theglobe.com, inc.
(Exact name of registrant as specified in its charter)
Delaware 7310 14-1781422
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification
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Valerie Ford Jacob, Esq. Allen L. Weingarten, Esq.
Stuart H. Gelfond, Esq. Morrison & Foerster LLP
Fried, Frank, Harris, Shriver & Jacobson 1290 Avenue of the Americas
One New York Plaza New York, New York 10104
New York, New York 10004 (212) 468-8000
(212) 859-8000
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Approximate date of commencement of proposed sale to public: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 (the "Securities Act"), check the following box. |_|
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the registration statement
for the same offering. |_| .
If delivery of the Prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
Title of Each Class of Proposed Maximum
Securities Aggregate Amount of
to be Registered Offering Price(1) Registration Fee
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Common Stock, $.001 par $50,000,000 $14,750
value (2)
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SUBJECT TO COMPLETION, DATED JULY 24, 1998
PRELIMINARY PROSPECTUS
Shares
[LOGO]
Common Stock
All of the shares of Common Stock, par value $0.001 per share (the "Common Stock"), offered hereby (the "Offering") are being sold by theglobe.com, inc. (the "Company" or "theglobe.com"). Prior to the Offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price for the Common Stock will be between $ and $ per share. See "Under- writing" for a discussion of the factors to be considered in determining the initial public offering price. Application will be made for quotation of the Common Stock on the Nasdaq National Market under the symbol "TGLO."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
Underwriting
Price to Discounts and Proceeds to
Public Commissions (1) Company (2)
-------------------------------------------------------------------------------
Per Share................... $ $ $
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Total (3)................... $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933,
as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the Underwriters a 30-day option to purchase
up to additional shares of Common Stock on the same terms and
conditions as set forth above, to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock are being offered by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by the Underwriters against payment therefor and subject to certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify the Offering and to reject orders in whole or in part. It is expected that delivery of the Common Stock will be made against payment therefor on or about , 1998 at the offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167.
Bear, Stearns & Co. Inc. Volpe Brown Whelan & Co.
The date of this Prospectus is , 1998.
The Company has a registered United States trademark for theglobe. The Company has filed United States trademark applications for theglobe.com and theglobe.com logo. Additionally, the Company has submitted trademark applications in various foreign countries for theglobe.com and theglobe.com logo. See "Business -- Intellectual Property Rights."
This Prospectus includes statistical data regarding the Internet industry. Such data is taken or derived from information published by sources including Media Metrix, Inc., a media research firm specializing in market and technology measurement on the Internet ("Media Metrix"), Jupiter Communications, LLC, a media research firm focusing on the Internet industry ("Jupiter Communications"), and International Data Corporation, a provider of market information and strategic information for the information technology industry ("IDC"). Although the Company believes that such data are generally indicative of the matters reflected therein, such data are inherently imprecise and investors are cautioned not to place undue reliance on such data.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTON OF THESE ACTIVITIES, SEE "UNDERWRITING."
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and Financial
Statements and Notes thereto, appearing elsewhere in this Prospectus.
Except where the context otherwise requires, all references in this
Prospectus to (a) the "Company" or "theglobe.com" refer to theglobe.com,
inc., a Delaware corporation, (b) the "Web" refer to the World Wide Web and
(c) the "site" refer to the Company's Web site. Unless otherwise indicated
or unless the context otherwise requires, all information in this
Prospectus reflects, upon the closing of the Offering, (i) the automatic
conversion of all outstanding shares of the Company's Preferred Stock into
shares of Common Stock, (ii) no exercise of the Underwriters'
over-allotment option and (iii) the Company's for Common Stock split to be
effected immediately prior to the consummation of the Offering.
The Company
theglobe.com is one of the world's leading online communities with over 1.7 million members in the United States and abroad. In June 1998, 6.1 million unique users visited the site. theglobe.com 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. theglobe.com facilitates this interaction by providing various free services, including home page building, discussion forums, chat, e-mail and a marketplace where members can purchase a variety of products and services. Additionally, theglobe.com provides its users news, weather, movie and music reviews, multi-player gaming, horoscopes and personals. By satisfying its users' personal and practical needs, theglobe.com seeks to become their online home. The Company's primary revenue source is the sale of advertising, with additional revenues generated through e-commerce arrangements and the sale of membership subscriptions for enhanced services.
The Company was founded by Todd V. Krizelman and Stephan J. Paternot in May 1995 to capitalize on the growing demand for online destinations that allow users to develop their own identities and establish relationships with other Internet users. theglobe.com offers users the ability to become active participants in its community and provides users set-up tools and guidance to build a personal Web site quickly and easily. theglobe.com community is organized in an intuitive hierarchy modeled after the real world where each layer reflects a more specific level of interest. There are six "Themes of Interest": Arts and Entertainment, Business and Finance, Lifestyles, Romance, Special Interests and Geographical Interests. 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," theglobe.com's smallest form of community. There are currently 325 Interest Groups. Interest Groups, once proposed by any member, are posted for petition. Those groups that garner enough votes then go "live" on the site. Members are not limited as to the number of communities they can join and are able to leave an Interest Group at any time, ensuring that the communities are dynamic and evolve as member interests change. "Community Leaders" are elected to manage communities and are able to highlight member content, communicate directly to constituents and organize events. The unique community focus of theglobe.com offers several advantages to the Company that include (i) member loyalty, (ii) member-developed content at a low cost to the Company and (iii) the ability to offer advertising targeted to specific user interests. In June 1998, the Company had 90 advertisers, including, Coca Cola, Dunkin' Donuts, J. Crew, Procter & Gamble, Sony, 3Com and Visa.
Since its founding, theglobe.com has experienced strong growth. The site has added approximately 100,000 new members every month since October 1997, and generated over 100 million page views in June 1998, an increase of over 100% from January 1998. More than 6.1 million unique users visited the site in June 1998, reflecting an increase of more than 350% since January 1998. Approximately 25% to 35% of theglobe.com's monthly traffic originates from abroad, reflecting the site's international appeal. According to Media Metrix, the average time spent per user at theglobe.com in the period April to June 1998 was approximately 15% higher than the average time spent on the top 25 Web sites visited most frequently.
theglobe.com's goal is to be the leading online community site. The
Company seeks to attain this goal through the following key strategies: (i)
improving user experience, (ii) developing brand identity and awareness,
(iii) increasing new membership acquisition through strategic alliances,
(iv) expanding globally, (v) further developing e-commerce and (vi)
enhancing membership services.
The Company was incorporated in May 1995 in the State of Delaware. The Company's principal executive offices are located at 31 West 21st Street, New York, New York 10010, and its telephone number is (212) 886-0800.
The Offering
Common Stock offered by the Company.................. shares
Common Stock to be outstanding after the Offering.... shares (1)(2)
Use of Proceeds......................................Advertising, brand
name promotions and
other general
corporate purposes,
including investment
in the development and
functionality of
theglobe.com Web site,
enhancements of the
Company's network
infrastructure and
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working capital. The Company may also use a portion of the proceeds for strategic alliances and acquisitions. See "Use of Proceeds."
(1) Based on the number of shares of Common Stock outstanding as of June 30, 1998, including 10,947,469 shares of Common Stock that will be issued upon the automatic conversion of the Company's existing preferred stock (the "Preferred Stock") upon consummation of the Offering. Also includes 4,046,018 shares of Common Stock issuable upon the exercise of outstanding warrants (the "Warrants") to acquire Common Stock at an exercise price of approximately $1.45 per share following consummation of the Offering. If the Underwriters' over-allotment option were exercised in full, an additional shares of Common Stock would be offered by the Company, and shares of Common Stock would be outstanding after the Offering.
(2) Excludes (i) 1,235,000 and 1,425,941 shares of Common Stock issuable upon the exercise of stock options that would be outstanding after the Offering under the Company's 1998 Stock Option Plan and 1995 Stock Option Plan, respectively, at a weighted average exercise price of $ per share (assuming an initial offering price of $ per share) and $ per share, respectively; and (ii) 565,000 and 12,001 shares of Common Stock reserved for future issuance under the 1998 Stock Option Plan and the 1995 Stock Option Plan, respectively. See "Capitalization", "Management--Executive Compensation," "Description of Capital Stock" and Financial Statements and the Notes related thereto appearing elsewhere in this Prospectus.
SUMMARY FINANCIAL DATA
(Dollars in thousands, except per share data)
The following table sets forth certain summary financial data for the Company. This information should be read in conjunction with the Financial Statements and Notes related thereto appearing elsewhere in this Prospectus. See "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
May 1, 1995
(inception) Six Months
through Year Ended Ended
December 31, December 31, June 30,
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1995 1996 1997 1997 1998
---- ---- ---- ---- ----
Statement of Operations Data:
Revenues......................... $ 27 $ 229 $ 770 $ 208 $ 1,173
Gross profit..................... 14 113 347 102 670
Loss from operations............. (66) (772) (3,883) (779) (6,470)
Net loss......................... (66) (750) (3,584) (767) (5,824)
Basic and diluted net loss per (0.03) (0.33) (1.56) (0.34) (2.51)
share(FN1)
Weighted average shares
outstanding used in basic and
diluted per share calculation (FN1) 2,250,000 2,250,000 2,293,545 2,281,920 2,322,794
Pro forma basic and diluted net
loss per share (basic and
diluted) (FN2).................
Weighted average shares used in
computing pro forma net loss per
share (FN2)....................
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June 30, 1998
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Actual As Adjusted(2)
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Balance Sheet Data:
Cash and cash equivalents
and short-term
investments............. $ 13,155
Working capital........... 10,452
Total assets.............. 15,603
Capital lease
obligations, excluding
current installments.... 629
Total stockholders' equity 11,571
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[FN]
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(FN1) Weighted average shares do not include any common stock equivalents
because such inclusion would have been anti-dilutive. See Financial
Statements and related Notes thereto appearing elsewhere in this
Prospectus for the determination of shares used in computing basic and
diluted loss per share.
(FN2) As adjusted to reflect the sale of shares of Common Stock
offered hereby at an assumed initial public offering price of $
per share) the midpoint of the estimated range set forth on the front
cover of this Prospectus) after deducting the estimated underwriting
discounts and commissions and estimated offering expenses payable
by the Company. See "Use of Proceeds" and "Capitalization."
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high degree of risk. The following factors and the other information contained in this Prospectus should be considered carefully before purchasing the Common Stock offered hereby. This Prospectus contains forward-looking statements that involve significant risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below, under "Cautionary Notice Regarding Forward-Looking Statements" and elsewhere in this Prospectus.
Limited Operating History; Fluctuating Rates of Revenue Growth; Anticipated Losses
The Company was founded in May 1995. Accordingly, the Company has a limited operating history upon which an evaluation of the Company, its current business and its prospects can be based, each of which must be considered in light of the risks, expenses and problems frequently encountered by all companies in the early stages of development, and particularly by such companies entering new and rapidly developing markets like the Internet. Such risks include, without limitation, the lack of broad acceptance of the community model on the Internet, the possibility that the Internet will fail to achieve broad acceptance as an advertising and commercial medium, the inability of the Company to attract or retain members, the inability of the Company to generate significant e-commerce-based revenues or premium service revenues from its members, a new and relatively unproven business model, the Company's ability to anticipate and adapt to a developing market, the failure of the Company's network infrastructure (including its server, hardware and software) to efficiently handle its Internet traffic, changes in laws that adversely affect the Company's business, the ability of the Company to manage effectively its rapidly expanding operations, including the amount and timing of capital expenditures and other costs relating to the expansion of the Company's operations, the introduction and development of different or more extensive communities by direct and indirect competitors of the Company, including those with greater financial, technical and marketing resources, the inability of the Company to maintain and increase levels of traffic on its Web site, the inability of the Company to attract, retain and motivate qualified personnel, and general economic conditions. To address these risks, the Company must, among other things, attract and retain members, maintain its customer base and attract a significant number of new advertising customers, respond to competitive developments, develop and extend its brand, continue to form and maintain relationships with strategic partners, continue to attract, retain and motivate qualified personnel, and continue to develop and upgrade its technologies and commercialize its services incorporating such technologies. There can be no assurance that the Company will be successful in addressing such risks, and any failure to do so could have a material adverse effect on the Company's business, results of operations and financial condition.
Although the Company has experienced significant revenue growth in recent periods, there can be no assurance that this will continue or increase. The Company's limited operating history makes the prediction of future results difficult or impossible and, therefore, the Company's recent revenue growth should not be taken as an indication of any growth that can be expected in the future. Furthermore, its limited operating history leads the Company to believe that period-to-period comparisons of its operating results are not meaningful and that the results for any period should not be relied upon as an indication of future performance. To the extent that revenues do not grow at anticipated rates, the Company's business, results of operations and financial condition would be materially and adversely affected.
The Company has not achieved profitability to date, and the Company anticipates that it will continue to incur net losses for the foreseeable future. The extent of these losses will depend, in part, on the amount of growth in the Company's revenues from advertising sales, e-commerce and membership service fees. As of June 30, 1998, the Company had an accumulated deficit of $10.2 million. The Company expects that its operating expenses will increase significantly during the next several years, especially in the areas of sales and marketing, and brand promotion. Thus, the Company will need to generate increased revenues to achieve profitability. To the extent that increases in its operating expenses precede or are not subsequently followed by commensurate increases in revenues, or that the Company is unable to adjust operating expense levels accordingly, the Company's business, results of operations and financial condition would be materially and adversely affected. There can be no assurance that the Company will ever achieve or sustain profitability or that the Company's operating losses will not increase in the future.
Dependence on Continued Growth in Use and Commercial Viability of the Internet
The Company's future success is substantially dependent upon continued growth in the use of the Internet. To support advertising sales, e-commerce and membership service fees on theglobe.com, the Internet's recent and rapid growth must continue, and e-commerce on the Internet must become widespread. None of these can be assured. The Internet may prove not to be a viable commercial marketplace. Additionally, due to the ability of consumers to easily compare prices of similar products or services on competing Web sites, gross margins for e-commerce transactions may narrow in the future and, accordingly, the Company's revenues from e-commerce arrangements may be materially negatively impacted. If use of the Internet does not continue to grow, the Company's business, results of operations and financial condition would be materially and adversely affected.
Additionally, to the extent that the Internet continues to experience significant growth in the number of users and the level of use, there can be no assurance that its technical infrastructure will continue to be able to support the demands placed upon it. The necessary technical infrastructure for significant increases in e-commerce, such as a reliable network backbone, may not be timely and adequately developed. In addition, performance improvements, such as high-speed modems, may not be introduced in a timely fashion. Furthermore, security and authentication concerns with respect to transmission over the Internet of confidential information, such as credit card numbers, may remain. Issues like these could lead to resistance against the acceptance of the Internet as a viable commercial marketplace. Also, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of activity, or due to increased governmental regulation. Changes in or insufficient availability of telecommunications services could result in slower response times and adversely affect usage of the Internet. To the extent the Internet's technical infrastructure does not effectively support the growth that may occur, the Company's business, results of operations and financial condition would be materially and adversely affected.
Dependence on Members for Content and Promotion
The Company depends substantially upon member involvement for content and for word-of-mouth promotion. Particularly, the Company depends upon the voluntary efforts of certain highly motivated members who are most active in developing content to attract other Internet users to the site. The Company expects such member involvement to reduce the need for the Company to expend resources on content development and site promotion. There can be no assurance that members will continue to generate significant content or to promote the site, nor that the member-generated content or promotional efforts will continue to attract other Internet users. There also can be no assurance that the Company's business would not be materially and adversely affected if its most highly active members became dissatisfied with the Company's services or its focus on the commercialization of those services.
Unproven Business Model; Developing Market; Unproven Acceptance of the Company's Products
The Company's business model is new and relatively unproven. The model depends upon the Company's ability to generate multiple revenue streams by leveraging its community platform. To be successful, the Company must, among other things, develop and market products and services that achieve broad market acceptance by its users, advertisers and e-commerce vendors. There can be no assurance that any Internet community, including theglobe.com, will achieve broad market acceptance. Accordingly, no assurance can be given that the Company's business model will be successful or that it can sustain revenue growth or be profitable.
The market for the Company's products and services is new, rapidly developing and characterized by an increasing number of market entrants. As is typical of any new and rapidly evolving market, demand and market acceptance for recently introduced products and services are subject to a high level of uncertainty and risk. Moreover, because this market is new and rapidly evolving, it is difficult to predict its future growth rate, if any, and its ultimate size. If the market fails to develop, develops more slowly than expected or becomes saturated with competitors, or if the Company's products and services do not achieve or sustain market acceptance, the Company's business, results of operations and financial condition would be materially and adversely affected. See "Business--Industry Background."
Risks Associated with Brand Development
The Company believes that establishing and maintaining brand identity is a critical aspect of efforts to attract and expand its member base, Internet traffic and advertising and commerce relationships. Furthermore, the Company believes that the importance of brand recognition will increase as low barriers to entry encourage the proliferation of Internet sites. In order to attract and retain members, advertisers and commerce vendors, and in response to competitive pressures, the Company intends to increase substantially its financial commitment to the creation and maintenance of brand loyalty among these groups. The Company plans to accomplish this, although not exclusively, through advertising campaigns in several forms of media, including television, print, billboards, buses, telephone kiosks, online media, and other marketing and promotional efforts. If the Company does not generate a corresponding increase in revenue as a result of its branding efforts or otherwise fails to promote its brand successfully, or if the Company incurs excessive expenses in an attempt to promote and maintain its brand, the Company's business, results of operations and financial condition would be materially and adversely affected.
Promotion and enhancement of theglobe.com brand will also depend, in part, on the Company's success in providing a high-quality "community experience." Such success cannot be assured. If members, other Internet users, advertisers and commerce vendors do not perceive theglobe.com community experience to be of high quality, or if the Company introduces new services or enters into new business ventures that are not favorably received by such parties, the value of the Company's brand could be diluted. Such brand dilution could decrease the attractiveness of theglobe.com to such parties, and could materially and adversely affect the Company's business, results of operations and financial condition.
Reliance on Advertising Revenues
The Company derives a substantial portion of its revenues from the sale of advertisements on its site, and expects to continue to do so for the foreseeable future. For the year ended December 31, 1997 and the six months ended June 30, 1998, advertising revenues represented 77% and 89%, respectively, of the Company's net revenues. The Company's business model therefore is highly dependent on the amount of "traffic" on theglobe.com, which has a direct effect on the Company's advertising revenues. The Company is in the early stages of implementing its advertising sales programs, which, if not successful, could materially and adversely affect the Company's business, results of operations and financial condition.
To date, substantially all of the Company's advertising contracts have been for terms averaging one to two months in length, with relatively few longer-term advertising contracts. Many of the Company's advertising customers have limited experience with Internet advertising, have not devoted a significant portion of their advertising expenditures to Internet advertising, and may not believe Internet advertising to be effective relative to traditional advertising media. Also, the Company's advertising customers may object to the placement of their advertisements on certain members' personal homepages, the content of which they deem undesirable. There can be no assurance that the Company's current advertisers will continue to purchase advertisements on theglobe.com.
The Company's contracts with advertisers typically guarantee the advertiser a minimum number of "impressions," or times that an advertisement is seen by users of theglobe.com. To the extent that minimum impression levels are not achieved for any reason, the Company may be required to "make good" or provide additional impressions after the contract term, which may adversely affect the availability of advertising inventory and which could have a material adverse effect on the Company's business, results of operations and financial condition. To the extent minimum guaranteed impressions are not met, the Company defers recognition of the corresponding revenues until guaranteed impression levels are achieved.
Additionally, the process of managing the placement of advertising within a large, high-traffic Web site like theglobe.com is an increasingly important and complex task. The Company relies on internal inventory management systems to provide enhanced internal reporting and customer feedback on advertising. The Company also licenses software from a third-party provider. See "--Dependence of Third-Party Relationships." To the extent that any extended failure of the Company's advertising management system results in incorrect advertising insertions, the Company may be exposed to "make good" obligations that may adversely affect the availability of advertising inventory, and which could have a material adverse effect on the Company's business, results of operations and financial condition.
The Company's ability to generate significant advertising revenues will depend, in part, on its ability to create new advertising programs without diluting the perceived value of its existing programs. The Company's ability to generate advertising revenues will depend also, in part, on advertisers' acceptance of the Internet as an attractive and sustainable medium, the development of a large base of users of the Company's products and services, the effective development of Web site content that provides user demographic characteristics that will be attractive to advertisers, and government regulation. The adoption of Internet-based advertising, particularly by those advertisers that have historically relied upon traditional advertising media, requires the acceptance of a new way of conducting business and exchanging information. There can be no assurance that the market for Internet advertising will continue to emerge or become sustainable. If the market develops more slowly than expected, the Company's business, results of operations and financial condition could be materially and adversely affected.
The Internet as an advertising medium has not been available for a sufficient period of time to gauge its effectiveness as compared with traditional advertising media. No standards have been widely accepted for the measurement of the effectiveness of Internet-based advertising, and there can be no assurance that any such standards will become widely accepted in the future. There can be no assurance that advertisers will accept the Company's or other parties' measurements of impressions. The rejection by advertisers of such measurements could have a material adverse effect on the Company's business, results of operations and financial condition.
The sale of Internet advertising is subject to intense competition that has resulted in a wide variety of pricing models, rate quotes and advertising services. This has made it difficult to project future levels of advertising revenues and rates. It is also difficult to predict which pricing models, if any, will achieve broad acceptance among advertisers. As described above, to date, the Company has based its advertising rates on providing advertisers with a guaranteed number of impressions, and any failure of the Company's advertising model to achieve broad market acceptance, would have a material adverse effect on the Company's business, results of operations and financial condition.
"Filter" software programs that limit or remove advertising from an Internet user's desktop are available to consumers. Widespread adoption or increased use of such software by users could have a material adverse effect upon the viability of advertising on the Internet and on the Company's business, results of operations and financial condition.
Potential Fluctuations in Operating Results; Quarterly Fluctuations
The Company's operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are outside the Company's control. See "--Limited Operating History; Fluctuating Rates of Revenue Growth; Anticipated Losses." As a strategic response to changes in the competitive environment, the Company may from time to time make certain pricing, service or marketing decisions or acquisitions that could have a material short-term or long-term adverse effect on the Company's business, results of operations and financial condition. In particular, in order to accelerate the promotion of theglobe.com as a brand, the Company intends to significantly increase its marketing budget after consummation of the Offering. See "--Risks Associated with Brand Development."
The Company believes that it may experience seasonality in its business, with use of the Internet and theglobe.com being somewhat lower during the summer vacation and year-end holiday periods. Advertising impressions (and therefore revenues) may be expected to decline accordingly in those periods. Additionally, seasonality may affect significantly the Company's advertising revenues during the first and third calendar quarters, as advertisers historically spend less during these periods. Because Internet advertising is an emerging market, additional seasonal and other patterns in Internet advertising may develop as the market matures, and there can be no assurance that such patterns will not have a material adverse effect on the Company's business, results of operations and financial condition.
The Company derives a significant portion of its revenues from the sale of advertising under short-term contracts, averaging one to two months in length. As a result, the Company's quarterly revenues and operating results are, to a significant extent, dependent on advertising revenues from contracts entered into within the quarter, and on the Company's ability to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. See "--Reliance on Advertising Revenues."
In addition to selling advertising, a key element of the Company's strategy is to generate revenues through e-commerce arrangements. To date, the revenues received by the Company under the revenue-sharing portions of these arrangements have not been material, and there can be no assurance that the Company will receive a material amount of revenue under these agreements in the future. Each of the Company's existing e-commerce arrangements is terminable upon short notice. As a result, the Company's revenues from e-commerce may fluctuate significantly from period to period depending on the continuation of its key e-commerce arrangements.
The foregoing factors, in some future quarters, may lead the Company's operating results to fall below the expectations of securities analysts and investors. In such event, the trading price of the Common Stock would likely be materially and adversely affected.
Broad Discretion in Use of Proceeds
The Company intends to use the net proceeds from the sale of Common Stock offered hereby for advertising, brand name promotions and other general corporate purposes, including investment in the development and functionality of theglobe.com Web site, enhancements of the Company's network infrastructure and working capital. The Company may also use a portion of the proceeds for strategic alliances and acquisitions. Accordingly, management will have significant flexibility in applying the net proceeds of this Offering. The failure of management to apply such funds effectively could have a material adverse effect on the Company's business, results of operations and financial condition. See "Use of Proceeds."
Dependence on Key Personnel
The Company's performance is substantially dependent on the performance of its senior management and key technical personnel. In particular, the Company's success depends on the continued efforts of its senior management team, especially its Co-Chief Executive Officers and Co-Presidents (and co-founders), Todd V. Krizelman and Stephan J. Paternot. The Company does not carry key person life insurance on any of its personnel. The loss of the services of any of its executive officers or other key employees could have a material adverse effect on the business, results of operations and financial condition of the Company.
The Company's future success also depends on its continuing ability to retain and attract highly qualified technical and managerial personnel. As of June 30, 1998, the Company had grown to approximately 80 full-time employees from approximately 20 in June 1997, and the Company anticipates that the number of its employees will increase significantly in the next 12 months. Wages for managerial and technical employees are increasing and are expected to continue to increase in the foreseeable future due to the competitive nature of this job market. There can be no assurance that the Company will be able to retain its key managerial and technical personnel or that it will be able to attract and retain additional highly qualified technical and managerial personnel in the future. The Company has experienced difficulty from time to time in attracting the personnel necessary to support the growth of its business, and there can be no assurance that the Company will not experience similar difficulty in the future. The inability to attract and retain the technical and managerial personnel necessary to support the growth of the Company's business, due to, among other things, a large increase in the wages demanded by such personnel, could have a material and adverse effect upon the Company's business, results of operations and financial condition. See "Business--Employees" and "--Technology" and "Management."
Management of Growth; New Management Team
The Company's recent growth has placed, and is expected to continue to place, a significant strain on its managerial, operational and financial resources. To manage its potential growth, the Company must continue to implement and improve its operational and financial systems, and must expand, train and manage its employee base. The Company's Chief Financial Officer joined the Company during July 1998. In addition, each of the Company's Director of Advertising Sales, Director of Technology, Director of Communications, Director of Human Resources and Director of Sales and Marketing has been with the Company for less than two years. Furthermore, the members of the Company's current senior management have not had any previous experience managing a public company or a large operating company. There can be no assurance that the Company will be able to effectively manage the expansion of its operations, that the Company's systems, procedures or controls will be adequate to support the Company's operations or that Company management will be able to achieve the rapid execution necessary to fully exploit the market opportunity for the Company's products and services. Any inability to manage growth effectively could have a material adverse effect on the Company's business, results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business."
Competition for Management Time; Potential Conflicts of Interest
Michael S. Egan is the Chairman of the Company and, as such, Mr. Egan serves as Chairman of the Board of Directors and as an executive officer of the Company with primary responsibility for day-to-day strategic planning and financing arrangements. After the Offering, Mr. Egan will also continue to be the controlling investor of Dancing Bear Investments, Inc. ("Dancing Bear Investments"), Chairman and Chief Executive Officer of Certified Vacations and Chairman of AutobyInternet, related entities of Dancing Bear Investments. Dancing Bear Investments may also acquire other entities in the future. Edward A. Cespedes is the Vice President of Corporate Development of the Company with primary responsibility for corporate development opportunities including mergers and acquisitions. After the Offering, Mr. Cespedes will also continue to serve 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 the Company. Accordingly, the Company will compete with Dancing Bear Investments and related entities for the management time of Messrs. Egan and Cespedes. The Company has recently begun e-commerce arrangements with certain entities controlled by Dancing Bear Investments which are not currently material to the Company. See "Certain Relationships and Related Transactions." These arrangements are not the result of arms' length negotiations, although the Company believes they are on terms that would be as favorable to the Company as would have been obtained on an arms' length basis. Due to their relationships with Dancing Bear Investments, Messrs. Egan and Cespedes will have an inherent conflict of interest in making any decision related to transactions between entities related to Dancing Bear Investments and the Company. The Company intends to review related party transactions in the future on a case-by-case basis.
Enhancement and Development of theglobe.com
To remain competitive, the Company must continue to enhance and improve the responsiveness, functionality and features of theglobe.com and develop other products and services. Enhancements of or improvements to the Web site may contain undetected programming errors that require significant design modifications, resulting in a loss of customer confidence and user support and a decrease in the value of the Company's brand name recognition.
The Company plans to develop and introduce new features and functions, such as increased capabilities for user personalization and interactivity. This will require the development or licensing of increasingly complex technologies. There can be no assurance that the Company will be successful in developing or introducing such features and functions or that such features and functions will achieve market acceptance or enhance the Company's brand name recognition. Any failure of the Company to effectively develop and introduce new features and functions, or the failure of such new features and functions to achieve market acceptance, could materially adversely affect the Company's business, results of operations and financial condition.
The Company also plans to develop and introduce new products and services, such as new content targeted for specific user groups with particular demographic and geographic characteristics. There can be no assurance that the Company will be successful in developing or introducing such products and services or that such products and services will achieve market acceptance or enhance the Company's brand name recognition. Any failure of the Company to effectively develop and introduce these products and services, or the failure of such products and services to achieve market acceptance, could adversely affect the Company's business, results of operations and financial condition. See "Business--Products and Services."
Technological Change
The market for Internet products and services is characterized by rapid technological developments, evolving industry standards and customer demands, and frequent new product introductions and enhancements. These market characteristics are exacerbated by the emerging nature of the market and the fact that many companies are expected to introduce new Internet products and services in the near future. The Company's future success will depend in significant part on its ability to continually improve the performance, features and reliability of the site in response to both evolving demands of the marketplace and competitive product and service offerings, and there can be no assurance that the Company will be successful in doing so. In addition, the widespread adoption of developing multimedia enabling technologies could require fundamental changes in the Company's technology and could fundamentally affect the nature, viability and measurability of Internet-based advertising, which could adversely affect the Company's business, results of operations and financial condition. See "Business--Products and Services."
Risk of Capacity Constraints and Systems Failures
A key element of the Company's strategy is to generate a high volume of user traffic. The Company's ability to attract advertisers and to achieve market acceptance of its products and services, and its reputation, depend significantly upon the performance of the Company and its network infrastructure (including its server, hardware and software). Any system failure that causes interruption or slower response time of the Company's products and services could result in less traffic to the Company's Web site and, if sustained or repeated, could reduce the attractiveness of the Company's products and services to advertisers and licensees. An increase in the volume of user traffic could strain the capacity of the Company's technical infrastructure, which could lead to slower response time or system failures, and adversely affect the delivery of the number of impressions that are owed to advertisers and thus the Company's advertising revenues. In addition, as the number of Web pages on and users of theglobe.com increase, there can be no assurance that the Company and its technical infrastructure will be able to grow accordingly, and the Company faces risks related to its ability to scale up to its expected customer levels while maintaining superior performance. Any failure of the Company's server and networking systems to handle current or higher volumes of traffic would have a material adverse effect on the Company's business, results of operations and financial condition.
The Company intends to enter into a Web hosting agreement with a third party (the "Host") by the end of 1998. Pursuant to the agreement, the Host is expected to provide and manage power and environmentals for the Company's networking and server equipment and also provide site connectivity to the Internet. Any disruption in the Internet access provided by the Host or any failure of the Company's server and networking systems to handle current or higher volumes of traffic could have a material adverse effect on the Company's business, results of operations and financial condition.
The Company is also dependent upon third parties to provide potential users with Web browsers and Internet and online services necessary for access to the site. In the past, users have occasionally experienced difficulties with Internet and online services due to system failures, including failures unrelated to the Company's systems. Any disruption in Internet access provided by third parties could have a material adverse effect on the Company's business, results of operations and financial condition. Furthermore, the Company is dependent on hardware suppliers for prompt delivery, installation and service of equipment used to deliver the Company's products and services.
The Company's operations are dependent in part upon its ability to protect its operating systems against damage from human error, fire, floods, power loss, telecommunications failures, break-ins and similar events. The Company does not presently have redundant, multiple site capacity in the event of any such occurrence. Despite the implementation of network security measures by the Company, its servers are also vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with the Company's computer systems. The occurrence of any of these events could result in the interruption, delay or cessation of service, which could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, the Company's reputation and theglobe.com brand could be materially and adversely affected. See "Business--Facilities."
Security Risks
Experienced programmers ("hackers") have attempted on occasion to penetrate the Company's network security. The Company expects that these attempts, some of which have succeeded, will continue to occur from time to time. Because a hacker who is able to penetrate the Company's network security could misappropriate proprietary information or cause interruptions in the Company's products and services, the Company may be required to expend significant capital and resources to protect against or to alleviate problems caused by such parties. Additionally, the Company may not have a timely remedy against a hacker who is able to penetrate its network security. Such purposeful security breaches could be material to the Company, although such actions have not been so to date. In addition to purposeful security breaches, the inadvertent transmission of computer viruses could expose the Company to a risk of loss or litigation and possible liability.
In offering certain payment services through its "Globe-shops" program, the Company could become increasingly reliant on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to effect secure transmission of confidential information, such as customer credit card numbers. Advances in computer capabilities, discoveries in the field of cryptography and other discoveries, events, or developments could lead to a compromise or breach of the algorithms that the Company's licensed encryption and authentication technology used to protect such confidential information. If such a compromise or breach of the Company's licensed encryption authentication technology occurs, it could have a material adverse effect on the Company's business, results of operations and financial condition. The Company may be required to expend significant capital and resources to protect against the threat of such security, encryption and authentication technology breaches or to alleviate problems caused by such breaches. Concerns over the security of Internet transactions and the privacy of users may also inhibit the growth of the Internet generally, particularly as a means of conducting commercial transactions.
Intense Competition
The market for members, users and Internet advertising is new and rapidly evolving, and competition for members, users and advertisers is intense and is expected to increase significantly. Barriers to entry are relatively insubstantial and the Company may face competitive pressures from many additional companies both in the United States and abroad.
The Company believes that the principal competitive factors for companies seeking to create communities on the Internet are critical mass, functionality of the Web site, brand recognition, member affinity and loyalty, broad demographic focus and open access for visitors. Other companies that are primarily focused on creating Internet communities are Tripod, Inc., a subsidiary of Lycos, Inc. ("Tripod"), and GeoCities, Inc. ("GeoCities"), and, in the future, Internet communities may be developed or acquired by companies currently operating Web directories, search engines, shareware archives and content sites, and by commercial online service providers ("OSPs"), Internet service providers ("ISPs") and other entities, certain of which may have more resources than the Company. Furthermore, the Company competes for users and advertisers with other content providers and with thousands of Web sites operated by individuals, the government and educational institutions. Such providers and sites include America Online, Inc. ("AOL"), Angelfire Communications ("Angelfire"), CNET, Inc. ("CNET"), CNN/Time Warner, Inc. ("CNN/Time Warner"), Excite, Inc. ("Excite"), Hotmail Corporation ("Hotmail"), Infoseek Corporation ("Infoseek"), Lycos, Inc. ("Lycos"), Microsoft Corporation ("Microsoft"), Netscape Communications Corporation ("Netscape"), Switchboard Inc. ("Switchboard"), Xoom Inc. ("Xoom") and Yahoo! Inc. ("Yahoo!"). In addition, the Company could face competition in the future from traditional media companies, such as newspaper, magazine, television and radio companies, a number of which, including Disney, CBS and NBC, have recently made significant acquisitions of or investments in Internet companies.
The Company believes that the principal competitive factors in attracting advertisers include the amount of traffic on its Web site, brand recognition, customer service, the demographics of the Company's members and users, the Company's ability to offer targeted audiences and the overall cost-effectiveness of the advertising medium offered by the Company. The Company believes 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. Accordingly, the Company will likely face increased competition, resulting in increased pricing pressures on its advertising rates, which could have a material adverse effect on the Company.
