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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NO.: 0-25053
THEGLOBE.COM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 14-1782422
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
120 BROADWAY
NEW YORK, NEW YORK 10271
(Address of principal executive offices) (Zip Code)
(212) 894-3600
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.001 per share
Preferred Stock Purchase Rights
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) 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 [X].
The number of shares outstanding of the Registrant's Common Stock, $.001
par value (the "Common Stock") as of March 20, 2000 was 30,461,575.
Aggregate market value of the voting Common Stock held by non-affiliates of
the registrant as of the close of business on March 20, 2000:
$156,059,000.*
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
The information required by Part III of this report, to the extent not set
forth herein, is incorporated by reference from the registrant's definitive
proxy statement relating to the annual meeting of stockholders to be held
in 2000, which definitive proxy statement shall be filed with the
Securities and Exchange Commission within 120 days after the end of the
fiscal year to which this Report relates.
* Includes voting stock held by third parties which may be deemed
to be beneficially owned by affiliates, but for which such
affiliates have disclaimed beneficial ownership.
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THEGLOBE.COM, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business.........................................................1
Item 2. Properties......................................................18
Item 3. Legal Proceedings...............................................18
Item 4. Submission of Matters to a Vote of Security Holders.............18
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................19
Item 6. Selected Consolidated Financial Data............................21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......46
Item 8. Consolidated Financial Statements and Supplementary Data........47
Item 9. Changes in and Disagreements with Accountants and
Accounting and Financial Disclosure.............................68
PART III
Item 10. Directors and Executive Officers of the Registrant..............69
Item 11. Executive Compensation..........................................69
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................................69
Item 13. Certain Relationships and Related Transactions..................69
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K.............................................................70
SIGNATURES..................................................................73
PART I
ITEM 1. BUSINESS
OVERVIEW
theglobe.com ("theglobe" or "the Company") is one of the world's
leading online properties with over 3.6 million registered members in the
United States and abroad. We specialize in delivering "community", which we
define as bringing people together around shared topics of interest. We
deliver "community" through four different streams: (1) our flagship
website, www.theglobe.com, which features the Company's best-of-breed
community products-globeClubs and uPublish!, both of which enable users to
personalize their online experience by interacting with other users around
similar interests; (2) distribution of "customized community solutions" to
strategic partners who desire to include community in their Web properties;
(3) the small business sector through providing web hosting services to
businesses and professional webmasters; and (4) a world leading games
information network. Our games information network includes HappyPuppy,
GamesDomain, KidsDomain, ConsoleDomain, Chips & Bits, Inc. and Strategy
Plus, Inc. (the "Games Network"). In December 1999, our online properties
had 4.7 million unique visitors and a reach of 7.2% of the Internet
according to Media Metrix. Since our inception in May 1995, enhancements to
our core infrastructure capabilities, products and services, as well as
strategic partnerships and acquisitions have enabled us to experience
growth in our user base, reach and revenues.
Our primary revenue source is the sale of advertising, with additional
revenues generated through the development and sale of promotional
sponsorship placements within our websites, the sale of merchandise through
our online store, electronic commerce revenue shares and, to a lesser
extent, membership service fees for the sale of enhanced services. Some of
our prominent advertisers include America Online, Microsoft, Intel,
Coca-Cola, American Express, Disney, AT&T and Hewlett Packard.
Additionally, we have created strategic partnerships with Sportsline.com,
Inc., AOL-UK, Excite-UK, Time Warner's Road Runner, Alloy.com,
DirectHit.com, Deja.com and OneMain.com to distribute our customized
community solutions.
BUSINESS STRATEGY
Our goal is to be the Internet's leading provider of community
solutions. Our business focuses on generating revenue through selling
targeted online advertising and promotional sponsorships on our network of
online properties, e-commerce and direct marketing efforts.
We seek to attain our goal through the following key strategies:
Develop our best-of-breed community solutions and games information
content. We create compelling services and games information content by:
o enabling members and partners to customize their online community
experiences through the use of our community solutions;
o developing loyalty programs to reward members for increased usage
and referrals;
o improving customer support to better service our members and
partners;
o integrating new communication functionality into our uPublish!
and globeClubs products;
o expanding the suite of personal publishing and website building
tools;
o continually monitoring our users' activity and eliciting their
feedback to create future enhancements; and
o developing cutting-edge editorial coverage of computer and video
games.
Distribute our customized community solutions to three types of
customers. Aggregating online communities will benefit our customers as
follows:
o our community partners gain an opportunity to host vibrant online
communities, which enhance the experience of their users, and
promote increased user traffic and loyalty; and
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o our advertising clients and e-commerce customers gain access to
large unduplicated, targeted audiences to whom they can sell
their products and services.
We target three basic customer segments for distribution of our
customized community solutions and games information content:
o BUSINESS TO CONSUMER DIRECT. Consumer direct represents our
traditional customers to whom we offer community solutions that
assist in finding and communicating with people around similar
interests on theglobe.com, our flagship website, and throughout
our world leading Games Network.
o BUSINESS TO BUSINESS. Our consumer indirect segment extends our
community solutions and Games Network to include the audiences of
web properties of our strategic partners. Through these
relationships, our partners take advantage of the strength of our
community tools to retain users and to promote increased site
usage by enabling consumers to find and communicate with people
around similar topics of interest. The users from these aggregate
communities create critical mass of highly targeted audiences for
our partners, end users and advertising customers.
A significant focus of our company in 2000 will be the
distribution of our customized community solutions and Games
Network to additional strategic partners. Our service offerings
consist of the development, hosting and maintenance of co-branded
community solutions for consumer Web properties. We host these
community micro-sites on our central operating system, which
enables us to aggregate members and community discussions from
each of our partners' community sites and makes those discussions
available for real-time or delayed interaction on other community
networks.
We offer integrated solutions for clubs, message boards and
homepage building. We also provide an array of operating and
support services to our partners, including community site
hosting and maintenance, direct customer support and end-user
support. We have designed our central operating system to be
reliable and to handle rapid growth in customer and member
activity. Our central technology enables us to rapidly develop a
partners' community site in a relatively short period of time.
Hosting and maintaining our partners' community sites on our
system significantly reduces our partners need to invest in
additional hardware and software or devote significant
engineering or support resources to develop and maintain their
sites.
These distribution partnerships increase our audience, which, in
turn, significantly increases our ability to sell targeted
advertising to our clients.
o BUSINESS TO SMALL BUSINESS. Through our WebJump.com property, we
offer small business websites hosting services and the ability to
enhance their websites with our leading publishing and
communication applications
PRODUCTS AND SERVICES
globeClubs. globeClubs is a network of web and e-mail based clubs that
allows users to interact around very specific topics of interest.
globeClubs also lends itself to groups who want to use it as a publishing
tool. There are two ways for our users to participate in our e-mail based
club service: (1) the user explores a comprehensive list of current clubs
(categorized in 13 categories and over 4,000 subcategories) joins an
existing group or (2) the user starts a new e-mail club and invites other
members to discuss or debate topics that are not currently part of the
globeClubs list.
The following represents a partial list of features included within
the globeClubs service:
o LIVE CHAT HELP DESK. Technical and general support is available
seven days a week to answer any
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question a user may have regarding the globeClubs service;
o OWNER'S RESOURCE CENTER. We have developed the Leaders Lounge
Club, a place where club owners can learn from experienced
members on what it takes to make a club successful. In addition,
members have access to our community staff, a forum message board
and a chat room;
o CLUB STATISTICS. Each club publishes up-to-date statistics that
allow club members to view a comprehensive display of a club's
status (including information regarding member totals, the number
of messages, frequency of member postings and content
popularity);
o HTML. Club members and owners can put up photos, text and
graphics on a club main page;
o PROMOTION TOOLS. We provide pre-made banners that members can put
on their homepages to promote their clubs;
o ADVANCED SEARCH. Allows members to search for topics, clubs, club
owners, discussion language and age groups;
o PROFILES. Enables users to develop profiles about themselves
describing appearances, hobbies, likes and dislikes, photos and
links to their favorite websites;
o PRIVACY. A club can remain hidden from the general public, where
only club members will find it; and
o SUBSCRIPTION SETTINGS. Members can change where they receive
messages posted to a club. There are 3 ways to subscribe to a
club: Individually (one at a time sent to your email address), by
digest (multiple posts collected in one e-mail) or Web only
(viewing messages on our website).
uPublish! uPublish! is a full service website building solution with
templates, features and functionality from which to choose. We offer a rich
picture gallery (from PictureNow!) and features such as roving chat, audio
chat, headlines, audio messages, and globeClubs information, coupled with
an intuitive design that caters to both the homepage building veteran and
the new user. Users create a wide range of both full sites and individual
pages with a superior tool set and 25 megabytes of disk space available.
Additionally, detailed help screens are available to users through the
entire homepage or website building process. A user may employ uPublish! in
two ways: (1) a user may build a homepage or website of his or her own
filled with personally chosen content or (2) a user may interact with other
users of uPublish! on an existing homepage or website via various audio and
text tools.
The following represents a partial list of features available to
homepage and website builders:
o TEXT. Type in specific messages within uPublish!;
o PICTURES: Upload photos or choose from the multitude of photos
available in our uPublish! photo gallery;
o CLIP ART: A complete gallery of clip art is available;
o BULLETED LISTS: Create a bulleted list of information to include
about a given subject, such as listing statistics, facts, quotes
or any other relevant information;
o ROVING CHAT: Add a feature to their site, enabling people who are
simultaneously browsing the site to communicate with one another;
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o CONTACT INFORMATION: Add demographic information about themselves
to allow other users to reach them;
o COUNTER: Add a counter (in analog or digital format) to their
site to see how many people have visited;
o DATES: Add a list of important dates to their site, such as a
schedule of games or playoff dates;
o EMAIL LINK: Set up a link to allow others to send them email,
with their email address already embedded inside;
o GUESTBOOK: This allows visitors to post messages to the owner of
a homepage or website via signing a guestbook;
o HEADLINES: Add a variety of content feeds to their site;
o SITE LINKS: Add a section of specific links to their pages
including other websites;
o LIVE VOICE CHAT: Add a live voice chat room to their websites.
