in the case
of any supplements or amendments thereto), and the Company agrees to reasonably
consider such comments in preparing any amendment or supplement to the Piggyback
Registration Statement or related prospectus;
(c) Furnish (without charge) to counsel for the selling Holders, one
copy of the Piggyback Registration Statement, each amendment and supplement
thereto (in each case including all exhibits) and furnish to the Holders such
number of copies of the prospectus included in such Piggyback Registration
Statement, including each preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them;
(d) Use all reasonable commercial efforts to register or qualify the
Registrable Securities covered by the Piggyback Registration Statement under
such securities or blue sky laws of such States of the United States of America
where any exemption is not available as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify generally to do business as a foreign
corporation, to pay taxes in any jurisdiction where it would not but for the
requirements of this Agreement be obligated to be so qualified, to consent to
general service of process or to pay taxes in any such state or jurisdiction;
(e) Promptly notify counsel for the Holders selling Registrable
Securities covered by the Piggyback Registration Statement: (i) when the
Registration Statement, any pre-effective amendment, the prospectus or any
prospectus supplement related thereto or post-effective amendment to the
Registration Statement has been filed and, with respect to the Registration
Statement or any post-effective amendment, when the same has become effective;
(ii) of any request by the SEC or state securities authority for amendments or
supplements to the Registration Statement or the prospectus related thereto or
for additional information; (iii) of the issuance by the SEC of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for such purpose; and (iv) of the receipt by the Company of any
notification with respect to the suspension of the qualification of any
Registrable Securities for sale under the securities or blue sky laws of any
jurisdiction or the initiation of any proceeding for such purpose;
(f) Comply with all applicable rules and regulations of the SEC, and
make generally available to the Holders, as soon as reasonably practicable after
the effective date of a Piggyback Registration Statement (and in any event
within sixteen (16) months thereafter), an earnings statement (which need not be
audited) covering the period of at least twelve (12) consecutive months
beginning with the first day of the Company's first calendar quarter after the
-7-
<PAGE>
effective date of the Registration Statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act and Rule 158
thereunder;
(g) Cause all Registrable Securities covered by the Piggyback
Registration Statement to be listed on the Nasdaq National Market or principal
securities exchange on which similar securities issued by the Company are then
listed, if the listing of such Registrable Securities is then permitted under
the rules of such exchange;
(h) Provide and cause to be maintained a transfer agent and registrar
for all Registrable Securities covered by the Piggyback Registration Statement
not later than the effective date of such Registration Statement; and
(i) Cooperate with the selling Holders of Registrable Securities to
facilitate the timely preparation and delivery of certificates not bearing any
restrictive legends representing the Registrable Securities to be sold, and
cause such Registrable Securities to be issued in such denominations and
registered in such names in accordance with the instructions of the selling
Holders of Registrable Securities.
No Holder may include any of its Registrable Securities in a Registration
Statement pursuant to this Agreement unless and until such Holder furnishes to
the Company in writing, as soon as practicable after the date hereof but in no
event later than five (5) days after receipt of notice from the Company of the
filing of the Registration Statement, the information specified in Item 507 or
508 of Regulation S-K promulgated under the Securities Act, as applicable, for
use in connection with the Registration Statement or prospectus or preliminary
prospectus included therein. Each selling Holder agrees to promptly furnish
such information and any additional information required to be disclosed in
order to make the information previously furnished to the Company by such Holder
not materially misleading.
The Company shall not be required to effect a registration pursuant to this
Agreement in any particular jurisdiction in which the Company would be required
to qualify to do business as a foreign corporation or to pay taxes wherein it
would not but for the requirements of this Agreement be obligated to be so
qualified or to consent to general service of process or pay taxes in any such
state or jurisdiction effecting such registration, qualification or compliance.
2.5 Termination of Registration Rights. All registration rights granted to
a Holder under this Section 2 shall terminate and be of no further force and
effect upon the earlier of: (i) such time as the securities of the Company held
by a Holder cease to be Registrable Securities, as defined herein, and (ii) such
time as the third effective Piggyback Registration Statement shall have become
effective.
2.6 Delay of Registration. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 2.
2.7 Indemnification. In the event any Registrable Securities are included
in a Registration Statement under Section 2.2:
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<PAGE>
(a) Indemnification by the Company. To the extent permitted by law,
------------------------------
the Company will indemnify and hold harmless each Holder, the partners, officers
and directors of each Holder, if any, who control such Holder within the meaning
of the Securities Act or the Exchange Act, against any and all losses, claims,
damages, liabilities or expenses whatsoever as incurred (including but not
limited to reasonable attorneys' fees and any and all reasonable expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), joint or several, to
which they may become subject under the Securities Act, the Exchange Act or
other federal or state law, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof), arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in
such Registration Statement or final prospectus contained therein or any
amendments or supplements thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company shall not be liable in any case to the
- -------- -------
extent that any loss, claim, damage, liability or expense (or action or
proceeding in respect thereof) arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by such Holder, partner,
officer, director, or controlling person of such Holder, and provided, further,
-------- -------
that the Company shall not be liable to any Person who participates in the
offering or sale of Registrable Securities or any other Person, if any, who
controls such Person, in any such case if any such loss, claim, damage,
liability or expense (or action or proceeding in respect thereof) arises out of
such Person's failure to send or give a copy of the final prospectus or
amendment or supplement thereto, as the same may be then supplemented or
amended, to the Person asserting an untrue statement or alleged untrue statement
or omission or alleged omission at or prior to the written confirmation of the
sale of Registrable Securities to such Person if such statement or omission was
corrected in such final prospectus so long as such final prospectus, and any
amendments or supplements thereto, have been furnished to such Person
participating in the offering or sale of Registrable Securities.
(b) Indemnification by the Holders. To the extent permitted by law,
------------------------------
each Holder will, if Registrable Securities held by such Holder are included in
such Registration Statement, indemnify and hold harmless the Company, each of
its directors, its officers, and each Person, if any, who controls the Company
within the meaning of the Securities Act, and any other Holder selling
securities under such Registration Statement or any of such other Holder's
partners, directors or officers, if any, who control such Holder, against any
losses, claims, damages, liabilities or expenses (including but not limited to
attorneys' fees and any and all expenses whatsoever incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or any
claim whatsoever, and any and all amounts paid in settlement of any claim or
litigation), severally, to which the Company or any such director, officer,
controlling Person, or other such Holder, partner, director, or officer, if any,
or controlling such other Holder may become subject under the Securities Act,
the Exchange Act or other federal or state law, insofar as such losses, claims,
damages, liabilities or expenses (or actions or proceedings in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement for registration of
the Registrable
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Securities, or final prospectus contained therein or any amendments or
supplements thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent (and only to the extent) that such losses, claims, damages, liabilities
or expenses (or actions or proceedings in respect thereof) arise out of or are
based upon any such untrue statement or alleged untrue statement or omission or
alleged omission made therein in reliance upon and in conformity with written
information furnished to the Company by such Holder expressly for use in
connection with such registration.
(c) Notices of Claims, etc. Promptly after receipt by an indemnified
----------------------
party of notice of the commencement of any action or proceeding involving a
claim referred to in the preceding subdivisions of this Section 2.7, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party, give written notice to the latter of the commencement of
such action; provided, however, that the failure of any indemnified party to
-------- -------
give notice as provided herein shall not relieve the indemnifying party of its
obligations under the preceding subdivisions of this Section 2.7, except to the
extent that the indemnifying party is prejudiced by such failure to give notice.
In case any such action is brought against an indemnified party, and it notifies
an indemnifying party of the commencement thereof, the indemnifying party will
be entitled to participate therein, and, to the extent it may elect by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof.
Notwithstanding the foregoing, the indemnified party shall have the right to
employ its own counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of such indemnified party unless (i) the
employment of such counsel shall have been authorized in writing by the
indemnifying party in connection with the defense of such action, (ii) the
indemnifying party shall not have employed counsel to have charge of the defense
of such action within a reasonable time after notice of commencement of the
action, or (iii) such indemnified party shall have reasonably concluded that
there may be defenses available to it which are different from or additional to
those available to the indemnifying party (in which case the indemnifying party
shall not have the right to direct the defense of such action on behalf of the
indemnified party), in any of which events such fees and expenses shall be borne
by the indemnifying party. In no event shall the indemnifying party be liable
for fees and expenses of more than one counsel (in addition to any local
counsel) separate from its own counsel for all indemnified parties in connection
with any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, and
which counsel shall be approved by the indemnifying party, whose approval shall
not be unreasonably withheld. No indemnifying party shall be liable for any
settlement of any action or proceeding effected without its written consent,
which consent shall not be unreasonably withheld. No indemnifying party shall,
without the consent of the indemnified party, consent to entry of any judgment
or enter into any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such indemnified party of a
release from all liability in respect of such claim or litigation.
(d) Contribution. If the indemnification provided for in this Section
------------
2.7 is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any losses, claims, damages, liabilities or
expenses (including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
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<PAGE>
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), joint or several, of the
nature contemplated by such indemnification provision, the indemnifying party,
in lieu of indemnifying such indemnified party thereunder, shall to the extent
permitted by applicable law contribute to the amount paid or payable by such
indemnified party as a result of such loss, claim, damage, liability or expense
(or action or proceeding in respect thereof) in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on the one
hand and of the indemnified party on the other in connection with the statements
or omissions which resulted in such losses, claims, damages, liabilities or
expenses (or actions or proceedings in respect thereof), as well as any other
relevant equitable considerations. The relative fault of the indemnifying party
and of the indemnified party shall be determined by a court of law by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission to state a material fact relates to information
supplied by the indemnifying party or by the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission; provided that, in no event shall any
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contribution by a Holder hereunder exceed the net proceeds from the offering
received by such Holder. No Person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation. In addition, no Person shall be obligated to contribute
hereunder any amounts in payment for any settlement of any action or claim
effected without such Person's consent, which consent shall not be unreasonably
withheld.
(e) Survival of Indemnification. The obligations of the Company and
---------------------------
the Holders under this Section 2.7 shall survive completion of any offering of
Registrable Securities in a Registration Statement pursuant to Section 2.2.