Many of the Company's existing and potential competitors, including companies operating Web directories and search engines, and traditional media companies, have longer operating histories in the Internet market, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than the Company. Such competitors may be able to undertake more extensive marketing campaigns for their brands and services, adopt more aggressive advertising pricing policies and make more attractive offers to potential employees, distribution partners, commerce companies, advertisers and third-party content providers. Furthermore, the Company's existing and potential competitors may develop communities that are equal or superior in quality to, or that achieve greater market acceptance than, theglobe.com. There can be no assurance that the Company will be able to compete successfully against its current or future competitors or that competition will not have a material adverse effect on the Company's business, results of operations and financial condition.
There can be no assurance that Web sites maintained by the Company's existing and potential competitors will not be perceived by advertisers as being more desirable for placement of advertisements than theglobe.com. In addition, many of the Company's current advertising customers and strategic partners have established collaborative relationships with certain of the Company's existing or potential competitors. There can be no assurance that the Company will be able to retain or grow its membership base, traffic levels and advertising customer base at historical levels, or that competitors will not experience better retention or greater growth in these areas than the Company. Accordingly, there can be no assurance that any of the Company's advertising customers and strategic partners will not sever or will elect not to renew their agreements with the Company, the result of which could have a material adverse effect on the Company's business, results of operations and financial condition.
Dependence on Third-Party Relationships
The Company is and will continue to be significantly dependent on a number of third-party relationships to increase traffic on theglobe.com and thereby generate advertising revenues, maintain the current level of service and variety of content for its members, and meet future milestones. The Company is generally dependent on other Web site operators that provide links to theglobe.com. The Company also has relationships with several online retailers whereby the Company is paid for providing to them online storefronts and promotional materials on theglobe.com. See "Business--Business Strategy--Increase New Membership Acquisition through Strategic Alliances."
Most of the Company's arrangements with third-party Internet sites and other third-party service providers do not require future minimum commitments to use the Company's services or to provide access or links to the Company's services or products, are not exclusive and are short-term or may be terminated at the convenience of the other party. Moreover, the Company does not have agreements with the majority of other Web site operators that provide links to theglobe.com, and such Web site operators may terminate such links at any time without notice to the Company. There can be no assurance that third parties regard their relationship with the Company as important to their own respective businesses and operations, that they will not reassess their commitment to the Company at any time in the future or that they will not develop their own competitive services or products.
There can be no assurance that the Company will be able to maintain relationships with third parties that supply the Company with software or products that are crucial to the Company's success, or that such software or products will be able to sustain any third-party claims or rights against their use. Furthermore, there can be no assurance that the software, services or products of those companies that provide access or links to the Company's services or products will achieve market acceptance or commercial success. Accordingly, there can be no assurance that the Company's existing relationships will result in sustained business partnerships, successful service or product offerings or the generation of significant revenues for the Company. Failure of one or more of the Company's strategic relationships to achieve or maintain market acceptance or commercial success or the termination of one or more successful strategic relationships could have a material adverse effect on the Company's business, results of operations and financial condition. In particular, the elimination of a pre-installed bookmark on a Web browser that directs traffic to the Company's Web site could significantly reduce traffic on the Company's Web site, which would have a material adverse effect on the Company's business, results of operations and financial condition. See "Business--Corporate Alliances and Relationships."
Additional Financing Requirements
The Company currently anticipates that the net proceeds of this Offering, together with available funds and cash flows generated from advertising revenues, will be sufficient to meet its anticipated needs for working capital, capital expenditures and business expansion for the next 12 months. The Company expects that it will continue to experience negative operating cash flow for the foreseeable future as a result of significant spending on advertising and infrastructure. Accordingly, the Company may need to raise additional funds in a timely manner in order to fund its anticipated expansion, develop new or enhanced services or products, respond to competitive pressures or acquire complementary products, businesses or technologies. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of the stockholders of the Company will be reduced, stockholders may experience additional dilution and such securities may have rights, preferences or privileges senior to those of the holders of the Common Stock. There can be no assurance that additional financing will be available on terms favorable to the Company, or at all. If adequate funds are not available or are not available on acceptable terms, the Company may not be able to fund its expansion, take advantage of acquisition opportunities, develop or enhance services or products or respond to competitive pressures. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
Risks Associated with Potential Acquisitions
As part of its business strategy, the Company expects to review acquisition prospects that would complement its existing business, augment the distribution of its community or enhance its technological capabilities. Future acquisitions by the Company could result in potentially dilutive issuances of equity securities, large and immediate write-offs, the incurrence of debt and contingent liabilities or amortization expenses related to goodwill and other intangible assets, any of which could materially and adversely affect the Company's business, results of operations and financial condition.
Furthermore, acquisitions entail numerous risks and uncertainties, including difficulties in the assimilation of operations, personnel, technologies, products and information systems of the acquired companies, the diversion of management's attention from other business concerns, the risks of entering geographic and business markets in which the Company has no or limited prior experience and the potential loss of key employees of acquired organizations. The Company has not made any acquisitions in the past. No assurance can be given as to the ability of the Company to successfully integrate any businesses, products, technologies or personnel that might be acquired in the future, and the failure of the Company to do so could have a material adverse effect on the Company's business, results of operations and financial condition.
Reliance on Intellectual Property and Proprietary Rights
The Company regards substantial elements of its Web site and underlying technology as proprietary and attempts to protect it by relying on trademark, service mark, copyright and trade secret laws and restrictions on disclosure and transferring title and other methods. The Company also generally enters into confidentiality agreements with its employees and consultants and in connection with its license agreements with third parties and generally seeks to control access to and distribution of its technology, documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company's proprietary information without authorization or to develop similar technology independently. The Company pursues the registration of its trademarks in the United States and internationally. The Company has registered a United States trademark for theglobe. The Company has filed United States trademark applications for theglobe.com and theglobe.com logo. Additionally, the Company has submitted trademark applications for theglobe.com and theglobe.com logo in Australia, Brazil, Canada, China, the European Union (covering Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Ireland, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom), Hong Kong, Israel, Japan, New Zealand, Norway, Russia, Singapore, South Africa, Switzerland and Taiwan. Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which the Company's services are distributed or made available through the Internet, and policing unauthorized use of the Company's proprietary information is difficult. See "Business--Intellectual Property and Proprietary Rights."
Legal standards relating to the validity, enforceability and scope of protection of certain proprietary rights in Internet-related businesses are uncertain and still evolving, and no assurance can be given as to the future viability or value of any of the Company's proprietary rights. There can be no assurance that the steps taken by the Company will prevent misappropriation or infringement of its proprietary information, which could have a material adverse effect on the Company's business, results of operations and financial condition.
Litigation may be necessary in the future to enforce the Company's intellectual property rights, to protect the Company's trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation might result in substantial costs and diversion of resources and management attention. Furthermore, there can be no assurance that the Company's business activities will not infringe upon the proprietary rights of others, or that other parties will not assert infringement claims against the Company, including claims that by directly or indirectly providing hyperlink text links to Web sites operated by third parties, the Company is liable for copyright or trademark infringement. Moreover, from time to time, the Company may be subject to claims of alleged infringement by the Company or its members of the trademarks, service marks and other intellectual property rights of third parties. Although such claims have not resulted in any significant litigation or had a material adverse effect on the Company's business to date, such claims and any resultant litigation, should it occur, might subject the Company to significant liability for damages, might result in invalidation of the Company's proprietary rights and, even if not meritorious, could result in substantial costs and diversion of resources and management attention and could have a material adverse effect on the Company's business, results of operations and financial condition.
The Company currently licenses from third parties certain technologies incorporated into theglobe.com. As the Company continues to introduce new services that incorporate new technologies, it may be required to license additional technology from others. There can be no assurance that these third-party technology licenses will continue to be available to the Company on commercially reasonable terms, if at all. Additionally, there can be no assurance that the third parties from which the Company currently licenses its technology will be able to defend their proprietary rights successfully against claims of infringement. As a result, any inability of the Company to obtain any of these technology licenses could result in delays or reductions in the introduction of new services or could adversely affect the performance of its existing services until equivalent technology can be identified, licensed and integrated. See "Business--Intellectual Property and Proprietary Rights."
Government Regulation and Legal Uncertainties Associated with the Internet
A number of legislative and regulatory proposals under consideration by federal, state, local and foreign governmental organizations may lead to laws or regulations concerning various aspects of the Internet, including, but not limited to, online content, user privacy, taxation, access charges, liability for third-party activities and jurisdiction. Additionally, it is uncertain as to how existing laws will be applied by the judiciary to the Internet. The adoption of new laws or the application of existing laws may decrease the growth in the use of the Internet, which could in turn decrease the demand for the Company's services, increase the Company's cost of doing business, or otherwise have a material adverse effect on the Company's business, results of operations and financial condition. See "Business-- Government Regulation and Legal Uncertainties."
There can be no assurance that the United States or foreign nations will not enact legislation or seek to enforce existing laws prohibiting or restricting certain content, such as online gambling, from the Internet. Currently, online gambling advertisers account for under ten percent of the Company's advertising revenues. Prohibition and restriction of Internet content could dampen the growth of Internet use, decrease the acceptance of the Internet as a communications and commercial medium, expose the Company to liability, and/or require substantial modification of theglobe.com, and thereby have a material adverse effect on the Company's business, results of operations and financial condition.
Internet user privacy has become an issue both in the United States and abroad. Current American privacy law consists of a few disparate statutes directed at specific industries that collect personal data, none of which specifically covers the collection of personal information online. There can be no assurance that the United States or foreign nations will not adopt legislation purporting to protect such privacy. Any such action could affect the way in which the Company is allowed to conduct its business, especially those aspects that involve the collection or use of personal information, and could have a material adverse effect on the Company's business, results of operations and financial condition.
The tax treatment of the Internet and e-commerce is currently unsettled. A number of proposals have been made at the federal, state and local level and by certain foreign governments that could impose taxes on the sale of goods and services and certain other Internet activities. The United States Congress is considering legislation that would place a temporary moratorium on certain types of taxation on Internet commerce. There can be no assurance that any such legislation will be adopted by Congress or what form it will take, or that current attempts at taxing or regulating commerce over the Internet would not substantially impair the growth of commerce and as a result have a material adverse effect on the Company's business, results of operations and financial condition.
Certain local telephone carriers have asserted that the growing popularity and use of the Internet has burdened the existing telecommunications infrastructure, and that many areas with high Internet use have begun to experience interruptions in telephone service. These carriers have petitioned the Federal Communications Commission (the "FCC") to impose access fees on ISPs and OSPs. If such access fees are imposed, the costs of communicating on the Internet could increase substantially, potentially slowing the growth in use of the Internet, which could in turn decrease demand for the Company's services or increase the Company's cost of doing business, and thus have a material adverse effect on the Company's business, results of operations and financial condition.
Although the Company's server is located in the State of New York, the governments of other states and foreign countries might attempt to prosecute the Company for violations of their laws. There can be no assurance that violations of such laws will not be alleged or charged by state or foreign governments and that such laws will not be modified, or new laws enacted, in the future. Any of the foregoing could have a material adverse effect on the Company's business, results of operations and financial condition.
Liability for Information Retrieved from or Transmitted over the Internet
Because materials may be downloaded by the online or Internet services operated or facilitated by the Company or the Internet access providers with which it has relationships and may be subsequently distributed to others, there is a potential that claims will be made against the Company for defamation, negligence, copyright or trademark infringement or other theories based on the nature and content of such materials. Such claims have been brought against online services in the past. The Company has received inquiries from third parties regarding such matters, all of which have been resolved to date without any payments or other material adverse effect on the Company. In addition, the increased attention focused upon liability issues and legislative proposals could impact the overall growth of Internet use.
The Company could also be exposed to liability with respect to third-party information that may be accessible through the Company's Web site, or through content and materials that may be posted by members on their personal Web sites or on chat rooms or bulletin boards offered by the Company. Such claims might include, among others, that by directly or indirectly providing hyperlink text links to Web sites operated by third parties or by providing hosting services for members' sites, the Company is liable for copyright or trademark infringement or other wrongful actions by such third parties through such Web sites. It is also possible that if any third-party content information provided on the Company's Web site contains errors, third parties could make claims against the Company for losses incurred in reliance on such information.
The Company offers e-mail service, which is provided by a third party. See "--Dependence on Third-Party Relationships." Such service may expose the Company to potential risk, such as liabilities or claims resulting from unsolicited e-mail ("spamming"), lost or misdirected messages, illegal or fraudulent use of e-mail or interruptions or delays in e-mail service.
The Company also enters into agreements with commerce partners and sponsors under which the Company is entitled to receive a share of any revenue from the purchase of goods and services through direct links from the Company's Web site. Such arrangements may expose the Company to additional legal risks and uncertainties, including potential liabilities to consumers of such products and services, even if the Company does not itself provide such products or services. While the Company's agreements with these parties often provide that the Company will be indemnified against such liabilities, there can be no assurance that such indemnification, if available, will be adequate.
Even to the extent such claims do not result in liability to the Company, the Company could incur significant costs in investigating and defending against such claims. The imposition on the Company of potential liability for information carried on or disseminated through its systems could require the Company to implement measures to reduce its exposure to such liability, which may require the expenditure of substantial resources and limit the attractiveness of the Company's services to members and users. While the Company will attempt to reduce its exposure to such liability through the use of member agreements and user policies and disclaimers, the enforceability and effectiveness of such measures are uncertain.
Although the Company carries general liability insurance, the Company's insurance may not cover all potential claims to which it is exposed or may not be adequate to indemnify the Company for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could have a material adverse effect on the Company's business, results of operations and financial condition.
Risks Associated with International Operations and Expansions
A part of the Company's strategy is to continue to develop theglobe.com community model in international markets. Approximately 25% to 35% of the Company's monthly traffic originates from abroad, although substantially all of the Company's advertising revenue is generated in the United States. There can be no assurance that the Internet or the Company's community model will become widely accepted for advertising and e-commerce in any international markets. In addition, the Company expects that the success of any additional foreign operations it initiates in the future will also be substantially dependent upon local partners. If revenues from international ventures are not adequate to cover the investments in such activities, the Company's business, results of operations and financial condition could be materially and adversely affected. The Company may experience difficulty in managing international operations as a result of difficulty in locating an effective foreign partner, competition, technical problems, local laws and regulations, distance and language and cultural differences, and there can be no assurance that the Company or its international partners will be able to successfully market and operate the Company's community model in foreign markets. The Company also believes that, in light of substantial anticipated competition, it will be necessary to move quickly into international markets in order to effectively obtain market share, and there can be no assurance that the Company will be able to do so. There are certain risks inherent in doing business on an international level, such as unexpected changes in regulatory requirements, trade barriers, difficulties in staffing and managing foreign operations, fluctuations in currency exchange rates, longer payment cycles in general, problems in collecting accounts receivable, difficulty in enforcing contracts, political and economic instability, seasonal reductions in business activity in certain other parts of the world and potentially adverse tax consequences. There can be no assurance that one or more of such factors will not have a material adverse effect on the Company's future international operations and, consequently, on the Company's business, results of operations and financial condition.
Control by Current Stockholders
Following the completion of the Offering, Michael Egan, the Chairman of the Company, will beneficially own or control, directly or indirectly, shares of Common Stock which in the aggregate will represent approximately % of the outstanding shares of Common Stock (and shares and % on a fully diluted basis). Following consummation of the Offering, Messrs. Krizelman and Paternot, collectively, will beneficially own % of the Common Stock ( % on a fully diluted basis). Following the Offering, Messrs. Egan, Krizelman and Paternot and certain directors of the Company will hold outstanding Warrants exercisable for 4,046,018 shares of Common Stock. See "Description of Capital Stock -- Warrants." Messrs. Egan, Krizelman and Paternot expect to enter into a voting agreement (the "Voting Agreement") pursuant to which Mr. Egan agrees to vote for certain nominees of Messrs. Krizelman and Paternot to the Board of Directors and Messrs. Krizelman and Paternot agree to vote for the nominees of Mr. Egan to the Board who will represent a majority of the Board of Directors. Accordingly, Mr. Egan will have theability to elect a majority of the directors of the company and Messrs. Egan, Krizelman and Paternot will also have the ability to control theoutcome of all issues submitted to a vote of the stockholders of the Company requiring majority approval. See "Principal Stockholders." The Voting Agreement will also provide that Messrs. Egan, Krizelman and Paternot will be subject to certain "tag-along" and "drag-along" rights in connection with any private sale of securities of the Company after the Offering. Voting control by Messrs. Egan, Krizelman and Paternot may discourage certain types of transactions involving an actual or potential change of control of the Company, including transactions in which the holders of Common Stock might receive a premium for their shares over prevailing market prices. See "Certain Relationships and Related Transactions."
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.
The Company has reviewed its internal programs and has determined that there are no significant Year 2000 issues within the Company's systems or services. However, although the Company believes that its systems are Year 2000 compliant, the Company utilizes third-party equipment and software that may not be Year 2000 compliant. Failure of such third-party equipment or software to operate properly with regard to the year 2000 and thereafter could require the Company to incur unanticipated expenses to remedy any problems, which could have a material adverse effect on the Company's business, results of operations and financial condition. The Company is in the process of contacting all of its significant suppliers and strategic partners to determine the extent to which the Company's interface systems are vulnerable to these third parties' failure to remediate their own Year 2000 issues. Furthermore, the purchasing patterns of advertisers may be affected by Year 2000 issues as companies expend significant resources to correct their current systems for Year 2000 compliance. These expenditures may result in reduced funds available for Internet advertising or sponsorship of Internet services, which could have a material adverse effect on the Company's business, results of operations and financial condition.
Impact of General Economic Conditions
Time spent on the Internet by individuals, purchases of new computers and purchases of membership subscriptions to Internet sites are discretionary for consumers and may be particularly affected by adverse trends in the general economy. The success of the Company's operations depends to a significant extent upon a number of factors relating to discretionary consumer spending, including economic conditions (and perceptions of such conditions by consumers) affecting disposable consumer income such as employment, wages and salaries, business conditions, interest rates, availability of credit and taxation, for the economy as a whole and in regional and local markets where the Company operates. There can be no assurance that consumer spending will not be adversely affected by general economic conditions, which could negatively impact the Company's results of operations or financial condition. Any significant deterioration in general economic conditions or increases in interest rates may inhibit consumers' use of credit and cause a material adverse effect on the Company's revenues and profitability. In addition, the Company's business strategy relies on advertising by and agreements with other Internet companies. Any significant deterioration in general economic conditions that adversely affected these companies could also have a material adverse effect on the Company's business, results of operations and financial condition.
No Prior Public Market; Possible Volatility of Stock Price
Prior to the Offering, there has been no public market for the Common Stock. Although the Company intends to apply for quotation on the Nasdaq National Market, if the Common Stock is listed, there can be no assurance as to the development or liquidity of any trading market for the Common Stock or that investors in the Common Stock will be able to resell their shares at or above the initial public offering price. The initial public offering price for the shares of Common Stock will be determined through negotiations between the Company and representatives of the Underwriters and may not be indicative of the market price of the Common Stock after the Offering. See "Underwriting." The trading price of the Company's Common Stock could be subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new products and services by the Company or its competitors, changes in financial estimates by securities analysts, the operating and stock price performance of other companies that investors may deem comparable to the Company and other events or factors. In addition, the stock market in general, and the market prices for Internet-related companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the trading price of the Company's Common Stock, regardless of the Company's operating performance.
Shares Eligible for Future Sale; No Prior Trading Market; Registration Rights
Upon consummation of the Offering, the Company will have outstanding a total of shares of Common Stock, and approximately 1,235,000 and 1,425,941 shares of Common Stock subject to stock options granted under the Company's 1998 Stock Option Plan and 1995 Stock Option Plan, respectively. See "Management--Executive Compensation." Of such shares, the shares of Common Stock being sold in the Offering (together with any shares sold upon exercise of the Underwriters' over-allotment options) will be immediately eligible for sale in the public market without restriction, except for shares purchased by or issued to any "affiliate" of the Company (within the meaning of the Securities Act). All of the shares of Common Stock outstanding prior to the Offering will be "restricted securities" as such term is defined under Rule 144 under the Securities Act ("Rule 144") in that such shares were issued in private transactions not involving a public offering. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k)or 701 promulgated under the Securities Act or another exemption from registration. In addition, upon consummation of the Offering, 4,046,018 shares of Common Stock will be issuable upon exercise of an outstanding Warrants. Approximately shares of Common Stock are not subject to the volume limitations of Rule 144 and are currently eligible for sale in the public market without restriction, except for shares held by an "Affiliate" of the Company. Additionally, holders of all of the Company's outstanding equity have been granted registration rights with respect to the shares of Common Stock into which their securities are convertible. See "Description of Capital Stock-- Registration Rights." However, pursuant to the terms of the agreements pursuant to which the registration rights were granted, such holders have agreed not to sell or otherwise transfer or dispose of any shares of Common Stock or other securities of the Company held by them without the consent of the Company for a period of up to 180 days after the date of this Prospectus. Additionally, the Company and members of the Company's management who are stockholders of the Company and certain other stockholders have agreed that, subject to certain exceptions, for a period of 180 days after the date of this Prospectus, without the prior written consent of Bear, Stearns & Co. Inc., they will not, directly or indirectly, issue, sell, offer or agree to sell, grant any option for the sale, pledge, make any short sale, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act or otherwise dispose of any shares of Common Stock (or securities convertible into, exercisable for or exchangeable for Common Stock) of the Company or of any of its subsidiaries. The Company intends to file a registration statement on Form S-8 for the shares held pursuant to its option plans and stock incentive plans that may make those shares freely tradeable. Such registration statement will become effective immediately upon filing, and shares covered by that registration statement will thereupon be eligible for sale in the public markets, subject to the applicable lock-up agreements and Rule 144 limitations applicable to Affiliates. See "Shares Eligible for Future Sale."
No information is currently available and no prediction can be made as to the timing or amount of future sales of such shares or the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock (including shares issuable upon the exercise of stock options), or the perception that such sales could occur, could materially adversely affect prevailing market prices for the Common Stock and the ability of the Company to raise equity capital in the future. See "Shares Eligible for Future Sale" and "Description of Capital Stock--Registration Rights."
Antitakeover Effect of Certain Charter Provisions
Prior to the consummation of the Offering, the Board of Directors expects to adopt a Rights Agreement (defined below), to be effective upon the consummation of the Offering, that may have the effect of discouraging, delaying or preventing a change in control of the Company or unsolicited acquisition proposals. Further, certain provisions of the Company's Certificate of Incorporation and By-Laws and of Delaware law could have the effect of delaying or preventing a change in control of the Company. See "Description of Capital Stock."
Dilution; Absence of Dividends
Investors purchasing shares of Common Stock in the Offering will incur immediate and substantial dilution of $ per share in net tangible book value per share of the Common Stock from the initial public offering price. To the extent outstanding options to purchase Common Stock are exercised, there will be further dilution. In addition, the Company does not anticipate paying any cash dividends in the foreseeable future. See "Dividend Policy" and "Dilution."
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). These forward-looking statements can be identified by the
use of predictive, future-tense or forward-looking terminology, such as
"believes," "anticipates," "expects," "estimates," "may," "will," or
similar terms. These statements appear in a number of places in this
Prospectus and include statements regarding the intent, belief or current
expectations of the Company, its directors or its officers with respect to,
among other things: (i) trends affecting the Company's financial condition
or results of operations; (ii) the Company's business and growth
strategies; (iii) the Internet and Internet commerce; and (iv) the
Company's financing plans. Investors are cautioned that any such
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. Factors that could adversely affect actual
results and performance include, among others, the Company's limited
operating history, dependence on continued growth in the use of the
Internet, the Company's unproven business model, dependence on members,
reliance on advertising revenues, potential fluctuations in quarterly
operating results, security risks of transmitting information over the
Internet, government regulation, technological change and competition. The
accompanying information contained in this Prospectus, including, without
limitation, the information set forth under the heading "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" identifies important additional factors that
could materially adversely affect actual results and performance.
Prospective investors are urged to carefully consider such factors. All
forward-looking statements attributable to the Company are expressly
qualified in their entirety by the foregoing cautionary statement.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock offered hereby by the Company are estimated to be approximate- ly $ million (approximately $ million if the Underwriters' over- allotment option is exercised in full), based on an assumed initial public offering price of $ per share (the midpoint of the estimated range) and after deducting the estimated underwriting discounts and commissions and other estimated Offering expenses. See "Description of Capital Stock."
The Company will use the net proceeds of the Offering for advertising, brand name promotions and for other general corporate purposes, including investment in the development and functionality of its Web site, enhancements of the Company's network infrastructure and working capital. The Company may also use a portion of the proceeds for strategic alliances and acquisitions. Accordingly, management will have significant flexibility in applying the net proceeds of this Offering. Pending any such use, as described above, the Company intends to invest the net proceeds in interest-bearing instruments.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common Stock. The Company currently intends to retain its future earnings, if any, to fund the development and growth of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future. The declaration and payment of dividends by the Company are subject to the discretion of the Board of Directors. Any future determination to pay dividends will depend on the Company's results of operations, financial condition, capital requirements, contractual restrictions and other factors deemed relevant by the Board of Directors.
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company as of June 30, 1998, (ii) the pro forma capitalization as of such date, after giving effect to the conversion of all outstanding shares of Preferred Stock into Common Stock, and (iii) the pro forma capitalization of the Company as of June 30, 1998 as adjusted to reflect the shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $ per share. The capitalization information set forth in the table below is qualified and should be read in conjunction with the Financial Statements and Notes related thereto included elsewhere in this Prospectus.
June 30, 1998
---------------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
---------------------------------------------
(Dollars in thousands, except per share data)
Obligations under capital leases,
excluding current installments..........$ 629 $ 629
Stockholders' equity:
Preferred Stock, 3,000,000
shares authorized:
Series A through E, $.001
par value; 2,900,001 shares
authorized; 2,899,991 shares
issued and outstanding (aggregate
liquidation value of $21,886,110);
none issued and outstanding, pro
forma and pro forma as adjusted...... 3 --
Common Stock, $.001 par value;
22,000,000 shares authorized,
actual and pro forma; 100,000,000
shares authorized, pro forma as
adjusted; 2,308,541 shares issued
and outstanding, actual; 13,341,527
shares outstanding, pro forma;
shares issued and outstanding,
pro forma as adjusted (1)............ 2 13
Unrealized loss on available-for-sale
securities........................... (30) (30)
Additional paid-in capital........... 21,873 21,865
Deferred compensation................. (52) (52)
Accumulated deficit................... (10,225) (10,225)
Total stockholders' equity............ 11,571 11,571
======== ========
Total capitalization.............. $12,200 $12,200 $
---------------------------------- ======== ======== ========
|
(1) Based on the number of shares of Common Stock outstanding as of June 30, 1998, and adjusted to include 10,947,469 shares of Common Stock that will be issued upon the automatic conversion of the Company's existing Preferred Stock upon consummation of the Offering. Excludes 4,046,018 shares of Common Stock issuable upon the exercise of outstanding Warrants at an exercise price of approximately $1.45 per share following the consummation of the Offering. See "Description of Capital Stock--Warrants." If the Underwriters' over-allotment option were exercised in full, an additional shares of Common Stock would be offered by the Company and shares of Common Stock would be outstanding after the Offering. "See "Underwriting." Excludes (i) 1,235,000 and 1,425,941 shares of Common Stock issuable upon the exercise of stock options that would be outstanding after the Offering under the Company's 1998 Stock Option Plan and 1995 Stock Option Plan, respectively, at a weighted average exercise price of $ per share (based on an initial public offering price of $ ) and $ per share, respectively and (ii) 565,000 and 12,001 shares of Common Stock reserved for future issuance under the Company's 1998 Stock Option Plan and the 1995 Stock Option Plan, respectively. See "Capitalization," "Management--Executive Compensation," "Descrip- tion of Capital Stock" and Financial Statements and Notes related thereto appearing elsewhere in this Prospectus.
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1998, after giving effect to the conversion of all outstanding shares of Preferred Stock into 10,947,469 shares of Common Stock was approximately $ or $ per share of Common Stock. Pro forma net tangible book value per share is determined by dividing the pro forma tangible net worth of the Company (pro forma total assets less goodwill less pro forma total liabilities) by the number of shares of Common Stock. After giving effect to the sale of shares of Common Stock offered hereby at an assumed initial public offering price of $ per share and the application of the estimated net proceeds from the Offering, pro forma net tangible book value of the Company as of June 30, 1998 would have been $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $ per share to new investors. The following table illustrates this dilution on a per share basis:
Assumed initial public offering price per share.... $____
Pro forma net tangible book value per share as of
June 30, 1998..................................... $____
Increase per share attributable to new investors.. ____
Pro forma net tangible book value per share after
the Offering...................................... ____
Dilution per share to new investors................ $ (1)
=======
-----------
|
(1) The foregoing computations assume no exercise of the Underwriters' overallotment option, stock options or the Warrants. The Warrants entitle the holders thereof to purchase an aggregate of 4,046,018 shares of Common Stock at an exercise price of approximately $1.45 per share. If the foregoing Warrants had been exercised at June 30, 1998, pro forma net tangible book value per share after the Offering would
have been $ , representing an immediate dilution to new investors of $ per share and an immediate increase in net tangible book value of $ per share attributable to the Offering. |
The following table summarizes, as of June 30, 1998, the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by the existing stockholders and by new investors purchasing shares in this Offering (after giving effect to the conversion of the outstanding shares of Preferred Stock into shares of Common Stock and before deduction of estimated underwriting discounts and commissions and other estimated expenses of the Offering):
Investors in Offering. ---------- ---------- -------- ------------ ---------
Total............... (2) 100% 100%
========== ========== ======== ============ =========
-------------------------
|
(1) Assumes all of the Company's outstanding Preferred Stock is converted into Common Stock. Excludes 4,046,018 shares of Common Stock that may be issued upon the exercise of the Warrants at approximately $1.45 per share.
(2) Excludes 1,235,000 and 1,425,941 shares of Common Stock reserved for issuance under options that will be outstanding after the Offering pursuant to the Company's 1998 Stock Option Plan and the Company's 1995 Stock Option Plan, respectively at a weighted average exercise price of $ per share (based on an initial public offering price of $ ) and $ per share, respectively. See "Management--Executive Compensation," "Description of Capital Stock--Warrants" and Note ___ of Notes to Financial Statements. To the extent outstanding stock options are exercised, there will be further dilution to new investors.
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
The following selected consolidated financial data should be read in conjunction with the Company's Financial Statements and Notes related thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. The consolidated statement of operations data for the period from May 1, 1995 (inception) to December 31, 1995 and each of the years in the two-year period ended December 31, 1997, and the consolidated balance sheet data at December 31, 1996 and 1997, are derived from the consolidated financial statements of the Company which have been audited by KPMG Peat Marwick LLP, independent accountants, and are included elsewhere in this Prospectus. The balance sheet data at December 31, 1995 are derived from audited financial statements of the Company not included herein. The statement of operations data for each of the six-month periods ended June 30, 1997 and 1998, and the balance sheet data at June 30, 1998, are derived from unaudited interim financial statements of the Company included elsewhere in this Prospectus. The unaudited financial statements have been prepared on substantially the same basis as the audited financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations for such periods. Historical results are not necessarily indicative of the results to be expected in the future, and results of interim periods are not necessarily indicative of results for the entire year.
May 1, 1995
(inception)
through Year Ended Six Months Ended
December 31, December 31, June 30,
------------- ----------- --------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
Statement of
Operations Data:
Revenues ...................................... $ 27 $ 229 $ 770 $ 208 $ 1,173
Cost of revenues .............................. 13 116 423 106 503
----------- ----------- ----------- ----------- -----------
Gross profit .................................. 14 113 347 102 670
Operating expenses:
Sales and marketing.......................... 1 276 1,248 224 4,493
Product development.......................... 60 120 154 63 251
General and administrative................... 19 489 2,828 594 2,396
----------- ----------- ----------- ----------- -----------
Total Operating Expenses..................... 80 885 4,230 881 7,140
----------- ----------- ----------- ----------- -----------
Loss from operations........................... (66) (772) (3,883) (779) (6,470)
----------- ----------- ----------- ----------- -----------
Interest income (expense),
net ......................................... (0) 22 335 12 673
----------- ----------- ----------- ----------- -----------
Loss before provision for......................
income taxes ................................ (66) (750) (3,548) (767) (5,797)
----------- ----------- ----------- ----------- -----------
Provision for income taxes..................... -- -- 36 27
----------- ----------- ----------- ----------- -----------
Net loss ...................................... $ (66) $ (750) $ (3,584) $ (767) $ (5,824)
=========== =========== =========== =========== ===========
Basic and diluted
net loss per share........................... $ (0.03) $ (0.33) $ (1.56) $ (0.34) $ (2.51)
=========== =========== =========== =========== ===========
Weighted average
shares outstanding
used in basic and
diluted per share
calculation.................................. 2,250,000 2,250,000 2,293,545 2,281,920 2,322,794
=========== =========== =========== =========== ===========
Pro forma basic and diluted net loss per share (1)
Weighted average shares outstanding used in pro forma basic and
diluted per share calculation (1)
|
December 31, June 30,
------------ --------
1995 1996 1997 1998
----- ---- ---- ----
Balance Sheet Data:
Cash and cash
equivalents and
short-term investments....................... $ 587 $ 757 $18,874 $13,155
Working capital ............................... 575 648 17,117 10,452
Total assets .................................. 647 973 19,462 15,603
Capital lease
obligations, excluding
current installments......................... -- -- 99 629
Total stockholders'
equity....................................... $ 632 $ 795 $17,352 $11,571
(1) Weighted average shares do not include any common stock equivalents
because such inclusion would have been anti-dilutive. See Financial
Statements and Notes related thereto appearing elsewhere in this
Prospectus for an explanation of the weighted average number of shares
used to compute pro forma basic and diluted loss per share.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All statements, trend analysis and other information contained in this Prospectus relative to markets for the Company's products and trends in revenues, gross margin and anticipated expense levels, as well as other statements including words such as "believe," "anticipate," "expect," "estimate," "plan" and "intend" and other similar expressions, constitute forward-looking statements. Those forward-looking statements are subject to business and economic risks, and the Company's actual results of operations may differ materially from those contained in the forward-looking statements. For a more detailed discussion of these business and economic risks, see "Risk Factors." The following discussion of the financial condition and results of operations of the Company should also be read in conjunction with the Financial Statements and the Notes related thereto included elsewhere in this Prospectus.
Overview
theglobe.com is one of the world's leading online communities today with over 1.7 million members in the United States and abroad. In June 1998, 6.1 million unique users visited the site. theglobe.com 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. theglobe.com facilitates this interaction by providing various free services, including home page building, discussion forums, chat, e-mail and a marketplace where members can purchase a variety of products and services. Additionally, theglobe.com provides its users news, weather, movie and music reviews, multi-player gaming, horoscopes and personals. By satisfying its users' personal and practical needs, theglobe.com seeks to become their online home. The Company's primary revenue source is the sale of advertising, with additional revenues generated through e-commerce arrangements, and the sale of membership subscriptions for enhanced services.
