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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, 1998 COMMISSION FILE NO.: 0-25053
THEGLOBE.COM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 14-1781422
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
31 WEST 21ST STREET
NEW YORK, NEW YORK 10010
(Address of principal executive offices) (Zip Code)
(212) 886-0800
(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].
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of the close of business on March 1, 1999: $264,943,350.*
Common Stock outstanding at March 1, 1999: 10,661,327 shares.
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 1999, 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.
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business........................................................1
Item 2. Properties.....................................................14
Item 3. Legal Proceedings..............................................15
Item 4. Submission of Matters to a Vote of Security Holders............15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................16
Item 6. Selected Financial Data........................................17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....40
Item 8. Financial Statements and Supplementary Data....................40
Item 9. Changes in and Disagreements with Accountants and
Accounting and Financial Disclosure............................57
PART III
Item 10. Directors and Executive Officers of the Registrant.............58
Item 11. Executive Compensation.........................................58
Item 12. Security Ownership of Certain Beneficial Owners and
Management.....................................................58
Item 13. Certain Relationships and Related Transactions.................58
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.......................................................59
SIGNATURES...............................................................61
PART I
ITEM 1. BUSINESS
OVERVIEW
theglobe.com is one of the world's leading online communities with
nearly 2.5 million members in the United States and abroad. In December
1998, over 9.3 million unique users visited our web site. Our web site is a
destination on the Internet where users are able to personalize their
online experience by publishing their own content and interacting with
others having similar interests. We facilitate this interaction by
providing various free services, including home page building, discussion
forums, chat rooms, e-mail and electronic commerce. Additionally, we
provide our users with news, business information, real time stock quotes,
weather, movie and music reviews, multi-player gaming and personals. By
satisfying our users' personal and practical needs, we seek to become our
users' online home.
We generate revenues primarily by selling advertisements, sponsorship
placements within our site, development fees and, to a lesser extent, from
electronic commerce revenues and the sale of membership subscriptions for
enhanced services. In the last three months of 1998, we had approximately
147 advertisers, including Coca Cola, Dunkin' Donuts, J. Crew, Polygram,
Sony, 3Com and Visa. In February 1999, we acquired Azazz.com, an online
retail store which sells a variety of name brand products directly to
consumers. We began integrating Azazz into our site in February 1999 and
expect to begin to generate additional revenues from electronic commerce in
the second quarter of 1999.
Since our founding, we have experienced strong growth. Over 9.3
million unique users visited our site in December 1998, according to ABC
Interactive. Unique users are the actual number of users who access our
site. Members are users who register with us and provide personal
information to us. Approximately 40% of our monthly traffic originates from
abroad, reflecting our site's international appeal.
THEGLOBE.COM
Todd V. Krizelman and Stephan J. Paternot began our company to take
advantage of the demand for online destinations that allow users to develop
their own identities and establish relationships with users with similar
interests. We organized our community in a hierarchy modeled after the real
world. Our site has ten "Themes of Interest":
o Arts o News
o Business o Romance
o Entertainment o Sports
o Life o Technology
o Metro o Travel
Themes of Interest are subdivided into 24 "Cities," which are further
divided into 75 "Districts." Within each District, members have the ability
to create or join "Interest Groups," our smallest form of community. As of
December 31, 1998, there were over 325 Interest Groups. Any member may
propose an Interest Group, but an Interest Group will not be activated on
the site until it receives sufficient votes from other members. We do not
limit the number of communities which our members can join and our members
are free to leave an Interest Group at any time. Because of this, the
communities are dynamic and evolve as member interests change. Members of a
community elect community leaders to manage communities, highlight member
content, communicate directly to constituents and organize events.
Within Interest Groups, our members can access a collection of
services to generate content, including chat, open forums and e-mail.
Member-created content within Interest Groups satisfies users' desires for
topic specific information, conversation and debate. Members vote and
generate content for communities. We believe our member-created content
helps us attract a large audience of users. As these users become familiar
with our site, we believe that we have a greater ability to convert them
into members.
The unique community focus of our site offers us several advantages
that include:
o Member Loyalty. Because we provide a homepage for our members,
members develop loyalty to our site and to the communities in
which they participate. We believe that this translates into more
frequent usage by members and longer stays at our site.
o Member-Developed Content. Users develop the majority of the
content on our site on a voluntary basis for the benefit of all
of our users. As a result, we avoid some of the costs associated
with content development.
o Targeted Advertising. We allow advertisers to target their
advertisements based on both demographic information and affinity
group affiliations. Our volume of user traffic, frequency and
average length of use also draw advertisers to our site. Our
ability to reach users across a wide variety of interest areas
has made our site attractive to technology companies and
traditional consumer product and service companies. As of
December 31, 1998, approximately 70% of our advertisers were
branded consumer product and service companies.
OUR BUSINESS STRATEGY
Our goal is to be the leading online community site. We seek to attain
this goal through the following key strategies:
Improve User Experience. We will continue efforts to improve user
experience on our site by:
o launching new services to enhance our community;
o personalizing our site to the preferences of individual
members;
o simplifying user interfaces and otherwise improving the ease
of use;
o improving customer support;
o developing loyalty programs to reward members for increased
usage;
o expanding the suite of personal publishing/web site building
tools; and
o creating additional opportunities for participating in
existing affinity groups and expanding the number of
affinity groups.
Develop Brand Identity and Awareness. We intend to expand our presence
as a mass market site by building brand awareness. We plan to continue to
allocate a significant portion of our resources to develop our brand in the
same fashion as traditional consumer product and service companies. We
believe that establishing brand awareness among consumers is instrumental
in attracting new members to our site. It may also attract media buyers who
tend to favor well-known and trusted companies.
Further Develop Electronic Commerce. We intend to increase our
electronic commerce revenues by (1) selling select products directly to
consumers through the integration of Azazz into our web site and (2)
indirectly selling products to consumers through increasing the number of
electronic commerce partners who establish virtual storefronts in
theglobe.com Marketplace.
We plan to re-launch our Marketplace area in the second quarter of
1999. We believe that integrating Azazz with our existing electronic
commerce business should enhance our users' overall shopping experience.
The acquisition enables us to directly offer a broad array of products,
attractive prices and premium customer service. In particular, we will
differentiate ourselves from competitors by offering Azazz's "personal
shopper" application which enables customers to communicate directly with a
live customer service representative during each step of the online
shopping process.
Acquisition, Joint Venture and Alliance Strategy. We review
acquisition candidates and joint ventures in the ordinary course of
business, some of which may be material. We are currently in negotiations
with third parties for various transactions. These transactions may or may
not be consummated. Our focus is to seek transactions that would complement
our existing business, increase our traffic, augment the distribution of
our community, enhance our technological capabilities or increase our
electronic commerce revenues.
Expand Globally. We believe that significant opportunities exist to
capitalize on the growth of the Internet internationally. We are pursuing
strategic relationships with international companies to exploit
cross-marketing, co-branding and promotional opportunities. We believe that
users outside of the United States generate approximately 40% of our
traffic. Users outside of the United States are able to communicate and
publish on our site in their own languages. We have also received prominent
press coverage in Europe, Asia and Australia.
Enhance Membership Services. We offer additional Internet services,
including increased storage space for building home pages, through our gold
and platinum membership programs. To attract a wider subscriber base, we
intend to develop new membership programs offering premium content,
shopping clubs and entertainment services.
OUR PRODUCTS AND SERVICES
We provide users with the following products and services:
Free Services. We provide a range of free services to our members
including:
o business and technology news,
o real-time stock quotes and portfolio services,
o "my globe" personalized home pages,
o classified listings,
o a marketplace where members can purchase a variety of
products and services,
o home page building,
o discussion forums,
o chat rooms and
o e-mail.
By satisfying our users' personal and practical needs, we seek to
become our users' online home. Our primary revenue source is the sale of
advertising, with additional revenues generated through electronic commerce
and the sale of membership subscriptions for enhanced services. We derive
electronic commerce revenues in theglobe.com Marketplace through
merchandise sales by partners, and, beginning in the second quarter of
1999, from direct merchandise sales. We believe that the addition of
Azzaz's broad array of products, attractive prices and premium customer
service to our Marketplace will significantly enhance the shopping
experience for our millions of monthly users.
Premier Partners. We have relationships with premier partners who pay
a fixed monthly fee, generally from $5,000 to $100,000 per month, and often
a percentage of sales, to receive prominent placement in our Marketplace
and on our site. Premier partner agreements typically run for a period of
six months to three years. In some instances, premier partners pay us a
share of the sales over a particular threshold amount from users directed
to them from our site. Premier partners include:
o Lowestfare.com. Lowestfare.com offers discounted airline, car and
hotel reservations, vacation packages and cruises. Lowestfare.com
has entered into a three-year agreement with us to be our
exclusive provider of travel-related services. They also provide
us with content, including weather, mapping, destination
information and voice response e-mail. We provide Lowestfare.com
with advertising and Marketplace exposure.
o Republic Industries. Republic Industries owns the largest chain
of new vehicle dealerships in the United States and operates a
chain of used car megastores under the AutoNation USA brand name.
We provide AutoNation preferred placement in our auto category
under a three-year agreement.
o Cyberian Outpost. Cyberian Outpost sells computer hardware,
software and accessories directly to consumers online. We have
entered into a six month arrangement with Cyberian Outpost to be
our exclusive online computer hardware retailer.
o RSL Communications. We have a one-year arrangement with RSL for
Internet telephony services.
Member Subscriptions. We offer additional Internet services through
our Gold and Platinum membership packages. For example, these packages
provide additional storage space and the ability to host limited commercial
activity. The subscriptions cost $4.95 or $9.95 monthly, depending on the
level of service.