(f) Other Indemnification. Indemnification and contribution similar
---------------------
to that specified in the preceding subdivisions of this Section 2.7 (with
appropriate modifications) shall be given by the Company and each seller of
Registrable Securities with respect to any required registration or other
qualification of securities under any federal or state law or regulation of any
governmental authority other than the Securities Act.
2.8 Rule 144 Reporting. With a view to making available to the Holders the
benefits of certain rules and regulations of the SEC which may permit the sale
of the Registrable Securities to the public without registration, the Company
agrees to use its commercially reasonable best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in SEC Rule 144 or any similar or analogous rule
promulgated under the Securities Act; and
(b) File with the SEC, in a timely manner, all reports and other
documents required of the Company under the Exchange Act.
2.9 "Market Stand Off" Agreement. In the case of any underwritten public
offering by the Company of shares of Common Stock, whether for its own account
or for the account of
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any stockholder of the Company, each Holder agrees that, during a period of
seven (7) days prior to and ninety (90) days following the effective date of a
Registration Statement filed in connection with such offering, such Holder will
not, without the prior written consent of the Company, directly or indirectly,
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, or otherwise dispose of or transfer any shares of Common Stock or
any securities convertible into or exchangeable or exercisable for Common Stock,
whether now owned or hereafter acquired by such Holder or with respect to which
such Holder has or hereafter acquires the power of disposition, or enter into
any swap or any other agreement or any transaction that transfers, in whole or
in part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction is to be settled by delivery
of Common Stock or other securities, in cash or otherwise. The Company shall
give notice of such restriction in the manner set forth in Section 4.7. Upon the
request of the underwriters for any underwritten public offering of Common Stock
of the Company referred to above, each Holder hereby agrees to deliver a "lock-
up" or "market stand-off" agreement signed by such Holder which is equivalent in
substance to the agreement set forth in this Section 2.9 addressed to such
underwriter. Any such underwriter shall expressly be deemed to be a third party
beneficiary of this Section 2.9.
The obligations described in this Section 2.9 shall not apply to a
registration relating solely to employee benefit plans or similar forms that may
be promulgated in the future, or a registration relating solely to a Rule 145
transaction (including the registration for resale of securities issued in a
Rule 145 transaction) on Form S-4 under the Securities Act or similar forms that
may be promulgated in the future, unless in any such case such registration is
in connection with an underwritten public offering. The Company may impose
stop-transfer instructions with respect to the shares of Common Stock (or other
securities) subject to the foregoing restriction until the end of such
restrictive period.
3. CONFIDENTIALITY.
(a) Each Holder agrees not to disclose to any third party or use
Confidential Information (as hereinafter defined) of the Company for its own use
or for any purpose except to evaluate and enforce its current equity investment
in the Company. Each Holder shall undertake to treat such Confidential
Information in a manner consistent with the treatment of its own information of
similar proprietary nature and agrees that it shall protect the confidentiality
of Confidential Information. Each transferee of any Holder who receives
Confidential Information shall agree to be bound by such provisions.
(b) "Confidential Information" means any notices given by the Company
pursuant to the terms of this Agreement and any other information disclosed by
the Company either directly or indirectly in a writing stamped "Confidential" or
"Proprietary" or, if disclosed orally, which is promptly confirmed in writing to
be Confidential Information. Confidential Information does not include
information, technical data or know-how which (i) is generally known or publicly
available not as a result of any action or inaction of a Holder; (ii) is
disclosed to a Holder on a non-confidential basis by a third party having a
legal right to disclose such information; or (iii) is approved for release by
written authorization of the Company. The provisions of this Section shall not
apply to the extent that a Holder is required to disclose
-12-
<PAGE>
Confidential Information pursuant to any law, statute, rule or regulation or any
legal process or order of any court, provided that the Holder shall notify the
-------- ----
Company of any such required disclosure as promptly as possible and shall
cooperate with the Company in order to limit the scope of any order or service
of legal process requiring disclosure of such Confidential Information.
4. GENERAL.
4.1 Governing Law. This Agreement shall be governed by and construed under
the laws of the State of New York without giving effect to conflicts of laws
principles. Each of the parties to this Agreement hereby irrevocably and
unconditionally consents to submit to the exclusive jurisdiction of the courts
of the State of New York and the courts of the United States of America located
in the Southern District of the State of New York for any action, claim or
proceeding arising out of or relating to this Agreement (and agrees not to
commence any action, claim or proceeding relating hereto except in such courts),
and further agrees that service of any process, summons, notice or document by
U.S. registered mail to its respective address shall be effective service of
process for any action, claim or proceeding brought against it in any such
court. Each of the parties to this Agreement hereby irrevocably and
unconditionally waives any objection to the laying of venue of any action, claim
or proceeding arising out of this Agreement in the courts of the State of New
York or the courts of the United States of America located in the State of New
York and hereby further irrevocably and unconditionally waives and agrees not to
plead or claim in any such court that any such action, claim or proceeding
brought in any such court has been brought in an inconvenient forum. Each of the
parties hereto hereby irrevocably and unconditionally waives any right it may
have to trial by jury in connection with any action, claim or proceeding arising
out of or relating to this Agreement.
4.2 Survival. The provisions of Section 2.7 and Section 3 hereof shall
survive any termination of this Agreement
4.3 Successors and Assigns. Except as otherwise expressly provided herein,
the provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors, and administrators of the parties hereto
and shall inure to the benefit of and be enforceable by each Person who shall be
a Holder from time to time in accordance with the terms of this Agreement.
4.4 Severability. In case any provision of the Agreement shall be invalid,
illegal, or unenforceable, the validity, legality, and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
4.5 Amendment and Waiver.
(a) Except as otherwise expressly provided herein, this Agreement may
be amended or modified and the observance of any provision hereof may be waived
(either generally or in a particular instance and either retroactively or
prospectively) upon the written consent of the Company and the Holders of at
least a majority in interest of the Registrable Securities. Any
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<PAGE>
amendment or waiver effected in accordance with this Section 4.5 shall be
binding upon each Holder and the Company.
(b) Except as otherwise expressly provided herein, the obligations of
the Company and the rights of the Holders under this Agreement may be waived
only with the written consent of at least a majority in interest of the
Registrable Securities.
(c) This Agreement may be amended only with the written consent of the
Company to include any additional party as a "Holder."
4.6 Delays or Omissions. It is agreed that no delay or omission to
exercise any right, power or remedy accruing to any Holder, upon any breach,
default or noncompliance of the Company under this Agreement shall impair any
such right, power or remedy, nor shall it be construed to be a waiver of any
such breach, default or noncompliance, or any acquiescence therein, or of any
similar breach, default or noncompliance thereafter occurring. It is further
agreed that any waiver, permit, consent or approval of any kind or character on
any Holder's part of any breach, default or noncompliance under this Agreement
or any waiver on such Holder's part of any provisions or conditions of this
Agreement must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement, by law or otherwise afforded to Holders, shall be cumulative and not
alternative.
4.7 Notices. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given and received: (i) upon personal
delivery to the party to be notified, (ii) when sent by confirmed facsimile if
sent during normal business hours of the sender; if not, then on the next
business day, (iii) five (5) days after having been sent by registered or
certified mail, return receipt requested, postage prepaid, or (iv) one (1) day
after deposit with a recognized overnight courier, specifying next day delivery.
All communications shall be sent to the party to be notified at the address as
set forth on Exhibit A hereto or at such other address as such party may
designate in writing to the Company in accordance with this Section 4.7 by ten
(10) days' advance written notice to the other parties hereto.
4.8 Attorneys' Fees. In the event that any dispute among the parties to
this Agreement should result in litigation, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing any right of such prevailing party under or with respect to this
Agreement, including without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.
4.9 Headings. The titles of the sections and subsections of this Agreement
are for convenience of reference only and are not to be considered in construing
the intent of this Agreement.
4.10 Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the subject
matter hereof and supersedes all previous negotiations, agreements and
arrangements made between the parties with respect to such subject matter.
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<PAGE>
4.11 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
4.12 Third-Party Beneficiaries. This Agreement shall inure to the benefit
of and be binding upon the Company and each of the other signatories hereto and
their respective successors and assigns. The underwriter for an underwritten
public offering of the Company shall be expressly deemed to be a third-party
beneficiary of the provisions of such Section. Other than as expressly set forth
in this paragraph, no other party will be considered a third-party beneficiary
of any rights or benefits created under this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Registration
Rights Agreement as of the date set forth in the first paragraph hereof.
COMPANY: HOLDER:
theglobe.com, inc.
By:____________________________ By:________________________________
Todd V. Krizelman
Co-Chief Executive Officer
By:____________________________
Stephan J. Paternot
Co-Chief Executive Officer
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<PAGE>
EXHIBIT A
Schedule of Potential Holders
Name Address Telephone and Facsimile
- ---- ------- -----------------------
<PAGE>
EXHIBIT 10.20
CO-BRANDING Agreement
This Co-Branding Agreement (the "Agreement") is entered into as of March
___, 1999 (the "Effective Date") by and between theglobe.com, Inc., with its
principal place of business at 31 West 21st Street, New York, NY 10010
("theglobe"), and The Boxlot Company, with its principal place of business at
12626 High Bluff Drive, Suite 370, San Diego, CA 92130 ("Boxlot").
1. DEFINITIONS.
(a) "Boxlot Banners" means any banner, button, text or similar ads Boxlot
provides to theglobe in connection with this Agreement.
(b) "Boxlot Content" means any content or information (including without
limitation any text, music, sound, photographs, video, graphics, data or
software), in any medium, provided by Boxlot to theglobe (other than Boxlot
Banners), as part of the Service or on the Co-Branded Pages, including any
content specified in Exhibit A.
(c) "Boxlot Marks" means all Boxlot domain names, trademarks, logos, and
other graphics reasonably necessary or desirable for theglobe to perform under
this Agreement.
(d) "Boxlot Site" means the Boxlot-branded (i.e., non-co-branded) version
of the Service and associated pages.
(e) "Co-Branded Pages" means all pages of the Service (including, without
limitation, any Java screens associated with the Service or emails or other
direct communications sent to Users by operation of the Service).
(f) "Domain Name" means the domain name described in Exhibit A.
