AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 2000
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO ___________________
COMMISSION FILE NO. 0-25053
THEGLOBE.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
STATE OF DELAWARE 14-1782422
---------------------- ---------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
120 BROADWAY
NEW YORK, NEW YORK 10271
---------------------- --------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 894-3600
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
The number of shares outstanding of the Registrant's Common Stock,
$.001 par value (the "Common Stock"), as of May 8, 2000 was 30,511,522.
<PAGE>
THEGLOBE.COM, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
Page
----
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at March
31, 2000 (unaudited) and December 31, 1999 1
Unaudited Condensed Consolidated Statements of
Operations for the three months ended March
31, 2000 and 1999 2
Unaudited Condensed Consolidated Statements of
Cash Flows for the three months ended March
31, 2000 and 1999 3
Notes to Unaudited Condensed Consolidated
Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Qualitative and Quantitative Disclosures about
Market Risk 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings II-1
Item 2. Changes in Securities and Use of Proceeds II-1
Item 3. Defaults Upon Senior Securities II-1
Item 4. Submission of Matters to a Vote of Security
Holders II-1
Item 5. Other Information II-1
Item 6. Exhibits and Reports on Form 8-K II-1
A. Exhibits
B. Reports on Form 8-K
Signatures II-3
<PAGE>
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THEGLOBE.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2000 1999
----------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 19,163,869 $ 36,585,998
Short-term investments................................. 23,845,292 19,288,627
Accounts receivable, net............................... 5,196,382 4,219,716
Prepaid and other current assets....................... 2,998,495 1,446,187
----------------- -----------------
Total current assets................................. 51,204,038 61,540,528
Other assets............................................. 6,145,401 718,750
Restricted investments................................... 5,157,290 3,657,497
Property and equipment, net.............................. 10,511,689 9,464,291
Goodwill and other intangible assets, net................ 71,864,810 63,462,251
----------------- -----------------
Total assets......................................... $ 144,883,228 $ 138,843,317
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................................... $ 3,153,610 $ 2,722,017
Accrued expenses....................................... 3,505,539 2,439,369
Accrued compensation................................... 1,307,509 1,610,445
Deferred revenue....................................... 1,216,493 565,919
Current portion of long-term debt and current installments
of capital lease obligations ........................ 2,036,120 1,956,982
----------------- -----------------
Total current liabilities............................ 11,219,271 9,294,732
Long-term debt and capital lease obligations, excluding
current installments.................................. 1,823,192 2,200,895
Deferred rent............................................ 466,754 438,263
Stockholders' equity:
Common stock........................................... 30,504 27,771
Additional paid-in capital............................. 218,113,074 197,307,293
Deferred compensation.................................. (239,295) (269,307)
Accumulated other comprehensive loss................... (4,409) (109,462)
Accumulated deficit.................................... (86,525,863) (70,046,868)
----------------- ------------------
Total stockholders' equity........................... 131,374,011 126,909,427
Commitments and contingencies............................
Total liabilities and stockholders' equity........... $ 144,883,228 $ 138,843,317
================= =================
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THEGLOBE.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
-------------------------------------------
2000 1999
-------------------------------------------
(unaudited)
<S> <C> <C>
Revenues:
Advertising............................................ $ 4,615,042 $ 3,078,020
Electronic commerce and other.......................... 2,364,143 113,784
----------------- -----------------
Total revenues....................................... 6,979,185 3,191,804
Cost of revenues......................................... 4,407,998 1,196,350
----------------- -----------------
Gross profit............................................. 2,571,187 1,995,454
Operating expenses:
Sales and marketing.................................... 5,597,098 2,186,918
Product development.................................... 2,967,747 2,113,806
General and administrative............................. 3,211,043 2,754,031
Amortization of goodwill and intangible assets......... 7,624,170 1,360,778
----------------- -----------------
Total operating expenses................................. 19,400,058 8,415,533
----------------- -----------------
Loss from operations..................................... (16,828,871) (6,420,079)
Interest and other income, net........................... 420,046 195,626
----------------- -----------------
Loss before provision for income taxes................... (16,408,825) (6,224,453)
Provision for income taxes............................... 70,170 45,889
----------------- -----------------
Net loss................................................. $ (16,478,995) $ (6,270,342)
================= ==================
Basic and diluted net loss per share..................... $ (0.57) $ (0.30)
================= ==================
Weighted average basic and diluted shares outstanding.... 28,804,530 21,089,668
================= =================
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THEGLOBE.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
-------------------------------------------
2000 1999
-------------------------------------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................ $ (16,478,995) $ (6,270,342)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization......................... 8,559,097 1,623,321
Loss on sale of short-term securities................. 134,852 --
Deferred rent......................................... 28,491 246,623
Other................................................. 51,695 48,188
Changes in operating assets and liabilities, net of effect
of acquisitions:
Accounts receivable, net.............................. 35,552 (314,464)
Prepaid and other current assets...................... (803,045) (51,108)
Other assets.......................................... 93,750 --
Accounts payable...................................... (1,490,032) (23,084)
Accrued expenses...................................... 1,008,756 59,269
Accrued compensation.................................. (424,487) (20,573)
Deferred revenue...................................... 310,666 (25,975)
----------------- -----------------
Net cash used in operating activities.................... (8,973,700) (4,728,145)
----------------- -----------------
Cash flows from investing activities:
Purchases of short-term securities...................... (7,202,800) (10,796,291)
Proceeds from sale and maturities of short-term securities 2,620,202 --
Purchases of property and equipment..................... (1,663,115) (566,611)
Cash paid for acquisitions, net of cash acquired........ (374,872) 2,511
Payments of security deposits, net...................... (1,499,793) (1,785,011)
----------------- -----------------
Net cash used in investing activities.................... (8,120,378) (13,145,402)
----------------- -----------------
Cash flows from financing activities:
Payments under capital lease obligations................ (469,121) (232,989)
Payments of long-term debt.............................. (56,321) --
Proceeds from exercise of common stock
options and warrants................................... 168,954 97,400
Net proceeds from issuance of common stock.............. 32,294 --
----------------- -----------------
Net cash used in financing activities.................... (324,194) (135,589)
----------------- -----------------
Net change in cash and cash equivalents.................. (17,418,272) (18,009,136)
Effect of exchange rate changes on cash and cash equivalents (3,857) --
Cash and cash equivalents at beginning of period......... 36,585,998 29,250,572
----------------- -----------------
Cash and cash equivalents at end of period............... $ 19,163,869 $ 11,241,436
================= =================
Supplemental disclosure of noncash transactions:
Equipment acquired under capital leases............... $ 34,277 $ 178,864
================= =================
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
<PAGE>
THEGLOBE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of the theglobe.com
theglobe.com, inc. (the "Company" or "theglobe") was incorporated on
May 1, 1995 (inception) and commenced operations on that date. theglobe.com
is an online property with registered members and users in the United
States and abroad. theglobe'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 on its online properties, which includes the development and
sale of sponsorship placements within its web sites. Additional revenues
are generated through the sale of video games and related products through
its online store, the sale of advertising in its games information
magazine, the sale of its games information magazine through newsstands and
subscriptions and electronic commerce revenue shares.
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 community
solutions by the marketplace.
(b) Principles of Consolidation
The condensed consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries from their respective
dates of acquisition (see Note 3). All significant intercompany balances
and transactions have been eliminated in consolidation.
(c) Unaudited Interim Condensed Consolidated Financial Information
The unaudited interim condensed consolidated financial statements of
the Company as of March 31, 2000 and for the three months ended March 31,
2000 and 1999 included herein have been prepared in accordance with the
instructions for Form 10-Q under the Securities Exchange Act of 1934, as
amended, and Article 10 of Regulation S-X under the Securities Act of 1933,
as amended. Certain information and note disclosures normally included in
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations relating to interim condensed consolidated
financial statements.
In the opinion of management, the accompanying unaudited interim
condensed consolidated financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present
fairly the financial position of the Company at March 31, 2000 and the
results of its operations and its cash flows for three months ended March
31, 2000 and 1999.
The results of operations for such periods are not necessarily
indicative of results expected for the full year or for any future period.
These financial statements should be read in conjunction with the audited
financial statements as of December 31, 1999, and for the three years then
ended and related notes included in the Company's 10-K filed with the
Securities and Exchange Commission. Certain reclassifications have been
made to the 1999 financial statements to conform to the 2000 presentation.
(d) Use of Estimates
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
(e) 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
were $15.7 million at March 31, 2000 and $30.2 million at December 31, 1999
and consisted of government securities.
(f) Short-term Investments
The Company accounts for its short-term investments in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115
establishes the accounting and reporting requirements for all debt
securities and for investments in equity securities that have readily
determinable fair market value. All short-term marketable securities must
be classified as one of the following: held-to-maturity, available-for-sale
or trading securities. The Company's short-term investments consist of both
held-to-maturity and available-for-sale securities. The Company's
held-to-maturity securities are carried at amortized cost in the statement
of financial position. The amortization of the discount or premium that
arises at acquisition is included in earnings. The Company's
available-for-sale securities are carried at fair value, with unrealized
gains and losses reported as accumulated other comprehensive loss within
stockholders' equity. Unrealized gains and losses are computed on the basis
of the specific identification method. Realized gains, realized losses and
declines in value judged to be other-than-temporary, are included in
interest income (expense). The cost of available-for-sale securities sold
are based on the specific-identification method and interest earned is
included in earnings.
The Company's short-term investments were comprised of the following
at March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
Available-for-sale securities.................. $ -- $ 2,889
Held-to-maturity securities.................... 23,845 16,400
-------------- -------------
Short-term investments.................. $ 23,845 $ 19,289
========= ========
</TABLE>
At December 31, 1999, the fair value of the Company's
available-for-sale securities approximated cost and unrealized gains and
losses were not material.
(g) Restricted Investments
Restricted investments includes security deposits held in Certificates
of Deposit and other interest bearing accounts as collateral for certain
capital equipment and office space leases and escrow payments held as
collateral in connection with certain distribution agreements. In February
2000, the Company placed into escrow approximately $1.5 million as
collateral in connection with its distribution agreement with
Sportsline.com, Inc. (see Note 2).
(h) Goodwill and Intangible Assets
Goodwill and intangible assets primarily relates to the Company's
acquisitions accounted for under the purchase method of accounting, or its
purchase of intangible assets. Under the purchase method of accounting, the
excess of the purchase price over the identifiable net tangible assets of
the acquired entity is recorded as identified intangible assets and
goodwill. Goodwill and intangible assets is stated at cost, net of
accumulated amortization, and is being amortized under the straight-line
method over a 2 to 3 year period, the expected period of benefit (3 years
for goodwill). As of March 31, 2000, accumulated amortization was $28.1
million.
(i) Comprehensive Loss
The Company's comprehensive loss was approximately $16.4 million and
$6.3 million for the three months ended March 31, 2000 and 1999,
respectively. The Company's other comprehensive loss as of March 31, 2000
included approximately $4,000 of losses related to its foreign currency
translation adjustment. The Company's other comprehensive loss as of
December 31, 1999 included approximately $108,000 of net unrealized losses
on short-term investments and a $1,000 loss related to the Company's
foreign currency translation adjustment. The decrease in accumulated other
comprehensive income as of March 31, 2000 was attributable to the sale of
certain of the Company's short-term investments.
(j) Revenue Recognition
ADVERTISING
The Company's revenues are derived principally from the sale of online
advertisements under short-term contracts. To date, the duration of the
Company's online advertising commitments has generally averaged from one to
three months. Online 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", defined as the number of times that
an advertisement appears in pages viewed by the users of the Company's
online properties. Payments received from advertisers prior to displaying
their advertisements on the Company's sites are recorded as deferred
revenues and are recognized as revenue ratably when the advertisement is
displayed. To the extent minimum guaranteed impressions levels are not met,
the Company defers recognition of the corresponding revenues until
guaranteed levels are achieved. The Company's online advertising revenue
includes the development and sale of sponsorship placements within its web
sites. Development fees related to the sale of sponsorship placements on
the Company's web sites are deferred and recognized ratably as revenue over
the term of the contract. The Company also derives revenue through the sale
of advertisements in its games information magazine, which was acquired in
February 2000. Advertising revenues for the games information magazine are
recognized at the on-sale date. Advertising revenue accounted for 66% and
96% of total revenues for three months ended March 31, 2000 and 1999,
respectively.
The Company trades advertisements on its web properties in exchange
for advertisements on the Internet sites of other companies. Barter
revenues and expenses are recorded at the fair market value of services
provided or received, whichever is more readily 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 typically occurs in the same period in which
barter revenue is recognized. Barter revenues and expenses represented 2%
and 4% of total revenues for the three months ended March 31, 2000 and
1999, respectively.