CORPORATE ALLIANCES AND RELATIONSHIPS
We have a number of relationships with partners and content providers
to provide our users with a full suite of web services. These arrangements
provide us with a cost-effective method for increasing our services without
incurring significant capital expenditures. Examples include:
o Business and Finance. By providing free real-time stock quotes,
stock screening analysis and portfolio tools from the Thomson
Financial Network and stock market editorial analysis and daily
articles from CBS MarketWatch, we are able to assist our users in
planning and tracking their investment decisions.
o Entertainment. Through entertainment news and gossip from E!
Online and music reviews and commentary from SonicNet, we offer
our users multiple viewpoints on the latest events in the
entertainment industry.
o Online Calendar and Address Book. We license Visto's Briefcase
application for use on our site which permits our users to manage
all of their appointments and contact information through our
site.
o Other Key Services. We provide sports highlights and scores from
Fox Sports, employment, real estate and automobile classified
listings from Classified Warehouse and weather forecasts from
AccuWeather.
ADVERTISING CUSTOMERS
With over 9.3 million unique users as of December 1998, and nearly 2.5
million members in the United States and abroad, we have attracted mass
market consumer product companies as well as technology-related businesses
to advertise on our site. We believe that our community site is well
positioned to capture a portion of the growing number of consumer product
and service companies advertising online.
Our advertising clients enter into short term agreements, which
typically last one to three months. Our clients generally receive a
guaranteed number of impressions for a fixed fee. In 1998, no single
advertiser accounted for more than 10% of total revenues and approximately
70% of our advertisers were repeat customers. In the last three months of
1998, approximately 147 advertising clients advertised on our site. Some of
our advertising clients include:
American Express Hilton Lee Jeans Polygram
AT&T Intel Levi's Sony
BellSouth J. Crew Microsoft 3Com
Coca Cola Kellogg's Brands Office Depot USWest
Dunkin' Donuts Kodak Pepsi Visa
ADVERTISING SALES AND DESIGN
We seek to distinguish ourselves from our competition by creating
unique advertising and sponsorship opportunities designed to build brand
loyalty for our corporate sponsors by seamlessly integrating their
advertising messages into our content. We can deliver advertising to
specific targets within our site's themed content areas, allowing
advertisers to single out and effectively deliver their messages to their
respective target audiences. For example, a company can target an
advertisement solely to males or females over 24 years of age coming to our
Business Theme area from Latin America. We believe that sophisticated
targeting is a critical element for capturing worldwide advertising budgets
for the Internet. Additionally, we intend to expand the amount and type of
demographic information we collect from our members, which will allow us to
offer more specific data to our advertising clients.
While our competition generally provides banner advertising as its
primary advertising option, we offer an assortment of advertising options
for our clients. We work with our advertising customers to meet their
needs. We offer advertisers:
o Banner advertising o Sweepstakes
o Button advertising o Content development
o Text links o Affinity packages for
advertising partners
o Pop-up advertisements o Direct marketing and lead
generation, if users have
opted in to these programs
o Log out links to full page o Market research for
advertisements advertising campaigns
o Various sponsorship programs
We have an internal sales organization of approximately 25
professionals. These professionals focus on both selling advertisements on
our web site and developing long-term strategic relationships with clients.
A significant portion of our sales personnel's income is commission based.
We have sales offices in New York City, Chicago and San Francisco and
intend to open additional sales offices in selected markets around the
world.
MARKETING AND PROMOTIONS
In 1998, we committed approximately $7.3 million to advertising in
traditional offline media and in online media. In March 1998, we launched
our advertising campaign through television, print, billboards, buses,
telephone kiosks, online media, and other marketing efforts. These efforts
were aimed at:
o generating additional traffic to our site,
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.
We intend to continue to commit a significant part of our budget to
marketing our brand.
TECHNOLOGY
Our strategy is to operate our business through the application of
existing technologies. The various features of our online environment are
implemented using a combination of off-the-shelf and proprietary software
components. Whenever possible, we favor licensing and integrating
"best-of-breed" technology from industry leaders, including Oracle, Sun
Microsystems and Microsoft. We believe that this component approach is more
manageable, reliable and scalable than single-source solutions. In
addition, our emphasis on commercial components accelerates our development
time. We believe that this is an advantage in our rapidly evolving market.
In addition to being scalable, our system has many redundancies, which
benefit us if part of our system is down. Our servers are connected to the
Internet through a combination of links provided through three separate
carriers, AppliedTheory, UUNET and AT&T. This approach to connectivity
allows us to continue operations in the event of a failure in any carrier.
We plan to continue to upgrade our systems as necessary for our business
plan. Our system allows us to roll out upgrades incrementally on an
as-needed basis.
To efficiently manage our system, we have developed highly automated
methods of monitoring the performance of each system component. If any
subsystem fails, the failed subsystem is taken out of service and requests
are distributed among the remaining operational systems. We have also
developed tools to perform routine management tasks such as log processing
and content updates in an automated, remote-controlled fashion. We believe
that our investment in automation lessens the need for the additional
personnel that would otherwise be required to support the system as it
grows.
In the fourth quarter of 1998, we relocated our data processing
systems and servers to the New York Teleport in Staten Island, New York
under a three year lease with Telehouse International Corporation. The New
York Teleport facility provides security, electricity and premises for our
systems. More than 90% of our web site traffic is handled through this
facility. The facility has four independent battery-operated power
supplies, as well as four independent diesel generators designed to provide
power to these systems within seconds of a power surge. If required, the
diesel generators can supply the data center's power for several days.
Telehouse International Corporation does not guarantee that our Internet
access will be uninterrupted, error-free or secure.
We maintain 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 access will be uninterrupted, error-free or secure.
COMPETITION
The market for members, users and Internet advertising among web sites
is new and rapidly evolving. We expect the intense competition for members,
users and advertisers, as well as competition in the electronic commerce
market, to increase significantly. Barriers to entry are relatively
insubstantial and we face competitive pressures from many additional
companies both in the United States and abroad. See "Risk Factors -
Competition for members, users and advertisers, as well as competition in
the electronic commerce market, is intense and is expected to increase
significantly."
All types of web sites compete for users. Competitor web sites include
community sites, as well as "gateway" or "portal" sites and various other
types of web sites. We believe that the principal competitive factors in
attracting users to a site are:
o functionality of the web site,
o brand recognition,
o member affinity and loyalty,
o broad demographic focus,
o open access for visitors,
o critical mass of users, particularly for community-type sites,
and
o services for users.
We compete for users, advertisers and electronic commerce customers
with:
o other online community web sites, such as GeoCities, which has
agreed to be acquired by Yahoo!, Tripod and AngelFire,
subsidiaries of Lycos, and Xoom.com,
o search engines and other Internet "portal" companies, such as
Excite, InfoSeek, Lycos and Yahoo!,
o online content web sites, such as CNET, ESPN.com and ZDNet.com,
o publishers and distributors of television, radio and print, such
as CBS, NBC and CNN/Time Warner,
o general purpose consumer online services, such as America Online
and Microsoft Network,
o web sites maintained by Internet service providers, such as AT&T
WorldNet, EarthLink and MindSpring, and
o electronic commerce web sites, such as Amazon.com, Etoys and
CDNow.
Many of our existing competitors, as well as a number of potential new
competitors, have the following advantages:
o longer operating histories in the Internet market;
o greater name recognition;
o larger customer bases; and
o significantly greater financial, technical, and marketing
resources.
In addition, providers of Internet tools and services, including
community-type sites, may be acquired by, receive investments from, or
enter into other commercial relationships with larger, well-established and
well-financed companies, such as Microsoft and America Online. For example,
Excite has agreed to be acquired by @Home, America Online acquired Netscape
and Lycos announced a transaction with USA Network and Ticketmaster
Citysearch Online. In addition, there has been other significant
consolidation in the industry. This consolidation may continue in the
future. We could face increased competition in the future from traditional
media companies, including cable, newspaper, magazine, television and radio
companies. A number of these large traditional media companies, including
Disney, CBS and NBC, have been active in Internet related activities.
Many of our competitors, including other community sites, have
announced that they are contemplating developing Internet navigation
services and are attempting to become "gateway" or "portal" sites through
which users may enter the web. In the event these companies develop
successful "portal" sites, we could lose a substantial portion of our user
traffic. Furthermore, many non-community sites are seeking to develop
community aspects in their sites. Web browsers offered by Netscape and
Microsoft also increasingly incorporate prominent search buttons that
direct traffic to competing services. These features could make it more
difficult for Internet users to find and use our product and services. In
the future, Netscape, Microsoft and other browser suppliers may also more
tightly integrate products and services similar to ours into their browsers
or their browsers' pre-set home page. Additionally, entities that sponsor
or maintain high-traffic web sites or that provide an initial point of
entry for Internet viewers, such as the Regional Bell Operating Companies,
cable companies or Internet Service Providers, such as Microsoft and
America Online, offer and can be expected to consider further development,
acquisition or licensing of Internet search and navigation functions that
compete with us. These competitors could also take actions that make it
more difficult for viewers to find and use our products and services.
We believe that the number of Internet companies relying on
Internet-based advertising revenue, as well as the number of advertisers on
the Internet and the number of users, will increase substantially in the
future. We believe that the principal competitive factors in attracting
advertisers include the following:
o amount of traffic on a web site,
o brand recognition,
o customer service,
o the demographics of members and users of a web site,
o the ability to offer targeted audiences, and
o the overall cost effectiveness of the advertising medium offered.
In addition, many of our current advertising customers and strategic
partners have established collaborative relationships with some of our
existing and potential competitors. Accordingly, we will likely face
increased competition. We also compete with traditional advertising media,
including television, radio, cable and print for a share of advertisers'
total advertising budgets. This will result in increased pricing pressures
on our advertising rates, which could have a material adverse effect on us.