Visitors can talk to the site builder or to each other via HearMe
technology. This function can also be executed as text chat;
o MY CLUBS: Add links to the globeClubs to which they belong;
o POLL: Create their own poll, with up to four possible responses.
Statistics are shown to allow users to see vote split in
percentages;
o GIFT REGISTRY INFORMATION: Add information about the gifts they
would like to receive, as well as the stores at which they are
registered;
o SEARCH: Add the ability to search their site or other Web
properties for additional information;
o SELL YOUR PERSONAL DIGITAL CONTENT: Sell their own digital
content right on their sites, done in partnership with WAVE;
o CALENDAR: Add their personal schedule to their sites;
o PROMOTION: A number of promotional tools can be added to member
homepages and websites. These include joining a free ad banner
exchange network, submitting pages or sites to major search
engines, categorizing one's page or site for promotion within
theglobe community and emailing friends and family once a page or
site has been created;
o HTML: If users prefer to write their own HTML, they are provided
with an online editor to assist them through the process; and
o FILES: uPublish! offers homepage and website builders a file
manager to manage all files that are created. Files can be viewed
on both the directory and subdirectory levels.
BUSINESS TO BUSINESS RELATIONSHIPS
We have a number of strategic distribution relationships to provide
partners with our customized community solutions. These relationships
provide us with a cost-effective method of aggregating critical mass in
highly targeted audiences without incurring significant marketing or
infrastructure costs. Some of our premier
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partners include, but are not limited to, the following:
o Sportsline.com, Inc. We develop and operate community services
for CBS Sportsline, a leader in global Internet sports media.
o Time Warner's Road Runner. Road Runner is one of the nation's
leading providers of high speed online service. We provide our
Games Network and message boards to Road Runner's 650,000
subscribers.
o Excite UK. GamesDomain, a games publication within the Games
Network, provides comprehensive games information content to
Excite UK, one of the UK's leading web portals.
o OneMain.com. OneMain.com, an Internet Service Provider in smaller
metropolitan markets and rural communities, offers our co-branded
customized community solutions to its approximately 600,000
subscribers.
o Alloy.com. This website focuses on teen community and commerce
and will feature uPublish!, our website and homepage building
solution.
o DirectHit.com. A search technology provider owned by Ask Jeeves,
DirectHit.com will offer our globeClubs service through text link
to its users.
o AOL UK. We provide game downloads to AOL UK's approximately
600,000 members.
o Chaitime.com. Chaitime.com, a South Asian online community, will
offer a private label version of uPublish! and globeClubs, as
well as our message boards functionality, to its users.
o Deja.com. Deja.com, a consumer decision-making decision Web
property, and we agree to cross distribute and promote one of
each others core services, Deja Ratings and globeClubs,
respectively.
In addition to our agreements to distribute our community
solutions to strategic partners, we have various strategic relationships
with certain entities to provide content on our site. Some of these
partners include HotJobs.com, Reuters news service, CBS Marketwatch, Dr.
Koop.com, Isyndicate, Mortgage IT and E!Online.
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ADVERTISING CUSTOMERS
We had over 4.7 million unique users and a reach of 7.2% of the
Internet according to the December 1999 Media Metrix report. Additionally,
we have over 3.6 million registered members in the United States and abroad
with an additional 600,000 registered members related to our Webjump
property. We have attracted mass market consumer product companies as well
as technology-related businesses to advertise on our sites. We believe that
our core community and Games Network, as well as our numerous distribution
partners, make us well positioned to capture a portion of the growing
number of consumer product and service companies advertising online.
In 1999, no single advertiser accounted for more than 10% of total
revenues and approximately 70% of our advertisers were repeat customers.
For the twelve months ended December 31, 1999, approximately 470 clients
advertised on our sites running over 700 individual advertising campaigns.
Some of our advertising clients include:
Ameritrade CNET Intel Pepsi
American Express Dell Computers Kellogg's Brands Sprint
AOL Disney Kodak Sony
AT&T Dunkin' Donuts Lee Jeans 3Com
BellSouth EA Sports Levi's US West
Coca Cola Hewlett Packard Microsoft Warner Brother's
CNBC Hilton Office Depot Visa
ADVERTISING SALES AND DESIGN
We distinguish ourselves from our competition by creating unique
advertising and sponsorship opportunities designed to build brand loyalty
for our corporate sponsors by seamlessly integrating their advertising
messages into our different sites' content, as well as delivering targeted
messages to our users' desktop. By aggregating users around common
interests, we increase the ability to target these groups of users through
traditional web based advertising opportunities as well as direct marketing
initiatives that target the user off the web using their e-mail client.
We can deliver targeted advertising within different vertical areas of
our sites, allowing advertisers to single out and effectively deliver their
messages to their targeted audiences. We have the ability to target
specific demographic data, which include, but are not limited to, age,
gender, product, sub-vertical categorization and country. We believe that
sophisticated targeting is a critical element for capturing worldwide
advertising budgets for the Internet. Additionally, we have been expanding
the amount and type of demographic data we collect (all voluntarily
provided by our users), which allows us to offer more specific data to our
advertising clients for promotion of their products both online and
offline.
While our competition generally provides banner advertising as its
primary advertising option, we believe that our competitive advantage to
garnering significant advertising revenue lies in the flexibility of our
advertising options. We offer an assortment of advertising units and
advertising programs to ensure that our customers meet their needs. We
offer clients the following forms of advertising, which can be purchased
individually, in assorted combinations or in pre-defined packages:
o Banner advertising o Sweepstakes
o Five sizes of button o Affinity packages for
advertising advertising partners
o Text links o Direct marketing and lead
o Three sizes of pop-up generation, if users have
advertisements opted in to these programs
o Full page advertisements o List services for third
o Various sponsorship programs party direct marketing
o Market research for
advertising campaigns
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We have an internal advertising sales staff of approximately 32
professionals. These professionals focus on selling advertisements on our
websites and developing long-term strategic relationships with clients. A
significant portion of our sales personnel's compensation is commission
based. We have sales offices in New York City, Chicago, San Francisco and
London and intend to open additional sales offices in selected markets
around the world.
MARKETING AND PROMOTIONS
In 1999, we committed approximately $8.7 million to offline and online
media advertising. In November 1999, we launched an extensive television
advertising campaign to promote two new core products: uPublish!, our state
of the art personal publishing tool and globeClubs, a network of web and
e-mail based clubs that allows users to interact around very specific
topics of interest. During 1999, we used online and offline media to
generate brand awareness and registrations for our service. For the year
ended December 1999, we generated approximately 1.2 million new
registrations for our properties. Additionally, we increased our membership
base by over 600,000 members from our acquisition of WebJump.com in
November 1999. Our online marketing efforts were focused on:
o generating additional traffic to our sites,
o building and defining a desirable online destination in the minds
of present and potential online consumers, and
o creating a strong and viable brand within the Internet and
advertising industries.
In 2000, we intend to continue our marketing efforts. The dollars allocated
to marketing will primarily be used to secure distribution partnerships as
well as to continue to build traffic and our individual website brands.
TECHNOLOGY
Our strategy is to operate our business through the application of
existing technologies. The various features of our online environment are
implemented using a combination of off-the-shelf and proprietary software
components. Whenever possible, we favor licensing and integrating
"best-of-breed" technology from industry leaders, including Oracle, Sun
Microsystems and Microsoft. We believe that this component approach is more
manageable, reliable and scalable than single-source solutions. In
addition, our emphasis on commercial components accelerates our development
time. We believe that this is an advantage in our rapidly evolving market.
In addition to being scalable, our system has many redundancies, which
benefits us if our systems experience operating difficulties. Our servers
are connected to the Internet through a combination of links provided
through three separate carriers: AppliedTheory, UUNET and AT&T. This
approach to connectivity allows us to continue operations in the event of a
failure in any carrier. We plan to continue to upgrade our systems as
necessary to conform to our business plan. Our system allows us to roll out
upgrades incrementally on an as-needed basis.
To efficiently manage our systems, we have developed highly automated
methods of monitoring the performance of each system component. If any
subsystem fails, the failed subsystem is taken out of service and requests
are distributed among the remaining operational systems. We have also
developed tools to perform routine management tasks such as log processing
and content updates in an automated, remote-controlled fashion. We believe
that our investment in automation lessens the need for the additional
personnel that would otherwise be required to support the system as it
grows.
Our data processing systems and servers are hosted at the New York
Teleport in Staten Island, New York under a three year lease with Telehouse
International Corporation. The New York Teleport facility provides
security, electricity and premises for our systems. The facility has four
independent diesel generators designed to provide power to these systems
within seconds of a power surge. If required, the diesel generators can
supply the data center's power for several days. Telehouse International
Corporation does not guarantee that our Internet access will be
uninterrupted, error-free or secure.
We maintain additional server equipment at Exodus Communications,
Inc.'s facility in Seattle, Washington. Exodus provides and manages power,
environmentals and connectivity to the Internet through multiple links on a
24 hour-a-day, seven days per week basis. Exodus does not guarantee that
our Internet
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access will be uninterrupted, error-free or secure.
COMPETITION
Competition among community-focused sites is growing rapidly, as new
companies continue to enter the market and existing companies continue to
layer community applications onto their sites. We expect that the market
will continue to evolve rapidly, and the rate of product innovations and
new product introductions will remain high.
Barriers to entry are relatively insubstantial and we face competitive
pressures from many companies, both in the United States and abroad. With
the abundance of companies operating in this market, consumers and
advertisers have a wide selection of community services to choose from. In
order to remain competitive for consumers and the advertising and
e-commerce revenue each user represents, we must maintain a concerted
effort to continually develop new offerings, refine our core products and
enter into successful distribution agreements.