The Company was incorporated in May 1995. For the period from inception through December 1995, the Company had minimal sales and its operating activities related primarily to the development of the necessary computer infrastructure and initial planning and development of theglobe.com. Operating expenses in 1995 were minimal. During 1996, the Company continued the foregoing activities and also focused on recruiting personnel, raising capital, and developing programs to attract and retain members. In 1997, the Company moved its headquarters to New York City, expanded its membership base from less than 250,000 to almost 1 million, improved and upgraded its services, expanded its production staff, built an internal sales department, and began active promotion of theglobe.com to increase market awareness. From the end of 1997 through June 30, 1998, revenues and operating expenses have increased as the Company has placed a greater emphasis on building its advertising revenues and memberships by expanding its sales force and promoting theglobe.com brand.
To date, the Company's revenues have been derived principally from the sale of advertisements and, to a lesser extent, from subscription revenues. E-commerce revenues have not been significant to date, but are expected to increase as the Company's existing e-commerce arrangements grow and new arrangements are entered into. Advertising revenues constituted 89% of total revenues for the six months ended June 30, 1998 and 77% of total revenues for the year ended December 31, 1997. The Company sells a variety of advertising packages to clients, including banner advertisements, event sponsorship, and targeted and direct response advertisements. Currently, the Company's advertising revenues are derived principally from short-term advertising arrangements, averaging one to two months, in which the Company guarantees a minimum number of impressions for a fixed fee. Advertising revenues are recognized ratably in the period in which the advertisement is displayed, provided that no significant Company obligations remain and collection of the resulting receivable is probable. Payments received from advertisers prior to displaying their advertisements on the 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, the Company defers recognition of the corresponding revenues until guaranteed levels are achieved.
In addition to advertising revenues, the Company derives other revenues primarily from its membership subscriptions. The Company's membership programs offer premium services for a monthly fee, providing additional services such as incremental storage space and the ability to host limited commercial activity. Although non-advertising revenues may continue to grow through the development of new membership programs and the planned introduction of theglobe.com's e-commerce merchandising solution, Globe-shops, in the fourth quarter of 1998, the Company expects to derive its revenue principally from the sale of advertising space on its Web site for the foreseeable future. The Company's recent arrangements with its premier e-commerce partners generally provide the Company with a fee for renting space in theglobe.com Marketplace, and/or a share of any sales resulting from direct links from the Company's Web site. Revenues from these programs will be recognized in the month that the service is provided. Revenues from the Company's share of the proceeds from its e-commerce partners' sales will be recognized by the Company upon notification from its partners of sales attributable to the Company's site. To date, revenues from e-commerce arrangements have not been material.
The Company incurred net losses of $65,706, $750,180 and $3.6 million for the period from May 1, 1995 (date of inception) to December 31, 1995, and the years ended December 31, 1996 and 1997, respectively, and $5.8 million for the six months ended June 30, 1998. At June 30, 1998, the Company had an accumulated deficit of $10.2 million. The net losses and accumulated deficit resulted from the Company's lack of substantial revenues and the significant operation, infrastructure and other costs incurred in the development and marketing of the Company's services. As a result of its expansion plans, the Company expects to incur additional losses from operations for the foreseeable future. To the extent that increases in its operating expenses precede or are not subsequently followed by commensurate increases in revenues, or that the Company is unable to adjust operating expense levels accordingly, the Company's business, results of operations and financial condition would be materially and adversely affected. There can be no assurance that the Company will ever achieve or sustain profitability or that the Company's operating losses will not increase in the future.
The Company has recorded deferred compensation of approximately $25,000 and $83,100 for the years ended December 31, 1996 and 1997, respectively, in connection with the grant of certain stock options to employees, representing the difference between the deemed value of the Company's Common Stock for accounting purposes and the exercise price of such options at the date of grant. Such amount is presented as a reduction of stockholders' equity and 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. As a result, the Company currently expects to amortize the following amounts of deferred compensation annually: 1998--$46,200; 1999--$26,300; 2000--$1,800; 2001--$1,200; and 2002--$500. Amortization of deferred compensation was $23,100 and $28,100 for the six months ended June 30, 1998 and the year ended 1997, respectively. The Company expects to record a charge to earnings in the third quarter of 1998 in connection with the transfer during the third quarter of 1998 of Warrants to acquire 450,000 shares of Common Stock from Dancing Bear Investments (its largest stockholder) to Todd V. Krizelman, Stephan J. Paternot and Edward A. Cespedes. The amount of such charge will be determined by the difference between the initial public offering price per share and the exercise price per Warrant (approximately $1.45 per share).
Results of Operations
The following table sets forth the results of operations (as a percentage of total revenues) for the periods indicated by each item reflected in the Company's statement of operations. Given its limited operating history, the Company believes that an analysis of its cost and expense categories as a percentage of revenue is not meaningful.
May 1,
1995
(inception)
to Six Months Ended
December 31, Year Ended December 31, June 30,
------------ ----------------------- --------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
Revenues.......................... 100% 100% 100% 100% 100%
Cost of revenues.................. 48% 51% 55% 51% 43%
---- ---- ---- ---- ----
Gross profit ................... 52% 49% 45% 49% 57%
Operating expenses:
Sales and marketing............ 5% 121% 162% 108% 383%
Product development 224% 52% 20% 30% 21%
General and administrative..... 68% 213% 367% 285% 204%
---- ---- ---- ---- ----
Total Operating expenses 297% 386% 549% 423% 608%
---- ---- ---- ---- ----
Loss from operations.............. (245%) (337%) (504%) (374%) (551%)
Interest income (expense), net.... (0%) 10% 43% 5% 57%
---- ---- ---- ---- ----
Loss before provision for income
taxes.......................... (245%) (327%) (461%) (369%) (494%)
Provision for income taxes........ 0% 0% 4% 0% 2%
---- ---- ---- ---- ----
Net loss.......................... (245%) (327%) (465%) (369%) (496%)
---- ---- ---- ---- ----
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Comparison of Six Months Ended June 30, 1997 and 1998
Revenues. Revenues increased from $208,241 for the six months ended June 30, 1997 to $1.2 million for the six months ended June 30, 1998, an increase of 463%. The period to period growth in revenues resulted from an increase in (i) the number of advertisers as well as the average contract duration and value, (ii) the Company's Web site traffic and (iii) to a lesser extent, its subscription memberships.
Advertising Revenues. Advertising revenues were $144,166 or 69% of total revenues and $1.0 million or 89% of total revenues for the six months ended June 30, 1997 and 1998, respectively. Commencing in April 1996, the Company engaged an Internet advertising service provider to sell the Company's Web site advertising inventory in exchange for a service fee. The Company recognized revenues net of such service fees. Commencing May 1, 1997, the Company canceled this arrangement and created its own internal sales department in order to properly represent theglobe.com brand on a consistent basis as well as to reduce overall sales costs. Accordingly, the advertisements sold by the Internet advertising service provider accounted for approximately 28% of total revenues for the six months ended June 30, 1997. The Company did not record any similar expense in the six months ended June 30, 1998. In addition, the Company recorded $37,500 and $39,906 of barter advertising revenues, representing 18% and 3% of total revenues, for the six months ended June 30, 1997 and 1998, respectively, which primarily related to an advertising contract with a major Internet search engine provider that was cancelled in January 1998. The Company anticipates that advertising revenues will continue to account for a substantial share of total revenues for the foreseeable future and that barter revenue will continue to comprise an insignificant portion of the Company's total revenues in the future.
Subscription Revenues. The Company's subscription membership revenues were $64,075 or 31% of total revenues and $129,792 or 11% of total revenues for the six months ended June 30, 1997 and 1998, respectively. At June 30, 1998, the Company had deferred revenues of $132,353, attributable to prepaid subscription memberships which are amortized ratably over the remaining membership term, typically ranging from one to 12 months.
Cost of Revenues. Cost of revenues consists primarily of Internet connection charges, Web site equipment leasing costs, depreciation, barter advertising expenses, salaries of operations personnel and other related maintenance and support costs. Gross margins were 49% and 57% for the six months ended June 30, 1997 and 1998, respectively. The increase in gross margin was primarily due to a greater increase in revenues relative to the increase in cost of revenues. In addition, the Company recorded $37,500 and $39,906 of barter advertising expenses during the six months ended June 30, 1997 and 1998, respectively, included in cost of revenues, which is equivalent to the barter advertising revenues recorded in the same period. The June 30, 1997 and 1998 gross margins exclusive of the barter transactions were 60% and 59%, respectively. Therefore, excluding barter, gross margins have remained fairly consistent from period to period.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries of sales and marketing personnel, commissions, advertising, public relations, sales force and other marketing related expenses. Sales and marketing expenses increased from $224,170 or 108% of total revenues for the six months ended June 30, 1997 to $4.5 million or 383% of total revenues for the six months ended June 30, 1998. The period to period increase in sales and marketing expenses was primarily attributable to expansion of the Company's online and print advertising, public relations and other promotional expenditures, as well as increased sales and marketing personnel and related expenses required to implement the Company's marketing strategy in the first half of 1998. Sales and marketing expenses also increased as a result of the Company's decision to shift its advertising to an internal sales department in the second quarter of 1997. Sales and marketing expenses as a percentage of total revenues have increased as a result of the continued development and implementation of theglobe.com's branding and marketing campaign. The Company expects sales and marketing expenses will continue to increase in absolute dollars for the foreseeable future as the Company continues its branding strategy, expands its direct sales force, hires additional marketing personnel and increases expenditures for marketing and promotion.
Product Development Expenses. Product development expenses include personnel costs associated with the development, testing and upgrades to the Company's Web site and systems as well as personnel costs related to its editorial content and community management and support. Product development expenses increased from $62,500 or 30% of total revenues for the six months ended June 30, 1997 to $250,869 or 21% of total revenues for the six months ended June 30, 1998. The absolute dollar increase in product development expenses was primarily attributable to increased staffing levels required to support theglobe.com and related back-office systems and to enhance the content and features within the Company's Web site. The Company believes that timely deployment of new and enhanced features and technology are critical to attaining its strategic objectives and remaining competitive. Accordingly, the Company intends to continue recruiting and hiring experienced product development personnel and to make additional investments in product development. The Company expenses product development costs as incurred. As such, the Company expects that product development expenditures will increase in absolute dollars in future periods.
General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related costs for general corporate functions, including finance, accounting, facilities and legal expenses, and fees for professional services. General and administrative expenses increased from $594,358 or 285% of total revenues for the six months ended June 30, 1997 to $2.4 million or 204% of total revenues for the six months ended June 30, 1998, an increase of $1.8 million, or 303%. The absolute dollar increase in general and administrative expenses was primarily due to increased salaries and related expenses associated with 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. The Company expects that it will incur additional general and administrative expenses as the Company hires additional personnel and incurs additional costs related to the growth of the business and its operation as a public company, including directors' and officers' liability insurance, investor relations programs and professional service fees. Accordingly, the Company anticipates that general and administrative expenses will continue to increase in absolute dollars.
Interest Income (Expense), Net. Interest income (expense), net includes income from the Company's cash and investments and expenses related to the Company's capital lease obligations. Interest income (expense), net increased from $11,384 for the six months ended June 30, 1997 to $672,637 for the six months ended on June 30, 1998, an increase of $661,253. The increase in interest income was primarily due to a higher average cash, cash equivalent and investment balance as a result of capital received from the issuance of shares of the Company's Preferred Stock in the third quarter of 1997.
Income Taxes. Income taxes of $26,500 for the six months ended June 30, 1998 are based solely on state and local taxes on business and investment capital. The Company's effective tax rate differs from the statutory federal income tax rate, primarily as a result of the uncertainty regarding the Company's ability to utilize its net operating loss carryforwards. Due to the uncertainty surrounding the timing or realization of the benefits of its net operating loss carryforwards in future tax returns, the Company has placed a valuation allowance against its otherwise recognizable deferred tax assets. As of June 30, 1998 and December 31, 1997, the Company had approximately $9.9 million and $4.4 million of federal net operating loss carryforwards for tax reporting purposes available to offset future taxable income. The Company's federal net operating loss carryforwards expire beginning 2000 through 2012, respectively. 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 the Company's ownership interests in the third quarter of 1997, as defined in the Internal Revenue Code of 1986, as amended (the "Code"), future utilization of the Company's net operating loss carryforwards will be subject to certain limitations or annual restrictions. See Note 5 to the Notes to Financial Statements appearing elsewhere in this Prospectus.
Comparison of the Period From May 1, 1995 (Inception) to December 31, 1995 and Years Ended December 31, 1996 and 1997
Revenues. Revenues were $26,815, $229,363, and $770,293 for the period from May 1, 1995 (inception) to December 31, 1995, and for the years ended December 31, 1996 and 1997, respectively. The period to period growth resulted from an increase in (i) the number of advertisers as well as the average contract duration and value, (ii) the Company's Web site traffic and (iii) to a lesser extent, its subscription memberships.
Advertising Revenues. Advertising revenues were $26,815 or 100% of total revenues, $216,814 or 95% of total revenues, and $592,409 or 77% of total revenues for the period from May 1, 1995 (inception) to December 31, 1995, and for the years ended December 31, 1996 and 1997, respectively. Commencing in April 1996, the Company engaged an Internet advertising service provider to sell the Company's Web site advertising inventory in exchange for a service fee. During 1996, the advertisements sold by the Internet advertising service provider accounted for approximately 71% of total revenues. Commencing May 1, 1997, the Company canceled this arrangement and created its own internal sales department in order to represent theglobe.com brand on a consistent basis as well as to reduce overall sales costs. During 1997, revenues from this service provider were only 8% of total revenues. During 1997, the Company recorded $166,500 of barter advertising revenues, representing 22% of total revenues, which primarily related to an advertising contract with a major Internet search engine.
Subscription Revenues. The Company's subscription membership revenues were $12,549 or 5% of total revenues and $177,884 or 23% of total revenues for the years ended December 31, 1996 and 1997, respectively. At December 31, 1996 and 1997, the Company had deferred revenues of $32,144 and $113,290, respectively, attributable to prepaid subscription memberships. The Company did not have subscription revenues in its year of inception.
Cost of Revenues. Cost of revenues were $12,779 or 48% of total revenues, $116,780 or 51% of total revenues, $423,706 or 55% of total revenues for the period from May 1, 1995 (inception) to December 31, 1995, and for the years ended December 31, 1996 and 1997, respectively. Gross margins were 52%, 49% and 45% in 1995, 1996 and 1997, respectively. The general decline in gross margins as a percentage of total revenues was attributable to the growth of the networking infrastructure resulting in an increase in Internet connection, support and maintenance charges, equipment costs as well as operations personnel costs. In 1995, the Company's first year of operation, cost of revenues only represented Internet connection and support and maintenance charges. In 1997, gross margins also decreased due to the inclusion of $166,500 of barter advertising expenses in cost of revenues, which was equivalent to the barter advertising revenues recorded in the same period. The 1997 gross margin exclusive of the barter transactions was 57%. The Company's 1997 gross margin was positively impacted by its decision to shift its advertising to an internal sales department during May 1997 and the increase in the Company's subscription members.
Sales and Marketing Expenses. Sales and marketing expenses were $1,248 or 5% of total revenues, $275,947 or 121% of total revenues, and $1.2 million or 162% of total revenues for the period from May 1, 1995 (inception) to December 31, 1995, and for the years ended December 31, 1996 and 1997, respectively. In the first year of operation, the Company did not dedicate meaningful funds to sales and marketing. The period to period increase in sales and marketing expenses from 1996 to 1997 was primarily attributable to expansion of the Company's online and print advertising, public relations and other promotional expenditures as well as increased sales and marketing personnel and related expenses required to implement the Company's marketing strategy. Sales and marketing expenses also increased as a result of the Company's decision to shift its advertising to an internal sales department in the second quarter of 1997.
Product Development Expenses. Product development expenses were $60,000 or 224% of total revenues, $120,000 or 52% of total revenues, and $153,667 or 20% of total revenues for the period from May 1, 1995 (inception) to December 31, 1995, and for the years ended December 31, 1996 and 1997, respectively. The increases in absolute dollars in product development expenses were primarily attributable to increased staffing levels required to support theglobe.com and its related back-office systems. Product development expenses as a percentage of total revenues have decreased because of the growth in total revenues.
General and Administrative Expenses. General and administrative expenses were $18,380 or 68% of total revenues, $489,073 or 213% of total revenues, and $2.8 million or 367% of total revenues for the period from May 1, 1995 (inception) to December 31, 1995, and for the years ended December 31, 1996 and 1997, respectively. The period to period increase in general and administrative expenses was primarily due to increases in the number of general and administrative personnel, professional services, travel and facility related expenses to support the growth of the Company's operations. The increased salaries reflect the highly competitive nature of hiring in the new media industry. General and administrative expenses as a percentage of total revenues decreased in 1996 because of the growth in total revenues. General and administrative expenses as a percentage of total revenues and in absolute dollars increased in 1997 primarily related to expenses associated with management's employment contracts and accrued bonuses granted during the second half of 1997 combined with the additional costs required to support the rapid growth of the Company's operations.
Interest Income (Expense), Net. Interest income (expense), net was $(114), $22,257 and $334,720, for the period from May 1, 1995 (inception) to December 31, 1995, and for the years ended December 31, 1996 and 1997, respectively. The increase in interest income for the year ended December 31, 1997 was primarily due to a higher average cash, cash equivalent, and investment balance as a result of the proceeds received from the issuance of shares of the Company's Preferred Stock in the third quarter of 1997.
Income Taxes. Income taxes of $36,100 for the year ended December 31, 1997 was based solely on state and local taxes on business and investment capital. The Company paid less than $1,000 in income taxes in 1995 and 1996.
Liquidity and Capital Resources
Since its inception, the Company has primarily financed its operations through (i) the private placement of its Preferred Stock through which the Company raised $20 million and $280,000 in the third and second quarters of 1997, respectively, and $910,000 in 1996, (ii) the private placement of Common Stock, through which the Company raised $647,000 in 1995 and (iii) capital equipment lease financing which, from December 1997 through June 1998, totaled approximately $963,000 million. As of June 30, 1998, the Company had approximately $3.0 million in cash and cash equivalents and $10.2 million in marketable securities.
Net cash used in operating activities was $330,223 and $5.4 million for the six months ended June 30, 1997 and 1998, respectively, and $58,510, $601,602, and $1.9 million for the period from May 1, 1995 (inception) to December 31, 1995, and for the years ended December 31, 1996 and 1997, respectively. The Company had significant negative cash flows from operating activities in each fiscal and quarterly period to date. Net cash used in operating activities resulted primarily from the Company's net operating losses, adjusted for certain non-cash items, and a higher level of accounts receivable due to the time lag between revenue recognition and the receipt of payments from advertisers, which were partially offset by increases in accounts payable, accrued expenses, deferred revenues and the timing of payments associated with the Company's 1997 accrued bonuses in the first quarter of 1998. For the six months ended June 30, 1998, the increase in net cash used in operating activities resulted primarily from the Company's net operating loss of $5.8 million and the payment of 1997's bonuses of $1.1 million during the first six months of 1998.
Net cash provided (used) in investing activities was $(229,696) and $2.6 million for the six months ended June 30, 1997 and 1998, respectively, and $(51,101), $(138,309), and $(13.2) million for the period from May 1, 1995 (inception) to December 31, 1995, and for the years ended December 31, 1996 and 1997, respectively. Net cash provided (used) in investing activities was primarily related to purchase and sales of short-term investments with the proceeds from the Company's issuance of shares of the Company's Preferred Stock in the third quarter of 1997, totaling $20 million, and the purchase of property and equipment in connection with the Company's build out of its infrastructure. During December 1997 and the first six months of 1998, the Company acquired additional equipment under capital leases of $126,000 and $836,648, respectively.
Net cash provided by (used in) financing activities was $258,205 and $(69,233) for the six months ended June 30, 1997 and 1998, respectively, and $696,685, $909,955, and $20.2 million for the period from May 1, 1995 (inception) to December 31, 1995, and for the years ended December 31, 1996 and 1997, respectively. Net cash provided by financing activities during 1995 consisted primarily of $45,500 in convertible notes payable and $646,505 in proceeds from the issuance of the Company's Common Stock. Net cash provided by financing activities in 1996 and in 1997 consisted primarily of net proceeds from the issuance of the Company's Preferred Stock. Net cash used in financing activities of $(77,405) consisted primarily of payments under its capital lease obligations.
As of June 30, 1998, the Company's principal commitments consisted of obligations outstanding under capital and operating leases. The Company spent approximately $557,253 on capital expenditures since inception, excluding capital lease arrangements. The Company estimates that its capital expenditures for the second half of 1998 and 1999 will be approximately $2 million and $7 million, respectively. The Company currently expects that its principal capital expenditures during that time will relate to improvements to technical infrastructure and a planned move of the Company headquarters at the end of 1998.
The Company's capital requirements depend on numerous factors, including market acceptance of the Company's services, the amount of resources the Company devotes to investments in its Web site, the resources the Company devotes to marketing and selling its services and its brand promotions and other factors. The Company has experienced a substantial increase in its capital expenditures and operating lease arrangements since its inception consistent with the growth in the Company's operations and staffing, and anticipates that this will continue for the foreseeable future. Additionally, the Company will continue to evaluate possible investments in businesses, products and technologies, and plans to expand its sales and marketing programs and conduct more aggressive brand promotions.
The Company believes that the net proceeds from this Offering, together with its current cash and cash equivalents, will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for at least 12 months. If cash generated from operations is insufficient to satisfy the Company's liquidity requirements, the Company may seek to sell additional equity or debt securities or to obtain a credit facility. The sale of additional equity or convertible debt securities could result in additional dilution to the Company's stockholders. There can be no assurance that financing will be available in amounts or on terms acceptable to the Company, if at all. See "Risk Factors--Additional Financing Requirements."
Quarterly Results of Operations Data
The following table sets forth certain unaudited quarterly statement of operations data for each of the six quarters ended June 30, 1998 as well as such data expressed as a percentage of the Company's total revenues for the periods indicated. In the opinion of management, this information has been prepared substantially on the same basis as the audited financial statements appearing elsewhere in this Prospectus, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the unaudited quarterly results of operations data.
The quarterly data should be read in conjunction with the audited financial statements of the Company and the notes thereto appearing elsewhere in this Prospectus. The operating results for any quarter are not necessarily indicative of the operating results for any future period. In particular, because of the Company's limited operating history, the Company has limited meaningful financial data upon which to base revenues and planned operating expenses. Additionally, the Company believes that it may experience seasonality in its business, with use of the Internet and theglobe.com being somewhat lower during the summer vacation period and year-end holiday periods. Additionally, seasonality may affect significantly the Company's advertising revenue during the first and third calendar quarters. See "Risk Factors-Potential Fluctuations in Operating Results; Quarterly Fluctuations."
Three Months Ended
------------------
March 31, June 30, September 30, December 31, March 31, June 30,
1997 1997 1997 1997 1998 1998
--------- -------- ------------- ------------ --------- --------
(Dollars in thousands, except per share data)
Statement of Operations
Data:
Revenues ............... $ 87 $ 121 $ 207 $ 355 $ 394 $ 780
Cost of revenues ....... 25 81 133 185 213 291
------- ------- ------- ------- ------- -------
Gross profit .......... 62 40 74 170 181 489
Operating expenses:
Sales and marketing.... 64 160 404 620 1,411 3,083
Product development.... 30 32 37 54 85 165
General and
administrative........ 303 291 1,511 722 1,098 1,299
------- ------- ------- ------- ------- -------
Total operating
expenses............... 397 483 1,952 1,396 2,594 4,547
Loss from operations.... (335) (443) (1,878) (1,226) (2,413) (4,058)
Interest income
(expense), net......... 3 8 113 210 456 217
------- ------- ------- ------- ------- -------
Loss before provision
for income taxes....... (332) (435) (1,765) (1,016) (1,957) (3,841)
Provision for
income taxes........... -- -- 18 18 16 10
------- ------- ------- ------- ------- -------
Net loss ............... $ (332) $ (435) $ (1,783) $ (1,034) $ (1,973) $ (3,851)
======= ======= ======= ======= ======= =======
Percentage of Revenues:
Revenues ............... 100% 100% 100% 100% 100% 100%
Cost of revenues........ 29% 67% 64% 52% 54% 37%
------- ------- ------- ------- ------- -------
Gross profit .......... 71% 33% 36% 48% 46% 63%
Operating expenses:
Sales and marketing.... 74% 132% 196% 175% 358% 395%
Product development.... 34% 27% 18% 15% 22% 21%
General and
administrative........ 348% 240% 731% 203% 279% 167%
------- ------- ------- ------- ------- -------
Total operating
expenses............... 456% 399% 945% 393% 659% 583%
Loss from operations.... (385%) (366%) (909%) (345%) (613%) (520%)
Interest income
(expense), net......... 4% 7% 55% 59% 116% 28%
------- ------- ------- ------- ------- -------
Loss before
provision for
income taxes.......... (381%) (359%) (854%) (286%) (497%) (492%)
Provision for
income taxes........... 0% 0% 9% 5% 4% 1%
------- ------- ------- ------- ------- -------
Net loss................ (381%) (359%) (863%) (291%) (501%) (493%)
======= ======= ======= ======= ======= =======
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Impact of the Year 2000
The Year 2000 issue is 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.
The Company has reviewed its internal programs and has determined that there are no significant Year 2000 issues within the Company's systems or services. However, although the Company believes that its systems are Year 2000 compliant, the Company utilizes third-party equipment and software that may not be Year 2000 compliant. Failure of such third-party equipment or software to operate properly with regard to the year 2000 and thereafter could require the Company to incur unanticipated expenses to remedy any problems, which could have a material adverse effect on the Company's business, results of operations and financial condition. The Company is in the process of contacting all of its significant suppliers and strategic partners to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues. Furthermore, the purchasing patterns of advertisers may be affected by Year 2000 issues as companies expend significant resources to correct their current systems for Year 2000 compliance. These expenditures may result in reduced funds available for Internet advertising or sponsorship of Internet services, which could have a material adverse effect on the Company's business, results of operations and financial condition.
Effects of Inflation
Due to relatively low levels of inflation in 1995, 1996 and 1997 and the first six months of 1998, inflation has not had a significant effect on the Company's results of operations since inception.
Impact of Recently Issued Accounting Standards
The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" in the quarter ended June 30, 1998. SFAS No. 130 requires the Company to report in their financial statements, in addition to its 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 certain investments in debt and equity securities. There were no differences between the Company's comprehensive loss and its net loss as reported.
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. The Company has determined that it does not have any separately reportable business segments.
In June 1998, the FASB issued SFAS No. 133. Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standard 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 the Company as the Company currently does not have any derivative instruments or hedging activities.
BUSINESS
Overview
theglobe.com is one of the world's leading online communities with over 1.7 million members in the United States and abroad, In June 1998, 6.1 million unique users visited this site. theglobe.com 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. theglobe.com facilitates this interaction by providing various free services, including home page building, discussion forums, chat, e-mail and a marketplace where members can purchase a variety of products and services. Additionally, theglobe.com provides its users news, weather, movie and music reviews, multi-player gaming, horoscopes and personals. By satisfying its users' personal and practical needs, theglobe.com seeks to become their online home. The Company's primary revenue source is the sale of advertising, with additional revenues generated through e-commerce arrangements and the sale of membership subscriptions for enhanced services.
Since its founding in May 1995, theglobe.com has experienced strong growth. The site has added over 100,000 new members every month since October 1997, and generated over 100 million page views in June 1998, an increase of over 100% from January 1998. More than 6.1 million unique users visited the site in June 1998, reflecting an increase of more than 350% since January 1998. Approximately 25% to 35% of theglobe.com's monthly traffic originates from abroad, reflecting the site's international appeal. According to Media Metrix, the average time spent per user at theglobe.com in the period April to June 1998 was approximately 15% higher than the average time spent on the top 25 Web sites visited most frequently.
Industry Background
The rapid adoption of the Internet as a means to gather information, communicate, interact and be entertained, combined with the vast proliferation of Web sites, has made the Internet an important new mass medium. IDC estimates that the number of Internet users exceeded 69 million in 1997, and will grow to over 320 million by 2002. The Internet enables advertisers to target advertising campaigns utilizing sophisticated databases of information on the users of various sites and to directly generate revenues from these users through online transactions. As a result, the Internet has become a compelling means to advertise and market products and services.
With the volume of sites and vast abundance of information available on the Internet, users are increasingly seeking an online home where they can interact with others with similar interests and quickly find information, products and services related to a particular interest or need. Community sites were developed as a solution to the challenges posed by the Internet's growth and complexity. They offer a single location where users can build their personal Web sites and place them among others having similar interests. In addition, these sites generally offer services including access to e-mail accounts, chat rooms, news, and entertainment services, among other features. By satisfying the needs of its users, communities seek to establish a close relationship with their audience. As a result, users tend to be loyal to and spend more time online at community sites.
Advertising. Jupiter Communications estimates that spending on Internet advertising in the U.S. will grow from $1.9 billion in 1997 to $7.7 billion in 2002. The Internet has become a compelling advertising vehicle that provides advertisers with targeting tools not available from traditional advertising media. The interactive nature of the Internet and the development of "click-through" advertising banners and other feedback tools enable advertisers to measure impression levels, establish a dialogue with users and receive "real-time" direct feedback from their target markets. Such feedback provides advertisers with an effective means to measure the attractiveness of their offerings among targeted audiences and make modifications to their advertising campaigns on short notice. Community sites are generally able to provide advertisers significantly more information regarding consumers than other Web sites because they collect detailed demographic data and facilitate the development of user-created affinity groups. The ability to target advertisements to broad audiences, specific regional populations, affinity groups or individuals makes community Web site advertising a highly versatile and effective tool for delivering customized and cost-effective messages.
One indicator of the Internet's popularity as an advertising medium is the growing number and diversity of Internet advertisers. Most early Internet advertisers were technology and Internet-related companies. Today, a growing number of Internet advertisers consist of traditional, consumer product and service companies. The diverse audience of users accessing community sites has made such sites especially attractive to consumer product and service companies advertising on the Internet. The Company believes that this trend should continue, and that a wide variety of companies outside the technology and Internet industries, such as financial services, consumer goods, automotive and pharmaceutical companies, are or will be increasingly using the Internet, and community sites in particular, to advertise.
E-commerce and Direct Marketing. The Internet has become a significant marketplace for buying and selling goods and services. Jupiter Communications estimates that the amount of goods or services purchased in online consumer transactions will grow from approximately $3 billion in 1997 to approximately $38 billion in 2002. Improvements in security, interface design and transaction-processing technologies have facilitated an increase in online consumer transactions. Early adopters of such improvements include online merchants offering broad product catalogs (such as books, music CDs and toys), those seeking distribution efficiencies (such as PCs, flowers and groceries) and those offering products and services with negotiable pricing (such as automobiles and mortgages). The Company believes that as the volume of online transactions increases, traditional retailers will offer a wide variety of products and services online. The Company believes that online communities provide businesses an attractive environment for selling products and services by providing direct access to users with like interests.
The Internet allows marketers to collect meaningful demographic information and feedback from consumers, and to rapidly respond to this information with new messages. This offers a significant new opportunity for businesses to increase the effectiveness of their direct marketing campaigns. In traditional media, a significant portion of all advertising budgets are spent on direct marketing because of its effectiveness. However, the effectiveness of direct marketing campaigns is dependent upon the quality of consumer data used to develop and place consumer advertisements. In addition to providing detailed demographic data, community Web site participants indicate their areas of personal interest by self-selecting themselves into affinity groups. This added level of information provides direct marketers an invaluable tool to target potential customers more accurately. Accordingly, advertisers are able to improve their direct marketing campaigns which may translate into higher sales.
theglobe.com Solution
The Company was founded by Todd V. Krizelman and Stephan J. Paternot to capitalize on the growing demand for online destinations that allow users to develop their own identities and establish relationships with other Internet users. theglobe.com community is organized in an intuitive hierarchy modeled after the real world, with each layer reflecting a more specific level of interest. There are six "Themes of Interest": Arts and Entertainment, Business and Finance, Lifestyles, Romance, Special Interests and Geographical Interests. 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," theglobe.com's smallest form of community. There are currently 325 Interest Groups. Interest Groups, once proposed by any member, are posted for petition. Those groups that garner enough votes then go "live" on the site. Members are not limited as to the number of communities they can join and are able to leave an Interest Group at any time, ensuring that the communities are dynamic and evolve as member interests change. "Community Leaders" are elected to manage communities and are able to highlight member content, communicate directly to constituents and organize events.
Within Interest Groups, members can access a collection of services provided by theglobe.com to generate content, including chat, open forums and e-mail. Member created content within Interest Groups satisfy users' desires for topic specific information, conversation and debate. Members vote and generate content for communities, thereby facilitating production of desirable content on theglobe.com. Viewing community content does not require membership, allowing theglobe.com to leverage its member-created content to attract a large audience of users. As these users become familiar with theglobe.com, the Company believes it has a greater ability to convert them into members, perpetuating the growth of the site.
The unique community focus of theglobe.com offers the Company several advantages that include:
Member Loyalty. Because theglobe.com provides a home for its members, members develop loyalty to the site and to the communities in which they participate. This translates into more frequent usage by members and longer stays at the site. According to Media Metrix, the average time spent per user at theglobe.com in the period April through June 1998 was approximately 15% higher than the average time spent on the top 25 Web sites visited most frequently.
Member Developed Content. The majority of content on theglobe.com is developed by users on a voluntary basis for the benefit of all users of the site. As a result, the Company avoids the majority of costs associated with content development.
Targeted Advertising. theglobe.com structure provides a valuable platform for advertisers by allowing them to target advertisements based on both demographic information and affinity group affiliations. Advertisers are also drawn to the globe.com's volume of user traffic, frequency and average length of use. theglobe.com's ability to reach users across a wide variety of interest areas has made the site attractive to both technology companies as well as traditional consumer product and service companies. Currently, approximately 60% of theglobe.com's advertisers are branded consumer product and service companies.
Business Strategy
theglobe.com's goal is to be the leading online community site. The Company seeks to attain this goal through the following key strategies:
Improve User Experience. The Company will continue efforts to improve
user experience on theglobe.com by: (i) simplifying user interfaces and
improving the ease of use of services, (ii) improving customer support,
(iii) developing loyalty programs to reward members for increased usage,
(iv) expanding the suite of personal publishing/Web site building tools,
(v) creating additional opportunities for participating in existing
affinity groups, as well as expanding the number of affinity groups, (vi)
personalizing the site to the preferences of individual members and (vii)
launching new services to enhance the community.
Develop Brand Identity and Awareness. The Company intends to expand its presence as a mass market site by building brand awareness. The Company plans to continue to allocate a significant portion of its resources to develop its brand in the same fashion as traditional consumer product and service companies. The Company believes that establishing brand awareness among consumers is instrumental in attracting new members to theglobe.com and also has the effect of attracting media buyers who tend to favor well-known and trusted companies. theglobe.com also intends to continue to market its services in various media. In March 1998, theglobe.com launched advertising campaigns in several forms of media, including television, print, billboards, buses, telephone kiosks, online media, and other marketing and promotional efforts designed to build its brand name in selected cities.
Increase New Membership Acquisition through Strategic Alliances. theglobe.com continues to seek new ways to reach potential members when they are first becoming acquainted with the Internet. The Company believes that early contact with such users will enhance its ability to instill customer loyalty. Accordingly, the Company has established a strategic alliance with EarthLink Network, Inc. ("EarthLink"), one of the largest ISPs in the United States, through which members gain Internet access and are directed to theglobe.com as their home site upon startup. The Company has also formed strategic alliances with companies including Advertising Age, Together Systems and Ziff Davis University. These relationships are designed to drive additional traffic to the site, create brand building opportunities and allow for the marketing of products and services to theglobe.com's user base.