ELECTRONIC COMMERCE AND OTHER
The Company derives other revenues from the sale of video games and
related products through its online store, the sale of its games
information magazine through newsstands and subscriptions and electronic
commerce revenue shares. Sales from the online store are recognized as
revenue when the product is shipped to the customer. Freight out costs are
included in net sales and have not been significant to date. The Company
provides an allowance for merchandise sold through its online store. The
allowance provided to date has not been significant. Newsstand sales of the
games information magazine are recognized at the on-sale date, net of
provisions for estimated returns. Subscriptions are recorded as deferred
revenue when initially received and recognized as income pro ratably over
the subscription term. Revenues from the Company's share of the proceeds
from its e-commerce partners' sales are recognized upon notification from
its partners of sales attributable to the Company's sites. Sales through
the online store accounted for 32% and 4% of total revenue for the three
months ended March 31, 2000 and 1999, respectively. Sales of the Company's
games information magazine through newsstands and subscriptions accounted
for 2% of total revenue for the three months ended March 31, 2000. The
Company acquired its games information magazine in February 2000. To date,
revenues from the Company's electronic commerce revenue share agreements
have been immaterial.
(k) 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 and short-term investments among a diverse group of
issuers and instruments. The Company performs periodic evaluations of these
investments and the relative credit standings of the institutions with
which it invests. At certain times, the Company's cash balances with any
one financial institution may exceed Federal Deposit Insurance Corporation
insurance limits.
The Company's customers are primarily concentrated in the United
States. The Company performs ongoing credit evaluations of its customers'
financial condition and establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of customers, historical
trends and other information; to date, such losses have been within
management's expectations.
For the three months ended March 31, 2000 and 1999, there were no
customers that accounted for over 10% of revenues generated by the Company.
The Company had one customer that represented more than 10% of accounts
receivable as of March 31, 2000 and December 31, 1999.
(l) Net Loss Per Common Share
Diluted net loss per common share has not been presented separately,
as the outstanding stock options, warrants and contingent stock purchase
warrants are anti-dilutive for each of the periods presented.
Diluted net loss per common share for the three months ended March 31,
2000 and 1999 does not include the effects of (1) options to purchase
4,373,477 and 3,935,662 shares of Common Stock, respectively, and (2)
warrants to purchase 4,011,534 and 4,064,828 shares of Common Stock,
respectively.
(m) Segment Reporting
During 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
annual and interim reporting standards for operating segments of a company.
SFAS 131 requires disclosures of selected segment-related financial
information about products, major customers and geographic areas. The
Company is organized in a single operating segment for purposes of making
operating decisions and assessing performance. The chief operating decision
maker evaluates performance, makes operating decisions and allocates
resources based on financial data consistent with the presentation in the
accompanying condensed consolidated financial statements.
The Company's revenues have been earned primarily from customers in
the United States. In addition, all significant operations and assets are
based in the United States.
(n) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company has not yet
analyzed the impact of this pronouncement on its consolidated financial
statements.
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition
in Financial Statements." SAB 101 provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements filed with
the SEC. The SEC issued SAB 101A which deferred the adoption of SAB 101
until no later than June 30, 2000. The Company does not expect the adoption
of SAB 101 to have a material effect on its consolidated financial
statements.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB No. 25." FIN 44 provides guidance on certain aspects
of applying APB No. 25, "Accounting for Stock Issued to Employees." FIN 44
is effective July 1, 2000, but is also effective for certain events that
have occurred after December 15, 1998 or January 12, 2000. To date, FIN 44
has not had a material impact on the Company's consolidated financial
statements.
In March 2000, the Emerging Issues Task Force of the FASB reached a
consensus on Issue No. 00-2, "Accounting for Web Site Development Costs"
which provides guidance on when to capitalize versus expense costs incurred
to develop a web site. The consensus is effective for web site development
costs in quarters beginning after June 30, 2000. The Company has not yet
analyzed the impact of this issue on its consolidated financial statements.
(o) Reclassifications
Certain reclassifications have been made to prior year's condensed
consolidated financial statements to conform to the current year's
presentation.
(2) SPORTSLINE.COM, INC. DISTRIBUTION AGREEMENT
In February 2000, the Company entered into a strategic two year
partnership with Sportsline.com, Inc. ("Sportsline"), whereby the Company
will exclusively develop and operate community solutions on the Sportsline
web site ("Sportsline Agreement"). Under the terms of the Sportsline
Agreement, Sportsline received $5.0 million, paid in the Company's Common
Stock. The total shares of Common Stock issued in connection with the
Sportsline Agreement were 699,281 at $7.15 per share. The Company recorded
the initial $5.0 million payment in Other Assets and will amortize the
amount under the straight-line method over the two year contractual term of
the Sportsline Agreement. The contractual term of the Sportsline Agreement
commenced upon Sportsline's launch of the Company's community solutions on
its web site in April 2000. Sportsline can potentially receive additional
compensation in either stock or cash, based upon the achievement of certain
performance goals throughout the term of the Sportsline Agreement.
Additionally, the Company receives the exclusive right to sell advertising,
sponsorships and non-sports related e-commerce within the Sportsline
community area.
(3) ACQUISITION OF CHIPS & BITS, INC. AND STRATEGY PLUS, INC.
On February 24, 2000, CB Acquisition Corp. ("CB Merger Sub"), a
Vermont corporation and a wholly-owned subsidiary of theglobe was merged
with and into Chips & Bits, Inc., a Vermont corporation ("Chips & Bits"),
with Chips & Bits as the surviving corporation (the "CB Merger"). Also on
February 24, 2000, SP Acquisition Corp. ("SP Merger Sub"), a Vermont
corporation and a wholly-owned subsidiary of theglobe, was merged with and
into Strategy Plus, Inc., a Vermont corporation ("Strategy Plus"), with
Strategy Plus as the surviving corporation (together with the CB Merger,
the "Mergers"). The Mergers were effected pursuant to an Agreement and Plan
of Merger dated as of January 13, 2000 by and among theglobe, CB Merger
Sub, SP Merger Sub, Chips & Bits, Strategy Plus, Yale Brozen and Christina
Brozen (the "Merger Agreement"). As a result of the Mergers, both Chips &
Bits and Strategy Plus became wholly-owned subsidiaries of theglobe.
The consideration paid by the Company consisted of 1,903,977 shares of
the Company's Common Stock, valued at $14.9 million. The Company also
incurred acquisition costs of approximately $0.6 million. An additional
payment of $1.3 million in newly issued shares of Common Stock is
contingent upon the attainment of certain performance targets by Chips &
Bits and Strategy Plus during the 2000 fiscal year.
This transaction was accounted for under the purchase method of
accounting. The aggregate purchase price of these transactions was $15.5
million. The Company has preliminarily allocated $0.6 million to the net
tangible assets of Chips & Bits and $0.8 million to the net tangible
liabilities of Strategy Plus. The historical carrying amounts of the net
tangible assets acquired and liabilities assumed by the Company
approximated their fair market value on the date of acquisition. The
purchase price in excess of the fair market value of the net tangible
assets acquired and liabilities assumed by the Company amounted to $15.7
million and has been preliminarily allocated to goodwill. The goodwill
amount will be amortized under the straight-line method over an estimated
useful life of 3 years, the expected period of benefit.
The following unaudited pro forma consolidated financial information
gives effect to the above described acquisitions, and the acquisitions of
shop.theglobe.com and Attitude Network, Ltd., acquired in February and
April of 1999, respectively, as if they had occurred at the beginning of
the respective periods by consolidating the results of operations of the
Company, shop.theglobe.com, Attitude Network, Ltd., Chips & Bits and
Strategy Plus for the three months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------------
2000 1999
----------------- --------------------
(in thousands, except per share data)
<S> <C> <C>
Revenues................................................. $ 8,497 $ 6,631
Net loss................................................. (17,579) (15,033)
Basic and diluted net loss per share..................... $ (0.59) $ (0.61)
Weighted average basic and diluted shares outstanding.... 29,955 24,794
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
March 31, December 31,
2000 1999
----------------- -----------------
(unaudited)
Computer equipment and software, including assets under
capital leases of $5,864 and $5,830, respectively............... $ 11,694 $ 9,613
Furniture and fixtures, including assets under capital leases of
$42 and $42, respectively....................................... 1,636 1,159
Leasehold improvements............................................ 2,107 2,025
----------------- -----------------
15,437 12,797
Less accumulated depreciation and amortization, including amounts
related to assets under capital leases of $2,005 and $1,828,
respectively.................................................... 4,925 3,333
----------------- -----------------
Total.................................................... $ 10,512 $ 9,464
================= =================
</TABLE>
(5) 2000 BROAD BASED EMPLOYEE STOCK OPTION PLAN
In February 2000, the Board of Directors adopted the 2000 Broad Based
Employee Stock Option Plan (the "Broad Based Plan"). The Broad Based Plan
authorized the issuance of 850,000 stock options. Stock options under the
Broad Based Plan may be granted to officers, other employees, consultants
and advisors of the Company. The Company intends that at least a majority
of the stock options issued under the Broad Based Plan are to
non-management employees. A committee selected by the Company's Board of
Directors has the authority to approve optionees and the terms of the stock
options granted, including the option price and the vesting terms. Options
granted under the Broad Based Plan expire no later than after a ten year
period. As of March 31 2000, the Company had approximately 406,100 stock
options outstanding under the Broad Based Plan all of which were issued at
an exercise price equal to the fair market value of the Company's Common
Stock on the date of grant.
(6) COMMITMENTS AND CONTINGENCIES
(a) Litigation
On July 1, 1999, the Company filed a complaint in Supreme Court of the
State of New York, County of New York. The lawsuit alleges that
Stockplayer.com, Inc. breached advertising service agreements with the
Company by failing to pay for advertising services performed by the
Company. On August 13, 1999, Stockplayer.com, Inc. filed its answer denying
that it breached these advertising services agreements. The answer also
alleges that the Company breached alleged express and implied warranties in
connection with certain information provided by the Company to
Stockplayer.com. Stockplayer.com alleges that it has been damaged in an
amount not less than $5,000,000. The Company believes that these
allegations are without merit and plans to vigorously defend these
allegations. The Company believes that it is unlikely that this claim will
have a material adverse effect on the Company's consolidated financial
condition or results of operations.
From time to time the Company has been named in other claims arising
in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position, results of
operations or liquidity.
(b) Contingent Stock Issuances
The Company, from time to time, has entered into purchase and/or
distribution agreements which require the payment of additional cash and/or
the issuance of additional Common Stock upon the occurrence of specified
future events. The Company intends to satisfy any potential payments under
these agreements through the issuance of Common Stock. At March 31, 2000,
the Company recorded approximately $0.5 million in Other Assets and
Additional Paid-in-Capital in connection with these agreements. To date,
these payments have been calculated using the fair market value of the
Company's Common Stock at March 31,2000. This amount will be amortized over
the remaining contractual terms of the agreements and will be adjusted
accordingly at each interim balance sheet date for fluctuations in the fair
market value of the Company's Common Stock and/or achievement of certain
performance goals as defined in the agreements.
(7) SUBSEQUENT EVENTS
(a) 2000 Stock Option Plan
In April 2000, the Company's 2000 Stock Option Plan (the "2000 Plan")
was adopted by the Board of Directors. The 2000 Plan reserved 500,000
shares of Common Stock for future issuance. The 2000 Plan provides for the
grant of "incentive stock options" intended to qualify under Section 422 of
the Code, stock options which do not so qualify and shares of restricted
stock. The granting of incentive stock options is subject to limitation as
set forth in the 2000 Plan. Incentive stock options may be granted only to
employees, including officers of the Company. Directors, officers,
employees and consultants of the Company and its subsidiaries are eligible
to receive non-qualified stock options and grants of restricted stock under
the 2000 Plan. A committee selected by the Company's Board of Directors has
the authority to approve optionees and the terms of the stock options
granted, including the option price and the vesting terms. Options granted
under the 2000 Plan expire after a ten year period and are subject to the
acceleration of vesting upon the occurrence of certain events. The 2000
Plan is subject to stockholder approval and will be voted on at the
Company's annual stockholder meeting in June 2000.
(b) Restructuring of Electronic Commerce Operations
In April 2000, the Company's Board of Directors approved a plan to
close the Company's electronic commerce operations in Seattle, Washington.
The closure of the Seattle operations is the result of the Company's
realignment of its electronic commerce operations to focus on the direct
sale of video games and related products and partnerships with third
parties who are interested in reaching the Company's audiences. In
connection with the closure of the Seattle operations, the Company will
record a restructuring charge of approximately $15.9 million, or $0.52 per
basic and diluted share of Common Stock, of which approximately $14.5
million will be related to non-cash charges. Significant costs included in
the restructuring charge are the write-off of goodwill and intangible
assets of $13.5 million, severance payments and related costs of $0.7
million, an inventory write-off of $0.3 million and a write-down of $0.7
million related to certain fixed assets to their residual value that will
not be used in the future operations of theglobe or its subsidiaries. The
Company will record the restructuring charge in the second quarter of 2000.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. These forward-looking
statements can be identified by the use of predictive, future-tense or
forward-looking terminology, such as "believes," "anticipates," "expects,"
"estimates," "plans," "may," "intends," "will," or similar terms. Investors
are cautioned 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 described under
"Risk Factors" and elsewhere in this report. The following discussion
should be read together with the condensed consolidated financial
statements and notes to those statements included elsewhere in this report.