(g) "Launch Date" means the first date on which the Service is made
publicly available.
(h) "Marks" means the Boxlot Marks or theglobe Marks, as applicable.
(i) "Net Revenues" means all monetary consideration theglobe actually
receives for CPM- or CPC-based advertisements and promotions (other than those
for its commerce partners) delivered in connection with the Co-Branded Pages,
less a sales and administration fee of 15%.
(j) "Page Templates" means theglobe's standard page layout templates, as
revised by theglobe from time to time.
(k) "Service" means the services described in Exhibit A, as changed over
time in accordance with this Agreement, which are co-branded using the Page
Templates. The Service
1
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also includes any Boxlot-operated back-end administration tools or pages used by
theglobe or Boxlot to exchange data in accordance with this Agreement.
(l) "Shadow Site" means the password-protected site where the Co-Branded
Pages are made available for theglobe's review and approval prior to being made
publicly available.
(m) "theglobe Marks" means all theglobe domain names, trademarks, logos,
and other graphics reasonably necessary or desirable for Boxlot to perform under
this Agreement.
(n) "theglobe Site" means all pages under the theglobe.com domain.
(o) "User" means any person who accesses any Co-Branded Page.
2. DEVELOPMENT AND IMPLEMENTATION.
2.1 Pre-Launch Deliverables. On or around March 31, 1999, theglobe shall
deliver to Boxlot the Page Templates and the other materials specified in
Exhibit A.
2.2 Initial Development. Boxlot shall develop the Co-Branded Pages using
the Page Templates and take all other steps required to co-brand the Service in
accordance with Exhibit A. In addition, if theglobe is passing any user data to
Boxlot, theglobe's standard Automatic Partner Registration procedure shall
apply, and Boxlot shall perform the development necessary to use such procedure.
The current Automatic Partner Registration procedure is described in Exhibit D.
Boxlot shall make the Service implementation available to theglobe on the Shadow
Site prior to making it publicly available. Boxlot shall not make the initial
Service implementation publicly available without theglobe's prior written
approval. Unless otherwise specified, each party shall be responsible for all
development, hosting and other costs associated with the pages living on their
servers and all emails they send.
2.3 Changes. theglobe shall have sole control over the Service's look and
feel, and Boxlot shall not make any change in the Service's look and feel
without theglobe's prior consent. Further, Boxlot shall notify theglobe if
Boxlot changes or adds any functionality of the services described in Exhibit A
(as modified by Boxlot over time) as implemented on the Boxlot Site. Unless
requested by theglobe, Boxlot shall implement such changes or additions to the
Service and make such implementation available on the Shadow Site for theglobe's
approval within 30 days of their introduction on the Boxlot Site. However,
under no circumstances shall Boxlot offer Users any community features (such as
email, chat, message boards, or the ability to create home pages) from the Co-
Branded Pages without theglobe's consent, and if Boxlot desires to do so, the
parties will work together to discuss appropriate implementations. Boxlot shall
make available via the Shadow Site all changes to the Service or the Co-Branded
Pages completed in this Section 2, and Boxlot shall not implement such changes
on the publicly available Service or Co-Branded Pages until it has received
theglobe's approval.
2.4 Service Operation. Boxlot shall host and operate the Service under
the Domain Name in accordance with the terms of Exhibit B.
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2.5 Rebranding. If requested by theglobe, Boxlot shall implement on the
Co-Branded Pages new versions of the Page Templates if theglobe changes the Page
Templates across theglobe Site generally. Further, if requested by theglobe,
Boxlot shall create additional branded versions of the Service and Co-Branded
Pages branded with the branding of theglobe's distribution partners, which
branded versions shall be implemented within 30 days and subject to approval in
accordance with this Section 2.
2.6 Boxlot Content. Boxlot shall provide Boxlot Content to Users via the
Co-Branded Pages, except that Boxlot shall deliver to theglobe those elements of
Boxlot Content residing on theglobe's servers in accordance with the terms of
Exhibit A. Unless otherwise directed by theglobe, the Co-Branded Pages shall
include all of the content displayed on the Boxlot Site, and the Boxlot Content
shall be updated to keep the Co-Branded Pages in parity with the Boxlot Site.
Any nonconformance with the terms of the frequency/quantity columns of Exhibit A
shall permit theglobe to terminate immediately if the breach is not cured within
12 hours.
2.7 Navigation. Boxlot shall not, in conjunction with the Service, use any
interstitials, pop-up windows, other intermediate steps or any other technology
or content which acts as a barrier to the transition of a User from theglobe
Site to the Co-Branded Pages, nor shall Boxlot otherwise frame the Co-Branded
Pages or use any other technology which interferes with or affects the page
layout of such pages. All Co-Branded Pages shall link back to theglobe Site as
specified by theglobe.
2.8 User Relations. Boxlot shall be responsible for providing all
customer support regarding the Service or the Co-Branded Pages, and theglobe may
redirect to Boxlot any associated customer support inquiries. Boxlot shall have
sole control over the user agreement that governs the Service, and Boxlot shall
have the sole responsibility for dealing with breaches of such user agreement.
However, if theglobe has an issue with the user agreement or Boxlot's
enforcement of it, the parties shall discuss such issues in good faith.
Furthermore, Boxlot's privacy policy shall make any disclosures, or obtain any
User consent, reasonably requested by theglobe that the parties believe are
necessary to make the disclosures about Users back to theglobe required by this
Agreement. All Users shall be treated at least as favorable in all respects
(including without limitation with respect to pricing, quality of service, and
customer support responsiveness) as Boxlot treats users of the Boxlot Site.
2.9 Database Synchronization. If requested by theglobe and if Boxlot
captures relevant information, Boxlot shall use reasonable efforts to cooperate
with theglobe to implement ways for theglobe to capture User information to the
extent that such information would change the relevant information in theglobe's
databases.
2.10 Promotions. Following the Launch Date, the parties shall conduct the
promotions specified in Exhibit A.
3. ADVERTISING.
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3.1 Ad Sales. theglobe shall have sole control over all advertising and
promotion inventory on the Co-Branded Pages. Boxlot shall not introduce any
advertising spots or third party branding in conjunction with the Co-Branded
Pages or the Service without theglobe's approval. If, after theglobe (or its
designee) uses commercially reasonable efforts to sell such inventory, there
remains unsold inventory, then theglobe may, in its sole discretion, place house
or barter ads in such inventory.
3.2 Ad Serving. theglobe or its designee shall be solely responsible for
serving all advertisements and promotions in connection with the Co-Branded
Pages. theglobe shall provide Boxlot with ad serving code, which Boxlot shall
implement at its own expense on all Co-Branded Pages. theglobe hereby grants to
Boxlot a nonexclusive license to use such code solely to permit theglobe or its
designee to serve ads in connection with the Co-Branded Pages. Boxlot shall
notify theglobe at least 15 days prior to making any changes that would affect
serving ads on the Co-Branded Pages.
3.3 Boxlot Banners. Boxlot shall deliver to theglobe any Boxlot Banners
which are to be run in accordance with this Agreement. Such banners shall
comply with theglobe's then-current technical standards. The terms of any
insertion order or similar document regarding the Boxlot Banners are expressly
rejected, except to the extent that they specify the location, timing or
duration of the display of the Boxlot Banners and such terms are accepted by
theglobe. Unless mutually agreed otherwise, Boxlot Banners shall link to the
Co-Branded Pages. theglobe may request that Boxlot Banners be co-branded with
theglobe Marks, in which case the parties shall work together to develop a
mutually acceptable implementation. theglobe may approve or reject any Boxlot
Banner in its sole discretion. theglobe shall use commercially reasonable
efforts not to run banners on the Co-Branded Pages for the companies enumerated
on Exhibit C. Boxlot may update Exhibit C from time to time during the term;
however: (a) Boxlot may not add any site or company to Exhibit C which is not
reasonably considered to be in the online auctions business, and (b) if Boxlot
adds any new sites or companies to Exhibit C, theglobe shall be entitled to
complete any contractual obligations pursuant to contracts in place with such
sites or companies at the time of addition.
4. LICENSES AND STANDARDS.
4.1 Content. Boxlot hereby grants to theglobe a non-exclusive, worldwide
license to use, reproduce, create derivative works of (only as necessary to
build pages in a manner consistent with this Agreement), publicly display,
publicly perform and digitally perform Boxlot Banners, and those elements of the
Boxlot Content served from theglobe's servers (as denoted in Exhibit A), on
theglobe Site or otherwise as reasonably appropriate to advertise and promote
the Service and the Co-Branded Pages. Subject to the approval process in
Section 2, theglobe hereby grants to Boxlot a non-exclusive, worldwide license
to use, reproduce, create derivative works of (only as necessary to build Co-
Branded Pages), publicly display, publicly perform and digitally perform the
Page Templates on Co-Branded Pages.
4.2 Trademarks. Boxlot hereby grants to theglobe a non-exclusive license
to use the Boxlot Marks (including the Domain Name if applicable) to advertise
and promote the Service.
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theglobe hereby grants to Boxlot a non-exclusive license to use theglobe Marks
(including the Domain Name if applicable) on the Co-Branded Pages.
4.3 Trademark Restrictions. The Mark owner may terminate the foregoing
trademark license if, in its reasonable discretion, the licensee's use of the
Marks tarnishes, blurs or dilutes the quality associated with the Marks or the
associated goodwill and such problem is not cured within 10 days of notice of
breach; alternatively, instead of terminating the license in total, the owner
may specify that certain licensee uses may not contain the Marks. Title to and
ownership of the owner's Marks shall remain with the owner. The licensee shall
use the Marks exactly in the form provided and in conformance with any trademark
usage policies. The licensee shall not take any action inconsistent with the
owner's ownership of the Marks, and any benefits accruing from use of such Marks
shall automatically vest in the owner. The licensee shall not form any
combination marks with the other party's Marks other than the Domain Name (if
applicable). If the Domain Name is deemed a combination mark, neither party
shall use the Domain Name for any purpose except as expressly provided herein or
attempt to register the Domain Name, and the parties will jointly cooperate on
any enforcement action of infringement of the Domain Name.
