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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION l3 OR l5(d) OF
THE SECURITIES EXCHANGE ACT OF l934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-25107
EarthWeb Inc.
(Exact name of registrant as specified in its charter)
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Delaware 13-3899472
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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3 Park Avenue, New York, New York 10016
(Address of principal executive offices,
including zip code)
Registrant's telephone number, including area code: (212) 725-6550
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section l2(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
______________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange Act of
l934 during the preceding l2 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant, based on the closing price of the common stock on March 1, 1999 of
$37.75, as reported on the NASDAQ National Market was approximately
$158,228,219. Shares of common stock held by each officer and director and by
each person who owns 5% or more of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for any other purpose.
As of March 1, 1999, the registrant had outstanding 8,509,862 shares of
common stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE:
The following documents (or parts thereof) are incorporated by reference into
the following parts of this Form 10-K:
(1) 1998 Annual Report to Stockholders - Items 5, 6, 7, 8 and 14(a). With the
exception of those portions that are incorporated by reference, the
Registrant's 1998 Annual Report is not deemed filed as part of this Report.
(2) Proxy Statement for the 1999 Annual Meeting of Stockholders - Items 10, 11,
12 and 13.
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PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the matters discussed in
this Annual Report on Form 10-K, and specifically in this Item or otherwise
incorporated by reference into this Annual Report on Form 10-K are "forward-
looking statements" (as such term is defined in the Private Securities
Litigation Reform Act of 1995). These statements can be identified by the use
of forward-looking terminology such as "believes," "expects," "may", "will",
"should," or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that involve risks and
uncertainties. The safe harbor provisions of Section 21E of the Securities
Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933,
as amended, apply to forward-looking statements made by EarthWeb. These
forward-looking statements involve risks and uncertainties, including those
identified within "Risk Factors" and elsewhere in, or incorporated by reference
into, this Annual Report on Form 10-K. The actual results that EarthWeb
achieves may differ materially from forward-looking projections due to such
risks and uncertainties. These forward-looking statements are based on current
expectations, and EarthWeb assumes no obligation to update this information.
Readers are urged to carefully review and consider the various disclosures made
by EarthWeb in this Annual Report on Form 10-K and in EarthWeb's other reports
filed with the Securities and Exchange Commission that attempt to advise
interested parties of the risks and factors that may affect EarthWeb's business.
EarthWeb is the leading provider of Internet-based online services to the
information technology ("IT") industry worldwide. Our integrated business-to-
business online services address the needs of the various sectors of the IT
marketplace for content, community and commerce. EarthWeb's content offerings
include a wide range of technical materials, such as resource directories,
tutorials and a reference library. These materials enhance the ability of IT
professionals to perform their job functions. Our community areas, such as
bulletin boards and question and answer services, allow users to help one
another solve technical problems and share information. Our commerce services
provide a single online source for IT vendors to target an audience of IT
professionals who come to EarthWeb to purchase specialized software and other
products. Our recruitment services enable technical recruiters and IT managers
to locate skilled IT professionals. As a global intermediary for IT
professionals, advertisers and vendors, EarthWeb is positioned as a trusted
third party that offers an integrated environment where these constituencies can
share information, interact with one another and transact business. We believe
that none of the companies, that we consider our competitors offer the depth and
range of online services that we provide.
EarthWeb's flagship service, developer.com, focuses primarily on the software
development and Internet segments. Developer.com features a vast collection of
online resources, including the full text of more than 150 technical books, over
300 exclusive technical articles, over 375 proprietary tutorials, and access to
over 150,000 technical resources. Datamation.com is a leading resource for IT
enterprise managers providing case studies, technical articles and technology
assessment tools, substantially all of which are our proprietary assets.
EarthWeb offers additional proprietary resources for IT managers through its
Intranet Journal and Y2Kinfo sites. EarthWeb's subscription service,
ITKnowledge, offers subscribers the full text of 400 technical books from
leading publishers. EarthWeb's online services also include javascripts.com, a
resource for JavaScript developers, and jars.com, a site providing ratings and
reviews of Java and other code. Our unique blend of online services currently
attracts an average of over 1.4 million users a month and the email version of
EarthWeb's Journal, featuring highlights from our online services, currently has
over 375,000 subscribers. In February 1999 EarthWeb acquired Dice.com, a
leading resource of IT job listings currently containing more than 83,000 jobs
and go certify.com which provides users with information on technical
certification programs, a very active and growing market. In March 1999,
EarthWeb acquired The Perl Journal, a leading technical publication for
developers using the Perl programming language and the related website TPJ.com.
EarthWeb was incorporated in New York in April 1996, commenced operations in
October 1996 and was reincorporated in Delaware in June 1997. EarthWeb LLC
transferred substantially all of its assets and liabilities to EarthWeb in
October 1996 in exchange for 2,925,000 shares of common stock, which at such
time represented all of the issued and outstanding common stock. From inception
in 1994 until mid-1997, we primarily developed and maintained Web sites and
online commerce infrastructures for our customers.
References to "EarthWeb" "we"', "our" and "us" in this Form 10-K that refer to
the period prior to October 25, 1996 are to the EarthWeb's predecessors, and for
the later period refer to EarthWeb.
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Our principal executive office is located at 3 Park Avenue, New York, New York
10016, and our telephone number at such location is (212) 725-6550. Our
corporate Web site address is http://www.earthweb.com. Information contained on
our Web site is not part of this Form 10-K .
Industry Overview
IT Industry
Professionals in the IT industry have become more specialized and have grown in
number as the pace and complexity of technological change has increased. IT
professionals today play a central role in many organizations because their
ability to deploy and integrate new information technologies is essential to
executing business strategy and maintaining competitiveness. Organizations are
increasingly adopting technologies such as:
. client/server architectures
. data warehousing
. Internet/intranet applications
. object-oriented software development
These and other technologies have continued to fuel the growth in the worldwide
market for IT products and services, which is forecasted to grow from an
estimated $834 billion in 1998 to $1.1 trillion in 2001, according to
International Data Corporation ("IDC"). IT spending in 1998 in North America,
Western Europe and Japan is estimated by IDC to have been 41%, 28% and 14%,
respectively, of total global IT spending.
With the increasing complexity of information technology, professionals tend to
develop specialized knowledge and skill bases relevant to a particular segment
or sub-segment of the IT industry. These segments can be categorized into six
broad areas, each with major sub-segments:
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Segment Description Major Sub-segments
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Software Development Creation of software applications C/C++, Java, Visual Basic and other
using various programming languages, programming languages, object-oriented
tools and environments technology and visual development
environments
Internet Technologies and Web Use of technologies based on Internet Internet, intranet, extranet, Web sites,
Development protocols for communication and Internet commerce, Internet security and
commerce both within and between Internet protocols
organizations
Enterprise Management Deployment of sophisticated, Systems management software, financial
large-scale software applications and management systems, enterprise resource
systems to manage and support planning, Year 2000, middleware, field
functions within businesses and other sales automation, data warehousing and
organizations supply chain management
Networking and Design, installation and management of Network and directory services, data and
Telecommunications infrastructure for data and voice voice communications technologies,
communications wireless and mobile communications and
Internet service provider network
infrastructure
Hardware Design, manufacture, purchase and Personal, midrange and mainframe systems;
maintenance of hardware components and computer chip, PC display, multimedia and
peripherals disk storage technologies
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Services, Support and Services that support the development, Systems integration, outsourced custom
Consulting implementation and maintenance of development, systems design and
enterprise computing systems maintenance, outsourced network
management and technical support
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IT professionals need to stay abreast of rapid technological developments in a
marketplace where vendors continually introduce new products with a variety of
standards and short life cycles. They have historically relied on resources
provided by IT publishers, software and hardware vendors, training service
providers and fellow professionals to follow the latest trends in the industry.
IDC forecasts that the IT education and training market alone will grow from an
estimated $16.7 billion in 1998 to $25.8 billion in 2001. Due to the fast rate
of change, however, technical information, training materials, and software
tools become quickly dated and obsolete. This environment creates the following
common needs among IT professionals:
. Content. IT professionals require a wide range of independent, in-depth and
up-to-date content including technical resources, such as source code,
technical articles and white papers; market information about emerging
products and technologies; expert technical advice; training and skills
development; IT related research; and specialized reference materials.
. Community. IT professionals need an environment in which they can share
technical information with one another, work together to find solutions to
common technical problems, learn about upcoming IT conferences and other
industry events and seek employment and hire personnel.
. Commerce. IT professionals increasingly need a centralized channel through
which they can purchase specialized IT products. In particular, IT
professionals need a source for obtaining hard-to-find technologies,
including software produced by small and mid-sized vendors that is not
widely available through existing channels.
IT professionals devote considerable time, effort and financial resources
researching new technologies, seeking answers to technical questions and
developing and implementing IT solutions. They have had to rely on fragmented
and disparate sources, such as technical books and print magazines, training
materials provided by service providers and traditional software retailers. None
of these sources has provided a comprehensive solution for IT professionals'
need for content, community and commerce.
The Internet
The Internet enables millions of people worldwide to have access to current news
and information, create community among individuals with similar professional or
personal interests and conduct business electronically. The number of Internet
users worldwide is projected to grow from an estimated 82 million at the end of
1998 to 329 million by the year 2002, according to IDC. With this growth in the
number of Internet users, the Internet is emerging as a mass communication and
commerce medium, which offers advertisers and vendors certain advantages. The
Internet permits advertisers to target specific demographic groups, measure the
effectiveness of their advertising campaigns and revise them in response to
real-time feedback. Business-to-business Internet advertising is forecasted by
Forrester to increase from an estimated $290 million in 1998 to $2.6 billion in
2002 and consumer-oriented Internet advertising is forecasted by Jupiter
Communications to increase from an estimated $1.9 billion to $7.7 billion in the
same period. The Internet provides online merchants with the ability to reach a
global audience and to operate with minimal infrastructure, reduced overhead and
greater economies of scale, while providing customers with broad selection,
increased pricing information and unparalleled convenience. IDC forecasts that
total commerce on the Internet will grow from an estimated $12.4 billion in 1998
to $239.5 billion in 2001, with the business-to-business component growing from
an estimated $7.3 billion to $179.4 billion in the same period.
The EarthWeb Solution
EarthWeb provides online services to IT professionals in an integrated business-
to-business environment that addresses their needs for content, community and
commerce. EarthWeb provides comprehensive online services for IT professionals
and offers channels through which advertisers and IT vendors can target
potential buyers. As a global intermediary for IT professionals, advertisers and
vendors, EarthWeb is positioned as a trusted third party that offers a forum for
these constituencies to share information, interact with one another and
transact business.
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Content. EarthWeb's online services provide access to technical resources that
enhance IT professionals' ability to perform their daily job functions. These
resources contain up-to-date information that allows IT professionals to keep
pace with the rapidly changing IT industry. EarthWeb's technical resources
include a library of full-text reference books, training materials and
tutorials, technical articles, white papers and source code libraries. IT
professionals can easily browse these technical resources using EarthWeb's
proprietary categorization system as well as search across EarthWeb's wide range
of content using a single semantic search engine.
Community. EarthWeb provides various means by which users can contribute
materials to its sites and communicate with each other. Users are encouraged to
submit source code, object code, development tools and other materials that are
then archived in EarthWeb's directories. EarthWeb's online services also include
a number of bulletin boards for technical discussion that allow users to solve
problems together, and that are managed by experienced IT professionals to
maintain the quality of content. These discussion threads are then archived
creating an online knowledge repository for future reference. EarthWeb also
provides IT professionals with a centralized calendar of upcoming conferences
and other industry events and online technical job listings via its new
acquisition, dice.com. EarthWeb believes that nurturing a sense of community
fosters loyalty and affinity among its users and increases the amount of time
they spend using its online services.
Commerce. EarthWeb provides IT professionals with a centralized online location
to purchase products, including specialized software and technical books. Many
of the products in the online store are difficult to find through existing
channels. Vendors include major software developers, such as Microsoft, Lotus
and Symantec, as well as small and mid-sized specialized software vendors.
EarthWeb also provides a classified advertising service that allows IT
professionals to buy and sell specialized hardware. EarthWeb has implemented an
electronic software delivery mechanism that enables users to download directly a
variety of software immediately after purchase.
Benefits for Advertisers and Vendors. EarthWeb provides IT advertisers and
vendors with a channel to target what it believes to be the world's largest
aggregation of IT professionals. Many of these professionals either make or
influence purchasing decisions. EarthWeb's advertisers and vendors generally can
enhance the effectiveness of their advertising or merchandising by customizing
or refining advertisements, and by placing them on either a targeted area on
EarthWeb's sites or across EarthWeb's entire network of online services.
EarthWeb also provides small to mid-size vendors with a much needed distribution
channel and the ability to focus their marketing efforts cost effectively.
Business Strategy
EarthWeb seeks to maintain and strengthen its position as the leading provider
of online services to IT professionals worldwide. EarthWeb intends to achieve
this objective by implementing the following key strategies:
Extend Online Services to Additional IT Segments. EarthWeb intends to extend its
online services model across additional segments of the IT industry.
Specifically, EarthWeb seeks to replicate, through internal development and
acquisitions, its integrated service offerings to address the needs of IT
professionals in segments of the IT industry beyond its current offerings in the
software development, Internet and enterprise management segments.
Datamation.com, for instance, provides EarthWeb with a strong service offering
for the enterprise management segment. EarthWeb also intends to continue
strengthening its existing online offerings by maintaining what it believes to
be the most in-depth, independent and up-to-date content available for IT
professionals and enhancing its interactive community building and commerce
services.
Enhance Worldwide Brand Recognition. EarthWeb will continue to promote the
EarthWeb brand as the leading integrated source of content, community, and
commerce for all segments of the IT industry. In addition, EarthWeb plans to
promote its branded online services, such as developer.com and datamation.com,
under the EarthWeb umbrella through online and offline advertising, strategic
alliances and other promotional activities. EarthWeb seeks to reinforce for
users, advertisers, and vendors that the EarthWeb brands represent technical
competence, comprehensiveness, timeliness, and neutrality. EarthWeb believes
that the extension of the EarthWeb's online services model to additional IT
segments will attract additional users and further enhance awareness of its
brands.
Cultivate Multiple Revenue Streams. EarthWeb believes its business-to-business
model has strongly positioned it to grow its existing revenue streams and
develop new sources of revenue. EarthWeb currently derives substantially all of
its revenues from advertising and sponsorships. With regard to advertising
revenue, EarthWeb will seek to maintain or increase the premium CPM rates it
commands for its targeted user base and to attract non-technology advertisers by
marketing the attractive demographics of its IT professional user base. With
regard to EarthWeb's other current revenue streams, EarthWeb
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seeks to attract more merchandisers to its online store and enter into
additional brand licensing arrangements. Sources of revenue include the sale of
subscriptions to premium services. EarthWeb launched its first subscription
service, ITknowledge.com, in October 1998. EarthWeb has the rights to the
content used in ITknowledge.com. Although EarthWeb has migrated some content
from its existing sites, EarthWeb expects that most of the content in the
subscription service will be content that does not exist on its other sites.
EarthWeb believes that many IT professionals or their employers will be willing
to pay for access to an increased volume of enhanced content. EarthWeb believes
it can grow its current and future revenue streams with minimal incremental
costs by leveraging its existing sales, marketing and technology infrastructure.
Grow Through Targeted Acquisitions. EarthWeb will continue to pursue
acquisitions to fulfill a number of objectives. The first, and most important,
is to strengthen EarthWeb's existing online services and extend its offerings
into additional IT industry segments. The second is to obtain valuable brands,
expertise and access to new advertisers and users. The third is to increase
traffic on EarthWeb's online services. Based on EarthWeb's eight acquisitions
since August 1997, EarthWeb has found that the addition of new sites generally
increases traffic on its existing sites as well as on the acquired sites.
EarthWeb believes it will continue to be able to find attractive candidates for
acquisition.
Expand Internationally. Many IT professionals reside outside the United States
and approximately one-third of EarthWeb's traffic originates internationally.
EarthWeb believes that the number of IT professionals worldwide will grow
significantly in the future. EarthWeb intends to capitalize on these
international market opportunities through localization and translation of
selected content into foreign languages and the creation of regional business
ventures to increase EarthWeb's audience worldwide. EarthWeb has successfully
localized and translated portions of its content for the Japanese market and has
other language translation efforts underway.
Online Services
EarthWeb offers a broad range of online services to meet IT professionals' needs
for content, community and commerce.
Content. The content on EarthWeb's sites includes technical resources,
reference materials, decision support tools, training materials and tutorials,
technical news, articles and information.
Technical Resources. EarthWeb's online services provide IT professionals with
access to over 150,000 resources and examples for use in their work, including
reusable source code and software interface components. EarthWeb also provides
online decision support tools, including a regular technology survey of more
than 1,000 IT professionals and online assessment tools enabling IT managers to
evaluate their technology infrastructure. EarthWeb further provides extensive
technical resource directories that are categorized using its proprietary
categorization system and contain links to over 17,000 technical resources
related to topics such as:
. Active Server Pages . Middleware
. ActiveX . Perl
. C/C++ . push technology
. CGI . Visual Basic
. Cold Fusion . XML
. databases . VRML
. distributed objects . databases
. HTML/DHTML . networks
. intranets . Year 2000
. Java
. JavaScript
Most of these technical resources are submitted by users and include links to
Web sites that contain technical articles, training materials and source code.
Most of the interface components are provided through licenses with various
aggregators of content. EarthWeb has expended considerable time and effort in
developing its proprietary categorization system, which enables users to quickly
identify and locate relevant technical resources, and has received industry
recognition for this system.
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Reference Materials. EarthWeb believes its reference library is the largest
online library of technical books for IT professionals. Its more than 150
technical reference, how-to and training books for IT professionals are provided
in full text in HTML and address areas such as:
. ActiveX . middleware
. APIs . office suites
. browsers . operating systems and utilities
. C/C++ . push technologies
. CGI . servers and networks
. Perl . SQL
. databases . TCP/IP
. HTML . Unix
. Intranets . Visual Basic
. Java . Visual InterDev
. Java Beans . VRML
. JavaScript . Web graphics
. Linux . Web site management
EarthWeb is in the process of adding more than 3,000 additional books to its
online reference library, which will comprise over 1.5 million pages of text.
These books are provided by leading publishers, such as Macmillan Computer
Publishing and the Coriolis Group, a division of International Thompson
Publishing as well as others. EarthWeb also provides in-depth product analysis,
benchmarks and other product reference information that facilitate product
evaluation. Reference materials can be browsed by their table of contents or
searched using a semantic search engine. Most of the online books can also be
purchased in physical form through EarthWeb's online store.