OVERVIEW
We are one of the world's leading online properties with over 5.4
million unique visitors in March 2000 based upon Media Metrix data. We
specialize in bringing people together around shared topics of interest. We
deliver "community" through four different streams: our flagship web site,
theglobe.com, featuring our best-of-breed community products-globeClubs and
uPublish!, both of which enable our users to personalize their online
experience by interacting with other users around similar interests;
distribution of our customized community solutions to strategic partners
who desire to include community in their Web properties; small businesses
looking to add "community" to their web sites; and a leading games
information network. Our games information network includes HappyPuppy,
GamesDomain, KidsDomain, ConsoleDomain, Chips & Bits, Inc. and Strategy
Plus, Inc. Since our inception in May 1995, significant developments to
core infrastructure capabilities, products and services, and strategic
partnerships and acquisitions have enabled us to experience tremendous
growth in our user base, reach and revenues.
Our primary revenue source is the sale of online advertising, which
includes the development and sale of promotional sponsorship placements
within our web sites, with additional revenues generated through the sale
of advertisements in our games information magazine, the sale of video
games and related products through our online store, the sale of our games
information magazine through newstands and subscriptions and electronic
commerce revenue shares.
In November 1998, we completed an initial public offering of
approximately 7.0 million shares of our Common Stock. The initial offering
price was $4.50 per share which resulted in net proceeds of $27.3 million,
after underwriting discounts of $2.0 million and offering costs $2.0
million.
In April 1999, we acquired Attitude Networks, Ltd., a provider of
online games information content whose web sites include Happy Puppy, Games
Domain and Kids Domain, three leading web sites serving game enthusiasts.
The aggregate purchase price amounted to $46.8 million and was comprised,
in part, of approximately 1.6 million shares of newly issued Common Stock.
In May 1999, we completed a secondary public offering of 3.5 million
shares of Common Stock at an offering price of $20.00 per share. Net
proceeds amounted to $65.0 million, after underwriting discounts of $3.5
million and offering costs of $1.5 million.
In December 1999, we acquired the web hosting assets of Webjump.com, a
web hosting property that primarily focuses on small businesses. The total
purchase price for this transaction was $13.0 million and was primarily
comprised of 1.1 million shares of newly issued Common Stock. An additional
$12.5 million, payable in newly issued shares of Common Stock, is
contingent upon the attainment of certain performance targets on or before
November 2000.
In February 2000, we acquired Chips & Bits, Inc. and Strategy Plus,
Inc., providers of online and offline entertainment content focused towards
game enthusiasts. The total purchase price for this transaction was
approximately $15.5 million and was comprised, in part, of 1.9 million
newly issued shares of Common Stock. An additional $1.3 million, payable in
newly issued shares of Common Stock, is contingent on the attainment of
certain performance targets by Chips & Bits, Inc. and Strategy Plus, Inc.
during the 2000 fiscal year.
RESULTS OF OPERATIONS
Revenues. To date, our primary revenue source has been the sale of
advertisements on our online properties, which includes the development and
sale of sponsorship placements within our web sites. We earn revenue on
sponsorship contracts for fees relating to the design, coordination, and
integration of the customer's content and links. Additionally, we derive
advertising revenue through the sale of advertisements in our games
information magazine which we acquired in February 2000. We sell a variety
of online advertising packages to clients, including banner advertisements,
event sponsorships, and targeted and direct response advertisements. Our
online advertising revenues are derived principally from short-term
advertising arrangements, averaging one to three months. We generally
guarantee a minimum number of impressions, defined as the number of times
that an advertisement appears in pages viewed by the users of our online
properties, for a fixed fee. In addition to advertising revenues, we derive
other revenues through the sale of video games and related products through
our online store, the sale of our games information magazine through
newsstands and subscriptions and electronic commerce revenue shares.
Revenues increased to $7.0 million for the three months ended March
31, 2000 as compared with $3.2 million for the three months ended March 31,
1999. Advertising revenues for the three months ended March 31, 2000 were
$4.6 million, which represented 66% of total revenues. Advertising revenues
for the three months ended March 31, 1999 were $3.1 million, which
represented 96% of total revenues. The growth in advertising revenues was
primarily attributable to an increase in the number of advertisers, as well
as the average commitment per advertiser, and an increase in the traffic on
our web sites. We anticipate that advertising revenues will continue to
account for a substantial share of our total revenues for the foreseeable
future. Sales of merchandise through our online store accounted for 32% and
4% or total revenues for the three months ended March 31, 2000 and 1999,
respectively. The increase in electronic commerce revenue is attributable
to increased sales from our online store. In order to realign our
e-commerce operations to focus on video games and related products, the
Company elected to shut down its electronic commerce operations in Seattle
Washington (see Note 7 of the notes to the condensed consolidated financial
statements). Sales of our games information magazine through newsstands and
subscriptions accounted for 2% of total revenues for the three months ended
March 31, 2000. We acquired our games information magazine in February
2000. Barter revenues represented 2% of total revenues for the three months
ended March 31, 2000 and 4% of total revenues for the three months ended
March 31, 1999.
Cost of Revenues. Cost of revenues consist primarily of Internet
connection charges, staff and related costs of operations personnel,
depreciation and maintenance costs of web site equipment and the costs of
merchandise sold and shipping fees in connection with our online store.
Gross margins were 37% and 63% for the three months ended March 31, 2000
and 1999, respectively. The period-to-period decrease in the gross margins
was primarily attributable to a higher concentration of electronic commerce
and advertising sales in our games information magazine, both of which
traditionally result in lower gross margins than online advertising
revenues. The absolute dollar increase in cost of revenues was due to
additional costs of merchandise attributed to increased sales through our
online store, an increase in Internet connection costs to support the
increase in web site traffic, an increase in depreciation expense related
to increased equipment costs and personnel costs required to support the
expansion of our sites and services. We expect cost of revenues to continue
to increase in absolute dollars as additional connectivity and staffing
costs will be required to support our future growth and we continue to
increase our electronic commerce sales.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and related expenses of sales and marketing personnel,
commissions, advertising and marketing costs, public relations expenses,
coupons and other promotional activities and barter expense. Sales and
marketing expense was $5.6 million for the three months ended March 31,
2000 as compared with $2.2 million for the three months ended March 31,
1999. The period-to-period increase in sales and marketing expense was
attributable to increased salary and related personnel costs to support our
revenue growth, increased advertising costs, which included costs
associated with our television advertising campaign and promotional
expenses required to implement our branding and marketing strategy. We
expects sales and marketing costs to increase in absolute dollars due to
increased staffing costs necessary to support our growth and continued
branding and marketing efforts.
Product Development. Product development expenses include salaries and
related personnel costs, expenses incurred in connection with the
development of, testing of and upgrades to our web sites and community
management tools and editorial and content costs. Product development
expenses increased to $3.0 million for the three months ended March 31,
2000 as compared to $2.1 million for the three months ended March 31, 1999.
The period-to-period increase was primarily attributable to additional
personnel costs required to support the web sites of shop.theglobe.com,
acquired in February 1999, and Attitude Network, Ltd., acquired in April
1999, and to enhance their content and features. The Company has elected to
shut down shop.theglobe.com, its e-commerce operations in Seattle,
Washington, in order to focus its e-commerce operations on video games and
related products (see Note 7 of notes to condensed consolidated financial
statements). We intend to continue recruiting and hiring experienced
product development personnel who will maintain and upgrade our community
management tools.
General and Administrative Expenses. General and administrative
expenses consist primarily of salaries and related personnel costs for
general corporate functions including finance, human resources, legal and
facilities, outside legal and professional fees, bad debt expenses and
general corporate overhead costs. General and administrative expenses were
$3.2 million for the three months ended March 31, 2000 as compared with
$2.8 million for the three months ended March 31, 1999. The
period-to-period increase was primarily attributable to increased salaries
and personnel costs associated with building of our basic infrastructure
and increased provisions for bad debts. The increase in salaries reflects
the highly competitive nature of hiring in the new media industry. We
expect to incur additional general and administrative expenses as we hire
additional personnel and incur additional costs related to the growth of
the business.
Amortization of Goodwill and Intangible Assets. Amortization expense
was $7.6 million for the three months ended March 31, 2000 as compared with
$1.4 million for the three months ended March 31, 1999. The
period-to-period increase in amortization expense was primarily
attributable to the acquisitions of Attitude Network, Ltd. in April 1999
and Chips & Bits, Inc. and Strategy Plus, Inc. in February 2000 and the
purchase of the web hosting assets of Webjump.com in December 1999. The
Company recorded goodwill and intangible assets of $47.0 million, $15.7
million and $13.0 million, respectively, in connection with these
transactions. The total amount of goodwill and purchased intangibles as of
March 31, 2000 was $100.0 million and is being amortized over the expected
period of benefit ranging from two to three years (three years for
goodwill).
Interest and other income, net. Interest and other income, net
primarily includes interest income from our cash and cash equivalents and
short-term investments, interest expense related to our capital lease
obligations and realized gains and losses from the sale of short-term
investments. The year-to-year increase in interest and other income, net
was primarily attributable to increased interest income earned on increased
cash and cash equivalents and short-term investments resulting from the net
proceeds of our secondary public offering of Common Stock. The increased
interest income was offset by increased interest expenses related to the
assumption of additional capital lease obligations and realized losses on
the sale of short-term investments in the first quarter of 2000.
Income Taxes. Income taxes were $70,000 for three months ended March
31, 2000 as compared with $46,000 for the three months ended March 31,
1999. Income taxes were based solely on state and local taxes on business
and investment capital. The period-to-period increase is a result of our
initial and secondary public offerings and our acquisitions which, in turn,
increased our investment capital. Our effective tax rate differs from the
statutory federal income tax rate, primarily as a result of the uncertainty
regarding our ability to utilize our net operating loss carryforwards. Due
to the uncertainty surrounding the timing or realization of the benefits of
our net operating loss carryforwards in future tax returns, we have placed
a 100% valuation allowance against our otherwise recognizable deferred tax
assets. At December 31, 1999, the Company had net operating loss
carryforwards available for U.S. and foreign tax purposes of $69.5 million
and $1.0 million, respectively. These carryforwards expire through 2019.
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 and May 1999, as defined in the
Internal Revenue Code of 1986, as amended (the "Code"), future utilization
of our net operating loss carryforwards prior to the change of ownership
will be subject to certain limitations or annual restrictions.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, we had approximately $19.2 million in cash and
cash equivalents and approximately $23.8 million in short-term investments.
Net cash used in operating activities was $9.0 million for the three months
ended March 31, 2000 as compared to $4.7 million for the three months ended
March 31, 1999. The increase in net cash used in operating activities
resulted primarily from an increase in our net operating losses, exclusive
of depreciation expense and amortization expense related to our
acquisitions. The increase was also attributable to decreases in accounts
payable and accrued compensation as well as an increase in prepaid and
other assets. These amounts were offset by increases in accrued expenses
and deferred revenue.
Net cash used in investing activities was $8.1 million for the three
months ended March 31, 2000 as compared to $13.1 million for the three
months ended March 31, 1999. The decrease in net cash used in investing
activities is primarily attributable to a decrease in the purchase of
short-term investments and an increase in the proceeds received from the
sale of short-term investments. These amounts were offset by increases in
the purchase of property and equipment and the cash paid for acquisitions,
net of cash acquired.
Net cash used in financing activities was approximately $0.3 million
for the three months ended March 31, 2000 as compared to $0.1 million for
the three months ended March 31, 1999. The increase in net cash used in
financing activities was primarily attributable to an increase in the
payments made in connection with our capital lease obligations.
We currently have no material commitments other than those under our
capital and operating lease agreements. We expect to meet our lease
obligations with our cash and cash equivalents and short-term investments.
In April 2000, the Company's Board of Directors approved a plan to
close the Company's electronic commerce operations in Seattle, Washington.
In connection with the closure of the Seattle operations, the Company will
record a restructuring charge of approximately $15.9 million, of which
approximately $1.4 million will be related to costs requiring an outlay of
cash. Significant cash costs included in the restructuring charge are
severance payments and related costs of $0.7 million, contractual rent
payments of $0.2 million and post closing administrative and transportation
costs of $0.5 million, all of which are expected to be satisfied by July
2000. We expect to meet these cash restructuring charges with our current
cash and cash equivalents and short-term investments.
Our capital requirements depend on numerous factors, including market
acceptance of our services, the capital required to maintain our web sites,
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. Additionally, we
continue to evaluate possible investments in businesses, products and
technologies, some of which may be material. Since our inception, we have
incurred significant operating losses and we believe we will continue to
incur operating losses for the foreseeable future. We expect that we will
continue to experience negative operating cash flows for the foreseeable
future as a result of our operating losses. We believe that our current
cash and cash equivalents and short-term investments will be sufficient to
meet our anticipated cash needs for working capital and capital
expenditures for our existing business for the next 12 months. We may need
to raise additional funds during 2000 to obtain or operate any acquired
businesses or joint venture arrangements. We cannot assure you that
additional financing will be available on terms favorable to us, or at all.
See "Risk Factors -- We may need to raise additional funds, including
through the issuance of debt."