4.4 Ownership. As between theglobe and Boxlot: (a) theglobe and its
suppliers retain all rights, title and interest in and to all intellectual
property rights embodied in or associated with the Page Templates, and (b)
Boxlot and its suppliers retain all rights, title and interest in and to all
intellectual property rights embodied in or associated with the Boxlot Content,
Boxlot Banners and Boxlot Marks. There are no implied licenses under this
Agreement, and any rights not expressly granted to a licensee hereunder are
reserved by the licensor or its suppliers. Neither party shall exceed the scope
of the licenses granted hereunder.
4.5 Standards. Boxlot shall not provide Boxlot Banners or Boxlot Content,
and theglobe shall not provide to Boxlot any Page Templates, that: (a) infringe
any third party's intellectual property right or right of publicity or privacy;
(b) violate any law or regulation; (c) are defamatory, obscene, harmful to
minors or child pornographic; (d) contain any viruses, trojan horses, worms,
time bombs, cancelbots or other computer programming routines that are intended
to damage, detrimentally interfere with, surreptitiously intercept or
expropriate any system, data or personal information; or (e) are materially
false, inaccurate or misleading.
5. USER DATA.
5.1 Rights/Restrictions. Except as specified in this section, each party
may freely use and disclose any information (both individual and aggregated)
about Users ("User Data"). Neither party shall disclose any User Data in any
manner that permits the User Data to be associated with the other party or
permits the targeting of Users on the basis of their status as Users (in
theglobe's case) or theglobe users (in Boxlot's case), nor shall a party use the
User Data to target Users on the basis of their status as Users (in theglobe's
case) or theglobe users (in Boxlot's case). However, either party may disclose
User Data if it is aggregated (in a non-associatable way) with data from
multiple online properties. Each party shall use and disclose User Data only in
accordance with the privacy policy under which it was collected.
5
<PAGE>
5.2 Delivery to theglobe. Boxlot shall deliver to theglobe all
information about Users who register with Boxlot on the Co-Branded Pages that
Boxlot collects from its registration process. Such information shall be
delivered weekly in an electronic format specified by theglobe using a process
reasonably specified by theglobe.
6. PAYMENT TERMS.
6.1 Payments. The parties shall make the payments described in Exhibit A.
Overdue payments shall accrue interest, at the lesser of 1 1/2% per month or the
maximum allowable interest under applicable law, from due date until paid, and
the owing party shall pay the owed party's costs of collection (including
reasonable attorneys' fees).
6.2 Taxes. All fees and payments stated herein exclude, and the party
making payment shall pay, any sales, use or other tax related to the parties'
performance of their obligations or exercise of their rights under this
Agreement, exclusive of taxes based on the receiving party's net income.
6.3 Audit Rights. A party obligated to make payments hereunder shall keep
for 3 years proper records and books of account relating to the computation of
such payments. Once every 12 months, the party receiving payment or its
designee may inspect such records to verify reports. Any such inspection will
be conducted in a manner that does not unreasonably interfere with the inspected
party's business activities. The inspected party shall immediately make any
overdue payments disclosed by the audit plus applicable interest. Such
inspection shall be at the inspecting party's expense; however, if the audit
reveals overdue payments in excess of 5% of the payments owed to date, the
inspected party shall immediately pay the cost of such audit, and the inspecting
party may conduct another audit during the same 12 month period.
7. REPORTS.
7.1 By theglobe. Within 30 days following the end of each month, theglobe
shall provide Boxlot with its standard reports regarding theglobe's promotions
hereunder and reports on the computation of Net Revenues.
7.2 By Boxlot. In addition to any other reports specified herein, Boxlot
shall provide to theglobe the following reports: (a) daily usage reports
regarding the Co-Branded Pages describing the number of page impressions, number
of Users and such other information as Boxlot generally provides to its other
similar partners, (b) weekly demographic reports regarding the Service
containing summary information regarding user demographic profiles, and (c) if
applicable, within 30 days following the end of each month, reports regarding
the computation of the fees it owes under Section 6.
In addition to the foregoing, as soon as commercially reasonable (but in no
event later than 6 months following the Launch Date), Boxlot (with assistance as
necessary from theglobe) shall deliver reports to theglobe about individual
registered Users on the Co-Branded Pages when the User bids on an item,
purchases an item, lists an item for sale and successfully sells an item. The
report shall be broken down into at least the following categories: the User's
unique UserID
6
<PAGE>
number assigned by theglobe, the action being logged (bid, purchase, list,
sale), the date and time of the event, and the topic/category in which the event
occurred. Such reports shall be provided to theglobe on at least a monthly basis
in an electronic format that is easily decoded in an automated manner for import
into theglobe's statistics database, and the file shall be a <TAB> delimited
text file with each line corresponding to an event and including the information
outlined above.
8. TERM AND TERMINATION.
8.1 Term. This Agreement will become effective on the Effective Date and
will continue in effect for 2 years following the Launch Date.
8.2 Termination for Failure to Perform. By providing written notice, a
party may immediately terminate this Agreement: (a) if the other party
materially breaches this Agreement and fails to cure that breach within 15 days
after receiving written notice of the breach, or (b) as provided in Sections 2.6
or 12.7 or Exhibit B. In addition, by providing written notice, theglobe may
immediately terminate this Agreement, or at its option immediately suspend its
promotion and other efforts hereunder, in the case of Boxlot's breach of Section
12.1.
8.3 Termination for Change of Control. By providing written notice,
theglobe may terminate this Agreement in its sole discretion if one of the
following companies (or their subsidiaries) does an "Ownership Change Event":
Lycos, Yahoo (including GeoCities, which shall be included even if their
proposed merger does not occur), Xoom, Fortune City, Excite, Go Network
(including Disney and Infoseek), Snap! (including NBC) and AOL. An "Ownership
Change Event" means: (x) the acquisition of 50% or more of Boxlot's equity or
voting interests; (y) a merger or consolidation of Boxlot; or (z) the sale,
exchange or transfer of all or substantially all of Boxlot's assets related to
the Service.
8.4 Termination for Changes. By providing written notice, theglobe may
terminate this Agreement in its sole discretion if: (a) Boxlot's business model
changes such that the Service is no longer Boxlot's primary line of business, or
(b) at the one year anniversary of the Launch Date, the Service is significantly
inferior to the comparable services being offered by the market leaders in the
person to person auction space.
8.5 Termination for Failure to Grow. By providing written notice, Boxlot
may immediately terminate this Agreement if theglobe's registered user base has
not increased by *** users by the 1 year anniversary of the Effective Date.
8.6 Effects of Termination. Upon expiration or termination, all licenses
granted hereunder shall terminate unless such licenses are expressly stated as
surviving. Boxlot shall promptly remove all theglobe Marks and Page Templates
from its servers, and theglobe shall promptly remove all Boxlot Marks, Boxlot
Banners and Boxlot Content from its servers. Sections 1, 4.4, 5.1, 6.2, 6.3,
8.6, 9, 10, 11 and 12.2 to 12.9, and any obligation to pay any owed but unpaid
amounts, shall survive any expiration or termination.
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<PAGE>
In addition, Boxlot acknowledges that the placement fees set forth in
Exhibit A were intended to be *** in year 1 and *** in year 2, even though
theglobe has agreed to extend credit terms to Boxlot by allowing Boxlot to pay
over time. Thus, in the event that this Agreement terminates under Section 8.2
due to Boxlot's failure to perform (excluding the cross-reference to Section
12.7) prior to the end of the applicable year, Boxlot shall immediately pay to
theglobe the amount necessary to pay the total year's placement fee for that
year. Boxlot waives any right to assert that the foregoing fee is a liquidated
damage or a penalty.
9. NO WARRANTIES. EACH PARTY PROVIDES ALL MATERIALS AND SERVICES TO THE OTHER
PARTY "AS IS." EACH PARTY DISCLAIMS ALL WARRANTIES AND CONDITIONS, EXPRESS,
IMPLIED OR STATUTORY, INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OF
TITLE, NON-INFRINGEMENT, MERCHANTABILITY, AND FITNESS FOR A PARTICULAR PURPOSE.
Each party acknowledges that it has not entered into this Agreement in reliance
upon any warranty or representation except those specifically set forth herein.
Unless an approval process is specified herein, all deliverables provided by one
party to the other shall be deemed accepted (for purposes of the UCC) when
delivered.
10. INDEMNITY. Each party (the "Indemnifying Party") shall indemnify the other
party (the "Indemnified Party") against any and all claims, losses, costs and
expenses, including reasonable attorneys' fees, which the Indemnified Party may
incur as a result of claims in any form by third parties arising from: (x) the
Indemnifying Party's acts, omissions or misrepresentations to the extent that
the Indemnifying Party is deemed an agent of the Indemnified Party, or (y) the
Indemnifying Party's breach of its privacy policy. In addition, theglobe shall
indemnify Boxlot against any and all claims, losses, costs and expenses,
including reasonable attorneys' fees, which Boxlot may incur as a result of
claims in any form by third parties arising from the Page Templates or theglobe
Marks. In addition, Boxlot shall indemnify theglobe against any and all claims,
losses, costs and expenses, including reasonable attorneys' fees, which theglobe
may incur as a result of claims in any form by third parties arising from Boxlot
Banners, Boxlot Content, Boxlot Marks, the Service (excluding the Page Templates
or theglobe Marks) or Boxlot's breach of Section 12.1. The foregoing
obligations are conditioned on the Indemnified Party: (i) giving the
Indemnifying Party notice of the relevant claim, (ii) cooperating with the
Indemnifying Party, at the Indemnifying Party's expense, in the defense of such
claim, and (iii) giving the Indemnifying Party the right to control the defense
and settlement of any such claim, except that the Indemnifying Party shall not
enter into any settlement that affects the Indemnified Party's rights or
interest without the Indemnified Party's prior written approval. The
Indemnified Party shall have the right to participate in the defense at its
expense.
11. LIABILITY LIMITS. NEITHER PARTY SHALL BE LIABLE FOR LOST PROFITS OR
SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (HOWEVER ARISING, INCLUDING
NEGLIGENCE) ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, EVEN IF THE
PARTIES ARE AWARE OF THE POSSIBILITY OF SUCH DAMAGES.