See "Risk Factors--We rely substantially on advertising revenues."
Additionally, the electronic commerce market is new and rapidly
evolving, and we expect the intense competition among electronic commerce
merchants to increase significantly. We generate substantially all of our
electronic commerce revenues from our electronic commerce partners in our
Marketplace. In the future, we expect to generate electronic commerce
revenues through our Azazz acquisition. Because the Internet allows
consumers to easily compare prices of similar products or services on
competing web sites and there are low barriers to entry for potential
competitors, gross margins for electronic commerce transactions may narrow
further in the future. Competition among Internet retailers or among our
electronic commerce partners may have a material adverse effect on our
ability to generate revenues through electronic commerce transactions or
from these electronic commerce partners.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard substantial elements of our site and underlying technology
as proprietary. We attempt to protect them by relying on intellectual
property laws. We also generally enter into confidentiality agreements with
our employees and consultants and in connection with our license agreements
with third parties. We also seek to control access to and distribution of
our technology, documentation and other proprietary information. Despite
these precautions, it may be possible for a third party to copy or
otherwise obtain and use our proprietary information without authorization
or to develop similar technology independently.
We pursue the registration of our trademarks in the United States and
internationally. Our efforts include:
o the registration of a United States trademark for the globe,
o the filing of United States trademark applications for
theglobe.com, theglobe.com logo, TGLO, A Whole New Life Awaits
You, globeDirect and globeStores,
o the submission of trademark applications for theglobe.com logo in
Australia, Brazil, Canada, China, the European Union, Hong Kong,
Israel, Japan, New Zealand, Norway, Russian Federation,
Singapore, South Africa, Switzerland and Taiwan, and
o the submission of trademark applications for A Whole New Life
Awaits You in the European Union and Switzerland.
Effective trademark, service mark, copyright and trade secret protection
may not be available in every country in which our services are distributed
or made available through the Internet. Policing unauthorized use of our
proprietary information is difficult. See "Risk Factors--We rely on
intellectual property and proprietary rights."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
We are subject to laws and regulations that are applicable to various
Internet activities. There are many legislative and regulatory proposals
under consideration by federal, state, local and foreign governments and
agencies, including matters relating to:
o online content,
o Internet privacy,
o Internet taxation,
o access charges,
o liability for information retrieved from or transmitted over the
Internet,
o domain names, and
o jurisdiction.
New regulations may increase our costs of compliance and doing business,
decrease the growth in Internet use and decrease the demand for our
services or otherwise have a material adverse effect on our business.
Online Content. Online content restrictions cover many areas,
including indecent or obscene content and gambling. Several federal and
state statutes prohibit the transmission of indecent or obscene information
and content, including sexually explicit information and content. The
constitutionality of some of these statues is unclear at this time. For
example, in 1997 the Supreme Court of the United States held that selected
parts of the federal Communications Decency Act of 1996 governing indecent
and patently offensive content were unconstitutional. Many other provisions
of the Communications Decency Act, including those relating to obscenity,
however, remain in effect. Prior to the Supreme Court's decision, a federal
district court in New York held that some provisions of the New York penal
law modeled on the Communications Decency Act violated the Constitution. A
companion provision of that law, however, was subsequently upheld. Since
the Supreme Court's decision, a federal district court in New Mexico held
that a provision of the New Mexico penal law purporting to make it unlawful
to disseminate over the Internet information that is harmful to minors
violated the Constitution.
The Child Online Protection Act became effective on November 20, 1998.
It requires web sites engaged in the business of the commercial
distribution of material that is deemed to be obscene or harmful to minors
to restrict minors' access to this material. However, the Child Online
Protection Act exempts from liability telecommunications carriers, Internet
service providers and companies involved in the transmission, storage,
retrieval, hosting, formatting or translation of third-party communications
where these companies do not select 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. We cannot predict the ultimate outcome or effect
of this litigation or the effect that the Child Online Protection Act may
have on our business.
The U.S. Department of Justice and some state Attorneys General have
intensified their efforts in taking action against businesses that operate
Internet gambling activities. In the last Congress, the Senate passed the
Internet Gambling Prohibition Act, which, if enacted, would have prohibited
placing or receiving a bet via the Internet in any state. A similar bill
has been introduced in the current Congress. We cannot predict whether
similar legislation will be enacted in the current Congress. Even in the
absence of new legislation directed specifically at Internet-based
gambling, existing federal and state statutes generally criminalize these
activities. During 1998, online gambling advertisers accounted for under
ten percent of our advertising revenues. The enactment of any legislation
in the United States or abroad that limits or prevents businesses from
operating online gambling would likely have an adverse effect on our
advertising revenue.
Some states, including New York and California, have enacted laws or
adopted regulations that expressly or as a matter of judicial
interpretation apply various consumer fraud and false advertising
requirements to parties who conduct business over the Internet. The
constitutionality and the enforceability of some of these statutes is
unclear at this time. For example, in 1997, a federal district court held
that a Georgia criminal statute violated the Constitution when it
prohibited Internet transmissions that falsely identify the sender or use
trade names or logos that would falsely state or imply that the sender was
legally authorized to use them.
Internet Privacy. In October 1998, the Children's Online Privacy
Protection Act was signed into law, which directs the FTC to develop
regulations for the collection of data from children by commercial web site
operators. Separately, the Federal Trade Commission Act prohibits unfair
and deceptive practices in and affecting commerce. The FTC Act authorizes
the FTC to seek injunctive and other relief for violations of the FTC Act,
and provides a basis for government enforcement of fair information
practices. For instance, failure to comply with a stated privacy policy may
constitute a deceptive practice in some circumstances and the FTC would
have authority to pursue the remedies available under the Act for any
violations. Furthermore, in some circumstances, information practices may
be inherently deceptive or unfair, regardless of whether the entity has
publicly adopted any privacy policies.
Some industry groups 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 privacy policies, we may incur expenses in obtaining the endorsement
of industry groups or in altering our current policies to comply with these
standards. We cannot assure you that the adoption of voluntary standards
will preclude any legislative or administrative body from taking
governmental action regarding Internet privacy.
In June 1998, the FTC released a report analyzing the effectiveness of
self-regulation as a means of protecting consumer privacy on the Internet.
The report concluded that industry self-regulation had not been adequate.
The report listed four core information practices that the FTC believes
must be part of any privacy protection effort: notice, choice, access and
security. The FTC has indicated that in the absence of effective
self-regulation, it may support federal legislation to address consumer
privacy concerns. We cannot assure you that the FTC's actions in this area
will not adversely affect our ability to collect demographic and personal
information from members, which could have an adverse affect on our ability
to attract advertisers. This could have a material adverse effect on us.
The FTC has begun investigations into the privacy practices of
companies that collect information on the Internet. For example, on August
13, 1998, the FTC announced that it had entered into a proposed consent
order with one of our competitors. In its complaint, the FTC alleged that
this competitor engaged in three deceptive practices. First, the FTC
alleged that the company falsely represented that the personal identifying
information it collects through its membership application form is used
only to provide members the specific offers and products or services they
request. Second, the FTC alleged that the competitor falsely represented
that the "optional information" it collects through the application form is
not disclosed to third parties without the member's permission. Third, the
FTC alleged that the competitor had falsely represented that it collected
and maintained the information provided by children who joined various
neighborhoods on its site, when in fact the undisclosed third parties
actually collected and maintained the information. Without admitting that
these allegations are correct, the competitor agreed in a consent order
made final by the FTC on February 12, 1999, among other things, to post a
clear and prominent privacy statement on its home page and each location
where information is collected, disclosing the information collected, the
purpose to which the information would be used, the persons to whom the
information would be released, and the methods by which subscribers could
access and remove the information. The competitor also agreed to obtain
express parental consent before collecting information from children 12 and
under and to notify individuals from whom it previously collected personal
information and offer them the opportunity to have that information
deleted. Finally, the competitor agreed to post, for five years, a clear
and prominent hyperlink within its privacy statement directing visitors to
the FTC's site to view educational material on privacy. The final order
also contained an additional provision added during the public comment
period, permitting the competitor to collect or use personal information
from children to the extent permitted by the Children's Online Privacy
Protection Act or by regulations or guides issued under that act.
We are continuing to review our practices in light of the recent FTC
activity and the enactment of the Children's Online Privacy Protection Act.
However, we cannot predict the exact form of the regulations that the FTC
may adopt. Accordingly, we cannot assure you that our current practices
will comply with the regulatory scheme which the FTC ultimately adopts or
that we will not have to make significant changes to comply with such laws.
We include statements about user privacy in our user agreement with
new members. The current user agreement states that our members should not
have an expectation of privacy in their accounts and that the government or
third parties may force us to disclose member e-mail under some
circumstances, or that third parties may unlawfully intercept private
communications. Additionally, the user agreement states that we may make
our database of user information available to other parties for promotions
of and solicitations for their goods or services. In the user agreement,
each member expressly consents to disclosure of personally identifiable
information. We also inform each member that he or she has the ability to
remove their personal information or update selected personal information
from the information made available to third parties.
Regardless of the user agreement, we could be required under several
privacy statutes and regulations, including the Electronic Communications
Privacy Act of 1986, to disclose information about users in a variety of
contexts including pursuant to a subpoena or court order.
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. 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:
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. The Commerce
Department has indicated that it hopes to complete an agreement with the EU
by June 21, 1999. We cannot assure you that this directive will not
materially adversely affect our business.
Any additional legislation or regulations relating to consumer privacy
or the application or interpretation of existing laws and regulations could
affect the way in which we are allowed to conduct our business, especially
those aspects that contemplate the collection or use of our members'
personal information.