EFFECTS OF INFLATION
Due to relatively low levels of inflation in 1999, 1998, 1997 and
1996, inflation has not had a significant effect on our results of
operations since inception.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. We have not yet analyzed the
impact of this pronouncement on our consolidated financial statements.
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition
in Financial Statements." SAB 101 provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements filed with
the SEC. The SEC issued SAB 101A which deferred the adoption of SAB 101
until no later than June 30, 2000. We do not expect the adoption of SAB 101
to have a material effect on our consolidated financial statements.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB No. 25." FIN 44 provides guidance on certain aspects
of applying APB No. 25, "Accounting for Stock Issued to Employees." FIN 44
is effective July 1, 2000, but is also effective for certain events that
have occurred after December 15, 1998 or January 12, 2000 on a prospective
basis. To date, FIN 44 has not had a material impact on our consolidated
financial statements.
In March 2000, the Emerging Issues Task Force of the FASB reached a
consensus on Issue No. 00-2, "Accounting for Web Site Development Costs",
which provides guidance on when to capitalize versus expense costs incurred
to develop a web site. The consensus is effective for web site development
costs in quarters beginning after June 30, 2000. We have not yet analyzed
the impact of this issue on our consolidated financial statements.
<PAGE>
RISK FACTORS
In addition to the other information in this report, the following
factors should be carefully considered in evaluating our business and
prospects.
OUR LIMITED OPERATING HISTORY MAKES FINANCIAL FORECASTING DIFFICULT.
theglobe was founded in May 1995. Accordingly, we have a limited
operating history for you to use in evaluating us and our prospects. Our
prospects should be considered in light of the risks encountered by
companies in the early stages of development, particularly companies
operating in new and rapidly evolving markets like the Internet. We may not
successfully address these risks. For example, we may not be able to:
o maintain or increase levels of user and member traffic on our web
sites;
o maintain or increase the percentage of our advertising inventory
sold;
o maintain or increase both CPM levels and sponsorship revenues;
o adapt to meet changes in our markets and competitive
developments;
o integrate or successfully develop recent acquisitions;
o develop or acquire content for our services;
o identify, attract, retain and motivate qualified personnel; and
o raise sufficient capital to sustain future operations.
REVENUE GROWTH IN PRIOR PERIODS MAY NOT BE INDICATIVE OF FUTURE
GROWTH.
We achieved significant revenue growth during 1998, 1999 and the first
quarter of 2000. Our limited operating history makes prediction of future
revenue growth difficult. Additionally, in an effort to realign our
electronic commerce operations to focus on video games and related
products, we elected to shut down our e-commerce operations in Seattle,
Washington. This could materially and adversely impact our revenue growth.
Accurate predictions of future revenue 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 revenue growth.
WE ANTICIPATE INCREASED OPERATING EXPENSES AND EXPECT TO CONTINUE TO
INCUR LOSSES.
We have incurred net losses since our inception and we expect that we
will continue to incur net losses for the foreseeable future. We had net
losses of approximately $16.5 million for the three months ended March 31,
2000 and $49.6 million, $16.0 million, $3.6 million and $0.8 million for
the years ended December 31, 1999, 1998, 1997 and 1996, respectively. As of
March 31, 2000, we had an accumulated deficit of approximately $86.5
million. The principal causes of our losses are likely to continue to be:
o costs resulting from development and enhancement of our services;
o amortization expense related to our acquisitions;
o increased sales and marketing expenses necessary to maintain
revenue growth and develop brand identity;
o growth of our sales force;
o expansion of our business facilities and systems infrastructure;
o failure to generate sufficient revenue to compensate for
increased costs; and
o increased general and administrative expenses;
We will need to generate significantly increased revenues to achieve
profitability, particularly if we are unable to adjust our expenses in
light of any earnings shortfall. We cannot assure you that we will ever
achieve or sustain profitability.
OUR QUARTERLY OPERATING RESULTS FLUCTUATE AND VARY BY SEASON.
Our quarterly revenues, expenses and operating results have varied
significantly in the past and are likely to vary significantly from quarter
to quarter in the future. As a result, quarter to quarter comparisons of
our revenues and operating results may not be meaningful. In addition, due
to our limited operating history and our new and unproven business model,
we cannot accurately predict our future revenues or results of operations.
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 occurs, the trading price of our Common Stock would almost certainly
be materially and adversely affected. The factors which will cause our
quarterly operating results to fluctuate include:
o the level of traffic on our web sites;
o the overall demand for Internet advertising and electronic
commerce;
o the addition or loss of advertisers and electronic commerce
partners on our web sites;
o overall usage and acceptance of the Internet;
o seasonal trends in advertising and electronic commerce sales and
member usage;
o capital expenditures and other costs relating to the expansion of
our operations;
o the incurrence of costs relating to acquisitions;
o realignment of certain business operations, such as closing our
e-commerce operations in Seattle, Washington;
o the timing and profitability of acquisitions, joint ventures and
strategic alliances;
o failure to generate significant revenues and profit margins from
new products and services;
o competition from others providing services similar to those of
ours.
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 sites 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 Chips &
Bits, Inc. subsidiary. We also have existing electronic commerce
arrangements with third parties for the sale of merchandise on our
electronic commerce 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 products
featured on our site and overall competition in the marketplace.
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 sites. 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 sites. 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 sites.
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 or games information properties ("Games Network").
To be successful, we must, among other things, develop and market products
and services that achieve broad market acceptance by our users, advertisers
and electronic commerce vendors. We must continue to develop electronic
commerce revenue streams by marketing products directly to users and having
users purchase products through our electronic commerce site. We cannot
assure you that any Internet community, including our site, will achieve
broad market acceptance and to be able to generate significant electronic
commerce revenues. We also cannot assure you that our business model will
be successful, that it will sustain revenue growth or that it will be
profitable.
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 slower 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 shop.theglobe.com, formerly known as Azazz,
to develop electronic commerce retailing on our site. In April 2000, the
Board of Directors approved a plan to close the Company's e-commerce
operations in Seattle, Washington (see Note 7 to the condensed consolidated
financial statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations). On April 9, 1999, we acquired
Attitude Network, Ltd. to add two leading game enthusiast web sites to our
entertainment theme. On November 20, 1999, we acquired the web hosting
assets of Webjump.com to expand our home page hosting services. On February
24, 2000, we acquired Chips & Bits, Inc., an electronic commerce retailer
that focuses primarily on game enthusiasts and Strategy Plus, Inc., an
offline media property that publishes a monthly games magazine. We consider
and evaluate, from time to time, potential business combinations, either
involving potential investments in our Common Stock or other business
combinations, joint ventures alliances or business development
arrangements, 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
transactions of these types, some of which may be material, but we have not
reached any binding agreements. These transactions may or may not be
consummated. Our future acquisitions or joint ventures could result in
numerous risks and uncertainties, including:
o potentially dilutive issuances of equity securities, which may be
issued at the time of the transaction or if certain tests are met
or not met, as the case may be. These securities may be freely
tradable in the public market or subject to registration rights
which could require us to publicly register a large amount of
Common Stock, which could have a material adverse effect on our
stock price;
o large and immediate write-offs;
o significant write-offs if we determine that the business
acquisition does not fit;
o the incurrence of debt and contingent liabilities or amortization
expenses related to goodwill and other intangible assets;
o difficulties in the assimilation of operations, personnel,
technologies, products and information systems of the acquired
companies;
o the diversion of management's attention from other business
concerns;
o the risks of entering geographic and business markets in which we
have no or limited prior experience such as electronic commerce
retailing;
o the risk that the acquired business will not perform as expected;
and
o risks associated with international expansion.
WE MAY BE UNSUCCESSFUL IN DEVELOPING BRAND AWARENESS; BRAND IDENTITY
IS CRITICAL TO US.
We believe that establishing and maintaining awareness of
"theglobe.com" brand name, and the brand name of our wholly owned
subsidiaries, is critical to attracting and expanding our member base, the
traffic on our web sites and our advertising and electronic commerce
relationships. If we fail to promote and maintain our brand or our brand
value is diluted, our business, operating results and financial condition
could be materially adversely affected. The importance of brand recognition
will increase because low barriers to entry continue to result in an
increased number of web sites. To promote our brand, we may be required to
continue to increase our financial commitment to creating and maintaining
brand awareness. We may not generate a corresponding increase in revenues
to justify these costs. Additionally, if members, other Internet users,
advertisers and customers do not perceive our community experience or Games
Network 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 materially diluted.
WE RELY SUBSTANTIALLY ON ONLINE ADVERTISING REVENUES.
We derive a substantial portion of our revenues from the sale of
advertisements on our web sites. We expect to continue to do so for the
foreseeable future. Our business model and revenues are highly dependent on
the amount of traffic on our sites and our ability to properly monetize
this traffic. The level of traffic on our sites determines the amount of
online advertising inventory we can sell. Our ability to generate
significant online 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 online advertising revenues will
also depend, in part, on the following:
o advertisers' acceptance of the Internet as an attractive and
sustainable medium;
o advertisers' willingness to pay for advertising on the Internet
at current rates;
o the development of a large base of users of our products and
services;
o our level of traffic;
o the effective development of web site content that attracts users
having demographic characteristics attractive to advertisers; and
o price competition among web sites.
We cannot assure you that the market for Internet advertising will
continue to emerge or become sustainable. If the Internet advertising
market develops slower than we expect, our business performance would be
materially adversely affected. To date, substantially all our online
advertising contracts have been for terms averaging one to three months in
length, with relatively few longer term advertising contracts.
Additionally, our online advertising customers may object to the placement
of their advertisements on some members' personal homepages, the content of
which they deem undesirable. Moreover, measurements of site visitors may
not be accurate or trusted by our advertising customers. For any of the
foregoing reasons, we cannot assure you that our current advertisers will
continue to purchase advertisements on our sites. 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.
A significant portion of our revenues are derived from Internet
companies that are early stage entities. These entities are dependant on
additional financing in order to survive. For companies such as these, the
risk of default on outstanding indebtedness to us may be higher than we
anticipate.
WE RELY ON THIRD PARTIES OVER WHOM WE HAVE LIMITED CONTROL TO MANAGE
THE PLACEMENT OF ADVERTISING ON OUR WEBSITES.
The process of managing advertising within large, high-traffic web
sites such as ours is an increasingly important and complex task. We
license our advertising management system from DoubleClick, Inc. under an
agreement expiring in October 2000. DoubleClick may terminate the agreement
upon 30 days' notice if (1) we breach the agreement or (2) DoubleClick
reasonably determines that we have used their advertising management system
in a manner that could damage their technology or which reflects
unfavorably on DoubleClick's reputation. No assurance can be given that
DoubleClick would not terminate the agreement. Any termination and
replacement of DoubleClick's service could disrupt our ability to manage
our advertising operations. Additionally, we have entered into a contract
with Engage Technologies, Inc. for the license of proprietary software to
manage the placement of advertisements on our web sites. This software has
been implemented and our relationship under the contract has not yet been
material. There can be no assurance that this software will effectively
manage and measure the placement of advertisements on our web sites and
that errors will not occur. For example, Doubleclick informed us in June
1999 that its report of the numbers of unique visitors to the theglobe web
site was not accurate. We cannot assure you that there will be no
miscalculations of such or other measurements in the future. Any
miscalculations or other problems with reporting these measurements could
have a material adverse effect on our business, financial condition or
stock price.
To the extent that we encounter system failures or material
difficulties in the operation of our advertising management systems, we may
o be unable to deliver banner advertisements and sponsorships
through our sites; and
o be required to provide additional impressions to our advertisers
after the contract term.
Our obligations to provide additional impressions would displace
saleable advertising inventory. This would reduce revenues and could have a
material adverse effect on us.
WE DEPEND SUBSTANTIALLY ON OUR KEY PERSONNEL.
Our performance is substantially dependent on the continued service of
our senior management and key technical personnel, all of whom have only
worked together for a short time. In particular, our success depends on the
continued efforts of our senior management team, especially our founders,
our President and Chief Operating Officer and our Chief Financial Officer.
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
could have a material adverse effect on our business. Additionally, we are
currently searching for a new Chief Executive Officer. There is no
guarantee that we will be successful in hiring a new Chief Executive
Officer.
WE DEPEND ON HIGHLY QUALIFIED TECHNICAL AND MANAGERIAL PERSONNEL.
Our future success also depends on our continuing ability to attract,
retain and motivate highly qualified technical and managerial personnel.
Our business plan requires us to increase our employee base over the next
12 months. Competition for employees in our industry is intense. We may be
unable to attract, assimilate or retain highly qualified technical and
managerial personnel in the future. Wages for managerial and technical
employees are increasing and are expected to continue to increase in the
future. We have from time to time in the past experienced, and we expect to
continue to experience in the future, difficulty in hiring and retaining
highly skilled employees with appropriate qualifications. Furthermore,
there is no guarantee that our stock option plan will be considered
attractive by industry standards, particularly in light of the recent
trading levels of our Common Stock. 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 systems and expand and train our employee base. Some of our key
employees were hired during 1998, including our President and Chief
Operating Officer, who joined us in August 1998 and our Chief Financial
Officer, who joined us in July 1998. In addition, our General Counsel,
Director of Communications and Director of Human Resources each have been
with us for less than three years. Furthermore, the members of our current
senior management, other than the Chairman, have not had any previous
experience managing a public company or a large operating company.