EXCEPT IN THE EVENT OF A CLAIM UNDER SECTION 10 OR FAILURE TO PAY UNDER SECTION
6, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE
8
<PAGE>
OTHER PARTY IN AN AMOUNT GREATER THAN THE AMOUNT BOXLOT ACTUALLY PAYS TO
THEGLOBE HEREUNDER.
12. GENERAL.
12.1 Compliance with Laws. At its own expense, Boxlot shall comply with
all applicable laws and regulations regarding providing and operating the
Service. Without limiting the foregoing, Boxlot shall (a) obtain all
governmental approval, permits and licenses, and make all governmental filings
and registrations, necessary for the marketing and performance of the Service in
every United States jurisdiction, (b) ensure that theglobe is not required to
obtain any governmental approval, permits or licenses as a result of this
Agreement, theglobe's performance hereunder or any payments made to theglobe
hereunder, and (c) promptly resolve any assertions that the Service is illegal
or violating a protected third party interest.
12.2 Governing Law. This Agreement will be governed and construed in
accordance with the laws of the State of New York without giving effect to
conflict of laws principles. Both parties submit to personal jurisdiction in New
York and further agree that any cause of action arising under this Agreement
shall be brought in a court in New York City, NY.
12.3 Publicity. Prior to the release of any press releases or other
similar promotional materials related to this Agreement, the releasing party
shall submit a written request for approval to the other party with a copy of
the materials to be released, which request shall be made no less than 3
business days prior to the requested release date. A party shall not
unreasonably withhold or delay the granting of its approval of such materials.
The parties shall issue the first press release jointly.
12.4 Independent Contractors. The parties are independent contractors, and
no agency, partnership, franchise, joint venture or employment relationship is
intended or created by this Agreement. Neither party shall make any warranties
or representations on behalf of the other party.
12.5 Assignment. Neither party may assign its rights or delegate its
duties hereunder (except to an affiliated company, or to a successor in interest
in the event of a merger, sale of assets of the business to which this Agreement
is related, or consolidation) without the other party's prior written consent,
and any purported attempt to do so is null and void.
12.6 Severability; Headings. If any provision herein is held to be
invalid or unenforceable for any reason, the remaining provisions will continue
in full force without being impaired or invalidated in any way. The parties
agree to replace any invalid provision with a valid provision that most closely
approximates the intent and economic effect of the invalid provision. Headings
are for reference purposes only and in no way define, limit, construe or
describe the scope or extent of such section.
12.7 Force Majeure. Except as otherwise provided, if performance
hereunder (other than payment) is interfered with by any condition beyond a
party's reasonable control, the affected party, upon giving prompt notice to the
other party, shall be excused from such performance to
9
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the extent of such condition. However, if a force majeure detrimentally affects
a party's performance of a material covenant hereunder for 14 days or more, the
other party can terminate this Agreement. Each party acknowledges that website
operations may be affected by numerous factors outside of a party's control. In
the case of Boxlot's performance, a Boxlot force majeure includes theglobe's
failure to perform its obligations described in this Agreement or an outage that
affects the entire Internet in the United States; however, in no event shall a
failure of any Boxlot supplier or vendor be deemed a Boxlot force majeure.
12.8 Notice. Any notice under this Agreement will be in writing and
delivered by personal delivery, overnight courier, confirmed facsimile,
confirmed email, or certified or registered mail, return receipt requested, and
will be deemed given upon personal delivery, 1 day after deposit with an
overnight courier, 5 days after deposit in the mail, or upon confirmation of
receipt of facsimile or email. Notices will be sent to a party at its address
set forth above or such other address as that party may specify in writing
pursuant to this Section.
12.9 Entire Agreement; Waiver. This Agreement sets forth the entire
understanding and agreement of the parties, and supersedes any and all oral or
written agreements or understandings between the parties, as to the subject
matter of the Agreement. This Agreement may be changed only by a writing signed
by both parties. The waiver of a breach of any provision of this Agreement will
not operate or be interpreted as a waiver of any other or subsequent breach.
12.10 Equity Stake. Boxlot shall grant to theglobe, pursuant to industry-
standard terms negotiated between the parties in good faith, immediately vested
options to purchase shares of common stock equal to up to 4% of Boxlot's fully
diluted capital stock (in accordance with the chart below). Theglobe shall be
restricted from exercising such options until the first anniversary of the
Effective Date, and such options shall have a five-year term. Each such option
shall have an exercise price equal to the lesser of (1) the price at which
Boxlot's common stock is sold to the public in an initial public offering or (2)
$6 per share; each of the foregoing as may be adjusted for any stock splits,
combinations or re-organizations affecting Boxlot's capital stock. Boxlot shall
grant to theglobe registration rights for such options and any shares of common
stock issued or issuable upon the exercise of such options (including without
limitation, two demand registration rights and unlimited piggyback registration
rights) on Form S-1, Form S-3 or such other form as may be applicable pursuant
to the Securities Act of 1933 as amended.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Number of aggregate unique users, as measured by Aggregate percent of Boxlot's equity subject to the
unique IP addresses, in a month who visit a page options upon achieving such level once
under the Domain Name
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
500,000 1%
- ------------------------------------------------------------------------------------------------------------------
1,000,000 2%
- ------------------------------------------------------------------------------------------------------------------
1,500,000 3%
- ------------------------------------------------------------------------------------------------------------------
1,750,000 3.5%
- ------------------------------------------------------------------------------------------------------------------
2,000,000 4%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
THEGLOBE.COM, INC.: THE BOXLOT COMPANY:
By: /s/ Dean Daniels By: /s/ Frederick Cary
Name: Dean Daniels Name: Frederick Cary
Title: COO Title: CEO
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<PAGE>
EXHIBIT A
BUSINESS TERMS
Description of the Service: person-to-person auctions
Description of Boxlot Content:
***
Domain Name for the Co-Branded Pages: auctions.theglobe.com
theglobe's Promotions. In positions determined by theglobe in its sole
discretion, theglobe shall:
. list "Classifieds/Auctions" in the tools category of the left hand nav bar
. list auctions in relevant theme areas
. list auctions in myglobe [Note: this will be done when commercially
reasonable to do so some time after the Launch Date]
. list auctions in shop.theglobe.com
theglobe may provide substitute placement if theglobe changes or reorganizes its
site or navigation/directory structure. theglobe shall provide a minimum of ***
impressions per month of promotion for auctions on the Co-Branded Pages
(including without limitation any of the foregoing). theglobe's sole and
exclusive obligation for failing to deliver the minimum number of impressions
shall be to continue performing the promotion until it delivers the total number
of required impressions.
Boxlot's Promotions. theglobe may place up to 100 listings a month on the
Boxlot Site (and all co-branded versions thereof) promoting products being sold
by theglobe or its affiliates without having to pay any listing fee, closing
value fee, transaction fee or other fee.
theglobe Pre-Launch Deliverables: In addition to developing the Page Templates,
theglobe shall provide to Boxlot a media and promotional plan and a plan for
doing the production/design services related to the Service's integration into
theglobe Site.
PAYMENTS
. ***
. Placement Fee. The following schedule of payments apply:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Time of Payment Amount of Payment
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
Execution ***
- ------------------------------------------------------------------------------------------------------------------
Launch Date ***
- ------------------------------------------------------------------------------------------------------------------
1st monthly anniversary of Launch Date ***
- ------------------------------------------------------------------------------------------------------------------
2nd monthly anniversary of Launch Date ***
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
3rd monthly anniversary of Launch Date ***
- ------------------------------------------------------------------------------------------------------------------
4th monthly anniversary of Launch Date ***
- ------------------------------------------------------------------------------------------------------------------
5th monthly anniversary of Launch Date ***
- ------------------------------------------------------------------------------------------------------------------
6th monthly anniversary of Launch Date ***
- ------------------------------------------------------------------------------------------------------------------
7th monthly anniversary of Launch Date ***
- ------------------------------------------------------------------------------------------------------------------
8th monthly anniversary of Launch Date ***
- ------------------------------------------------------------------------------------------------------------------
9th monthly anniversary of Launch Date ***
- ------------------------------------------------------------------------------------------------------------------
10th monthly anniversary of Launch Date ***
- ------------------------------------------------------------------------------------------------------------------
11th monthly anniversary of Launch Date ***
- ------------------------------------------------------------------------------------------------------------------
Each monthly anniversary thereafter (excluding the ***
final monthly anniversary (e.g., the last day of the
contract))
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
. Ad Split. theglobe shall pay Boxlot *** of Net Revenues.
. Transactional Revenue. Boxlot shall retain *** of the transaction revenues
it generates from operation of the Service.
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<PAGE>
EXHIBIT B
PERFORMANCE STANDARDS
A. Service Availability. The Service generally shall be publicly available to
Users a minimum of 95% of the time during any 7 day period and 98% of the time
during any 30 day period, excluding "Maintenance." Maintenance is defined as
scheduled Service outages for Service maintenance or upgrades of which theglobe
is notified at least 48 hours in advance, so long as such outages are scheduled
for low-usage time periods and do not exceed a total of 20 hours in any 30 day
period.
B. Response Time. The mean response time for server response to access the
Service shall not exceed more than 6 seconds during any 1 hour period.
C. Bandwidth. Throughout the term, Boxlot shall have an agreement in place
with its Internet connectivity provider which requires such provider to
automatically increase bandwidth capacity if such capacity exceeds 25%
utilization.
D. Security. Boxlot shall prevent unauthorized access to restricted areas of
its servers and any databases or other sensitive material generated from or used
in conjunction with the Service. In addition, Boxlot shall immediately notify
theglobe of any known security breaches or holes in the Service or Co-Branded
Pages.
E. Error Correction. Boxlot shall resolve any errors with the Service
(including without limitation any Javascripts or ActiveX controls used in
connection with such pages) that cause such services not to be able to perform
one or more major functions within 24 hours of the earlier of its discovery of
the error or theglobe's notice of the error. Boxlot shall resolve all other
errors with such services within 7 days of the earlier of its discovery of the
error or theglobe's notice of the error.