Internet Taxation. Governments at the federal, state and local level,
and some foreign governments, have made a number of proposals that would
impose additional taxes on the sale of goods and services and various other
Internet activities. In 1998, the federal Internet Tax Freedom Act was
signed into law, placing a three-year moratorium on state and local taxes
on Internet access and on multiple or discriminatory taxes on electronic
commerce. However, this moratorium exempts existing state or local laws.
The statute also creates a commission to study several Internet taxation
issues. We cannot assure you that future laws imposing taxes or other
regulations on Internet commerce would not substantially impair the growth
of Internet commerce and as a result materially adversely affect our
business.
The Clinton Administration has stated that the United States will
advocate in the World Trade Organization and other appropriate
international organizations that the Internet be declared a tariff-free
environment whenever it is used to deliver products and services. In
addition, the Clinton Administration has stated that the government should
impose no new taxes on Internet commerce, but rather that taxation should
be consistent with established principles of international taxation, should
avoid inconsistent national tax jurisdictions and double taxation and
should be simple to administer and easy to understand. However, we cannot
assure you that foreign countries will not seek to tax Internet
transactions.
Access Charges. Several telecommunications carriers are supporting
regulation of the Internet by the FCC in the same manner that the FCC
regulates other telecommunications services. These carriers have alleged
that the growing popularity and use of the Internet has burdened the
existing telecommunications infrastructure, resulting in interruptions in
phone service. Incumbent local exchange telephone carriers have in the past
petitioned the FCC to regulate Internet service providers in a manner
similar to long-distance telephone carriers and to impose interstate access
charges on Internet service providers. In May 1997, however, the FCC
confirmed that Internet service providers will continue to be exempt from
interstate access charges. In August 1998, the Eighth Circuit Court of
Appeals upheld the FCC's authority to maintain the exemption. On February
25, 1999, the FCC adopted an order concerning payment by incumbent local
exchange carriers of reciprocal compensation for dial-up calls to Internet
service providers that obtain their local telephone service from
competitive local exchange carriers. The FCC found that Internet traffic is
largely interstate, and therefore subject to the FCC's jurisdiction,
because end user calls to Internet service providers do not terminate at
the Internet service providers' servers, but continue to Internet locations
that often are outside the state or country in which the call originates.
Although the FCC stated that the order does not require Internet service
providers to pay access charges for calls placed through their services,
the order does provide further support for a possible, ultimate finding
that access charges must be paid for at least some categories of Internet
services, such as Internet-based voice telephony. If the FCC were to
withdraw the exemption or take other action responding to
telecommunications carrier concerns, the costs of communicating through the
Internet could increase substantially, potentially slowing the growth in
Internet use. This could decrease demand for our services or increase our
cost of doing business.
Liability for Information Retrieved from or Transmitted over the
Internet. Materials may be downloaded and publicly distributed over the
Internet by the Internet services operated or facilitated by us or by the
Internet access providers with which we have relationships. These
third-party activities could result in potential claims against us for
defamation, negligence, copyright or trademark infringement or other claims
based on the nature and content of these materials. The Communications
Decency Act of 1996 provides that no provider or user of an interactive
computer service shall be treated as the publisher or speaker of any
information provided by another information content provider.
Future legislation or regulations or court decisions may hold us
liable for listings accessible through our web site, for content and
materials posted by members on their respective personal web pages, for
hyperlinks from or to the personal web pages of members, or through content
and materials posted in our chat rooms or bulletin boards. Liability might
arise from claims alleging that, by directly or indirectly providing
hyperlinks to web sites operated by third parties or by providing hosting
services for members' sites, we are liable for copyright or trademark
infringement or other wrongful actions by these third parties. If any
material on our web site contains informational errors, someone might sue
us for losses incurred in reliance on the erroneous information. We attempt
to reduce our exposure to potential liability through, among other things,
provisions in member agreements, user policies, insurance and disclaimers.
However, the enforceability and effectiveness of these measures are
uncertain.
In October 1998, the Digital Millennium Copyright Act, whose Title II
contains the Internet Copyright Infringement Liability Clarification Act,
was signed into law. This statute provides that, under some circumstances,
a service provider would not be liable for any monetary relief, and would
be subject to limited injunctive relief, for claims of infringement, based
on copyright materials transmitted by users over its digital communications
network or stored on its systems or under the control of or connected to
its systems. This statute also provides that, under some circumstances, a
service provider would not be liable for any claim if the service provider
acted in good faith to remove access to the infringing material. With
respect to infringement caused by storing material on a system or network,
in order to benefit from the protections of the act, a service provider
must appoint a designated agent to receive notifications of claimed
infringement and must provide information about that agent to the U.S.
Copyright Office and to the public in a publicly accessible place on the
service. We have appointed a designated agent, have provided that
information to the Copyright Office, and made it available to the public on
our site.
A third party provides our e-mail service. This relationship exposes
us to potential claims, including claims resulting from unsolicited e-mail
or "spamming," lost or misdirected messages, illegal or fraudulent use of
e-mail or interruptions or delays in e-mail service. Some states have
adopted laws that address spamming. Other states, including New York, are
considering, or have considered, similar legislation. For example,
California has adopted a law permitting electronic mail service providers
to sue parties who initiate unsolicited commercial messages in violation of
its e-mail policy, if the initiator has notice of that policy. California
also requires unsolicited e-mail advertisements to include opt-out
instructions with a toll-free telephone number or a valid return address in
the e-mail and requires senders of unsolicited e-mail advertisements to
honor opt-out requests. California also imposes criminal penalties on
parties who knowingly use Internet domain name of another party to send one
or more messages where such messages damage or cause damage to a computer,
computer system, or computer network. Similarly, the Virginia legislature
has passed, and the governor is considering signing a bill that, if
adopted, would make it a crime to send unsolicited bulk e-mail containing
false message headers or to sell software designed to do so and would
impose civil penalties for injuries caused by unsolicited bulk e-mail.
Washington has adopted a law that allows recipients of unsolicited e-mail
containing false headers and misleading subject lines to bring lawsuits
seeking damages of up to $500.00 for unsolicited commercial e-mail
messages. Potential liability for information disseminated through our
systems could lead us to implement measures to reduce our exposure to
liability. This could require the expenditure of substantial resources and
limit the attractiveness of our services. We attempt to reduce our exposure
to potential liability through, among other things, provisions in member
agreements, user policies and disclaimers. However, the enforceability and
effectiveness of these measures are uncertain.
We sell products directly to consumers and we also enter into
agreements with commerce partners and sponsors under which we are entitled
to receive a share of the revenue from the purchase of goods and services
through direct links from our site. These arrangements may expose us to
additional legal risks, including potential liabilities to consumers by
virtue of our involvement in providing access to these products or
services, even if we do not ourselves provide these products or services.
Our agreements with these parties often provide that these parties will
indemnify us against liabilities. However, we cannot assure you that this
indemnification will be enforceable or adequate. Although we carry general
liability insurance, our insurance may not cover all potential claims or
liabilities to which we are exposed. Any imposition of liability that is
not covered by insurance could have a material adverse effect on our
business.
The increased attention on liability issues relating to information
retrieved or transmitted over the Internet and legislative and
administrative proposals in this area could decrease the growth of Internet
use. This could decrease the demand for our services. We may also incur
significant costs in investigating and defending against these claims.
Domain Names. Domain names are the user's Internet addresses. Domain
names have been the subject of significant trademark litigation in the
United States. We have registered the domain names "theglobe.com,"
"shop.theglobe.com," "tglo.com" and "azazz.com." We cannot assure you that
third parties will not bring claims for infringement against us for the use
of these names. Moreover, because domain names derive value from the
individual's ability to remember the names, we cannot assure you that our
domain names will not lose their value if, for example, users begin to rely
on mechanisms other than domain names to access online resources.
The current system for registering, allocating and managing domain
names has been the subject of litigation and proposed regulatory reform. We
cannot assure you that our domain names will not lose their value, or that
we will not have to obtain entirely new domain names in addition to or in
place of our current domain names.
Jurisdiction. Our facilities are located primarily in New York.
However, due to the global reach of the Internet it is possible that the
governments of other states and foreign countries might attempt to regulate
Internet activity and our transmissions. They 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.
EMPLOYEES
As of December 31, 1998, we had approximately 120 full-time employees,
including approximately 25 in sales and marketing, 55 in production, 30 in
finance and administration and 10 in technology. Our future success
depends, in part, on our ability to continue to attract, retain and
motivate highly qualified technical and management personnel. Competition
for these persons is intense. From time to time, we also employ independent
contractors to support our research and development, marketing, sales and
support and administrative organizations. Our employees are not represented
by any collective bargaining unit and we have never experienced a work
stoppage. We believe that our relations with our employees are good.
ITEM 2. PROPERTIES
Our headquarters are located in a leased facility in New York City and
consist of approximately 20,000 square feet of office space, a majority of
which is under a lease with approximately six months remaining. Our
principal web server equipment and operations are maintained by our
personnel at the New York Teleport facility in Staten Island, New York
under a Data Center Space Lease with Telehouse International Corporation of
America for 2,800 square feet of commercial space for a term of three
years. Additional web server equipment relating to our electronic commerce
business is located with and maintained by Exodus Communications, Inc. in
Seattle, Washington. We have also entered into two six-month leases for a
total of 3,943 square feet of office space in New York City. We intend to
relocate our headquarters in the second quarter of 1999 to a larger
facility and have entered into a fifteen-year lease for approximately
47,000 square feet of commercial space in New York City for this purpose.
We lease approximately 1,200 square feet of office space in San Francisco
for our West Coast sales office. In connection with our acquisition of
Azazz, we assumed a month-to-month lease for approximately 4,000 square
feet of office space in Kirkland, Washington. We believe that additional
commercial space will be available for lease at market rates.