Accordingly, we cannot assure you that:
o we will be able to effectively manage the expansion of our
operations;
o our key employees will be able to work together effectively as a
team to successfully manage our growth;
o we will be able to hire, train and manage our growing employee
base;
o our systems, procedures or controls will be adequate to support
our operations; and
o our management will be able to achieve the rapid execution
necessary to fully exploit the market opportunity for our
products and services.
Our inability to manage growth effectively could have a material
adverse effect on our business.
OUR CHAIRMAN HAS OTHER INTERESTS AND TIME COMMITMENTS; WE HAVE
CONFLICTS OF INTEREST WITH SOME OF OUR DIRECTORS.
Because our Chairman, Mr. Michael Egan, is an officer of other
companies, we will have to compete for his time. 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 is also the controlling investor of Dancing Bear
Investments, Inc., an entity controlled by Mr. Egan, which is our largest
stockholder. Mr. Egan has not committed to devote any specific percentage
of his business time with us. Accordingly, we compete with Dancing Bear
Investments, Inc. and Mr. Egan's other related entities for his time. Mr.
Egan was named Chairman of ANC Rental Corporation, a proposed spin-off of
the car rental business of AutoNation, Inc.
We currently have revenue agreements with entities controlled by Mr.
Egan and by H. Wayne Huizenga, one of our directors. These agreements were
not the result of arm's-length negotiations, but we believe that the terms
of these agreements are on comparable terms as if they were entered into
with unaffiliated third parties. The revenues recognized from such
agreements represented less than 2% of total revenues for the three months
ended March 31, 2000 and less than 4% and 3% of total revenues for the
years ended December 31, 1999 and 1998. Due to their relationships with
their related entities, Messrs. Egan and Huizenga will have an inherent
conflict of interest in making any decision related to transactions between
their related entities and us. We intend to review related party
transactions in the future on a case-by-case basis.
WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL AND OTHER
CHANGES.
The markets in which we compete are characterized by:
o rapidly changing technology;
o evolving industry standards;
o frequent new service and product announcements, introductions and
enhancements; and
o changing consumer demands.
We may not be able to keep up with these rapid changes. In addition,
these market characteristics are heightened by the emerging nature of the
Internet and the apparent need of companies from varying industries to
offer Internet-based products and services. As a result, our future success
depends on our ability to adapt to rapidly changing technologies and
standards. We will also need to continually improve the performance,
features and reliability of our services in response to competitive
services and product offerings and the evolving demands of the marketplace.
In addition, the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could
require us to incur substantial expenditures to modify our services or
infrastructure and could fundamentally affect the nature of our business.
WE HAVE CAPACITY CONSTRAINT AND SYSTEM DEVELOPMENT RISKS.
A key element of our strategy is to generate a high volume of user
traffic. Our ability to attract advertisers and to achieve market
acceptance of our products and services and our reputation depend
significantly upon the performance of our network infrastructure, including
our servers, 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 sites could result in reduced
traffic and reduced revenue, and could impair our reputation. Our web sites
must accommodate a high volume of traffic and deliver frequently updated
information. Our web sites have 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 sites.
Accordingly, we face risks related to our ability to accommodate our
expected customer levels while maintaining superior performance. In
addition, slower response time may damage our reputation and result in
fewer users at our sites or users spending less time at our sites. This
would decrease the amount of inventory available for sale to advertisers.
Accordingly, any failure of our servers 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.
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 sites. Our reputation,
theglobe.com brand and the brands of our subsidiaries could be materially
and adversely affected by any problems to our sites. 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 sites depends on
maintaining relevant security features. Substantial or ongoing security
breaches on our systems 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 systems and we
expect that these attempts will continue to occur from time to time.
Because a hacker who is able to penetrate our network security could
misappropriate proprietary information or cause interruptions in our
products and services, we may have to expend significant capital and
resources to protect against or to alleviate problems caused by these
hackers. Additionally, we may not have a timely remedy against a hacker who
is able to penetrate our network security. Such security breaches could
materially adversely affect our company. In addition, the transmission of
computer viruses resulting from hackers or otherwise could expose us to
significant liability. Our insurance policies carry low coverage limits,
which may not be adequate to reimburse us for losses caused by security
breaches. We also face risks associated with security breaches affecting
third parties with whom we have relationships.
COMPETITION FOR MEMBERS, USERS AND ADVERTISERS, AS WELL AS COMPETITION
IN THE ELECTRONIC COMMERCE MARKET IS INTENSE AND IS EXPECTED TO
INCREASE SIGNIFICANTLY.
The market for members, users and Internet advertising among web sites
is new and rapidly evolving. Competition for members, users and
advertisers, as well as competition in the electronic commerce market, is
intense and is expected to increase significantly. Barriers to entry are
relatively insubstantial and we believe we will face competitive pressures
from many additional companies both in the United States and abroad.
Accordingly, pricing pressure on advertising rates will increase in the
future which could have a material adverse effect on us. All types of web
sites compete for users. Competitor web sites include community sites and
games information networks, as well as "gateway" or "portal" sites and
various other types of web sites. We believe that the principal competitive
factors in attracting users to a site are:
o functionality of the web site;
o brand recognition;
o member affinity and loyalty;
o broad demographic focus;
o open access for visitors;
o critical mass of users, particularly for community-type sites;
o attractiveness of content and services to users; and
o pricing and customer service for electronic commerce sales.
We compete for users, advertisers and electronic commerce marketers
with the following types of companies:
o other online community web sites, such as GeoCities, which was
acquired by Yahoo!; Tripod and AngelFire, subsidiaries of Lycos;
and Xoom.com which was acquired by NBC;
o search engines and other Internet "portal" companies, such as
Excite@Home, InfoSeek, which was acquired by the Walt Disney
Company, Lycos and Yahoo!;
o online content web sites, such as CNET, ESPN.com and ZDNet.com;
o publishers and distributors of television, radio and print, such
as CBS, NBC and CNN/Time Warner;
o general purpose consumer online services, such as America Online
and Microsoft Network;
o web sites maintained by Internet service providers, such as AT&T
WorldNet, EarthLink and MindSpring;
o electronic commerce web sites, such as Amazon.com, Etoys and
CDNow; and
o other web sites serving game enthusiasts, including Ziff Davis'
Gamespot and CNET's Gamecenter.
Many of our competitors, including other community sites, have
developed or may develop Internet navigation services and have or are
attempting to become "gateway" or "portal" sites through which users may
enter the web. In the event these companies are successful in their efforts
to become "portal" sites, we could lose a substantial portion of our user
traffic. Furthermore, many non-community sites have been developing
community aspects in their sites.
Many of our existing and potential competitors, including companies
operating web directories and search engines, and traditional media
companies, have the following advantages:
o longer operating histories in the Internet market,
o greater name recognition;
o larger customer bases; and
o significantly greater financial, technical and marketing
resources
In addition, providers of Internet tools and services, including
community-type sites, may be acquired by, receive investments from, or
enter into other commercial relationships with larger, well-established and
well-financed companies, such as Microsoft and America Online. For example,
Excite merged with At Home, America Online acquired Netscape and Xoom.com
and Snap.com completed a transaction in which NBC merged some of its online
assets with these entities to form NBCi. 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 Walt Disney Co., CBS and NBC, have been active in
Internet related activities. Those competitors may be able to undertake
more extensive marketing campaigns for their brands and services, adopt
more aggressive advertising pricing policies and make more attractive
offers to potential employees, distribution partners, electronic commerce
companies, advertisers, third-party content providers and acquisition
targets. Furthermore, our existing and potential competitors may develop
sites that are equal or superior in quality to, or that achieve greater
market acceptance than, our sites. We cannot assure you that advertisers
may not perceive our competitors' sites as more desirable than ours.
To compete with other web sites, we have developed and will continue
to develop and introduce new features and functions, such as increased
capabilities for user personalization and interactivity. We also have
developed and will continue to introduce new products and services, such as
"community tools" and 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 sites 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 services that
compete with ours. These features could make it more difficult for Internet
users to find and use our products 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.
WE DEPEND ON THE CONTINUED GROWTH IN THE USE AND COMMERCIAL VIABILITY
OF THE WEB.
Our market is relatively new and rapidly evolving. Our business is
substantially dependent upon the continued rapid growth in the use of the
Internet and electronic commerce on the Internet becoming more widespread.
Commercial use of the Internet is relatively new. Web usage may be
inhibited for a number of reasons, including:
o inadequate network infrastructure;
o security and authentication concerns with respect to transmission
over the Internet of confidential information, including credit
card numbers, or other personal information;
o ease of access;
o inconsistent quality of service;
o availability of cost-effective, high-speed service; and
o bandwidth availability.
If the Internet develops as a commercial medium more slowly than we
expect, it will materially 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 sites, could grow more
slowly or decline. Also, the Internet's commercial viability may be
significantly hampered due to:
o delays in the development or adoption of new operating and
technical standards and performance improvements required to
handle increased levels of activity;
o increased government regulation; and
o insufficient availability of telecommunications services which
could result in slower response times and adversely affect usage
of the Internet.
WE MAY BE MATERIALLY ADVERSELY AFFECTED IF ELECTRONIC COMMERCE DOES
NOT BECOME A VIABLE SOURCE OF SIGNIFICANT REVENUES OR PROFITS FOR THE
COMPANY. IN ADDITION, OUR ELECTRONIC COMMERCE BUSINESS MAY RESULT IN
SIGNIFICANT LIABILITY CLAIMS AGAINST US.
In February 2000, we acquired Chips & Bits, Inc., a direct marketer of
video games and related products over the Internet. However, we have
limited experience in the sale of products online as compared to our
competitors 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 and profits,
including:
o our ability to obtain new customers at a reasonable cost, retain
existing customers and encourage repeat purchases;
o the likelihood that both online and retail purchasing trends may
rapidly change;
o the level of product returns;
o merchandise shipping costs and delivery times;
o our ability to manage inventory levels;
o our ability to secure and maintain relationships with vendors;
o the possibility that our vendors may sell their products through
other sites; and
o intense competition for electronic commerce revenues, resulting
in downward pressure on gross margins.
In April 2000, we elected to shut down our e-commerce operations in
Seattle, Washington in order to focus our e-commerce operations on video
games and related products (see Note 7 of the condensed consolidated
financial statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations). 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
which are narrower than for advertising businesses may further narrow in
the future and, accordingly, our revenues and profits from electronic
commerce arrangements may be materially and adversely affected. If use of
the Internet for electronic commerce does not continue to grow, our
business and financial condition would be materially and adversely
affected.
Additionally, consumers may sue us if any of the products that we sell
are defective, fail to perform properly or injure the user. Some of our
agreements with manufacturers contain provisions intended to limit our
exposure to liability claims. However, these limitations may not prevent
all potential claims. Liability claims could require us to spend
significant time and money in litigation or to pay significant damages. As
a result, any claims, whether or not successful, could seriously damage our
reputation and our business.
INTERNET ADVERTISING MAY NOT PROVE AS EFFECTIVE AS TRADITIONAL MEDIA.
The Internet advertising market is new and rapidly evolving. We cannot
yet gauge its effectiveness as compared to traditional advertising media.
Many of our current or potential advertising partners have little or no
experience using the Internet for advertising purposes and they have
allocated only a limited portion of their advertising budgets to Internet
advertising. The adoption of Internet advertising, particularly by those
entities that have historically relied upon traditional media, requires the
acceptance of a new way of conducting business, exchanging information and
advertising products and services. Advertisers that have traditionally
relied upon other advertising media may be reluctant to advertise on the
Internet or find it less effective.
No standards have been widely accepted to measure the effectiveness of
Internet advertising or to measure the demographics of our user base.
Additionally, no standards have been widely accepted to measure the number
of members, unique users, page views or impressions related to a particular
site. We cannot assure you that any standards will become available in the
future, that standards will accurately measure our users or the full range
of user activity on our sites or that measurement services will accurately
report our user activity based on their standards. If standards do not
develop, advertisers may not advertise on the Internet. In addition, we
depend on third parties to provide these measurement services. These
measurements are often based on sampling techniques or other imprecise
measures and may materially differ from each other and from our estimates.
We cannot assure you that advertisers will accept our or other parties'
measurements. The rejection by advertisers of these measurements could have
a material adverse effect on our business and financial condition.
The sale of Internet advertising is subject to intense competition
that has resulted in a wide variety of pricing models, rate quotes and
advertising services. For example, advertising rates may be based on the
number of user requests for additional information made by clicking on the
advertisement, known as "click throughs," or on the number of times an
advertisement is displayed to a user, known as "impressions." Our contracts
with advertisers typically guarantee the advertiser a minimum number of
impressions. To the extent that minimum impression levels are not achieved
for any reason, including the failure to obtain the expected traffic, our
contracts with advertisers may require us to provide additional impressions
after the contract term, which may adversely affect the availability of our
advertising inventory. In addition, certain long-term contracts with
advertisers may be canceled if response rates or sales generated from our
site are less than advertisers expectations. 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. In addition, concerns regarding the privacy of
user data on the Web may reduce the amount of user data collected in the
future, thus reducing our ability to provide targeted advertisements. This
may, in turn, put downward pressure on CPM's.