We believe that in order to attract new users and retain existing
ones, we need to:
o Educate users and other Web properties on the benefits of
community, specifically theglobe.com community;
o Maintain functional, intuitively-designed websites;
o Foster our brand image in the marketplace;
o Offer our users best-of-breed services both developed in-house
and via third-party relationships;
o Maintain a broad demographic focus, with a wide content and
service appeal to the largest possible audience; and
o Maintain a sizable, vibrant audience, enabling users to find
other users with similar interests (thereby increasing each
user's likelihood to participate in theglobe.com community.)
As an outsourced community solutions provider, we compete for business
relationships with software and service firms such as PeopleLink, Urbanite,
Homepage.com and TalkCity.
As a leading community destination site, we compete for users and
advertisers with:
o Stand-alone online discussion services and web-based clubs such
as Egroups, Ecircles, Deja.com and TalkCity;
o Stand-alone online publishing and homepage hosting sites such as
Homestead, FortuneCity and NetTaxi; and
o Multi-focused media sites offering either one or both of the
above services, such as Yahoo!, Lycos, NBCi, Microsoft's MSN,
America Online and Disney's Go Network.
As one of the largest games information properties on the Web, our
Games Network competes for users and advertisers with:
o Games information sites and communities such as Snowball's IGN,
ZDnet's Gamespot, and CNET's GameCenter; and
o Online games centers, where users can play games such as Uproar,
Pogo and Lycos' Gamesville.
As a leading community for children, our KidsDomain site competes for
users and advertisers with
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children-focused communities and sites such as Nick.com and Children's
Television Workshop.
As a business-to-business web hosting service, our Webjump property
competes with:
o Other free business hosting services such as Go2Net's Hypermart
and FreeYellow; and
o Fee-based business hosting services such as AT&T Small Business
Hosting and Yahoo's SimpleNet.
Many of our existing competitors, as well as a number of potential
competitors, may have the following advantages:
o Longer operating histories in the Internet market;
o Larger market presence;
o Larger customer bases; and
o Greater financial, technical, and marketing resources.
In addition, many companies involved in the community services market
may be acquired by, receive investments from, or enter into commercial
relationships with larger, well-established and well-financed companies. In
the past year, Xoom.com entered into a strategic relationship with NBC,
Yahoo! completed its acquisition of Geocities, and Egroups merged with
ONEList. These acquisitions and alliances may pose competitive advantages
for our competitors through combined marketing efforts, increased capital
and combined user bases. As a result of this highly competitive market,
these consolidations and strategic ventures may continue in the future.
We believe that the number of Internet businesses relying on
advertising revenue will continue to grow, as will the total amount of
advertising conducted on the Web. We believe that in order to garner the
greatest share of advertising expenditures, we must continue to:
o Maintain brand visibility in the advertisement buying community;
o Attract a high volume of traffic to our sites;
o Cover a broad range of topics with our sites' information
content;
o Appeal to a wide-ranging demographic;
o Offer advertisers the ability to precisely target our highly
segmental audience;
o Accurately determine the most profitable and competitive price
points for our various advertising packages; and
o Prove to advertisers the efficacy of advertising to our targeted
audience.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard substantial elements of our site and underlying technology
as proprietary. We attempt to protect them by relying on intellectual
property laws. We also generally enter into confidentiality agreements with
our employees and consultants and in connection with our license agreements
with third parties. We also seek to control access to and distribution of
our technology, documentation and other proprietary information. Despite
these precautions, it may be possible for a third party to copy or
otherwise obtain and use our proprietary information without authorization
or to develop similar technology independently.
We pursue the registration of our trademarks in the United States and
internationally. Our efforts include:
o The registration of a United States trademark for THEGLOBE.COM
and THEGLOBE (logo);
o The filing of United States trademark applications for BUILD A
WORLD AROUND YOU, GLOBECLUBS, SHOP.THEGLOBE.COM and TGLO;
o The registration of THEGLOBE (logo) in the European Union,
Israel, New Zealand and Norway; and
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o The filing of trademark applications for THEGLOBE (logo) in
Australia, Brazil, Canada, China, Hong Kong, Japan, Russian
Federation, Singapore, South Africa, Switzerland and Taiwan.
Additionally, Attitude Network has filed applications to register
HAPPY PUPPY (logo) and KIDS DOMAIN (logo) in the United States, Canada, and
the European Union. Attitude Network has registered GD GAMES DOMAIN (logo)
in the United Kingdom and has applied to register GAMES DOMAIN (logo) in
Canada, China and the European Union.
theglobe.com is implementing a patent strategy designed to create
barriers to entry to potential competitors. We have filed a number of
patent applications with the United States Patent & Trademark Office
covering various aspects of the business and are working with our patent
counsel on additional patents for inclusion in our patent portfolio. While
our strategy is meant to create effective barriers to entry for others into
our markets, the scope of our patents will not be determined until final
action is taken by the United States Patent & Trademark Office.
Effective trademark, service mark, copyright, patent and trade secret
protection may not be available in every country in which our services are
distributed or made available through the Internet. Policing unauthorized
use of our proprietary information is difficult. Existing or future
trademarks or service marks applied for or registered by other parties and
which are similar to ours may prevent us from expanding the use of our
trademarks and service marks into other areas. See "Risk Factors--We rely
on intellectual property and proprietary rights."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
We are subject to laws and regulations that are applicable to various
Internet activities. There are many legislative and regulatory proposals
under consideration by federal, state, local and foreign governments and
agencies, including matters relating to:
o online content;
o online gambling;
o Internet privacy;
o Internet taxation;
o access charges;
o liability for information retrieved from or transmitted over the
Internet;
o unsolicited commercial email messages;
o domain names; and
o jurisdiction.
New laws and regulations may increase our costs of compliance and
doing business, decrease the growth in Internet use, decrease the demand
for our services or otherwise have a material adverse effect on our
business.
ONLINE CONTENT
General Restrictions on Transmitting Indecent and Obscene Content.
Several federal and state statutes generally prohibit the transmission of
indecent or obscene information and content, including sexually explicit
information and content. The constitutionality of some of these statutes is
unclear at this time. For example, on the one hand in 1997 the Supreme
Court of the United States held that selected parts of the Federal
Communications Decency Act of 1996 imposing criminal penalties for
transmitting indecent and patently offensive content were unconstitutional.
On the other hand, many other provisions of the Communications Decency Act,
including those relating to obscenity, remain in effect. For example, on
April 19, 1999, the Supreme Court summarily affirmed a lower court decision
holding that selected parts of the Communications Decency Act imposing
criminal penalties for transmitting indecent comments or images with an
intent to annoy was constitutional, as long as those comments or images
were also obscene.
10
Restrictions on Transmitting Indecent and Obscene Content to Minors.
Other federal and state statutes specifically prohibit transmission of
certain content to minors. The Child Online Protection Act, which became
effective in November, 1998, requires websites engaged in the business of
the commercial distribution of material that is deemed to be obscene or
harmful to minors to restrict minors' access to this material. However, the
Child Online Protection Act exempts from liability telecommunications
carriers, Internet service providers and companies involved in the
transmission, storage, retrieval, hosting, formatting or translation of
third-party communications where these companies do not select or alter the
third-party material. On February 1, 1999, a federal district court in
Pennsylvania entered a preliminary injunction preventing enforcement of the
harmful-to-minors portion of the act. The provisions of the act relating to
obscenity, however, remain in effect. On April 2, 1999, the Justice
Department appealed the federal district court's decision to the Third
Circuit Court of Appeals. The Third Circuit has not yet handed down its
decision in this case. A similar state statute in New Mexico has been found
unconstitutional by the Tenth Circuit of Appeals.
Content Filters. Congress, selected states, and some municipalities
have proposed, or are currently considering, mandating the use of content
filters in public libraries and schools to restrict access to certain
materials available through the Internet. In Loudoun County, Virginia, a
content filter policy was adopted by the county library board in 1997 and
was later found to be unconstitutional by a federal district court. The
adoption of content filters in public libraries and schools may render
certain parts of our websites inaccessible to end users, affecting our
advertising revenues.
Consumer Fraud and Advertising. Some states, including New York and
California, have enacted laws or adopted regulations that expressly or as a
matter of judicial interpretation apply various consumer fraud and false
advertising requirements to parties who conduct business over the Internet.
The constitutionality and the enforceability of some of these statutes is
unclear at this time.
GAMBLING
The U.S. Department of Justice and some state Attorneys General have
intensified their efforts in taking action against businesses that operate
Internet gambling activities. In the current Congress, a bill is pending
that, if enacted, would prohibit placing or receiving a bet via the
Internet in any state. Even in the absence of new legislation directed
specifically at Internet-based gambling, existing federal and state
statutes criminalize some gambling activities. In June 1999, a federal
commission ordered to study the economic and social effects of gambling
issued a report recommending a broad ban on Internet gambling. In July
1999, a New York Supreme Court held that state gambling laws applied to an
offshore Internet casino whose computer servers were located and licensed
in Antigua. Online gambling advertisers accounted for under ten percent of
our advertising revenues in 1999.
PRIVACY
Several privacy laws and regulations have been adopted relating to the
collection, use, and disclosure of personally identifiable information. Any
additional legislation or regulations relating to consumer privacy or the
application or interpretation of existing laws and regulations could affect
the way in which we are allowed to conduct our business, especially those
aspects that contemplate the collection or use of our members' personal
information.
Children's Online Privacy Protection Act. In October 1998, the
Children's Online Privacy Protection Act was signed into law. The law
directs the Federal Trade Commission to develop regulations governing the
collection of data from children by commercial website operators. On
October 20, 1999, the FTC issued its final regulations. The regulations
apply to commercial websites directed to, or that knowingly collect
information from, children under 13. The rule becomes effective April 21,
2000.