F. Browser Compatibility. The Service shall initially be compatible with
Netscape Navigator 3.X and 4.X and Microsoft Internet Explorer 3.X and 4.X.
theglobe may unilaterally add additional browsers or versions that the Service
must be compatible with, effective after 30 days advance written notice, if
theglobe certifies that such additional browsers or versions are used by more
than 5% of its Users. Users shall not require any plug-ins in order to access
any Service functionality.
G. Data Authentication. Boxlot shall use commercially reasonable efforts, no
less than industry-standard, to authenticate the origin of all information
provided by theglobe as having come from theglobe.
H. Customer Support. Boxlot shall auto-respond to all customer and technical
support inquiries within 10 minutes of the receipt of inquiry. Boxlot shall
manually respond to all such inquiries within 24 hours. Boxlot shall resolve
all such inquiries within 72 hours or shall notify theglobe that it cannot do
so, in which case theglobe at its sole discretion may intervene to assist in
resolving the inquiry.
I. Remedies. In addition to other applicable remedies, theglobe may
immediately terminate this Agreement without a further cure period if: (a) any
breach of this Exhibit lasts 2 consecutive specified time periods, or if no time
period for measurement is specified, 10 days, or (b) the same provision is
breached on two separate occasions (even if the first was cured).
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<PAGE>
EXHIBIT C
BOXLOT COMPETITIVE SET
aciauction
Auction 123
Auction Net Online
Auction Network
Auction Online
Auction Sales Online
Auction Universe
Auction USA
Auction Warehouse
Auction World
AuctionAddict
AuctionFloor
AuctionGate
AuctionInc.
AuctionLine
AuctionPC
AuctionPort-Interactive Online Auctions
Auctionsamerica
Auctionware Technologies
AuctionWorks
AuctionX
Autographs...and more!
B2BAuction
BargainsUSA
Bid on Collectibles
Bid Online
Bid4it
BidAway Web Auctions
Biddernet
Bidders Paradise
BidderSuite
bidnask.com
Bidnow
Boekhout's Collectibles Mall
Buck Auction
Butterfield & Butterfield
Central Missouri Internet Auction
Christie's
CityAuction
Classifieds Live
CoinTrade Online
CommPublic Online
Consultants Research Institute
CSL Associates Online Auction for Pearls
Dan's Online Auction
DealDeal
Deep Discount Network
Digitalauction
eBay
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<PAGE>
Electronic Auction
Encore E-Z Auction
FairAuction
FinalBid Internet Auction Service
First Auction
FocalPoint Online Photo Auction
Foryourneeds
Fun Time Auction
G.B. Tate & Sons Online Auction
GEMS AUCTION
Gifts and More Online Auction
Glenn Johnson Coins
Going Going Sold
Going Once
Going, Going...Sold!
Golden Age Antiques and Collectibles
Golf Auction
GolfClubExchange
GolfWeb GolfAuction
Haggle Online
Hobby Markets Online
Human Digital Auction
Infinite Auction
Insight Corp Auction
Interactive Auction Online
interAUCTION Services
Intermodal Equipment Exchange
International Electronic Auction
Internet Auction House
Internet Liquidators Int
IWA Auction House
John Morelli Auctioneers
Keybuy Auction House
Klik-Klok Dutch Auction
Labx
Lightningauctions
Magnolia Auction
Metric Equipment Sales
ML Coins
Motherlode Gold Auction
Nab-it
National Auction Properties, Inc.
Nationwide Dealer Exchange
Netauction
Netauctions
NetMarket
Nettworth
NonProfitAuction
Northerbys Online Auctions
Numisma Online Coin Auctions
Numismatists Online Coin Auctions
Old Auction Barn
OneWebPlace
Online Auction Services
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<PAGE>
OnLine Exchange
ONSALE Interactive Marketplace
Paulus Swaen Internet Auction
PC Buyer
Philatelists Online
Prizefight
ProAuctions
RacerX
Remington York Online Auction
Rotman Collectibles
Sandafayre
Sandy's Super Auction
Save the Earth Foundation ArtRock Auction
Scala-Mathis Auctions, Inc.
SCC Exchange
Southeast Auction Company
Sotheby's
Sportsauctionsusa
Steal-a-Record Auction
Super Auction
Superior Coin & Stamp Auction Galleries
SurplusAuction
Teletrade
The Auction Block
The Auction Store
The Sell And Trade Internet Marketplace
TIME MACHINE....Silent Watch Auction
u-Auction-it
uBid
Universe Auctions
University of Michigan AuctionBot
Up4Sale
USAuctions
USCents
VintageUSA Direct Auction
WebAuction
Wild Auction
World Wide Auctions
Yahoo Auction
ZAuction
1st Sporting Equipment Auction
3WAuction
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<PAGE>
EXHIBIT D
AUTOMATIC PARTNER REGISTRATION
To maintain a consistent user experience, any theglobe member should not need to
separately log in to the Service or the Co-Branded Pages. The only login or
registration that should be required to access the Service or the Co-Branded
Pages is theglobe Site's login or registration. Because Boxlot hosts the
Service and the Co-Branded Pages, theglobe will pass to Boxlot information about
each User accessing the Service or the Co-Branded Pages as described below:
. Accounts will be created for each User via a one-time "welcome" page
(hosted by theglobe) when the User tries to access the portion of the
Service requiring such registration for the first time.
. The "welcome" page will include registration fields for any information
about the User needed to use the Service but not currently in theglobe's
database.
. The "welcome" page will include a "Privacy Policy" informing the User that
their data is being passed to a third party (Boxlot) in order to use the
Services.
. Any additional required User information is collected and entered into
theglobe's database. Then, the required User information is sent to Boxlot
all at once to create the new account. theglobe will include the User's
"username" and "UserID#" in the data passed to Boxlot.
Additional notes on account creation:
. The User will only see the "Welcome" page until they consent to the privacy
policy and enter any required information. This page will not appear after
the User completes the initial account creation process.
. Account information stored on Boxlot's servers in connection to the Service
will need to be kept in parity with theglobe. To do so, the parties shall
work together to implement a mechanism for updating information on Boxlot's
servers when User information changes on theglobe Site.
. The technology used to pass the data to Boxlot for account creation and
ongoing account updates will be determined jointly by Boxlot and theglobe.
. The UserID# theglobe passes to Boxlot during account creation will be
stored by Boxlot in association with each User. This UserID# is necessary
to link individual user reporting and individual account updates between
Boxlot and theglobe on an ongoing basis.
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<PAGE>
EXHIBIT 10.21
theglobe.com
MERCHANDISING AGREEMENT
PREMIERE PARTNER
This Premiere Partner Merchandising Agreement (the "Agreement") is made as
of March 16, 1999 by and between theglobe.com, Inc., with its principal place of
business at 31 West 21st Street, New York, NY 10010 ("theglobe"), and Music HQ,
Inc., with its principal place of business at 118 Captains Court, Durham, NC
27712 ("Music HQ").
1. DEFINITIONS.
(a) "Launch Date" means the first day on which theglobe performs any of the
promotions described on Exhibit A.
(b) "Music HQ Banners" means any banner, button, text or similar ads Music
HQ provides to theglobe in connection with this Agreement.
(c) "Music HQ Content" means any content or information (including without
limitation any text, music, sound, photographs, video, graphics, data or
software), in any medium, provided by Music HQ to theglobe (other than Music HQ
Banners).
(d) "Music HQ Marks" means all Music HQ domain names, trademarks and logos
reasonably necessary or desirable for theglobe to perform under this Agreement.
(e) "Music HQ Pages" means the musichq.com and dvdflix.com websites as co-
branded in accordance with this Agreement.
(f) "Marks" means the Music HQ Marks or theglobe Marks, as applicable.
(g) "Referral" means a person who accesses the Music HQ Pages.
(h) "theglobe Marks" means all theglobe domain names, trademarks and logos
reasonably necessary or desirable for Music HQ to perform under this Agreement.
(i) "theglobe Materials" means theglobe's navigation bars, logos and other
co-branding elements provided to Music HQ for incorporation on the Music HQ
Pages.
(j) "theglobe Site" means all pages under theglobe.com domain.
2. MUSIC HQ PAGES.
2.1 Pre-Launch Deliverables. On or before March 31, 1999, theglobe shall
deliver to Music HQ the following: theglobe Materials, a media and promotional
plan, and a plan for
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doing the production/design services related to integrating Music HQ's
promotions into theglobe Site. In addition, theglobe shall complete such
production/design services.
2.2 Co-Branding. The Music HQ Pages shall be co-branded with theglobe
Materials. The parties shall mutually agree upon the look and feel of any co-
branded Music HQ Pages, specifying the location of all theglobe Materials and
other branding. Music HQ may not publicly display the Music HQ Pages until such
agreement has been reached and theglobe has approved Music HQ's implementation.
Thereafter, without theglobe's written consent, which shall not be unreasonably
withheld, Music HQ shall not change any Music HQ Pages (a) in a way that would
degrade, detract from or interfere with theglobe's branding, or (b) to introduce
any new third party branding on such Music HQ Pages. Unless theglobe requests
otherwise, the Music HQ Pages shall contain substantially the same content and
functionality as the pages under www.musichq.com and www.dvdflix.com. Music HQ
shall not provide any hypertext links from the Music HQ Pages to a page outside
of the Music HQ Pages except that Music HQ may provide hypertext links to all of
its entertainment-oriented, wholly owned web sites. If requested by theglobe,
Music HQ shall create additional branded versions of the Music HQ Pages branded
with the branding of theglobe's distribution partners, which branded versions
shall be implemented within 30 days and subject to approval in accordance with
this Section 2.
2.3 Content Delivery. All deliveries of theglobe Materials or Music HQ
Content, as applicable, shall comply with technical standards of the recipient,
as reasonably specified by the recipient.
2.4 Referral Relations. Music HQ shall be responsible for providing all
customer support regarding the Music HQ Pages and the goods and services offered
on such pages, and theglobe may redirect to Music HQ any associated customer
support inquiries. To the extent that Music HQ is delivering back to theglobe
any information about Referrals, Music HQ's privacy policy shall make any
disclosures, or obtain any Referral consent, necessary to make the disclosures
about Referrals back to theglobe required by this Agreement.