WE DEPEND ON THIRD PARTIES TO INCREASE TRAFFIC ON OUR SITES AND TO
PROVIDE SOFTWARE AND PRODUCTS.
We are dependent on various web sites that provide direct links to our
sites. 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 sites. 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 sites 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 sites.
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, BUT NOT LIMITED TO,
THE ISSUANCE OF DEBT.
Our capital requirements depend on numerous factors, including market
acceptance of our services, the capital required to maintain our web sites,
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. Additionally, we
will continue to evaluate possible investments in businesses, products and
technologies, some of which may be material. Since our inception, we have
incurred significant operating losses and we believe we will continue to
incur operating losses for the foreseeable future. We expect that we will
continue to experience negative operating cash flows for the foreseeable
future as a result of our operating losses. We believe that our cash and
cash equivalents and short-term investments at March 31, 2000 will be
sufficient to meet our anticipated cash need for working capital and
capital expenditures for our existing business for the next 12 months.
However, we may need to raise additional funds in a timely manner in order
to:
o fund our anticipated expansion;
o develop new or enhanced services or products;
o respond to competitive pressures;
o acquire complementary products, businesses or technologies; and
o enter into joint ventures.
If we raise additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of our stockholders
will be reduced. Stockholders may experience additional dilution and these
securities may have rights senior to those of the holders of our Common
Stock. We do not have any contractual restrictions on our ability to incur
debt. Any indebtedness could contain covenants which restrict our
operations. We cannot assure you that additional financing will be
available on terms favorable to us, or at all. If adequate funds are not
available or are not available on acceptable terms, our business could be
materially adversely effected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
WE RELY ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.
We regard substantial elements of our web sites 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. In addition, we have filed a number of patent applications
with the United States Patent Office. However, effective intellectual
property protection may not be available in every country in which our
services are distributed or made available through the Internet. Policing
unauthorized use of our proprietary information is difficult. Legal
standards relating to the validity, enforceability and scope of protection
of proprietary rights in Internet-related businesses are also uncertain and
still evolving. We cannot assure you about the future viability or value of
any of our proprietary rights.
Litigation may be necessary in the future to enforce our intellectual
property rights or to determine the validity and scope of the proprietary
rights of others. Furthermore, we cannot assure you that our business
activities will not infringe upon the proprietary rights of others, or that
other parties will not assert infringement claims against us, including
claims related to providing hyperlinks to web sites operated by third
parties or providing advertising on a keyword basis that links a specific
search term entered by a user to the appearance of a particular
advertisement. Moreover, from time to time, third parties may assert claims
of alleged infringement by us or our members of their intellectual property
rights. See Note 10 of the consolidated financial statements and "Legal
Proceedings" under Item 3 in Part I in this Form 10-K. Any litigation
claims or counterclaims could impair our business because they could:
o be time-consuming;
o result in costly litigation;
o subject us to significant liability for damages;
o result in invalidation of our proprietary rights;
o divert management's attention;
o cause product release delays; or
o require us to redesign our products or require us to enter into
royalty or licensing agreements that may not be available on
terms acceptable to us, or at all.
We license from third parties various technologies incorporated into
our sites. 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 have registered several Internet domain names including
"theglobe.com," "shop.theglobe.com," "globelists.com," "tglo.com,"
"azazz.com," "happypuppy.com, " "realmx.com," "kidsdomain.com,"
"gamesdomain.com," "webjump.com" and "cdmag.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 sites 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.
WE MAY FACE INCREASED GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES IN
OUR INDUSTRY.
There are an increasing number of federal, state, local and foreign
laws and regulations pertaining to the Internet. In addition, a number of
federal, state, local and foreign legislative and regulatory proposals are
under consideration. Laws or regulations may be adopted with respect to the
Internet relating to liability for information retrieved from or
transmitted over the Internet, online content regulation, user privacy and
quality of products and services. Changes in tax laws relating to
electronic commerce could materially effect our business and financial
condition. 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.
There are certain various issues being discussed by the accounting
profession and the Securities and Exchange Commission that would affect
Internet companies accounting policies with regards to revenue recognition,
barter transactions, impression guarantees as they relate to advertising
contracts, coupon and promotional expenses and customer acquisition costs.
While these discussions remain in the preliminary stages as of now, we
cannot predict the impact that certain proposed changes would have on our
results of operations, our financial condition or our stock price.
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 sites 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 sites. 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 sites. After the shop.theglobe.com acquisition in
February 1999, we also began selling products directly to consumers. We
increased our electronic commerce capabilities through our acquisition of
Chips & Bits, Inc. 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, Ltd., which operates Games Domain.com,
Kids Domain.com and Console Domain.com through a wholly-owned U.K.
subsidiary. We had not previously operated internationally. Additionally,
we may not be 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, electronic commerce or
our Games Network in any international markets. To expand overseas we
intend to seek to acquire additional web sites and enter into relationships
with foreign business partners. This strategy contains risks, including:
o we may experience difficulty in managing international operations
because of distance, as well as language and cultural
differences;
o we or our future foreign business associates may not be able to
successfully market and operate our services in foreign markets;
o because of substantial anticipated competition, it will be
necessary to implement our business strategy quickly in
international markets to obtain a significant share of the
market; and
o we do not have the content or services necessary to substantially
expand our operations in many foreign markets.
We will unlikely be able to significantly penetrate these markets
unless we gain the relevant content, either through partnerships, other
business arrangements or possibly acquisitions with content-providers in
these markets. There are also risks inherent in doing business on an
international level, including:
o unexpected changes in regulatory requirements;
o trade barriers;
o difficulties in staffing and managing foreign operations;
o fluctuations in currency exchange rates and the introduction of
the euro;
o longer payment cycles in general;
o problems in collecting accounts receivable;
o difficulty in enforcing contracts;
o political and economic instability;
o seasonal reductions in business activity in certain other parts
of the world; and o potentially adverse tax consequences.
VARIOUS STOCKHOLDERS, INDIVIDUALLY OR IN THE AGGREGATE, MAY CONTROL US.
Michael S. Egan, our Chairman, beneficially owns or controls, directly
or indirectly, 9,844,606 shares of our Common Stock which in the aggregate
represents approximately 28% of the outstanding shares of our Common Stock.
Todd V. Krizelman and Stephen J. Paternot, our Co-Chief Executive Officers,
together, beneficially own 12% of the outstanding shares of Common Stock.
Accordingly, Mr. Egan would likely be able to exercise significant
influence in any stockholder vote, particularly if Messrs. Krizelman and
Paternot support his position. Yale and Christina Brozen, the former owners
of Chips & Bits, Inc. and Strategy Plus, Inc., beneficially own
approximately 6% of the outstanding shares of Common Stock as tenants in
the entirety.
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, Messrs. Egan, Krizelman and Paternot will
likely be able to elect a majority of our directors. Additionally, each
party other than Mr. Egan has granted an irrevocable proxy with respect to
all matters subject to a stockholder vote to Dancing Bear Investments,
Inc., an entity controlled by Mr. Egan, for any shares held by that party
received upon the exercise of outstanding warrants for 400,000 shares of
our Common Stock. The stockholders' agreement also provides for tag-along
and drag-along rights in connection with any private sale of these
securities.
OUR STOCK PRICE IS VOLATILE.
The trading price of our Common Stock has been volatile and may
continue to be volatile in response to various factors, including:
o quarterly variations in our operating results;
o competitive announcements;
o changes in financial estimates by securities analysts;
o failure to meet analysts estimates;
o the operating and stock price performance of other companies that
investors may deem comparable to us; and
o news relating to trends in our markets.
The stock market has experienced significant price and volume
fluctuations, and the market prices of technology companies, particularly
Internet-related companies, have been highly volatile. In the past,
following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted
against a company. Litigation, if instituted, whether or not successful,
could result in substantial costs and a diversion of management's attention
and resources, which would have a material adverse effect on our business.
THE SALE OF SHARES ELIGIBLE FOR FUTURE SALE IN THE OPEN MARKET COULD
DEPRESS OUR STOCK PRICE.
Sales of significant amounts of Common Stock in the public market in
the future, the perception that sales will occur or the registration of
such shares 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. We currently have approximately 18,939,248 shares of
Common Stock that are freely tradable. Approximately 7,864,034 shares of
Common Stock are held by our "affiliates," within the meaning of the
Securities Act of 1933, and are currently eligible for sale in the public
market subject to volume limitation. On May 2, 2000, we filed a
registration statement on Form S-3 to register for sale the 1,104,972
shares of Common Stock held by Infonent.com, Inc., issued in connection
with our acquisition of the web hosting assets of Webjump.com. In addition,
any of the 1,104,972 shares that are not sold pursuant to this registration
statement will be eligible for sale, subject to volume limitation, in
November 2000. Further, since Infonent.com, Inc. is currently in
bankruptcy, it may be eligible to sell all or a portion of the shares not
sold in connection with this registration statement pursuant to exemptions
from the securities law afforded to it under bankruptcy laws. On May 11,
2000, we filed a registration statement on Form S-3 to register for sale
1,635,966 shares of Common Stock issued to Yale and Christina Brozen as
tenants in the entireties as a result of our acquisitions of Chips & Bits
and Strategy Plus. The shares that are not sold under this registration
statement and 249,159 shares become eligible for sale in February 2001. In
connection with our distribution agreement with Sportsline.com, Inc.,
699,281 shares will become eligible for sale in the public market, subject
to volume limitations, in February 2001. We may issue additional shares in
connection with this agreement based upon certain performance and stock
price metrics.
There are outstanding options to purchase 4,421,477 shares of Common
Stock which become eligible for sale in the public market from time to time
depending on vesting and the expiration of lock-up agreements. The issuance
of these securities are registered under the Securities Act. In addition,
there are outstanding warrants to purchase up to 4,011,534 shares of our
Common Stock upon exercise. Substantially all of our stockholders holding
restricted securities, including shares issuable upon the exercise of
warrants to purchase our Common Stock, are entitled to registration rights
under various conditions.
THE LOW PRICE OF OUR COMMON STOCK COULD RESULT IN A LOWER PRICE FOR
OUR COMMON STOCK.
The shares of our Common Stock are currently listed on the Nasdaq
national market. Due to the recent decline in the price of our Common
Stock, our Common Stock could be suspended or delisted from the Nasdaq due
to their minimum trading requirements, particularly if our stock price
falls below $1.00 per share or certain financial tests are not met. If the
shares of our Common Stock were to be suspended or delisted from the Nasdaq
system, it would be much more difficult to dispose of our Common Stock or
obtain accurate quotations as to the price of our securities.
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:
o have the effect of delaying, deferring or preventing a change in
control of our company;
o discourage bids of our Common Stock at a premium over the market
price; or
o adversely affect the market price of, and the voting and other
rights of the holders of, our Common Stock.
We must follow Delaware laws that could have the effect of delaying,
deterring or preventing a change in control of our company. One of these
laws prohibits us from engaging in a business combination with any
interested stockholder for a period of three years from the date the person
became an interested stockholder, unless various conditions are met. In
addition, provisions of our charter and by-laws, and the significant amount
of Common Stock held by our executive officers, directors and affiliates,
could together have the effect of discouraging potential takeover attempts
or making it more difficult for stockholders to change management.
WE DO NOT EXPECT TO PAY CASH DIVIDENDS.
We do not anticipate paying any cash dividends in the foreseeable
future.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Collection Risks. Our accounts receivables are subject, in the normal
course of business, to collection risks. Although we regularly assess these
risks and have policies and business practices to mitigate the adverse
effects of collection risks, significant losses may result due to the
non-payment of receivables by our advertisers.
Interest Rate Risk. Our return on our investments in cash and cash
equivalents and short-term investments is subject to interest rate risks.
We regularly assesses these risks and have established policies and
business practices to manage the market risk of our short-term securities.
Foreign Currency Risk. We transact business in the United Kingdom.
Accordingly, we are subject to exposure from adverse movements in foreign
currency exchange rates. The effect of foreign currency exchange rate
fluctuations for 1999 and the first quarter of 2000 was not material. We do
not use derivative financial instruments to limit our foreign currency risk
exposure.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 6 - "Commitments and Contingencies" in Part I, Item 1,
"Condensed Consolidated Financial Statements."
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of Unregistered Securities
On February 24, 2000, we issued 1,885,125 shares of our Common Stock
in connection with the acquisition of Chips & Bits, Inc. and Strategy Plus,
Inc. In addition, we issued 18,852 shares of our Common Stock to satisfy
certain bonus obligations that were triggered in connection with the
acquisition. Additional shares of Common Stock may be issued upon the
attainment of certain performance goals in 2000. This transaction was a
private placement exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to Section 4(2).
On February 23, 2000, we issued 699,281 shares of Common Stock in
connection with a distribution agreement with Sportsline.com, Inc. This
transaction was a private placement exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant Section
4(2).