Training Materials and Tutorials. EarthWeb features over 375 original,
proprietary, in-depth technical tutorials for IT professionals on subjects such
as:
. Active Server Pages . Java
. ActiveX . JavaScript
. CGI . multimedia
. databases . Perl
. distributed objects . general programming
. emerging technologies . Visual Basic
. Internet . VRML
. HTML/DHTML . XML
. intranets
The tutorials include workshops on specific technical issues, online textbooks,
source code, tests and quizzes. The vast majority of these tutorials are owned
exclusively by EarthWeb, and the balance comes from a variety of third-party
publishers. EarthWeb believes it offers one of the largest collections of
training materials and tutorials for IT professionals on the Web, and adds new
training materials on a weekly basis.
Technical News, Articles and Information. EarthWeb provides a range of original
articles, aggregated news and case studies. EarthWeb provides a vast collection
of articles on various technical subjects, including software development,
Internet technologies and Web development and enterprise management. EarthWeb
owns the articles that it has commissioned to be written. EarthWeb's online
Journal features highlights from EarthWeb's online services as well as original
news, research, analysis and feature articles. The Journal is published in HTML
and email formats. Currently, the email version has over 305,000 subscribers and
is growing at an average rate of more than 3,000 new subscribers each week.
EarthWeb also provides news of most interest to IT professionals, which is
aggregated daily from various media sources, including CMP and Ziff-Davis.
Community. EarthWeb provides useful interactive forums for IT professionals,
such as technical bulletin boards, question and answer services and job
listings.
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Technical Bulletin Boards. EarthWeb's online services include more than 20
technical bulletin boards containing more than 3,000 interactive technical
discussion threads, which are focused and managed by experienced IT
professionals. There are currently over 15,000 postings on EarthWeb's Web sites.
These online bulletin boards enable users to help each other solve technical
problems. These bulletin boards are then archived, creating an online knowledge
repository for future reference. EarthWeb enables users to locate relevant
discussion threads through its search engine.
Technical Question and Answer Services. EarthWeb encourages users to submit
questions or problems that are answered by EarthWeb's network of experienced IT
professionals. Detailed answers are published online in a searchable format.
Technical Job Listings; Other Services. EarthWeb also provides a comprehensive
calendar of upcoming IT conferences and other industry events, and hosts online
conference proceedings. Dice.com lists thousands of high-tech permanent ,
contract, and consulting jobs nationwide for programmers, software engineers,
system administrators, web developers, hardware engineers and others, and
provides services exclusively to recruiting companies that place high-tech
candidates at client sites. Currently, advertisers on dice.com include Manpower
Technical Services, Volt Services Group and Modis Professional Services.
Commerce. EarthWeb provides a channel for IT professionals to shop online for
specialized IT products.
Online Shopping. EarthWeb's online store provides IT professionals access to
over 33,000 products from over 350 vendors, including Microsoft, Lotus, Symantec
and other leading IT vendors. EarthWeb provides a browsable online catalog,
secure transactions and physical or secure electronic delivery of software
products.
Classified Ads. EarthWeb provides technical classified advertising services for
the IT professional through a contractual arrangement with Classifieds2000. The
classified advertising section includes listings for technical equipment ranging
from desktop computers, modems and printers to hubs/repeaters, routers, servers
and switches.
Marketing and Sales
Marketing
EarthWeb employs a combination of online and offline advertising and promotional
campaigns to promote use of its online services by users, advertisers and
vendors. EarthWeb purchases advertising on selected technical Web sites such as
Infoworld Electric and ZDNet and in IT industry newsletters such as
Informationweek Daily and ZDNet. Utilizing search engines such as Excite and
Lycos, EarthWeb buys advertising that appears when certain keywords or topics
are entered. EarthWeb is promoted by over 30,000 links from other Web sites and
links on major distribution portals and search engines. Additionally, EarthWeb's
Java directory has a permanent bookmark on Netscape's Communicator 4.0, and
EarthWeb's developer.com was chosen as one of 21 "gold channels" in the
channel directory of Microsoft Internet Explorer 4.0. EarthWeb further markets
its online services through its Journal, which is currently emailed to more than
375,000 subscribers. EarthWeb also promotes its online services through
traditional print media. EarthWeb has an ongoing public relations program,
participates in tradeshows, conferences, speaking engagements and promotional
contests and publishes articles in technical publications.
EarthWeb pursues strategic relationships with key marketing partners to enhance
brand awareness. Developer.com's Gamelan directory has been exclusively
designated by Sun Microsystems as "The Official Directory for Java" since
1996. Developer.com was also designated by Apple as the exclusive online
location for the proceedings of the 1998 Apple Worldwide Developers Conference.
EarthWeb also licenses its brands to strategic third parties such as Macmillan
Computer Publishing, which established the EarthWeb Press to publish books and
software for IT professionals.
Advertising Sales
EarthWeb historically has derived substantially all of its revenues from the
sale of advertisements. EarthWeb believes it has been able to achieve its
advertising revenues to date primarily through its ability to enable advertisers
to efficiently and effectively reach targeted segments of the IT community.
Based on independent research commissioned by EarthWeb, 81% of EarthWeb's users
are the primary or co-primary decision-makers for purchases of Internet and Web
applications in their enterprises. EarthWeb believes that targeting this
audience has enabled it since the beginning of 1997 to sell advertising space at
rates that are higher than the average rates charged by online services aimed at
more general audiences. Based upon publicly available banner advertisement rate
cards, EarthWeb's rates are approximately 2.5 to 4.0 times higher than the rates
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of Lycos, Excite, and Yahoo! and Infoseek, which EarthWeb believes to be a
representative group of online services aimed at more general audiences.
Independent research has also shown that 89% of users have some college
education, 30% have at least some graduate level education and 62% are between
18 and 34 years old. EarthWeb believes these demographics will be attractive to
non-technology advertisers.
EarthWeb offers advertisers two main advertising options: run-of-site and
premium placement. Run-of-site advertisements rotate on a random basis
throughout EarthWeb's online services, offering advertisers the broadest reach
of EarthWeb users. Run-of-site advertisements are typically sold in blocks of
50,000 impressions, currently at a CPM of $68, before volume discounts and
advertising agency commissions, for banner advertising. Advertisements can also
be displayed in specific sections in EarthWeb's service, which target specific
IT professional subsegments, at a CPM of $78, before volume discounts and
advertising agency commissions, for banner advertising. EarthWeb also offers
advertisers the opportunity to sponsor its weekly electronic newsletter, which
reaches over 375,000 users, at a CPM of $100.
EarthWeb organizes its sales force by geographic regions as follows: New
England/Eastern Canada; Mid-Atlantic; Southeast/Midwest; Southwest and two
territories within the Northwest.
During the year ended December 31 1998, 168 individual advertisers, an increase
of 630% over the prior year, placed advertisements on EarthWeb's online
services. IBM and Microsoft accounted for approximately 11% and 10%,
respectively, of EarthWeb's revenues for the year ended December 31,1998. The
following is a partial list of EarthWeb's significant advertisers:
. Allaire . Novell
. Apple Computer . Object Design
. CyberCash . Oracle
. IBM . O'Reilly Software
. Intel . Seagate
. Lotus . Silicon Graphics
. Microsoft . Stingray
. Miller Freeman . Sun Microsystems
. Net Objects . Tandem
. Netscape . ZD Expo/JavaOne
Competition
EarthWeb believes it competes on the basis of brand recognition, exclusivity of
content and services, quality and quantity of content, product and resource
selection, convenience, reliability and speed of fulfillment. EarthWeb believes
that it is differentiated and well positioned against its competitors because of
its unique focus on providing a combination of content, community and commerce,
including training materials, technical directories, a reference library, a
knowledge repository of technical questions and answers and specialized
technical products, for its users.
The market for Internet-based online services is relatively new, intensely
competitive and rapidly changing. Since the advent of commercial services on the
Internet, the number of online services competing for users' attention and
spending has proliferated because of, among other reasons, the absence of
substantial barriers to entry, and EarthWeb expects that competition will
continue to intensify. EarthWeb competes with other companies who have
particular sections of their Web sites directed at certain segments or sub-
segments of the professional community, such as Ziff-Davis (InternetUser), CNET
(builder.com and activex.com), CMP (TechWeb), Mecklermedia (webdeveloper.com),
Wired Digital (Webmonkey) and IDG (Javaworld). EarthWeb also competes for
circulation and advertising impressions with general interest portal and
destination sites as well as traditional media. With respect to sales of
products, EarthWeb competes with traditional retailers of such products, such as
book, software and online retail stores.
Many of EarthWeb's current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than EarthWeb. These
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements and to devote greater resources to the
development, promotion and sale of their products and services than EarthWeb.
There can be no assurance that EarthWeb will be able to compete successfully
against its current or future competitors.
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Infrastructure, Operations and Technology
EarthWeb makes its Web sites available using multiple Sun Microsystems and
Wintel-based servers that run on Sun Solaris and Microsoft NT operating systems.
For disk storage, EarthWeb partially relies on a high performance and fully
redundant central storage system from EMC. The full implementation of this
central storage system will significantly enhance the scalability of EarthWeb's
online services. EarthWeb licenses software from the following vendors: Apache
and Netscape (Web servers); Accipiter (advertising management system);
BroadVision (commerce system); Netscape (subscriptions system) and CyberSource
(secure credit card capture and billing).
EarthWeb maintains two data centers, one for production and one for development
and staging. In the event of an outage at the production facility, the systems
in the development and staging center are capable of supporting EarthWeb's
online services. EarthWeb's Internet connections are fully redundant, so that if
a failure in the network or equipment of one service provider occurs, traffic is
automatically routed through the other provider. All of EarthWeb's production
servers are powered by an uninterruptible power supply with a diesel generator
designed to provide back-up power to the power supply at the production facility
within seconds of a power outage. In addition, all of EarthWeb's production
systems are copied to backup tapes each night and regularly stored at an off-
site storage facility. EarthWeb maintains a quality assurance process to
constantly monitor its servers, processes and network connectivity. EarthWeb has
implemented these various redundancies and backup systems in order to minimize
the risk associated with damage from fire, power loss, telecommunications
failure, break-ins, computer viruses and other events beyond EarthWeb's control.
See "Risk Factors--Risk of capacity constraints and system failures."
Intellectual Property
EarthWeb protects its intellectual property through a combination of license
agreements, service mark, copyright, trade secret laws and other methods of
restricting disclosure and transferring title. EarthWeb obtains the majority of
its content under license agreements with publishers, through work for hire
arrangements with third parties and from internal staff development. EarthWeb
has no patents or patents pending for its current online services and does not
anticipate that patents will become a significant part of EarthWeb's
intellectual property in the foreseeable future. EarthWeb also enters into
confidentiality agreements with its employees, consultants, vendors and
customers, license agreements with third parties and generally seeks to control
access to and distribution of its technology, documentation and other
proprietary information. EarthWeb pursues the registration of its service marks
in the United States and internationally, and has obtained United States service
mark registration for its EarthWeb service mark and the Fang Logo Design, has
been assigned Plugin Datamation and Datamation and has applied for registration
of certain of its other servicemarks, such as developer.com and developer
direct. The legal status of intellectual property on the Internet is currently
subject to various uncertainties. See "Risk Factors--Intellectual property."
Employees
As of March 1, 1999 EarthWeb and its wholly-owned subsidiary, EW Career
Solutions, Inc., which operates dice.com, had 121 full time employees, including
40 in sales and marketing. EarthWeb's future success, depends in large part on
its ability to attract and retain highly qualified employees. Competition for
such personnel is intense and there can be no assurance that EarthWeb will be
able to retain its senior management or other key personnel in the future.
EarthWeb's employees are not represented by any union, and EarthWeb considers
its relations with its employees to be good.
Risk Factors
Uncertainties associated with limited operating history
Although EarthWeb commenced operations in October 1994, EarthWeb did not begin
operating our current business of providing online services to IT professionals
until October 1995 and did not begin generating advertising revenues until June
1996. Accordingly, we have a limited operating history upon which you can
evaluate our business. EarthWeb competes in the relatively new markets for
Internet services and products. You should evaluate our chances of financial
and operational success in light of the risks, uncertainties, expenses, delays
and difficulties associated with operating a business in a relatively new and
unproven market, many of which may be beyond our control. Some of the risks
that we face include:
. our failure to continue to develop and extend our online service brands;
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. the rejection of our services by Internet users, vendors or advertisers;
. our inability to maintain and increase the levels of traffic on our online
services;
. the development of similar or superior services or products by competitors;
. the failure of the market to adopt the Internet as an advertising medium;
. the failure to successfully sell Internet advertising through our internal
. sales force;
. reductions in market prices for Internet advertising as a result of
competition or other factors;
. our inability to integrate effectively the technology and operations of any
acquired businesses or technologies with our operations; and
. the inability to identify, attract, retain and motivate qualified personnel.
Our failure to address these risks could have a material adverse effect on our
business, results of operations and financial condition.
Operating losses and potential need for additional funds
EarthWeb had an accumulated deficit of $17.3 million at December 31, 1998. We
have also experienced operating losses as well as net losses for all of the
fiscal years during which we have operated. We expect that we will continue to
operate at a loss for the foreseeable future. Although our revenues have grown
in recent quarters, we cannot assure you that such growth will be maintained or
increased in the future. You should not rely on EarthWeb's recent revenue
growth as indicative of our future results of operations. We cannot predict
with accuracy our future results of operations and believe that any period-to-
period comparisons of EarthWeb's results of operations are not meaningful.
We expect to increase our operating expenses significantly, expand our sales and
marketing operations and continue to develop and extend our online services. In
the future, we may not generate sufficient revenues to pay for all of these
operating or other expenses. If we fail to generate sufficient cash to pay
these expenses, we will need to identify other sources of financing. We may not
be able to borrow money or issue more shares of common stock or other securities
to meet our cash needs, and even if we can complete such transactions, the terms
may be unfavorable or otherwise seem unreasonable to us.
Unproven acceptance of EarthWeb's online services in a developing market
The market for EarthWeb's online services has only recently begun to develop, is
rapidly evolving and is characterized by an increasing number of market
entrants. As is typical of a new and rapidly evolving industry, demand and
market acceptance for recently introduced services is uncertain and we cannot
predict the future growth, if any, and size of this market. The market for
EarthWeb's online services may not continue to develop or become sustainable. If
use of our online services fails to grow, our ability to establish other online
services would be materially adversely affected. In addition, we may not be
successful in our business strategy of extending our online services model to
additional segments of the IT industry.
Dependence on continued growth in the use of the Internet; dependence on
Internet infrastructure
Our future success is substantially dependent upon continued growth in the use
of the Internet. The number of users and advertisers on the Internet may not
increase and commerce over the Internet may not become more accepted and
widespread for a number of reasons, including:
. actual or perceived lack of security of information, such as credit card
numbers;
. lack of access and ease of use;
. congestion of traffic on the Internet;
. inconsistent quality of service and lack of availability of cost-effective,
high speed service;
. possible outages due to Year 2000 difficulties or other damage to the
Internet;
. excessive governmental regulation;
. uncertainty regarding intellectual property ownership; and
. lack of high-speed modems and other communications equipment.
Published reports have also indicated that growth in the use of the Internet has
resulted in users experiencing delays, transmission errors and other
difficulties. As currently configured, the Internet may not support an increase
in the number or requirements of our users. In addition, there have been
certain outages and delays on the Internet as a result of damage to the
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current infrastructure. The amount of traffic on EarthWeb's online services
could be materially affected if there are outages or delays in the future. The
use of the Internet may also decline if there are delays in the development or
adoption of modifications by third parties that are required to support
increased levels of activity on the Internet. If none of the foregoing changes
occur, or if the Internet does not become a viable commercial medium, our
business, results of operations and financial condition could be materially
adversely affected. In addition, even if those changes occur, we may be required
to spend significant amounts to adapt our online services to any new or emerging
technologies relating to the Internet.
Reliance on advertising revenues and uncertain adoption of the Internet as an
advertising medium
Our future success is highly dependent on an increase in the use of the Internet
as an advertising medium. The Internet advertising market is new and rapidly
evolving, and it cannot yet be compared with traditional advertising media to
gauge its effectiveness. As a result, demand and market acceptance for Internet
advertising solutions is uncertain. Most of our current or potential
advertising customers 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 for advertising, requires the acceptance of a new way of
conducting business, exchanging information and advertising products and
services. Such customers may find Internet advertising to be less effective for
promoting their products and services relative to traditional advertising media.
If the market for Internet advertising fails to develop or develops more slowly
than we expect, then our business, results of operations and financial condition
could be materially adversely affected.
There are currently no standards for the measurement of the effectiveness of
Internet advertising and standard measurements may need to be developed to
support and promote Internet advertising as a significant advertising medium.
Our advertising customers may challenge or refuse to accept our or third-party
measurements of advertisement delivery requests from the Web sites of Web
publishers using our solutions, and our customers may not accept any errors in
such measurements. In addition, the accuracy of database information used to
target advertisements is essential to the effectiveness of Internet advertising
that may be developed in the future. The information in our database, like any
database, may contain inaccuracies that our customers may not accept.
Substantially all of our revenues are derived from banner advertisements. If
advertisers determine that banner advertising is an ineffective or unattractive
advertising medium, we may not be able to effectively make the transition to any
other form of Internet advertising. Also, there are "filter" software programs
that limit or prevent advertising from being delivered to a user's computer.
The commercial viability of Internet advertising, and our business, results of
operations and financial condition, would be materially adversely affected by
Web users' widespread adoption of such software.
We rely primarily on our in-house advertising sales force for domestic
advertising sales. EarthWeb's success depends, in part, on hiring, retaining,
managing, training and motivating its sales force. If a significant portion of
our advertising sales force leaves, we may not be able to compete for or retain
advertisers and we may not be able to sustain or increase our current
advertising sales level. The reduction in the amount of revenue from
advertising sales could have a material adverse effect on EarthWeb's business,
results of operations and financial condition.
In addition, the competition in the sale of advertising on the Internet,
including competition from Internet portals and other high-traffic sites is
intense. This competition has resulted in a wide range of rates quoted by
different vendors for a variety of advertising services. As a result, we cannot
accurately predict the future levels of Internet advertising revenues that we
will realize. The prices for Internet advertising may also be affected by
competition among current and future suppliers of Internet navigational services
or Web sites and advertising network. This, together with competition with
other traditional media for advertising placements, could result in significant
price competition, reduced pricing for Internet advertising and reductions in
EarthWeb's advertising revenues.
Dependence on a limited number of advertisers
Our revenues to date have been derived from a limited number of customers and we
expect that a limited number of advertisers will continue to account for a
significant portion of our revenues. In particular, IBM and Microsoft accounted
for approximately 11% and 10%, respectively, of EarthWeb's revenues for the year
ended December 31, 1998 and our top 20 advertisers accounted for an aggregate of
approximately 52% of EarthWeb's revenues during 1998. Both Microsoft and IBM
advertised on EarthWeb's online services during the year ended December 31,
1997, but revenues from each accounted for less than 10% of EarthWeb's revenues
during 1997. Moreover, EarthWeb typically sells pursuant to purchase order
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agreements, which are subject to cancellation. Current advertisers may not
continue to purchase advertising from us or we may not be able to attract
additional advertisers. The loss of one or more of the advertisers that
represent a material portion of our revenues could have a material adverse
effect on our business, results of operations and financial condition. In
addition, the non-payment or late payment of amounts due by a significant
advertiser could have a material adverse effect on our business, results of
operations and financial condition.