Under the rule, these websites, with certain exceptions, would have to
obtain parental consent before collecting, using, or disclosing personal
information from children. This consent, with certain exceptions, would
11
have to be verifiable. Verifiable consent means any reasonable effort,
taking into consideration available technology, to ensure that parents of
children from whom information is sought receive notice of the website
operator's personal information collection, use, and disclosure practices
and that authorizes the collection, use, and disclosure of the information.
Certain less secure methods of obtaining consent such as e-mail will be
permissible for two years and only for internal uses. Information collected
for disclosure to third parties will require more secure methods such as
use of a credit card, toll-free number, digital signature, or e-mail that
is sent along with a password or a personal identification number. Websites
must also give parents a choice as to whether their child's information can
be disclosed to third parties, and give parents a chance to prevent further
use or future collection of personal information from their child. Parents
must also, upon request, be given a means of reviewing the personal
information collected from their child.
The statute includes a "safe harbor" program for industry groups or
others who wish to create self-regulatory programs to govern participants'
compliance. The rule outlines the process by which industry groups and
others may obtain certification of their guidelines. One safe harbor
application is currently pending before the FTC.
We currently require parental consent before allowing people who
identify themselves as being 12 or younger to become members of
theglobe.com website and to post any data in our chat rooms, forums, and
similar discussion groups. We are reviewing our current parental consent
practices and expect to have a verifiable consent mechanism in place by the
effective date of the rule.
Gramm-Leach-Bliley Act. In November 1999, the Gramm-Leach-Bliley Act
("GLBA") was signed into law. The GLBA contains certain privacy provisions
which require, among other things that, entities that qualify as financial
institutions under the act (which potentially may cover entities engaged in
a wide range of businesses) to provide individuals with a notice of their
privacy policies before entering into a customer relationship and to
prohibit the transfer of certain information regarding individuals who
obtain a financial service from such an entity to an unaffiliated third
party, subject to certain exceptions, unless the individual has been given
the opportunity to opt out of such sharing of their information. The FTC,
along with other federal agencies, has proposed rules to implement the GLBA
privacy provisions. The FTC proposed rule has requested comment on the
types of entities that may be deemed to be financial institutions. The
proposed rules are expected to become effective in November 2000. We will
be monitoring this rule making process to determine what impact, if any, it
may have on our business.
Other Federal Privacy Bills. Several other privacy bills have been
introduced in the current Congress. We cannot predict the exact form of any
legislation that the Congress might enact. Accordingly, we cannot assure
you that our current practices will comply with any legislative scheme that
Congress ultimately adopts or that we will not have to make significant
changes to comply with such laws.
FTC Reports. In June 1998, the FTC released a report analyzing the
effectiveness of self- regulation as a means of protecting consumer privacy
on the Internet. The report concluded that industry self-regulation had not
been adequate. The report listed four core information practices that the
FTC believes must be part of any privacy protection effort: notice, choice,
access and security. In July 1999, the FTC issued a second report in which
it concluded that legislation to address online privacy was not appropriate
at that time.
FTC Enforcement Activity. The Federal Trade Commission Act prohibits
unfair and deceptive practices in and affecting commerce. The FTC Act
authorizes the FTC to seek injunctive and other relief for violations of
the FTC Act, and provides a basis for government enforcement of fair
information practices. For instance, failure to comply with a stated
privacy policy may constitute a deceptive practice in some circumstances
and the FTC would have authority to pursue the remedies available under the
Act for any violations. Furthermore, in some circumstances, the FTC may
assert that information practices may be inherently deceptive or unfair,
regardless of whether the entity has publicly adopted any privacy policies.
The FTC has begun investigations into the privacy practices of
companies that collect information on the Internet. For example, on
February 12, 1999, the FTC made final a consent order with one of our
competitors in connection with that competitor's online collection of
personally identifiable data and its subsequent use of that data.
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Similarly, on August 12, 1999, the FTC entered into a final consent order
with the operator of a website directed to children and teens that focuses
on issues relating to money and investing. The FTC alleged that the site
falsely represented that personal information collected from children in a
survey would be maintained anonymously, and that the participant would be
sent an e-mail newsletter as well as prizes. The FTC's action was
predicated on its allegation that the personal information about the child
and family finances were in fact maintained in an identifiable manner. The
order prohibits such alleged misrepresentations in the future and requires
the operator to post a privacy notice on its sites directed toward children
and obtain verifiable parental consent before collecting personally
identifiable information from children.
DoubleClick, Inc. has disclosed that the FTC is investigating its
advertisement and data collection practices. In 1999, DoubleClick purchased
Abacus Direct Corp., an owner of a database containing consumers' offline
catalogue purchasing behavior. Shortly thereafter, DoubleClick announced
its intention to link the personal identities of consumers in the Abacus
database to the other information and anonymous data it collects about
Internet users in the ordinary course of its business. This announcement
was opposed by a number of privacy groups, including the Electronic Privacy
Information Center, who petitioned the FTC to begin an investigation.
Although DoubleClick has announced that it would refrain from linking the
personal identities with the other information and anonymous data until the
government and industry can agree on a set of privacy standards, the
investigations are ongoing.
The attorneys general of New York and Michigan have also announced
that they are investigating DoubleClick. The attorney general of Michigan
has sent a notice of intended action to DoubleClick. That notice of
intended action is a formal warning that sometimes precedes the filing of a
formal lawsuit.
We are continuing to review our privacy practices in light of FTC
enforcement activity. We cannot assure you that the FTC's activities in
this area will not adversely affect our ability to collect demographic and
personal information from members, which could have an adverse effect on
our ability to attract advertisers. This could have a material adverse
effect on us.
Voluntary Self-Regulation. Some industry groups and other
organizations have proposed, or are in the process of proposing, various
voluntary standards regarding the treatment of data collected over the
Internet. In order to improve user and member confidence in our site, we
revised theglobe.com website user agreement and privacy policy and became a
licensee of the TRUSTe Privacy Program. As a TRUSTe licensee, we have
agreed to adhere to certain established privacy principles for theglobe.com
website as well as to comply with TRUSTe's oversight and consumer
resolution process. theglobe.com website privacy policy now sets forth what
personal information is being collected, how it will be used, with whom it
will be shared, who is gathering the information, what options the user
has, what security procedures are in place to prevent misuse or loss, and
how users can correct information to control its dissemination. We may
choose to join other organizations that require us to comply with other
privacy principles. We may incur expenses in obtaining the endorsement of
these organizations or in altering our current policies to comply with
these privacy principles. We cannot assure you that the adoption of
voluntary standards will preclude any legislative or administrative body
from taking governmental action regarding Internet privacy.
European Union Privacy Directive. At the international level, the
European Union adopted a directive that requires EU member countries to
impose restrictions on the collection and use of personal data, effective
October 25, 1998. Among other provisions, the directive generally requires
member countries to prevent the transfer of personally-identifiable data to
countries that do not offer equivalent privacy protections. At present, the
EU has indicated that the United States does not provide protections
equivalent to that of the directive. The directive could, among other
things, affect United States companies that collect information over the
Internet from individuals in EU member countries, and may impose
restrictions that are more stringent than current Internet privacy
standards in the United States. In response to the directive, on November
4, 1998, the U.S. Department of Commerce published for comment a set of
safe harbor principles regarding privacy protection for personally
identifiable data. These principles were revised on April 19, 1999. The
Commerce Department proposed that organizations that come within the safe
harbor would be presumed to maintain an adequate level of privacy
protection and could continue to receive personal data transfers from EU
member countries. The draft safe harbor provides for:
13
o notice regarding the organization's intended use of personal
data;
o the opportunity for an individual to choose how the organization
or a third party will use personal information;
o requirements regarding the security and integrity of personal
data and access by an individual to data regarding that
individual; and
o mechanisms for ensuring an organization's compliance with the
privacy principles.
The Commerce Department and the EU are engaged in ongoing discussions
about the application of the directive to United States companies. On March
14, 2000, the Commerce Department and the EU jointly announced that an
arrangement had been reached. The EU Parliament and the EU member states
must approve the arrangement before it can be implemented. The Commerce
Department has urged these entities to approve the arrangement prior to the
June 2000 U.S.-EU Summit. We own some websites operated in the U.K. that
collect personally identifiable data. We are continuing to review our
privacy policies and practices in light of the directive and the proposed
safe harbor. We cannot assure you that the U.S. and EU's activities in this
area will not adversely affect our ability to collect demographic and
personal information from members, which could have an adverse affect on
our ability to attract advertisers. This could have a material adverse
effect on us.
INTERNET TAXATION
United States. Governments at the federal, state and local level, and
some foreign governments, have made a number of proposals that would impose
additional taxes on the sale of goods and services and various other
Internet activities. In 1998, the federal Internet Tax Freedom Act was
signed into law, placing a three-year moratorium on state and local taxes
on Internet access and on multiple or discriminatory taxes on electronic
commerce. However, this moratorium exempts existing state or local laws.
The statute also created a commission, known as the Advisory Commission on
Electronic Commerce to study several Internet taxation issues. The Advisory
Commission must submit its findings to Congress no later than April 21,
2000. In addition, bills have been introduced in the Senate and the House
proposing that the three-year moratorium be made permanent. We cannot
assure you that future laws imposing taxes or other impositions on Internet
commerce would not substantially impair the growth of Internet commerce and
as a result materially adversely affect our business.
World Trade Organization. The Clinton Administration has stated that
the United States will advocate in the World Trade Organization and other
appropriate international organizations that the Internet be declared a
tariff-free environment whenever it is used to deliver products and
services. In addition, the Clinton Administration has stated that the
government should impose no new taxes on Internet commerce, but rather that
taxation should be consistent with established principles of international
taxation, should avoid inconsistent national tax jurisdictions and double
taxation and should be simple to administer and easy to understand. On
November 11, 1999, Congress passed a concurrent resolution urging the U.S.
to seek a global consensus supporting a moratorium on tariffs and on
special, multiple and discriminatory taxation of e-commerce. We cannot
assure you that foreign countries will not seek to tax Internet
transactions or will show similar support of such a moratorium.