(d) Use of Proceeds from Sales of Registered Securities.
On November 13, 1998, we completed our initial public offering of
approximately 7.0 million shares of Common Stock at a price of $4.50 per
share (File No. 333-59751). We received net proceeds of $27.3 million, net
of $2.0 million in underwriting discounts and $2.0 million in offering
costs. On May 19, 1999, we completed our secondary public offering of 3.5
million shares of Common Stock at a price of $20.00 per share (File No.
333-76153). We received net proceeds of $65.0 million, net of $3.5 million
in underwriting discounts and $1.5 million in offering costs. None of the
expenses incurred in our initial or secondary public offerings were direct
or indirect payments to our directors, officers, general partners or their
associates, to persons owning ten percent or more of any class of our
equity securities or to our affiliates. As of March 31, 2000, the net
proceeds received from our public offerings have been used for networking
infrastructure and the functionality of our web sites and for general
corporate purposes, which include working capital, advertising costs, the
leasing of new office facilities, the expansion of our sales and marketing
capabilities, our advertising campaign and our brand name promotions. We
have also used a portion of such net proceeds for the acquisition of
complementary businesses, assets, services and technology. None of the
general corporate expenses incurred were direct or indirect payments to our
directors, officers, general partners or their associates, to persons
owning ten percent or more of any class of our equity securities or to our
affiliates.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit Number Description
-------------- -----------
10.1 2000 Broad Based Employee Stock Option Plan
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
On February 23, 2000, we filed a Form 8-K under Items 5 and 7
regarding our distribution agreement with Sportsline.com, Inc.
On February 24, 2000, we filed a Form 8-K under Items 2 and 7
regarding our acquisitions of Chips & Bits, Inc. and Strategy Plus, Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report on Form 10-Q to be signed on its
behalf by the undersigned thereto duly authorized.
theglobe.com, inc.
/s/ Francis T. Joyce
--------------------
Francis T. Joyce
Vice President, Chief Financial Officer
and Treasurer (Principal Financial and
Accounting Officer)
May 15, 2000
theglobe.com, inc.
2000 BROAD BASED EMPLOYEE
STOCK OPTION PLAN
<PAGE>
theglobe.com, inc.
2000 BROAD BASED EMPLOYEE
STOCK OPTION PLAN
1. Purpose.
-------
The purpose of this Plan is to strengthen theglobe.com, inc., a
Delaware corporation (the "Company"), by providing an incentive to a broad
base of its employees and consultants and thereby encouraging them to
devote their abilities and industry to the success of the Company's
business enterprise. It is intended that this purpose be achieved by
extending to certain employees (including future employees who have
received a formal written offer of employment) and consultants of the
Company and its Subsidiaries an added long-term incentive for high levels
of performance and extraordinary efforts through the grant of Nonqualified
Stock Options (as such term is defined below). The Company intends that at
least a majority of the shares subject to grants hereunder are made to
non-management employees.
2. Definitions.
-----------
For purposes of the Plan:
2.1 "Affiliate" means any entity, directly or indirectly,
controlled by, controlling or under common control with the Company or any
corporation or other entity acquiring, directly or indirectly, all or
substantially all the assets and business of the Company, whether by
operation of law or otherwise.
2.2 "Agreement" means the written agreement between the Company
and an Optionee evidencing the grant of an Option and setting forth the
terms and conditions thereof.
2.3 "Board" means the Board of Directors of the Company.
2.4 "Cause" means:
(a) in the case of an Optionee whose employment with the
Company or a Subsidiary is subject to the terms of an employment agreement
between such Optionee and the Company or Subsidiary, which employment
agreement includes a definition of "Cause", the term "Cause" as used in the
Plan or any Agreement shall have the meaning set forth in such employment
agreement during the period that such employment agreement remains in
effect; and
(b) in all other cases, (i) intentional failure to perform
reasonably assigned duties, (ii) dishonesty or willful misconduct in the
performance of duties, (iii) involvement in a transaction in connection
with the performance of duties to the Company or any of its Subsidiaries
which transaction is adverse to the interests of the Company or any of its
Subsidiaries and which is engaged in for personal profit or (iv) willful
violation of any law, rule or regulation in connection with the performance
of duties (other than traffic violations or similar offenses).
2.5 "Change in Capitalization" means any increase or reduction in
the number of Shares, or any change (including, but not limited to, in the
case of a spin-off, dividend or other distribution in respect of Shares, a
change in value) in the Shares or exchange of Shares for a different number
or kind of shares or other securities of the Company or another corporation
or any extraordinary distribution in respect of Shares, by reason of a
reclassification, recapitalization, merger, consolidation, reorganization,
spin-off, split-up, issuance of warrants or rights or debentures, stock
dividend, stock split or reverse stock split, cash dividend, property
dividend, combination or exchange of shares, repurchase of shares, change
in corporate structure or otherwise.
2.6 "Code" means the Internal Revenue Code of 1986, as amended.
2.7 "Committee" means a committee, as described in Section 3.1,
appointed by the Board from time to time to administer the Plan and to
perform the functions set forth herein.
2.8 "Company" means theglobe.com, inc., a Delaware corporation.
2.9 "Consultant" means any consultant or advisor that qualifies
as an "employee" within the meaning of the rules applicable to Form S-8, as
in effect from time to time, of the Securities Act.
2.10 "Disability" means:
(a) in the case of an Optionee whose employment with the
Company or a Subsidiary is subject to the terms of an employment agreement
between such Optionee and the Company or Subsidiary, which employment
agreement includes a definition of "Disability", the term "Disability" as
used in the Plan or any Agreement shall have the meaning set forth in such
employment agreement during the period that such employment agreement
remains in effect; and
(b) in all other cases, the term "Disability" as used in the
Plan or any Agreement shall mean a physical or mental infirmity which
impairs the Optionee's ability to perform substantially his or her duties
for a period of one hundred eighty (180) consecutive days.
2.11 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
2.12 "Fair Market Value" on any date means the closing sales
prices of the Shares on such date on the principal national securities
exchange on which such Shares are listed or admitted to trading, or, if
such Shares are not so listed or admitted to trading, the average of the
per Share closing bid price and per Share closing asked price on such date
as quoted on the National Association of Securities Dealers Automated
Quotation System or such other market in which such prices are regularly
quoted, or, if there have been no published bid or asked quotations with
respect to Shares on such date, the Fair Market Value shall be the value
established by the Board in good faith.
2.13 "Nonemployee Director" means a director of the Company who
is a "nonemployee director" within the meaning of Rule 16b-3 promulgated
under the Exchange Act.
2.14 "Nonqualified Stock Option" means an Option which is not an
incentive stock option as provided in Section 422 of the Code.
2.15 "Option" means a Nonqualified Stock Option.
2.16 "Optionee" means a person to whom an Option has been granted
under the Plan.
2.17 "Parent" means any corporation which is a parent corporation
(within the meaning of Section 424(e) of the Code) with respect to the
Company.
2.18 "Permitted Transferee" means an Optionee's immediate family,
trusts solely for the benefit of such family members and partnerships in
which such family members and/or trusts are the only partners. For this
purpose, "immediate family" of an Optionee means the Optionee's spouse,
parents, children, stepchildren and grandchildren and the spouses of such
parents, children, stepchildren and grandchildren.
2.19 "Plan" means this theglobe.com, inc. 2000 Broad Based
Employee Stock Option Plan, as amended from time to time.
2.20 "Pooling Transaction" means an acquisition of the Company in
a transaction which is intended to be treated as a "pooling of interests"
under generally accepted accounting principles.
2.21 "Securities Act" means the Securities Act of 1933, as
amended.
2.22 "Shares" means the Common Stock, par value $0.001 per share,
of the Company.
2.23 "Subsidiary" means any corporation which is a subsidiary
corporation (within the meaning of Section 424(f) of the Code) with respect
to the Company.
2.24 "Successor Corporation" means a corporation, or a parent or
subsidiary thereof within the meaning of Section 424(a) of the Code, which
issues or assumes a stock option in a transaction to which Section 424(a)
of the Code applies.
3. Administration.
--------------
3.1 The Plan shall be administered by the Committee, which shall
hold meetings at such times as may be necessary for the proper
administration of the Plan. The Committee shall keep minutes of its
meetings. A quorum shall consist of not fewer than two (2) members of the
Committee and a majority of a quorum may authorize any action. Any decision
or determination reduced to writing and signed by a majority of all of the
members of the Committee shall be as fully effective as if made by a
majority vote at a meeting duly called and held. The Committee shall
consist of at least two (2) Directors and may consist of the entire Board;
provided, however, that if the Committee consists of less than the entire
Board, each member shall be a Nonemployee Director. For purposes of the
preceding sentence, if one or more members of the Committee is not a
Nonemployee Director but recuses himself or herself or abstains from voting
with respect to a particular action taken by the Committee, then the
Committee, with respect to that action, shall be deemed to consist only of
the members of the Committee who have not recused themselves or abstained
from voting.
3.2 No member of the Committee shall be liable for any action,
failure to act, determination or interpretation made in good faith with
respect to the Plan or any transaction hereunder. The Company hereby agrees
to indemnify each member of the Committee for all costs and expenses and,
to the extent permitted by applicable law, any liability incurred in
connection with defending against, responding to, negotiating for the
settlement of or otherwise dealing with any claim, cause of action or
dispute of any kind arising in connection with any actions in administering
the Plan or in authorizing or denying authorization to any transaction
hereunder.
3.3 Subject to the express terms and conditions set forth herein,
the Committee shall have the power from time to time to:
(a) determine those eligible individuals to whom Options
shall be granted under the Plan and the number of such Options to be
granted and to prescribe the terms and conditions (which need not be
identical) of each such Option, including the exercise price per Share
subject to each Option, and make any amendment or modification to any
Agreement consistent with the terms of the Plan;
(b) to construe and interpret the Plan and any Agreements
granted hereunder and to establish, amend and revoke rules and regulations
for the administration of the Plan, including, but not limited to,
correcting any defect or supplying any omission, or reconciling any
inconsistency in the Plan or in any Agreement, in the manner and to the
extent it shall deem necessary or advisable, including so that the Plan
complies with Rule 16b-3 under the Exchange Act, the Code to the extent
applicable and other applicable law, and otherwise to make the Plan fully
effective. All decisions and determinations by the Committee in the
exercise of this power shall be final, binding and conclusive upon the
Company, its Subsidiaries, the Optionees, and all other persons having any
interest therein;
(c) to determine the duration and purposes for leaves of
absence which may be granted to an Optionee on an individual basis without
constituting a termination of employment or service for purposes of the
Plan;
(d) to exercise its discretion with respect to the powers
and rights granted to it as set forth in the Plan; and
(e) generally, to exercise such powers and to perform such
acts as are deemed necessary or advisable to promote the best interests of
the Company with respect to the Plan.
4. Stock Subject to the Plan; Grant Limitations.
--------------------------------------------
4.1 The maximum number of Shares that may be made the subject of
Options granted under the Plan is 850,000. Upon a Change in Capitalization,
the maximum number of Shares referred to in this Section 4.1 shall be
adjusted in number and kind pursuant to Section 8. The Company shall
reserve for the purposes of the Plan, out of its authorized but unissued
Shares or out of Shares held in the Company's treasury, or partly out of
each, such number of Shares as shall be determined by the Board.
4.2 Upon the granting of an Option, the number of Shares
available under Section 4.1 for the granting of further Options shall be
reduced by the number of Shares in respect of which the Option is granted;
provided, however, that if any Option is exercised by tendering Shares,
either actually or by attestation, to the Company as full or partial
payment of the exercise price, the maximum number of Shares available under
Section 4.1 shall be increased by the number of Shares so tendered.
4.3 Whenever any outstanding Option or portion thereof expires,
is canceled, is settled in cash (including the settlement of tax
withholding obligations using Shares) or is otherwise terminated for any
reason without having been exercised or payment having been made in respect
of the entire Option, the Shares allocable to the expired, canceled,
settled or otherwise terminated portion of the Option may again be the
subject of Options granted hereunder.
5. Option Grants for Eligible Individuals.
--------------------------------------
5.1 Authority of Committee. Subject to the provisions of the
Plan, the Committee shall have full and final authority to select those
eligible individuals who will receive Options, and the terms and conditions
of the grant to such eligible individuals shall be set forth in an
Agreement.
5.2 Exercise Price. The purchase price or the manner in which the
exercise price is to be determined for Shares under each Option shall be
determined by the Committee and set forth in the Agreement.
5.3 Maximum Duration. Options granted hereunder shall be for such
term as the Committee shall determine, provided that no Option shall be
exercisable after the expiration of ten (10) years from the date it is
granted; provided, however, that the Committee may provide that an Option
may, upon the death of the Optionee, be exercised for up to one (1) year
following the date of the Optionee's death even if such period extends
beyond ten (10) years from the date the Option is granted. The Committee
may, subsequent to the granting of any Option, extend the term thereof, but
in no event shall the term as so extended exceed the maximum term provided
for in the preceding sentence.