New and highly competitive market; low barriers to entry
EarthWeb competes in the IT services market, which is relatively new and
intensely competitive. Since the advent of commercial services on the Internet,
the number of online services competing for users' attention and spending has
proliferated because of, among other reasons, the absence of substantial
barriers to entry. We expect competition to intensify as the market evolves.
EarthWeb competes with other companies that direct portions of their Web sites
towards certain segments or sub-segments of the IT professional community. Some
of EarthWeb's competitors include:
. Ziff-Davis (InternetUser)
. CNET (builder.com and activex.com)
. CMP (TechWeb)
. Planet IT
. IDG (Javaworld)
In addition, our competitors for advertising are general interest portal and
destination sites, as well as traditional media. Our competitors for sales of
products are book, software and online retailers that sell products similar to
ours. Many of our competitors have longer operating histories, larger client
bases, longer relationships with clients, greater brand or name recognition and
significantly greater financial, technical, marketing and public relations
resources than we do. As a result, they may be in a position to respond more
quickly to new or emerging technologies and changes in customer requirements and
to develop and promote their products and services more effectively. We may not
be able to compete successfully against present or future competitors.
There are relatively low barriers to entry in the IT services market. As a
result, new market entrants pose a threat to EarthWeb's business. EarthWeb does
not own any patent technology that precludes or inhibits competitors from
entering the IT services market. Existing or future competitors may develop or
offer services that are comparable or superior to ours at a lower price, which
could have a material adverse effect on our business, results of operations and
financial condition.
Variations in quarterly results of operations; seasonality
Because of our limited operating history, we cannot plan operating expenses
based solely on historical financial data. We plan our expenses based in part
upon our expectations concerning future revenue. Our expenses, to a large
extent, are fixed. Our quarterly revenues and operating results depend
substantially upon the advertising revenues we receive within that quarter,
which are difficult to forecast accurately. The cancellation or deferral of a
small number of advertising contracts could have a material adverse effect on
our business, results of operations and financial condition. We may be unable to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall, and any significant shortfall could have a material adverse effect on
our business, results of operation and financial condition.
Our quarterly results have historically been affected by variations in the
following:
. the level of usage of the Internet;
. demand for Internet advertising;
. the addition or loss of advertisers;
. the level of user traffic on EarthWeb's online services;
. economic conditions specific to the Internet industry; and
. online media and economic conditions generally.
We also believe that our revenues are subject to seasonal fluctuations because
advertisers generally place fewer advertisements during the first and third
calendar quarter of each year. As a strategic response to this, we have and may
continue to make certain pricing, service or marketing decisions. We also may
consummate business combinations to reduce
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our exposure to seasonality. Any failure of one or more of these strategies
could have a material adverse effect on our business, results of operations and
financial condition.
Need to develop and maintain brand recognition
We believe that establishing and maintaining the identity of our several brands
is critical in attracting and expanding our audience, and that the importance of
brand recognition will increase due to the growing number of Internet online
services. Promotion and enhancement of EarthWeb's brands will depend largely on
our success in continuing to provide high quality online services. If users do
not perceive EarthWeb's existing online services to be of high quality, or if we
introduce new online services or enter into new business ventures that are not
favorably received by users, the uniqueness of our brands could be diminished
and the attractiveness of our audiences to advertisers could be reduced. We may
also find it necessary to increase substantially our financial commitment to
creating and maintaining a distinct brand loyalty among users. If we (1) cannot
provide high quality online services, (2) fail to promote and maintain our
brands, or (3) incur excessive expenses in an attempt to improve our online
services or promote and maintain our brands, our business, results of operations
and financial condition could be materially adversely affected.
Dependence on Jack Hidary and William Gollan: shortage of qualified IT personnel
Our performance is substantially dependent on the performance of our senior
management and key technical personnel. In particular, our success depends
substantially on the continued efforts of Jack D. Hidary and William Gollan.
EarthWeb has employment agreements with Messrs. Hidary and Gollan. However,
these key personnel may leave EarthWeb or compete with us. In addition, we have
key person life insurance on only certain members of our senior management. The
loss of Messrs. Hidary or Gollan or one or more of EarthWeb's other key
employees could have a material adverse effect on our business, results of
operations and financial condition.
Our future success also depends upon our continuing ability to identify,
attract, hire and retain highly qualified technical, managerial, creative,
marketing, sales, product development and other specialized training, personnel.
There is currently a shortage of qualified personnel in the IT services market,
and this shortage is likely to continue. We compete intensely for qualified
personnel with other companies. If we cannot attract, motivate and retain
qualified professionals, our business and results of operations could be
materially adversely affected.
Strain on our resources due to continued growth
Our recent growth has strained our managerial, operational and financial
resources. A key part of our strategy is to grow, both by hiring more personnel
and through acquisitions, which will continue to strain our resources. In
addition, we currently intend to establish or acquire additional services that
will increase the strain on our managerial, operational and financial resources.
To manage future growth, our management must continue to improve our operational
and financial systems and expand, train, retain and manage our employee base.
Our management may not be successful in managing EarthWeb's growth effectively.
If our systems, procedures and controls are inadequate to support our
operations, our expansion would be halted and we could lose our opportunity to
gain significant market share. Any inability to manage growth effectively could
have a material adverse effect on our business, results of operations and
financial condition.
Inability to identify potential acquisitions and to integrate operations
Our strategy includes the acquisition of assets of Internet-based content
providers that enhance our current online services. Our continued growth will
depend in part on our ability to identify suitable acquisition candidates and to
acquire them on appropriate terms. In addition, the anticipated results of any
acquisitions may not be realized. Some of the risks that EarthWeb may encounter
in acquiring other companies include the following:
. expenses, delays and difficulties of integrating the acquired company into
EarthWeb's existing organization;
. potential disruption of our ongoing business;
. diversion of management's attention;
. expenses of amortizing the acquired company's intangible assets;
. impact on our financial condition due to the timing of the acquisition;
. failure to retain key personnel;
. difficulties of integrating the personnel and cultures of the acquired
company into the existing organization; and
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. potential legal liabilities.
If any of these risks materialize, they could have a material adverse effect on
our business, results of operations and financial condition.
Inability to expand and manage international operations
A key part of our strategy is to develop our online service brands in
international markets. To date, we have had only limited experience in
developing localized versions of our online services and in marketing and
operating our online services internationally. We intend to enter into
relationships with foreign business partners. If the international revenues are
not adequate to offset our investments in international activities, our
business, results of operations and financial condition could be materially and
adversely affected. We may experience difficulty in managing international
operations because of distance, as well as language and cultural differences.
We and any of our future foreign business associates may not be able to
successfully market and operate our online services in foreign markets.
Furthermore, in light of substantial anticipated competition, we believe that it
will be necessary to implement our business strategy quickly in international
markets to obtain a significant share of the market. We cannot give you any
assurance that we will be able to do so. Other risks that could affect
EarthWeb's operations include:
. fluctuations in currency exchange rates;
. conversion to the "Euro" by several members of the European Union;
. difficulties arising from staffing and managing foreign operations;
. unexpected changes in the legal and regulatory requirements of different
countries;
. potential political and economic instability; and
. overlapping or differing tax laws.
If any of these risks materialize, EarthWeb's domestic and international
businesses, results of operations and financial condition could be materially
adversely affected.
Dependence on content providers
Our success depends upon our ability to provide a wide range of in-depth
content. The markets for our online services are characterized by rapidly
changing technology, emerging industry standards and the rapidly changing needs
of our audience. We rely on a number of publishers of technical materials, our
vendors and the users of our online services for the continuing provision of up-
to-date content. No single content provider is material to EarthWeb's
operations. However, publishers of technical materials with which we currently
have a relationship, EarthWeb's current vendors or the current users of
EarthWeb's online services may not continue to provide us with a similar flow of
content or that may not continue to do so on the same terms and conditions. If
the flow of content for our online services decreases either in terms of quality
or quantity, or ceases completely, our business, results of operations and
financial condition could be materially adversely affected.
Dependence on strategic alliances
We rely on strategic alliances with Sun Microsystems, IBM, Microsoft, CMP, Ziff-
Davis, MacMillan and Netscape, among others, to attract users and paid
advertising to our online services. These relationships may not continue or we
may not be able to develop any additional third party alliances on acceptable
commercial terms. No one of these strategic alliances is individually material
to our operations. However, our inability to maintain current strategic
relationships generally or develop new strategic relationships could have a
material adverse affect on our business, results of operation and financial
condition.
Risk of capacity constraints and systems failures
The performance of our online services is critical to (1) our reputation, (2)
our ability to attract advertisers to our services and (3) achieving market
acceptance of our online services. Any system failure, including network,
software or hardware failure, that causes interruption or an increase in
response time of our online services could result in decreased usage of our
services. If such failures are sustained or repeated, they could reduce the
attractiveness of our online services to our users, vendors and advertisers. An
increase in the volume of queries conducted through our online services could
strain the capacity of the
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software or hardware we employ, which could lead to slower response time or
system failures, and, thereby, adversely affect EarthWeb's advertising revenues.
We also face technical challenges associated with higher levels of
personalization and localization of content delivered to users of our online
services.
The process of managing advertising within our large, high traffic Internet
online service is an increasingly important and complex task. EarthWeb relies on
both internal and licensed third party advertising inventory management and
analysis systems. We could incur so-called "make good" obligations to our
advertising customers if an extended failure of our advertising system results
in incorrect advertising insertions. By displacing advertising inventory, such
obligations could defer advertising revenues and thereby have a material adverse
effect on our business, results of operations and financial condition.
Our operations are dependent in part upon our ability to protect our operating
systems against (1) physical damage from acts of God, (2) power loss, (3)
telecommunications failures, (4) physical break-ins and (5) similar events. The
occurrence of any of these events could result in interruptions, delays or
cessations in service to users of our online services, which could have a
material adverse effect on our business, results of operations and financial
condition.
Online security risks
EarthWeb is potentially vulnerable to attempts by unauthorized computer users
("hackers") to penetrate our network security. If successful, such individuals
could misappropriate proprietary information or cause interruptions in our
online services. We may be required to expend significant capital and resources
to protect against the threat of such security breaches or to alleviate problems
caused by such breaches. In addition to security breaches, our inadvertent
transmission of computer viruses could expose us to risk of loss or litigation
and possible liability. Continued concerns over the security of Internet
transactions and the privacy of the users may also inhibit the growth of the
Internet generally as a means of conducting commercial transactions.
Inability to protect intellectual property
We believe that our service marks and other proprietary rights are important to
our success and competitive position. We have registered certain of our service
marks in the United States and abroad. We also limit access to and distribution
of our proprietary information, as well as proprietary information licensed from
third parties. Our management cannot ensure that these strategies will be
adequate to deter misappropriation of our proprietary information and material.
Despite our efforts to protect our intellectual property, we also face the
following risks:
. non-recognition or inadequate protection of our proprietary rights in
certain foreign countries;
. undetected misappropriation of our proprietary information or materials;
. development of similar technologies by competitors;
. unenforceablity of the non-competition agreements entered into by our
employees; and
. infringement claims, even if not meritorious.
If any of these risks materialize, we could be required to pay significant
amounts to defend our rights and our managerial resources could be diverted.
Legal standards relating to the validity, enforceability and scope of protection
of certain intellectual property rights in Internet-related industries are
uncertain and still evolving, and no assurance can be given as to the future
viability or value of any intellectual property rights of EarthWeb or other
companies within the IT industry. We generally enter into confidentiality
agreements with its employees, consultants, vendors and customers, license
agreements with third parties and generally seek to control access to and
distribution of its technology, documentation and other proprietary information.
EarthWeb pursues the registration of its service marks in the United States and
internationally, and has obtained United States service mark registrations for
EarthWeb and its related logo (the "Fang Logo Design"), has been assigned
Plugin Datamation and Datamation and has applied for the registration of certain
additional service marks, including developer.com and developer direct.
Effective trademark, copyright and trade secret protection may not be available
in every country in which EarthWeb's online services are distributed or made
available through the Internet. The steps we have taken to protect our
proprietary rights may not be adequate, and third parties could infringe or
misappropriate our copyrights, service marks, trade dress and similar
proprietary rights.
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We have licensed in the past, and expect to license in the future, certain
elements of our distinctive trademarks, service marks, trade dress, trade
secrets and similar proprietary rights to third parties. While we attempt to
ensure that the quality of our several brands is maintained by such licensees,
no assurance can be given that such licensees will not take actions that could
materially and adversely affect the value of proprietary rights or the
reputation of our online services, either of which could have a material adverse
effect on business, results of operation and financial condition. Also, we are
aware that third parties have from time to time copied significant portions of
developer.com directory listings for use in competitive Internet navigational
tools and services, and we cannot guaranty that the distinctive elements of
developer.com can be protected under copyright law.
Liability for information services
Because content made available by third parties may be downloaded by the online
services operated or facilitated by us and may be subsequently distributed to
others, there is a potential that claims will be asserted against EarthWeb for
defamation, negligence or personal injury, or based on other theories due to the
nature of such content. Such claims have been brought, and sometimes
successfully asserted, against other online service providers. In addition, we
could be exposed to liability with respect to the selection of listings that may
be accessible through our online services or through content and materials that
may be posted by users in our classifieds, bulletin board or chat room services.
By providing hypertext links to Internet sites operated by third parties, we may
be exposed to claims or liability for wrongful actions by such third parties
through such Internet sites. It is also possible that users could claim that we
were responsible for losses incurred in reliance on information provided on
EarthWeb's online services. Although we carry general liability insurance, our
insurance may not cover potential claims of this type or may not be adequate to
provide full indemnification. Any imposition of liability or legal defense
expenses that are not covered by insurance or are in excess of insurance
coverage could have a material adverse effect on our business, results of
operations and financial condition.
U.S. and foreign government regulation and legal uncertainties
Congress has recently passed legislation that regulates certain aspects of the
Internet, including on-line content, copyright infringement, user privacy,
taxation, access charges, liability for third-party activities and jurisdiction.
In addition, federal, state, local and foreign governmental organizations are
also considering legislative and regulatory proposals that would regulate the
Internet. Areas of potential regulation include libel, pricing, quality of
products and services and intellectual property ownership.
The European Union has also recently enacted several directives relating to the
Internet. In order to safeguard against the spread of certain illegal and
socially harmful materials on the Internet, the European Commission has drafted
the "Action Plan on Promoting the Safe Use of the Internet," which seeks to
promote the safe use of the Internet. Other European Commission directives
address the regulation of privacy, e-commerce, security, commercial piracy,
consumer protection and taxation of transactions completed over the Internet.
It is not known how courts will interpret both existing and new laws.
Therefore, EarthWeb's management is uncertain as to how new laws or the
application of existing laws will affect our business. Increased regulation of
the Internet may reduce the use of the Internet, which could decrease the demand
for our services, increase our cost of doing business or otherwise have a
material adverse effect on our business, results of operations and financial
condition.
Concentration of stock ownership
As of March 1, 1999, the stockholders set forth below (and their affiliates)
collectively owned approximately 77% of the outstanding shares of common stock
and owned individually the percentage set forth opposite their respective names:
Directors 27%
Executive officers 24%
Warburg, Pincus Ventures, L.P. 26%
If the stockholders listed above choose to act or vote in concert, they will
have the power to influence the election of EarthWeb's directors, the
appointment of new management and the approval of any other action requiring the
approval of EarthWeb's stockholders, including any amendments to our Amended and
Restated Certificate of Incorporation and mergers or sales of all of its assets.
In addition, without the consent of these stockholders, EarthWeb could be
prevented from
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entering into certain potentially beneficial transactions.
Conversely, third parties could be discouraged from making a tender offer or bid
to acquire EarthWeb at a price per share that is above the price at which the
common stock trades on Nasdaq.
Anti-Takeover provisions of the Delaware General Corporation Law and EarthWeb's
amended and restated certificate of incorporation
Certain provisions of the Delaware General Corporation Law (the "DGCL") and
EarthWeb's Amended and Restated Certificate of Incorporation and Amended and
Restated By-Laws may discourage or prevent a third party from acquiring control
of EarthWeb. Such provisions may discourage bids for common stock at a premium
over the market price and may adversely affect the market price and the voting
and other rights of the holders of common stock. Our Amended and Restated By-
laws include certain restrictions on who may call a special meeting of
stockholders, and either a majority of the board of directors or the holders of
66.66% of the outstanding capital stock of EarthWeb, which are entitled to vote
in the elections of the board of directors, must approve all amendments to
EarthWeb's Amended and Restated By-Laws.
EarthWeb's Amended and Restated Certificate of Incorporation authorizes the
board of directors to issue up to 2,000,000 shares of "blank check" preferred
stock. The board of directors will have the authority without action by
EarthWeb's stockholders to fix the rights, privileges and preferences of, and to
issue shares of, such preferred stock. The issuance of preferred stock could
make it more difficult for a third party to acquire EarthWeb. In addition,
EarthWeb's Amended and Restated Certificate of Incorporation provides that the
board of directors will be divided into three classes with the directors serving
staggered three-year terms. Only the holders of 66.66% of the outstanding
capital stock of EarthWeb that are entitled to vote in the elections of the
board of directors can amend this provision. This classification could
discourage a third party from attempting to gain control of EarthWeb.
Volatility of stock prices for Internet-related companies
EarthWeb's common stock began trading on the Nasdaq on November 11, 1998 and its
market price has been highly volatile. In addition, the overall market for
internet-related companies has been volatile. This volatility may continue.
Factors that may materially adversely affect the market price of our common
stock include:
. variations in our financial results and earnings;
. failure to meet or exceed estimates by securities analysts;
. fluctuations in the stock prices of EarthWeb's competitors;
. any loss of key management;
. adverse regulatory actions or decisions;
. announcements of extraordinary events such as litigation or acquisitions or
changes in pricing policies by EarthWeb or its competitors;
. changes in the market for EarthWeb's online services; and
. general economic, political and market conditions.
Reliance on independent market data
EarthWeb has included information in this Form 10-K relating to (1) the number
of Internet users, (2) the size of Internet commerce, (3) the worldwide market
for information technology products and services, (4) the size of business-to-
business Internet advertising and (5) the size of the consumer related Internet
advertising. This information is based on studies prepared by the Internet
market research firms International Data Corporation, Forrester Research and
Jupiter Communications. These studies include projections that are based on a
number of assumptions including:
. no catastrophic failure of the Internet;
. the worldwide economy will resume its expansion;
. Internet security will be adequately addressed;
. the number of people online and the total number of hours spent online will
increase significantly over the next five years;
. the use of the Internet will increase significantly in major foreign
countries and some of such countries will adopt the U.S. style of
advertising on the Internet;
. media advertising will continue to grow in all categories and online
advertising will comprise an increased percentage of all media advertising;
17
<PAGE>
. the value of online advertising dollars spent per online user hour will
increase;
. non-technology industry Internet advertising will increase;
. the download speed of content will increase dramatically; and
. a proliferation of Internet access devices other than the PC (for example,
PC/television sets).