2.5 Shopping Cart. If theglobe makes its shopping cart technology
universal so that it can consummate transactions across multiple merchants in
theglobe network, then Music HQ shall work with theglobe to effectuate the
implementation of such technology in connection with purchases from the Music HQ
Pages.
3. MARKETING.
3.1 Promotions. On and following the Launch Date, theglobe shall provide
the promotions described in Exhibit A. In the event that theglobe redesigns
theglobe Site in a way that impacts such promotions, theglobe shall provide
substantially similar promotions on the redesigned site.
3.2 Exclusivity. Subject to the following qualifications and exclusions,
Music HQ shall be the only company whose advertisements' content advertise the
retail sale of Excluded Goods on shop.theglobe.com (or a successor area on
theglobe Site which is exclusively devoted to selling goods and services to
theglobe users) and www.theglobe.com. "Excluded Goods" are
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entertainment-oriented DVDs, entertainment-oriented, non-interactive music CDs
and cassettes and entertainment-oriented movie videos. "Excluded Goods" do not
include video games.
(a) theglobe may run promotions and advertisements for companies and
websites which sell Excluded Goods (including without limitation providing
hypertext links to their associated sites which may sell Excluded Goods) so long
as the applicable promotion does not mention the retail sale of Excluded Goods
in the promotion. By way of example, theglobe may run a banner ad for Barnes &
Noble which, in the content of the banner, promotes books, even though users who
click through the banner may see promotions for or actually purchase Excluded
Goods. As another example, theglobe may run promotions for SonicNet and E!
which promote their sites generally, even if these sites may promote the retail
sale of Excluded Goods. As another example, theglobe may not run a promotion
for Disney where, in the banner, Disney promotes the sale of one of its videos.
(b) theglobe may perform under its agreements with everycd.com and
cductive.com. ***.
(c) theglobe may perform under its agreement with grooveJam, including
without limitation selling the grooveJam CDs from shop.theglobe.com.
(d) theglobe may fulfill its currently existing banner ad campaign
obligations and obligations with respect to similar promotions (including
without limitation any associated keyword buys). This includes, without
limitation, theglobe's obligations to Video Premiere and Big Star Entertainment.
However, if these agreements come up for renewal and theglobe has the discretion
whether or not to renew, theglobe shall not renew such agreements.
(e) theglobe's relationships with companies that aggregate products or
advertising for third parties are not covered unless such aggregator is
exclusively or primarily in the business of retailing Excluded Goods. For
example, Emaginet is permitted to deliver digital coupons on theglobe Site, and
Emaginet's delivery of digital coupons for music or video to theglobe users is
not covered.
(f) Music or video-related editorial content shall not be deemed an
advertisement, even if theglobe is paid to place it on theglobe Site and even if
the content is accompanied by logos and links.
(g) Areas of theglobe Site not specifically mentioned are not covered,
including without limitation any co-branded sites operated by others, any emails
to members and any third party operated pages framed by theglobe.
(h) Any corporate or asset acquisitions by theglobe are not covered.
(i) All member-created or uploaded content is not covered.
(j) Any promotions for classified ads or auctions are not covered.
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(k) Promotions run in conjunction with contests and sweepstakes are
excluded, including if the prize is an Excluded Good.
(l) Any promotions for any products or services which incidentally
contain an Excluded Good (as part of a package) are not covered. Furthermore,
the promotion or sale of any computer software, video games, or interactive
media are not covered.
3.3 Framing. theglobe in its sole discretion may frame the Music HQ
Pages, and any consideration theglobe derives from such frames shall be solely
theglobe's.
3.4 Music HQ Banners. Music HQ shall deliver to theglobe any Music HQ
Banners which are to be run in accordance with this Agreement. Such banners
shall comply with theglobe's then-current technical standards. The terms of any
insertion order or similar document regarding the Music HQ Banners are expressly
rejected, except to the extent that they specify the location, timing or
duration of the display of the Music HQ Banners and such terms are accepted by
theglobe. Music HQ Banners shall link to the Music HQ Pages. theglobe may
request that Music HQ Banners be co-branded with theglobe Marks, in which case
the parties shall work together to develop a mutually acceptable implementation.
theglobe may approve or reject any Music HQ Banner in its sole discretion.
4. PAYMENT.
4.1 ***.
4.2 ***.
4.3 Placement Fee. On the Launch Date and each monthly anniversary
thereof, Music HQ shall pay to theglobe a nonrefundable (except as described in
Exhibit A) placement fee of *** per month, paid in advance for the following
month.
4.4 Terms. Overdue payments shall accrue interest, at the lesser of 1
1/2% per month or the maximum allowable interest under applicable law, from due
date until paid, and Music HQ shall pay theglobe's costs of collection
(including reasonable attorneys' fees).
4.5 Taxes. Music HQ shall pay, any sales, use or other tax related to the
performance of its obligations under this Agreement.
5. LICENSES AND STANDARDS.
5.1 Content. Music HQ hereby grants to theglobe a non-exclusive,
worldwide license to use, reproduce, create derivative works of (only as
necessary to build pages in a manner consistent with this Agreement), publicly
display, publicly perform and digitally perform Music HQ Banners and Music HQ
Content on theglobe Site or otherwise as reasonably appropriate to advertise and
promote the Music HQ Pages. Subject to the approval process in Section 2,
theglobe hereby grants to Music HQ a non-exclusive, worldwide license to use,
reproduce, create derivative works of (only as necessary to build Music HQ
Pages), publicly display, publicly perform and digitally perform theglobe
Materials on Music HQ Pages.
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5.2 Trademarks. Music HQ hereby grants to theglobe a non-exclusive
license to use the Music HQ Marks to advertise and promote the Music HQ Pages.
theglobe hereby grants to Music HQ a non-exclusive license to use theglobe Marks
on the Music HQ Pages and, if requested by theglobe, in the Music HQ Banners.
5.3 Trademark Restrictions. The Mark owner may terminate the foregoing
trademark license if, in its reasonable discretion, the licensee's use of the
Marks tarnishes, blurs or dilutes the quality associated with the Marks or the
associated goodwill and such problem is not cured within 10 days of notice of
breach; alternatively, instead of terminating the license in total, the owner
may specify that certain licensee uses may not contain the Marks. Title to and
ownership of the owner's Marks shall remain with the owner. The licensee shall
use the Marks exactly in the form provided and in conformance with any trademark
usage policies. The licensee shall not take any action inconsistent with the
owner's ownership of the Marks, and any benefits accruing from use of such Marks
shall automatically vest in the owner. The licensee shall not form any
combination marks with the other party's Marks.
5.4 Ownership. As between theglobe and Music HQ: (a) theglobe and its
suppliers retain all rights, title and interest in and to all intellectual
property rights embodied in or associated with theglobe Materials, and (b) Music
HQ and its suppliers retain all rights, title and interest in and to all
intellectual property rights embodied in or associated with the Music HQ Content
and Music HQ Banners. There are no implied licenses under this Agreement, and
any rights not expressly granted to a licensee hereunder are reserved by the
licensor or its suppliers. Neither party shall exceed the scope of the licenses
granted hereunder.
5.5 Standards. Music HQ shall not provide Music HQ Banners (excluding any
theglobe Marks incorporated therein at theglobe's request) or Music HQ Content,
and theglobe shall not provide to Music HQ any theglobe Materials, that: (a)
infringe any third party's intellectual property right or right of publicity or
privacy; (b) violate any law or regulation; (c) are defamatory, obscene, harmful
to minors or child pornographic; (d) contain any viruses, trojan horses, worms,
time bombs, cancelbots or other computer programming routines that are intended
to damage, detrimentally interfere with, surreptitiously intercept or
expropriate any system, data or personal information; or (e) are materially
false, inaccurate or misleading.
5.6 Quality Standards. Music HQ shall provide the goods and services
offered from the Music HQ Pages, and any related customer and technical support,
on a quality level substantially equivalent to the quality offered by Music HQ's
online competitors. The category or types of goods and services offered from
the Music HQ Pages as of the Effective Date shall be the same or substantially
similar throughout the term of the Agreement. Music HQ shall clearly state, and
shall follow the stated, warranty and refund policies. All Referrals shall be
treated at least as favorably in all respects (including without limitation with
respect to pricing, quality of service, and customer support responsiveness) as
Music HQ treats users of the musichq.com and dvdflix.com sites.
6. INFORMATION ABOUT REFERRALS. Music HQ shall not disclose to any third
parties any information or data collected from or about Referrals (including
information provided by theglobe, voluntarily-disclosed information, and any
information Music HQ gleans from Referrals'
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access or use of the Music HQ Pages), nor may Music HQ use such information for
any purpose other than as necessary to deliver purchased goods or services to
Referrals (or, for those Referrals who sign up as affiliates, to perform in
accordance with Music HQ's affiliate program). Music HQ shall use at least
industry-standard methods to protect the security of such Referral-related
information.
7. NO WARRANTIES. EACH PARTY PROVIDES ALL MATERIALS AND SERVICES TO THE OTHER
PARTY "AS IS." EACH PARTY DISCLAIMS ALL WARRANTIES AND CONDITIONS, EXPRESS,
IMPLIED OR STATUTORY, INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OF
TITLE, NON-INFRINGEMENT, MERCHANTABILITY, AND FITNESS FOR A PARTICULAR PURPOSE.
Each party acknowledges that it has not entered into this Agreement in reliance
upon any warranty or representation except those specifically set forth herein.
Unless an approval process is specified herein, all deliverables provided by one
party to the other shall be deemed accepted (for purposes of the UCC) when
delivered.
8. TERM AND TERMINATION.
8.1 Term. This Agreement will become effective on the Effective Date and
will continue in effect for 1 year following the Launch Date. The parties
shall, during the 60 days immediately prior to expiration, negotiate in good
faith to extend the term of this Agreement. However, no extension shall apply
unless mutually agreed upon in writing by both parties.
8.2 Termination for Failure to Perform. By providing written notice, a
party may terminate this Agreement if the other party materially breaches this
Agreement and fails to cure that breach within 15 days after receiving written
notice of the breach. In addition, by providing written notice, theglobe may
terminate this Agreement, or at its option immediately suspend its promotion and
other efforts hereunder, in the case of Music HQ's breach of Section 11.1.