Expand Globally. The Company believes that significant opportunities exist to capitalize on the growth of the Internet internationally and is pursuing strategic relationships with international companies to exploit cross-marketing, co-branding and promotional opportunities. Approximately 25% to 35% of theglobe.com's traffic is generated by members outside of the United States who are able to communicate and publish on the site in their respective languages. The Company has received prominent press coverage in Europe, Asia and Australia, and has established a relationship with MTV U.K. to feature theglobe.com's founders on a weekly news show (to be launched initially in the United Kingdom in the fall of 1998).
Further Develop E-commerce. The Company intends to increase its e-commerce revenues by continuing to increase the number of e-commerce partners in theglobe.com Marketplace (the "Marketplace"), and through the introduction of "Globe-shops," its e-commerce merchandising solution aimed at the small to mid-sized office and home office market, in the fall of 1998. In addition, the Company is seeking to expand the number of its premier commerce partners ("Premier Partners") that rent space on theglobe.com. As of June 30, 1998, approximately 35 companies, including four Premier Partners, participated in the Marketplace.
Enhance Membership Services. The Company currently offers additional Internet services, such as increased storage space for building home pages, through its Gold and Platinum membership programs. To attract a wider subscriber base, the Company intends to develop new membership programs offering premium content, shopping clubs and entertainment services.
Products and Services
theglobe.com provides users with access to the following collection of products and services to generate content and purchase merchandise online:
Free Services. theglobe.com provides a range of free services to its members through which they are able to personalize their online experience. These services include personal Web site hosting, discussion forums, chat and e-mail. Additionally, theglobe.com provides news, weather, movie and music reviews, multiplayer gaming, horoscopes and personals. Members are also provided discounts on merchandise offered by certain retailers in the Marketplace.
theglobe.com Marketplace. theglobe.com Marketplace provides users access to products offered by leading retailers and service providers. The Company allows retailers to locate in its Marketplace and collects a fee based on a percentage of transactions. The Marketplace currently has 35 participants including BarnesandNoble.com, FAO Schwarz and Lens Express. The Company also has relationships with four Premier Partners who pay an additional fixed monthly fee in order to receive prominent placement at theglobe.com. Premier marketplace agreements typically run for a period of six months to one year and are renewable at the option of the partner. The Company currently has such agreements with Cyberian Outpost, Inc. for software and computer hardware, GetSmart for consumer finance, Classified Warehouse for classified advertisements and has signed a letter of intent with RSL Communications for Internet telephony and phone services.
Globe-shops. In the fourth quarter of 1998, the Company intends to introduce Globe-shops, its e-commerce merchandising solution aimed at the small to mid-sized office and home office market. The Globe-shop tool set will allow merchants and users to build storefronts at theglobe.com assisted by an easy-to-use online guide. The Company will offer Globe-shop merchants and users various options ranging from a basic promotional storefront to a more complete solution, including a catalog, shopping cart and online transaction capabilities. The Company intends to charge Globe-shop owners a monthly service fee based on the level of service utilized and a transactional fee.
Member Subscriptions. The Company currently offers additional Internet services through its Gold and Platinum membership packages. These packages provide services such as additional storage space and the ability to host limited commercial activity. Member subscriptions are available for a $4.95 or $9.95 monthly fee, depending on the level of service.
Corporate Alliances and Relationships
theglobe.com has established a number of relationships designed to drive additional traffic to its site, create brand building opportunities, and allow for the marketing of products and services to theglobe.com user base. These arrangements are with a variety of online and offline partners and provide a cost effective way to deliver traffic to the site because they do not require significant capital expenditures. Examples include:
EarthLink. theglobe.com seeks to reach new members as they first become acquainted with the Internet. The Company believes that early contact with such users will enhance the Company's ability to instill customer loyalty. Consistent with this strategy, the Company has established an alliance, currently in a trial phase, with EarthLink, one of the largest ISPs in the United States. EarthLink has created a custom version of their "start-up CD-ROM" which not only gives users Internet access but also automatically directs them to theglobe.com as their home site upon start-up. Additionally, EarthLink promotes theglobe.com within its site and pays the production costs of co-branded theglobe.com/EarthLink start-up CD-ROMs. EarthLink pays a commission to the Company for each member or user gaining Internet access by utilizing the co-branded start-up CD-ROM. When the trial phase is completed (expected in August 1998), the alliance will be automatically renewed for one-year periods, unless terminated by either party.
Advertising Age. theglobe.com hosts a full-service community for Advertising Age, a leading trade publication for the advertising industry. In exchange for providing the full range of membership services available on theglobe.com to users of the Advertising Age Web site, the Company receives free promotion on the Advertising Age Web site, as well as discounts on advertising in Advertising Age magazine. This relationship provides theglobe.com with significant exposure throughout the advertising community, particularly among media buyers.
JobDirect, Inc. JobDirect, Inc. ("JobDirect") is an Internet resume service which connects entry-level job seekers with employment opportunities. In exchange for development of community features for its Web site, JobDirect provides theglobe.com with a link from its site as well as prominent promotion in its offline job events on college campuses. JobDirect provides all of its members e-mail from theglobe.com and distributes co-branded marketing material to college students, providing theglobe.com with exposure to the college-age market segment.
In addition to the above relationships, the Company has a variety of other arrangements designed primarily to drive traffic to its site, including agreements with Ziff Davis University, Together Systems, Launch Magazine, Wall Street Sports LLC, LINCS, WebSurfer, Mining Company and Lycos.
Advertising Customers
With over 1.6 million registered members, over 6.1 million monthly users and over 100 million monthly page views as of June 1998, the Company has successfully attracted both mass market consumer product companies as well as technology-related businesses advertising on the Internet. Due to its advantages as a community Web site, the Company believes it is well positioned to capture a portion of the growing number of consumer product and service companies seeking to advertise online. In June 1998, approximately 90 customers advertised on theglobe.com. During that period, approximately 70% were repeat customers and no one customer accounted for more than 10% of revenues. Some of the Company's advertising clients include:
Lee Jeans Coca Cola J. Crew Ziff Davis Procter & Gamble Visa Polygram BellSouth Dunkin' Donuts Office Depot Levi's Microsoft Sony 3Com USWest Intel |
Advertising Sales and Design
The Company seeks to distinguish itself from its competition through the creation of unique advertising and sponsorship opportunities that are designed to build brand loyalty for its corporate sponsors by seamlessly integrating their advertising messages into theglobe.com's content. Through its close relationship with the end user, the Company has the ability to deliver advertising to specific targets within the 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 35-40 year old Canadian men with music interests. The Company believes that such sophisticated targeting is a critical element for capturing worldwide advertising budgets for the Internet. Additionally, the Company intends to expand the amount and type of demographic information it collects from its members, which will allow it to offer more specific data to its advertising clients.
While the Company's competition generally provides banner advertising as its primary delivery system, the Company offers an assortment of advertising options to its clients, allowing them to take advantage of theglobe.com's unique relationship with its users and rapidly growing membership base. In addition to direct response indicators like "click-throughs," theglobe.com also specializes in providing innovative and aggressive selling services and a number of "branding" and "beyond the banner" sponsorship packages for its advertisers at higher premiums, such as:
. Banner Advertising . Sweepstakes
. Button Advertising . Content Development
. Contextual Links within Relevant . Affinity Packages for Advertising
Content Partners
. Pop Up and Log Out Interstitials . Opt-In Direct Marketing/Lead
Generation
. E-mail Sponsorship Programs
. Celebrity Event Sponsorships . Pre- and Post-Campaign Market
Research
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The Company has built an internal sales organization of 16 professionals, focusing on both selling advertisements on the Web site and developing long-term strategic relationships with clients. A significant portion of the Company's sales personnel's income is commission based. All of the Company's sales personnel sell advertising exclusively for theglobe.com. The Company currently sells over 95% of its advertising inventory through its in-house sales staff, allowing the Company to better control its pricing and inventory, maintain brand consistency and capture maximum revenue. The Company has sales offices in New York City and San Francisco, and intends to open additional sales offices in selected markets around the world.
Marketing and Promotions
The Company was the first community Web site to commit significant funds to advertising in traditional offline media, distinguishing itself from most of its competitors and other online companies. The Company launched an $8 million advertising campaign in March 1998, including television, print, billboards, buses, telephone kiosks, online media, and other marketing and promotional efforts. These efforts are aimed at generating significant additional traffic to theglobe.com, building and defining a desirable online destination in the minds of present and potential online consumers, and creating a strong and viable brand within the Internet industry and advertising trades. The Company intends to continue to commit a significant part of its budget to marketing theglobe.com brand. The Company advertises on national cable channels like MTV, E! Entertainment Television, Comedy Central, ESPN and the Sci-Fi Channel. The Company has also purchased advertising on network television in several markets including New York, San Francisco, Seattle, Boston, Denver and Atlanta.
Technology
The Company's strategy is to apply existing technologies in novel ways to deliver content and provide services to members of its online community. The various features of theglobe.com's online environment are implemented using a combination of commercially available and proprietary software components. The Company favors licensing and integrating "best-of-breed" commercially available technology from industry leaders such as Oracle, Sun Microsystems and Microsoft whenever possible. The Company reserves internal development of software for those components which are either unavailable on the market or which have major strategic advantages when developed internally. The Company believes that this component approach is more manageable, reliable, and scalable than single-source solutions. In addition, the emphasis on commercial components speeds development time, which is an advantage when competing in a rapidly evolving market.
Consistent with the Company's preference for off-the-shelf software components, the hardware systems utilized by the Company also consist of commercially available components. The Company believes that this architecture provides the ability to increase scale more quickly and reliably, and at lower cost, than more centralized systems. Although the existing infrastructure currently exceeds the Company's present demand, the Company has aggressive plans for additional upgrades in anticipation of increased demand.
The Company's distributed server architecture allows it to roll out upgrades incrementally on an as-needed basis. In addition to being scalable, the Web-serving architecture is also entirely redundant. The Company's Internet servers are connected to the Internet through multiple dedicated 45 Mb T3 connections obtained through two separate backbone providers, AppliedTheory and UUNET. This approach to connectivity protects the Company by allowing it to continue operations in the event of a failure in either backbone. See "Risk Factors--Technological Change."
In order to efficiently manage the system, the Company has developed highly automated methods of monitoring the system performance of each component. In the event of a failure in any subsystem, the failed subsystem is immediately taken out of service and requests are distributed among the remaining operational systems. The Company has also developed a suite of tools to perform routine management tasks such as log processing and content updates in an automated, remote-controlled fashion. The Company believes that its investment in automation lessens the need for the additional personnel that would otherwise be required to support the system as it grows. See "Risk Factors--Technological Change" and "--Dependence on Key Personnel."
Competition
The market for members, users and Internet advertising is new and rapidly evolving, and competition for members, users and advertisers is intense and is expected to increase significantly. Barriers to entry are relatively insubstantial and the Company may face competitive pressures from many additional companies both in the United States and abroad. The Company believes that the principal competitive factors for companies seeking to create communities on the Internet are critical mass, functionality of the Web site, brand recognition, member affinity and loyalty, broad demographic focus and open access for visitors. Other companies that are primarily focused on creating Internet communities are Tripod and GeoCities, and, in the future, Internet communities may be developed or acquired by companies currently operating Web directories, search engines, shareware archives, content sites, OSPs, ISPs and other entities, certain of which may have more resources than the Company. In addition, the Company could face competition in the future from traditional media companies, a number of which, including Disney, CBS and NBC, have recently made significant acquisitions or investments in Internet companies. Furthermore, the Company competes for users and advertisers with other content providers and with thousands of Web sites operated by individuals, the government and educational institutions. Such providers and sites include AOL, Angelfire, CNET, CNN/Time Warner, Excite, Hotmail, Infoseek, Lycos, Microsoft, Netscape, Switchboard, Xoom and Yahoo! The Company also faces competitive pressure from traditional media such as newspapers, magazines, radio and television. The Company believes that the principal competitive factors in attracting advertisers include the amount of traffic on its Web site, brand recognition, customer service, the demographics of the Company's members and users, the Company's ability to offer targeted audiences and the overall cost-effectiveness of the advertising medium offered by the Company. The Company believes 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. Accordingly, the Company will likely face increased competition, resulting in increased pricing pressures on its advertising rates, which could have a material adverse effect on the Company. See "Risk Factors--Intense Competition."
Intellectual Property and Proprietary Rights
The Company regards substantial elements of its Web site and underlying technology as proprietary and attempts to protect it by relying on trademark, service mark, copyright and trade secret laws and restrictions on disclosure and transferring title and other methods. The Company currently has no patents or patents pending and does not anticipate that patents will become a significant part of the Company's intellectual property in the foreseeable future. The Company also generally enters into confidentiality agreements with its employees and consultants and in connection with its license agreements with third parties and generally seeks to control access to and distribution of its technology, documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company's proprietary information without authorization or to develop similar technology independently. The Company pursues the registration of its trademarks in the United States and internationally. The Company has registered a United States trademark for theglobe. The Company has filed United States trademark applications for theglobe.com and theglobe.com logo. Additionally, the Company has submitted trademark applications for theglobe.com and theglobe.com logo in Australia, Brazil, Canada, China, the European Union (covering Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Ireland, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom), Hong Kong, Israel, Japan, New Zealand, Norway, Russia, Singapore, South Africa, Switzerland and Taiwan. Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which the Company's services are distributed or made available through the Internet, and policing unauthorized use of the Company's proprietary information is difficult. See "Risk Factors--Reliance on Intellectual Property and Proprietary Rights."
Government Regulation and Legal Uncertainties
The Company is currently subject to certain federal and state laws and regulations that are applicable to certain activities on the Internet. Legislative and regulatory proposals under consideration by federal, state, local and foreign governmental organizations concern various aspects of the Internet, including, but not limited to, online content, user privacy, taxation, access charges, liability for third-party activities and jurisdiction. Such government regulation may place the Company's activities under increased regulation, increase the Company's cost of doing business, decrease the growth in Internet use and thereby decrease the demand for the Company's services or otherwise have a material adverse effect on the Company's business, results of operations and financial condition. See "Risk Factors--Government Regulation and Legal Uncertainties Associated with the Internet."
Online Content. Online content restrictions cover many areas, including but not limited to, indecent, obscene or offensive information and content, such as sexually explicit information, gambling and consumer fraud.
Several federal and state statutes prohibit the transmission of certain types of indecent, obscene, or offensive information and content, including sexually explicit information and content, over the Internet to certain persons. The constitutionality and the enforceability of some of these statues is not clear 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 (the "CDA") governing "indecent" and "patently offensive" content were unconstitutional. Many other provisions of the CDA, 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 certain provisions of the New York penal law modeled on the CDA violated the Constitution. A companion provision of that law, however, was subsequently upheld.
The U.S. Department of Justice and some state Attorneys General have recently intensified their efforts in prosecuting businesses that operate Internet gambling activities, and pending legislation seeks to ban Internet gambling. In October 1997, the Senate Judiciary Committee approved the "Internet Gambling Prohibition Act," which, if enacted, would prohibit placing, receiving or otherwise making a bet or wager via the Internet in any state, and would also prohibit engaging in the business of betting or wagering through the Internet in any state. The bill also would direct the Secretary of State to negotiate with foreign countries to conclude international agreements that would enable the United States to enforce specified provisions of the act outside the United States. A substantially similar bill has been introduced in the House of Representatives.
Certain 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 statues is not clear 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. The United States government currently has limited authority over the collection and dissemination of personal data collected online. The Federal Trade Commission Act (the "Act") prohibits unfair and deceptive practices in and affecting commerce. The Act authorizes the Federal Trade Commission (the "FTC") to seek injunctive and other equitable relief, including redress, for violations of the Act, and provides a basis for government enforcement of certain fair information practices. For instance, failure to comply with a stated privacy policy may constitute a deceptive practice in certain circumstances, and the FTC would have authority to pursue the remedies available under the Act for such violations. Furthermore, in certain circumstances, information practices may be inherently deceptive or unfair, regardless of whether the entity has publicly adopted any privacy policies. The FTC has issued an opinion letter addressing the possible unfairness inherent in collecting certain personal identifying information from children online and transferring it to third parties without obtaining prior parental consent. However, as a general matter, the FTC lacks authority to require companies to adopt privacy policies.
Certain 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 establish and bolster user and member confidence in its privacy policies, the Company may incur expenses in obtaining the endorsement of such industry groups or in altering its current policies to comply with such standards. There can be no assurance that the adoption of such 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 provided adequate protection for Internet users. The report listed four core principles that must be part of any privacy protection effort: notice, choice, access and security. In order to protect the privacy of children, the FTC recommended legislation that would require Web sites that obtain information from children to provide actual notice to parents and to obtain parental consent. The FTC expects to announce legislative recommendations for online privacy protection for adults as early as the summer of 1998. To the extent that the Company's practices do not conform to these principles it may be subject to action by the FTC. There can be no assurance that these efforts will not adversely affect the Company's ability to collect demographic and personal information from members, which could have an adverse affect on its ability to attract advertisers. This could in turn have a material adverse effect on the Company's business, results of operations and financial condition.
Moreover, the FTC has begun investigations into the privacy practices of companies that collect information on the Internet. In settlement negotiations with at least one Internet company, the FTC has proposed that the company be required to establish certain procedures to give notice to consumers regarding the company's information collection and disclosure practices, provide consumers with the ability to have that company delete their personal identifying information from that company's database, more clearly identify its affiliation, or lack thereof, with third parties that may collect information or sponsor activities on that company's site, and obtain express parental consent prior to collecting and using personal identifying information obtained from children under 13 years of age.
Despite the Company's policies protecting user privacy, the Company could be forced to disclose information about users by a court order. There can be no assurance that these efforts will not adversely affect the Company's ability to collect demographic and personal information from members, which could have an adverse affect on its ability to attract advertisers. This could in turn have a material adverse effect on the Company's business, results of operations and financial condition.
At the international level, the European Union (the "EU") has adopted a directive (the "Directive") that will impose restrictions on the collection and use of personal data, effective October 1998. 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 U.S. There can be no assurance that this Directive will not adversely affect the Internet privacy activities of entities such as the Company that engage in data collection from users in certain EU member countries in conducting their business.
Any new legislation enacted by federal, state, or foreign governments regulating online privacy could affect the way in which the Company is allowed to conduct its business, especially those aspects that contemplate the collection or use of members' personal information.
Internet Taxation. A number of proposals have been made at the federal, state and local level, and by certain foreign governments, that would impose additional taxes on the sale of goods and services over the Internet, and certain states have taken measures to tax Internet-related activities.
Currently, Congress is considering legislation that would place a temporary moratorium on any new taxation of Internet commerce. On June 23, 1998, the House of Representatives passed H.R. 4105, the "Internet Tax Freedom Act," which includes a moratorium on state and local taxes on Internet access, bit taxes, or multiple or discriminatory taxes on electronic commerce. Certain existing state laws, however, would be expressly excepted from this moratorium if such state law was reaffirmed within a one-year period. The bill would also create a commission to study several Internet taxation issues and to present proposed legislation to the President and Congress. H.R. 4105, if enacted in its current form, would also prohibit the FCC and the states from regulating the prices of Internet access and online services. The Senate is also considering legislation on Internet taxation. Any legislation that is eventually passed by both houses of Congress may contain provision different from those in H.R. 4105. See "Access Charges" below.
There can be no assurance that any such legislation will be adopted by Congress or that new taxes will not be imposed upon Internet commerce after any moratorium adopted by Congress expires or that current attempts at taxing or regulating commerce over the Internet would not substantially impair the growth of e-commerce and as a result adversely affect the Company's opportunity to derive financial benefit from such activities.
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 no new taxes should be imposed 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, there can be no assurance 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. Local telephone carriers such as Pacific Bell, a subsidiary of SBC Communications Inc., have petitioned the FCC to regulate ISPs and OSPs in a manner similar to long distance telephone carriers and to impose access fees on ISPs and OSPs. If either of these petitions is granted, or the relief sought therein is otherwise granted, the costs of communicating on or through the Internet could increase substantially, potentially slowing the growth in Internet use, which could in turn decrease demand for the Company's services or increase the Company's 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 the Company, or by the Internet access providers with which the Company has relationships. These third-party activities could result in potential claims against the Company for defamation, negligence, copyright or trademark infringement or other claims based on the nature and content of such materials. See "Risk Factors--Liability for Information Retrieved from or Transmitted over the Internet."
Future legislation or regulations or court decisions may hold the Company liable for listings accessible through its 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 the Company's chat rooms or bulletin boards. Such liability might arise from claims alleging that, by directly or indirectly providing hyperlink text links to Web sites operated by third parties or by providing hosting services for members' sites, the Company is liable for copyright or trademark infringement or other wrongful actions by such third parties through such Web sites. If any third-party material on the Company's Web site contains informational errors, the Company may be sued for losses incurred in reliance on such information. While the Company attempts to reduce its exposure to such potential liability through, among other things, provisions in member agreements, user policies and disclaimers, the enforceability and effectiveness of such measures are uncertain.
In May 1998, the Senate passed the "Digital Copyright Millennium Act," whose Title II contained the "Internet Copyright Infringement Liability Clarification Act." This legislation would, if enacted, provide that, under certain circumstances, a "service provider" would not be liable for any monetary relief, and would be subject to limited injunctive relief, for infringing copyright materials transmitted by users over its digital communications network, temporarily stored on its system by its system caching procedures, stored on systems or networks under its control, or connected to its systems or networks by hyperlinks and other information location tools. This legislation also provides that, under certain circumstances, a service provider shall not be liable for any claim based on the service provider's good faith removal of or disabling access to such infringing material. A similar bill has been introduced in the House of Representatives.
The Company's e-mail service is provided by a third party. See "Risk Factors-Dependence on Third-Party Relationships." Such relationship exposes the Company to potential risk, such as claims resulting from unsolicited e-mail ("spamming"), lost or misdirected messages, illegal or fraudulent use of e-mail or interruptions or delays in e-mail service. Potential liability for information carried on or disseminated through the Company's systems could lead the Company to implement measures to reduce its exposure to such liability, which may require the expenditure of substantial resources and limit the attractiveness of the Company's services to members and users. While the Company attempts to reduce its exposure to such potential liability through, among other things, provisions in member agreements, user policies and disclaimers, the enforceability and effectiveness of such measures are uncertain.
The Company also enters into agreements with commerce partners and sponsors under which the Company is entitled to receive a share of any revenue from the purchase of goods and services through direct links from the Company's Web site. Such arrangements may expose the Company to additional legal risks and uncertainties, including potential liabilities to consumers of such products and services by virtue of the Company's involvement in providing access to such products or services, even if the Company does not itself provide such products or services. While the Company's agreements with these parties often provide that the Company will be indemnified against such liabilities, there can be no assurance that such indemnification, if available, will be enforceable or adequate. Although the Company carries general liability insurance, the Company's insurance may not cover all potential claims to which it is exposed or may not be adequate to indemnify the Company for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could have a material adverse effect on the Company's business, results of operations and financial condition.
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, thereby decreasing the demand for the Company's services. Even to the extent that claims relating to such issues do not result in liability to the Company, the Company could incur significant costs in investigating and defending against such 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. The Company has registered the domain name "theglobe.com." There can be no assurance that third parties will not bring claims for infringement against the Company for the use of this trademark. Moreover, because domain names derive value from the individual's ability to remember such names, there can be no assurance that the Company's 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 of proposed regulatory reform. There can be no assurance that the Company's domain names will not lose their value, or that the Company will not have to obtain entirely new domain names in addition to or in lieu of its current domain names, if such litigation or reform efforts result in a restructuring in the current system.
Jurisdiction. Due to the global reach of the Internet, it is possible that, although transmissions by the Company over the Internet originate primarily in the State of New York, the governments of other states and foreign countries might attempt to regulate Internet activity and the Company's transmissions or prosecute the Company for violations of their laws. There can be no assurance that violations of such laws will not be alleged or charged by state or foreign governments and that such laws will not be modified, or new laws enacted, in the future. Any of the foregoing could have a material adverse effect on the Company's business, results of operations and financial condition.
Employees
As of June 30, 1998, the Company had 80 full-time employees, including 20 in sales and marketing, 45 in production and 10 in finance and administration. The Company's future success will depend, in part, on its ability to continue to attract, retain and motivate highly qualified technical and management personnel, for whom competition is intense. From time to time, the Company also employs independent contractors to support its research and development, marketing, sales and support and administrative organizations. The Company's employees are not represented by any collective bargaining unit, and the Company has never experienced a work stoppage. The Company believes its relations with its employees are good.
Facilities
The Company's headquarters are currently located in a leased facility in New York City, consisting of approximately 12,000 square feet of office space, a majority of which is under a five-year lease with four years remaining. The Company intends to relocate its headquarters at the end of 1998 to a larger facility and is currently evaluating a number of locations in the greater New York City area. The Company has also leased approximately 1,200 square feet of office space in San Francisco for its West Coast sales office.
Legal Proceedings
There are no material legal proceedings pending or, to the Company's knowledge, threatened against the Company.
MANAGEMENT
Executive Officers and Directors
The following table sets forth the names, ages and positions of the Company's executive officers and directors. Executive officers are appointed by, and serve at the discretion of, the Board of Directors. All directors hold office until the annual meeting of stockholders of the Company following their election or until their successors are duly elected and qualified.
Name Age Position
---- --- --------
Michael S. Egan............ 58 Chairman
Todd V. Krizelman.......... 24 Co-Chief Executive Officer,
Co-President
and Director
Stephan J. Paternot........ 24 Co-Chief Executive Officer,
Co-President,
Secretary and Director
Edward A. Cespedes......... 32 Vice President of Corporate
Development and Director
Francis T. Joyce........... 45 Vice President, Chief Financial
Officer and Treasurer
Rosalie V. Arthur.......... 39 Director
Robert M. Halperin......... 70 Director
David Horowitz............. 69 Director
H. Wayne Huizenga.......... 60 Director
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Michael S. Egan. Mr. Egan has served as Chairman of theglobe.com since August 1997. As such, Mr. Egan serves as Chairman of the Board of Directors and as an executive officer of the Company with primary responsibility for day-to-day strategic planning and financing arrangements. Mr. Egan has been the controlling investor of Dancing Bear Investments a privately held investment company, since 1996. From 1986 to 1996, he was the majority owner and Chairman of Alamo Rent-A-Car, Inc. ("Alamo"), now a subsidiary of Republic Industries, Inc. Mr. Egan began his career with Alamo in 1976 and held various management and ownership positions during this period until he bought a controlling interest in 1986. Mr. Egan is also Chairman and Chief Executive Officer of Certified Vacations, a wholesale tour operator, and Chairman of AutobyInternet. Mr. Egan is a director of Florida Panthers Holdings, Inc. Mr. Egan began in the car rental business with Olins Rent-A-Car, where he held various positions, including President. Prior to acquiring Alamo, Mr. Egan held various administrative positions at Yale University and administrative and teaching positions at the University of Massachusetts at Amherst. Mr. Egan is a graduate of Cornell University, where he received a bachelor's degree in Hotel Administration.
Todd V. Krizelman. Mr. Krizelman co-founded the Company in the fall of 1994. He is Co-Chief Executive Officer and Co-President of the Company and has served in various capacities with the Company since its founding. Mr. Krizelman graduated from Cornell University in 1996, where he received a bachelor's degree in Biology.
Stephan J. Paternot. Mr. Paternot co-founded the Company in the fall of 1994. He is Co-Chief Executive Officer, Co-President and Secretary of the Company and has served in various capacities with the Company since its founding. Mr. Paternot graduated from Cornell University in 1996, where he received bachelor's degrees in Business and Computer Science.
Edward A. Cespedes. Mr. Cespedes was appointed Vice President of Corporate Development in July 1998 and has served as a director of the Company since August 1997. As Vice President for Corporate Development, Mr. Cespedes has primary responsibility for corporate development opportunities including mergers and acquisitions. Mr. Cespedes is also a Managing Director of Dancing Bear Investments. Mr. Cespedes joined Dancing Bear Investments at its inception in 1996, where his responsibilities include venture capital investments, mergers and acquisitions and finance. Prior to joining Dancing Bear Investments, Mr. Cespedes served as Director of Corporate Finance for Alamo in 1996, where he was responsible for general corporate finance in the United States and in Europe. From 1988 to 1996, Mr. Cespedes worked in the Investment Banking Division of J.P. Morgan & Company, where he most recently focused on mergers and acquisitions. Mr. Cespedes also serves on the board of directors of AutobyInternet. Mr. Cespedes received a bachelor's degree in International Relations from Columbia University.
Francis T. Joyce. Mr. Joyce was appointed Vice President, Chief Financial Officer and Treasurer of the Company in July 1998. From 1997 until joining the Company, Mr. Joyce served as Chief Financial Officer of the Reed Travel Group, a division of Reed Elsevier Plc, which is an international publisher of travel information. From 1994 to 1997, Mr. Joyce was the Chief Financial Officer at Alexander Consulting Group, a division of Alexander & Alexander Services, Inc., an international professional services firm, which included a human resources consulting firm, an insurance brokerage unit and an executive planning life insurance unit. From 1988 to 1994, Mr. Joyce worked as a Senior Vice President and controller at Bates Worldwide, a division of Saatchi & Saatchi Co., an advertising firm. Mr. Joyce received a Bachelor of Science in Accounting from the University of Scranton and a Master of Business Administration from Fordham University. He is a Certified Public Accountant.
Rosalie V. Arthur. Ms. Arthur has served as a director of the Company since August 1997. Ms. Arthur is a Senior Managing Director and Vice President of Mergers and Acquisitions of Dancing Bear Investments. She currently serves on the Board of Directors of Dancing Bear Investments and several of its affiliated companies. She also served on the Board of Directors of Alamo Rent-A-Car and affiliated entities and Nantucket Nectars. Prior to joining Dancing Bear Investments, she served as Chief of Staff and Financial Counselor to the Chairman of Alamo from 1986 to 1996, when the Company was sold. Ms. Arthur was the Manager of Financial Reporting at Sensormatic Electronics Corporation from 1984 to 1986 and worked in the audit department of KPMG Peat Marwick from 1980 to 1984. Ms. Arthur received her Bachelor of Science in Accounting from the University of South Florida. She is a Certified Public Accountant.
Robert M. Halperin. Mr. Halperin has served as a director of the Company since 1995. He has acted as an advisor to Greylock Management, a venture capital firm, for the past five years. He is a member of the board of directors of Avid Technology, Inc. In addition, Mr. Halperin serves on the Board of Directors of the Associates of Harvard Business School, the Harvard Business School Publishing Co. and Stanford Health Services and also is a Life Trustee of the University of Chicago. He is the former Vice Chairman of Raychem Corporation's Board of Directors and also served as its President and Chief Operating Officer. Mr. Halperin joined Raychem Corporation in 1957. Mr. Halperin received a master of business administration degree from Harvard Business School, and he earned a bachelor's degree in liberal arts from the University of Chicago and a bachelor's degree in Mechanical Engineering from Cornell University.
David Horowitz. Mr. Horowitz has served as a Director of the Company since December 1995. He has acted as an investor and consultant in the media and communications industries for at least the past five years, and as a consultant to the American Society of Composers, Authors and Publishers, and a Lecturer at the Columbia University School of Law. From 1973 to 1984, Mr. Horowitz was an officer and director of Warner Communications, Inc., and until 1985 he was President and CEO of MTV Networks, Inc. Mr. Horowitz is a graduate of Columbia University, where he received a bachelor's degree, and is a graduate of Columbia Law School.
H. Wayne Huizenga. Mr. Huizenga has served as a director of the Company since July 1998. Mr. Huizenga has served as the Chairman of the Board of Republic Industries, Inc. since August 1995, as its Co-Chief Executive Officer since October 1996 and as its Chief Executive Officer from August 1995 until October 1996. Mr. Huizenga also serves as the Chairman of the Board and Chief Executive Officer of Republic Services, Inc., as the Chairman of the Board of Florida Panthers Holdings, Inc. and as the Chairman of the Board of Extended Stay America, Inc. From September 1994 until October 1995, Mr. Huizenga served as the Vice Chairman of Viacom Inc. ("Viacom"), and as the Chairman of the Board of Blockbuster Entertainment Group ("Blockbuster"), a division of Viacom. From April 1987 through September 1994, Mr. Huizenga served as the Chairman of the Board and Chief Executive Officer of Blockbuster. In September 1994, Blockbuster merged into Viacom. In 1971, Mr. Huizenga co-founded Waste Management, Inc. and served in various capacities, including President, Chief Operating Officer and a director from its inception until 1984. Mr. Huizenga also owns or controls the Miami Dolphins and Florida Marlins professional sports franchises, as well as Pro Player Stadium, in South Florida.
The Company currently intends to appoint an additional member to the Board of Directors. This Board member will be a nominee of Michael S. Egan.
Key Employees
The following table sets forth the names and positions of the Company's key employees.
Name Position ---- -------- Susan Berkowitz Director of Sales and Marketing Vance Huntley Director of Technology Esther Loewy Director of Communications Will Margiloff Director of Advertising Sales David Tonkin Director of Human Resources |
Susan Berkowitz. Ms. Berkowitz joined theglobe.com in 1996 as Director of Sales and Marketing. Before joining theglobe.com, Ms. Berkowitz was the Director of Media Ventures at SPIN Magazine from 1994 to 1996. Prior to that time, Ms. Berkowitz was hired to build a new worldwide Entertainment Marketing division for J. Walter Thompson from 1993 to 1994. Prior to that time, Ms. Berkowitz was a Vice President at Chase Manhattan Bank in the Real Estate Investment Banking division from 1987 to 1993.
Vance Huntley. Vance Huntley joined theglobe.com in 1995 as Director of Technology. Between 1991 and 1994 Mr. Huntley held software development positions with Delta-Epsilon Software and the Cornell Institute of Social Economic Research. In 1994 Mr. Huntley developed a Transmission Electron Microscopy simulation for the Cornell Materials Science Center while completing his BS in the Applied & Engineering Physics program at Cornell University. In 1990, Mr. Huntley wrote simulation software at the Lawrence Livermore National Laboratory Supercomputing Center.
Esther Loewy. Ms. Loewy joined theglobe.com in May 1997 as Director of Communications. As such, Ms. Loewy is responsible for managing the in-house communications department for the Company as well as the direction of theglobe.com's media and public relations. Before joining theglobe.com, Ms. Loewy was a consultant for the @Cafe in New York and other media companies from 1995 to 1997. From 1992 to 1995 Ms. Loewy was a Senior Account Executive at Charles Levine Communication.
Will Margiloff. Mr. Margiloff joined theglobe.com in March 1998 as Director of Advertising Sales. Mr. Margiloff is responsible for the management and direction of theglobe.com's sales force in New York and San Francisco, as well as the expansion of the Company's advertising efforts both domestically and internationally. Before joining theglobe.com, from 1997 to 1998 Mr. Margiloff was the Vice President of East Coast Sales for 24/7 Media. From 1995 to 1998 Mr. Margiloff held the senior sales management position at software site Jumbo!
David Tonkin. Mr. Tonkin joined theglobe.com in May 1998 as Director of Human Resources. Mr. Tonkin is responsible for managing the recruiting, hiring and human resource administration of all employees at theglobe.com. Before joining theglobe.com, from 1995 to 1998 Mr. Tonkin worked as a Senior Resource Manager for Knowledge Transfer International, responsible for recruiting, developing and managing consulting staffing services. Prior to that time, from 1994 to 1995, Mr. Tonkin worked as Human Resource Manager for NightRider (Alco Management Service). From 1993 to 1994 Mr. Tonkin worked as Operations Manager for Premier Shoe Company.