If any one or more of these assumptions turns out to be incorrect, the
projections based on such assumptions may be materially different from actual
results. Internet-related markets and products may not grow over the next three
to four years at the rates projected by International Data Corporation,
Forrester Research or Jupiter Communications, or at all, and if those markets or
products do not grow at such projected rates, there could be a material adverse
effect on EarthWeb's business, results of operations and financial condition.
ITEM 2. PROPERTIES
EarthWeb's headquarters are currently located in a leased facility in New York
City consisting of a total of approximately 33,500 square feet of office space,
the majority of which is under a ten year lease. EarthWeb believes that its
existing facilities are adequate to meet current requirements, and that suitable
additional or substitute space will be available as needed.
ITEM 3. Legal Proceedings
EarthWeb is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 9, 1998, stockholders holding a majority of the shares of each class
of EarthWeb's outstanding voting stock executed two written consents in lieu of
special meeting, in which such stockholders (1) approved an Amendment to
EarthWeb's Certificate of Incorporation to effect a .65 -for-one reverse stock
split and to create a staggered Board of Directors, (2) approved the adoption of
EarthWeb's 1998 Stock Incentive Plan, (3) approved the adoption of EarthWeb's
1998 Employee Stock Purchase Plan, and (4) approved an Amended and Restated
Certificate of Incorporation to consolidate certain prior amendments to the
Certificate of Incorporation into one document.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to the
section entitled "Shareholder Information" on page 31 of the Company's 1998
Annual Report to Stockholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to the
section entitled "Selected Financial Data" on page 10 of the Company's 1998
Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this Item is incorporated by reference to the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on pages 11-15 of the Company's 1998 Annual Report
to Stockholders.
18
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISk
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
section entitled "Management" of the Company's Proxy Statement for its 1999
Annual Meeting of Stockholders, which will be filed with the Securities and
Exchange Commission within 120 days after December 31, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
section entitled "Compensation of Executive Officers" of the Company's Proxy
Statement for its 1999 Annual Meeting of Stockholders, which will be filed with
the Securities and Exchange Commission within 120 days after December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
section entitled "Principal Security Holders" of the Company's Proxy Statement
for its 1999 Annual Meeting of Stockholders, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
section entitled "Certain Relationships and Related Transactions" of the
Company's Proxy Statement for its 1999 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a) Documents filed as part of this Report:
--------------------------------------
The following financial statements and the Report of the Independent Accountants
are incorporated herein by reference to the Registrant's 1998 Annual Report to
Stockholders pursuant to Item 8:
19
<PAGE>
<TABLE>
<CAPTION>
Page in Annual Report
------------------------
<S> <C>
Balance Sheets at December 31, 1998 and 1997............................... 16
Statement of Operations for the years ended December 31, 1998, 1997 and
1996...................................................................... 17
Statements of Stockholders' Equity for the years ended December 31, 1998,
1997 and 1996............................................................. 18
Statements of Cash Flows for the years ended December 31, 1998, 1997 and
1996...................................................................... 19
Notes to Financial Statements.............................................. 20-28
Report of Independent Accountants.......................................... 29
</TABLE>
All other financial statement schedules are omitted because they are not
required, are inapplicable or the information has been included elsewhere in the
financial statements or notes thereto.
b) Reports on Form 8-K.
-------------------
No Reports on Form 8-K were filed during the fourth quarter of 1998. A Report
on Form 8-K was filed on February 16, 1999.
c) Exhibits.
--------
<TABLE>
<CAPTION>
Exhibit No. Description
- --------------------- -----------
<C> <S>
*2.1 Agreement and Plan of Merger among Registrant, EW Career Solutions, Inc., D&L Online, Inc., Lloyd
Linn, and Diane Rickert; incorporated by reference to Exhibit 2.1 to the Registrant's Current Report
on Form 8-K dated February 2, 1999.
3.1 Form of Amended and Restated Certificate of Incorporation; incorporated by reference to Exhibit 3.1
to Registrant's Registration Statement on Form S-1 (SEC File No. 333-60837).
3.2 Form of Amended and Restated By-laws; incorporated by reference to Exhibit 3.2 to Registrant's
Registration Statement on Form S-1 (SEC File No. 333-60837).
4.1 Amended and Restated Shareholders Agreement dated as of June 24, 1997 among the Registrant, EarthWeb
LLC, Global Network Partners LLC ("GNP"), Warburg, Pincus Ventures, L.P. ("Warburg"), Jack D. Hidary,
Murray Hidary and Nova Spivack; incorporated by reference to Exhibit 4.1 to Registrant's
Registration Statement on Form S-1 (SEC File No. 333-60837).
4.2 Specimen Common Stock Certificate of Registrant; incorporated by reference to Exhibit 4.2 to
Registrant's Registration Statement on Form S-1 (SEC File No. 333-60837).
4.3 Registration Rights Agreement dated as of October 25, 1996 by and between the Registrant, Warburg,
EarthWeb LLC and GNP; incorporated by reference to Exhibit 4.3 to Registrant's Registration
Statement on Form S-1 (SEC File No. 333-60837).
4.4 Registration Rights Agreement between Registrant, Lloyd Linn and Diane Rickert; incorporated by
reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated February 2, 1999.
9 Form of Voting Trust Agreement, as amended; incorporated by reference to Exhibit 9 to Registrant's
Registration Statement on Form S-1 (SEC File No. 333-60837).
10.1 1996 Amended and Restated Stock Plan, as amended; incorporated by reference to Exhibit 10.1 to
Registrant's Registration Statement on Form S-1 (SEC File No. 333-60837).
10.2 Employment Agreement dated January 1, 1995 between GNP (formerly EarthWeb Ltd.) and Jack D. Hidary;
incorporated by reference to Exhibit 10.2 to Registrant's Registration Statement on Form S-1 (SEC
File No. 333-60837).
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- --------------------- -----------
<S> <C>
10.3 Employment Agreement dated January 1, 1995 between GNP (formerly EarthWeb Ltd.) and Murray Hidary;
incorporated by reference to Exhibit 10.3 to Registrant's Registration Statement on Form S-1 (SEC
File No. 333-60837).
10.4 Employment Agreement dated November 4, 1996 between the Registrant and Irene Math; incorporated by
reference to Exhibit 10.4 to Registrant's Registration Statement on Form S-1 (SEC File No.
333-60837).
10.5 Employment Agreement dated November 3, 1997 between the Registrant and William Gollan; incorporated
by reference to Exhibit 10.5 to Registrant's Registration Statement on Form S-1 (SEC File No.
333-60837).
10.6 Employment Agreement dated January 12, 1998 between the Registrant and John Kleine.
10.7 Consulting Agreement dated as of August 1, 1998 between the Registrant and Nova Spivack;
incorporated by reference to Exhibit 10.6 to Registrant's Registration Statement on Form S-1 (SEC
File No. 333-60837).
10.8 Intercompany Services Agreement dated October 25, 1996 among the Registrant, EarthWeb LLC, GNP
(formerly EarthWeb Ltd.), Jack D. Hidary, Murray Hidary and Nova Spivack, as amended; incorporated
by reference to Exhibit 10.7 to Registrant's Registration Statement on Form S-1 (SEC File No.
333-60837).
10.9 Lease Agreement dated April 28, 1995 between 3 Park Avenue Co. and MJN Enterprises, Inc., as
amended; incorporated by reference to Exhibit 10.8 to Registrant's Registration Statement on Form
S-1 (SEC File No. 333-60837).
10.10 Form of 1998 Stock Incentive Plan; incorporated by reference to Exhibit 10.9 to Registrant's
Registration Statement on Form S-1 (SEC File No. 333-60837).
10.11 Form of 1998 Employee Stock Purchase Plan; incorporated by reference to Exhibit 10.10 to
Registrant's Registration Statement on Form S-1 (SEC File No. 333-60837).
10.12 Employment Agreement between Registrant and Lloyd Linn; incorporated by reference to Exhibit 10.1 to
the Registrant's Current Report on Form 8-K dated February 2, 1999.
13.1 1998 Annual Report to Stockholders, portions of which are incorporated by reference herein.
21.1 Subsidiary of Registrant.
23.1 Consent of Independent Accountants.
27 Financial Data Schedule.
</TABLE>
* Confidential treatment has been requested with respect to certain
portions of this Exhibit. Omitted portions have been filed separately
with the Commission.
21
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on March 19, 1999.
EARTHWEB INC.
By: /s/ Jack D. Hidary
--------------------------------------
Jack D. Hidary
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities on March 19, 1999.
<TABLE>
<CAPTION>
Name and Signature Title
- ----------------------------------------------------- ---------------------------------------
<S> <C>
/s/ Jack D. Hidary President, Chief Executive
- ----------------------------------------------------- Officer and Director
Jack D. Hidary
/s/ Murray Hidary Executive Vice President,
- ----------------------------------------------------- Secretary, Treasurer and
Murray Hidary Director
/s/ Nova Spivack Director
- -----------------------------------------------------
Nova Spivack
/s/ Henry Kressel Director
- -----------------------------------------------------
Henry Kressel
/s/ Cary Davis Director
- -----------------------------------------------------
Carry Davis
/s/ Irene Math Vice President, Finance
- ----------------------------------------------------- (Principal Financial and
Irene Math Accounting Officer)
</TABLE>
<PAGE>
Exhibit Index
-------------
Exhibit Description
- ------- -----------
10.6 Employment Agreement dated January 12, 1998 between the
Registrant and John Kleine
13.1 1998 Annual Report to Stockholders
21.1 Subsidiary of Registrant
23.1 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
<PAGE>
Exhibit 10.6
Employment Agreement
--------------------
THIS AGREEMENT, dated January 12, 1998 (the "Agreement"), is between
EarthWeb Inc., a Delaware corporation ("EarthWeb"), and John Kleine (the
"Employee").
In consideration of Employee's employment with EarthWeb, Employee hereby
agrees to be bound by and comply with the following terms and conditions of
employment:
Section 1. At-Will Employment. Employee acknowledges and agrees that
------------------
his/her employment status is that of an employee-at-will and that Employee's
employment may be terminated by EarthWeb or Employee at any time with or without
cause.
Section 2. Compensation. In consideration of the services to be
------------
rendered hereunder, Employee shall be paid in accordance with the offer letter.
Section 3. Employee Inventions and Ideas.
-----------------------------
(a) Employee will disclose to EarthWeb all Inventions (as herein defined).
"Inventions" shall mean all ideas, potential marketing and sales relationships,
inventions, copyrightable expression, research, plans for products or services,
business development strategies, marketing plans, computer software (including,
without limitation, source code), computer program, original works of
authorship, characters, know-how, trade secrets, information, data,
developments, discoveries, improvements, modifications, technology, algorithms
and designs, whether or not subject to patent or copyright protection, made,
conceived, expressed, developed, or actually or constructively reduced to
practice by Employee solely or jointly with others during the term of Employee's
employment with EarthWeb, which refer to, are suggested by, or result from any
work which Employee may do during his/her employment, or from any information
obtained from EarthWeb or any affiliate of EarthWeb, such that said information
is obtained in the performance of duties related to employment at EarthWeb.
(b) The Inventions shall be the exclusive property of EarthWeb, and
Employee acknowledges that all of said Inventions shall be considered as "work
made for hire" belonging to EarthWeb. To the extent that any such Inventions,
under applicable law, may not be considered work made for hire by Employee for
EarthWeb, Employee agrees to assign and, upon its creation, automatically
assigns to EarthWeb the ownership of such material, including any copyright or
other intellectual property rights in such materials, without the necessity of
any further consideration. EarthWeb shall have the exclusive right to use the
Inventions, whether original or derivative, for all purposes without additional
compensation to Employee. At EarthWeb's expense, Employee will assist EarthWeb
in every proper way to protect the Inventions throughout the world, including,
without limitation, executing in favor of EarthWeb, or any affiliate of
EarthWeb, patent, copyright, and other applications and assignments relating to
the Inventions.
Section 4. Proprietary Information.
-----------------------
(a) Employee will not disclose or use, at any time either during or after
the term of employment, except at the request of EarthWeb or an affiliate of
EarthWeb, any Confidential Information (as herein defined). "Confidential
Information" shall mean all EarthWeb proprietary information, technical data,
trade secrets, and know-how, including, without limitation, research, product
plans, customer lists, markets, software, developments, inventions, discoveries,
processes, formulas, algorithms, technology, designs, drawings, marketing and
other plans, business strategies and financial data and information, including
but not limited to Inventions, whether or not marked as "Confidential."
"Confidential Information" shall also mean information received by EarthWeb from
customers of EarthWeb or other third parties subject to a duty to keep
confidential.
(b) Employee hereby acknowledges and agrees that all personal property,
including, without
<PAGE>
limitation, all books, manuals, records, reports, notes, contracts, lists,
blueprints, and other documents, or materials, or copies thereof, Confidential
Information, and equipment furnished to or prepared by Employee in the course of
or incident to his employment, including, without limitation, records and any
other materials pertaining to Inventions, belong to EartEarthWeb and shall be
promptly returned to EarthWeb upon termination of employment. Following
termination, the Employee will not retain any written or other tangible or
electronic material containing any Confidential Information or information
pertaining to any Invention.
Section 5. Limited Agreement Not to Compete.
--------------------------------
(a) While employed by EarthWeb, Employee shall not, directly or indirectly,
as an employee, employer, consultant, agent, principal, partner, manager,
stockholder, officer, director, or in any other individual or representative
capacity, engage or participate in any business that is competitive with the
business of EarthWeb. Notwithstanding the foregoing, Employee may own less than
two percent (2%) of any class of stock or security of any corporation which
competes with EarthWeb listed on a national securities exchange.
(b) While employed by EarthWeb and for a period of twelve (12) months after
the termination of Employee's employment with EarthWeb, Employee shall not,
directly or indirectly, solicit for employment or employ any person who (i) at
the time of such solicitation or offer is currently employed by EarthWeb or (ii)
has been employed by EarthWeb within three months of such solicitation or offer.
(c) For a period of twelve (12) months after the termination of Employee's
employment with EarthWeb, Employee shall not, directly or indirectly:
(1) work as an employee, employer, consultant, agent, principal, partner,
manager, officer, director, or in any other individual or representative
capacity for any person or entity that directly competes with EarthWeb. For
the purpose of this section, the term "directly competing" is defined as a
person or entity or division of an entity that is
(i) an on-line service for Information Technology Professionals whose
primary business is to provide Information Technology Professionals
with a directory of third party technology, software, and/or developer
resources; and/or an online reference library, and/or:
(ii) an on-line store, the primary purpose of which is to sell or
distribute third party software or products used for Internet site or
software development; or
(2) take away exclusively from EarthWeb for Employee (or for any other
person or entity) or any person or entity who or which was an advertiser of
EarthWeb during the Employee's employment at EarthWeb, or
Section 6. EarthWeb Resources. Employee may not use any EarthWeb
------------------
equipment for personal purposes without written permission from EarthWeb.
Employee may not give access to EarthWeb's offices or files to any person not in
the employ of EarthWeb without written permission of EarthWeb.
Section 7. Injunctive Relief. Employee agrees that the remedy at law
-----------------
for any breach of the provisions of Section 3, Section 4 or Section 5 of this
Agreement shall be inadequate and EarthWeb shall be entitled to injunctive
relief in addition to any other remedy at law which EarthWeEarthWeb may have.
Section 8. Severability. In the event any of the provisions of this
------------
Agreement shall be held by a court, arbitrator or other tribunal of competent
jurisdiction to be unenforceable or invalid, that part will be amended to
achieve as nearly as possible the same effect and the other provisions of this
Agreement shall remain in full force and effect.
Section 9. Survival. In the event of termination of this Agreement, the
--------
provisions of Sections 1, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13 and 14 shall
survive.
Section 10. Representations and Warranties. Employee represents and
------------------------------
warrants that Employee is not under any obligations to any third party which
could interfere with the Employee's performance under this Agreement, and that
Employee's performance of his/her obligations to EarthWeb during the term of
his/her employment with EarthWeb will not breach any agreement by which Employee
is bound not to disclose any proprietary information including, without
limitation,
<PAGE>
that of former employers.
Section 11. Governing Law. The validity, interpretation,
-------------
enforceability, and performance of this Agreement shall be governed by and
construed in accordance with the laws of the State of New York, exclusive of its
choice of law rules.
Section 12. Dispute Resolution. Except for disputes relating to or
------------------
arising out of Sections 3, 4, 5 and/or 7 of this Agreement, any dispute relating
to or arising out of Employee's employment at EarthWeb, which cannot be resolved
by negotiation, shall be settled by binding arbitration in accordance with the
AAA Employment Dispute Arbitration Rules and Procedures, as amended by this
Agreement. Employment disputes include, but are not limited to, all claims,
demands or actions under Title VII of the Civil Rights Act of 1964, Civil Rights
Act or 1866, Civil Rights Act of 1991 and all amendments to the aforementioned,
and any other federal, state, or local statute or regulation or common law
regarding employment discrimination in employment or the termination of
employment. The costs of arbitration, including the fees and expenses of the
arbitrator, shall be shared equally by the parties. Each party shall bear the
cost of preparing and presenting its case. The arbitration shall take place in
the Borough of Manhattan, in the City of New York, in the State of New York.
The arbitration shall be conducted in strict confidence. In no event shall the
arbitrator have the authority to make any award that provides for punitive or
exemplary damages or attorneys' fees. The arbitrator's decision shall be based
upon the substantive law of the State of New York. The arbitrator's decision
shall follow the plain meaning of the relevant documents, and shall be final and
binding. The award may be confirmed and enforced in any court of competent
jurisdiction. The parties hereby agree that any federal or state court sitting
in New York City in the State of New York is a court of competent jurisdiction.
This paragraph does not limit EarthWeb's right to seek monetary damages and
injunctive relief in any state or federal court sitting in the New York City in
the State of New York (jurisdictional, venue and inconvenient forum objections
to which are hereby waived by both parties) in the event that a dispute relates
to or arises under Sections 3, 4 or 5 of this Agreement.
Section 13. Modification. EarthWeb reserves the right to modify the
------------
terms of this Agreement on a quarterly basis, subject to notice and
acknowledgment by the Employee of such modifications. Notice of any such
modifications shall be presented to the Employee for acknowledgment and shall be
attached as Schedule A.
Section 14. General. This Agreement supersedes and replaces any
-------
existing agreement entered into by Employee and EarthWeb relating generally to
the same subject matter, and may be modified only in a writing signed by
EarthWeb. Failure to enforce any provision of the Agreement shall not
constitute a waiver of any term herein. This Agreement contains the entire
agreement between the parties with respect to the subject matter herein.