ITEM 3. LEGAL PROCEEDINGS
From time to time we are named in claims arising in the ordinary
course of business. Currently, no legal proceedings or claims are pending
against or involve us that, in the opinion of management, could reasonably
be expected to have a material adverse effect on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of our stockholders during the
fourth quarter of the year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Our common stock trades on the Nasdaq National Market under the Symbol
"TGLO". The following table sets forth the range of high and low closing
sales prices of our common stock for the period indicated:
Fiscal Quarter Ended High Low
-------------------------------- ------- -------
December 31, 1998
(commencing November 13, 1998) $63.500 $27.438
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
On March 10, 1999, we had approximately 146 holders of record of
common stock. This does not reflect persons or entities who hold their
stock in nominee or "street" name through various brokerage firms.
DIVIDENDS
We have not paid any cash dividends on our common stock. We expect to
invest any future earnings 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
From October 1, 1998 to December 31, 1998, we have used an aggregate
of $4,064,887 which included net proceeds from our initial public offering
for investments in our web site, including enhancements to our server and
networking infrastructure and the functionality of our web site, and for
general corporate purposes, including working capital, expansion of our
sales and marketing capabilities and brand-name promotions. We have also
used a portion of the remainder of such net proceeds for acquisitions of
complementary businesses, services and technology.
RECENT SALES OF UNREGISTERED SECURITIES
During the period from October 1, 1998 through December 31, 1998, we
granted an aggregate of 43,250 options to purchase common stock to our
officers, directors and employees under our 1998 Stock Option Plan. These
options had a weighted average exercise price equal to $19.92 per share of
common stock. All of these option grants were made under the exemption from
the registration requirements of Rule 701 of the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the 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."
(INCEPTION)
THROUGH
YEAR ENDED DECEMBER 31, DECEMBER 31,
-------------------------------- -----------
1998 1997 1996 1995
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues............................... $ 5,510 $ 770 $ 229 $ 27
Cost of revenues....................... 2,239 423 116 13
---------- ---------- ---------- -----------
Gross profit........................... 3,271 347 113 14
Operating expenses:
Sales and marketing.................. 9,299 1,248 276 1
Product development.................. 2,633 154 120 60
General and administrative........... 6,828 2,828 489 19
Non-recurring charge................... 1,370 -- -- --
---------- ---------- ---------- -----------
Total Operating Expenses............... 20,130 4,230 885 80
---------- ---------- ---------- -----------
Loss from operations................... (16,859) (3,883) (772) (66)
---------- ---------- ---------- -----------
Interest income (expense), net........ 892 335 22 --
---------- ---------- ---------- -----------
Loss before provision for income taxes. (15,967) (3,548) (750) (66)
---------- ---------- ---------- -----------
Provision for income taxes............. 79 36 -- --
---------- ---------- ---------- -----------
Net loss............................... $ (16,046) $ (3,584) $ (750) $ (66)
========== ========== ========== ===========
Basic and diluted net loss per share (1) $ (6.74) $ (3.13) $ (0.67) $ (0.06)
========== ========== ========== ===========
Weighted average shares outstanding
used in basic and diluted per share
calculation (1)...................... 2,381,140 1,146,773 1,125,000 1,125,000
========== ========== ========== ===========
DECEMBER 31,
---------------------------------------------
1998 1997 1996 1995
---------- ---------- ---------- -----------
BALANCE SHEET DATA:
Cash and cash equivalents and short-
term investments..................... $ 30,149 $ 18,874 $ 757 $ 587
Working capital........................ 27,009 17,117 648 575
Total assets........................... 38,130 19,462 973 647
Capital lease obligations, excluding
current installments................. 2,006 99 -- --
Total stockholders' equity............. 30,301 17,352 795 632
(1) Weighted average shares do not include any common stock
equivalents because the inclusion of those common stock equivalents
would have been anti-dilutive. See the financial statements and notes
appearing elsewhere in this Form 10-K for the determination of shares
used in computing basic and diluted loss per share.
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 financial statements and notes to those
statements included elsewhere in this report.
OVERVIEW
Our web site is one of the world's leading online communities with
nearly 2.3 million members in the United States and abroad. In December
1998, over 9.3 million unique users visited our site. Our web site is a
destination on the Internet where users are able to personalize their
online experience by publishing their own content and interacting with
others having similar interests. We facilitate this interaction by
providing various free services, including home page building, discussion
forums, chat rooms, e-mail and electronic commerce. Additionally, we
provide our users with news, business information, real time stock quotes,
weather, movie and music reviews, multi-player gaming and personals. By
satisfying our users' personal and practical needs, we seek to become our
users' online home. Our primary revenue source is the sale of advertising,
with additional revenues generated through electronic commerce
arrangements, development fees and the sale of membership service fees for
enhanced services.
We were incorporated in May 1995. For the period from inception
through December 1995, we had minimal sales and our operating activities
related primarily to the development of the necessary computer
infrastructure and initial planning and development. Operating expenses in
1995 were minimal. During 1996, we continued the foregoing activities and
also focused on recruiting personnel, raising capital and developing
programs to attract and retain members. In 1997, we
o moved our headquarters to New York City;
o expanded our membership base from less than 250,000 to almost 1
million;
o improved and upgraded our services;
o expanded our production staff;
o built an internal sales department; and
o began active promotion of theglobe.com web site to increase
market awareness.
During 1998, revenues and operating expenses increased as we placed a
greater emphasis on building our advertising revenues and memberships by
expanding our sales force and promoting theglobe.com brand.
To date, our revenues have been derived principally from the sale of
advertisements and sponsorship placements within our site and, to a lesser
extent, from subscription and electronic commerce revenues. Electronic
commerce revenues have not been significant to date, but are expected to
increase with the acquisition of Azazz, and as our existing electronic
commerce arrangements grow and new arrangements are entered into.
Advertising revenues constituted 89%, 77% and 95% of total revenues for the
years ended December 31, 1998, 1997 and 1996. We sell a variety of
advertising packages to clients, including banner advertisements, event
sponsorship, and targeted and direct response advertisements. Our
advertising revenues are derived principally from short-term advertising
arrangements. These arrangements average one to three months. We generally
guarantee a minimum number of impressions for a fixed fee. Advertising
revenues are recognized ratably in the period in which the advertisement is
displayed, if no significant company obligations remain and collection of
the resulting receivable is probable. Payments received from advertisers
before displaying their advertisements on our web site are recorded as
deferred revenues and are recognized as revenue ratably when the
advertisement is displayed. To the extent minimum guaranteed impression
levels are not met, we defer recognition of the corresponding revenues
until guaranteed levels are achieved.
In addition to advertising revenues, we derive other revenues
primarily from our membership service fees, electronic commerce revenue,
development fees and sponsorship placements within our site. Subscription
fees are recognized over the membership term. A number of recent
arrangements with our premier electronic commerce partners provide us with
a share of any sales resulting from direct links from the our web site. We
recognize revenues from our share of the proceeds from our electronic
commerce partners' sales upon notification from our partners of sales
attributable to our web site. To date, revenues from electronic commerce
arrangements have not been significant. In addition, in 1999 we began
direct electronic commerce sales to users. We also earn additional revenue
on sponsorship contracts for fees relating to the design, coordination, and
integration of the customer's content and links. We recognize these
development fees as revenue once the related activities have been
performed.
We incurred net losses of approximately $16.0 million in 1998, $3.6
million in 1997 and $750,200 in 1996. At December 31, 1998, we had an
accumulated deficit of $20.4 million. We recorded deferred compensation of
approximately $118,100 in 1998, $83,100 in 1997 and $25,000 in 1996 in
connection with the grant of various stock options to employees,
representing the difference between the deemed value of our common stock
for accounting purposes and the exercise price of the options at the date
of grant. This amount is presented as a reduction of stockholders' equity
and is being amortized over the vesting period of the applicable options,
generally three to five years. Amortization of deferred stock compensation
is allocated to the general and administrative expense line identified on
the statement of operations consistent with the classification of the
related personnel.
In addition, we incurred a charge of approximately $1.4 million to
earnings in the third quarter of 1998 in connection with the transfer of
warrants to acquire 225,000 shares of common stock by Dancing Bear
Investments, Inc., which was our principal shareholder at the date of
transfer, to some of our officers at approximately $2.91 per share. The
amount of this non-cash charge was based on the difference between the fair
market value of our stock at the date of transfer ($9.00 per share) and the
exercise price of the warrant of approximately $2.91 per share. This
expense was classified separately in the statement of operations as a
non-recurring charge.
RESULTS OF OPERATIONS
Revenues. Revenues increased to approximately $5.5 million in 1998 as
compared to $770,300 in 1997 and $229,400 in 1996. The year to year growth
resulted from an increase in (1) the number of advertisers and the average
commitment per advertiser, (2) our web site traffic, (3) the number of our
sales people and (4) marketing and advertising expenditures. Advertising
revenues were approximately $4.9 million or 89% of total revenues in 1998,
$592,400 or 77% of total revenues in 1997 and $216,800 or 95% of total
revenues in 1996. In 1998, we significantly increased our sales force and
began a marketing campaign to promote theglobe.com web site. We anticipate
that advertising revenues will continue to account for a substantial share
of our total revenues for the foreseeable future. Other revenues were
derived from membership service fees, development fees, electronic commerce
revenue shares and sponsorship placements within our web site. At December
31, 1998, we had deferred revenues of approximately $673,600. Barter
revenues were approximately 2% of total revenues for 1998, 22% for 1997 and
0% for 1996.