Board Committees
The Audit Committee of the Board of Directors reviews and monitors the corporate financial reporting and the internal and external audits of the Company, including, among other things, the Company's control functions, the results and scope of the annual audit and other services provided by the Company's independent accountants, and the Company's compliance with legal matters that have a significant impact on the Company's financial condition. The Audit Committee will consult with the Company's management and the Company's independent accountants prior to the presentation of financial statements to stockholders and, as appropriate, initiates inquiries into aspects of the Company's financial affairs. In addition, the Audit Committee has the responsibility to consider and recommend the appointment of, and to review fee arrangements with, the Company's independent accountants. The current members of the Audit Committee are Messrs. Halperin and Horowitz and Ms. Arthur.
The Compensation Committee of the Board of Directors reviews and makes recommendations to the Board regarding the Company's compensation policies and all forms of compensation to be provided to executive officers and directors of the Company, including, among other things, annual salaries and bonuses and stock option and other incentive compensation arrangements of the Company. In addition, the Compensation Committee reviews bonus and stock compensation arrangements for all other employees of the Company. The current members of the Compensation Committee are Messrs. Egan, Halperin and Horowitz and Ms. Arthur. Prior to July 15, 1998, the Compensation Committee consisted of Messrs. Egan, Halperin, Krizelman and Paternot. Stock option grants will be approved, at the election of the Compensation Committee, by either the entire Board or a subcommittee of the Compensation Committee consisting of Messrs. Horowitz and Halperin.
The Nominating Committee of the Board of Directors makes recommendations to the Board of Directors regarding nominees for the Board of Directors. The current members of the Nominating Committee are Messrs. Egan, Krizelman and Paternot and Ms. Arthur.
Executive Officers
Executive officers of the Company are appointed by the Board of Directors and serve at the discretion of the Board of Directors.
Directors' Compensation
Directors who are also employees of the Company receive no compensation for serving on the Board of Directors. With respect to Directors who are not employees of the Company ("Non-Employee Directors"), the Company intends to reimburse such directors for all travel and other expenses incurred in connection with attending such Board of Directors and committee meetings. Non-Employee Directors are also eligible to receive automatic stock option grants under the 1998 Plan. The 1998 Plan provides that each eligible Non-Employee Director as of July 13, 1998 will receive an initial grant of options to acquire 50,000 shares of Common Stock, and each Director who becomes an eligible Non-Employee Director after such date will receive an initial grant of options to acquire 25,000 shares of Common Stock. In addition, each eligible Non-Employee Director will receive an annual grant of options to acquire 7,500 shares of Common Stock on the first business day following each of the Company's annual meeting of shareholders that occurs while the 1998 Plan is in effect. All such stock options will be granted with per share exercise prices equal to the fair market value of the Common Stock as of the date of grant.
Executive Compensation
The following table sets forth information concerning compensation for services in all capacities awarded to, earned by or paid to the Company's Co-Chief Executive Officers (collectively, the "Named Executives") during the year ended December 31, 1997:
SUMMARY COMPENSATION TABLE (1)
Long-Term
Compensation
------------
Number of
Securities
Underlying
Annual Compensation Securities
------------------- Underlying
Bonus Options All Other
Name and Principal Position Salary($) ($) (#) Compensation($)(2)
--------------------------- -------- ------ ----------- -----------------
Todd V. Krizelman, $76,000 $18,750 289,951 $500,000
Co-Chief Executive
Officer and Co-President
Stephan J. Paternot, $76,000 $18,750 289,951 $500,000
Co-Chief Executive Officer,
Co-President and Secretary
----------------------
|
(1) The Company did not have any other executive officers during this period.
(2) Reflects a one-time payment of $500,000 associated with the Company's sale of Preferred Stock and Warrants to Dancing Bear Investments in August 1997.
1997 YEAR END OPTION VALUES (1)
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options Options at Fiscal
at Fiscal Year-End (#) Year-End ($)(2)
---------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---------------------- ----------- ------------- ----------- -------------
Todd V. Krizelman 50,000 289,951 $68,000 $295,750
Stephan J. Paternot 50,000 289,951 $68,000 $295,750
|
(1) The Named Executives did not exercise any options in 1997.
(2) Based on a per share fair market value of Common Stock equal to $ , as of December 31, 1998.
OPTIONS GRANTS IN 1997
Potential
Realizable Value
at Assumed Rates
Number of Percent Exercise of Stock Price
Securities of Options or Appreciation for
Underlying Granted to Base Option Term (1)
|
Todd V. Krizelman 289,951 37% $0.35 May 2007 $172,348 $438,705 Stephan J. Paternot 289,951 37% $0.35 May 2007 $172,348 $438,705
Employment Agreements
On August 13, 1997, the Company entered into employment agreements (each a "Chief Executive Employment Agreement") with Todd V. Krizelman and Stephan J. Paternot. Pursuant to the terms of each Chief Executive Employment Agreement, each individual will be employed as an Executive (as defined therein) of the Company. Each Chief Executive Employment Agreement provides for an annual base salary of $125,000 with eligibility to receive annual increases amounting to no less than 15% of the Executive's then-base salary. Pursuant to the Chief Executive Employment Agreements, each of the Executives also received a one-time payment of $500,000 associated with the sale of Preferred Stock and Warrants to Dancing Bear Investments, and are entitled to an annual cash bonus, which will be assessed at the Board's discretion and upon the achievement of target performance objectives set forth in the Company's budget. Each Executive is also entitled to participate in the stock option plans of the Company as well as all health, welfare, and other benefit plans provided by the Company to its most senior executives.
Each of the Chief Executive Employment Agreements is for a term expiring August 13, 2002, unless terminated for Cause (as defined in each Chief Executive Employment Agreement) or Disability (as defined in each Chief Executive Employment Agreement). Each of the Chief Executive Employment Agreements provides that, in the event of termination by the Company without Cause, the Executive will be entitled to receive from the Company: (i) any accrued and unpaid base salary, (ii) reimbursement for any reasonable and necessary monies advanced or expenses incurred in connection with the Executive's employment, (iii) a pro-rata portion of the annual bonus for the year of termination and (iv) for one year following such termination or the remainder of the term of the Chief Executive Employment Agreement, whichever is less, continued salary payments and employee benefits. In addition, termination without Cause automatically triggers the vesting of all stock options held by the Executive.
In the event of a Change in Control (as defined in the Chief Executive Employment Agreement) or a dissolution of the Company, each Executive may elect to terminate his employment by delivering a notice within 60 days to the Company and receive (i) any accrued and unpaid base salary as of the termination date and (ii) an amount reimbursing the Executive for expenses incurred on behalf of the Company prior to the termination date.
Each Chief Executive Employment Agreement contains a covenant not to compete with the Company for a period of five years from the date of each Chief Executive Employment Agreement or, in the case of termination without Cause or after a Change in Control, the earlier of a period of one year immediately following termination of employment or five years from the consummation of this Offering.
On July 13, 1998, the Company entered into an Employment Agreement with Francis T. Joyce (the "Joyce Employment Agreement"). Pursuant to the terms of the Joyce Employment Agreement, he will be employed as Chief Financial Officer ("CFO") of the Company. The Joyce Employment Agreement provides for an annual base salary of not less than $200,000 per year with eligibility to receive annual increases in base salary as determined by the Co-Chief Executive Officers and Co-Presidents of the Company. Mr. Joyce will also receive an annual cash bonus of $50,000. Mr. Joyce shall be granted stock options (the "Options") to purchase 175,000 shares of Common Stock, with an exercise price per share equal to the fair market value per share of Common Stock as of the date of the grant (which shall be 15% below the initial public offering price.) The Joyce Employment Agreement also provides for the grant of additional options upon the Company's attainment of certain financial targets in the 1999 and 2000 fiscal years of the Company. The Options shall vest with respect to one-third of the shares subject thereto on each of the first three anniversaries of the date of grant.
The Joyce Employment Agreement is for a term expiring on July 13, 2001, unless terminated for Cause (as defined in the Joyce Employment Agreement) or Disability (as defined in the Joyce Employment Agreement). The Joyce Employment Agreement provides that, in the event of termination by the Company without Cause, Mr. Joyce will be entitled to receive from the Company (i) any accrued and unpaid base salary (as of the termination date) and salary continuation during a non-competition period following termination which will be six months (or one year, if the Company elects to pay Mr. Joyce his salary during such period), (ii) reimbursement for any and all monies advanced or expenses incurred in connection with his employment, and (iii) a pro-rata portion of the annual bonus for the year of termination. In addition termination without Cause automatically triggers the vesting of all stock options held by Mr. Joyce that have not yet vested.
The Joyce Employment Agreement contains a covenant not to compete with the Company for a period of from six months (or one year, if the Company elects to pay Mr. Joyce his salary during such period) from the date of the Joyce Employment Agreement's termination.
1998 Stock Option Plan
The Company's 1998 Stock Option Plan (the "1998 Plan") was adopted by
the Board of Directors on July 15, 1998, and approved by the stockholders
of the Company as of July 15, 1998. The 1998 Plan provides for the grant of
"incentive stock options" intended to qualify under Section 422 of the Code
and stock options which do not so qualify. The granting of incentive stock
options is subject to limitation as set forth in the 1998 Plan. Directors,
officers, employees and consultants of the Company and its subsidiaries are
eligible to receive grants under the 1998 Plan. The 1998 Plan is designed
to comply with the requirements for "performance-based compensation" under
Section 162(m) of the Code, and the conditions for exemption from the
short-swing profit recovery rules under Rule 16b-3 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
The purpose of the 1998 Plan is to strengthen the Company by providing an incentive to its directors, officers, employees and consultants and thereby encouraging them to devote their abilities and industry to the success of the Company's business enterprise. Options may be granted by the Board or Committee (as defined below) in its discretion to directors, officers, employees and consultants of the Company and its subsidiaries. In addition, directors of the Company who are not also employees of the Company or any of its subsidiaries are eligible to receive automatic formula option grants as provided in the 1998 Plan. Such formula option grants include an initial grant of options to acquire 50,000 shares to the eligible non-employee directors who served on the Board as of July 15, 1998 (25,000 shares to eligible non-employee directors who become directors for the first time after July 15, 1998) as well as annual grants of options to acquire 7,500 shares to eligible non-employee directors on the day following each annual shareholders meeting while the 1998 Plan is in effect. The terms and conditions of such options are set forth in the 1998 Plan.
The 1998 Plan authorizes for issuance 1,800,000 shares of Common Stock, subject to adjustment as provided in the 1998 Plan. As of July 15, 1998, the Board of Directors approved for grant 200,000 options to each of Messrs. Krizelman and Paternot and 50,000 options to Mr. Cespedes. One-quarter of Mr. Cespedes' options are immediately vested. Additionally, the Company intends to grant, subject to Board of Directors or Committee approval, 200,000 options to Mr. Egan in connection with his appointment as an officer in the Company. Options will be granted by the Board of Directors or a committee (the "Committee") of the Board of Directors comprised of two or more "non-employee directors" within the meaning of Rule 16b-3, and unless otherwise determined by the Board of the Directors, "outside directors" within the meaning of Section 162(m), which will administer the 1998 Plan. See "-- Board Committees." No individual may be granted options with respect to more than a total of 500,000 shares during any three consecutive calendar year period under the 1998 Plan. Shares of Common Stock subject to the 1998 Plan may either be authorized and unissued shares or previously issued shares acquired or to be acquired by the Company and held in its treasury. Subject to the terms of the 1998 Plan, the Committee has the right to grant options to eligible participants and to determine the terms and conditions of option agreements, including the vesting schedule and exercise price of such options. The 1998 Plan provides that the term of any option may not exceed ten years. In the event of a Change in Control (as defined in the 1998 Plan) all outstanding options will become immediately and fully vested. If a participant's employment (or service as a director) is terminated following a Change in Control, any options vested at such time will remain outstanding until the earlier of the first anniversary of such termination and the expiration of the option term.
In order to prevent dilution or enlargement of the rights of participants, the 1998 Plan permits the Committee to make adjustments to the aggregate number of shares subject to the 1998 Plan or any option, and to the purchase price to be paid or the amount to be received in connection with the realization of any option, upon the occurrence of certain events as described in the 1998 Plan.
1995 Stock Option Plan
The Company's 1995 Stock Option Plan, as amended (the "1995 Plan"), was adopted by the Board of Directors on May 26, 1995. The 1995 Plan provides for the grant of incentive stock options and non-qualified stock options. Directors, employees and consultants of the Company and its affiliates are eligible to receive grants under the 1995 Plan. The 1995 Plan authorizes for issuance 1,582,000 shares of Common Stock, subject to adjustment as provided in the 1995 Plan. As of June 30, 1998, options relating to approximately 1,425,941 shares of Common Stock are outstanding under the 1995 Plan and approximately 12,001 shares remain subject to future option grants. The remaining options under the 1995 Plan may be granted by Messrs. Krizelman and Paternot pursuant to the terms of the 1995 Plan. The Company currently intends to grant 500 options to each of its employees currently employed by the Company and who have served prior to January 1, 1998 and 200 options to each of its employees currently employed by the Company whose employment commenced after January 1, 1998.
401(k) Savings Plan
theglobe.com has established a savings and profit-sharing plan that qualifies as a tax-deferred saving plan under Section 401(k) of the Internal Revenue Code (the "Savings Plan") for certain eligible employees of theglobe.com. Under the Savings Plan, participants may contribute up to 15% of their eligible compensation, up to $10,000, in any year on a pre-tax basis. Such employee contributions are fully-vested at all times. In addition, theglobe.com may, in its discretion, make additional contributions on behalf of participants. All amounts contributed under the Savings Plan are invested in one or more investment accounts administered by the plan administrator.
Stock Incentive Plan
The Company intends, subject to final approval of the Board of Directors, to issue shares of Common Stock to the Company's Community Leaders under a stock incentive plan. Immediately following the execution of the Underwriting Agreement, each of the Company's Community Leaders, as of July 23, 1998, will be issued fully vested shares of Common Stock (approximately in the aggregate), contingent upon the closing of the Offering.
Compensation Committee Interlocks and Insider Participation
On July 15, 1998, Michael Egan, Robert M. Halperin, David Horowitz and Rosalie Arthur were appointed as members of the Compensation Committee. Prior to such date, the Compensation Committee was comprised of Messrs. Egan, Halperin, Krizelman and Paternot. Mr. Egan will, effective as of July 22, 1998, also serve as an executive officer of the Company in his role as Chairman. Mr. Egan is also the controlling investor of Dancing Bear Investments, and Ms. Arthur is a Senior Managing Director of Dancing Bear Investments. See "Certain Relationships and Related Transactions - Arrangements with Entities Controlled by Michael Egan." It is contemplated that Mr. Egan will not receive salary or bonus from the Company, however the Board of Directors approved a grant of stock options covering 200,000 shares of Common Stock under the Company's 1998 Stock Option Plan, as consideration for his performance of services in his capacity as an executive officer. In the past fiscal year, Mr. Egan has served as a director of AutobyInternet and Certified Vacations, entities with which the Company has recently begun e-commerce arrangements.
Key Man Insurance
The Company does not have and currently does not intend to purchase key man insurance.
Indemnification Agreements
The Company has entered into indemnification agreements with its directors and officers. These agreements provide, in general, that the Company shall indemnify and hold harmless such directors and officers to the fullest extent permitted by law against any judgments, fines, amounts paid in settlement, and expenses (including attorneys' fees and disbursements) incurred in connection with, or in any way arising out of, any claim, action or proceeding (whether civil or criminal) against, or affecting, such directors and officers resulting from, relating to or in any way arising out of, the service of such directors and officers as directors and officers of the Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Arrangements with Entities Controlled by Michael Egan
The Company has recently entered into an e-commerce contract with AutobyInternet, an entity controlled by Michael S. Egan, pursuant to which the Company will pay AutobyInternet a fee for every new subscribing member of theglobe.com referred to the Company by AutobyInternet. In addition, the Company has entered into an e-commerce arrangement with Certified Vacations, another entity controlled by Michael Egan. As of June 30, 1998, the Company had not paid any fees to AutobyInternet or received any revenues from Certified Vacations.
Voting Agreement
Messrs. Egan, Krizelman and Paternot expect to enter into a Voting Agreement pursuant to which Mr. Egan agrees to vote for certain nominees of Messrs. Krizelman and Paternot to the Board of Directors and Messrs. Krizelman and Paternot agree to vote for Mr. Egan's nominees to the Board, who will represent a majority of the Board. Additionally, pursuant to the terms of the Voting Trust Agreement, Messrs. Krizelman and Paternot have agreed to contribute any shares which may be acquired by them pursuant to exercise of outstanding Warrants transferred to each of them by Dancing Bear Investments to a voting trust controlled by Michael S. Egan. Such shares will be voted by Michael S. Egan and will be subject to restrictions on transfer for a period of years. The Voting Trust Agreement will also provide that Messrs. Egan, Krizelman and Paternot will be subject to certain "tag-along" and "drag-along" rights in connection with any private sale of securities of the Company after the Offering.
Transactions with Directors, Officers and 5% Stockholders
Since the Company's inception, the Company has raised capital primarily through the sale of shares of its Preferred Stock. The following table summarizes the shares of Common Stock and Preferred Stock purchased for greater than $60,000 by executive officers, directors and 5% stockholders of the Company and persons associated with them since the Company's inception.
Executive Preferred Stock Officers, -------------------------------------------------- Directors and Common 5% Stockholders Stock Series A Series B Series C Series D(1) SeriesE(2) --------------- -------- -------- -------- -------- ----------- ---------- Dancing Bear(3) 51 10 Investments, Inc. Michael S.Egan(4) 51 10 Robert M. Halperin(5) 47,620 12,500 David Horowitz(6) 100,000 25,000 -------------------- |
(1) Convertible into 8,047,529 shares of Common Stock.
(2) Represents Warrants to purchase 10 shares of Series E Preferred Stock prior to the Offering and an aggregate of 4,046,018 shares of Common Stock after the Offering.
(3) Dancing Bear Investments paid $20 million for its initial investment in the Series D Preferred Stock and the Warrants.
(4) Includes the shares that Mr. Egan is deemed to beneficially own as the controlling investor of Dancing Bear Investments.
(5) Mr. Halperin paid $25,000.50 and $25,000 for his Series B and Series C Preferred Stock issued in December 1995 and , respectively.
(6) Mr. Horowitz paid $52,000 and $50,000 for his Series B and Series C Preferred Stock issued in December 1995 and , respectively.
All of the directors and executive officers of the Company are also parties to registration rights agreements with the Company which are described under "Description of Capital Stock--Registration Rights." The Company also has entered into indemnification agreements with its directors and officers. See "Management--Indemnification Agreements."
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of July 24, 1998 and as adjusted to reflect the sale of shares offered by the Company hereunder, certain information with respect to the beneficial ownership of the Common Stock of the Company by (i) each person known to the Company to own 5% or more of the outstanding shares of Common Stock, (ii) each of the Company's directors, (iii) each of the Company's executive officers, and (iv) all of the directors and executive officers as a group.
The percentages of total shares of Common Stock set forth below assume that only the indicated person or group has exercised options and warrants which are exercisable within 60 days of July 24, 1998 and do not reflect the percentage of Common Stock which would be calculated if all other holders of currently exercisable options or Warrants had exercised their securities. See footnote 1 below.
Percentage of Total Shares
Shares of Common Stock
Beneficially ------------------
Name Owned (1) Before Offering After Offering
---- ------------ ---------------- --------------
Dancing Bear Investments, 12,273,547 69.9%
Inc. (2)
333 East Las Olas Blvd.
Ft. Lauderdale, FL
Michael S. Egan(3) 12,286,047 69.9
Todd V. Krizelman(4) 1,489,886 10.9
Stephan J. Paternot(5) 1,594,976 11.6
Edward A. Cespedes(6) 62,500 * *
Francis T. Joyce(7) 0 *
Rosalie V. Arthur(8) 62,500 * *
Robert M. Halperin(9) 164,981 1.2
David Horowitz(10) 188,889 1.4
H. Wayne Huizenga(11) 12,500 * *
All directors and 15,862,279 85.5%
executive officers as a
group
(9 persons) (12)
-----------------------
|
*Less than one percent.
(1) Beneficial ownership is determined in accordance with rules of the Securities and Exchange Commission (the "SEC"). In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of Common Stock options or Warrants held by that person that are currently exercisable or exercisable within 60 days of July 24, 1998 are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of each other person.
(2) Includes: (a) 51 shares of Series D Preferred Stock, which will be converted into an aggregate of 8,047,529 shares of Common Stock upon consummation of the Offering, (b) 3,726,018 shares of Common Stock issuable following consummation of the Offering upon exercise of Warrants and (c) 500,000 shares of Common Stock issuable following consummation of the Offering, upon exercise of Warrants held by persons other than Dancing Bear Investments but as to which Dancing Bear Investments will have voting power upon exercise pursuant to a Voting Trust Agreement.
(3) Includes the following shares that Mr. Egan is deemed to beneficially own as the controlling investor of Dancing Bear Investments: (a) 51 shares of Series D Preferred Stock, which will be converted into an aggregate of 8,047,529 shares of Common Stock upon consummation of the Offering, and (b) 3,726,018 shares of Common Stock issuable, following consummation of the Offering, upon exercise of Warrants, and (c) 500,000 shares of Common Stock issuable following consummation of the Offering, upon exercise of Warrants held by persons other than Mr. Egan but as to which Mr. Egan will have voting power upon exercise pursuant to a Voting Trust Agreement. Excludes 200,000 shares subject to options that will not be exercisable within 60 days of July 24, 1998.
(4) Includes (a) 44,910 shares of Series A Preferred Stock, which will be converted into an equal number of shares of Common Stock upon consummation of the Offering, (b) 194,976 shares of Common Stock subject to options that are currently exercisable and (c) 200,000 shares of Common Stock issuable following consummation of the Offering upon exercise of Warrants. Excludes 364,975 shares subject to options that will not be exercisable within 60 days of July 24, 1998.
(5) Includes 194,976 shares of Common Stock subject to options that are currently exercisable and 200,000 shares of Common Stock issuable following consummation of the Offering upon exercise of Warrants. Excludes 364,975 shares subject to options that will not be exercisable within 60 days of July 24, 1998.
(6) Includes 12,500 shares of Common Stock subject to options that are currently exercisable, and 50,000 shares of Common Stock issuable following consummation of the Offering upon exercise of Warrants. Excludes 37,500 shares subject to options that will not be exercisable within 60 days of July 24, 1998.
(7) Excludes 225,000 share of Common Stock subject to options that will not be exercisable within 60 days of July 24, 1998.
(8) Includes 12,500 shares of Common Stock subject to options that are currently exercisable, and 50,000 shares of Common Stock issuable following consummation of the Offering upon exercise of Warrants. Excludes 37,500 shares subject to options that will not be exercisable within 60 days of July 24, 1998 and shares held by Dancing Bear Investments (see footnote 2 above) for which Ms. Arthur serves as an officer and a director, and as to which Ms. Arthur disclaims beneficial ownership.
(9) Includes 47,620 shares of Series B Preferred Stock, and 12,500 shares of Series C Preferred Stock, each convertible into an equal number of shares of Common Stock, and 19,344 shares of Common Stock subject to options that are currently exercisable. Excludes 95,139 shares of Common Stock subject to options that are not currently exercisable. Includes 180,360 shares of Common Stock owned by Mr. Halperin's children for which he has a power of attorney but as to which he disclaims beneficial ownership.
(10) Includes 100,000 shares of Series B Preferred Stock and 25,000 shares of Series C Preferred Stock, each convertible into an equal number of shares of Common Stock, and 31,945 shares of Common Stock subject to options that are currently exercisable. Excludes 86,111 shares of Common Stock subject to options that are not currently exercisable.
(11) Includes 12,500 shares subject to options that are exercisable within 60 days of July 24, 1998. Excludes 37,500 shares subject to options that are not exercisable within 60 days of July 24, 1998.
(12) See footnotes 3 through 11 above.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital consists of 100 million shares of Common Stock and three million shares of Preferred Stock, par value $.001 per share (the "Preferred Stock"). As of June 30, 1998, there were 2,308,541 shares of Common Stock outstanding and 2,899,991 shares of Preferred Stock outstanding (which may be convertible into shares of Common Stock at any time).
The Company's Stockholders have approved the Second Amended and Restated Certificate of Incorporation (the "Certificate"). The following descriptions of the Company's capital stock do not purport to be complete and are subject to and qualified in their entirety by the provisions of the Company's Certificate and By-Laws, which are included as exhibits to the Registration Statement of which this Prospectus is a part, and by the provisions of applicable law.
Common Stock
Following this Offering, approximately shares of Common Stock will be outstanding. All of the issued and outstanding shares of Common Stock are, and upon the completion of this Offering the shares of Common Stock offered hereby will be, fully paid and non-assessable. Each holder of shares of Common Stock is entitled to one vote per share on all matters to be voted on by stockholders generally, including the election of directors. There are no cumulative voting rights. The holders of Common Stock are entitled to dividends and other distributions as may be declared from time to time by the Board of Directors out of funds legally available therefor, if any. See "Dividend Policy." Upon the liquidation, dissolution or winding up of the Company, the holders of shares of Common Stock would be entitled to share ratably in the distribution of all of the Company's assets remaining available for distribution after satisfaction of all its liabilities and the payment of the liquidation preference of any outstanding Preferred Stock as described below. The holders of Common Stock have no preemptive or other subscription rights to purchase shares of stock of the Company, nor are such holders entitled to the benefits of any redemption or sinking fund provisions.
Preferred Stock
As of June 30, 1998, the Company has 2,900,001 shares of Preferred Stock, divided into Series A, Series B, Series C, Series D and Series E. Shares of each series of Preferred Stock are convertible into Common Stock, subject to anti-dilution adjustments, and will automatically convert into Common Stock concurrent with the closing of the Offering (subject to anti-dilution adjustments). Additionally, the holders of shares of each series of Preferred Stock may currently elect to convert each series to Common Stock by a majority vote of the outstanding shares in that series. Further, currently each share of Series A Preferred Stock shall automatically convert to Common Stock upon the conversion into shares of Common Stock of all outstanding shares of Series B Preferred Stock and Series C Preferred Stock. If the Company issues additional shares of Common Stock for per share consideration of less than $0.10, $0.525 and $2.00 for the Series A, Series B and Series C Preferred Stock, respectively, anti-dilution adjustments will be made. Assuming that the conditions to the Automatic Conversion are satisfied, following the closing of this Offering, no shares of Preferred Stock will remain outstanding. The Board of Directors has the authority, without further action by the stockholders, to issue the Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences and the number of shares constituting any series or the designation of such series. Preferred Stock could thus be issued quickly with terms calculated to delay or prevent a change of control of the Company or to serve as an entrenchment device for incumbent management. The issuance of Preferred Stock may have the effect of decreasing the market price of the Common Stock, and may adversely affect the voting and other rights of the holders of Common Stock.
Warrants
As of June 30, 1998, the Company has issued and outstanding Warrants to purchase 10 shares of Series E Preferred Stock, each convertible into one percent of the fully diluted Common Stock, and having an exercise price of $ per share. Upon consummation of the Offering, the Series E Preferred Stock will be converted into Common Stock, and the Warrants will be exercisable into 4,046,018 shares of Common Stock (subject to certain anti-dilution adjustments) at an exercise price of approximately $1.45 per share. Prior to the Consummation of the Offering, a portion of the Warrants held by Dancing Bear Investments will be transferred to certain employees and directors of the Company. The Warrants may be exercised at any time on or before August 13, 2004. After expiration of the exercise period, the holder of the Warrants will have no future rights to exercise such Warrants.
Rights Agreement
The Board of Directors currently expects to adopt a Rights Agreement to be effective simultaneously with the consummation of the Offering. Pursuant to the Rights Agreement, the Board of Directors will declare a dividend of one preferred share purchase right (a "Right") for each outstanding share of Common Stock. Each Right will entitle the registered holder to purchase from the Company one one-thousandth of a share of a new series of junior preferred stock, par value $.01 per share (the "Junior Preferred Shares"), of the Company at a price of $ per share (the "Purchase Price"), subject to adjustment. The description and terms of the Rights will be set forth in a Rights Agreement between the Company and the designated Rights Agent. The description set forth below is intended as a summary only and is qualified in its entirety by reference to the form of the Rights Agreement, which will be filed as an exhibit to the Registration Statement. See "Available Information."
The Rights will be attached to all certificates representing outstanding shares of Common Stock, and no separate Right Certificates (as hereinafter defined) will be distributed. The Rights will separate from the shares of Common Stock on the earliest to occur of (i) the first date of public announcement that a person or "group" (other than Dancing Bear Investments, Michael S. Egan or any entity controlled by Michael S. Egan) has acquired beneficial ownership of securities having 15% or more of the voting power of all outstanding voting securities of the Company (as hereinafter defined), (ii) ten (10) business days (or such later date as the Board of Directors of the Company may determine) following the commencement of, or announcement of an intention to commence, a tender offer or exchange offer the consummation of which would result in a person or group becoming an Acquiring Person or (iii) twenty business days prior to the date on which a Transaction (as defined in the Rights Agreement) is reasonably expected to become effective or be consummated (the earliest of such dates being called the "Distribution Date"). A person or group whose acquisition of voting securities causes a Distribution Date pursuant to clause (i) above is an "Acquiring Person." The first date of public announcement that a person or group has become an Acquiring Person is the "Stock Acquisition Date."
The Rights Agreement will provide that until the Distribution Date the Rights will be transferred with and only with the shares of Common Stock. Until the Distribution Date (or earlier redemption or expiration of the Rights), new Common Stock certificates issued upon transfer or new issuance of shares of Common Stock will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption or expiration of the Rights), the surrender for transfer of any certificates for shares of Common Stock outstanding, even without such notation, will also constitute the transfer of the Rights associated with the shares of Common Stock represented by such certificate. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the shares of Common Stock as of the close of business on the Distribution Date (and to each initial record holder of certain shares of Common Stock issued after the Distribution Date), and such separate Right Certificates alone will evidence the Rights.
The Rights will not be exercisable until the Distribution Date and will expire at 5:00 P.M., New York, New York time, on the tenth anniversary of the date of issuance, unless earlier redeemed by the Company as described below.
In the event that any person becomes an Acquiring Person (except pursuant to a Permitted Offer as hereinafter defined), each holder of a Right will have (subject to the terms of the Rights Agreement) the right (the "Flip-In Right") to receive upon exercise the number of shares of Common Stock, or, in the discretion of the Board of Directors of the Company, the number of one one-thousandth of a share of Preferred Stock (or, in certain circumstances, other securities of the Company) having a value (immediately prior to such triggering event) equal to two times the Purchase Price. Notwithstanding the foregoing, following the occurrence of the event described above, all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person or any affiliate or associate thereof will be null and void. A "Permitted Offer" is a tender or exchange offer for all outstanding shares of Common Stock which is at a price and on terms determined, prior to the purchase of shares under such tender or exchange offer, by a majority of Disinterested Directors (as hereinafter defined) to be adequate (taking into account all factors that such Disinterested Directors deem relevant) and otherwise in the best interests of the Company and its stockholders (other than the person or any affiliate or associate thereof on whose basis the offer is being made) taking into account all factors that such Disinterested Directors may deem relevant. "Disinterested Directors" are directors of the Company who are not officers of the Company and who are not Acquiring Persons or affiliates or associates thereof, or representatives of any of them, or any person who was directly or indirectly proposed or nominated as a director of the Company by a Transaction Person (as defined in the Rights Agreement).
In the event that, at any time following the Stock Acquisition Date or, if a Transaction is proposed, the Distribution Date, (i) the Company is acquired in a merger or other business combination transaction in which the holders of all of the outstanding shares of Common Stock immediately prior to the consummation of the transaction are not the holders of all of the surviving corporation's voting power, or (ii) more than 50% of the Company's assets or earning power is sold or transferred, in either case with or to an Interested Stockholder, or, if in such transaction all holders of shares of Common Stock are not offered the same consideration, any other person, then each holder of a Right (except Rights which previously have been voided as set forth above) shall thereafter have the right (the "Flip-Over Right") to receive, upon exercise, shares of common stock of the acquiring company having a value equal to two times the Purchase Price. The holder of a Right will continue to have the Flip-Over Right whether or not such holder exercises or surrenders the Flip-In Right.
The Purchase Price payable, and the number of one-thousandths of a share of Preferred Stock or other securities issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the shares of Preferred Stock, (ii) upon the grant to holders of the shares of Preferred Stock of certain rights or warrants to subscribe for or purchase shares of Preferred Stock at a price, or securities convertible into shares of Preferred Stock with a conversion price, less than the then current market price of the shares of Preferred Stock or (iii) upon the distribution to holders of the shares of Preferred Stock of evidences of indebtedness or assets (excluding regular quarterly cash dividends) or of subscription rights or warrants (other than those referred to above).
The Purchase Price payable, and the number of one-thousandths of a share of Preferred Stock or other securities issuable, upon exercise of the Rights are also subject to adjustment in the event of a stock split of the shares of Common Stock, or a stock dividend on the shares of Common Stock payable in shares of Common Stock, or subdivisions, consolidations or combinations of the shares of Common Stock occurring, in any such case, prior to the Distribution Date.
With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. No fractional one-thousandths of a share of Preferred Stock will be issued, and in lieu thereof, an adjustment in cash will be made based on the market price of the shares of Preferred Stock on the last trading day prior to the date of exercise.
At any time prior to the earlier to occur of (i) a person becoming an Acquiring Person or (ii) the expiration of the Rights, the Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right (the "Redemption Price"), which redemption shall be effective upon the action of the Board of Directors of the Company. Additionally, the Company may redeem the then outstanding Rights in whole, but not in part, at the Redemption Price after the triggering of the Flip-In Right and before the expiration of any period during which the Flip-In Right may be exercised in connection with a merger or other business combination transaction or series of transactions involving the Company in which all holders of shares of Common Stock are not offered the same consideration but not involving a Transaction Person (as defined in the Rights Agreement), (ii) following an event giving rise to, and the expiration of the exercise period for, the Subscription Right if and for as long as no person beneficially owns securities representing 15% or more of the voting power of the Company's voting securities or (iii) if the Acquiring Person reduces his ownership below 5% in transactions not involving the Company. The redemption of Rights described in the preceding sentence shall be effective only as of such time when the Subscription Right is not exercisable, and in any event, only after 10 business days' prior notice. Upon the effective date of the redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price.
The shares of Preferred Stock purchasable upon exercise of the Rights will be non-redeemable and junior to any other series of preferred stock the Company may issue (unless otherwise provided in the terms of such stock). Each share of Preferred Stock will have a preferential quarterly dividend in an amount equal to 1,000 times the dividend declared on each share of Common Stock, but in no event less than $10. In the event of liquidation, the holders of Preferred Stock will receive a preferred liquidation payment equal to the greater of $1,000 or 1,000 times the payment made per each share of Common Stock. Each share of Preferred Stock will have 1,000 votes, voting together with the shares of Common Stock. In the event of any merger, consolidation or other transaction in which shares of Common Stock are exchanged, each share of Preferred Stock will be entitled to receive 1,000 times the amount and type of consideration received per share of Common Stock. The rights of the Preferred Stock as to dividends, liquidation and voting, and in the event of mergers and consolidations, are protected by customary anti-dilution provisions. Fractional shares of Preferred Stock will be issuable; however, the Company may elect to distribute depositary receipts in lieu of such fractional shares. In lieu of fractional shares other than fractions that are multiples of one two-hundredth of a share, an adjustment in cash will be made based on the market price of the Preferred Stock on the last trading date prior to the date of exercise.