AGREED TO BY:
EARTHWEB INC. EMPLOYEE
By: /s/ Juliet Clapp By: /s/ John Kleine
Title: Director, Human Resources Title: Vice President, Systems and
Operations
<PAGE>
EVERY UNIVERSE HAS A CENTER. IN THE WORLD OF
INFORMATION TECHNOLOGY, IT'S EARTHWEB.
THE FIRST BUSINESS-TO-BUSINESS INTERNET COMPANY TO ENTER THE PUBLIC MARKET.
FOR EARTHWEB, 1998 WAS A YEAR OF TREMENDOUS SUCCESS. WE SOLIDIFIED OUR POSITION
AS A LEADING PROVIDER OF ONLINE SERVICES FOR THE IT INDUSTRY AND BECAME THE
FIRST PUBLIC BUSINESS-TO-BUSINESS INTERNET COMPANY.
WE SIGNIFICANTLY WIDENED OUR BASE OF ADVERTISERS, INCREASED OUR AD SALES FORCE
AND LAUNCHED OUR FIRST PAID SUBSCRIPTION SERVICE. WE LAUNCHED AN ONLINE
TECHNICAL JOB MARKETPLACE AND AN ONLINE TECHNICAL SOLUTIONS STORE, ACQUIRED FIVE
TARGETED ONLINE CONTENT SERVICES AND SIGNIFICANTLY EXPANDED OUR OFFERINGS TO
ATTRACT QUARTERLY UNIQUE VISITS OF OVER 8.4 MILLION.
IN 1999, THESE ACCOMPLISHMENTS WILL PROPEL US FORWARD AS A COMPANY WITH THE
VISION AND RESOURCES TO SUSTAIN OUR DRIVE FOR GROWTH.
<PAGE>
IN 1998 THE NUMBER OF IT PROFESSIONALS VISITING EARTHWEB'S ONLINE SERVICES IN
SEARCH OF MISSION-CRITICAL WORKPLACE SOLUTIONS CONTINUED TO GROW. COMPLEMENTING
THIS GROWTH WAS AN INCREASE IN PRODUCT AND SERVICE VENDORS SEEKING TO DELIVER
SOLUTIONS TO THIS TARGETED AUDIENCE OF TECHNICAL PROFESSIONALS. AS A RESULT,
EARTHWEB SOLIDIFIED ITS POSITION AS A CENTRAL BUSINESS INTERMEDIARY FOR THESE
TWO GROUPS AND SAW EXTENSIVE INCREASES IN IMPRESSIONS, ADVERTISERS AND REVENUES.
EarthWeb increased Q4 1998 revenues 310% over revenues for the same period in
1997. EarthWeb's 1998 revenues of $3,349,000 represent an increase of 195% over
1997 revenues of $1,135,000. The majority of these revenues resulted from
advertising sales with additional revenues coming from EarthWeb's e-commerce
software and book sales as well as from subscriptions for its new service,
ITKnowledge.
As a powerful testament to our skilled sales team, EarthWeb brought in 154 new
unique advertisers for a total of 168 in 1998 representing a significant
increase from 23 in 1997. The Company's roster of advertisers now includes IBM,
Lucent Technologies, Sun Microsystems, Symantec, Microsoft, Fujitsu, and many
other product and service companies looking to target IT professionals seeking
mission-critical workplace solutions.
New content, new services and an end-of-year marketing campaign all contributed
to a significant increase in EarthWeb's site-wide page views and unique visits
in 1998. The final quarter of 1998 saw 50.4 million page views across EarthWeb's
online services, a 515% increase over those in the fourth quarter of 1997.
We also experienced a surge in unique visits, which grew from 4.3 million in the
second quarter of 1998 to 8.4 million in the fourth quarter of the same year. As
we continue to launch content targeted at additional segments of the IT industry
and expand our existing offerings, we anticipate continued traffic growth in
1999.
2
<PAGE>
DEAR SHAREHOLDERS,
I'm delighted to report a tremendous year for EarthWeb and to welcome you to our
company's first annual report. 1998 has been a year of continued progress and
success for EarthWeb. As a leading provider of online services for the
information technology (IT) industry, we made history this year as the first
business-to-business Internet company to enter the public market. In an industry
where businesses spent over $800 billion in 1998 on IT products and services and
are forecast to spend over $1 trillion annually,(1) we attracted a significant
aggregation of computer professionals responsible for those purchases. We end
the year with quarterly unique visits of 8.4 million, more than 500,000 pages of
online content, significantly increased revenues and experienced sales and
senior management teams. It's been a remarkable year and we look forward to
leveraging our leadership position.
> ACHIEVEMENTS
EarthWeb significantly increased the number of visits to its online services in
1998. Page views also significantly increased on EarthWeb's online services from
8.2 million in the fourth quarter of 1997 to over 50.4 million in the same
period of 1998. The increase in visitors and impressions prompted our decision
to bring advertising sales efforts in-house, and we did so quite successfully,
attracting 20 seasoned sales professionals to EarthWeb.
> CAPITALIZING ON THE BUSINESS-TO-BUSINESS IT ADVERTISING MARKET
Advertisers continued to turn to EarthWeb in 1998 to reach our targeted audience
of IT professionals seeking mission-critical solutions for technical challenges
that they face in the workplace. All told, 154 new unique advertisers joined
EarthWeb's 1998 advertising roster to target EarthWeb's exclusive audience of
computer professionals. EarthWeb is able to command significantly higher ad
rates than consumer online services because of the high purchasing power of
EarthWeb's targeted professional audience. Advertising sales accounted for the
largest part of EarthWeb's revenues in 1998, which rose to $3,349,000, a 195%
increase over 1997 revenues of $1,135,000.
> SUBSCRIPTIONS LAUNCH A NEW REVENUE STREAM
In 1998 EarthWeb introduced its first subscription-based online service,
ITKnowledge (www.itknowledge.com). Through strategic partnerships with seven
leading technology publishers, EarthWeb gained the rights to post the full text
of over 3,000 technical books online. We introduced ITKnowledge to the IT
community in the final quarter of 1998 with our first extensive marketing
campaign.
> EXPANDING TO OVER 500,000 PAGES OF CONTENT
EarthWeb significantly expanded its rich technology content offerings in 1998
through acquisitions and the launch of several sites, features and content areas
that address new sectors of technology professionals. EarthWeb's acquisition of
Datamation (http://www.datamation.com), extended our online services into the
enterprise market with proprietary content geared primarily towards CIOs and
other IT managers. EarthWeb also expanded the content of its flagship online
service, developer.com, and launched Y2Kinfo.com (http://www.y2kinfo.com), a
site dedicated to Year 2000 tools, information and services.
> STRATEGIC PARTNERSHIPS AND ACQUISITIONS FOR ENHANCED OFFERINGS
A strategic partnership with Internet superstore Beyond.com enabled EarthWeb to
launch EarthWeb Direct, an online software store specializing in IT products.
EarthWeb entered into additional agreements in 1998 to offer technology
recruitment and classified sections for the IT industry. In 1999, EarthWeb
continued its acquisition strategy through its acquisition of Dice.com, a
leading online IT professional recruitment board.
> SENIOR MANAGEMENT TO LEAD US INTO 1999
EarthWeb rounded out 1998 by putting an experienced senior management team in
place, hires that included: Kevin McPherson, who joined EarthWeb as the Vice
President of Worldwide Advertising Sales from his post as Vice
President/Publisher of BYTE Magazine; Vice President of Worldwide Marketing,
Scott Anderson, who was formerly Partner, Worldwide Management Supervisor at
Ogilvy & Mather; Vice President of Content, Mark Schlack, who comes to EarthWeb
from an Editor-in-Chief position with BYTE Magazine and Vice President of
Technology and Operations, John Kleine who joined EarthWeb from True North
Communications.
In the coming years the continued introduction of new technologies will heighten
the IT professional's need for independent technical information and expert
guidance, the technical recruiter's and IT manager's need for qualified
technical professionals and the IT vendor's need for distribution channels for
products and messages. As EarthWeb enters 1999, we do so with the staff,
resources and vision to serve those pressing needs and solidify our position as
the central business-to-business destination for the IT industry. We look
forward to another year of successes and thank you for your support as we work
to achieve them.
Sincerely,
Jack D. Hidary
President and Chief Executive Officer
3
<PAGE>
EARTHWEB'S MISSION IS TO BE THE BUSINESS-TO-BUSINESS HUB OF THE
TRILLION-DOLLAR IT MARKETPLACE.
TECHNOLOGY HAS BECOME AN ESSENTIAL TOOL FOR EXECUTING BUSINESS STRATEGY AND
MAINTAINING COMPETITIVENESS. ORGANIZATIONS ARE INCREASINGLY ADOPTING
TECHNOLOGIES SUCH AS CLIENT/SERVER ARCHITECTURES, DATA WAREHOUSING,
INTERNET/INTRANET APPLICATIONS AND OBJECT-ORIENTED SOFTWARE DEVELOPMENT. THESE
AND MANY OTHER TECHNOLOGIES HAVE CONTINUED TO FUEL THE GROWTH IN THE WORLDWIDE
MARKET FOR IT PRODUCTS AND SERVICES, WHICH IS FORECASTED TO GROW FROM $834
BILLION IN 1998 TO $1.1 TRILLION IN 2001, ACCORDING TO IDC.
"Time-to-market is a critical factor in IT success. I require independent,
unbiased research and analysis from experts in this fast-moving sector, and I
need it now. A central IT hub eases and speeds the technical due-diligence
phase, allowing me to quickly move on to implementation."
IT EXECUTIVE, REUTERS NEW MEDIA
4
<PAGE>
EARTHWEB MAINTAINS MARKET LEADERSHIP BY SERVING AS THE CENTRAL DESTINATION.
EARTHWEB LEVERAGES THE INTERNET TO CONNECT BUYERS TO SELLERS,
EMPLOYEES TO EMPLOYERS, VENDORS TO CUSTOMERS AND PROFESSIONALS
TO A WEALTH OF FOCUSED TECHNICAL INTELLIGENCE.
THROUGH ITS TARGETED ONLINE SERVICES, EARTHWEB PROVIDES ONLINE JOB BOARDS,
ONLINE SOFTWARE STORES, AND EXTENSIVE DATABASES OF REFERENCE MATERIAL AND OTHER
TECHNICAL CONTENT TO SERVE THE MISSION-CRITICAL NEEDS OF THE IT INDUSTRY.
"I talk to many people who ask for views on the industry and its direction.
Datamation helps keep me in touch with what's happening." SENIOR SYSTEMS
ENGINEER, COMPAQ
5
<PAGE>
FOR IT MANAGERS, DEVELOPERS, TECHNICAL RECRUITERS AND IT VENDORS.
Systems Engineers and Developers
Systems engineers, developers and other IT professionals require a wide array of
resources to speed through the learning curve associated with application
creation and deployment. Earthweb provides the following for these
professionals:
> ONLINE TRAINING
> CODE AND TECHNICAL INFORMATION
> A MARKETPLACE FOR IT PRODUCTS AND SERVICES
> CAREER ENHANCEMENT AND JOB LOCATION SERVICES
> ACCESS TO TECHNICAL EXPERTS AND COMMUNITY
IT Managers
IT managers cite extensive workplace challenges relating to recruitment,
training and project deployment. To solve these and the other mission-critical
needs that they face every day, Earthweb provides the following for these
professionals:
> PROJECT PLANNING, MANAGEMENT AND IMPLEMENTATION RESOURCES
> CURRENT INDUSTRY AND TECHNOLOGY TREND DATA
> INFORMATION, TRAINING, AND TOOLS FOR DEVELOPMENT TEAMS
> PRACTICAL CASE STUDIES OF IT PROJECTS
> RECRUITMENT SERVICES FOR TECHNICAL PROFESSIONALS
IT Product and Service Vendors
IT vendors strive to deliver their message at the moment their audience is
seeking technical solutions. Our services enable this growing marketplace to:
> ADVERTISE A PRODUCT OR SERVICE
> CONDUCT ONE-TO-ONE MARKET RESEARCH WITH A TECHNICAL AUDIENCE
> SELL PRODUCTS THROUGH EARTHWEB DIRECT
> DISTRIBUTE PRODUCTS THROUGH TECHNOLOGY DIRECTORIES
> RESEARCH PRODUCTS AND TECHNOLOGIES
> RECRUIT SKILLED TECHNICAL PROFESSIONALS
Technical Recruiters
With recruitment of skilled technical professionals topping the list of global
IT challenges, recruiters have increasingly directed their attention and
resources online to locate qualified candidates. Our services enable technical
recruiters to:
> LOCATE SKILLED TECHNICAL PROFESSIONALS
> LOCATE COMPANIES WITH RECRUITMENT NEEDS
> KEEP UP WITH TECHNOLOGY TRENDS
6
<PAGE>
EARTHWEB CONTINUED ITS EXPANSION OF INTEGRATED CONTENT, COMMUNITY AND COMMERCE.
Business-to-Business Services
IT managers cite the recruitment of qualified technical professionals as one of
their most challenging workplace issues. Responding to this need, EarthWeb
entered into an agreement with a leading recruitment company in 1998 to create a
technical online job marketplace. This comprehensive service enables IT
recruiters and managers to locate qualified individuals while providing IT
professionals with the tools to advance their careers.
EarthWeb bolstered its online recruitment offerings in 1999 by acquiring
Dice.com, a leading online job posting service used by thousands of IT
professionals.
Online Commerce Alliances
As the number of new technologies continues to grow daily, IT professionals
require fast access to development tools and other products to accelerate the
development and integration process. In 1998 EarthWeb entered into an agreement
with software superstore Beyond.com. This strategic partnership resulted in the
launch of EarthWeb Direct, the most comprehensive software store featuring tools
for IT professionals.
EarthWeb also established a co-branded online training store in partnership with
Computer Literacy.
Content Alliances
Perhaps the most significant of EarthWeb's many successful endeavors in 1998
were its strategic partnerships with leading technical publishers. Responding
once again to the expressed need of IT professionals for reference and training
material, EarthWeb obtained rights to display on its services over 3,000 of the
leading technical books for its subscription-based online library of IT
information, ITKnowledge. A premier online reference site for IT professionals,
ITKnowledge contains the full text of books from publishers including Macmillan
Computer Publishing, IDG Books Worldwide, The Coriolis Group, Wordware
Publishing, CRC Press, 29th Street Press and ASP Publishing.
EarthWeb also continues its strategic partnerships with CMP and Ziff Davis to
provide its audience with up-to-date technology news.
7
<PAGE>
COMMERCE OFFERINGS THROUGH STRATEGIC PARTNERSHIPS WITH
COMPLEMENTARY MARKET LEADERS.
IN 1998, EARTHWEB FORMED STRATEGIC PARTNERSHIPS THAT RESULTED IN A NUMBER OF NEW
ONLINE OFFERINGS TAILORED TO ADDITIONAL SECTORS OF THE IT INDUSTRY. THESE
ARRANGEMENTS GENERATED NEW REVENUE STREAMS FOR THE COMPANY WHILE LEADING TO A
GLOBAL TECHNICAL RECRUITMENT SECTION, THE LARGEST IT SOFTWARE STORE, AND THE
INDUSTRY'S MOST COMPREHENSIVE ONLINE REFERENCE LIBRARY.
STRATEGIC PARTNERSHIPS WILL PLAY A CONTINUED ROLE IN EARTHWEB'S EXPANSION PLANS
IN THE COMING YEAR.
"Over half of the candidates we hired during the past year came to us as a
result of DICE.com! I am still astounded at the terrific responses we continue
to receive. The more we use DICE.com the more it continues to pay off . . ."
IT RECRUITER, PROACTIVE RESOURCES, INC.
8
<PAGE>
EARTHWEB HAS ENJOYED A YEAR OF TREMENDOUS SUCCESS. AS WE MOVE FORWARD IN 1999,
WE DO SO WITH UNIQUE QUARTERLY VISITS OF 8.4 MILLION, MORE THAN 500,000 PAGES OF
CONTENT, POWERFUL SALES AND SENIOR MANAGEMENT TEAMS, AND THE RESOURCES AND
VISION TO EXECUTE OUR GROWTH PLANS.
IN THE COMING YEAR, EARTHWEB WILL CONTINUE TO SERVE THE $1 TRILLION IT INDUSTRY
BY CONNECTING EMPLOYERS TO EMPLOYEES, VENDORS TO CUSTOMERS AND IT PROFESSIONALS
TO EXPERTS. WE WILL SOLIDIFY OUR POSITION AS THE BUSINESS-TO-BUSINESS HUB OF THE
IT INDUSTRY THROUGH THE CONTINUED GROWTH OF OUR EXISTING SERVICES AS WELL AS
THROUGH STRATEGIC ACQUISITIONS AS WE CONSOLIDATE OUR INDUSTRY.
9
<PAGE>
Exhibit 13.1
1998 ANNUAL REPORT TO STOCKHOLDERS
----------------------------------
<TABLE>
<CAPTION>
<S> <C>
Selected Financial Data 10
Management's Discussion and Analysis 11-15
Balance Sheets 16
Statements of Operations 17
Statements of Stockholders' Equity 18
Statements of Cash Flows 19
Notes to Financial Statements 20-28
Report of Independent Accountants 29
Quarterly Results of Operations 30
</TABLE>
10
<PAGE>
Selected Financial Data
The following selected financial data should be read in conjunction with the
financial statements and notes thereto and "Management's Discussion & Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Annual Report. The statement of operations data for the years ended December 31,
1998, 1997 and 1996 and the balance sheet data as of December 31, 1998 and 1997
are derived from the audited financial statements of EarthWeb, and are included
elsewhere in this Annual Report. The balance sheet data as of December 31, 1996
and 1995 and the statement of operations data for the year ended December 31,
1995 are derived from the audited financial statements of EarthWeb not included
herein. The historical results presented here are not necessarily indicative of
future results.
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C> <C>
Selected Financial Data 1998 1997 1996 1995
Dollars in thousands, except per share data
- --------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Revenues $ 3,349 $ 1,135 $ 472 $ --
Cost of revenues 2,131 1,358 314 --
Gross profit (deficit) 1,218 (223) 158 --
- --------------------------------------------------------------------------------------------------------
Operating expenses
Product development 1,476 1,003 68 36
Sales and marketing 4,547 1,018 252 --
General and administrative 3,356 2,567 1,802 626
Depreciation and amortization 1,116 893 101 42
Total operating expenses 10,495 5,481 2,223 704
- --------------------------------------------------------------------------------------------------------
Loss from operations (9,277) (5,704) (2,065) (704)
Interest and other income, net 307 267 61 (1)
Loss from continuing operations (8,970) (5,437) (2,004) (705)
Loss from discontinued operations -- (2,384) (42) 65
Net Loss (8,970) (7,821) (2,046) (640)
- --------------------------------------------------------------------------------------------------------
Basic and diluted net loss per share
from continuing operations (1.53) (1.13) (0.69) (0.24)
Basic and diluted net loss per share
from discontinued operations -- (0.50) (0.01) 0.02
Basic and diluted net loss per share $(1.53) $(1.63) $(0.70) $ (0.22)
- --------------------------------------------------------------------------------------------------------
Weighted average shares outstanding
used in computing basic and diluted
net loss per share 5,880,467 4,812,055 2,925,000 2,925,000
As of December 31,
Dollars in thousands 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Cash and cash equivalents $ 25,292 $ 4,775 $ 3,779 $ 886
Working capital 23,705 4,317 3,315 865
Total assets 30,477 8,514 5,652 1,393
Long-term obligations 66 85 94 25
Stockholders' equity 26,852 6,445 4,259 1,251
</TABLE>
11
<PAGE>
Overview
EarthWeb is the leading provider of Internet-based online services to the IT
community worldwide. EarthWeb's integrated business-to-business online services
address the needs of IT professionals for content, community and commerce.