ACCESS CHARGES
Several telecommunications carriers are supporting regulation of the
Internet by the FCC in the same manner that the FCC regulates other
telecommunications services. These carriers have alleged that the growing
popularity and use of the Internet has burdened the existing
telecommunications infrastructure, resulting in interruptions in phone
service. Incumbent local exchange telephone carriers have in the past
petitioned the FCC to regulate Internet service providers in a manner
similar to long-distance telephone carriers and to impose interstate access
charges on Internet service providers. In May 1997, however, the FCC
confirmed that Internet service providers will continue to be exempt from
interstate access charges. In August 1998, the Eighth Circuit Court of
Appeals upheld the FCC's authority to maintain the exemption.
In February 1999, the FCC adopted an order concerning payment by
incumbent local exchange carriers of reciprocal compensation for dial-up
calls to Internet service providers that obtain their local telephone
service from
14
competitive local exchange carriers. The FCC found that Internet traffic is
largely interstate, and therefore subject to the FCC's jurisdiction,
because end user calls to Internet service providers do not terminate at
the Internet service providers' servers, but continue to Internet locations
that often are outside the state or country in which the call originates.
Although the FCC stated that the order does not require Internet service
providers to pay access charges for calls placed through their services,
the order does provide further support for a possible, ultimate finding
that access charges must be paid for at least some categories of Internet
services, such as Internet-based voice telephony.
If the FCC were to withdraw the exemption or take other action
responding to telecommunications carrier concerns, the costs of
communicating through the Internet could increase substantially,
potentially slowing the growth in Internet use. This could decrease demand
for our services or increase our cost of doing business.
LIABILITY FOR INFORMATION RETRIEVED FROM OR TRANSMITTED OVER THE
INTERNET
Liability issues relating to information retrieved or transmitted over
the Internet include claims for copyright or trademark infringement,
defamation, unsolicited electronic mail, negligence, or other claims based
on the nature and content of these materials.
Copyright. In October 1998, the Digital Millennium Copyright Act,
whose Title II contains the Internet Copyright Infringement Liability
Clarification Act, was signed into law. This statute provides that, under
some circumstances, a service provider would not be liable for any monetary
relief, and would be subject to limited injunctive relief, for claims of
infringement, based on copyright materials transmitted by users over its
digital communications network or stored on its systems or under the
control of or connected to its systems. This statute also provides that,
under some circumstances, a service provider would not be liable for any
claim if the service provider acted in good faith to remove access to the
infringing material. With respect to infringement caused by storing
material on a system or network, in order to benefit from the protections
of the act, a service provider must appoint a designated agent to receive
notifications of claimed infringement and must provide information about
that agent to the U.S. Copyright Office and to the public in a publicly
accessible place on the service. We have appointed a designated agent to
receive notifications of claimed infringement on theglobe.com website, have
provided that information to the Copyright Office, and made it available to
the public on the site.
Defamation. The Communications Decency Act of 1996 provides that no
provider or user of an interactive computer service shall be treated as the
publisher or speaker of any information provided by another information
content provider.
Revenue Sharing. We sell products directly to consumers and we also
enter into agreements with commerce and service partners and sponsors under
which we are entitled to receive a share of the revenue from the purchase
of goods and services through direct links from our site. These
arrangements may expose us to additional legal risks, including potential
liabilities to consumers by virtue of our involvement in providing access
to these products or services, even if we do not ourselves provide these
products or services. Some of our agreements with these parties provide
that these parties will indemnify us against liabilities. However, we
cannot assure you that this indemnification will be enforceable or
adequate. Although we carry general liability insurance, our insurance may
not cover all potential claims or liabilities to which we are exposed. Any
imposition of liability that is not covered by insurance could have a
material adverse effect on our business.
Materials may be downloaded and publicly distributed over the Internet
by the Internet services operated or facilitated by us. Future legislation
or regulations or court decisions may hold us liable for listings and other
content accessible through our website, for content and materials posted by
members on their respective personal web pages, for hyperlinks from or to
the personal web pages of members, for content and materials transmitted by
members in e-mail clubs, or through content and materials posted in our
chat rooms or bulletin boards. Liability might arise from claims alleging
that, by directly or indirectly providing hyperlinks to websites operated
by third parties or by providing hosting services for members' sites, we
are liable for copyright or trademark infringement or other wrongful
actions by these third parties. If any material on our website contains
informational errors, someone might sue us for losses incurred in reliance
on the erroneous information. We attempt to reduce our exposure to
potential liability through, among other things, provisions in member
agreements, user policies, insurance and
15
disclaimers. however, the enforceability and effectiveness of these
measures are uncertain. Future legislation or regulation in the area of
liability for information received from or transmitted over the Internet
could decrease the growth of Internet use. These factors could decrease the
demand for our services. We may also incur significant costs in
investigating and defending against these claims.
UNSOLICITED COMMERCIAL ELECTRONIC MAIL
Some states have adopted laws that address unsolicited commercial
e-mail or "spamming." The federal government and other states, including
New York, are considering, or have considered, similar legislation.
California has adopted a law permitting electronic mail service
providers to sue parties who initiate unsolicited commercial messages in
violation of its e-mail policy, if the initiator has notice of that policy.
California also requires unsolicited e- mail advertisements to include
opt-out instructions with a toll-free telephone number or a valid return
address in the e-mail and requires senders of unsolicited e-mail
advertisements to honor opt-out requests. California also imposes criminal
penalties on parties who knowingly use Internet domain name of another
party to send one or more messages where such messages damage or cause
damage to a computer, computer system, or computer network. Similarly,
under Virginia law, it is a crime to send unsolicited bulk e-mail
containing false message headers or to sell software designed to do so, and
civil penalties can be imposed for injuries caused by unsolicited bulk
e-mail. Under Washington law, recipients of unsolicited commercial e-mail
containing false headers and misleading subject lines can bring lawsuits
seeking damages of up to $500.00.
A third party provides our e-mail service. Potential liability for
information disseminated through our systems could lead us to implement
measures to reduce our exposure to liability. This could require the
expenditure of substantial resources and limit the attractiveness of our
services. We attempt to reduce our exposure to potential liability through,
among other things, provisions in member agreements, user policies and
disclaimers. However, the enforceability and effectiveness of these
measures are uncertain.
DOMAIN NAMES
Domain names have been the subject of significant trademark litigation
in the United States. The current system for registering, allocating and
managing domain names has been the subject of litigation and is currently
subject to regulatory reform.
We have registered several domain names, including "theglobe.com,"
"shop.theglobe.com," "tglo.com," "happypuppy.com," "realmx.com,"
"kidsdomain.com" "gamesdomain.com," "webjump.com," and "cdmag.com." We
cannot assure you that third parties will not bring claims for infringement
against us for the use of these names. Moreover, because domain names
derive value from the individual's ability to remember the names, we cannot
assure you that our domain names will not lose their value if, for example,
users begin to rely on mechanisms other than domain names to access online
resources. We cannot assure you that our domain names will not lose their
value, or that we will not have to obtain entirely new domain names in
addition to or in place of our current domain names.
JURISDICTION
Due to the global reach of the Internet it is possible that the
governments of other states and foreign countries might attempt to regulate
Internet activity and our transmissions. Our facilities are located
primarily in New York, California, and Washington. Additionally, we own
websites, which are based in the United Kingdom and are subject to some
regulation under U.K. law. Consequently, foreign countries may take action
against us for violations of their laws. We cannot assure you that
violations of these laws will not be alleged or charged by state or foreign
governments and that these laws will not be modified, or new laws enacted,
in the future. Any actions of this type could have a material adverse
effect on our business.
OTHER
16
America Online has disclosed that the Department of Labor is
investigating the applicability of the Fair Labor Standards Act to its
Community Leader program. AOL's Community Leaders perform tasks such as
answering questions from subscribers, supervising chat rooms and enforcing
community rules. AOL has stated that it believes its Community Leader
program reflects industry practices, that its Community Leaders are
volunteers, not employees, and that its actions comply with law. AOL has
also stated that it is cooperating with the DOL, but is unable to predict
the outcome of the DOL's investigation. AOL has also disclosed that former
volunteers have brought a class-action suit against AOL alleging violations
of the FLSA and comparable state statutes. We have also implemented a
community leader program. We believe that the AOL program differs from our
program in several significant respects. However, we cannot predict the
outcome of this investigation or lawsuit, or their effect on our business.
EMPLOYEES
As of December 31, 1999, we had approximately 220 full-time employees,
including approximately 35 employees related to our shop.theglobe.com
operations and 40 employees related to our operations of our Games Network.
The 145 employees related to the operations of theglobe.com consisted of 46
employees in sales and marketing, 47 employees in product development, 14
employees in technology and 38 employees in finance and administration. Our
future success depends, in part, on our ability to continue to attract,
retain and motivate highly qualified technical and management personnel.
Competition for these persons is intense. From time to time, we also employ
independent contractors to support our research and development, marketing,
sales and support and administrative organizations. Our employees are not
represented by any collective bargaining unit and we have never experienced
a work stoppage. We believe that our relations with our employees are good.
17
ITEM 2. PROPERTIES
Our headquarters are located in an approximately 47,000 square foot
facility located in New York City, under a lease which expires in January
2014. We maintain a sales office in an approximately 4,000 square foot
facility in San Francisco, California, under a lease that expires in June
2004. We also maintain approximately 14,100 square feet of office space in
Seattle, Washington in connection with our e-commerce operations that
expires in December 2000. In connection with our operation of a portion of
our Games Network, we maintain 2,465 square feet of office space in
Birmingham, England, under a lease that expires in October 2007. Our
principal web server equipment and operations are maintained by our
personnel at the New York Teleport facility in Staten Island, New York. We
rent approximately 2,800 square feet of space under a Data Center Space
Lease that expires in August 2001. Additional web server equipment relating
to our electronic commerce business is located with and maintained by
Exodus Communications, Inc. in Seattle, Washington. We believe that its
current facilities are adequate to maintain its current operations.