In the event that a majority of the Board of Directors of the Company is comprised of persons elected at a meeting of stockholders who were not nominated by the Board of Directors in office immediately prior to such meeting (including successors of such persons elected to the Board of Directors), then for 365 days following such meeting, the Rights Agreement may not be amended and the Rights may not be redeemed if such amendment or redemption, as the case may be, is reasonably likely to facilitate a combination or sale, mortgage or other transfer of assets or earning power (a "Transaction") with a Transaction Person (as defined below). The Rights Agreement may not be amended and the Rights may not be redeemed thereafter if during such 365 day period the Company enters into any agreement reasonably likely to facilitate a Transaction with a Transaction Person and the amendment or redemption, as the case may be, is reasonably likely to facilitate a Transaction with a Transaction Person.
A "Transaction Person" with respect to a Transaction means (x) any Person who (i) is or will become an Acquiring Person or a Principal Party (as such term is defined in the Rights Agreement) if the Transaction were to be consummated and (ii) either (A) such Person directly or indirectly proposed or nominated a director of the Company which director is in office at the time of consideration of the Transaction, or (B) the Transaction with such Person was approved by persons elected to the Board of Directors with the objective, for the purpose or with the effect of facilitating a merger or consolidation of the Company, a sale, mortgage or transfer, in one or more transactions, of assets or earning power aggregating more than 50% of the assets or earning power of the Company and its subsidiaries (taken as a whole) or any transaction which would result in a Person becoming an Acquiring Person, or (y) an Affiliate or Associate of such a Person.
Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. While the distribution of the Rights will not be taxable to stockholders of the Company, stockholders may, depending upon the circumstances, recognize taxable income should the Rights become exercisable or upon the occurrence of certain events thereafter.
The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group of persons that attempts to acquire the Company on terms not approved by the Board of Directors. The Rights should not interfere with any merger or other business combination approved by the Board of Directors prior to the time that a person or group has acquired beneficial ownership of 15% or more of the Common Stock since the Rights may be redeemed by the Company at the Redemption Price until such time.
Registration Rights
Pursuant to the terms of the Investor Rights Agreement, dated as of August 13, 1997 (the "Investor Rights Agreement"), at any time following the Offering, holders of 25% of all of the Common Stock converted from Series B, Series C, Series D or Series E Preferred Stock, or issued as a dividend or distribution for the above-mentioned Preferred Stock (the "Registrable Securities"), or 50% of the Registrable Securities issued or issuable in respect of the Series B and Series C Preferred Stock have the right to require the Company to file a registration statement covering all or part of their shares up to four times at the Company's expense. Holders of shares of Common Stock (after giving effect to the conversion which will occur upon consummation of the Offering) have registration rights under the Investor Rights Agreement. The Company will not be obligated to register such shares if such holders propose to sell such securities at an aggregate price to the public of less than $5,000,000. The Company may defer registration for not more than 120 days if the Board of Directors determines that it would be seriously detrimental to the Company and its stockholders to register the shares at such time. An underwriter participating in the sale of the Registrable Securities may limit the number of shares offered, and such number shall be allocated to the holders of such securities on a pro rata basis. The Company is not required to effect more than one demand registration on behalf of such holders in any twelve calendar month period. The Company is not required in most cases to pay the registration expenses for any such demand registration that is subsequently withdrawn by the requesting Holders.
Holders of Registrable Securities have the right to include all or part of their Registrable Securities in a registration statement filed by the Company for purposes of a public offering (Piggyback Registration). The holders of a majority of Registrable Securities have amended the Investor Rights Agreement to waive any registration rights in connection with this Offering. An underwriter participating in such offering may limit the number of shares offered, and such number shall be allocated first to the Company, then to such holders on a pro rata basis, then to any stockholder on a pro rata basis. The Company has the right to terminate or withdraw any such registration and shall bear the expenses of any such withdrawn registration. The Company is not obligated further after it has effected five such registrations for any such holders.
Pursuant to the Investor Rights Agreement, holders of Registrable Securities have agreed with the Company to be subject to lock-up periods of not more than seven days prior to and 180 days following the date of this Prospectus and of not more than seven days prior to and 90 days following the effective date of any subsequent Prospectus. All registration rights terminate three years after the date of this Prospectus. Any right described in this section may be amended and waived by written consent of the Company and the holders of a majority of the Registerable Securities.
Pursuant to the terms of the Registration Rights Agreement by and among Dancing Bear Investments, the holders of Series A Preferred Stock, Messrs. Krizelman and Paternot and the Company, the Company has granted registration rights to such persons similar to the rights granted pursuant to the Investor Rights Agreement.
Limitation of Director Liability
The Certificate limits the liability of directors of the Company to
the Company and its stockholders to the fullest extent permitted by
Delaware law. Specifically, directors of the Company will not be personally
liable for money damages for breach of fiduciary duty as a director, except
for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General Corporation Law ("DGCL"),
which concerns unlawful payments of dividends, stock purchases or
redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit.
Delaware Law and Certain Charter and By-Laws Provisions
Delaware Law
The Company is subject to the provisions of Section 203 ("Section 203") of the DGCL. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or, in certain cases, within three years prior, did own) 15% or more of the corporation's voting stock. Under Section 203, a business combination between the Company and an interested stockholder is prohibited unless it satisfies one of the following conditions: (i) the Company's Board of Directors must have previously approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder, or (ii) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the Company outstanding at the time the transaction commenced (excluding, for purposes of determining the number of shares outstanding, shares owned by (a) persons who are directors and also officers and (b) employee stock plans, in certain instances) or (iii) the business combination is approved by the Board of Directors and authorized at an annual or special meeting of the stockholders by the affirmative vote of the holders of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder.
Special Meetings
The By-Laws provide that special meetings of stockholders for any purpose or purposes can be called only upon the request of the Chairman of the Board, the President, the Board of Directors, or the holders of shares entitled to at least a majority of the votes at the meeting.
Amendment of Company By-Laws
In order to adopt, repeal, alter or amend the provisions set forth therein, the By-Laws require either the affirmative vote of the holders of at least a majority of the voting power of all of the issued and outstanding shares of capital stock of the Corporation entitled to vote thereon or by the Board of Directors.
Advance Notice Provisions for Stockholder Nominations and Proposals
The By-Laws establish advance notice procedures for stockholders to make nominations of candidates for election as directors, or bring other business before an annual meeting of stockholders of the Company.
These procedures provide that only persons who are nominated by or at the direction of the Board of Directors, or by a stockholder who has given timely written notice to the Secretary of the Company prior to the meeting at which directors are to be elected, will be eligible for election as directors of the Company. Further, these procedures provide that at an annual meeting, only such business may be conducted as has been specified in the notice of the meeting given by, or at the direction of, the Board or by a stockholder who has given timely written notice to the Secretary of the Company of such stockholder's intention to bring such business before such meeting.
Under these procedures, notice of stockholder nominations to be made or business to be conducted at an annual meeting must be received by the Company not less than 60 days nor more than 90 days prior to the date of the meeting (or, if less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to the stockholders, the 10th day following the earlier of (i) the day such notice was mailed or (ii) the day such public disclosure was made). Under these procedures, notice of a stockholder nomination to be made at a special meeting at which directors are to be elected must be received by the Company not later than the close of business on the tenth day following the day on which such notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever occurs first.
Under the By-Laws, a stockholder's notice nominating a person for election as a director must contain certain information about the proposed nominee and the nominating stockholder. If the Chairman determines that a nomination was not made in accordance with the By-Laws, such nomination will be disregarded. Similarly, a stockholder's notice proposing the conduct of business must contain certain information about such business and about the proposing stockholder. If the Chairman determines that business was not properly brought before the meeting in accordance with the By-Laws, such business will not be conducted.
By requiring advance notice of nominations by stockholders, the By-Laws afford the Board an opportunity to consider the qualifications of the proposed nominee and, to the extent deemed necessary or desirable by the Board, to inform stockholders about such qualifications. By requiring advance notice of other proposed business, the By-Laws also provide an orderly procedure for conducting annual meetings of stockholders and, to the extent deemed necessary or desirable by the Board, provides the Board with an opportunity to inform stockholders, prior to such meetings, of any business proposed to be conducted at such meetings, together with any recommendations as to the Board's position regarding action to be taken with respect to such business, so that stockholders can better decide whether to attend such a meeting or to grant a proxy regarding the disposition of any such business.
Although the Certificate does not give the Board any power to approve or disapprove stockholder nominations of the election of directors or proposals for action, the foregoing provisions may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if the proper procedures are not followed, and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal, without regard to whether consideration of such nominees or proposals might be harmful or beneficial to the Company and its stockholders.
Written Consent Provisions
The By-Laws provide that any action required or permitted to be taken by the holders of capital stock at any meeting of stockholders of the Company may be taken without a meeting only by the holders of outstanding capital stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is .
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common Stock. No information is currently available and no prediction can be made as to the timing or amount of future sales of shares, or the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of the Common Stock (including shares issuable upon the exercise of stock options) in the public market after the lapse of the restrictions described below, or the perception that such sales may occur, could materially adversely affect the prevailing market prices for the Common Stock and the ability of the Company to raise equity capital in the future. See "Risk Factors--Shares Eligible for Future Sale; No Prior Trading Market; Registration Rights."
Upon consummation of the Offering, the Company will have outstanding shares of Common Stock ( if the Underwriters' over-allotment option is exercised in full). All of the shares of Common Stock offered hereby ( if the Underwriters' over-allotment option is exercised in full), will be immediately eligible for sale without restriction or further registration under the Securities Act, unless purchased by or issued to any "affiliate" of the Company, as that term is defined in Rule 144, described below. All of the shares of Common Stock outstanding prior to the Offering (or shares issued upon conversion of Preferred Stock upon consummation of the Offering), are "Restricted Securities," as that term is defined in Rule 144, and may not be sold in the absence of registration other than in accordance with Rule 144, 144(k) or 701 promulgated under the Securities Act or another exemption from registration. In addition, upon consummation of the Offering, 4,046,018 shares of Common Stock will be issuable upon exercise of outstanding Warrants.
In general, under Rule 144 as currently in effect, any affiliate of the Company or any person (or persons whose shares are aggregated in accordance with Rule 144) who has beneficially owned shares of Common Stock which are treated as Restricted Securities for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the outstanding shares of Common Stock (approximately shares based upon the number of shares outstanding after the Offering) or the reported average weekly trading volume in the Common Stock during the four weeks preceding the date on which notice of such sale was filed under Rule 144. Sales under Rule 144 are also subject to certain manner of sale restrictions and notice requirements and to the availability of current public information concerning the Company. In addition, affiliates of the Company must comply with the restrictions and requirements of Rule 144 (other than the one-year holding period requirements) in order to sell shares of Common Stock that are not Restricted Securities (such as Common Stock acquired by affiliates in market transactions). Further, if a period of at least two years has elapsed from the date Restricted Securities were acquired from the Company or an affiliate of the Company, a holder of such Restricted Securities who is not an affiliate at the time of the sale and who has not been an affiliate for at least three months prior to such sale would be entitled to sell the shares immediately without regard to the volume, manner of sale, notice and public information requirements of Rule 144.
Holders of all of the Company's outstanding equity will have certain demand registration rights (subject to the 180-day lock-up arrangement described below), under certain circumstances and subject to certain conditions, to require the Company to register their shares of Common Stock under the Securities Act, and certain rights to participate in any future registration of securities by the Company. The Company is not required to effect more than one demand registration on behalf of such holders in any twelve calendar month period. Pursuant to the agreements pursuant to which the registration rights were granted, holders of Registrable Securities have agreed to be subject to lock-up periods of not more than seven days prior to and 180 days following the date of this Prospectus and of not more than seven days prior to and 90 days following the effective date of any subsequent Prospectus. The Company intends to file a registration statement on Form S-8 for the shares held pursuant to the option plans which may make those shares freely tradeable. Such registration statement will become effective immediately upon filing and, shares covered by that registration statement will thereupon be eligible for sale in the public markets, subject to the applicable lock-up agreements and Rule 144 limitations applicable to affiliates. See "Description of Capital Stock--Registration Rights."
The Company and its executive officers, directors and certain of its current stockholders have agreed that, subject to certain exceptions, for a period of 180 days after the date of this Prospectus, without the prior written consent of Bear, Stearns & Co. Inc., they will not, directly or indirectly, issue, sell, offer or agree to sell, grant any option for the sale of, pledge, make any short sale, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act or otherwise dispose of any shares of Common Stock (or securities convertible into, exercisable for or exchangeable for Common Stock) of the Company or of any of its subsidiaries. The foregoing sentence shall not apply to (A) in the case of the Company , the shares of Common Stock to be sold hereunder, (B) the issuance of any shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof and referred to in this Prospectus, (C) in the case of the Company, any shares of Common Stock issued or options to purchase Common Stock granted pursuant to existing employee benefit plans of the Company referred to in this Prospectus, (D) the pledge by Dancing Bear Investments or its affiliates of shares of Common Stock to a financial institution in connection with a bona fide financing transaction, (E) transfers of shares of Common Stock to immediate family members or trusts for the benefit of such family members (a "Family Transferee"); provided such transferee enters into a similar lock-up agreement, (F) transfer of all or part of any Warrants held by Dancing Bear Investments on the date hereof to any employee of Dancing Bear Investments, any employee of the Company, Michael S. Egan or a Family Transferee of Michael S. Egan, provided that each transferee shall have executed a similar lock-up agreement, or (G) shares of Common Stock issued in connection with a merger, recapitalization or consolidation of the Company.
UNDERWRITING
The underwriters of the Offering named below (the "Underwriters"), for whom Bear, Stearns & Co. Inc. and Volpe Brown Whelan & Company, LLC are acting as representatives, have severally agreed with the Company, subject to the terms and conditions of the Underwriting Agreement (the form of which has been filed as an exhibit to the Registration Statement on Form S-1 of which this Prospectus is a part), to purchase from the Company the aggregate number of shares set forth opposite their respective names below at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus.
Underwriter Number of
------------ Shares
Bear, Stearns & Co. Inc......................... --------
Volpe Brown Whelan & Company, LLC..............
Total......................................
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The nature of the respective obligations of the Underwriters is such that all of the shares of Common Stock must be purchased if any are purchased. Those obligations are subject, however, to various conditions, including the approval of certain matters by counsel. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, and, where such indemnification is unavailable, to contribute to payments that the Underwriters may be required to make in respect of such liabilities.
The Company has been advised that the Underwriters propose to offer the shares of Common Stock, initially at the public offering price set forth on the cover page of this Prospectus and to certain selected dealers at such price less a concession not to exceed $ per share; that the Underwriters may allow, and such selected dealers may reallow, a concession to certain other dealers not to exceed $ per share; and that after the commencement of the Offerings, the public offering price and the concessions may be changed.
The Company has granted the Underwriters an option to purchase in the aggregate up to additional shares of Common Stock solely to cover over-allotments, if any. The options may be exercised in whole or in part at any time within 30 days after the date of this Prospectus. To the extent the options are exercised, the Underwriters will be severally committed, subject to certain conditions, including the approval of certain matters by counsel, to purchase the additional shares of Common Stock in proportion to their respective purchase commitments as indicated in the preceding tables.
The Underwriters have reserved for sale at the initial public offering price up to 5% of the shares of Common Stock to be sold in the Offering for sale to employees of the Company and its affiliates, and to their associates and related persons. The number of shares available for sale to the general public will be reduced to the extent any reserved shares are purchased. Any reserved shares not so purchased will be offered by the Underwriters on the same basis as the other shares offered hereby.
The Underwriters do not expect sales of Common Stock to any accounts over which they exercise discretionary authority to exceed 5% of the number of shares being offered hereby.
The Company and its executive officers, directors and certain of its current stockholders have agreed that, subject to certain exceptions, for a period of 180 days after the date of this Prospectus, without the prior written consent of Bear, Stearns & Co. Inc., they will not, directly or indirectly, issue, sell, offer or agree to sell, grant any option for the sale of, pledge, make any short sale, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act or otherwise dispose of any shares of Common Stock (or securities convertible into, exercisable for or exchangeable for Common Stock) of the Company or of any of its subsidiaries.
Prior to the Offering, there has been no public market for the Common Stock. Consequently, the initial public offering price will be determined through negotiations among the Company and representatives of the Underwriters. Among the factors to be considered in making such determination will be the Company's financial and operating history and condition, its prospects and prospects for the industry in which it does business in general, the management of the Company, prevailing equity market conditions and the demand for securities considered comparable to those of the Company.
In order to facilitate the Offering, certain persons participating in the Offering may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock during and after the Offering. Specifically, the Underwriters may over-allot or otherwise create a short position in the Common Stock for their own account by selling more shares than have been sold to them by the Company. The Underwriters may elect to cover any such short position by purchasing shares in the open market or by exercising the over-allotment options granted to the Underwriters. In addition, such persons may stabilize or maintain the price of the Common Stock by bidding for or purchasing shares in the open market and may impose penalty bids, under which selling concessions allowed to syndicate members or other broker-dealers participating in the Offering are reclaimed if shares previously distributed in the Offering are repurchased in connection with stabilization transactions or otherwise. The effect of these transactions may be to stabilize or maintain the market price of the Common Stock at a level above that which might otherwise prevail in the open market. The imposition of a penalty bid may also affect the price of the Common Stock to the extent that it discourages resales thereof. No representation is made as to the magnitude or effect of any such stabilization or other transactions. Such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Fried, Frank, Harris, Shriver & Jacobson (a partnership including professional corporations), New York, New York. Certain legal matters in connection with the offering will be passed upon for the Underwriters by Morrison & Foerster LLP, New York, New York.
EXPERTS
The financial statements for theglobe.com, inc. as of December 31, 1996 and 1997 and for the period from May 1, 1995 (inception) to December 31, 1995 and the years ended December 31, 1996 and 1997 included in this Prospectus and elsewhere in the Registration Statement have been so included in reliance on the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, upon the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement (which term shall encompass any and all amendments thereto) on Form S-1 (the "Registration Statement") under the Securities Act, with respect to the Common Stock offered hereby. This Prospectus, which is part of the Registration Statement, does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto, certain items of which are omitted in accordance with the rules and regulations of the SEC. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is hereby made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. For further information with respect to the Company, reference is hereby made to the Registration Statement and such exhibits and schedules filed as a part thereof, which may be inspected, without charge, at the Public Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at regional offices of the SEC located at Seven World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The SEC maintains a Web site that contains reports, proxy and information statements regarding registrants that file electronically with the SEC. The address of this Web site is (http://www.sec.gov). Copies of all or any portion of the Registration Statement may be obtained from the Public Reference Section of the SEC, upon payment of the prescribed fees.
theglobe.com, inc.
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report F-2
Balance Sheets as of December 31, 1996 and 1997
and June 30, 1998 (unaudited) F-3
Statements of Operations for the period from May 1, 1995
(inception) to December 31, 1995 and for the years
ended December 31, 1996 and 1997 and for the six months
ended June 30, 1997 (unaudited) and 1998 (unaudited) F-4
Statements of Stockholders' Equity for the period from
May 1, 1995 (inception) to December 31, 1995 and for the
years ended December 31, 1996 and 1997 and for the six months
ended June 30, 1997 (unaudited) and 1998 (unaudited) F-5
Statements of Cash Flows for the period from May 1, 1995
(inception) to December 31, 1995 and for the years ended
December 31, 1996 and 1997 and for the six months ended
June 30, 1997 (unaudited) and 1998 (unaudited) F-6
Notes to Financial Statements F-7
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Independent Auditors' Report
The Board of Directors and Stockholders
|
theglobe.com, inc.:
We have audited the accompanying balance sheets of theglobe.com, inc. as of December 31, 1996 and 1997, and the related statements of operations, stockholders' equity and cash flows for the period from May 1, 1995 (inception) to December 31, 1995 and for the years ended December 31, 1996 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of theglobe.com, inc. as of December 31, 1996 and 1997, and the results of its operations and its cash flows for the period from May 1, 1995 (inception) to December 31, 1995 and for the years ended December 31, 1996 and 1997 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP |
New York, New York
April 16, 1998, except for note 8,
which is as of July 22, 1998
theglobe.com, inc.
Balance Sheets
December 31, June 30,
-----------------------
Assets 1996 1997 1998
------------------------ ---------
(unaudited)
Current assets:
Cash and cash equivalents......... $757,118 $5,871,291 $2,997,391
Short-term investments............ --- 13,003,173 10,157,830
Accounts receivable, less
allowance for doubtful
accounts of $12,000 and $27,868
in 1997 and 1998,
respectively................... 66,128 254,209 624,191
Prepaids and other current assets. 2,377 -- 75,847
-------- -------- ----------
Total current assets.......... 825,623 19,128,673 13,855,259
Property and equipment, net......... 136,780 325,842 1,173,582
Other assets........................ 10,945 7,657 574,239
-------- ---------- -----------
Total assets.................. $973,348 $19,462,17 $15,603,080
======== ========== ===========
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Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $130,478 $396,380 $2,029,901
Accrued expense 15,234 325,454 834,959
Accrued bonuses -- 1,148,999 150,000
Deferred revenue 32,144 113,290 132,353
Current installments of
obligations under
capital leases.................. -- 27,174 255,962
-------- -------- ----------
Total current liabilities......... 177,856 2,011,297 3,403,175
Obligations under capital leases,
excluding
current installments.............. -- 98,826 629,281
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Stockholders' equity:
Preferred Stock, 3,000,000 shares authorized:
Convertible preferred stock, Series A
through E, $0.001 par value; 2,900,001
shares authorized; 2,759,940, 2,899,991
and 2,899,991, shares issued outstanding at
December 31, 1996 and 1997, and as
of June 30, 1998, respectively; aggregate
liquidation preference of
$21,837,110;.................. 2,760 2,900 2,900
Common stock, $0.001 par value;
100,000,000 shares authorized;
2,250,000, 2,308,541 and
2,394,058 shares issued and
outstanding, respectively....... 2,250 2,309 2,395
Additional paid-in capital........ 1,627,421 21,864,360 21,872,446
Net unrealized loss on securities. -- (41,201) (29,647)
Deferred compensation............. (21,053) (76,033) (52,914)
Accumulated deficit............... (815,886) (4,400,286)(10,224,556)
-------- ---------- -----------
Total stockholders' equity.... 795,492 17,352,049 11,570,624
Commitments ........................ ------- ---------- -----------
Total liabilities and
stockholders' equity........ $973,348 $19,462,172 $15,603,080
======== =========== ==========
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See accompanying notes to financial statements.
theglobe.com, inc.
Statements of Operations
Period from
May 1,
1995
(inception) Year Ended Six Months Ended
to December 31, June 30,
December 31, ------------------- -----------------------
1995 1996 1997 1997 1998
-------------- ------- ---------- ----------- ----------
(unaudited)
Revenues:
Advertising ...... $ 26,815 $ 216,814 $ 592,409 $ 144,166 $ 1,043,606
Subscriptions .... -- 12,549 177,884 64,075 129,792
----------- ----------- ----------- ----------- -----------
Total revenues 26,815 229,363 770,293 208,241 1,173,398
Cost of revenues .... 12,779 116,780 423,706 106,032 503,181
----------- ----------- ----------- ----------- -----------
Gross profit .. 14,036 112,583 346,587 102,209 670,217
Operating expenses:
Sales and
marketing ........ 1,248 275,947 1,248,349 224,170 4,493,039
Product
development ...... 60,000 120,000 153,667 62,500 250,869
General and
administrative ... 18,380 489,073 2,827,591 594,358 2,396,716
----------- ----------- ----------- ----------- -----------
Loss from
operations .... (65,592) (772,437) (3,883,020) (778,819) (6,470,407)
----------- ----------- ----------- ----------- -----------
Other income
(expense):
Interest and
dividend income . 980 25,966 334,720 11,384 703,097
Interest expense . (1,094) (3,709) -- -- (30,460)
----------- ----------- ----------- ----------- -----------
Total interest
income
(expense) .. (114) 22,257 334,720 11,384 672,637
----------- ----------- ----------- ----------- -----------
Loss before
provision
for income
taxes ...... (65,706) (750,180) (3,548,300) (767,435) (5,797,770)
----------- ----------- ----------- ----------- -----------
Provision for income
taxes ............... -- -- 36,100 -- 26,500
----------- ----------- ----------- ----------- -----------
Net loss ...... $ (65,706) $ (750,180) $(3,584,400) $ (767,435) $(5,824,270)
=========== =========== =========== =========== ===========
Basic and
diluted net loss
per share ........ $ (0.03) $ (0.33) $ (1.56) $ (0.34) $ (2.51)
=========== =========== =========== =========== ===========
Weighted average
basic and diluted
shares
outstanding ...... 2,250,000 2,250,000 2,293,545 2,281,920 2,322,794
=========== =========== =========== =========== ===========
See accompanying notes to financial statements.
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theglobe.com, inc.
Statements of Stockholders' Equity
Net
unrealized
gain
Convertible (loss) Total
preferred stock Common Stock Additional on sale stock-
----------------- ----------------- paid-in of Deferred Accumulated holders
Shares Amount Shares Amount Capital securities compensation deficit equity
------ ------ ------- ------- ---------- ---------- ------------ ----------- -------
Issuance of common shares
to founders........... $ -- $ $2,250,000 $2,250 $ 2,430 $ -- $ -- $ -- $ 4,680
Issuance of Series A
convertible preferred
stock................. 712,980 713 -- -- 66,287 -- -- -- 67,000
Promissory notes
converted to Series A
convertible preferred
stock................. 453,010 453 -- -- 45,785 -- -- -- 46,238
Issuance of Series B
convertible preferred
stock................. 1,103,830 1,104 -- -- 578,401 -- -- -- 579,505
Net loss for the period
from May 1, 1995
(inception) to
December 31, 1995..... -- -- -- -- -- -- -- (65,706) (65,706)
--------- ------ --------- ------ ---------- ------ ------- ------- ----------
Balance as of December
31, 1995.............. 2,269,820 2,270 2,250,000 2,250 692,903 -- -- (65,706) 631,717
Issuance of Series B
convertible preferred
stock................. 47,620 48 -- -- 24,937 -- -- -- 24,985
Issuance of Series C
convertible preferred
stock................. 442,500 442 -- -- 884,528 -- -- -- 884,970
Deferred compensation.... -- -- -- -- 25,053 -- (25,053) -- --
Amortization of deferred
compensation.......... -- -- -- -- -- -- 4,000 -- 4,000
Net loss................. -- -- -- -- -- -- -- (750,180) (750,180)
--------- ------ ------ ------ ----------- ------- ------- -------- ----------
Balance at December 31,
1996.................. 2,759,940 2,760 2,250,000 2,250 1,627,421 -- (21,053) (815,886) 795,492
Issuance of Series C
convertible preferred
stock................. 140,000 140 -- -- 279,860 -- -- -- 280,000
Exercise of stock options -- -- 58,541 59 4,448 -- -- -- 4,507
Issuance of Series D
convertible preferred
stock, net of expense
of $130,464........... 51 -- -- -- 19,869,536 -- -- -- 19,869,536
Net unrealized loss on
securities............ -- -- -- -- -- (41,201) -- -- (41,201)
Deferred compensation.... -- -- -- -- 83,095 -- (83,095) -- --
Amortization of deferred
compensation.......... -- -- -- -- -- -- 28,115 -- 28,115
Net loss................. -- -- -- -- -- -- -- (3,584,400) (3,584,400)
--------- ------ --------- ------ ----------- -------- -------- ----------- ----------
Balance at December 31,
1997.................. 2,899,991 2,900 2,308,541 2,309 21,864,360 (41,201) (76,033) (4,400,286) 17,352,049
Amortization of deferred
compensation.......... -- -- -- -- -- -- 23,119 -- 23,119
Exercise of stock options
(unaudited) -- -- 85,517 86 8 ,086 -- -- -- 8,172
Net loss for the period
(unaudited)........... -- -- -- -- -- -- -- (5,824,270) (5,824,270)
Change in net unrealized
gain (loss) on
securities (unaudited) -- -- -- -- -- 11,554 -- -- 11,554
--------- ------ ---------- ------ ----------- --------- ------ ---------- ---------
Balance at June 30, 1998
(unaudited)........... 2,899,991 2,900 2,394,058 2,395 21,872,446 (29,647) (52,914) (10,224,556) 11,570,624
========= ======= ========== ====== =========== ========= ======= ========== ==========
See accompanying notes to financial statements.
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theglobe.com, inc.
Statements of Cash Flows
Period from
May 1, 1995 Year ended Six months ended
(inception) to December 31, June 30,
December 31, ---------------------- ----------------------------
1995 1996 1997 1997 1998
----------- --------- -------- ----------- -------------
(unaudited)
Cash flows from operating activities:
Net loss............................... $ (65,706) $ (750,180) $(3,584,400) $(767,435) $(5,824,270)
Adjustments to reconcile net loss to net
cash used in operating activities:.
Depreciation and amortization.... 10,530 47,595 60,210 37,499 238,411
Non-cash related interest........ 738 -- -- -- --
Deferred compensation earned..... -- 4,000 28,115 14,057 23,119
Changes in operating assets and
liabilities:
Accounts receivable, net......... (3,025) (63,103) (188,081) 23,212 (369,982)
Prepaids and other current assets (16,440) (2,377) 2,377 2,377 (75,847)
Other assets..................... -- -- -- -- (568,226)
Accounts payable................. 9,794 120,684 265,902 57,706 1,633,521
Accrued expenses................. 5,599 9,635 310,220 192,532 509,505
Accrued bonuses.................. -- -- 1,148,999 37,250 (998,999)
Deferred revenue................. -- 32,144 81,146 72,579 19,063
--------- ---------- ------------ --------- -----------
Net cash used in operating
activities....................... (58,510) (601,602) (1,875,512) (330,223) (5,413,705)
--------- ---------- ------------ --------- -----------
Cash flows from investing activities:
Purchase of securities................. -- -- (13,044,374) -- (230,484)
Proceeds from sale of securities....... -- -- -- -- 3,087,381
Purchases of property and equipment.... (51,101) (138,309) (119,984) (229,696) (247,859)
---------- ------------ ------------- ---------- -----------
Net cash (used in) provided by
investing activities............. (51,101) (138,309) (13,164,358) (229,696) 2,609,038
---------- ------------ ------------- ---------- -----------
Cash flows from financing activities:
Payments under capital lease obligations -- -- -- -- (77,405)
Proceeds from convertible promissory
notes................................ 45,500 -- -- -- --
Proceeds from exercise of common stock
options.............................. -- -- 4,507 4,507 8,172
Proceeds from issuance of common stock. 4,680 -- -- -- --
Proceeds from issuance of convertible
preferred Series A, B and C stock.... 646,505 909,955 280,000 280,000 --
Proceeds from issuance of convertible
preferred Series D stock............. -- -- 20,000,000 -- --
Payment of financing costs............. -- -- (130,464) (26,302) --
--------- ---------- ------------ --------- -----------
Net cash provided by (used in)
financing activities............. 696,685 909,955 20,154,043 258,205 (69,233)
--------- ---------- ------------ --------- -----------
Net change in cash and cash
equivalents...................... 587,074 170,044 5,114,173 (301,714) (2,873,900)
Cash and cash equivalents at beginning of
period.................................. -- 587,074 757,118 757,118 5,871,291
--------- ---------- ------------- --------- -----------
Cash and cash equivalents at end of period $ 587,074 $ 757,118 $ 5,871,291 $ 455,404 $2,997,391
========= ========== ============= ========= ==========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest............................. $ 1,094 $ 3,709 $ -- $ -- $ 30,460
========= =========== ============= ========= =============
Income taxes......................... -- -- -- -- 45,125
========= =========== ============= ========= =============
Supplemental disclosure of noncash
transactions:
Series A convertible preferred stock
issued upon conversion of promissory
notes, including accrued interest of
$738................................. $ 46,238 $ -- $ -- $ -- $ --
========= =========== ============= ========= ============
Equipment acquired under capital leases $ -- $ -- $ 126,000 $ -- $ 836,648
========= =========== ============= ========= =============
See accompanying notes to financial statements.
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theglobe.com, inc.
Notes to Financial Statements
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Organization and Summary of Significant Accounting Policies
(a) Description of Business
theglobe.com, inc. (the "Company") was incorporated on May 1, 1995 (inception) and commenced operations on that date. theglobe.com is an online community with members and users in the United States and abroad. theglobe.com's users are able to personalize their online experience by publishing their own content and interacting with others having similar interests. The Company's primary revenue source is the sale of advertising, with additional revenues generated through e-commerce arrangements and the sale of membership subscriptions for enhanced services.
The Company's business is characterized by rapid technological change, new product development and evolving industry standards. Inherent in the Company's business are various risks and uncertainties, including its limited operating history, unproven business model and the limited history of commerce on the Internet. The Company's success may depend in part upon the emergence of the Internet as a communications medium, prospective product development efforts and the acceptance of the Company's solutions by the marketplace.
During August 1997, Dancing Bear Investments, Inc. invested $20,000,000 in the Company in exchange for a 51% ownership interest in the Company on a fully diluted basis, plus warrants
(the "Dancing Bear Investment"). (See Note 6)
(b) Initial Public Offering
In June 1998, the Board of Directors authorized the filing of a registration statement with the Securities and Exchange Commission ("SEC") that would permit the Company to sell shares of the Company's common stock in connection with a proposed initial public offering ("IPO"). If the IPO is consummated under the terms presently anticipated, upon the closing of the proposed IPO all of the then outstanding shares of the Company's Convertible Preferred Stock will automatically convert into shares of common stock.
(c) Unaudited Interim Financial Information
The interim financial statements of the Company for the six months ended June 30, 1997 and 1998, included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements. In the opinion of management, the accompanying unaudited interim financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company at June 30, 1997 and 1998, and the results of its operations and its cash flows for the six months ended June 30, 1997 and 1998.
theglobe.com, inc.
Notes to Financial Statements, Continued
(All information subsequent to December 31, 1997 is Unaudited)
(1), Continued
(d) Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
(e) Cash and Cash Equivalents
The Company considers all highly liquid securities with original maturities of three months or less to be cash equivalents. Cash equivalents at December 31, 1996 and 1997 were approximately $752,000 and $3,997,000, respectively, and $2,994,000 as of June 30, 1998, which consisted of certificates of deposit.
(f) Short-term Investments
Short-term investments are classified as available-for-sale and are available to support current operations or to take advantage of other investment opportunities. The majority of these investments are corporate bonds, which are stated at their estimated fair value based upon publicly available market quotes. Unrealized gains and losses are computed on the basis of specific identification and are included in stockholders equity. Realized gains, realized losses and declines in value, judged to be other-than-temporary, are included in income. The costs of securities sold are based on the specific-identification method and interest earned is included in interest income.
(g) Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, generally ranging from three to five years. Equipment under capital leases is stated at the present value of minimum lease payments and is amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the assets
(h) Other Assets
At June 30, 1998, other assets included $568,226 of security deposits held in an escrow account as collateral for certain capital lease equipment.
(i) Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. To date, no such impairment has been recorded.
theglobe.com, inc.
Notes to Financial Statements, Continued
(All information subsequent to December 31, 1997 is Unaudited)
(1), Continued
(j) Income Taxes
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in results of operations in the period that the tax change occurs. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
(k) Revenue Recognition
The Company's revenues are derived principally from the sale of banner advertisements under short-term contracts. To date, the duration of the Company's advertising commitments has generally averaged from one to two months. Advertising revenues are recognized ratably in the period in which the advertisement is displayed, provided that no significant Company obligations remain and collection of the resulting receivable is probable. Company obligations typically include the guarantee of a minimum number of "impressions" or times that an advertisement appears in pages viewed by the users of the Company's online properties.