EarthWeb's content offerings include a wide range of technical materials, such
as resource directories, tutorials and a reference library, which enhance the
ability of IT professionals to perform their job functions. Its community areas,
such as bulletin boards and question and answer services, allow users to help
one another solve technical problems and share information. Its commerce
services provide a single online source for IT professionals to purchase
specialized software and other products. EarthWeb's online services also offer a
channel through which advertisers and vendors can efficiently and effectively
target what EarthWeb believes to be the largest aggregation of IT professionals
worldwide.
From its inception in 1994 until mid-1997, EarthWeb primarily developed and
maintained Web sites and online commerce infrastructures for its customers.
During this period, substantially all of EarthWeb's revenues were derived from
development contracts, maintenance fees and software license fees. During 1996,
EarthWeb began developing online services for IT professionals. EarthWeb's
operations not related to providing online services to IT professionals were
discontinued in 1997 and have been recorded as discontinued operations for all
periods.
To date, EarthWeb has purchased eight Web sites to expand and extend its online
service offerings. In August 1997, EarthWeb acquired jars.com ("JARS"), the Web
site of the Java Applet Rating Service, for $1.1 million, consisting of a
$500,000 cash payment at closing and four quarterly payments of $150,000. JARS
is a premier online service providing ratings and reviews of Java and other
source code. In February 1998, EarthWeb acquired the companion Web sites
htmlgoodies.com and javagoodies.com, which provide tutorials and other technical
resources for Web developers. In April 1998, EarthWeb acquired
intranetjournal.com, a leading online service for Intranet managers. In May
1998, EarthWeb acquired javascripts.com, an online service that complements
EarthWeb's other offerings by providing a large repository of JavaScript source
code. In July 1998, EarthWeb acquired Datamation.com, which provides online
articles, resources and product analysis for IT enterprise managers. The
aggregate cost of these Web site acquisitions totaled approximately $949,000, of
which approximately $89,000 is payable until January 2000. At December 31, 1998,
EarthWeb had intangible assets of approximately $1.1 million, primarily related
to the acquisitions of JARS and Datamation. Intangible assets are amortized on a
straight-line basis over a period of three years.
In February 1999, the Company completed the acquisition of Dice.com, a leading
online job posting service for IT professionals, for approximately $35 million
in shares of common stock and cash with additional consideration to be paid
based upon future performance. Go certify.com, which provides users with
information on technical certification programs, was also acquired in February
1999. In March 1999, the Company acquired substantially all of the assets of The
Perl Journal, a leading technical publication for developers using the Perl
programming language, and the related Web site TPJ.com. The aggregate purchase
price for go certify.com and The Perl Journal was $980,000, of which $750,000 is
payable until March 2000 in the form of common stock or cash. The consideration
also consists of additional future payments to be made based upon future
performance.
These acquisitions will be accounted for using the purchase method of
accounting, and accordingly, the purchase price of each will be allocated to
assets acquired and liabilities assumed based on their respective fair values.
See Note 10 to EarthWeb's financial statements.
EarthWeb currently derives substantially all of its revenue from advertisements
and sponsorships on its online services. EarthWeb first recognized revenues from
advertising in June 1996 and advertising revenues constituted 95%, 86% and 100%
of EarthWeb's total revenues for the years ended December 31, 1998, 1997 and
1996, respectively. EarthWeb has historically utilized third party firms to sell
and service advertisements on EarthWeb's sites. At the end of the third quarter
of 1997, EarthWeb hired its first sales employee and in the first quarter of
1998, EarthWeb began relying predominantly on its in-house sales force.
EarthWeb's in-house sales force has increased EarthWeb's average cost per
thousand (CPM) by marketing to advertisers the advantages of using EarthWeb's
online services to reach the IT professional community. EarthWeb also derives
revenues from online commerce, brand licensing and subscription fees for
ITknowledge.com.
Advertising revenue is recognized in the period in which the advertisement is
displayed, provided that no significant Company obligations remain and the
collection of the receivable is probable. EarthWeb obligations typically include
guarantees of a minimum number of "impressions" (times that an advertisement is
viewed by users of EarthWeb's online services over a specified period of time).
Typically, if the minimum number of impressions is not achieved, EarthWeb will
extend the advertising campaign until the related guarantee is met, which would
result in delayed revenue recognition. EarthWeb records revenues and expenses
for barter transactions (receipt of advertisements or other goods or services in
exchange for advertisements on its online services) at the lesser of the
estimated fair value of the advertisements, goods or services received or the
fair value of the advertisements given. In future periods, management intends to
maximize cash advertising revenues, although EarthWeb will continue to enter
into barter advertising transactions as appropriate.
12
<PAGE>
In order to expand its online services, EarthWeb anticipates incurring
additional expenses to increase its product development and sales and marketing
efforts, pursue additional strategic acquisitions and support the growth of the
organization. The sales and marketing expenses will primarily include expenses
related to hiring additional employees and increasing advertising and brand
promotion activities. As a result of these expenditures and other factors,
EarthWeb expects to continue to incur losses in the foreseeable future.
EarthWeb expects to experience significant fluctuations in its future quarterly
results due to a variety of factors, many of which are outside of EarthWeb's
control. These factors include the level of usage on the Internet, demand for
Internet advertising, the addition or loss of advertisers, the level of user
traffic on EarthWeb's online services, economic conditions specific to the
Internet industry and online media and economic conditions generally. Management
believes that its revenues are also subject to seasonal fluctuations because
advertisers generally place fewer advertisements during the first and third
calendar quarters of each year. EarthWeb believes that certain expenses as a
percentage of revenues may fluctuate between periods based on the growth of
revenues; however, EarthWeb expects expenses to continue to grow in absolute
dollars for the foreseeable future.
Results of Operations
Year ended December 31, 1998 compared to year ended December 31, 1997
Revenues. Revenues for the year ended December 31, 1998 increased 195% to $3.3
million from $1.1 million for the year ended December 31, 1997. The increase in
revenues was due to an increase in advertising revenues of $2.2 million.
Approximately 62% of the growth in advertising revenues was attributable to an
increase in the volume of advertising sold. A secondary reason for the increase
in advertising revenue was the ability of EarthWeb's in-house sales force to
sell advertising at a higher price (CPM). Management does not expect significant
price increases in the future and expects to derive growth in revenues primarily
through increased volume of advertising sold.
Barter transactions accounted for approximately 25% and 16% of revenues for the
years ended December 31, 1998 and 1997, respectively. For both periods barter
advertising revenues primarily related to the exchange of advertisements with
other companies.
Cost of Revenues. EarthWeb's cost of revenues consists primarily of employee
salaries and related expenses (including payroll taxes and benefits), consulting
fees, freelance writing costs, Internet access and hosting fees, computer
related expenses and content licensing fees required to support and deliver
EarthWeb's online services. Cost of revenues for the year ended December 31,
1998 increased 57% to $2.1 million or 63.6% of net revenues from $1.4 million or
120% of net revenues for the year ended December 31, 1997. The increase in cost
of revenues was primarily attributable to increased employee salaries and
related expenses, consulting fees, and freelance writing costs due to the
expansion of EarthWeb's online service offerings.
Product Development Expenses. EarthWeb's product development expenses consist
primarily of employee salaries and related expenses (including payroll taxes and
benefits), consulting fees and computer leasing costs required to support the
development of new service offerings. Product development expenses for the year
ended December 31, 1998 increased 47% to $1.5 million from $1.0 million for the
year ended December 31, 1997. The increase in product development expenses was
primarily attributable to the expansion of EarthWeb's online service offerings,
related to the production of the ITKnowledge subscription service, which was
launched in October 1998.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily of
advertising (including expenses recorded for barter transactions), employee
salaries, commissions and related expenses (including payroll taxes and
benefits) of EarthWeb's sales force and marketing personnel, promotional
materials and trade show exhibition expenses. Sales and marketing expenses for
the year ended December 31, 1998 increased 347% to $4.5 million from $1.0
million for the year ended December 31, 1997. The increase was primarily
attributable to an increase in advertising expenses of $2.0 million and
salaries, commissions and related costs of $1.6 million for the in-house
advertising sales force, which did not exist during 1997. Barter transactions
accounted for approximately 19% and 18% of sales and marketing expenses for 1998
and 1997, respectively. Management expects sales and marketing expenses to
increase due to the growth of its sales force and its planned increase in
advertising and promotional activities.
General and Administrative Expenses. General and administrative expenses consist
primarily of employee salaries and related expenses (including payroll taxes and
benefits) for executive, administrative, and accounting personnel, facility
costs, recruiting fees, insurance costs and professional fees. General and
administrative expenses for the year ended December 31, 1998 increased 31% to
$3.4 million from $2.6 million for the year ended December 31, 1997. The
increase in general and administrative expenses was primarily attributable to
increased consulting fees, professional fees and employee salaries and related
expenses (including payroll taxes & benefits). Management expects general and
administrative expenses to increase in future periods due to the growth of the
business.
13
<PAGE>
Depreciation and Amortization. Depreciation and amortization consists primarily
of depreciation of property and equipment and amortization of intangible assets
related to acquisitions. Depreciation and amortization for the year ended
December 31, 1998 increased 25% to $1.1 million from $893,000 for the year ended
December 31, 1997. The increase was primarily a result of additional
depreciation on property and equipment and amortization of intangible assets
from acquisitions. Management expects depreciation and amortization to increase
due to the amortization of goodwill from several acquisitions in 1999.
Interest and Other Income, net. Interest and other income, net consists
primarily of interest earned on cash and cash equivalents. Interest and other
income, net for the year ended December 31, 1998 increased 15% to $307,000 from
$267,000 for the year ended December 31, 1997. The increase was primarily the
result of higher average cash balances during 1998, primarily from the proceeds
of EarthWeb's initial public offering.
Income Taxes. No provision for federal and state income taxes has been recorded
as EarthWeb has incurred net operating losses through December 31, 1998. As of
December 31, 1998, EarthWeb had approximately $16.3 million of net operating
loss carryforwards for federal income tax purposes, expiring through 2012,
available to offset future taxable income. Given EarthWeb's limited operating
history, losses incurred to date and the difficulty in accurately forecasting
EarthWeb's future results, management does not believe that the realization of
the related deferred income tax assets meets the criteria required by generally
accepted accounting principles and, accordingly, a full valuation allowance has
been recorded.
Year ended December 31, 1997 compared to year ended December 31, 1996
Revenues. Revenues for 1997 increased 140% to $1.1 million from $472,000 for
1996. The increase resulted from growth in the volume of advertising impressions
sold and a full year of advertising sales activity in 1997 compared to only
seven months of advertising sales activity in 1996. During 1997, the average
selling price (CPM) for advertising did not change substantially compared to
1996 levels. Barter transactions accounted for approximately 16% and 55% of
revenues for the years ended 1997 and 1996, respectively. During 1997, barter
advertising revenues primarily related to the exchange of advertisements with
other companies. In 1996, as a result of the contribution by Sun Microsystems of
server equipment with a value of $257,000 in exchange for advertising, EarthWeb
recorded a one-time barter transaction.
Cost of Revenues. The cost of revenues for 1997 increased 332% to $1.4 million
from $314,000 for 1996. This increase was primarily the result of costs related
to the growth of EarthWeb's online business, which included hiring additional
content and productions personnel resulting in increased employee salaries and
related expenses (including payroll taxes and benefits) of $821,000.
Product Development Expenses. Product development expenses for 1997 increased
1,367% to $1.0 million from $68,000 in 1996. The increase in product development
expenses was primarily the result of increased salaries and related expenses
(including payroll taxes and benefits) of $580,000, and consultant fees of
$252,000 to support the development of EarthWeb's online services.
Sales and Marketing Expenses. Sales and marketing expenses for 1997 increased
304% to $1.0 million from $252,000 in 1996. The increase in sales and marketing
expenses was primarily the result of an increase in marketing activities,
including advertising, trade show exhibitions, and promotional activities, which
increased $493,000, and employee salaries and related costs (including payroll
taxes and benefits), which increased $163,000. Expenses from barter transactions
were 18% and 0% of sales and marketing expenses for 1997 and 1996, respectively.
General and Administrative Expenses. General and administrative expenses for
1997 increased 42% to $2.6 million from $1.8 million in 1996. The increase in
general and administrative expenses was predominantly the result of increased
salaries and related expenses (including payroll taxes and benefits) of
$550,000, with the balance of the increase primarily due to increases in rent
expense for EarthWeb's additional office space and recruiting costs.
Depreciation and Amortization. Depreciation and amortization for 1997 increased
785% to $893,000 from $101,000 for 1996. This increase was primarily the result
of additional depreciation on property and equipment and amortization of
intangible assets from the JARS acquisition. In addition, depreciation and
amortization expense for 1997 included a write-off of intangible assets of
$337,000 related to the JARS acquisition.
Interest and Other Income, net. Interest and other income, net for 1997
increased 334% to $267,000 from $61,000 for 1996. The increase was the result of
higher average cash balances during 1997.
Liquidity and Capital Resources
EarthWeb historically has satisfied its cash requirements primarily through
offerings of convertible preferred stock and common stock and lease financings.
14
<PAGE>
Net cash used in operating activities was $6.5 million for the year ended
December 31, 1998 and $6.7 million for the year ended December 31, 1997. Cash
used in operating activities for 1998 resulted primarily from a net loss of $9.0
million offset by an increase in accounts payable and accrued expenses of $2.3
million, accounts receivable of $0.8 million and depreciation and amortization
of $1.1 million. Cash used in operating activities in 1997 was primarily
attributable to a net loss of $7.8 million, partially offset by depreciation and
amortization of $893,000.
Net cash used in investing activities for the year ended December 31, 1998 of
$2.2 million was primarily attributable to purchases of fixed assets of $1.1
million and acquisitions of $1.3 million. Net cash used in investing activities
of $2.3 million for 1997 was primarily attributable to cash used for the
purchase of fixed assets of $954,000, acquisitions of $812,000 and a restricted
cash deposit of $512,000 collateralizing letters of credit.
Net cash from financing activities was $29.3 million for the year ended December
31, 1998 and $10 million for the year ended December 31, 1997. In November 1998,
the Company completed its initial public offering of common stock in which
2,100,000 shares were issued at a price of $14.00 per share. Proceeds from the
offering net of offering costs were approximately $25.8 million. In June 1998,
the Company issued 436,446 shares of common stock to EarthWeb LLC through a
private placement, in consideration of net proceeds of $3.7 million. In June
1997, the Company issued shares of Series B Convertible Preferred Stock through
a private placement in consideration of net proceeds of $10 million.
The Company will continue to evaluate possible acquisitions of, or investments
in, business products and technologies that are complementary to those of the
Company, which may require the use of cash. Management believes that existing
cash balances will be sufficient to meet anticipated cash requirements for at
least the next twelve months; however, the Company may sell additional equity or
debt securities or obtain credit facilities. The sale of additional securities
could result in dilution to the Company's stockholders.
Year 2000
The Year 2000 issue involves the potential for system and processing failures of
date-related data resulting from computer-controlled systems using two digits
rather than four to define the applicable year. For example, computer programs
that contain time-sensitive software may recognize a date using two digits of
"00" as the year 1900 rather than the year 2000. This could result in system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar ordinary business activities.
EarthWeb believes that its internal software and hardware systems will function
properly with respect to dates in the year 2000 and thereafter and has completed
its internal IT and non-IT assessment. Nonetheless, there can be no assurance in
this regard until such systems are operational in the year 2000. EarthWeb is
currently creating contingency plans in the event of Year 2000 failures.
EarthWeb has contacted all of its significant suppliers to determine the extent
to which EarthWeb's systems are vulnerable to those third parties' failure to
make their own systems Year 2000 compliant. EarthWeb was informed by such
suppliers that their systems are Year 2000 compliant. Additionally, any Year
2000 problems experienced by EarthWeb's advertising customers could affect the
placement of advertisements on EarthWeb's online services. In the event any of
EarthWeb's suppliers or vendors prove not to be Year 2000 compliant, EarthWeb
believes that it could find a replacement vendor or supplier which is Year 2000
compliant without significant delay or expense. However, if substantially all of
EarthWeb's suppliers and vendors prove not to be Year 2000 compliant and if
EarthWeb experiences difficulties in finding replacement vendors, then, as a
result, EarthWeb's business could be materially adversely affected. The failure
to correct material Year 2000 problems by EarthWeb's suppliers and vendors could
result in an interruption in, or a failure of, certain normal business
activities or operations of EarthWeb. Such failure could materially and
adversely affect EarthWeb's results of operations, liquidity and financial
condition. Due to the general uncertainty inherent in the Year 2000 problem,
resulting from the uncertainty of the Year 2000 readiness of third-party
suppliers and vendors, EarthWeb is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on EarthWeb's
results of operations, liquidity or financial condition.
To date, EarthWeb has spent an immaterial amount on Year 2000 compliance issues
and expects to incur no significant costs in the future for Year 2000 problems.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective
for financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance on accounting for computer software developed or obtained for
internal use including the requirement to capitalize specified costs and
amortization of such costs. EarthWeb does not expect the adoption of this
standard to have a material effect on EarthWeb's capitalization policy.
15
<PAGE>
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5, which is effective for
financial statements for years beginning after December 15, 1998, provides
guidance on the financial reporting of start-up costs and organization costs. It
requires costs of start-up activities and organization costs to be expensed as
incurred. As EarthWeb has expensed these costs historically, the adoption of
this standard is not expected to have a significant impact on EarthWeb's results
of operations, financial position or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities" ("SFAS No. 133"), which establishes accounting and
reporting standards of derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. As EarthWeb does
not currently engage or plan to engage in derivative or hedging activities,
there will be no impact on EarthWeb's results of operations, financial position
or cash flows upon the adoption of this standard.