8.3 Effects of Termination. Upon expiration or termination, all licenses
granted hereunder shall terminate unless such licenses are expressly stated as
surviving. Music HQ shall promptly remove all theglobe Marks and theglobe
Materials from its servers, and theglobe shall promptly remove all Music HQ
Marks, Music HQ Banners and Music HQ Content from its servers. Sections 1, 4.5,
5.4, 6, 7, 8.3, 9, 10 and 11.2 to 11.9, and any obligation to pay any accrued
but unpaid amounts, shall survive any expiration or termination.
9. LIABILITY LIMITS. NEITHER PARTY SHALL BE LIABLE FOR LOST PROFITS OR
SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (HOWEVER ARISING, INCLUDING
NEGLIGENCE) ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, EVEN IF THE
PARTIES ARE AWARE OF THE POSSIBILITY OF SUCH DAMAGES.
EXCEPT IN THE EVENT OF A CLAIM UNDER SECTION 10, IN NO EVENT SHALL EITHER PARTY
BE LIABLE TO THE OTHER PARTY IN AN AMOUNT GREATER THAN TWO TIMES THE AMOUNT
MUSIC HQ ACTUALLY PAYS TO THEGLOBE HEREUNDER.
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10. INDEMNITY. Each party (the "Indemnifying Party") shall indemnify the other
party (the "Indemnified Party") against any and all claims, losses, costs and
expenses, including reasonable attorneys' fees, which the Indemnified Party may
incur as a result of claims in any form by third parties arising from: (x) the
Indemnifying Party's acts, omissions or misrepresentations to the extent that
the Indemnifying Party is deemed an agent of the Indemnified Party, or (y) the
Indemnifying Party's breach of its privacy policy. In addition, theglobe shall
indemnify Music HQ against any and all claims, losses, costs and expenses,
including reasonable attorneys' fees, which Music HQ may incur as a result of
claims in any form by third parties arising from theglobe Materials or theglobe
Marks. In addition, Music HQ shall indemnify theglobe against any and all
claims, losses, costs and expenses, including reasonable attorneys' fees, which
theglobe may incur as a result of claims in any form by third parties arising
from Music HQ Banners (excluding theglobe Marks if applicable), Music HQ
Content, Music HQ Marks, any goods or services offered or sold from the Music HQ
Pages, Music HQ's affiliate program or Music HQ's breach of Section 11.1. The
foregoing obligations are conditioned on the Indemnified Party: (i) giving the
Indemnifying Party written notice of the relevant claim, (ii) cooperating with
the Indemnifying Party, at the Indemnifying Party's expense, in the defense of
such claim, and (iii) giving the Indemnifying Party the right to control the
defense and settlement of any such claim, except that the Indemnifying Party
shall not enter into any settlement that affects the Indemnified Party's rights
or interest without the Indemnified Party's prior written approval. The
Indemnified Party shall have the right to participate in the defense at its
expense.
11. GENERAL.
11.1 Compliance with Laws. At its own expense, Music HQ shall comply with
all applicable laws and regulations regarding its performance in connection with
this Agreement, including without limitation those applicable to the marketing
or sale of the goods or services offered from the Music HQ Pages.
11.2 Governing Law. This Agreement will be governed and construed in
accordance with the laws of the State of New York without giving effect to
conflict of laws principles. Both parties submit to personal jurisdiction in
New York and further agree that any cause of action arising under this Agreement
shall be brought in a court in New York City, NY.
11.3 Publicity. Neither party shall issue any press release or similar
publicity statement regarding this Agreement without the prior approval of both
parties (not to be unreasonably withheld) or as required by law. The parties
shall issue the first press release jointly.
11.4 Independent Contractors. The parties are independent contractors,
and no agency, partnership, franchise, joint venture or employment relationship
is intended or created by this Agreement. Neither party shall make any
warranties or representations on behalf of the other party.
11.5 Assignment. Neither party may assign its rights or delegate its
duties hereunder (except to an affiliated company, or to a successor in interest
in the event of a merger, sale of assets of the business to which this Agreement
is related, or consolidation) without the other party's prior
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written consent, which shall not be unreasonably withheld, and any purported
attempt to do so is null and void.
11.6 Severability; Headings. If any provision herein is held to be
invalid or unenforceable for any reason, the remaining provisions will continue
in full force without being impaired or invalidated in any way. The parties
agree to replace any invalid provision with a valid provision that most closely
approximates the intent and economic effect of the invalid provision. Headings
are for reference purposes only and in no way define, limit, construe or
describe the scope or extent of such section.
11.7 Force Majeure. Except as otherwise provided, if performance
hereunder (other than payment) is interfered with by any condition beyond a
party's reasonable control, the affected party, upon giving prompt notice to the
other party, shall be excused from such performance to the extent of such
condition. Each party acknowledges that website operations may be affected by
numerous factors outside of a party's control.
11.8 Notice. Any notice under this Agreement will be in writing and
delivered by personal delivery, overnight courier, confirmed facsimile,
confirmed email, or certified or registered mail, return receipt requested, and
will be deemed given upon personal delivery, 1 day after deposit with an
overnight courier, 5 days after deposit in the mail, or upon confirmation of
receipt of facsimile or email. Notices will be sent to a party at its address
set forth above or such other address as that party may specify in writing
pursuant to this Section.
11.9 Entire Agreement; Waiver. This Agreement sets forth the entire
understanding and agreement of the parties, and supersedes any and all oral or
written agreements or understandings between the parties, as to the subject
matter of the Agreement. This Agreement may be changed only by a writing signed
by both parties. The waiver of a breach of any provision of this Agreement will
not operate or be interpreted as a waiver of any other or subsequent breach.
THEGLOBE.COM, INC.: MUSIC HQ:
By: /s/ Bryan J. Wiener By: /s/ Eric Garrison
Name: Bryan J. Wiener Name: Eric Garrison
Title: Director, Business Development Title: President
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Exhibit A
Promotions
1. ***.
2. A Music HQ button shall be periodically rotated on the shop.theglobe.com
home page.
3. theglobe shall place a search box for musichq.com on the music subtheme
page on www.theglobe.com, and theglobe shall place a search box for dvdflix.com
on the movie subtheme page on www.theglobe.com.
4. theglobe shall include a link to the Music HQ Site from the right hand
column nav bar (under "Resources") in the Entertainment, Music, Movies and
Television theme areas on www.theglobe.com.
5. Music HQ shall be the sponsor of *** sweepstakes associated with member
registration and *** entertainment-related contests. Music HQ shall provide to
theglobe a prize for distribution by theglobe to winners of such contests and
sweepstakes. Each such prize shall have a value no less than *** and no more
than ***. Music HQ shall deliver the prize to theglobe no later than 2 weeks
prior to the commencement of the applicable contest/sweepstakes; and if it does
not do so, theglobe may procure a suitable prize itself and invoice Music HQ for
the applicable amount. The rules and operation of such contests and sweepstakes
shall be determined solely by theglobe. ***.
6. theglobe shall include promotions for the Music HQ Site in its emails to
members *** times during the year.
. theglobe shall run *** Music HQ Banners on theglobe Site each month
(commencing August 1999), broken down as follows: *** banners, *** buttons and
*** text links. At least *** banners of the *** Music HQ Banners shall be
displayed in the Entertainment theme area on www.theglobe.com. In the event
that theglobe fails to deliver the foregoing impressions in a particular month,
Music HQ's sole and exclusive remedy shall be to have theglobe continue the
promotions in subsequent months until the minimum number of promotions are
complete. If, at the end of the Agreement, theglobe fails to deliver all
impressions promised hereunder, theglobe shall have an additional 90 days to
deliver the total number of required impressions. If theglobe does not do so,
theglobe shall thereafter promptly refund a prorated amount of the placement
fees set forth in Section 4.3 (prorated based on the number of impressions
actually delivered).
7. ***.
8. Music HQ shall be promoted in *** Holiday/Special Section areas on a page in
such area selected by theglobe as being relevant to Music HQ, and Music HQ will
be included in the associated email to members.
9. Music HQ shall be promoted as the sponsor of *** entertainment-related
member chats.
10. ***.
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EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
report dated February 20, 1999, relating to the balance sheets of theglobe.com,
inc. as of December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998, and related schedule. We also consent to the
reference to our firm under the caption "Experts."
/s/ KPMG LLP
New York, New York
April 30, 1999
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
report dated March 5, 1999, with respect to the financial statements of
factorymall.com, inc. as of December 31, 1998 and 1997 and for the period from
inception (April 15, 1996) to December 31, 1996 and for each of the two years
in the period ended December 31, 1998. We also consent to the reference to our
firm under the caption "Experts."
/s/ KPMG LLP
Seattle, Washington
April 30, 1999
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EXHIBIT 23.3
PRICEWATERHOUSECOOPERS [LOGO]
PricewaterhouseCoopers LLP
101 East Kennedy Boulevard
Suite 1500
Tampa, FL 33602-5147
Telephone (813) 229-0221
Facsimile (813) 229-3646
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
report, dated March 19, 1999, except for Note 16, for which the date is April 9,
1999, on our audits of the consolidated financial statements of Attitude
Network, Ltd. And its subsidiary. We also consent to the references to our Firm
under the caption "Experts."
/s/ PricewaterhouseCoopers LLP
April 30, 1999
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EXHIBIT 23.8
Date: Fri, 30 Apr 1999 13:37:03 -0700
From: Pam Dabney <[email protected]>
Organization: Red Herring
To: Esther Loewy <[email protected]>
Subject: Re: quote for prospectus
You have permission to quote the Red Herring as long as credit is given.
Pam Dabney
415-486-2850
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EXHIBIT 23.9
Date: Fri, 30 Apr 1999 16:21:32 -0400
To: [email protected]
From: Diane Meuser <[email protected]>
Subject: NYT approval
This is to state that the New York Times gives permission to use a quote from
the article "Wow: Cash Infusion for Internet 'Kids'..." by David Chen, 9/19/97,
in their prospectus, print run 10,000. The formal written fee quote will be sent
Monday, May 3, 1999, which will need to be signed and faxed back. The invoice
will follow with the fee of $1,000.
Thank you,
Diane Meuser
[email protected]