The Company also derived revenues from its membership subscriptions which are deferred and recognized ratably over the term of the subscription period, which is generally up to one year.
The Company trades advertisements on its Web properties in exchange for advertisements on the Internet sites of other companies. Barter revenues and expenses are recorded at the fair market value of services provided or received, whichever is more determinable in the circumstances. Revenue from barter transactions is recognized as income when advertisements are delivered on the Company's Web properties. Barter expense is recognized when the Company's advertisements are run on other companies' Web sites, which is typically in the same period when the barter revenue is recognized. Barter revenues and expenses were approximately $-0-, $-0-, and $166,500 for the period from May 1, 1995 (inception) to December 31, 1995 and for the years ended December 31, 1996 and 1997, respectively, and $37,500 and $39,906 for the six months ended June 30, 1997 and 1998, respectively.
(l) Product Development
Product development expenses include personnel costs associated with the development, testing and upgrades to the Company's Web site and systems as well as personnel costs related to its editorial content and community management and support. Product development costs are expensed as incurred.
theglobe.com, inc.
Notes to Financial Statements, Continued
(All information subsequent to December 31, 1997 is Unaudited)
(1), Continued
(m) Advertising
Advertising costs are expensed as incurred. Advertising costs totaling $1,248, $202,986 and $1,057,606 in 1995, 1996 and 1997, respectively, and $183,413 and $4,000,047 for the six months ended June 30, 1997 and 1998, respectively, are included in sales and marketing expenses in the Company's statements of operations.
(n) Stock-Based Compensation
The Company accounts for stock-based compensation arrangements in accordance with Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of Accounting Principle Board ("APB") Opinion No. 25 and provide pro forma net earnings disclosures for employee stock option grants if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
(o) Net Loss Per Common Share
The Company adopted SFAS No. 128, "Computation of Earnings Per Share," during the year ended December 31, 1997. In accordance with SFAS No. 128 and the Securities and Exchange Commission ("SEC") Staff Accounting Bullitin No. 98, basic earnings per share are computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of the incremental common shares issuable upon the conversion of the Convertible Preferred Stock (using the if-converted method) and shares issuable upon the exercise of stock options and warrants (using the Treasury Stock method); common equivalent shares are excluded from the calculation if their effect is anti-dilutive. Pursuant to SEC Staff Accounting Bulletin No. 98, common stock and convertible preferred stock issued for nominal consideration, prior to the anticipated effective date of an IPO, are required to be included in the calculation of basic and diluted net loss per share, as if they were outstanding for all periods presented. To date, the Company has not had any issuances or grants for nominal consideration.
Diluted loss per share has not been presented separately, as the outstanding stock options, warrants and contingent stock purchase warrants are anti-dilutive for each of the periods presented.
Anti-dilutive potential common shares outstanding were 2,619,820 for the period ended December 31, 1995, 3,444,037 and 14,873,344 for the years ended December 31, 1996 and 1997, respectively, and 3,823,398 and 17,528,945 for the six-month periods ended June 30, 1997 and 1998.
theglobe.com, inc.
Notes to Financial Statements, Continued
(All information subsequent to December 31, 1997 is Unaudited)
(1), Continued
(p) Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income generally represents all changes in shareholders' equity during the period except those resulting from investments by, or distributions to, shareholders. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997 and requires restatement of earlier periods presented. SFAS No. 130 had no impact on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of and Enterprise and Related Information." SFAS No. 131 establishes standards for the way that a public enterprise reports information about operating segments in annual financial statements, and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997 and requires statement of earlier periods presented. The Company has determined that it does not have any separately reporting business segments.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. This statement does not apply to the Company as the Company currently does not have any derivative instruments or hedging activities.
(q) Stock Split
In May 1996, the Company authorized and implemented a ten-for-one common stock split. All share and per share information in the accompanying financial statements has been retroactively restated to reflect the effect of this stock split. In August 1997, the Company authorized and implemented a ten-for-one preferred stock split.
theglobe.com, inc.
Notes to Financial Statements, Continued
(All information subsequent to December 31, 1997 is Unaudited)
(2) Concentration of Credit Risk
Financial instruments which subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and trade accounts receivable. The Company maintains cash and cash equivalents with various domestic financial institutions. The Company performs periodic evaluations of the relative credit standing of these institutions. From time to time, the Company's cash balances with any one financial institution may exceed Federal Deposit Insurance Corporation insurance limits.
The Company's customers are concentrated in the United States. The Company performs ongoing credit evaluations, generally does not require collateral and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends and other information; to date, such losses have been within management's expectations.
For the period from May 1, 1995 (inception) to December 31, 1995, there were no customers that accounted for over 10% of revenues generated by the Company, or of accounts receivable at December 31, 1995.
For the year ended December 31, 1996, one customer accounted for approximately 71% of total revenues generated by the Company and 90% of accounts receivable at December 31, 1996.
For the year ended December 31, 1997, there was one customer that accounted for 11% of revenues (excluding barter advertising revenues of $166,500) generated by the Company. There were no customers that accounted for over 10% of accounts receivable at December 31, 1997.
For the six months ended June 30, 1998, there were no customers that accounted for over 10% of revenues generated by the Company, or of accounts receivable at June 30, 1998.
(3) Property and Equipment
Property and equipment consist of the following:
June
December December 30,
31, 31, 1998
1996 1997 (unaudited)
--------- ---------- ------------
Computer equipment, including assets under
capital leases of $-0-, $126,000, and
$962,648, respectively.................. $181,557 $421,164 1,500,187
Furniture and fixtures.................... 7,853 14,230 19,714
-------- --------- ---------
189,410 435,394 1,519,901
Less accumulated depreciation and
amortization, including amounts
related to assets under capital........
leases of $-0-, $-0- and $110,007,
respectively............................ 52,630 109,552 346,319
-------- -------- ----------
Total............................... $136,780 $325,842 $1,173,582
======== ======== ==========
-------------------------------------------
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theglobe.com, inc.
Notes to Financial Statements, Continued
(All information subsequent to December 31, 1997 is Unaudited)
(4) Income Taxes
The Company did not incur any income taxes for the period from May 1, 1995 (inception) to December 31, 1995 and for the year ended December 31, 1996 as a result of operating losses. Income taxes for the year ended December 31, 1997 are based solely on state and local taxes on business and investment capital.
The difference between the provision for income taxes computed at the statutory rate and the reported amount of tax expense (benefit) attributable to income before income taxes for the period from May 1, 1995 (inception) to December 31, 1995 and for the year ended December 31, 1996 and 1997 are as follows:
1995 1996 1997
------------------------------------
Tax expense at statutory rates..... $(22,340) $ (257,781)$(1,218,695)
Increase (reduction) in income
taxes resulting from:
Valuation allowance adjustment.. 25,938 302,644 1,710,346
State and local income taxes,
net of Federal
income tax benefit.............. (3,660) (45,131) (458,817)
Other, net...................... 62 268 3,266
-------- -------- ---------
$ -- $ -- $ 36,100
======== ======== =========
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1997 are presented below.
1996 1997
Deferred tax assets:
---------- ---------
Net operating loss carryforwards....... $326,982 2,018,635
Allowance for doubtful accounts........ -- 5,520
Deferred compensation.................. 1,600 14,773
--------- ---------
Total gross deferred tax assets.... 328,582 2,038,928
Less valuation allowance................. (328,582) (2,038,928)
--------- ---------
Net deferred tax assets............ $ -- $ --
========= =========
|
The valuation allowance for deferred tax assets as of January 1, 1996 and 1997 was $328,582 and $2,038,928 respectively. The net change in the total valuation allowance for the years ended December 31, 1996 and 1997 was $302,644 and $1,710,346, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
theglobe.com, inc.
Notes to Financial Statements, Continued
(All information subsequent to December 31, 1997 is Unaudited)
(4), Continued
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
At December 31, 1997, the Company had net operating loss carryforwards available for federal and state income tax purposes of $4.4 million. These carryforwards expire through 2012 for federal purposes and state purposes.
Under Section 382 of the Internal Revenue Code of 1986, as amended, the utilization of net operating loss carryforwards may be limited under the change in stock ownership rules of the Internal Revenue Code. As a result of ownership changes which occurred in August 1997, the Company's operating tax loss carryforwards and tax credit carryforwards are subject to these limitations.
(5) Capitalization
Authorized Shares
During 1997, the Company amended and restated its certificate of incorporation. As a result, the total number of shares which the Company is authorized to issue is 25,000,000 shares: 22,000,000 of these shares are Common Stock, each having a par value of $0.001; and 3,000,000 shares are Preferred Stock, each having a par value of $0.001.
Common Stock
During 1995, the Company issued a total of 2,250,000 shares of Common Stock to its founders in exchange for $4,680 in cash. During 1997, the Company issued an additional 58,541 shares of Common Stock in connection with the exercise of certain stock options.
Convertible Preferred Stock
Each class of the Company's Convertible Preferred Stock (Preferred Stock) is convertible into Common Stock, as defined below, and has rights and preferences which are generally more senior to the Company's Common Stock and are more fully described in the Company's amended and restated certificate of incorporation. In 1995, the Company completed a private placement of 1,165,990 shares of Series A Preferred Stock for an aggregate price of approximately $113,000. Such consideration consisted of $67,000 in cash and the conversion of outstanding Notes (described below) in the aggregate amount of approximately $46,000. In 1995, the Company issued Convertible Promissory Notes ("Notes") in the aggregate principal amount of $45,500, bearing interest at rates between 6.62% and 8% per annum. These Notes, including interest thereon, were converted into a total of 453,010 shares of Series A Preferred Stock in connection with the Company's 1995 private placement, as required by the terms and conditions of such Notes.
As of December 31, 1997, the Company had five series of Convertible Preferred Stock (collectively "Preferred Stock") authorized and of which only four of the series were outstanding. The holders of the various series of Preferred Stock generally have the same rights and privileges.
theglobe.com, inc.
Notes to Financial Statements, Continued
(All information subsequent to December 31, 1997 is Unaudited)
(5), Continued
During December 1995, the Company completed a private placement of 1,151,450 shares of Series B Preferred Stock at 0.525 per share in two issuances for an aggregate price of approximately $604,000, $579,000 was paid in cash in 1995 and $25,000 in 1996.
In 1996, the Company completed a private placement of 442,500 shares of Series C Preferred Stock at $2.00 per share for an aggregate price of approximately $885,000, paid in cash.
In April 1997, the Company amended the Series C Preferred Stock agreement in order to extend the above private placement of Series C Preferred Stock to April 15, 1997. In connection with this private placement, the Company issued an additional 140,000 shares of Series C Preferred Stock at $2.00 per share for an aggregate price of $280,000 in 1997.
In August 1997, the Company authorized and issued 51 shares of Series D Preferred Stock for an aggregate cash amount of $20,000,000 in connection with the investment by Dancing Bear Investments, Inc. These shares constituted 51% of the fully diluted capital stock of the Company at that time. In addition to the Series D Preferred Stock, Dancing Bear Investments, Inc. received warrants which provide the right to purchase up to 10 shares of Series E Preferred Stock representing 10% of the fully diluted capital stock of the Company at the time of exercise for an aggregate purchase price of $5,882,353, if exercised in total. In connection with the Dancing Bear Investment, two officers and shareholders of the Company received $500,000 each as signing bonuses in connection with their employment agreements. Such amounts were accrued for at that time and were subsequently paid in the first quarter of 1998.
The conversion rate of the Series A, B and C Preferred Stock shall be the quotient obtained by dividing the applicable series' original issue price by the applicable series' conversion price. The original issue price and conversion price shall be $0.10, $0.525 and $2 per share for Series A, B and C, respectively. Each share of Series D and E Preferred Stock shall be convertible into an amount of common representing 1% of the fully diluted capital stock.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, as defined, on a pari passu basis, an amount equal to $0.10, $0.525 and $2, $392,156.86 and $588,235.30 per share for Series A, B, C, D and E convertible Preferred Stock, respectively, shall be paid out of the assets of the Company available for distribution before any such payments shall be made on any shares of the Company's common shares or any other capital stock of the Company other than the Preferred Stock, plus any declared but unpaid dividends.
theglobe.com, inc.
Notes to Financial Statements, Continued
(All information subsequent to December 31, 1997 is Unaudited)
(5), continued
The following table summarizes the Convertible preferred Stock authorized, issued and outstanding and liquidation preferences:
Shares
Issued and
Outstanding
Shares Liquidation
Authorized 1996 1997 Preference
--------- ---- ---- -----------
Series A 1,165,990 1,165,990 1,165,990 $ 0.10
Series B 1,151,450 1,151,450 1,151,450 $ 0.525
Series C 582,500 442,500 582,500 $ 2.00
Series D 51 0 51 $ 392,156.86
Series E 10 0 0
--------- --------- ---------
2,900,001 2,759,940 2,899,991
========= ========= =========
|
All Preferred Shares shall be automatically converted into common shares in the event the Company closes a firm commitment for an underwritten initial public offering of its common stock for an aggregate amount of at least $15,000,000. The Preferred Shares are subject to additional mandatory conversion rights, as defined in the Company's amended and restated certificate of incorporation.
(6) Stock Option Plan
1995 Stock Option Plan
During 1995, the Company established the 1995 Stock Option Plan, which was amended (the "Amended Plan") by the Board of Directors in December 1996. Under the Amended Plan, the Board of Directors may issue incentive stock options or nonqualified stock options to purchase up to 1,332,000 common shares. Incentive stock options may be granted only to officers who are employees of the Company, directors of the Company and other employees of the Company who are deemed to be "key employees." Incentive stock options must be granted at the fair market value of the Company's Common Stock at the date the option is issued. Nonqualified stock options may be granted to officers, directors, other employees, consultants and advisors of the Company. The option price for nonqualified stock options shall be at least 85% of the fair market value of the Company's Common Stock. The granted options under the amended plan shall be for periods not to exceed ten years. Incentive options granted to stockholders who own greater than 10% of the total combined voting power of all classes of stock of the Company must be issued at 110% of the fair market value of the stock on the date the options are granted.
In connection with the Dancing Bear Investments, the Company reserved an additional 250,000 shares of its common stock for issuance upon the exercise of options to be granted in the future under the Amended Plan.
The per share weighted-average fair value of stock options granted during 1995, 1996 and 1997 was $0.01, $0.08 and $0.16, respectively, on the date of grant using the option-pricing method with the following weighted-average assumptions: 1995 - risk-free interest rate 6% and an expected life of three years; 1996 - risk-free interest rate 6.18%, and an expected life of two years; 1997 - risk-free interest rate 6.00%, and an expected life of three years. As permitted under the provisions of SFAS No. 123, and based on the historical lack of a public market for the Company's units, no factor for volatility has been reflected in the option pricing calculation.
theglobe.com, inc.
Notes to Financial Statements, Continued
(All information subsequent to December 31, 1997 is Unaudited)
(6), continued
The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, compensation cost of $4,000 and $28,115 has been recognized for its stock options granted below fair market value in 1996 and 1997, respectively, in the accompanying financial statements.
Stock option activity during the periods indicated is as follows:
Weighted
Options average
granted exercise
price
------ --------
Outstanding at December 31, 1995......... 350,000 $ 0.01
Granted.................................. 334,097 $ 0.06
Exercised................................ -
Canceled................................. -
------- ------
Outstanding at December 31, 1996......... 684,097 $ 0.03
Granted.................................. 823,402 $ 0.37
Exercised................................ (58,541) $ 0.08
Canceled................................. (5,000) $ 0.49
-------
Outstanding at December 31, 1997......... 1,443,958 $ 0.22
=========
Vested at December 31, 1997 795,965
=========
Options available at December 31, 1997 79,502
=========
The following table summarizes information about stock options
outstanding at 12/31/97:
Options Outstanding Options Exercisable
------------------- ------------------------
Weighted
Average ----------- Weighted
Range of Remaining Weighted -----------
Exercise Number Contractual Average Number Average
Price Outstanding Life Exercise Outstanding Exercise
Price Price
------------- ---------- ---------- ---------- ---------- -----------
$0.01-$0.0525 563,778 1 $ 0.026 466,524 $ 0.02
$0.20-$0.35 709,680 1 0.323 329,441 0.33
$0.49 170,500 5 0.49 0 0
---------- --------
1,443,958 795,965
========== ========
|
theglobe.com, inc.
Notes to Financial Statements, Continued
(All information subsequent to December 31, 1997 Unaudited)
(6), Continued
At December 31, 1997, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $0.01 - $0.49 and 1 year, respectively.
The Company applies APB No. 25 in accounting for its stock options granted to employees and accordingly, no compensation expense has been recognized in the financial statements (except for those options issued with exercise prices less than fair market value at date of grant). Had the Company determined compensation expense based on the fair value at the grant date for its stock options issued to employees under SFAS No. 123, the Company's net loss would have been adjusted to the pro forma amounts indicated below:
1995 1996 1997
---- ---- ----
Net loss - as reported $65,706 $750,180 $3,584,400
======= ======== ==========
Net loss - pro forma $66,873 $756,135 $3,621,373
======= ======== ==========
Basic net loss per common $ (0.03) $ (0.33) $ (1.56)
|
share - as reported ======= ======== ==========
(7) Commitments
(a) Office Leases
In May 1997, the Company terminated its office lease in Ithaca, NY. The Company moved to New York City and entered into an operating lease agreement related to its new office space during February 1997.
Rent expense for the operating leases was $-0-, $26,181 and $81,157 for the period from May 1, 1995 (inception) to December 31, 1995 and for the years ended December 31, 1996 and 1997, respectively.
Future minimum payments under the New York City office operating leases are as follows:
Year ended December 31, Amount
1998........................ $120,200
1999........................ 121,787
2000........................ 86,517
2001........................ 87,000
2002........................ 7,250
--------
Total minimum lease payments $422,754
========
|
theglobe.com, inc.
|
Notes to Financial Statements, Continued
(All information subsequent to December 31, 1997 is Unaudited)
(7), Continued
(b) Equipment Leases
The Company's lease obligations are collateralized by certain assets at December 31, 1997. Future minimum lease payments under noncancellable operating leases (with initial or remaining lease terms in excess of one year) and future minimum capital lease obligations as of December 31, 1997 are:
Capital Operating
Year ending December 31, leases leases
------------------------
1998................................... $ 41,399 41,014
1999................................... 41,399 23,551
2000................................... 41,399 12,860
2001................................... 35,189 9,058
2002................................... -- 7,567
-------- -------
Total minimum lease payments. $159,386 $94,050
======== =======
Less amount representing interest
(at rates ranging from 11% to 12.5%).. 33,386
--------
Present value of minimum capital
lease payments........................ 126,000
--------
|
Less current installments of obligation
under capital leases 27,174
--------
Obligations under capital leases,
excluding current installments $ 98,826
========
|
In addition, the Company entered into five capital leases in 1998 with future minimum payments totaling $1,062,884 starting in 1998 through 2003.
(c) Advertising Contracts
During October 1997, the Company entered into an exclusive one-year contract with an advertising agency with a minimum monthly fee of $50,000.
(d) Employment Agreements
The Company maintains employment agreements expiring in 2002, with two executive officers of the Company. The employment agreements provide for minimum salary levels, incentive compensation and severance benefits, among other items.
theglobe.com, inc.
Notes to Financial Statements, Continued
(All information subsequent to December 31, 1997 is Unaudited)
(8) Subsequent Event (unaudited)
The Company expects to record a charge to earnings in the third quarter of 1998 in connection with the transfer during the third quarter 1998 of warrants to acquire 450,000 shares of Common Stock by Dancing Bear Investments to certain officers of the Company. The amount of such charge will be determined by the difference between the initial public offering price per share and the exercise price per warrant.
In July 1998, the Company approved the amendment and restatement of its certificate of incorporation to increase the number of authorized shares from 25,000,000 shares to 100,000,000 shares.
The Company's 1998 Stock Option Plan (the "1998 Plan") was adopted by the Board of Directors on July 15, 1998, and approved by the stockholders of the Company as of July 15, 1998. The 1998 Plan provides for the grant of "incentive stock options" intended to qualify under Section 422 of the Code and stock options which do not so qualify. The granting of incentive stock option is subject to limitation as set forth in the 1998 Plan. Directors, officers, employees and consultants of the Company and its subsidiaries are eligible to receive grants under the 1998 Plan.
The 1998 Plan authorizes for issuance of 1,800,000 shares of Common Stock, subject to adjustment as provided in the 1998 Plan. On July 15, 1998 the Board of Directors approved the grant of 200,000 options each to two executives. There are 1,235,000 options of Company outstanding under this Plan.
No dealer, sales representative or any other person has been authorized to give any information or to make any representations in connection with the Offering other than those contained in this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or any Underwriter. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, the Common Stock in any jurisdiction where, or to any person to whom, it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any time subsequent to the date hereof.
TABLE OF CONTENTS
Page
Prospectus Summary........... 3
Risk Factors................. 7
Cautionary Notice Regarding
Forward Looking Statements. 23
Use of Proceeds.............. 24
Dividend Policy.............. 24
Capitalization............... 25
Dilution..................... 26
Selected Financial Data...... 27
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations................. 28
Business..................... 37
Management................... 49
Certain Relationships and
Related Transactions....... 58
Principal Stockholders....... 60
Description of Capital Stock. 62
Shares Eligible for Future Sale 69
Underwriting................. 71
Legal Matters................ 72
Experts...................... 72
Additional Information....... 72
Index to Financial Statements F-1
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Until , 1998 (25 days after the date of this Prospectus), all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligations of dealers to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments and subscriptions.
= Shares
[LOGO]
Common Stock
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PROSPECTUS
Bear, Stearns & Co. Inc.
Volpe Brown Whelan & Co.
, 1998
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table shows the expenses, other than underwriting discounts and commissions, to be incurred in connection with the sale and distribution of securities being registered by the Company. Except for the SEC registration fee and the NASD Filing Fee, all amounts are estimated.
SEC Registration Fee..................................... $14,750
NASD Filing Fee.......................................... 5,500
Blue Sky Fees and Expenses............................... *
Legal Fees and Expenses.................................. *
Accounting Fees and Expenses............................. *
Printing Expenses........................................ *
Miscellaneous Expenses................................... *
----
Total................................................. $
=
-------------
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* To be filed by amendment.
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "DGCL") provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement in connection with specified actions, suits, proceedings whether civil, criminal, administrative, or investigative (other than action by or in the right of the corporation -- a "derivative action"), if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. A similar standard is applicable in the case of derivative actions, except that indemnification only extends to expenses (including attorneys' fees) incurred in connection with the defense or settlement of such action, and the statue requires court approval before there can be any indemnification where the person seeking indemnification has been found liable to the corporation. The statue provides that it is not exclusive of other indemnification that may be granted by a corporation's charter, by-laws, disinterested director vote, stockholder vote, agreement, or otherwise.
Article VI of the By-Laws requires the Company to indemnify any person who was or is a party or is threatened to be made a party to or is involved (including, without limitation, as a witness) in any threatened, pending or completed action, suit, arbitration, alternative dispute mechanism, investigation, administrative hearing or any other proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) brought by reason of the fact that he or she is or was a director or officer of the Company, or, while a director or officer of the Company, is or was serving at the request of the Company as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to an employee benefits plan against expenses (including attorneys' fees, judgments, fines, excise taxes under the Employee Retirement Income Security Act of 1974, penalties and amounts paid in settlement) incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful.
Section 102(b)(7) of the DGCL permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for (i) any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) payment of unlawful dividends or unlawful stock purchases or redemptions, or (iv) any transaction from which the director derived an improper personal benefit.
Article VI of the Certificate provides that to the fullest extent that the DGCL, as it now exists or may hereafter be amended, permits the limitation or elimination of the liability of directors, a director of the Company shall not be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director. Any amendment to or repeal of, or adoption of any provision of the Certificate inconsistent with, such Article VI shall not adversely affect any right or protection of a director of the Company for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal.
The Company has entered into indemnification agreements with its directors and officers substantially in the form attached to this registration statement as Exhibit 10.2. These agreements provide, in general, that the Company will indemnify such directors and officers for, and hold them harmless from and against, any and all amounts paid in settlement or incurred by, or assessed against, such directors and officers arising out of or in connection with the service of such directors and officers as a director or officer of the Company or its Affiliates (as defined therein) to the fullest extent permitted by Delaware law.
The Company maintains directors' and officers' liability insurance which provides for payment, on behalf of the directors and officers of the Company and its subsidiaries, of certain losses of such persons (other than matters uninsurable under law) arising from claims, including claims arising under the Securities Act, for acts or omissions by such persons while acting as directors or officers of the Company and/or its subsidiaries, as the case may be.
The Underwriting Agreement (the form of which is filed as Exhibit 1.1 hereto) provides for indemnification by the Underwriters of the Company and its officers and directors for certain liabilities arising under the Securities Act or otherwise.
Item 15. Recent Sales of Unregistered Securities
All sales, unless otherwise noted, were made in reliance on Section 4(2) of the Securities Act and/or Regulation D or Rule 701 promulgated under the Securities Act and were made without general solicitation or advertising. The purchasers were sophisticated investors with access to all relevant information necessary to evaluate these investments, and who represented to the Registrant that the shares were being acquired for investment.
DATE OF TITLE OF NUMBER OF CONSIDERATION
PURCHASER ISSUANCE SECURITIES SHARES RECEIVED ($)
--------- -------- ---------- ------------ ---------------
Alce Partners, L.P. 12/22/95 Series B 190,480 100,002
Preferred
Bergendahl, Anders 9/7/95 Series A 159,630 15,750
Preferred
Series B 95,240 50,001
Preferred
Series C 15,000 30,000
Preferred
Bergendahl, Mia 9/7/95 Series A 159,630 15,750
Preferred
Series B 47,620 25,000.50
Preferred
Cayuga Venture Fund Series C 12,500 25,000
Preferred
David Duffield 12/22/95 Series B 190,480 100,002
Trust Preferred
Series C 250,000 500,000
Preferred
de Selliers, Series C 25,000 50,000
Baudouin Preferred
Ganem, Bruce Series C 15,000
Preferred
GC&H Investments 12/22/95 Series B 47,620
Preferred
Grey, Nicki 11/16/95 Series A 6,430 500
Preferred
Grinstead, Simon 11/16/95 Series A 106,430 10,500
Preferred
Halperin, Mark R. 12/22/95 Series B 47,620
Preferred
Series C 12,500
Preferred
Halperin Dow, 12/22/95 Series B 47,620 25,000.50
Peggy Anne Preferred
Series C 12,500
Preferred
Halperin, Philip W. 12/22/95 Series B 47,620 25,000.50
Preferred
Series C 12,500
Preferred
Halperin, Robert M. 12/22/95 Series B 47,620 25,000.50
Preferred
Series C 12,500
Preferred
Hirsch, Jason 11/16/95 Series A 38,490 3,000
Preferred
Horowitz, David 12/22/95 Series B 100,000 52,500
Preferred
Series C 25,000 50,000
Preferred
Common Stock 31,944 3,111
Huret Family Trust Series C 12,500 25,000
Preferred
Karlsson, Bengt Series C 50,000 100,000
Preferred
Krizelman, Allen 9/7/95 Series A 151,690 15,000
Preferred
Krizelman, Susan 11/16/95 Series A 12,830 1,000
Preferred
Krizelman, Todd Common Stock 1,050,000
11/16/95 Series A 44,910 3,500
Preferred
Leavitt Series C 75,000 150,000
Investments, L.P. Preferred
Maconie, Andrew 11/16/95 Series A 6,430
Preferred
Miller, Dan Series C 37,500 75,000
Preferred
Muckstadt, Jack Series C 15,000 30,000
Preferred
Muller, Georges 1/22/96 Series B 47,620 25,000.50
Preferred
Paternot, Jacques 9/7/95 Series A 32,850 3,000
Preferred
12/22/95 Series B 13,330 6,998.25
Preferred
Paternot, Madeleine 11/16/95 Series A 2,570
Preferred
Paternot, Monica 11/16/95 Series A 3,860
Preferred
Paternot, Stephan Common Stock 1,200,000
Paternot, Thierry 11/16/95 Series A 6,430 500
Preferred
12/22/95 Series B 38,100 20,002.50
Preferred
Paternot, Yves 9/7/95 Series A 177,380 17,000
Preferred
12/22/95 Series B 47,620 25,000.50
Preferred
S. Knight Pond 9/7/95 Series A 256,430 26,500
Trust Preferred
12/22/95 Series B 142,860 75,001.50
Preferred
Tuli, John Common Stock 26,597
(1) In August 1997, the Company issued and sold to Dancing Bear
Investments (i) 51 shares of Series D Preferred Stock which will
convert into 8,047,529 shares of Common Stock upon consummation
of this Offering and (ii) Warrants to purchase 4,046,018 shares
of Common Stock of the Company at the time of exercise for an
aggregate price of $5,882,353. The aggregate consideration for
such transaction was $20 million.
(2) Since inception, the Company has granted stock options to
directors, officers and employees of the Company under the
Company's 1998 Stock Option Plan and 1995 Stock Option Plan. As
of July 1998, the Company has granted 1,235,000 and 1,425,941
shares of Common Stock to directors, officers and employees of
the Company under the Company's 1998 Stock Option Plan and 1995
Stock Option Plan, respectively, and the Company issued -0- and
144,058 shares of Common Stock pursuant to the exercise of these
options under the Company's 1998 Stock Option Plan and 1995 Stock
Option Plan, respectively
|
Item 16. Exhibits and financial statement schedules
(a) Exhibits
The following Exhibits are attached hereto and incorporated herein by reference:
1.1 Form of Underwriting Agreement*
3.1 Form of Second Amended and Restated Certificate of Incorporation of the Company
3.2 Form of By-Laws of the Company*
4.1 Second Amended and Restated Investor Rights Agreement among the Company and certain equity holders of the Company dated as of August 13, 1997
4.2 Amendment No.1 to Second Amended and Restated Investor Rights Agreement among the Company and certain equity holders of the Company dated as of July 15, 1998
4.3 Registration Rights Agreement dated as of July 15, 1998*
4.4 Specimen certificate representing shares of Common Stock of the Company*
4.5 Amended and Restated Warrant to Acquire Shares of Common Stock*
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson*
9.1 Voting Trust Agreement by and among Michael Egan, Todd V.
Krizelman and Stephan J. Paternot dated as of 1998*
10.1 Employment Agreement dated August 13, 1997, by and between the Company and Todd V. Krizelman
10.2 Employment Agreement dated August 13, 1997, by and between the Company and Stephan J. Paternot
10.3 Employment Agreement dated July 13, 1998, by and between the Company and Francis T. Joyce
10.4 Form of Indemnification Agreement between the Company and each of its Directors and Executive Officers
10.5 Lease Agreement dated January 14, 1997 between the Company and Fifth Avenue West Associates L.P.*
10.6 1998 Stock Option Plan*
10.7 1995 Stock Option Plan
10.8 Rights Agreement dated 1998, by and between the Company and as Rights Agent*
11.1 Computation of Loss Per Share
23.1 Consent of KPMG Peat Marwick
23.2 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in Exhibit 5.1)*
24.1 Power of Attorney (contained on signature page on page 8)
27.1 Financial Data Schedule*
99.1 Valuation and Qualifying Accounts
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) to provide to the Underwriters at the closing specified in the Underwriting Agreements, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt deliver to each purchaser.
(2) that insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the questions whether such indemnification by them is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.
(3) that for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933, shall be deemed to be part of this registration statement as of the time it was declared effective; and
(4) that for purposes of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus filed shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of New York, state of New York, on the 24th day of July 1998.
theglobe.com, inc.
By: /s/ Todd Krizelman
-----------------------
Todd Krizelman
Co-Chief Executive Officer and
Co-President
By: /s/ Stephan Paternot
------------------------
Stephan Paternot
Co-Chief Executive Officer,
Co-President and Secretary
|
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the persons whose signatures appear below, constitute and appoint Michael Egan, Todd Krizelman and Stephan Paternot, and each of them as their true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for them and in their names, places, and steads, in any and all capacities, to sign the Registration Statement to be filed in connection with the public offering of common stock of theglobe.com, inc. and any and all amendments (including post-effective amendments) to the Registration Statement, and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and the other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
----------- -------- -------
/s/ Michael Egan Chairman July 24, 1998
--------------------------
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Michael Egan
/s/ Todd Krizelman Co-Chief Executive Officer, July 24, 1998
-------------------------- Co-President and Director
Todd Krizelman
/s/ Stephan Paternot Co-Chief Executive Officer, July 24, 1998
-------------------------- Co-President, Secretary and
Director
Stephan Paternot
/s/ Frank Joyce Vice President and Chief July 24, 1998
-------------------------- Financial Officer (Principal
Accounting Officer)
Frank Joyce
/s/ Edward Cespedes Director July 24, 1998
--------------------------
Edward Cespedes
/s/ Rosalie Arthur Director July 24, 1998
--------------------------
Rosalie Arthur
/s/ Robert Halperin Director July 24, 1998
--------------------------
Robert Halperin
/s/ David Horowitz Director July 24, 1998
--------------------------
David Horowitz
/s/ H. Wayne Huizenga Director July 24, 1998
--------------------------
H. Wayne Huizenga
--------------------------
|
EXHIBIT 3.1
FORM OF
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
THEGLOBE.COM, INC.
TODD V. KRIZELMAN and STEPHAN J. PATERNOT hereby certify that:
1. The date of filing of the original Certificate of Incorporation of this corporation with the Secretary of State of the State of Delaware was May 26, 1995.
2. The original Certificate of Incorporation was amended and restated on August 13, 1997, and was duly filed with the Secretary of State of the State of Delaware.
3. They are the duly elected and acting Co-Chief Executive Officers and Co-Presidents of theglobe.com, inc., a Delaware corporation.
4. The Amended and Restated Certificate of Incorporation of this corporation is hereby amended and restated in its entirety (the "Second Amended and Restated Certificate of Incorporation") to read as follows:
I.
The name of this Corporation is theglobe.com, inc. (the "Corporation").
II.
The address, including street, number, city, and county, of the registered office of the Corporation in the State of Delaware is 1013 Centre Road, City of Wilmington 19805, County of New Castle; and the name of the registered agent of the Corporation in the State of Delaware at such address is The Prentice-Hall Corporation System, Inc.
III.
The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the Delaware General Corporation Law.
IV.
A. Authorized Capital Stock. The aggregate number of shares of capital stock which the Corporation shall have authority to issue is one hundred three million (103,000,000) shares divided into the following classes:
1. One hundred million (100,000,000) shares of Common Stock each having a par value of one-tenth of one cent ($0.001) per share (the "Common Stock"). Each share of Common Stock shall entitle the holder thereof to one vote in person or by proxy on all matters submitted to a vote of the stockholders of the Corporation; and
2. Three million (3,000,000) shares of Preferred Stock, each having a par value of one-tenth of one cent ($0.001) per share (the "Preferred Stock").
B. Preferred Stock. Preferred Stock may be issued from time to time in one or more series. The Board of Directors of the Corporation (the "Board") is hereby authorized, by filing a certificate pursuant to the Delaware General Corporation Law, to fix or alter from time to time the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof, including without limitation the dividend rights, dividend rates, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), redemption price or prices, and the liquidation preferences of any wholly unissued series of Preferred Stock, and to establish from time to time the number of shares constituting any such series and the designation thereof, or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status that such shares had prior to the adoption of the resolution originally fixing the number of shares of such series.