ITEM 3. LEGAL PROCEEDINGS
On July 1, 1999, the Company filed a complaint in Supreme Court of the
State of New York, County of New York. The lawsuit alleges that
Stockplayer.com, Inc. breached advertising service agreements with the
Company by failing to pay for advertising services performed by the
Company. On August 13, 1999, Stockplayer.com, Inc. filed its answer denying
that it breached these advertising services agreements. The answer also
alleges that the Company breached alleged express and implied warranties in
connection with certain information provided by the Company to
Stockplayer.com. Stockplayer.com alleges that it has been damaged in an
amount not less than $5,000,000. Based on our analysis, the Company
believes that these allegations are without merit and plans to vigorously
defend these allegations. The Company believes that it is unlikely that
this claim will have a material adverse effect on the Company's
consolidated financial condition or results of operations.
From time to time the Company has been named in other claims arising
in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position, results of
operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our stockholders' for a vote during the
three months ended December 31, 1999.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
Our Common Stock has traded on the NASDAQ National Market under the
Symbol "TGLO" since its initial public offering on November 13, 1998. Prior
to that date, there was no public market for our Common Stock. The
following table sets forth the range of high and low closing sales prices
of our Common Stock for the periods indicated as reported by the NASDAQ
stock market:
Fiscal Quarter Ended High Low
-------------------- ------ ------
December 31, 1999......................... $16.38 $ 8.38
September 30, 1999........................ $19.31 $10.25
June 30, 1999............................. $39.47 $12.75
March 31, 1999............................ $33.53 $15.75
December 31, 1998 (commencing November
13, 1998)....................... ......... $31.75 $13.72
The market price of our Common Stock is highly volatile and fluctuates
in response to a wide variety of factors. See "Risk Factors--Our stock
price is volatile."
HOLDERS OF COMMON STOCK
We had approximately 353 holders of record of Common Stock as of March
16, 2000. This does not reflect persons or entities who hold Common Stock
in nominee or "street" name through various brokerage firms.
DIVIDENDS
We have not paid any cash dividends on our Common Stock since our
inception. We expect to reinvest any future earnings in the Company to
finance growth, and therefore do not intend to pay dividends in the
foreseeable future. Our board of directors will determine if we pay any
future dividends.
USE OF PROCEEDS
On November 13, 1998, we completed our initial public offering of
approximately 7.0 million shares of Common Stock at a price of $4.50 per
share (File No. 333-59751). We received net proceeds of $27.3 million, net
of $2.0 million in underwriting discounts and $2.0 million in offering
costs. On May 19, 1999, we completed our secondary public offering of 3.5
million shares of Common Stock at a price of $20.00 per share (File No.
333-76153). We received net proceeds of $65.0 million, net of $3.5 million
in underwriting discounts and $1.5 million in offering costs. The number of
shares offered and the per share offering price reflect a two-for-one stock
split we effected on May 14, 1999. None of the expenses incurred in our
initial and secondary public offerings were direct or indirect payments to
our directors, officers, general partners or their associates, to persons
owning ten percent or more of any class of our equity securities or to our
affiliates. As of December 31, 1999, the net proceeds received from our
public offerings have been used for networking infrastructure and the
functionality of our websites and for general corporate purposes, which
include working capital, advertising costs, the leasing of new office
facilities, the expansion of our sales and marketing capabilities, our
advertising campaign and our brand name promotions. We have also used a
portion of such net proceeds for the acquisition of complementary
businesses, assets, services and
19
technology. None of the general corporate expenses incurred were direct or
indirect payments to our directors, officers, general partners or their
associates, to persons owning ten percent or more of any class of our
equity securities or to our affiliates.
RECENT SALES OF UNREGISTERED SECURITIES
On November 30, 1999, we issued 1,104,972 shares of our Common Stock
in connection with the acquisition of the web hosting assets of
Webjump.com. Additional shares of Common Stock may be issued upon the
attainment of certain performance goals in 2000. This transaction was a
private placement exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to Rule 506 of Regulation D,
promulgated thereunder.
20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data with respect to our
consolidated balance sheets as of December 31, 1999 and 1998 and the
related consolidated statements of operations for the years ended December
31, 1999, 1998 and 1997 have been derived from our audited consolidated
financial statements which are included herein. The selected financial data
with respect to our balance sheets as of December 31, 1997, 1996 and 1995
the related statements of operations for the year ended December 31, 1996
and the period May 1, 1995 (inception) through December 31, 1995 have been
derived from our audited financial statements which are not included
herein. The following selected consolidated financial data should be read
in conjunction with the consolidated financial statements and the notes
thereto and the information contained in Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
MAY 1, 1995
(INCEPTION)
THROUGH
DECEMBER
YEAR ENDED DECEMBER 31, 31,
------------------------------------------- -------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenues................... $18,641 $ 5,510 $ 770 $ 229 $ 27
Cost of revenues........... 8,548 2,136 257 116 13
------- ------- ------- ------- -------
Gross profit............... 10,093 3,374 513 113 14
Operating expenses (3):
Sales and marketing...... 19,352 9,402 1,415 276 1
Product development...... 10,488 2,633 154 120 60
General and
administrative......... 12,165 6,828 2,828 489 19
Non-recurring charge..... -- 1,370 -- -- --
Amortization of
goodwill and
intangible assets...... 20,460 -- -- -- --
------- ------- ------- ------- -------
Total operating expenses... 62,465 20,233 4,397 885 80
------- ------- ------- ------- -------
Loss from operations....... (52,372) (16,859) (3,884) (772) (66)
Other income, net.......... 1,705 892 335 22 --
------- ------- ------- ------- -------
Loss before provision
for income taxes and
extraordinary item (50,667) (15,967) (3,549) (750) (66)
Provision for income
taxes.................... 290 79 36 -- --
------- ------- ------- ------- -------
Loss before
extraordinary item....... (50,957) (16,046) (3,585) (750) (66)
Extraordinary item-gain
on early retirement of
debt..................... 1,356 -- -- -- --
------- ------- ------- ------- -------
Net loss................... (49,601) $(16,046) $(3,585) $ (750) $ (66)
======= ======= ======= ======= =======
Basic and diluted net loss
per share (1) (2):
Loss before
extraordinary item..... $ (2.06) $ (3.37) $ (1.56) $ (0.33) $ (0.03)
Extraordinary item-gain
on early retirement of
debt..................... $ 0.06 $ -- $ -- $ -- $ --
------- -------- ------- ------- -------
Net loss................. $ (2.00) $ (3.37) $ (1.56) $ (0.33) $ (0.03)
======= ======= ======= ======= =======
Weighted average shares
outstanding used in
basic and diluted per
share calculation
(1)(2)................... 24,777 4,762 2,294 2,250 2,250
======= ======= ======= ======= =======
21
DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
CONSOLIDATED BALANCE
SHEETS DATA:
Cash and cash
equivalents and short-
term investments.......... $55,875 $30,149 $18,874 $ 757 $ 587
Working capital............. 52,965 27,009 17,117 648 575
Total assets................ 138,843 38,130 19,462 973 647
Capital lease
obligations, excluding
current installments...... 2,201 2,006 99 -- --
Total stockholders'
equity.................... 126,909 30,301 17,352 795 632
- ----------------------
(1) Weighted average shares outstanding does not include any common stock
equivalents because the inclusion of those common stock equivalents
would have been anti-dilutive. See the consolidated financial
statements and the related notes appearing elsewhere in this Form 10-K
for the determination of shares used in computing basic and diluted
net loss per share.
(2) Weighted average shares outstanding and the basic and diluted net loss
per common share reflect the two-for-one stock split effected by the
Company on May 14, 1999. All prior periods have been adjusted to
reflect the stock split.
(3) Certain reclassifications have been made to prior year's selected
consolidated financial data to conform to the current year's
presentation.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. These forward-looking
statements can be identified by the use of predictive, future-tense or
forward-looking terminology, such as "believes," "anticipates," "expects,"
"estimates," "plans," "may," "intends," "will," or similar terms. Investors
are cautioned that any forward-looking statements are not guarantees of
future performance and involve significant risks and uncertainties, and
that actual results may differ materially from those projected in the
forward-looking statements as a result of various factors described under
"Risk Factors" and elsewhere in this report. The following discussion
should be read together with the consolidated financial statements and
notes to those statements included elsewhere in this report.
OVERVIEW
We are one of the world's leading online properties with over 3.6
million registered members in the United States and abroad. We specialize
in bringing people together around shared topics of interest. We deliver
"community" through four different streams: our flagship website,
www.theglobe.com, featuring our best-of-breed community products-globeClubs
and uPublish!, both of which enable our users to personalize their online
experience by interacting with other users with similar interests;
distribution of our customized community solutions to strategic partners
who desire to include community in their Web properties; small businesses
looking to add "community" to their websites; and a leading games
information network. Our games information network includes HappyPuppy,
GamesDomain, KidsDomain, ConsoleDomain, Chips & Bits, Inc. and Strategy
Plus, Inc. Since our inception in May 1995, significant developments to
core infrastructure capabilities, products and services, and strategic
partnerships and acquisitions have enabled us to experience tremendous
growth in our user base, reach and revenues.
Our primary revenue source is the sale of advertising, with additional
revenues generated through the development and sale of promotional
sponsorship placements within our websites, the sale of merchandise through
our online store, electronic commerce revenue shares and, to a lesser
extent, membership service fees for the sale of enhanced services.
In 1997, we accomplished the following:
o moved our headquarters to New York City;
o expanded our membership base from 250,000 to almost 1 million
members;
o improved and upgraded our services;
o expanded our production staff;
o built an internal sales department; and
o began an active promotional campaign of theglobe brand to
increase awareness.
During 1998, revenues and operating expenses increased significantly
as we placed a greater emphasis on building our advertising revenues,
sponsorship revenues and memberships by expanding our sales force and
promoting theglobe brand.