Cost of Revenues. Cost of revenues consist primarily of Internet
connection charges, web site equipment leasing costs, depreciation,
maintenance, barter advertising expenses, staff costs and related expenses
of operations personnel. Gross margins were 59% in 1998, 45% in 1997 and
49% in 1996. The increase in gross margin was primarily due to an increase
in revenues relative to the increase in cost of revenues. The absolute
dollar increase in cost of revenues was due to an increase in Internet
connection costs to support the increase in web site traffic, as well as an
increase in equipment costs, depreciation and staff costs required to
support the expansion of our site and services. In addition, we recorded
barter advertising expenses during 1998 and 1997, which was equivalent to
the barter advertising revenues recorded in the same period. The gross
margins exclusive of the barter transactions were 60% in 1998 and 57% in
1997. In 1996, we did not enter into any barter transactions. During the
fourth quarter of 1998, we moved our web site hosting functions to a
separate facility in Staten Island, New York. The new facility will allow
us to support our expanded services and content.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of salaries and related expenses of sales and marketing
personnel, commissions, advertising and public relations expenses. Sales
and marketing expenses were approximately $9.3 million or 169% of total
revenues in 1998, $1.2 million or 162% of total revenues in 1997, and
$275,900 or 120% of total revenues in 1996. The year-to-year increase in
sales and marketing expenses was primarily attributable to expansion of our
online and print advertising, public relations and other promotional
expenditures, as well as increased sales and marketing personnel and
related expenses required to implement our marketing strategy. Sales and
marketing expenses also increased as a result of our decision to shift our
advertising to an internal sales department in the second quarter of 1997.
Product Development Expenses. Product development expenses include
professional fees, staff costs and related expenses associated with the
development, testing and upgrades to our web site as well as expenses
related to its editorial content and community management and support.
Product development expenses were approximately $2.6 million or 48% of
total revenues in 1998, $153,700 or 20% of total revenues in 1997, and
$120,000 or 52% of total revenues in 1996. The increase in absolute dollars
in product development expenses was primarily attributable to increased
staffing levels required to support our web site and to enhance its content
and features. Product development expenses also increased as a result of
the launch of our web site redesign in November 1998. We intend to continue
recruiting and hiring experienced product development personnel and to make
additional investments in product development.
General and Administrative Expenses. General and administrative
expenses consist primarily of salaries and related costs for general
corporate functions, including finance, human resources, facilities and
legal, along with professional fees and bad debt expense and other
corporate expenses. General and administrative expenses were approximately
$6.8 million or 124% of total revenues in 1998, $2.8 million or 367% of
total revenues in 1997, and $489,100 or 213% of total revenues in 1996. The
absolute dollar increase in these expenses was primarily due to increased
salaries and related expenses associated with our management's employment
contracts, hiring of additional personnel, and increases in professional
fees and travel. The increased salaries also reflect the highly competitive
nature of hiring in the new media industry. We expect that we will incur
additional general and administrative expenses as we hire additional
personnel and incur additional costs related to the growth of our business
and operation as a public company, including directors' and officers'
liability insurance, investor relations programs and professional service
fees. Accordingly, we anticipate that general and administrative expenses
will continue to increase in absolute dollars.
Non-recurring charges. We recorded a non-recurring, non-cash charge of
approximately $1.4 million in the third quarter of 1998. This charge was in
connection with the transfer of outstanding warrants to acquire 225,000
shares of common stock by Dancing Bear Investments, which was our principal
shareholder at the time of the transfer, to some of our officers. There was
no similar charge in 1997 or 1996.
Other Income (expense). Other income (expense) includes interest
income from our cash and investments, interest expenses related to our
capital lease obligations, and realized gains and losses from sale of
short-term investments. The year-to-year increase in interest and dividend
income was due to a higher average cash, cash equivalent and investment
balance as a result of the proceeds received from the issuance of shares of
our preferred stock in the third quarter of 1997, and the issuance of
common stock in connection with our initial public offering in November
1998.
Interest and other expense increased in 1998 due to new capital lease
obligations. We entered into our first capital lease in late December 1997.
As a result, interest expense from capital lease obligations did not begin
until 1998.
Income Taxes. Income taxes were approximately $78,900 in 1998, $36,100
in 1997 and -0- in 1996. These income taxes were based solely on state and
local taxes on business and investment capital. These taxes increased from
year to year due to an increase in our average equity balance. The average
equity balance increased as a result of the proceeds received from our
issuance of shares of preferred stock in the third quarter of 1997, and our
issuance of common stock in connection with our initial public offering in
November 1998. Our effective tax rate differs from the statutory federal
income tax rate, primarily as a result of the uncertainty regarding our
ability to utilize net operating loss carryforwards. Due to the uncertainty
surrounding the timing or realization of the benefits of our net operating
loss carryforwards in future tax returns, we have placed a 100% valuation
allowance against our deferred tax assets. As of December 31, 1998, we had
approximately $29.2 million of federal and state net operating loss
carryforwards for tax reporting purposes available to offset future taxable
income. Our federal net operating loss carryforwards will expire beginning
in 2001 through 2018, if not utilized. The Tax Reform Act of 1986 imposes
substantial restrictions on the utilization of net operating losses and tax
credits in the event of an "ownership change" of a corporation. Due to the
change in our ownership interests in the third quarter of 1997, as defined
in the Internal Revenue Code, future utilization of our net operating loss
carryforwards will be affected by limitations or annual restrictions.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, we had approximately $29.3 million in cash
and cash equivalents and approximately $898,500 in marketable securities.
Net cash used in operating activities was approximately $13.5 million in
1998, $1.9 million in 1997 and $601,600 in 1996. The increase in net cash
used in 1998 resulted primarily from an increase in our expenses which
resulted in increased net operating losses. In addition we had a higher
level of receivables due to increased revenues and an increase in prepaid
expenses. These items were partially offset by an increase in accounts
payable and deferred revenues. The 1997 increase in net cash used was
primarily due to an increase in net operating loss and a higher account
receivable balance. These items were partially offset by the timing of
payments associated with our 1997 accrued bonuses paid in the first quarter
of 1998, as well as an increase in accounts payable and accrued expenses.
Net cash provided (used) in investing activities was approximately
$9.6 million in 1998, $(13.2) million in 1997 and $(138,300) in 1996. Net
cash provided by investing activities in 1998 was primarily related to the
sales of short-term investments to finance our working capital needs. These
sales were partially offset by approximately $1.7 million in security
deposits required for capital leases and the purchase of property and
equipment in connection with the build out of our infrastructure. Net cash
used in investing activities in 1997 was primarily related to the purchase
of securities with the proceeds from our private placement in the third
quarter of 1997. Cash used in investing activities in 1996 was related to
the purchase of property and equipment.
Net cash provided by financing activities was approximately $27.2
million in 1998, $20.2 million in 1997 and $910,000 in 1996. Net cash
provided by financing activities during 1998 consisted primarily of $27.3
million from the issuance of 3,481,667 shares of common stock in connection
with our initial public offering in November 1998. The net cash provided by
financing activities in 1997 consisted primarily of approximately $20.3
million from preferred stock issuances. These amounts were partially offset
by approximately $130,500 in financing costs related to the private
placements. The approximately $910,000 of net cash provided in 1996 was
from our private placements of preferred stock.
On February 1, 1999, we purchased factorymall.com, inc., a leading
interactive department store. We expect to invest an aggregate of up to
approximately $3.8 million of working capital in 1999 to support the future
operations of factorymall.com, inc.
Our capital requirements depend on numerous factors, including market
acceptance of our services, the amount of resources we devote to
investments in our web site, the resources we devote to marketing and
selling our services and our brand promotions and other factors. We have
experienced a substantial increase in our capital expenditures and lease
arrangements since our inception consistent with the growth in our
operations and staffing, and we anticipate that this will continue for the
foreseeable future. Additionally, we will continue to evaluate possible
investments in businesses, products and technologies, and we plan to expand
our sales force. We believe that our current cash and cash equivalents,
which primarily resulted from our initial public offering, 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 1999
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."
IMPACT OF THE YEAR 2000
The Year 2000 issue is the potential for system and processing
failures of date-related data and the result of computer-controlled systems
using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the Year 2000. This could
result in system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business
activities.
State of Readiness. We may be affected by Year 2000 issues related to
non-compliant information technology systems or non-information technology
systems operated by us or by third parties. We have substantially completed
an assessment of our internal and external third-party information
technology systems and non-information technology systems and a test of the
information technology systems that support our web site. At this point in
our assessment and testing, we are not aware of any Year 2000 problems
relating to systems we or third parties operate that would have a material
effect on our business or financial condition, without taking into account
our efforts to avoid these problems. However, we cannot assure you that
there will be no Year 2000 problems
Our information technology systems consist of software developed
either in-house or purchased from third parties, and hardware purchased
from vendors. We have contacted our principal vendors of hardware and
software. All of those contacted vendors have notified us that the hardware
and software that they supplied to us is Year 2000 compliant.
We have also substantially completed an assessment of our
non-information technology systems which we have identified as possibly
having Year 2000 issues. At this point in our assessment, we are not aware
of any Year 2000 problems relating to these systems which would have a
material effect on our business or financial condition, without taking into
account our efforts to avoid these problems.
Our information technology systems and other business resources rely
on information technology systems and non-information technology systems
provided by service providers and therefore may be vulnerable to those
service providers' failure to remediate their own Year 2000 issues. These
service providers include those for our network and e-mail services and
landlords for our leased office spaces. We have contacted these principal
service providers and we have been notified that the information technology
and non-information technology systems which they provide to us are Year
2000 compliant.
Cost. Based on our assessment to date, we do not anticipate that costs
associated with remediating our non-compliant systems will be material.
Risks. To the extent that our assessment is finalized without
identifying any material non-compliant information technology or
non-information technology systems operated by us or by third parties, the
most reasonably likely worst case Year 2000 scenario is the failure of one
or more of our vendors of hardware or software or one or more providers of
non-information technology systems to properly identify any Year 2000
compliance issues and remediate any issues before the end of the second
quarter of 1999. A failure could prevent us from operating our business,
prevent users from accessing our web site or change the behavior of
advertising customers or persons accessing our web site. We believe that
the primary business risks, in the event of a failure, would include but
not be limited to:
o lost advertising revenues,
o increased operating costs,
o loss of customers or persons accessing our web site,
o other business interruptions of a material nature, and
o claims of mismanagement, misrepresentation, or breach of
contract.