16
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
Balance Sheets 1998 1997
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 25,292,229 $ 4,775,153
Restricted cash 287,000 512,000
Accounts receivable, net 1,143,681 375,961
Prepaid expenses and other current assets 541,686 235,242
Discontinued operations (accounts receivable) -- 403,052
- -------------------------------------------------------------------------------------------------------------------
Total current assets 27,264,596 6,301,408
Fixed assets, net 2,068,752 1,650,828
Intangible assets, net 1,069,220 505,938
Other assets 74,816 55,674
Total assets $ 30,477,384 $ 8,513,848
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 1,805,076 $ 574,006
Accrued expenses 1,519,807 414,239
Other current liabilities 157,714 552,179
Discontinued operations (accrued expenses) 76,696 443,527
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,559,293 1,983,951
Other liabilities 65,686 85,311
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 3,624,979 2,069,262
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01; 2,000,000 authorized; none issued -- --
Series A Convertible Preferred Stock, par value $.01; none and 1,000,000 authorized,
none and 653,111 issued and outstanding -- 6,531
Series B Convertible Preferred Stock, par value $.01; none and 600,000 authorized,
none and 598,086 issued and outstanding -- 5,981
Common stock, par value $.01; 21,750,000 authorized, 7,903,761
and 2,925,000 issued and outstanding 79,038 29,250
Additional paid in capital 44,582,477 14,715,614
Unearned compensation (326,562) --
Treasury stock at cost, 4,713 shares (199,970) --
Accumulated deficit (17,282,578) (8,312,790)
Total stockholders' equity 26,852,405 6,444,586
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 30,477,384 $ 8,513,848
The accompanying notes are an integral part of these financial statements.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C>
Statements of Operations 1998 1997 1996
Revenue $ 3,349,165 $ 1,135,141 $ 472,109
Cost of revenues 2,131,593 1,358,293 314,332
- ---------------------------------------------------------------------------------------------------------------------
Gross profit (deficit) 1,217,572 (223,152) 157,777
- ---------------------------------------------------------------------------------------------------------------------
Operating expenses:
Product development 1,475,665 1,003,422 68,410
Sales and marketing 4,546,839 1,018,313 252,287
General and administrative 3,356,567 2,566,670 1,801,744
Depreciation and amortization 1,115,698 892,600 100,859
- ---------------------------------------------------------------------------------------------------------------------
Total operating expenses 10,494,769 5,481,005 2,223,300
- ---------------------------------------------------------------------------------------------------------------------
Loss from operations (9,277,197) (5,704,157) (2,065,523)
Interest and other income, net 307,409 267,139 61,497
- ---------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (8,969,788) (5,437,018) (2,004,026)
Discontinued operations:
Loss from discontinued operations -- (2,142,934) (42,255)
Loss on disposal of discontinued operations -- (240,585) --
- ---------------------------------------------------------------------------------------------------------------------
Net loss $(8,969,788) $(7,820,537) $(2,046,281)
- ---------------------------------------------------------------------------------------------------------------------
Basic and diluted net loss per share from continuing operations $ (1.53) $ (1.13) $ (0.69)
Basic and diluted net loss per share from discontinued operations $ -- $ (0.50) $ (0.01)
Basic and diluted net loss per share $ (1.53) $ (1.63) $ (0.70)
- ---------------------------------------------------------------------------------------------------------------------
Weighted average shares of common stock outstanding
used in computing basic and diluted net loss per share 5,880,467 4,812,055 2,925,000
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
Convertible Preferred Stock Additional
Members Series A and B Common Stock Paid in
Statements of Stockholders' Equity Contributions Shares Amount Shares Amount Capital
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995........... $ 2,064,000 -- $ -- -- $ -- $ --
Payment of member receivable...........
Reduction of member receivable.........
Net loss for the period January 1, 1996
to October 25, 1996...................
Effect of reorganization (Note 1)...... (2,084,000) 2,925,000 29,250 (158,916)
Issuance of Series A
convertible preferred stock........... 604,288 6,043 4,375,053
Conversion of promissory note for
Series A convertible preferred stock.... 48,823 488 499,512
Net loss for the period October 26,
1998 to December 31, 1996...............
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996............. -- 653,111 6,531 2,925,000 29,250 4,715,649
Issuance of Series B convertible
preferred stock......................... 568,182 5,682 9,494,316
Conversion of promissory note for
Series B convertible preferred stock.... 29,904 299 499,701
Issuance of non-qualified stock options.. 5,948
Net loss.................................
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997............. -- 1,251,197 12,512 2,925,000 29,250 14,715,614
Issuance of common stock................. 2,536,446 25,364 29,465,517
Exercise of stock options................ 2,482 26 3,792
Issuance of non-qualified stock options.. 41,430
Issuance of stock options below deemed
fair value for accounting purposes....... 368,010
Amortization of deferred compensation....
Conversion of preferred stock............ (1,251,197) (12,512) 2,439,833 24,398 (11,886)
Purchase of treasury stock...............
Net loss.................................
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998............. $ -- -- $ -- 7,903,761 79,038 $44,582,477
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Unearned Receivable Accumu-
Compen- from lated Treasury Stock
sation Member Deficit Shares Amount Total
Statements of Stockholders' Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995........... $ -- $(172,489) $(639,638) -- $ -- $1,251,873
Payment of member receivable........... 58,100 58,100
Reduction of member receivable.......... 114,389 114,389
Net loss for the period January 1, 1996
to October 25, 1996..................... (1,554,028) (1,554,026)
Effect of reorganization (Note 1)........ 2,193,666 --
Issuance of Series A
convertible preferred stock............. 4,381,096
Conversion of promissory note for
Series A convertible preferred stock.... 500,000
Net loss for the period October 26,
1998 to December 31, 1996............... (492,253) (492,253)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996............. -- -- (492,253) 4,259,177
Issuance of Series B convertible
preferred stock......................... 9,499,998
Conversion of promissory note for
Series B convertible preferred stock.... 500,000
Issuance of non-qualified stock options.. 5,948
Net loss................................. (7,820,537) (7,820,537)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997............. -- -- (8,312,790) 6,444,586
Issuance of common stock................. 29,490,881
Exercise of stock options................ 3,818
Issuance of non-qualified stock options.. 41,430
Issuance of stock options below deemed
fair value for accounting purposes....... (368,010) --
Amortization of deferred compensation.... 41,448 41,448
Conversion of preferred stock............ --
Purchase of treasury stock............... 4,713 (199,970) (199,970)
Net loss................................. (8,969,788) (8,969,788)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998............. $(326,562) $ -- $(17,282,578) 4,713 $(199,970) $26,852,405
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C>
Statements of Cash Flows 1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(8,969,788) $(7,820,537) $(2,046,281)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,115,698 892,600 100,859
Charge related to issuance of stock options 82,878 5,948 --
Barter transaction -- -- (257,398)
Reduction of members' receivable -- -- 114,389
Provision for doubtful accounts 42,650 10,505 --
Reserve for discontinued operations -- 443,527 --
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable (810,370) (285,287) (101,179)
Prepaid expenses and other current assets (306,444) (159,321) (72,571)
Other assets (19,142) (32,080) 76,725
Accounts payable and accrued expenses 2,294,223 364,877 531,815
Other current liabilities (10,767) 89,389 --
Discontinued operations 36,221 (235,526) 206,409
Net cash used in operating activities (6,544,841) (6,725,905) (1,447,232)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (1,147,512) (954,432) (598,543)
Acquisitions (1,310,300) (811,876) --
Restricted cash 225,000 (512,000) --
Net cash used in investing activities (2,232,812) (2,278,308) (598,543)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bridge financing -- 500,000 500,000
Proceeds from issuance of preferred stock, net -- 9,499,998 4,381,096
Proceeds from issuance of common stock, net 29,494,699 -- --
Purchase of treasury stock (199,970) -- --
Contribution from members -- -- 58,100
Net cash provided by financing activities 29,294,729 9,999,998 4,939,196
- ------------------------------------------------------------------------------------------------------------------
Net increase in cash for the period 20,517,076 995,785 2,893,421
Cash and cash equivalents, beginning of period 4,775,153 3,779,368 885,947
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $25,292,229 $ 4,775,153 $ 3,779,368
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Supplemental disclosure of Non-Cash Investing and Financing Activities:
During 1996, the Company received $257,398 of equipment, in lieu of cash, in a
transaction in which the Company recorded advertising revenue of the same
amount.
During 1996, certain executives of the Company paid expenses on behalf of the
Company, in the amount of $114,389, in exchange for the reduction of their
members' receivable amounts.
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
1. The Company
Organization
EarthWeb Inc. (the "Company") was incorporated in the State of New York on April
25, 1996 and subsequently re-incorporated in the State of Delaware on June 17,
1997.
On October 25, 1996, all of the assets and liabilities of EarthWeb LLC were
transferred, in a tax-free conversion, to EarthWeb Inc., in exchange for the
issuance of 2,925,000 shares of common stock of the Company. This transaction
was accounted for as a reorganization of entities under common control, in a
manner similar to a pooling of interest.
Business
The Company is a leading provider of Internet-based online services to the
information technology ("IT") industry worldwide. Its integrated business-to-
business online services address the needs of ITprofessionals for content,
community and commerce.
The Company has sustained net losses and negative cash flows from operations
since its inception. The Company's ability to meet its obligations in the
ordinary course of business is dependent upon its ability to establish
profitable operations or raise additional financing through public or private
equity financings, collaborative or other arrangements with corporate sources,
or other sources of financings to fund operations. During 1998, the Company
received financing of approximately $29,500,000, primarily through an initial
public offering of common stock in November 1998.
2. Significant Accounting Policies and Procedures
Revenue Recognition
The Company generates several types of revenue including the following:
Advertising Advertising revenues are derived from the sale of advertising space
on the Company's various online services. Advertising revenues are recognized
over the period in which the advertisements are displayed, provided that no
significant Company obligations remain and collection of the receivable is
reasonably assured. Company obligations typically include guarantees of a
minimum number of "impressions" (times that an advertisement is viewed by users
of the Company's online services over a specified period of time). To the extent
that minimum guaranteed impressions are not met, the Company defers recognition
of the corresponding revenues until the guaranteed impressions are achieved. For
the years ended December 31, 1998, 1997 and 1996, advertising revenues
represented approximately 95%, 86% and 100% of gross revenues from continuing
operations, respectively.
Revenues from barter transactions are recorded at the lower of the estimated
fair value of the advertisements, goods or services received or the estimated
fair value of the advertisements given. Revenue from barter transactions
(representing advertisements given) is recognized as income when advertisements
are delivered on the Company's Web sites. Barter expense (representing
advertisements received) is recognized when the Company's advertisements are run
on other companies' Web sites, which is typically in the same period when the
related barter revenue is recognized. For the years ended December 31, 1998,
1997 and 1996, barter transactions represented 25%, 16% and 55% of total
revenues from continuing operations, respectively.
Online Product Sales The Company has various agreements with product
manufacturers where publications and software are sold on the Company's Web
sites. The Company records the gross revenue earned and the related royalty due
to the vendor as cost of revenues when the products are sent electronically to
the customers and collectibility is reasonably assured.
Subscription Revenue The Company offers monthly and yearly subscriptions for
ITknowledge.com. Potential members are offered a fourteen day free trial
membership. If such trial membership is not cancelled within the trial period,
the member is charged. Subscription revenue is recognized ratably over the life
of the subscription. Accordingly, amounts received for services which have not
yet been provided are reflected as deferred revenue in the accompanying balance
sheets.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. Cash that
collateralizes certain letters of credit is recorded as restricted cash on the
balance sheet (see Note 6).
21
<PAGE>
Concentration of Credit Risk
Substantially all of the Company's excess cash has been invested in highly
liquid investments. The Company performs ongoing credit evaluations of its
customers' financial condition and generally does not require collateral on
accounts receivable. The Company maintains allowances for credit losses and such
losses have been within management's expectations. The Company's services are
provided to customers in several industries worldwide.
Accounts receivable are stated net of allowances for doubtful accounts of
approximately $53,000 and $11,000 as of December 31, 1998 and 1997,
respectively. Two customers accounted for 31% and 52% of the accounts receivable
balance at December 31, 1998 and 1997, respectively. Two customers accounted for
21% of revenues for the year ended December 31, 1998 and one customer accounted
for 12% of revenues from continuing operations for the year ended December 31,
1997.
Financial Instruments
The recorded amounts of financial instruments approximate their fair values.
Fixed Assets
Depreciation of equipment, furniture and fixtures and computer software is
provided for by the straight-line method over estimated useful lives ranging
from three to five years. Amortization of leasehold improvements is provided for
over the lesser of the term of the related lease or the estimated useful life of
the improvement. The cost of additions and betterments is capitalized, and
repairs and maintenance costs are charged to operations in the periods incurred.
Intangible Assets
Intangible assets, resulting from acquisitions of Web sites and other assets,
are being amortized using the straight-line method over three years.
Income Taxes
The Company recognizes deferred taxes by the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for differences between the financial-statement and
tax bases of assets and liabilities at enacted statutory tax rates in effect for
the years in which the differences are expected to reverse. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. In addition, valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized. The primary sources of temporary differences are depreciation
and amortization of intangible assets.
Risks and Uncertainties
The Company has a limited operating history and its prospects are subject to the
risks, expenses and uncertainties frequently encountered by companies in the new
and rapidly evolving markets for Internet products and services. These risks
include the failure to develop and extend the Company's online service brands,
the rejection of the Company's services by Web consumers, vendors and/or
advertisers, the inability of the Company to maintain and increase the levels of
traffic on its online services, as well as other risks and uncertainties. In the
event that the Company does not successfully implement its business plan,
certain assets may not be recoverable.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates. The Company's significant estimates include
the useful lives of fixed assets and intangibles and the accounts receivable
allowance for doubtful accounts.
Long-Lived Assets
The carrying amount of assets is reviewed on a regular basis for the existence
of facts or circumstances, both internally and externally, that suggest
impairment. To date no such impairment has been indicated except as disclosed in
Note 3. The Company determines if the carrying amount of a long-lived asset is
impaired based on anticipated undiscounted cash flows before interest. In the
event of impairment, a loss is recognized based on the amount by which the
carrying amount exceeds fair value of the asset. Fair value is determined
primarily using the anticipated cash flows before interest, discounted at a rate
commensurate with the risk involved.
22
<PAGE>
Net Loss Per Share
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128").
SFAS No. 128 replaced primary and fully diluted earnings per share with basic
and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effect of options, warrants and
convertible securities. Basic earnings per share is computed using the weighted-
average number of common shares outstanding during the period. Diluted earnings
per share is computed using the weighted-average number of common and common
stock equivalent shares outstanding during the period. Common equivalent shares
have been excluded from the computation as their effect is antidilutive for all
years. As the Convertible Preferred Stock was converted into common stock upon
completion of the Company's initial public offering ("IPO") in November 1998, it
has been reflected as common stock for all periods presented. Net loss per share
amounts for all periods have been restated to conform to SFAS No. 128
requirements.
Stock Split
The company authorized and implemented a 0.65-for-one reverse stock split in
connection with the initial public offering of the Company's common stock on
November 10, 1998. All references to the number of shares of common stock have
been retroactively restated in the financial statements to reflect the effect of
this transaction.
Comprehensive Income
The Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income" in 1998. SFAS No. 130 establishes standards for reporting comprehensive
income and its components in financial statements. Comprehensive income, as
defined, includes all changes in equity (net assets) during a period from non-
owner sources. To date, the Company has not had any transactions that are
required to be reported in comprehensive income.
Segments
The Company adopted the provisions of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" in 1998. This statement establishes
standards for the way companies report information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company has determined that it does not have any separately reportable
business segments as of December 31, 1998.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. The Company does not expect the adoption of this
standard to have a material effect on the Company's capitalization policy.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
of start-up activities and organization costs to be expensed as incurred. As the
Company has expensed these costs historically, the adoption of this standard is
not expected to have a significant impact on the Company's results of
operations, financial position or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities" ("SFAS 133"), which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. As the Company does not currently engage or
plan to engage in derivative or hedging activities there will be no impact to
the Company's results of operations, financial position or cash flows upon the
adoption of this standard.
3. Acquisitions
In August 1997, the Company acquired certain assets related to the Java Applet
Rating Service ("JARS") Web site. The total cost of the acquisition was
$1,261,876 including legal and other professional costs. As of December 31,
1997, there was a payable of $450,000 related to this acquisition that was paid
by August 1998. The Company has also entered into a four year consulting
agreement with the seller of JARS where the Company is obligated to pay a
consulting fee of $180,000 per year.
The cost of the JARS acquisition was allocated to certain assets based upon
their estimated fair values as follows:
<TABLE>
<S> <C>
Intangible assets $1,011,876
Capitalized software 230,000
Fixed assets 20,000
$1,261,876
- ----------------------------------
</TABLE>
23
<PAGE>
At December 31, 1997 the Company recorded a charge of approximately $337,000
related to an impairment of the intangible assets acquired in the JARS
acquisition to reflect the fair value of the remaining asset.
During 1998, the Company acquired several Web sites. In February 1998, the
Company acquired the companion Web sites htmlgoodies.com and javagoodies.com. In
April 1998, the Company acquired intranetjournal.com. In May 1998, the Company
acquired javascripts.com. In July 1998, the Company acquired substantially all
of the assets and properties of the Web site datamation.com. In conjunction with
the acquisition of datamation.com, the Company also licensed, on a non-
exclusive, fully paid basis from the seller, the right to use certain customer
lists for the purposes of marketing the Company's products and services. The
aggregate cost of these Web site acquisitions totaled approximately $949,000,
approximately $89,000 of which is payable over the next year.
Amortization expense of intangible assets resulting from acquisitions totaled
$404,000 and $506,000 in the years ended December 31, 1998 and 1997,
respectively.
4. Discontinued Operations
In November 1997, the Company formalized its plan to discontinue its
professional services and software products divisions. Accordingly, operating
results have been reclassified and reported in discontinued operations.
Operating results of the discontinued operations are as follows:
<TABLE>
<CAPTION>
Professional Software
Total Services Products Total Total
1998 1997 1997 1997 1996
<S> <C> <C> <C> <C> <C>
Revenues -- $2,303,813 $ 476,170 $ 2,779,983 $1,192,378
Expenses -- 1,361,046 3,802,456 5,163,502 1,234,633
Net (loss) income -- $ 942,767 $(3,326,286) $(2,383,519) $ (42,255)
- ----------------------------------------------------------------------------------------------------------------------------------
Assets and liabilities of the discontinued
operations are as follows at December 31:
Accounts receivable -- $ 253,052 $ 150,000 $ 403,052 --
Accrued expenses 76,696 103,585 339,942 443,527 --
Net assets (liabilities) (76,696) $ 149,467 $ (189,942) $ (40,475) --
- ----------------------------------------------------------------------------------------------------------------------------------
5. Fixed Assets
Property and equipment consist of the following:
December 31, 1998 December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Computer equipment and software $ 2,348,249 $1,753,627
Furniture and fixtures 499,425 321,818
Leasehold improvements 635,627 291,311
- ----------------------------------------------------------------------------------------------------------------------------------
3,483,301 2,366,756
Less, accumulated depreciation and amortization 1,414,549 715,928
$ 2,068,752 $1,650,828
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization for the years ended December 31, 1998, 1997 and
1996 totaled approximately $699,000, $529,000 and $101,000, respectively.