In November 1998, we completed an initial public offering of
approximately 7.0 million shares of our Common Stock. The initial offering
price was $4.50 per share which resulted in net proceeds of $27.3 million,
after underwriting discounts of $2.0 million and offering costs $2.0
million.
In February, 1999, we acquired factorymall.com, an online department
store doing business as Azazz.com, which sells a variety of name brand
products directly to consumers, for an aggregate purchase price of $22.8
million. The consideration paid, in part, consisted of approximately 0.7
million shares of newly issued Common Stock. We have integrated Azazz.com
into our electronic commerce site, now known as "shop.theglobe.com."
23
In April 1999, we acquired Attitude Networks, Ltd., a provider of
online games information content whose websites include Happy Puppy, Games
Domain and Kids Domain, three leading websites serving game enthusiasts.
The aggregate purchase price amounted to $46.8 million and was comprised,
in part, of approximately 1.6 million shares of newly issued Common Stock.
In May 1999, we completed a secondary public offering of 3.5 million
shares of Common Stock at an offering price of $20.00 per share. Net
proceeds amounted to $65.0 million, after underwriting discounts of $3.5
million and offering costs of $1.5 million.
In December 1999, we acquired the web hosting assets of Webjump.com, a
web hosting property that primarily focuses on small businesses. The total
purchase price for this transaction was $13.0 million and was primarily
comprised of 1.1 million shares of newly issued Common Stock. An additional
$12.5 million, payable in newly issued shares of Common Stock, is
contingent based upon the attainment of certain performance targets on or
before November 2000.
In February 2000, we acquired Chips & Bits, Inc. and Strategy Plus,
Inc., providers of online and offline entertainment content focused towards
game enthusiasts. The total purchase price for this transaction was
approximately $15.3 million and was comprised, in part, of 1.9 million
newly issued shares of Common Stock. An additional $1.25 million, payable
in newly issued shares of Common Stock, is contingent on the attainment of
certain performance targets by Chips & Bits, Inc. and Strategy Plus, Inc.
during the fiscal year 2000.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues. To date, our primary revenue source has been the sale of
advertisements on our online properties. Advertising revenues constituted
80% and 89% of total revenues for the years ended December 31, 1999 and
1998, respectively. We sell a variety of advertising packages to clients,
including banner advertisements, event sponsorships, and targeted and
direct response advertisements. Our advertising revenues are derived
principally from short-term advertising arrangements, averaging one to
three months. We generally guarantee a minimum number of impressions,
defined as the number of times that an advertisement appears in pages
viewed by the users of our online properties, for a fixed fee. Advertising
revenues are recognized ratably in the period in which the advertisement is
displayed, provided that no significant Company obligations remain and
collection of the resulting receivable is probable.
In addition to advertising revenues, we derive other revenues through
the development and sale of sponsorship placements within our websites, the
sale of merchandise through our online stores, electronic commerce revenue
shares and, to a lesser extent, membership service fees for the sale of
enhanced services. We earn revenue on sponsorship contracts for fees
relating to the design, coordination, and integration of the customer's
content and links. A number of arrangements with our premier electronic
commerce partners provide us with a share of any sales resulting from
direct links from our websites. To date, revenues from electronic commerce
revenue share arrangements have not been significant. Memberships fees for
the sale of enhanced services have been insignificant to date.
Revenues increased to $18.6 million for the year ended December 31,
1999 as compared with $5.5 million for the year ended December 31, 1998.
Advertising revenues for the year ended December 31, 1999 were $15.0
million which represented 80% of total revenues. Advertising revenues for
the year ended December 31, 1998 were $4.9 million which represented 89% of
total revenues. The growth in advertising revenues was primarily
attributable to an increase in the number of advertisers as well as the
average commitment per advertiser and an increase in our traffic on our
websites. We anticipate that advertising revenues will continue to account
for a substantial share of our total revenues for the foreseeable future.
We experienced an increase in other revenue due primarily to increased
sales through our online store. Other revenues were also derived from the
development and sale of sponsorship placements within our websites,
electronic commerce revenue shares and membership service fees. Barter
revenues represented 5% of total revenues for the year ended December 31,
1999 and 2% of total
24
revenues for the year ended December 31, 1998.
Cost of Revenues. Cost of revenues consist primarily of Internet
connection charges, staff costs and related costs of operations personnel,
depreciation and maintenance costs of website equipment and the costs of
merchandise sold and shipping fees in connection with our online store.
Gross margins were 54% and 61% for the years ended December 31, 1999 and
1998, respectively. The decrease in the gross margins for the year-to-year
period was primarily attributable to a higher concentration of electronic
commerce sales which traditionally results in lower gross margins than
advertising revenues. The absolute dollar increase in cost of revenues was
due to an increase in Internet connection costs to support the increase in
website traffic, as well as an increase in depreciation expense related to
increased equipment costs, costs of merchandise and personnel costs
required to support the expansion of our sites and services. We expect cost
of revenues to continue to increase in absolute dollars as additional
connectivity and staffing costs will be required to support our future
growth and we continue to increase sales through our online store.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and related expenses of sales and marketing personnel,
commissions, advertising and marketing costs, public relations expenses,
coupons and other promotional activities and barter expense. Sales and
marketing expense was $19.4 million for the year ended December 31, 1999 as
compared with $9.4 million for the year ended December 31, 1998. The period
to period increase in sales and marketing expense was attributable to
increased salary and related personnel costs to support our revenue growth,
increased advertising costs, which included costs associated with our
television advertising campaign and promotional expenses required to
implement our branding and marketing strategy. We expects sales and
marketing costs to increase in absolute dollars due to increased staffing
costs necessary to support our growth.
Product Development. Product development expenses include salaries and
related personnel costs, costs incurred in connection with the development
of, testing of and upgrades to our websites and community management tools
and editorial and content costs. Product development expenses increased to
$10.5 million for the year ended December 31, 1999 as compared to $2.6
million for the year ended December 31, 1998. The period to period increase
was primarily attributable to increased staffing levels required to support
our websites and to enhance their content and features. Additionally, we
incurred development expenses related to two new products, globeClubs and
uPublish!, which were launched in the fourth quarter of 1999. Development
costs related to these products were not significant. Product development
expenses also increased as a result of added features in connection with
the launch of certain site re-designs and upgrades that occurred at various
intervals throughout 1999. We intend to continue recruiting and hiring
experienced product development personnel who will maintain and upgrade our
community management tools.
General and Administrative Expenses. General and administrative
expenses consist primarily of salaries and related personnel costs for
general corporate functions, including finance, human resources, legal and
facilities, outside legal and professional fees, bad debt expenses and
general corporate overhead costs. General and administrative expenses were
$12.2 million for the year ended December 31, 1999 as compared with $6.8
million for the year ended December 31, 1998. The increase was primarily
attributed to increased salaries and personnel costs associated with
building of our basic infrastructure, increased legal and other
professional fees and travel expenses. These increases were, in part,
attributable to our acquisitions in 1999. The increased salaries also
reflect the highly competitive nature of hiring in the new media industry.
General and administrative costs also increased due to additional
provisions for bad debts and sales tax expenses, along with increased
public company expenses such as directors' and officers' liability
insurance and investor relations programs. We expect to incur additional
general and administrative expenses as we hire additional personnel and
incur additional costs related to the growth of the business.
Non-recurring charges. We recorded a non-recurring, non-cash charge of
approximately $1.4 million in the third quarter of 1998. This charge was in
connection with the transfer of outstanding warrants to acquire 450,000
shares of common stock by Dancing Bear Investments, which was our principal
shareholder at the time of the transfer, to some of our officers. There was
no similar charge in 1999.
25
Amortization of Goodwill and Intangible Assets. Amortization expense
was $20.5 million for the year ended December 31, 1999 and related to the
acquisitions of shop.theglobe.com in February 1999, Attitude Network, Ltd.
in April 1999 and the web hosting assets of Webjump.com in December 1999.
The gross goodwill and purchased intangibles of approximately $84.0 million
related to these acquisitions is being amortized over the expected period
of benefit ranging from two to three years (three years for goodwill).
There was no similar charge for the year ended December 31, 1998.
Other income (expense). Other income (expense) includes interest
income from our cash, cash equivalents and short-term investments, interest
expenses related to our capital lease obligations, amortization of debt
discounts and realized gains and losses from the sale of short-term
investments. Interest income was $2.5 million for the year ended December
31, 1999 as compared with $1.1 million for the year ended December 31,
1998. The period to period increase in interest income was attributable to
increased cash, cash equivalents and short-term investments resulting from
the net proceeds of our initial and secondary public offerings of Common
Stock. Interest expense was $0.8 million for the year ended December 31,
1999, as compared with $0.2 million for the year ended December 31, 1998.
The increase was attributable to increased interest expenses related to the
assumption of additional capital lease obligations and the amortization of
the debt discount related to long-term debt assumed in connection with the
acquisition of Attitude Network, Ltd. The long-term debt was fully re-paid
in October 1999.
Income Taxes. Income taxes were $0.3 million for the year ended
December 31, 1999 as compared with $0.1 million for the year ended December
31, 1998. Income taxes were based solely on state and local taxes on
business and investment capital. The period to period increase is a result
of our initial and secondary public offerings which, in turn, increased our
investment capital. Our effective tax rate differs from the statutory
federal income tax rate, primarily as a result of the uncertainty regarding
our ability to utilize our net operating loss carryforwards. Due to the
uncertainty surrounding the timing or realization of the benefits of our
net operating loss carryforwards in future tax returns, we have placed a
100% valuation allowance against our otherwise recognizable deferred tax
assets. At December 31, 1999, the Company had net operating loss
carryforwards available for U.S. and foreign tax purposes of $69.5 million
and $1.0 million, respectively. These carryforwards expire through 2019.
The Tax Reform Act of 1986 imposes substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change" of a corporation. Due to the change in our ownership
interests in the third quarter of 1997, as defined in the Internal Revenue
Code of 1986, as amended (the "Code"), future utilization of our net
operating loss carryforwards prior to the change of ownership will be
subject to certain limitations or annual restrictions.