Contingency Plan. As discussed above, we are engaged in an ongoing
Year 2000 assessment and testing. Following the completion of the
assessment, we plan to conduct a full-scale Year 2000 simulation of our
information technology systems by the end of the second quarter of 1999.
The results of this simulation and our assessment will be taken into
account in determining the nature and extent of any contingency plans.
EFFECTS OF INFLATION
Due to relatively low levels of inflation in 1996, 1997 and 1998,
inflation has not had a significant effect on our results of operations
since inception.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
We adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" as of January
1, 1998. SFAS No. 130 requires us to report in our financial statements, in
addition to our net income (loss), comprehensive income (loss), which
includes all changes in equity during a period from non-owner sources
including, as applicable, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on investments in debt and
equity securities. We adopted SFAS 130 as of December 31, 1997 and have
presented comprehensive income for all periods presented in the Statement
of Shareholders' Equity.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. We have determined that we do not
have any separately reportable business segments.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", which
establishes guidelines for the accounting for the costs of all computer
software developed or obtained for internal use. We adopted SOP 98-1
effective for the year ended December 31, 1998. The adoption of SOP 98-1 is
not expected to have a material impact on our financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS
No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The statement is not expected to affect us as we do
not have any derivative instruments or hedging activities.
RISK FACTORS
In addition to the other information in this report, the following
factors should be carefully considered in evaluating our business and
prospects.
OUR LIMITED OPERATING HISTORY MAKES FINANCIAL FORECASTING DIFFICULT.
theglobe was founded in May 1995. Accordingly, we have a limited
operating history for you to use in evaluating us and our prospects. Our
prospects should be considered in light of the risks encountered by
companies in the early stages of development, particularly companies
operating in new and rapidly evolving markets like the Internet. We may not
successfully address these risks. For example, we may not be able to:
o maintain and increase levels of user and member traffic on our
web site;
o maintain and increase the percentage of our advertising inventory
sold;
o adapt to meet changes in our markets and competitive
developments;
o develop or acquire content for our services;
o generate electronic commerce-related revenues; and
o identify, attract, retain and motivate qualified personnel.
REVENUE GROWTH IN PRIOR PERIODS MAY NOT BE INDICATIVE OF FUTURE GROWTH.
We achieved significant revenue growth in 1998. Our limited operating
history makes prediction of future growth difficult. Accurate predictions
of future growth are also difficult because of the rapid changes in our
markets. Accordingly, investors should not rely on past revenue growth
rates as a prediction of future growth.
WE ANTICIPATE INCREASED OPERATING EXPENSES AND EXPECT TO CONTINUE TO INCUR
LOSSES.
To date, we have not been profitable, and we expect that we will
continue to incur net losses for the foreseeable future. We had net losses
of approximately $750,200 for 1996, $3.6 million for 1997, and $16.0
million for 1998. As of December 31, 1998, we had an accumulated deficit of
approximately $20.4 million. The principal causes of our losses are likely
to continue to be:
o increased general and administrative expenses;
o costs resulting from enhancement of our services;
o significant increases in operating expenses in the next several years,
especially in the areas of sales and marketing;
o increased expenses necessary to maintain and develop brand identity;
o growth of our sales force;
o expansion of our business facilities; and
o failure to generate sufficient revenue in light of increased costs.
We will need to generate significantly increased revenues to achieve
profitability, particularly if we are unable to adjust our expenses in
light of any earnings shortfall. We cannot assure you that we will ever
achieve or sustain profitability.
OUR QUARTERLY OPERATING RESULTS FLUCTUATE AND VARY BY SEASON.
Our quarterly revenues, expenses and operating results have varied
significantly in the past and are likely to vary significantly from quarter
to quarter in the future. As a result, quarter to quarter comparisons of
our revenues and operating results may not be meaningful. In addition, due
to our limited operating history and our new and unproven business model,
we cannot predict our future revenues or results of operations accurately.
It is likely that in one or more future quarters our operating results will
fall below the expectation of securities analysts and investors. If this
happens, the trading price of our common stock would almost certainly be
materially and adversely affected.
The factors which will cause our quarterly operating results to
fluctuate include:
o the level of traffic on our web site;
o the overall demand for Internet advertising and electronic
commerce;
o the addition or loss of advertisers and electronic commerce
partners on our web site;
o usage of the Internet;
o seasonal trends in advertising and electronic commerce sales and
member usage;
o capital expenditures and other costs relating to the expansion of
our operations;
o the incurrence of costs relating to acquisitions; and
o the timing and profitability of acquisitions, joint ventures and
strategic alliances.
We derive a substantial portion of our revenues from the sale of
advertising under short-term contracts. These contracts average one to
three months in length. As a result, our quarterly revenues and operating
results are, to a significant extent, dependent on advertising revenues
from contracts entered into within the quarter, and on our ability to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. We believe that advertising sales in traditional media, such as
television and radio, generally are lower in the first and third calendar
quarters. If the Internet transitions from an emerging to a more developed
form of media, these same patterns may develop in Internet advertising
sales. Internet advertising expenditures may also develop a different
seasonality pattern. Traffic levels on our site and the Internet have
typically declined during the summer and year-end vacation and holiday
periods.
In addition to selling advertising, an increasing portion of our
revenues may be generated from electronic commerce through our Azazz
subsidiary. We also have existing electronic commerce arrangements with
third parties for the sale of merchandise on our web site which are
terminable upon short notice. As a result, our revenues from electronic
commerce may fluctuate significantly from period to period depending on the
level of demand for electronic commerce on our site and the continuation of
our electronic commerce arrangements.
WE DEPEND ON OUR MEMBERS FOR CONTENT AND PROMOTION.
We depend substantially upon member involvement for content and
word-of-mouth promotion. Particularly, we depend upon the voluntary efforts
of some highly motivated members who are most active in developing content
to attract other Internet users to our site. This member involvement
reduces the need for us to spend funds on content development and site
promotion. However, we cannot assure you that these members will continue
to effectively generate significant content or promote our site. Our
business may be materially and adversely affected if our most highly active
members become dissatisfied with our services or our focus on the
commercialization of those services or for any other reason stop generating
content that effectively promotes our site.
OUR BUSINESS MODEL IS NEW AND UNPROVEN.
Our business model is new and relatively unproven. This model depends
upon our ability to obtain more than one type of revenue source by using
our community platform. To be successful, we must, among other things,
develop and market products and services that achieve broad market
acceptance by our users, advertisers and electronic commerce vendors. We
must also market products directly to users and have users purchase
products through our site. We cannot assure you that any Internet
community, including our site, will achieve broad market acceptance. We
also cannot assure you that our business model will be successful, that it
will sustain revenue growth or that it will be profitable.
Additionally, the market for our products and services is new, rapidly
developing and characterized by an increasing number of market entrants. As
is typical of most new and rapidly evolving markets, demand and market
acceptance for recently introduced products and services are highly
uncertain and risky. Moreover, because this market is new and rapidly
evolving, we cannot predict our future growth rate, if any. If this market
fails to develop, develops more slowly than expected or becomes saturated
with competitors, or if our products and services do not achieve or sustain
market acceptance, our business would be materially and adversely affected.
WE MAY BE UNSUCCESSFUL IN DEVELOPING BRAND AWARENESS; BRAND IDENTITY IS
CRITICAL TO US.
We believe that establishing and maintaining awareness of
"theglobe.com" brand name is critical to attracting and expanding our
member base, the traffic on our web site and advertising and electronic
commerce relationships. If we fail to promote and maintain our brand or our
brand value is diluted, our business, operating results and financial
condition could be materially adversely affected. The importance of brand
recognition will increase because low barriers to entry continue to result
in an increased number of web sites. To promote our brand, we may be
required to continue to increase our financial commitment to creating and
maintaining brand awareness. We may not generate a corresponding increase
in revenues to justify these costs. Additionally, if members, other
Internet users, advertisers and customers do not perceive our community
experience to be of high quality, or if we introduce new services or enter
into new business ventures that are not favorably received by these
parties, the value of our brand could be diluted.
WE RELY SUBSTANTIALLY ON ADVERTISING REVENUES.
We derive a substantial portion of our revenues from the sale of
advertisements on our web site. We expect to continue to do so for the
foreseeable future. During 1998, advertising revenues represented 89% of
our net revenues. Our business model and revenues are highly dependent on
the amount of traffic on our site. The level of traffic on our site
determines the amount of advertising inventory we can sell. Our ability to
generate significant advertising revenues depends, in part, on our ability
to create new advertising programs without diluting the perceived value of
our existing programs. Our ability to generate advertising revenues will
also depend, in part, on the following:
o advertisers' acceptance of the Internet as an attractive and
sustainable medium;
o advertisers' willingness to pay for advertising on the Internet
at current rates;
o the development of a large base of users of our products and
services;
o our level of traffic;
o the effective development of web site content that attracts users
having demographic characteristics attractive to advertisers; and
o price competition among web sites.
We cannot assure you that the market for Internet advertising will
continue to emerge or become sustainable. If the Internet advertising
market develops slower than we expect our business performance would be
materially adversely affected. To date, substantially all our advertising
contracts have been for terms averaging one to three months in length, with
relatively few longer term advertising contracts. Additionally, our
advertising customers may object to the placement of their advertisements
on some members' personal homepages, the content of which they deem
undesirable. For any of the foregoing reasons, we cannot assure you that
our current advertisers will continue to purchase advertisements on our
site. We also compete with traditional advertising media, including
television, radio, cable and print, for a share of advertisers' total
advertising budgets. This will result in increased pricing pressures on our
advertising rates, which could have a material adverse effect on us.