24
<PAGE>
6. Commitments and Contingencies
Leases
The Company leases office space in New York, under non-cancelable operating
leases expiring at various dates through January 2008. Future minimum lease
payments under non-cancelable operating leases as of December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Operating Leases
<S> <C>
- ---------------------------------------
1999 $1,018,000
2000 961,000
2001 859,000
2002 744,000
2003 and thereafter 4,095,000
Total $7,677,000
- ---------------------------------------
</TABLE>
Rent expense was approximately $323,000, $278,000 and $183,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
Letter of Credit
As of December 31, 1998, the Company has a $287,000 standby letter of credit to
collateralize its principal facility lease agreement. Restricted cash
collateralizes such standby letter of credit.
Litigation
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. The Company does not believe that an adverse
outcome of any proceeding would have a material effect on the Company's
financial position or results of operations.
7. Stockholders' Equity
Common Stock In June 1998, the Company issued 436,446 shares of Common Stock to
EarthWeb LLC through a private placement, in consideration of net proceeds of
$3,719,000. In November 1998, the Company completed its initial public offering
of 2,100,000 shares of common stock at a price of $14.00 a share. The total net
proceeds to the Company from the IPO were approximately $25,770,000.
Preferred Stock On October 25, 1996, the Company issued 653,111 shares of
Series A Convertible Preferred Stock ("Series A") through a private placement,
in consideration of net proceeds to the Company of $4,881,096, inclusive of the
conversion of a $500,000 promissory note.
In June 1997, the Company issued 598,086 shares of Series B Convertible
Preferred Stock ("Series B") through a private placement, in consideration of
net proceeds of $9,999,998, inclusive of the conversion of a $500,000 promissory
note.
As of the closing date of the initial public offering, all shares of Convertible
Preferred Stock were converted into 2,439,833 shares of common stock.
Stock Option Plan During October 1996, the Company adopted the 1996 Amended and
Restated Stock Option Plan (the "1996 Plan") under which incentive stock options
or non-qualified stock options to purchase common stock may be granted to
eligible employees.
25
<PAGE>
In November 1998, the Board of Directors adopted the Company's 1998 Plan (the
"1998 Plan"). The Company has reserved 375,000 shares of Common Stock for
issuance under the 1998 Plan, plus an annual increase to be added on the first
day of the Company's fiscal year beginning in 2000 equal to two percent (2%) of
the number of shares outstanding as of such date or a lesser number of shares
determined by the Compensation Committee. A summary of the status of the
Company's Plans, as amended, as of December 31, 1997 and 1998, and changes
during the years ended December 31, 1997 and 1998 are presented below:
<TABLE>
<CAPTION>
Weighted Average
Option Shares Exercise Price
<S> <C> <C>
Options outstanding - January 1, 1997
Opening balance --
Granted 217,568 $ 2.40
Cancelled (17,478) 1.54
- -------------------------------------------------------------------------------------------------------
Options outstanding - December 31, 1997 200,090 2.49
Granted 363,925 5.14
Exercised (2,732) 1.54
Cancelled (58,120) 2.51
Expired (4,201) 1.64
Options outstanding - December 31, 1998 498,962 $ 4.43
- -------------------------------------------------------------------------------------------------------
Options exercisable at December 31, 1998 108,813
Options exercisable at December 31, 1997 --
Weighted average fair value of options granted during 1998 $0.97
Weighted average fair value of options granted during 1997 $0.75
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Weighted Weighted
Average Average Average
Range of Shares Remaining Exercise Shares Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.54 - $1.54 45,840 5.1 $ 1.54 20,179 $ 1.54
$2.77 - $3.23 361,472 6.0 $ 3.08 75,385 $ 3.07
$6.15 - $8.57 10,400 6.3 $ 7.74 1,559 $ 7.74
$10.00 - $13.00 81,250 6.7 $11.62 11,690 $11.63
498,962 108,813
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Options generally vest over a period of four years, however, 15% of all unvested
options automatically vested at the date of the initial public offering. At
December 31, 1998, the Company had reserved 900,000 shares of common stock for
the exercise of options.
The option plan also provides for the issuance of stock appreciation rights and
restricted stock awards under which shares of common stock may be issued to
eligible employees. No such awards have been made.
26
<PAGE>
Stock-Based Compensation The Company applies Accounting Principles Board
Opinion No. 25, "Accounting for Stock-Issued to Employees" and related
interpretations in accounting for its stock option issuances. The Company has
adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-
Based Compensation." Had compensation cost for the Company's stock option
issuances been determined based on the fair value at the grant date for awards
in 1998 and 1997 consistent with the provisions of SFAS No. 123, the Company's
net loss would have been adjusted to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Net loss -- as reported $(8,969,788) $(7,820,537)
Net loss -- pro forma $(9,022,961) $(7,860,720)
Basic net loss per share -- as reported and pro forma $ (1.53) $ (1.63)
</TABLE>
The fair value of each option grant is estimated on the date of the grant using
the "Black-Scholes option-pricing model" with the following weighted average
assumptions used for grants for the years ended December 31, 1998 and 1997; zero
dividend yield; no volatility (all options were issued prior to the
effectiveness of the IPO); a weighted average risk-free interest rate of 5.34%
and 6.90%, respectively; and expected lives of 4 and 5 years, respectively.
During the year ended December 31, 1998, the Company issued stock options with
strike prices below the then fair market value and, as a result, recorded
deferred compensation of approximately $368,000. Deferred compensation is
amortized over the four-year vesting period of the options. As of December 31,
1998, compensation cost of approximately $41,000 has been recognized.
1998 Employee Stock Purchase Plan The Company's 1998 Employee Stock Purchase
Plan (the "Stock Purchase Plan") was approved by the Board of Directors in
November 1998. The Stock Purchase Plan is intended to qualify as an "employee
stock purchase plan" under Section 423 of the Code in order to provide employees
of the Company with an opportunity to purchase Common Stock through payroll
deductions. An aggregate of 159,000 shares of the Company's Common Stock has
been reserved for issuance under the Stock Purchase Plan and is available for
purchase thereunder, plus an annual increase to be added on the first day of the
Company's fiscal year beginning in 2000 equal to the lesser of (i) 400,000
shares, (ii) two percent (2%) of the outstanding shares on such date or (iii) a
lesser number of shares determined by the Compensation Committee. At December
31, 1998, employee contributions to the Plan were approximately $66,000, which
will purchase shares of common stock on July 31, 1999.
8. Income Taxes
The components of the net deferred tax asset as of December 31, 1998 and 1997
consists of the following:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Operating loss carryforward $ 7,328,880 $ 3,325,050
Depreciation of fixed assets and amortization of intangibles 13,856 254,250
- -----------------------------------------------------------------------------------------
Net deferred tax asset 7,342,736 3,579,300
Less, Valuation allowance (7,342,736) (3,579,300)
Deferred tax asset $ 0 $ 0
- -----------------------------------------------------------------------------------------
</TABLE>
The difference between the Company's U.S. federal statutory rate of 35%, as well
as its state and local rate, net of a federal benefit of 7%, when compared to
its effective rate of 0% is principally comprised of its valuation allowance.
As of December 31, 1998, the Company has a net operating loss carryforward for
Federal income tax purposes of approximately $16,300,000. The carryforwards will
begin to expire in 2011 if not used. The net deferred tax asset has been fully
reserved due to the uncertainty of the Company's ability to realize this asset
in the future.
27
<PAGE>
9. Employee Savings Plan
The Company has a savings plan (the "Savings Plan") that qualifies as a deferred
salary arrangement under Section 401(k) of the Internal Revenue Code. Under the
Savings Plan, participating employees may defer a portion of their pretax
earnings, up to the Internal Revenue Service annual contribution limit. For the
years ended December 31, 1998 and 1997, the Company did not contribute to the
Savings Plan.
10. Subsequent Events (unaudited)
In February 1999, the Company completed the acquisition of Dice.com, a leading
online job posting service for information technology professionals, for
approximately $35 million in shares of common stock and cash. The consideration
also consists of additional future payments, based on the performance of
Dice.com, in the form of EarthWeb common stock or cash with an aggregate value
of up to $12,000,000. The Company funded the transaction through the issuance of
577,778 shares of common stock and from the proceeds of the initial public
offering. In addition, all outstanding options to purchase Dice.com common stock
were converted into non-qualified options to purchase an aggregate of 36,667
shares of EarthWeb Inc. common stock.
Under the terms of the acquisition agreement, an aggregate of 57,778 shares of
common stock will be held in escrow for 18 months for the purpose of
indemnifying the Company against certain liabilities of Dice.com and its
stockholders.
In February 1999, the Company acquired go certify.com, which provides users with
information on technical certification programs. In March 1999, the Company
acquired substantially all the assets of The Perl Journal, a leading technical
publication for developers using the Perl programming language, and the related
Web site TPJ.com. The aggregate purchase price of both acquisitions was
$980,000, of which $750,000 is payable until March 2000 in the form of common
stock or cash. The consideration paid also consists of additional future
payments, based on performance, in the form of cash or stock, with an aggregate
value of up to $500,000.
These acquisitions will be accounted for using the purchase method of
accounting. The results of operations for each will be included with those of
the Company for periods subsequent to the date of each acquisition.
28
<PAGE>
To the Board of Directors and Shareholders of EarthWeb Inc.:
In our opinion, the accompanying balance sheets and the related statements of
operations, stockholders' equity, and cash flows present fairly, in all material
respects, the financial position of EarthWeb Inc. at December 31, 1998 and 1997
and the results of its operations and cash flows for the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
New York, New York
January 21, 1999
29
<PAGE>
Quarterly Results of Operations (Unaudited)
The following table sets forth unaudited quarterly statement of operations data
for each of the four quarters during the years ended December 31, 1997 and 1998.
In the opinion of management, this information has been prepared substantially
on the same basis as the audited financial statements appearing elsewhere in
this Annual Report, and all necessary adjustments, consisting only of normal
recurring adjustments, have been included in the amounts stated below to present
fairly the unaudited quarterly results. The quarterly data should be read in
conjunction with the audited financial statements of EarthWeb and the notes
thereto appearing elsewhere in this Annual Report. The operating results for any
quarter are not necessarily indicative of the operating results for any future
period.
<TABLE>
<CAPTION>
Quarter ended March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997 1998 1998 1998 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars in thousands
Total revenues 330 262 194 349 308 666 944 1431
Cost of revenues 258 343 346 411 395 398 601 737
Gross profit (deficit) 72 (81) (152) (62) (87) 268 343 694
- --------------------------------------------------------------------------------------------------------------------
Operating expenses:
Product
development 237 239 291 236 246 310 434 485
Sales and marketing 159 265 328 266 333 477 1,082 2,655
General and
administrative 610 686 706 565 605 726 914 1,111
Depreciation and
amortization 63 77 199 554 233 244 311 328
Total operating
expenses 1,069 1,267 1,524 1,621 1,417 1757 2,741 4,579
- --------------------------------------------------------------------------------------------------------------------
Loss from
operations (997) (1,348) (1,676) (1,683) (1,504) (1,489) (2,398) (3,885)
Interest and other
income, net 41 26 125 75 47 30 42 187
- --------------------------------------------------------------------------------------------------------------------
Loss from continuing
operations (956) (1,322) (1,551) (1,608) (1,457) (1,459) (2,356) (3,698)
Loss from
discontinued
operations (172) (377) (631) (1,204) -- -- -- --
Net loss $(1,128) $(1,699) $(2,182) $(2,812) $(1,457) $(1,459) $(2,356) $(3,698)
- --------------------------------------------------------------------------------------------------------------------
Basic and diluted
net loss per share from
continuing operations $ (0.23) $ (0.25) $ (0.29) $ (0.30) $ (0.27) $ (0.27) $ (0.41) $ (0.53)
Basic and diluted
net loss per share from
discontinued operations (0.04) (0.07) (0.12) (0.22) -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Basic and diluted
net loss per share $ (0.27) $ (0.32) $ (0.41) $ (0.52) $ (0.27) $ (0.27) $ (0.41) $ (0.53)
</TABLE>
30
<PAGE>
Board of Directors
Jack D. Hidary(1)
President and Chief Executive Officer
Murray Hidary
Executive Vice President, Business Development, Secretary and Treasurer
Nova Spivack
Strategic Planning Advisor
Cary Davis(1)(2)
Vice President - E. M. Warburg, Pincus &Co., LLC
Henry Kressel(1)(2)
Managing Director - E. M. Warburg, Pincus & Co., LLC
Executive Officers
Jack D. Hidary
President, Chief Executive Officer and Director
Murray Hidary
Executive Vice President, Business Development, Secretary, Treasurer and
Director
William Gollan
Senior Vice President
Irene Math
Vice President, Finance
Lloyd Linn
Vice President, EarthWeb, Inc.
President, EW Career Solutions, Inc.
(operates the Dice.com business)
Kevin McPherson
Vice President, Worldwide Advertising Sales
John Kleine
Vice President, Systems and Operations
Scott Anderson
Vice President, Worldwide Marketing
Mark Schlack
Vice President, Content
Corporate Office
EarthWeb Inc.
3 Park Avenue
New York, New York 10016
Subsidiary
EW Career Solutions, Inc.
(operates the Dice.com business)
300 Walnut Street
Suite 100
Des Moines, IA 50309
Independent Accountants
PricewaterhouseCoopers LLP
New York, New York
Legal Counsel
Morrison & Foerster LLP
New York, New York
Transfer Agent and Registrar
American Stock Transfer & Trust Company
Form 10-K
Copies of the EarthWeb Inc. Form 10-K as filed with the Securities and Exchange
Commission are available without charge at www.sec.gov.
A copy of this annual report can be found online at: www.earthweb.com or via a
written, verbal or electronic request to the Company's corporate office.
Shareholder Information
EarthWeb Inc. Common Stock is quoted on the NASDAQ National Market under the
symbol EWBX. During the fourth quarter of 1998, the high and low closing prices
per share of common stock, as reported by NASDAQ, were $85.06 and $31.00,
respectively.
The Company has not paid cash dividends on its common stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
presently intends to retain its future earnings to finance the expansion and
development of the business.
As of March 1, 1999, 8,509,862 shares of EarthWeb Inc. common stock were issued
and outstanding and were held of record by 115 persons, including several
holders who are nominees for an undetermined number of beneficial owners.
All references to Web sites are not intended to incorporate information
contained therein.
31
<PAGE>
EarthWeb
www.earthweb.com
EarthWeb.com is the single point of access into EarthWeb's technical business-
to-business content and services. Through this hub, IT professionals can locate
thousands of resources available at EarthWeb's online services, including job
boards, software and the industry's most extensive collection of reference and
technical content.
Datamation
www.datamation.com
Datamation is the one-stop online resource center that provides unique
information, perspective and analysis for senior IT managers and executives at
large organizations.
HTML Goodies
www.htmlgoodies.com
With hundreds of HTML tutorials and extensive resources on DHTML, XML, SGML and
other mark-up languages, HTMLGoodies provides an audience of more than 300,000
Webmasters with the tools to create dynamic, functional Web sites.
Javascripts.com
www.javascripts.com
Home to dozens of original tutorials and hundreds of active forums,
Javascripts.com is recognized as the Internet's most comprehensive guide to
scripting languages and other Web development tools.
Developer.com
www.developer.com
A leading online resource for professional developers, developer.com offers
resource directories, reusable objects, discussions, training, news and more for
technologies including, C/C++, Perl, XML, ASP, Visual Basic, Middleware,
Networks, Databases and Security.
Dice.com
www.dice.com
With tens of thousands of current job listings for system engineers, developers
and other computer professionals, Dice.com is a premier job search site for IT
professionals.
Y2Kinfo
www.y2kinfo.com
Dedicated to Year 2000 tools, information and services, Y2KInfo is a
comprehensive online service for IT professionals involved in Year 2000
solutions.
Road Coders
www.roadcoders.com
Offering extensive links, source code, articles and development applications for
PalmPilot and Windows CE application development, Road Coders is the ultimate
site for people that code for the road.
ITKnowledge
www.itknowledge.com
EarthWeb's first subscription service, ITKnowledge covers such topics as
networking, databases, programming, Linux and hardware, and is the world's
largest online collection of technical books and source code.
Intranet Journal
www.intranetjournal.com
A resource for corporate Intranet professionals, Intranet Journal provides
targeted content, tutorials, original articles, moderated message exchange
boards and more on Intranet development and management topics.
EarthWeb Direct
www.earthwebdirect.com
Formed in partnership with Beyond.com, EarthWeb Direct focuses on software
products and tools for IT professionals.
Gamelan
www.gamelan.com
Noted industry-wide as the most comprehensive repository of Java resources and
endorsed by Sun Microsystems as the "Official Directory for Java," Gamelan
includes thousands of resources covering such topics as Java`s impact on
security, e-commerce, and distributed computing.
32
<PAGE>
EarthWeb Inc.
3 Park Avenue
New York, NY 10016
tel: 212.725.6550
fax: 212.725.6559
http://www.earthweb.com
33
<PAGE>
Exhibit 21.1
SUBSIDIARY OF REGISTRANT
------------------------
Name of Subsidiary Jurisdiction of Incorporation
------------------ -----------------------------
EW Career Solutions, Inc. Delaware
(operates dice.com business)
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation by reference in the registration statement on
Form S-8 of our report dated January 21, 1999, on our audits of the financial
statements of EarthWeb Inc. as of December 31, 1998 and 1997 and for the three
years in the period ended December 31, 1998. We also consent to the reference to
our firm under the caption "Experts."
PricewaterhouseCoopers LLP
New York, New York
March 17, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 25,292,229 4,775,153
<SECURITIES> 0 0
<RECEIVABLES> 1,196,681 386,961
<ALLOWANCES> (53,000) (11,000)
<INVENTORY> 0 0
<CURRENT-ASSETS> 27,264,596 6,301,408
<PP&E> 3,483,301 2,366,756
<DEPRECIATION> (1,414,549) (715,928)
<TOTAL-ASSETS> 30,477,384 8,513,848
<CURRENT-LIABILITIES> 3,559,293 1,983,951
<BONDS> 0 0
0 0
0 12,512
<COMMON> 79,038 29,250
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 30,477,384 8,513,848
<SALES> 3,349,165 1,135,141
<TOTAL-REVENUES> 3,349,165 1,135,141
<CGS> 2,131,593 1,358,293
<TOTAL-COSTS> 10,494,769 5,481,005
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (8,969,788) (5,437,018)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (8,969,788) (5,437,018)
<DISCONTINUED> 0 (2,383,519)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (8,969,788) (7,820,537)
<EPS-PRIMARY> (1.53) (1.63)
<EPS-DILUTED> (1.53) (1.63)
</TABLE>