Extraordinary Item-Gain on Early Retirement of Debt. During 1999, we
recorded an extraordinary gain of $1.4 million as a result of the early
retirement of long-term debt. In connection with the acquisition of
Attitude Network, Ltd., we assumed a non-interest bearing obligation
("happypuppy note") to the former owner of the happypuppy.com website
("happypuppy"). In October 1999, in connection with the settlement of
certain litigation between the former owners of happypuppy and us, we made
a lump sum payment of approximately $1.4 million to the former owners of
happypuppy, which represented full payment of the happypuppy note. The net
present value of the happypuppy note at the time of payment was $2.8
million. The extraordinary gain represented the difference between the lump
sum payment and the net present value of the happypuppy note at the time
the payment was tendered.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Revenues increased to $5.5 million for the year ended
December 31, 1998 as compared to $0.8 million for the year ended December
31, 1997. The year to year growth resulted from an increase in: (1) the
number of advertisers and the average commitment per advertiser, (2) our
website traffic, (3) the number of our sales people and (4) marketing and
advertising expenditures. Advertising revenues were approximately $4.9
million, or 89% of total revenues, for the year ended December 31, 1998 as
compared with $0.6 million, or 77% of total revenues, for the year ended
December 31, 1997. Other revenues were derived from membership service
fees, development fees, electronic commerce revenue shares and sponsorship
placements within our website. Barter revenues accounted for approximately
2% of total revenues for the year ended December 31, 1998 as compared with
22% of total revenues for the year ended December 31, 1997.
26
Cost of Revenues. Gross margins were 61% for the year ended December
31, 1998 as compared with 45% for the year ended December 31, 1997. The
increase in gross margin was primarily due to an increase in revenues
relative to the increase in cost of revenues. Cost of revenues were $2.1
million for the year ended December 31, 1998 as compared with $0.3 million
for the year ended December 31, 1997. The period to period increase in cost
of revenues was primarily due to an increase in Internet connection costs
to support the increase in website traffic, increased depreciation charges
resulting from increased equipment purchases needed to expand and support
our site and increase salary and personnel costs required to support the
expansion of our site and services. During the fourth quarter of 1998, we
moved our website hosting functions to a separate facility in Staten
Island, New York.
Sales and Marketing Expenses. Sales and marketing expenses were $9.4
million for the year ended December 31, 1998 as compared with $1.4 million
for the year ended December 31, 1997. The period to period increase was
primarily attributable to expansion of our online and print advertising,
public relations and other promotional expenditures and increased sales and
marketing personnel and related costs required to implement our marketing
strategy. Sales and marketing expenses also increased as a result of our
decision to shift our advertising to an internal sales department in the
second quarter of 1997.
Product Development Expenses. Product development expenses were $2.6
million for the year ended December 31, 1998 as compared to $0.2 million
for the year ended December 31, 1997. The increase in product development
expenses was primarily attributable to increased staffing levels required
to support our website and to enhance its content and features. Product
development expenses also increased as a result of the launch of our
website redesign in November 1998.
General and Administrative Expenses. General and administrative
expenses were $6.8 million for the year ended December 31, 1998 as compared
to $2.8 million for the year ended December 31, 1997. The period to period
increase in general and administrative expenses was primarily due to
increased salaries and related expenses associated with our management's
employment contracts, hiring of additional administrative personnel and
increases in professional fees and travel. The increased salaries also
reflect the highly competitive nature of hiring in the new media industry.
Additionally, during 1998, we incurred certain costs associated with
operating a public company including directors' and officers' insurance and
investor relations costs.
Non-recurring charges. We recorded a non-recurring, non-cash charge of
approximately $1.4 million in the third quarter of 1998. This charge was in
connection with the transfer of outstanding warrants to acquire 450,000
shares of common stock by Dancing Bear Investments, which was our principal
shareholder at the time of the transfer, to some of our officers. There was
no similar charge in 1997.
Other Income (expense). Other income (expense) includes interest
income from our cash, cash equivalents and short-term investments, interest
expenses related to our capital lease obligations, and realized gains and
losses from sales of short-term investments. Other income (expense) was
$0.9 million for the year ended December 31, 1998 as compared with $0.3
million for the year ended December 31, 1997. The period to period increase
is attributable to increased interest income resulting from higher average
cash, cash equivalents and short-term investments balances. These balances
increased as a result of net proceeds received from the issuance of shares
of our preferred stock in the third quarter of 1997 and the issuance of
Common Stock in connection with our initial public offering in November
1998. The increased interest income was offset by increase interest expense
resulting from the assumption of certain capital lease obligations in 1998.
Income Taxes. Income taxes were approximately $0.1 million for the
year ended December 31, 1998 as compared to $36,000 for the year ended
December 31, 1997. Income taxes were based solely on state and local taxes
on business and investment capital. These taxes increased from year to year
due to an increase in our investment capital. The investment capital
increased as a result of the proceeds received from our issuance of shares
of preferred stock in the third quarter of 1997 and our issuance of Common
Stock in connection with our initial public offering in November 1998. Our
effective tax rate differs from the statutory federal income tax rate,
primarily as a result of the uncertainty regarding our ability to utilize
net operating loss carryforwards. Due to the uncertainty surrounding the
timing or realization of the benefits of our net operating loss
carryforwards in future tax returns, we have placed a 100% valuation
allowance against our deferred tax assets. As of December 31, 1998, we
27
had approximately $29.2 million of federal and state net operating loss
carryforwards for tax reporting purposes available to offset future taxable
income. Our federal net operating loss carryforwards will expire beginning
in 2001 through 2018, if not utilized. The Tax Reform Act of 1986 imposes
substantial restrictions on the utilization of net operating losses and tax
credits in the event of an "ownership change" of a corporation. Due to the
change in our ownership interests in the third quarter of 1997, as defined
in the Code, future utilization of our net operating loss carryforwards
will be affected by limitations or annual restrictions.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, we had approximately $36.6 million in cash
and cash equivalents and approximately $19.3 million in short-term
investments. Net cash used in operating activities was approximately $30.1
million, $13.5 million and $1.9 million for the years ended December 31,
1999, 1998 and 1997, respectively. The increase in net operating cash used
for the year ended December 31, 1999 resulted primarily from the increase
in operating losses for the period. Additionally, the increase in net
operating cash used was attributable to increases in accounts receivable
and prepaid and other current assets and decreases in accounts payable and
deferred revenues. These items were partially offset by an increase in
accrued compensation. The increase in net operating cash used for the year
ended December 31, 1998 was primarily attributable to increases in net
operating losses for the period, accounts receivable and prepaid and other
current assets as well as a decrease in accrued compensation. These items
were partially offset by increases in accounts payable and deferred
revenues.
Net cash (used in) provided by investing activities was approximately
($25.4) million, $9.6 million and ($13.2) million for the years ended
December 31, 1999, 1998 and 1997, respectively. Significant components of
net cash used in investing activities during 1999 related to the purchases
of short-term investments and property and equipment and the payment of
security deposits in connection with our capital lease obligations. These
items were partially offset by proceeds received from the sales of
short-term securities and net cash received in connection with our
acquisitions of factorymall and Attitude Network, Ltd. Net cash provided by
investing activities during 1998 was the result of proceeds received from
the sales of short-term securities partially offset by the purchases of
property and equipment and the payments of security deposits in connection
with our capital lease obligations.
Net cash provided by financing activities was approximately $62.8
million, $27.2 million and $20.2 million for the years ended December 31,
1999, 1998 and 1997, respectively. Net cash provided by financing
activities during 1999 was primarily attributable to net proceeds received
from our secondary public offering of Common Stock and proceeds received
from the exercise of stock options and warrants. These items were partially
offset by payments of capital lease obligations and payments of long-term
debt, which was assumed in connection with our acquisition of Attitude
Network, Ltd. Net cash provided by financing activities during 1998 was
primarily attributable to net proceeds received from our initial public
offering of Common Stock and proceeds received from the exercise of stock
options. These items were partially offset by the payments of capital lease
obligations in 1998.
As of December 31, 1999, we had obligations amounting to $4.9 million
in connection with equipment purchased under capital leases. These
obligations are payable at various intervals between 2000 and 2003. We
expect to meet our current capital lease obligations with our cash, cash
equivalents and short-term investments.
Our capital requirements depend on numerous factors, including market
acceptance of our services, the capital required to maintain our websites,
the resources we devote to marketing and selling our services and our brand
promotions and other factors. We have experienced a substantial increase in
our capital expenditures and lease arrangements since our inception
consistent with the growth in our operations and staffing. We anticipate
that this will continue for the foreseeable future. Additionally, we will
continue to evaluate possible investments in businesses, products and
technologies, and we plan to expand our sales force. We believe that our
current cash, cash equivalents and short-term investments, which primarily
resulted from our initial and secondary public offerings, together with
cash flows will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for our existing business for at
least 12 months. However, we may need to raise additional funds during 2000
to obtain or operate any acquired businesses or joint venture arrangements.
See "Risk Factors -- We may need to raise additional funds, including
through the issuance of debt."
28
IMPACT OF YEAR 2000
Year 2000 issues related to non-compliant information technology
systems or non-information technology systems operated by us or by third
parties may affect us. We have completed our assessment of our internal and
external third-party information technology systems and non-information
technology systems and a test of the information technology systems that
support our websites. We have not experienced any Year 2000 related issues
to date with our internal systems or external third party systems on which
we rely. We do not anticipate any Year 2000 problems. We have not incurred
any material costs in relation to the evaluation, assessment and testing of
its Year 2000 compliance.
EFFECTS OF INFLATION
Due to relatively low levels of inflation in 1999, 1998, 1997 and 1996
inflation has not had a significant effect on our results of operations
since inception.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. We have not yet analyzed the
impact of this pronouncement on our consolidated financial statements.
29
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