5.4 Vesting. Subject to Section 6.4, each Option shall become
exercisable in such installments (which need not be equal) and at such
times as may be designated by the Committee and set forth in the Agreement.
To the extent not exercised, installments shall accumulate and be
exercisable, in whole or in part, at any time after becoming exercisable,
but not later than the date the Option expires. The Committee may
accelerate the exercisability of any Option or portion thereof at any time.
5.5 Deferred Delivery of Option Shares. The Committee may, in its
discretion, permit Optionees to elect to defer the issuance of Shares upon
the exercise of one or more Nonqualified Stock Options granted pursuant to
the Plan. The terms and conditions of such deferral shall be determined at
the time of the grant of the Option or thereafter and shall be set forth in
the Agreement evidencing the grant.
6. Terms and Conditions Applicable to All Options.
----------------------------------------------
6.1 Non-Transferability. No Option shall be transferable by the
Optionee otherwise than by will or by the laws of descent and distribution
or pursuant to a domestic relations order (within the meaning of Rule
16a-12 promulgated under the Exchange Act), and an Option shall be
exercisable during the lifetime of such Optionee only by the Optionee or
his or her guardian or legal representative. Notwithstanding the foregoing,
the Committee may set forth in the Agreement evidencing an Option at the
time of grant or thereafter, that the Option may be transferred to a
Permitted Transferee, and for purposes of the Plan, such Permitted
Transferee shall be deemed to be the Optionee. The terms of an Option shall
be final, binding and conclusive upon the beneficiaries, executors,
administrators, heirs and successors of the Optionee.
6.2 Method of Exercise. The exercise of an Option shall be made
only by a written notice delivered in person or by mail to the Secretary of
the Company at the Company's principal executive office, specifying the
number of Shares to be exercised and, to the extent applicable, accompanied
by payment therefor and otherwise in accordance with the Agreement pursuant
to which the Option was granted. The exercise price for any Shares
purchased pursuant to the exercise of an Option shall be paid, as
determined by the Committee in its discretion, in either of the following
forms (or any combination thereof): (a) cash or (b) the transfer, either
actually or by attestation, to the Company of Shares upon such terms and
conditions as determined by the Committee. In addition, Options may be
exercised through a registered broker-dealer pursuant to such cashless
exercise procedures which are, from time to time, deemed acceptable by the
Committee. Any Shares transferred to the Company (or withheld upon
exercise) as payment of the exercise price under an Option shall be valued
at their Fair Market Value on the day preceding the date of exercise of
such Option. If requested by the Committee, the Optionee shall deliver the
Agreement evidencing the Option to the Secretary of the Company who shall
endorse thereon a notation of such exercise and return such Agreement to
the Optionee. No fractional Shares (or cash in lieu thereof) shall be
issued upon exercise of an Option and the number of Shares that may be
purchased upon exercise shall be rounded to the nearest number of whole
Shares.
6.3 Rights of Optionees. No Optionee shall be deemed for any
purpose to be the owner of any Shares subject to any Option unless and
until (a) the Option shall have been exercised pursuant to the terms
thereof, (b) the Company shall have issued and delivered Shares to the
Optionee, and (c) the Optionee's name shall have been entered as a
stockholder of record on the books of the Company. Thereupon, the Optionee
shall have full voting, dividend and other ownership rights with respect to
such Shares, subject to such terms and conditions as may be set forth in
the applicable Agreement.
6.4 Effect of Certain Transactions.
------------------------------
(a) In the event of a merger or consolidation of the Company
with or into another corporation, or the sale of substantially all of the
assets of the Company, each outstanding Option shall be assumed, or an
equivalent option shall be substituted, by the Successor Corporation;
provided, however, that, unless otherwise determined by the Committee, such
Options shall remain subject to all of the conditions and restrictions
which were applicable to such Options prior to such assumption or
substitution. In the event that the Successor Corporation refuses to or
does not assume the Option or substitute an equivalent option therefor, the
Optionee shall have the right to exercise the Option as to all of the
Shares subject to the Option as described below, including Shares as to
which it would not otherwise be exercisable (a "Transaction Acceleration").
(b) Notwithstanding anything to the contrary contained in
Section 6.4(a), in the event of a Transaction Acceleration, or in the event
that the Committee determines to accelerate the exercisability of any
Options in connection with any transaction involving the Company or its
capital stock pursuant to Section 5.4, the Committee may, in its sole
discretion, authorize the redemption of the unexercised portion of the
Option for a consideration per share of Common Stock equal to the excess of
(i) the consideration payable per share of Common Stock in connection with
such transaction, over (ii) the purchase price per Share subject to the
Option.
(c) If an Option is exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the Secretary
shall notify the Optionee that the Option shall be fully exercisable for a
period of fifteen (15) days (or such other period as shall be determined by
the Committee) from the date of such notice, and the Option shall terminate
upon the expiration of such period. For the purposes of this paragraph, the
Option shall be considered assumed or an equivalent option shall be
considered substituted therefor if, following the merger or sale of assets,
the option confers the right to purchase or receive upon exercise, for each
Share subject to the Option immediately prior to the merger or sale of
assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets for each Share held on
the effective date of the transaction (and if holders were offered a choice
of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares).
7. Effect of a Termination of Employment.
-------------------------------------
The Agreement evidencing the grant of each Option shall set forth
the terms and conditions applicable to such Option upon a termination or
change in the status of the employment of the Optionee by the Company or a
Subsidiary or a division (including a termination or change by reason of
the sale of a Subsidiary or a division), which, shall be as the Committee
may, in its discretion, determine at the time the Option is granted or
thereafter.
8. Adjustment Upon Changes in Capitalization.
-----------------------------------------
(a) In the event of a Change in Capitalization, the
Committee shall conclusively determine the appropriate adjustments, if any,
to (i) the maximum number and class of Shares or other stock or securities
with respect to which Options may be granted under the Plan, (ii) the
number and class of Shares or other stock or securities which are subject
to outstanding Options granted under the Plan and the exercise price
therefor, if applicable.
(b) If, by reason of a Change in Capitalization, an Optionee
shall be entitled to exercise an Option with respect to new, additional or
different shares of stock or securities, such new, additional or different
shares shall thereupon be subject to all of the conditions, restrictions
and performance criteria which were applicable to the Shares subject to the
Option prior to such Change in Capitalization.
9. Effect of Liquidation.
---------------------
Except as otherwise provided in an Agreement, in the event of the
liquidation or dissolution of the Company (a "Liquidation"), the Plan and
the Options issued hereunder shall continue in effect in accordance with
their respective terms, except that following a Liquidation each Optionee
shall be entitled to receive in respect of each Share subject to any
outstanding Options, upon exercise of any Option, the same number and kind
of stock, securities, cash, property or other consideration that each
holder of a Share was entitled to receive in the Liquidation in respect of
a Share; provided, however, that such stock, securities, cash, property, or
other consideration shall remain subject to all of the conditions,
restrictions and performance criteria which were applicable to the Options
prior to such Liquidation.
10. Interpretation.
--------------
The Plan is intended to comply with Rule 16b-3 promulgated under
the Exchange Act and the Committee shall interpret and administer the
provisions of the Plan or any Agreement in a manner consistent therewith.
Any provisions inconsistent with such rule shall be inoperative and shall
not affect the validity of the Plan.
11. Pooling Transactions.
--------------------
Notwithstanding anything contained in the Plan or any Agreement
to the contrary, in the event of a transaction which is also intended to
constitute a Pooling Transaction, the Committee shall take such actions, if
any, as are specifically recommended by an independent accounting firm
retained by the Company to the extent reasonably necessary in order to
assure that the Pooling Transaction will qualify as such, including but not
limited to (a) deferring the vesting, exercise, payment, settlement or
lapsing of restrictions with respect to any Option, (b) providing that the
payment or settlement in respect of any Option be made in the form of cash,
Shares or securities of a successor or acquirer of the Company, or a
combination of the foregoing, and (c) providing for the extension of the
term of any Option to the extent necessary to accommodate the foregoing,
but not beyond the maximum term permitted for any Option.
12. Termination and Amendment of the Plan or Modification of Options.
----------------------------------------------------------------
12.1 Plan Amendment or Termination. The Plan shall terminate on
the day preceding the tenth anniversary of the date of its adoption by the
Board and no Option may be granted thereafter. The Board may sooner
terminate the Plan and the Board may at any time and from time to time
amend, modify or suspend the Plan; provided, however, that:
(a) no such amendment, modification, suspension or
termination shall impair or adversely alter any Options theretofore granted
under the Plan, except with the consent of the Optionee, nor shall any
amendment, modification, suspension or termination deprive any Optionee of
any Shares or their equivalent which he or she may have acquired through or
as a result of the Plan; and
(b) to the extent required under any applicable law,
regulation or exchange requirement, no amendment shall be effective unless
approved by the stockholders of the Company in accordance with applicable
law, regulation or exchange requirement.
12.2 Modification of Options. No modification of an Option shall
adversely alter or impair any rights or obligations under the Option
without the consent of the Optionee.
13. Non-Exclusivity of the Plan.
---------------------------
The adoption of the Plan by the Board shall not be construed as
amending, modifying or rescinding any previously approved incentive
arrangement or as creating any limitations on the power of the Board to
adopt such other incentive arrangements as it may deem desirable,
including, without limitation, the granting of stock options otherwise than
under the Plan, and such arrangements may be either applicable generally or
only in specific cases.
14. Limitation of Liability.
-----------------------
As illustrative of the limitations of liability of the Company,
but not intended to be exhaustive thereof, nothing in the Plan shall be
construed to:
(a) give any person any right to be granted an Option other
than at the sole discretion of the Committee;
(b) give any person any rights whatsoever with respect to
Shares except as specifically provided in the Plan;
(c) limit in any way the right of the Company or any
Subsidiary to terminate the employment or service of any person at any
time; or
(d) be evidence of any agreement or understanding, expressed
or implied, that the Company will employ any person at any particular rate
of compensation or for any particular period of time.
15. Regulations and Other Approvals; Governing Law.
----------------------------------------------
15.1 Except as to matters of federal law, the Plan and the rights
of all persons claiming hereunder shall be construed and determined in
accordance with the laws of the State of Delaware without giving effect to
conflicts of laws principles thereof.
15.2 The obligation of the Company to sell or deliver Shares with
respect to Options granted under the Plan shall be subject to all
applicable laws, rules and regulations, including all applicable federal
and state securities laws, and the obtaining of all such approvals by
governmental agencies as may be deemed necessary or appropriate by the
Committee.
15.3 The Board may make such changes as may be necessary or
appropriate to comply with the rules and regulations of any government
authority.
15.4 Each Option is subject to the requirement that, if at any
time the Committee determines, in its discretion, that the listing,
registration or qualification of Shares issuable pursuant to the Plan is
required by any securities exchange or under any state or federal law, or
the consent or approval of any governmental regulatory body is necessary or
desirable as a condition of, or in connection with, the grant of an Option
or the issuance of Shares, no Options shall be granted or payment made or
Shares issued, in whole or in part, unless listing, registration,
qualification, consent or approval has been effected or obtained free of
any conditions as acceptable to the Committee.
15.5 Notwithstanding anything contained in the Plan or any
Agreement to the contrary, in the event that the disposition of Shares
acquired pursuant to the Plan is not covered by a then current registration
statement under the Securities Act and is not otherwise exempt from such
registration, such Shares shall be restricted against transfer to the
extent required by the Securities Act and Rule 144 or other regulations
thereunder. The Committee may require any individual receiving Shares
pursuant to an Option granted under the Plan, as a condition precedent to
receipt of such Shares, to represent and warrant to the Company in writing
that the Shares acquired by such individual are acquired without a view to
any distribution thereof and will not be sold or transferred other than
pursuant to an effective registration thereof under said Act or pursuant to
an exemption applicable under the Securities Act or the rules and
regulations promulgated thereunder. The certificates evidencing any of such
Shares shall be appropriately amended to reflect their status as restricted
securities as aforesaid.
16. Miscellaneous.
-------------
16.1 Multiple Agreements. The terms of each Option may differ
from other Options granted under the Plan at the same time, or at some
other time. The Committee may also grant more than one Option to a given
eligible individual during the term of the Plan, either in addition to, or
in substitution for, one or more Options previously granted to that
eligible individual.
16.2 Withholding of Taxes.
--------------------
At such times as an Optionee recognizes taxable income in
connection with the receipt of Shares hereunder (a "Taxable Event"), the
Optionee shall pay to the Company an amount equal to the federal, state and
local income taxes and other amounts as may be required by law to be
withheld by the Company in connection with the Taxable Event (the
"Withholding Taxes") prior to the issuance of such Shares. The Company
shall have the right to deduct from any payment of cash to an Optionee an
amount equal to the Withholding Taxes in satisfaction of the obligation to
pay Withholding Taxes. The Committee may provide in the Agreement, at the
time of grant or at any time thereafter, that the Optionee, in satisfaction
of the obligation to pay Withholding Taxes, may elect to have withheld a
portion of the Shares then issuable to him or her having an aggregate Fair
Market Value equal to the Withholding Taxes.
16.3 Effective Date. The effective date of the Plan shall be as
determined by the Board.
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