WE RELY ON THIRD PARTIES OVER WHOM WE HAVE LIMITED CONTROL TO MANAGE THE
PLACEMENT OF ADVERTISING ON OUR WEB SITE.
The process of managing advertising within a large, high-traffic web
site such as ours is an increasingly important and complex task. We license
our advertising management system from DoubleClick, Inc. under an agreement
expiring April 15, 2000. DoubleClick may terminate the agreement upon 30
days' notice (1) if we breach the agreement or (2) if DoubleClick
reasonably determines that we have used their advertising management system
in a manner that could damage their technology or which reflects
unfavorably on DoubleClick's reputation. No assurance can be given that
DoubleClick would not terminate the agreement. Any termination and
replacement of DoubleClick's service could disrupt our ability to manage
our advertising operations. Additionally, we have entered into a contract
with Engage Technologies, Inc. for the license of proprietary software to
manage the placement of advertisement on our web site. This software is
still being implemented and our relationship under the contract has not yet
been material. There can be no assurance that this software will
effectively manage the placement of advertisements on our web site and that
errors will not occur.
To the extent that we encounter system failures or material
difficulties in the operation of our advertising management systems, we may
o be unable to deliver banner advertisements and sponsorships
through our site; and
o be required to provide additional impressions to our advertisers
after the contract term.
Our obligations to provide additional impressions would displace
saleable advertising inventory. This would reduce revenues and could have a
material adverse effect on us.
WE DEPEND SUBSTANTIALLY ON OUR KEY PERSONNEL.
Our performance is substantially dependent on the continued service of
our senior management and key technical personnel, all of whom have only
worked together for a short time. In particular, our success depends on the
continued efforts of our senior management team, especially our Co-Chief
Executive Officers, Co-Presidents, and co-founders, Todd V. Krizelman and
Stephan J. Paternot. We do not carry key person life insurance on any of
our personnel. The loss of the services of any of our executive officers or
other key employees would likely have a material adverse effect on our
business.
WE DEPEND ON HIGHLY QUALIFIED TECHNICAL AND MANAGERIAL PERSONNEL.
Our future success also depends on our continuing ability to attract,
retain and motivate highly qualified technical and managerial personnel.
Our business plan requires us to increase our employee base significantly
over the next 12 months. Competition for employees in our industry is
intense. We may be unable to attract, assimilate or retain highly qualified
technical and managerial personnel in the future. Wages for managerial and
technical employees are increasing and are expected to continue to increase
in the future. We have from time to time in the past experienced, and we
expect to continue to experience in the future, difficulty in hiring and
retaining highly skilled employees with appropriate qualifications. If we
are unable to attract and retain the technical and managerial personnel
necessary to support the growth of our business, our business would likely
be materially and adversely affected.
WE MAY NOT EFFECTIVELY MANAGE OUR GROWTH; OUR MANAGEMENT TEAM IS
INEXPERIENCED IN THE MANAGEMENT OF A LARGE PUBLIC COMPANY.
Our recent growth has placed significant strains on our resources. To
manage our future growth, we must continue to implement and improve our
operational and financial software systems and expand and train our
employee base. Some of our key employees were hired during 1998, including
our Chief Operating Officer, who joined us in August 1998 and our Chief
Financial Officer, who joined us in July 1998. In addition, our Director of
Marketing, Director of Advertising Sales, General Counsel, Director of
Business Development, Director of Communications and Director of Human
Resources each have been with us for less than two years. Furthermore, the
members of our current senior management, other than the Chairman, have not
had any previous experience managing a public company or a large operating
company. Accordingly, we cannot assure you that:
o we will be able to effectively manage the expansion of our
operations;
o our key employees will be able to work together effectively as a
team to successfully manage our growth;
o we will be able to hire, train and manage our growing employee
base;
o our systems, procedures or controls will be adequate to support
our operations; and
o our management will be able to achieve the rapid execution
necessary to fully exploit the market opportunity for our
products and services.
Our inability to manage growth effectively could have a material
adverse effect on our business.
OUR CHAIRMAN AND VICE PRESIDENT OF CORPORATE DEVELOPMENT HAVE OTHER
INTERESTS AND TIME COMMITMENTS; WE HAVE CONFLICTS OF INTEREST WITH SOME OF
OUR DIRECTORS.
Because our Chairman and our Vice President of Corporate Development
are officers or employees of other companies, we will have to compete for
their time. Michael S. Egan is our Chairman. Mr. Egan serves as the
Chairman of our board of directors and as an executive officer with primary
responsibility for day-to-day strategic planning and financing
arrangements. Mr. Egan also is the controlling investor of Dancing Bear
Investments, an entity controlled by Mr. Egan, which is our majority
stockholder. Edward A. Cespedes is our Vice President of Corporate
Development with primary responsibility for corporate development
opportunities including mergers and acquisitions. Mr. Cespedes also serves
as a Managing Director of Dancing Bear Investments. Messrs. Egan and
Cespedes have not committed to devote any specific percentage of their
business time with us. Accordingly, we compete with Dancing Bear
Investments and related entities for their time.
We have begun advertising electronic commerce arrangements with
entities controlled by Mr. Egan and by Republic Industries, Inc., an entity
affiliated with H. Wayne Huizenga, one of our directors. These arrangements
were not the result of arm's-length negotiations, but we believe that the
terms of these arrangements are on comparable terms as if they were entered
into with unaffiliated third parties. Due to their relationships with their
related entities, Messrs. Egan, Cespedes and Huizenga will have an inherent
conflict of interest in making any decision related to transactions between
their related entities and us. We intend to review related party
transactions in the future on a case-by-case basis.
WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL AND OTHER CHANGES.
The markets in which we compete are characterized by:
o rapidly changing technology,
o evolving industry standards,
o frequent new service and product announcements, introductions and
enhancements, and
o changing consumer demands.
We may not be able to keep up with these rapid changes. In addition,
these market characteristics are heightened by the emerging nature of the
Internet and the apparent need of companies from varying industries to
offer Internet-based products and services. As a result, our future success
depends on our ability to adapt to rapidly changing technologies and
standards. We will also need to continually improve the performance,
features and reliability of our services in response to competitive
services and product offerings and the evolving demands of the marketplace.
In addition, the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could
require us to incur substantial expenditures to modify our services or
infrastructure and could fundamentally affect the nature of our business.
WE HAVE CAPACITY CONSTRAINT AND SYSTEM DEVELOPMENT RISKS.
A key element of our strategy is to generate a high volume of user
traffic. Our ability to attract advertisers and to achieve market
acceptance of our products and services and our reputation depend
significantly upon the performance of our network infrastructure, including
our server, hardware and software. Any system failure, including network,
software or hardware failure, that causes an interruption in our service or
a decrease in responsiveness of our web site could result in reduced
traffic and reduced revenue, and could impair our reputation. Our web site
must accommodate a high volume of traffic and deliver frequently updated
information. Our web site has in the past and may in the future experience
slower response times for a variety of reasons, including system failures
and an increase in the volume of user traffic on our web site. Accordingly,
we face risks related to our ability to accommodate our expected customer
levels while maintaining superior performance. In addition, slower response
time may result in fewer users at our site or users spending less time at
our site. This would decrease the amount of inventory available for sale to
advertisers. Accordingly, any failure of our server and networking systems
to handle current or higher volumes of traffic at sufficient response times
would have a material adverse effect on our business.
In the fourth quarter of 1998, we moved our principal server to the
New York Teleport facility in Staten Island, New York under a lease with
Telehouse International Corporation of America. More than 90% of our web
site traffic is handled through this facility. Telehouse International does
not guarantee that our Internet access will be uninterrupted, error-free or
secure. Additionally, we maintain computer hardware, servers and operations
relating to our Azazz business in Seattle, Washington which are hosted by
Exodus Communications, Inc. Although Exodus provides comprehensive
facilities management services, including human and technical monitoring of
all production servers 24 hours-per-day, seven days-per-week, Exodus does
not guarantee that our Internet access will be uninterrupted, error-free or
secure. Our operations depend on the ability to protect our systems against
damage from unexpected events, including fire, power loss, water damage,
telecommunications failures, and vandalism. Any disruption in our Internet
access could have a material adverse effect on us. In addition, computer
viruses, electronic break-ins or other similar disruptive problems could
also materially adversely affect our web site. Our reputation and
theglobe.com brand could be materially and adversely affected by any
problems to our site. Our insurance policies may not adequately compensate
us for any losses that may occur due to any failures or interruptions in
our systems. We do not presently have any secondary off-site systems or a
formal disaster recovery plan.
In addition, our users depend on Internet service providers, online
service providers and other web site operators for access to our web sites.
Many of them have experienced significant outages in the past, and could
experience outages, delays and other difficulties due to system failures
unrelated to our systems. Moreover, the Internet infrastructure may not be
able to support continued growth in its use. Furthermore, we depend on
hardware suppliers for prompt delivery, installation and service of
equipment used to deliver our products and services. Any of these problems
could materially adversely affect our business.
HACKERS MAY ATTEMPT TO PENETRATE OUR SECURITY SYSTEM; ONLINE SECURITY
BREACHES COULD HARM OUR BUSINESS.
Consumer and supplier confidence in our web site depends on
maintaining relevant security features. Substantial or ongoing security
breaches on our system or other Internet-based systems could significantly
harm our business. We incur substantial expenses protecting against and
remedying security breaches. Security breaches also could damage our
reputation and expose us to a risk of loss or litigation. Experienced
programmers or "hackers" have successfully penetrated our system and we
expect that these attempts will continue to occur from time to time.
Because a hacker who is able to penetrate our networ