C. Designation of Preferred Stock.
1. One million one hundred sixty-five thousand, nine hundred ninety (1,165,990) shares of Preferred Stock are hereby designated Series A Preferred Stock (the "Series A Preferred Stock");
2. One million one hundred fifty-one thousand, four hundred fifty (1,151,450) shares of Preferred Stock are hereby designated Series B Preferred Stock (the "Series B Preferred Stock");
3. Five hundred eighty-two thousand five hundred (582,500) shares of Preferred Stock are hereby designated Series C Preferred Stock (the "Series C Preferred Stock");
4. Fifty-one (51) shares of Preferred Stock are hereby designated Series D Preferred Stock (the "Series D Preferred Stock"); and
5. Ten (10) shares of Preferred Stock are hereby designated Series E Preferred Stock (the "Series E Preferred Stock").
D. Rights, Preferences, Etc. of Series Preferred Stock. The rights, preferences, privileges, restrictions and other matters relating to the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock (collectively, the "Series Preferred Stock"), are as follows:
1. Dividend Rights. The holders of the then outstanding shares of Series Preferred Stock shall be entitled to receive, pari passu (with each share in the same series of Series Preferred Stock being entitled to the same dividend), dividends when, as and if declared by the Board out of any funds legally available therefor, prior and in preference to any declaration or payment of any dividend on the Common Stock payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock. Such dividends shall not be cumulative. No dividend may be declared or paid on any series of Series Preferred Stock unless such dividend is declared and paid pro rata on all series of outstanding Series Preferred Stock.
2. Liquidation Preference.
a. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of each share of Series Preferred Stock then outstanding shall be entitled, pari passu, to be paid out of the assets of the Corporation legally available for distribution to its stockholders, whether from capital, surplus or earnings, before any payment or setting apart for payment of any amount shall be made in respect of the Common Stock, until such time as the holders of the Series Preferred Stock shall have received their respective preference amounts (the "Preference Amounts") as specified below. Each Preference Amount shall be adjusted for any combinations, consolidations, or stock distributions or stock dividends with respect to such shares, plus all declared but unpaid dividends thereon, if any, to the date fixed for distribution:
(i) The Series A Preferred Stock Preference Amount is ten cents ($0.10) per share;
(ii) The Series B Preferred Stock Preference Amount is fifty-two and one-half cents ($0.525) per share;
(iii) The Series C Preferred Stock Preference Amount is two dollars ($2.00) per share;
(iv) The Series D Preferred Stock Preference Amount is three hundred ninety-two thousand one-hundred fifty-six dollars and eighty-six cents ($392,156.86) per share; and
(v) The Series E Preferred Stock Preference Amount is five hundred eighty-eight thousand two hundred thirty-five dollars and thirty cents ($588,235.30) per share.
If upon liquidation, dissolution or winding up of the Corporation the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders their full respective Preference Amounts, then such holders shall share ratably in any distribution of assets in proportion to the full amount to which they would otherwise be respectively entitled.
b. After payment has been made to the holders of Series Preferred Stock of their full Preference Amounts, the remaining assets of the Corporation shall be distributed ratably among the holders of the Common Stock.
3. Conversion. The holders of the Series Preferred Stock shall have conversion rights as follows:
a. Optional Conversion. Subject to and in compliance with the provisions of this Section 3, any shares of Series Preferred Stock may, at the option of the holder thereof, be converted at any time into fully-paid and nonassessable shares of Common Stock as set forth below:
(i) Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock shall each be convertible into Common Stock in the amount determined by multiplying the applicable conversion rate then in effect (determined as provided in Section 3.b(i) below) by the number of shares of Series Preferred Stock being converted.
(ii) The number of shares of Common Stock to which a holder of Series D Preferred Stock or Series E Preferred Stock shall be entitled upon conversion shall be an amount as determined in Section 3.b(ii) below.
b. Conversion Rate.
(i) The conversion rate in effect at any time for
conversion of the Series A Preferred Stock shall be the quotient obtained
by dividing the Series A Original Issue Price (as defined herein) by the
Series A Conversion Price (as defined herein), calculated as provided in
Section 3.c. The conversion rate in effect at any time for conversion of
the Series B Preferred Stock shall be the quotient obtained by dividing the
Series B Original Issue Price (as defined herein) by the Series B
Conversion Price (as defined herein), calculated as provided in Section
3.c. The conversion rate in effect at any time for conversion of the Series
C Preferred Stock shall be the quotient obtained by dividing the Series C
Original Issue Price (as defined herein) by the Series C Conversion Price
(as defined herein), calculated as provided in Section 3.c. The "Series A
Original Issue Price" shall be ten cents ($0.10) per share. The "Series B
Original Issue Price" shall be fifty-two and one-half cents ($0.525) per
share. The "Series C Original Issue Price" shall be two dollars ($2.00) per
share.
(ii) Each share of Series D Preferred Stock shall be convertible into an amount of Common Stock representing 1.0% of the Fully Diluted Capital Stock (as defined below), and each share of Series E Preferred Stock shall be convertible into an amount of Common Stock representing 1.0% of the Fully Diluted Capital Stock, as calculated on the date of conversion.
As used herein, "Fully Diluted Capital Stock" means the fully diluted capital stock of the Corporation, and assumes, without duplication, that (A) all outstanding shares of capital stock are outstanding, (B) all warrants (excluding any warrant to purchase Series E Preferred Stock or Common Stock issued or issuable upon conversion of Series E Preferred Stock), rights or options to acquire capital stock of the Corporation, or any other securities which may be exchanged for or convertible into capital stock of the Corporation, which have been issued or granted, including any options authorized under any stock option plans (except as set forth below), shall have been exercised, exchanged or converted whether or not such warrants, rights or options or other securities shall have vested or are then exercisable, exchangeable or convertible and (C) if any stock appreciation rights or other phantom stock or similar rights have been authorized, granted or issued, the capital stock equivalents underlying such rights are outstanding; provided, however, that "Fully Diluted Capital Stock" shall not include (i) any equity securities, equity security equivalents (including stock appreciation rights) or securities convertible or exchangeable into any of the foregoing, or into which any of the foregoing are converted, issued or granted by the Corporation after August 13, 1997, without the approval of six (6) of the nine (9) members of the Board as required by Article V, or any equity securities issued upon conversion or exchange of any of the foregoing; (ii) shares of Common Stock issued in a Qualified IPO; or (iii) options for up to one million (1,000,000) shares of Common Stock issued pursuant to the Company's 1998 Stock Option Plan. The Fully Diluted Capital Stock shall be calculated based upon the following formula: Fully Diluted Capital Stock = X/(1-Y), where "X" equals the Fully Diluted Capital Stock other than with respect to the Series D Preferred Stock and the Series E Preferred Stock; and "Y" equals 1/100th of the aggregate number of outstanding shares of Series D Preferred Stock and Series E Preferred Stock. The antidilution provisions contained in this Section 3.b shall terminate upon the closing of a Qualified IPO after giving effect to the conversion as set forth in paragraph d below.
c. Conversion Price. The conversion price for the Series A
Preferred Stock shall be ten cents ($0.10) per share (the "Series A
Conversion Price"), as adjusted from time to time in accordance with this
Section 3. The conversion price for the Series B Preferred Stock shall be
fifty-two and one-half cents ($0.525) per share (the "Series B Conversion
Price"), as adjusted from time to time in accordance with this Section 3.
The conversion price for the Series C Preferred Stock shall be two dollars
($2.00) per share (the "Series C Conversion Price" and collectively with
the Series A Conversion Price and the Series B Conversion Price, the
"Conversion Prices"), as adjusted from time to time in accordance with this
Section 3.
d. Automatic Conversion. Each share of Series Preferred Stock shall automatically be converted into shares of Common Stock at the then effective applicable conversion rate in the event of the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Act"), covering the offer and sale of Common Stock (whether for the account of the Corporation or for the account of one or more stockholders of the Corporation) to the public at an aggregate offering price of not less than fifteen million dollars ($15,000,000) (a "Qualified IPO"), in which event the conversion of each share of Preferred Stock shall be deemed to have occurred automatically at the closing of such Qualified IPO. In addition, each share of the Series A Preferred Stock shall automatically convert upon (i) the vote or written consent of the holders of a majority of the outstanding Series A Preferred Stock, or (ii) the conversion into shares of Common Stock of all outstanding shares of the Series B Preferred Stock and Series C Preferred Stock. Each share of Series B Preferred Stock shall automatically convert upon the vote or written consent of the holders of a majority of the outstanding Series B Preferred Stock. Each share of Series C Preferred Stock shall automatically convert upon the vote or written consent of the holders of a majority of the outstanding Series C Preferred Stock. Each share of Series D Preferred Stock shall automatically convert upon the vote or written consent of the holders of a majority of the outstanding Series D Preferred Stock. Each share of Series E Preferred Stock shall automatically convert upon the vote or written consent of the holders of a majority of the outstanding Series E Preferred Stock.
e. Mechanics of Conversion. No fractional shares of Common Stock shall be issued upon conversion of Series Preferred Stock. In lieu of any fractional shares to which the holder of Series Preferred Stock would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then-effective applicable Conversion Price. Before any holder of Series Preferred Stock shall be entitled to convert the same into full shares of Common Stock, it shall surrender the certificate or certificates therefor, duly endorsed, at the offices of the Corporation at such offices that it elects to convert the same (except that no such written notice of election to convert shall be necessary in the event of an automatic conversion pursuant to Section 3.d). The Corporation shall, as soon as practicable thereafter, issue and deliver at such offices to such holder a certificate or certificates, registered in such names as specified by the holder, for the number of shares of Common Stock to which it shall be entitled as aforesaid and a check payable to the holder in the amount of any cash amounts payable as the result of a conversion into fractional shares of Common Stock, and any accrued and unpaid dividends on the converted shares. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date (except that, in the event of an automatic conversion pursuant to Section 3.d, such conversion shall be deemed to have been made immediately prior to the closing of a Qualified IPO, or the effective date of the consent). If the conversion is in connection with an underwritten offering of securities registered pursuant to the Act, the conversion may, at the option of any holder tendering shares of Preferred Stock for conversion, be conditioned upon the closing with the underwriter of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock issuable upon such conversion of the tendered shares shall not be deemed to have converted such shares until immediately prior to the closing of such sale of securities. Any conversions of shares of Series D Preferred Stock or Series E Preferred Stock which occur at substantially the same time shall be deemed to have occurred simultaneously.
f. Adjustments for Subdivision, Dividends, Combinations or Consolidations of Common Stock.
(i) If the Corporation shall at any time or from time to time after the date that the first share of Series D Preferred Stock is issued (the "Original Issue Date") effect a combination or consolidation of the outstanding Common Stock, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Conversion Prices in effect immediately prior to such combination or consolidation shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased.
(ii) In the event the Corporation shall declare or pay any dividend on the Common Stock payable in Common Stock or in the event the outstanding shares of Common Stock shall be subdivided, by reclassification or otherwise than by payment of a dividend in Common Stock, into a greater number of shares of Common Stock, the Conversion Prices in effect immediately prior to such dividend or subdivision shall be proportionately decreased:
a. in the case of any such dividend, immediately after the close of business on the record date for the determination of holders of any class of securities entitled to receive such dividend, or
b. in the case of any such subdivision, at the close of business on the date immediately prior to the date upon which such corporate action becomes effective.
If such record date shall have been fixed and such
dividend shall not have been fully paid on the date fixed therefor, the
adjustment previously made in the applicable Conversion Price that became
effective on such record date shall be canceled as of the close of business
on such record date, and thereafter the applicable Conversion Price shall
be adjusted as of the time of actual payment of such dividend. The
adjustment provisions set forth in this subsection shall not apply to the
Series D Preferred Stock or the Series E Preferred Stock to the extent that
an adjustment in the number and kind of securities issuable upon conversion
of the Series D Preferred Stock or the Series E Preferred Stock is effected
through a change in the Fully Diluted Capital Stock pursuant to subsection
3.b above.
g. Adjustments for Other Dividends and Distributions. If the Corporation at any time or from time to time after the Original Issue Date makes, or fixes a record date for the termination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, in each such event provision shall be made so that the holders of the Series Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of other securities of the Corporation that they would have received had their Series Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 3 with respect to the rights of the holders of the Series Preferred Stock or with respect to such other securities by their terms. The adjustment provisions set forth in this subsection shall not apply to the Series D Preferred Stock or the Series E Preferred Stock to the extent that an adjustment in the number and kind of securities issuable upon conversion of the Series D Preferred Stock or the Series E Preferred Stock is effected through a change in the Fully Diluted Capital Stock pursuant to subsection 3.b above.
h. Adjustment for Reclassification, Exchange and Substitution. If at any time or from time to time after the Original Issue Date, the Common Stock issuable upon the conversion of the Series Preferred Stock is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section 3), in any such event each holder of Series Preferred Stock shall have the right thereafter to convert such stock into the kind and amount of stock and other securities and property receivable upon such recapitalization, reclassification or other change by holders of the maximum number of shares of Common Stock into which such shares of Series Preferred Stock could have been converted immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided herein or with respect to such other securities or property by the terms thereof. The adjustment provisions set forth in this subsection shall not apply to the Series D Preferred Stock or the Series E Preferred Stock to the extent that an adjustment in the number and kind of securities issuable upon conversion of the Series D Preferred Stock or the Series E Preferred Stock is effected through a change in the Fully Diluted Capital Stock pursuant to subsection 3.b above.
i. Sale of Shares Below Conversion Price.
(i) If at any time or from time to time the Corporation
issues or sells, or is deemed by the express provisions of this subsection
(i) to have issued or sold, Additional Shares of Common Stock (as defined
herein), other than as provided in Sections 3.f through 3.h above, for an
Effective Price (as defined herein) less than the then effective Series B
Conversion Price or Series C Conversion Price, then and in each such case
the then existing Series B Conversion Price or Series C Conversion Price,
as applicable, shall be reduced, as of the opening of business on the date
of such issue or sale, to a price determined by multiplying the Series B
Conversion Price or Series C Conversion Price, as applicable, by a fraction
(i) the numerator of which shall be (A) the number of shares of Common
Stock deemed Outstanding (as defined herein) immediately prior to such
issue or sale, plus (B) the number of shares of Common Stock that the
Aggregate Consideration Received (as defined herein) by the Corporation for
the total number of Additional Shares of Common Stock so issued could
purchase at such Series B Conversion Price or Series C Conversion Price, as
applicable, and (ii) the denominator of which shall be the number of shares
of Common Stock deemed Outstanding immediately prior to such issue or sale
plus the total number of Additional Shares of Common Stock so issued. For
the purposes of this paragraph, the number of shares of Common Stock deemed
to be outstanding as of a given date shall be the sum of (A) the number of
shares of Common Stock actually "Outstanding," (B) the number of shares of
Common Stock into which the then outstanding shares of Series Preferred
Stock could be converted if fully converted on the day immediately
preceding the given date, and (C) the number of shares of Common Stock
which could be obtained through the exercise or conversion of all other
rights, options and convertible securities on the day immediately preceding
the given date.
(ii) For the purpose of making any adjustment required under this Section 3.i, the consideration received by the Corporation from any issue or sale of securities shall (A) to the extent it consists of cash, be computed at the net amount of cash received by the Corporation after deduction of any underwriting or similar commissions, compensation or concessions paid or allowed by the Corporation in connection with such issue or sale but without deduction of any expenses payable by the Corporation, (B) to the extent it consists of property other than cash, be computed at the fair value of that property as determined in good faith by the Board, and (C) if Additional Shares of Common Stock, Convertible Securities (as defined herein) or rights or options to purchase either Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of the Corporation for a consideration that covers both, be computed as the portion of the consideration so received that may be reasonably determined in good faith by the Board to be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options.
(iii) For the purpose of the adjustment required under this Section 3.i, if the Corporation issues or sells any rights or options for the purchase of, stock or other securities convertible into, Additional Shares of Common Stock (such convertible stock or securities being herein referred to as "Convertible Securities") and if the Effective Price of such Additional Shares of Common Stock is less than the Series B Conversion Price (in the case of the Series B Preferred Stock) or the Series C Conversion Price (in the case of the Series C Preferred Stock), in each case the Corporation shall be deemed to have issued at the time of the issuance of such rights or options or Convertible Securities the maximum number of Additional Shares of Common Stock issuable upon exercise or conversion thereof and to have received as consideration for the issuance of such shares an amount equal to the total amount of the consideration, if any, received by the Corporation for the issuance of such rights or options or Convertible Securities, plus, in the case of such rights or options, the minimum amounts of consideration, if any, payable to the Corporation upon the exercise of such rights or options, plus, in the case of Convertible Securities, the minimum amounts of consideration, if any, payable to the Corporation (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) upon the conversion thereof; provided that, if in the case of Convertible Securities the minimum amounts of such consideration cannot be ascertained but are a function of antidilution or similar protective clauses, the Corporation shall be deemed to have received the minimum amounts of consideration without reference to such clauses; provided further, that, if the minimum amount of consideration payable to the Corporation upon the exercise or conversion of rights, options or Convertible Securities is reduced over time or on the occurrence or non-occurrence of specified events other than by reason of antidilution adjustments, the Effective Price shall be recalculated using the figure to which such minimum amount of consideration is reduced; provided further, that, if the minimum amount of consideration payable to the Corporation upon the exercise or conversion of such rights, options or Convertible Securities is subsequently increased, the Effective Price shall be again recalculated using the increased minimum amount of consideration payable to the Corporation upon the exercise or conversion of such rights, options or Convertible Securities. No further adjustment of the Series B Conversion Price or the Series C Conversion Price, as adjusted upon the issuance of such rights, options or Convertible Securities, shall be made as a result of the actual issuance of Additional Shares of Common Stock on the exercise of any such rights or options or the conversion of any such Convertible Securities. If any such rights or options or the conversion privilege represented by any such Convertible Securities shall expire without having been exercised, the Series B Conversion Price and Series C Conversion Price as adjusted upon the issuance of such rights, options or Convertible Securities shall be readjusted to the Series B Conversion Price and Series C Conversion Price which would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such rights or options or rights of conversion of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by the Corporation upon such exercise, plus the consideration, if any, actually received by the Corporation for the granting of all such rights or options, whether or not exercised, plus the consideration received for issuing or selling the Convertible Securities actually converted, plus the consideration, if any, actually received by the Corporation (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) on the conversion of such Convertible Securities, provided that such readjustment shall not apply to prior conversion of Series B Preferred or Series C Preferred.
(iv) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Corporation or deemed to be issued pursuant to this Section 3.i, whether or not subsequently reacquired or retired by the Corporation, other than (A) shares of Common Stock issued upon conversion of the Series Preferred Stock; (B) shares of Common Stock and/or options, warrants or other Common Stock purchase rights, and the Common Stock issued pursuant to such options warrants or other rights (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like) issued or to be issued to employees, officers or directors of, or consultants or advisors to, the Corporation or any subsidiary pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board; (C) shares of Common Stock issued pursuant to the exercise of options, warrants or convertible securities outstanding as of the Original Issue Date and (D) shares of Common Stock issued in a Qualified IPO. The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, or deemed to have been issued or sold by the Corporation under this Section 3.i, into the aggregate consideration received, or deemed to have been received by the Corporation for such issue under this Section 3.i, for such Additional Shares of Common Stock.
j. Certificate as to Adjustments. Upon the occurrence of
each adjustment or readjustment of the Conversion Prices pursuant to this
Section 3, the Corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and furnish
to each holder of Series Preferred Stock, a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the
written request at any time of any holder of Series Preferred Stock,
furnish or cause to be furnished to such holder a like certificate setting
forth (i) such adjustments and readjustments, (ii) the Conversion Prices at
the time in effect, and (iii) the number of shares of Common Stock and the
amount, if any, of other property which at the time would be received upon
the conversion of Series Preferred Stock.
k. Notices of Record Date. In the event that the Corporation shall propose at any time:
(i) to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus;
(ii) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights;
(iii) to effect any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or
(iv) to merge or consolidate with or into any other Corporation, or sell, lease or convey all or substantially all its property or business, or to liquidate, dissolve or wind up;
then, in connection with each such event, the Corporation shall send to the holders of the Preferred Stock;
a. at least ten days' prior written notice of the
date on which a record shall be taken for such
dividend, distribution or subscription rights (and
specifying the date on which the holders of Common
Stock shall be entitled thereto) or for determining
rights to vote in respect of the matter referred to in
(iii) and (iv) above; and
b. in the case of the matters referred to in (iii) and (iv) above, at least 10 days' prior written notice of the date when the same shall take place (and specifying, if practicable, or estimating the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event).
Each such written notice shall be given by first-class mail, postage prepaid, addressed to the holders of Series Preferred Stock at the address for each such holder as shown on the books of the Corporation.
l. Common Stock Reserved. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of Series Preferred Stock, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series Preferred Stock, and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series Preferred Stock, the Corporation shall take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose.
m. Voting Rights.
(i) Except as otherwise provided herein or as required by law, each share of Series Preferred Stock issued and outstanding shall have the number of votes equal to the number of shares of Common Stock into which such shares of Series Preferred Stock, as applicable, are convertible as adjusted from time to time pursuant to Section 3 hereof. Except as otherwise provided herein or as required by law, the Common Stock and the Series Preferred Stock shall vote together as a single class. Fractional votes by the holders of Series Preferred Stock shall not, however, be permitted and any fractional voting rights resulting from the above formula (after aggregating all shares into which shares of Series Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number.
(ii) The holders of Series D Preferred Stock, voting
together as a class, shall be entitled to elect five (5) directors of the
Corporation and to exercise any right of removal or replacement of such
directors; the holders of shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, voting together as a class,
shall be entitled to elect two (2) directors of the Corporation and to
exercise any right of removal or replacement of such directors; the holders
of shares of Series Preferred Stock and shares of Common Stock, voting
together as a class, shall be entitled to elect two (2) directors of the
Corporation and to exercise any right of removal or replacement of such
directors. All vacancies on the Board shall be filled only in accordance
with this section. This Section 3.m may be amended only by the affirmative
vote of eight (8) of the nine (9) members of the Board. This Section
3.m(ii) shall terminate upon the consummation of a Qualified IPO.
V.
For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation and regulation of the powers of the Corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that:
1. The management of the business and the conduct of the affairs of the Corporation shall be vested in its Board. The number of directors which shall constitute the whole Board shall be nine (9). The affirmative vote of at least six (6) of the nine (9) directors shall be necessary for effecting or validating the following actions, and such actions shall not constitute the valid and binding actions of the Board or the Corporation unless so approved:
a. Any action of the Board, or failure to act, that would cause, or could reasonably be expected to result in, a major shift (a "Major Shift") in the Corporation's "basic business plan." The Corporation's "basic business plan" is to be a virtual community in which the paramount priority is getting people to interact and/or communicate with each other. This may include selling subscriptions, advertising and merchandising in furtherance of this paramount priority. It is also expected that there will be other priorities in support of the virtual community. Any two (2) directors acting together may reasonably determine that a proposed Board action, or failure to act, would constitute a Major Shift and, therefore, that such action, or failure to act, shall be subject to the super-majority Board approval requirements set forth in this Section 1; provided, however, that a "Major Shift" shall not include the issuance by the Corporation of equity or debt securities (unless such action is intended, or could reasonably be expected, to result in a Major Shift) or the removal or termination of a director or officer of the Corporation.
b. Any transaction between the Corporation and any officer or director of the Corporation or holder of greater than 10% of the Fully Diluted Capital Stock or any affiliate or immediate family member of the foregoing.
c. Any issuance, reservation or authorization of capital stock or other securities by the Corporation that would, if approved in accordance with the provision hereof, result in a change in the number of shares of Fully Diluted Capital Stock (excluding the issuance of Series E Preferred Stock upon the exercise of outstanding warrants and the pro rata issuance of stock dividends that do not dilute any stockholder's equity interest in the Corporation).
This Section 1 may be amended only by the affirmative vote of eight
(8) of the nine (9) members of the Board. The super-majority voting
provisions contained in this Section 1 shall terminate upon the closing of
a Qualified IPO.
2. The Board may from time to time make, amend, supplement or repeal the Bylaws in the manner set forth therein.
3. The directors of the Corporation need not be elected by written ballot unless the Bylaws of the Corporation so provide.
4. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the Bylaws of the Corporation.
VI.
A director of the Corporation shall, to the full extent not prohibited by the Delaware General Corporation Law now existing or as hereafter amended, not be liable to the Corporation or its stockholders for monetary damages for breach of his fiduciary duty as a director.
VII.
The Corporation is to have perpetual existence.
VIII.
The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Second Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon the stockholders herein are granted subject to this right.
* * * * *
1. This Second Amended and Restated Certificate of Incorporation has been duly approved by the Board.
2. This Second Amended and Restated Certificate of Incorporation has been duly adopted in accordance with the provisions of Sections 228, 242, and 245 of the General Corporation Law of the State of Delaware by the Board and the stockholders of the Corporation. The total number of outstanding shares entitled to vote or act by written consent was two million two hundred seventy-six thousand five hundred ninety-seven (2,276,597) shares of common stock, par value $0.001 per share, of the Corporation, one million one hundred sixty-five thousand nine hundred ninety (1,165,990) shares of Series A Preferred Stock, one million one hundred fifty-one thousand four hundred fifty (1,151,450) shares of Series B Preferred Stock, five hundred eighty-two thousand five hundred (582,500) shares of Series C Preferred Stock and fifty-one (51) shares of Series D Preferred Stock. [A majority of the outstanding shares of common stock, par value $0.001 per share, of the Corporation, a majority of the outstanding shares of Series A Preferred Stock, a majority of the outstanding shares of Series B Preferred Stock, a majority of the outstanding shares of Series C Preferred Stock and a majority of the outstanding shares of Series D Preferred Stock approved this Second Amended and Restated Certificate of Incorporation by written consent in accordance with Section 228 of the General Corporation Law of the State of Delaware and written notice of such was given by the Corporation in accordance with said Section 228.]
IN WITNESS WHEREOF, theglobe.com, inc. has caused this Second Amended and Restated Certificate of Incorporation to be signed by its Co-Chief Executive Officers and Co-Presidents in New York, New York this __ day of July, 1998.
THEGLOBE.COM, INC.
ATTEST:
EXHIBIT 4.1
SECOND AMENDED AND RESTATED
INVESTOR RIGHTS AGREEMENT
WEBGENESIS, INC.
AUGUST 13, 1997
TABLE OF CONTENTS
PAGE
1. DEFINITIONS........................................................1
2. REGISTRATION; RESTRICTIONS ON TRANSFER.............................2
2.1 Restrictions on Transfer....................................2 2.2 Piggyback Registrations.....................................4 2.3 Demand Registration.........................................5 2.4 Expenses of Registration....................................7 2.5 Obligations of the Company..................................7 2.6 Termination of Registration Rights.........................11 2.7 Delay of Registration; Furnishing Information..............11 2.8 Indemnification............................................11 2.9 Assignment of Registration Rights..........................13 2.10 Amendment of Registration Rights...........................14 2.11 "Market Stand-Off" Agreement...............................14 2.12 Rule 144 Reporting.........................................14 |
3. INFORMATION RIGHTS................................................15
3.1 Quarterly Reports..........................................15
3.2 Confidentiality............................................15
4. GENERAL...........................................................16
4.1 Governing Law..............................................16
4.2 Survival...................................................16
4.3 Successors and Assigns.....................................16
4.4 Severability...............................................16
4.5 Amendment and Waiver.......................................16
4.6 Delays or Omissions........................................16
4.7 Notices....................................................17
4.8 Attorneys' Fees............................................17
4.9 Headings...................................................17
4.10 Entire Agreement...........................................17
4.11 Counterparts...............................................17
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SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
THIS SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT (the "Agreement") is entered into as of the 13th day of August, 1997, by and among WEBGENESIS, INC., a Delaware corporation (the "Company"), the purchasers of the Company's Series B Preferred Stock ("Series B Stock") listed on Exhibit A, the purchasers of the Company's Series C Preferred Stock ("Series C Stock") listed on Exhibit A and Dancing Bear Investments, Inc. ("Egan"). The purchasers of the Series B Stock and Series C Stock and Egan shall be referred to hereinafter as the "Investors" and each individually as an "Investor."
WHEREAS, the holders of Series B Stock and Series C Stock held registration and information rights pursuant to the Amended and Restated Investor Rights Agreement dated November 13, 1996 (the "Prior Investor Rights Agreement"), which the parties hereto intend to supersede and restate in its entirety; and
WHEREAS, the Company proposes to sell and issue to Egan fifty-one (51) shares of its Series D Preferred Stock ("Series D Stock") pursuant to the Stock Purchase Agreement of even date herewith by and between the Company and Egan (the "Purchase Agreement") and the Transaction Warrant (as defined in the Purchase Agreement) to purchase ten (10) shares of the Company's Series E Preferred Stock ("Series E Stock");
NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants and conditions set forth in this Agreement and in the Purchase Agreement, the parties mutually agree that all consents or conditions required to be obtained or satisfied under the Prior Agreement are hereby given and that the Prior Agreement is amended and restated in its entirety to read as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the following respective meanings:
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"HOLDER" means any person owning of record Registrable Securities that have not been sold to the public or any assignee of record of such Registrable Securities in accordance with Section 2.9 hereof.
"INITIAL OFFERING" means the Company's first firm commitment underwritten public offering of its Common Stock registered under the Securities Act raising gross proceeds for the Company in excess of Fifteen Million Dollars ($15,000,000).
"REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement or document.
"REGISTRABLE SECURITIES" means (i) Common Stock of the Company issued
or issuable upon conversion of the Shares (including Shares issuable upon
exercise of the Transaction Warrant); (ii) any Common Stock of the Company
issued upon the conversion of Shares issued upon exercise of the
Transaction Warrant; and (iii) any Common Stock of the Company issued as
(or issuable upon the conversion or exercise of any warrant, right or other
security which is issued as) a dividend or other distribution with respect
to, or in exchange for or in replacement of, such above-described
securities. Notwithstanding the foregoing, Registrable Securities shall not
include any securities that have been sold by a person to the public either
pursuant to a registration statement or Rule 144 or any successor rule or
sold in a private transaction in which the transferor's rights under
Section 2 of this Agreement are not assigned.
"REGISTRABLE SECURITIES THEN OUTSTANDING" shall be the number of shares determined by calculating the total number of shares of the Company's Common Stock that are Registrable Securities and either (i) are then issued and outstanding or (ii) are issuable pursuant to then exercisable or convertible securities.
"REGISTRATION EXPENSES" shall mean all expenses incurred by the Company in complying with Sections 2.2 and 2.3, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, reasonable fees and disbursements of a single special counsel for the Holders, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company).
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"SELLING EXPENSES" shall mean all underwriting discounts and selling commissions applicable to the sale.
"SHARES" shall mean the Company's Series B Stock, Series C Stock, Series D Stock and Series E Stock.
"SEC" or "COMMISSION" means the Securities and Exchange Commission.
"STOCKHOLDERS' AGREEMENT" shall mean that certain Stockholders' Agreement, dated August 13, 1997, by and among the Company and the undersigned parties thereto.
2. REGISTRATION; RESTRICTIONS ON TRANSFER.
2.1 RESTRICTIONS ON TRANSFER.
(a) Each Holder agrees not to make any disposition of all or any portion of the Shares or Registrable Securities unless and until the Holder complies with the requirements set forth in the Stockholders' Agreement, if applicable to such Holder, and:
(i) There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or
(ii) (A) The transferee has agreed in writing to be bound by
this Section 2.1, (B) such Holder shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and
(C) if reasonably requested by the Company, such Holder shall have
furnished the Company with an opinion of counsel, reasonably satisfactory
to the Company, that such disposition will not require registration of such
shares under the Securities Act.
(iii) Notwithstanding the provisions of paragraphs (i) and
(ii) above, no such registration statement or opinion of counsel shall be
necessary for a transfer by a Holder which is (A) a partnership to its
partners or former partners in accordance with partnership interests, (B) a
corporation to its shareholders in accordance with their interest in the
corporation, (C) a limited liability company to its members or former
members in accordance with their interest in the limited liability company,
or (D) to the Holder's family member or trust for the benefit of an
individual Holder, provided the transferee will be subject to the terms of
this Section 2.1 to the same extent as if he were an original Holder
hereunder.
(b) LEGENDS. Each certificate representing Shares shall be stamped or otherwise imprinted with the following legends:
(i) THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
(ii) (WITH RESPECT TO SHARES SUBJECT TO THE STOCKHOLDERS' AGREEMENT:) THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE PROVISIONS OF THAT CERTAIN STOCKHOLDERS' AGREEMENT, DATED AUGUST 13, 1997, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY.
(iii) ANY LEGEND REQUIRED BY APPLICABLE STATE SECURITIES LAWS.
(c) The Company shall promptly reissue certificates without the legend specified in Section 2.1(b)(i) at the request of any Holder who has obtained an opinion of counsel (which counsel may be counsel to the Company) reasonably acceptable to the Company to the effect that the securities proposed to be disposed of may lawfully be so disposed of without registration, qualification or legend.
(d) Any legend endorsed on an instrument pursuant to applicable state securities laws and the stop-transfer instructions with respect to such securities shall be removed upon receipt by the Company of an order of the appropriate blue sky authority authorizing such removal.
2.2 PIGGYBACK REGISTRATIONS. The Company shall notify all Holders in writing at least fifteen (15) days prior to the filing of any registration statement under the Securities Act for purposes of a public offering of securities (other than non-convertible debt securities) of the Company (including, but not limited to, registration statements relating to secondary offerings of securities of the Company, but excluding registration statements relating to employee benefit plans or with respect to corporate reorganizations or shares sold in connection with an acquisition, including other transactions under Rule 145 of the Securities Act) and will afford each such Holder an opportunity to include in such registration statement all or part of such Registrable Securities held by such Holder. Each Holder desiring to include in any such registration statement all or any part of the Registrable Securities held by it shall, within fifteen (15) days after the above-described notice from the Company, so notify the Company in writing. Such notice shall state the maximum number of Registrable Securities intended to be included in such registration and the intended method of disposition of the Registrable Securities by such Holder. If a Holder decides not to request inclusion of all of its Registrable Securities in any registration statement thereafter filed by the Company, such Holder shall nevertheless continue to have the right to include any Registrable Securities in any subsequent such registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein.
(a) UNDERWRITING. If the registration statement under which the
Company gives notice under this Section 2.2 is for an underwritten
offering, the Company shall so advise the Holders. In such event, the right
of any such Holder to be included in a registration pursuant to this
Section 2.2 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in
the underwriting to the extent provided herein. Each Holder proposing to
distribute its Registrable Securities through such underwriting shall enter
into a custody agreement and power of attorney authorizing the Company to
sell the Registrable Securities to be offered by such Holders and to
execute on the Holder's behalf an underwriting agreement in customary form
with the underwriter or underwriters selected for such underwriting by the
Company. If any Holder is or will be unable to deliver any document
reasonably required by the underwriters to register such Registrable
Securities, then the Company shall have no obligation to include such
Registrable Securities in such registration. Notwithstanding any other
provision of the Agreement, if the underwriter determines in good faith
that marketing factors require a limitation of the number of shares to be
underwritten, the number of shares that may be included in the underwriting
shall be allocated as follows: first, to the Company for its own account;
second, to the Holders on a pro rata basis based on the total number of
Registrable Securities held by the Holders; and third, to any stockholder
of the Company (other than a Holder) on a pro rata basis. No such reduction
shall reduce the securities being offered by the Company for its own
account to be included in the registration and underwriting. In no event
will shares of any other selling stockholder be included in such
registration which would reduce the number of shares which may be included
by Holders without the written consent of Holders of not less than
two-thirds (66 2/3%) of the Registrable Securities proposed to be sold in
the offering.
(b) RIGHT TO TERMINATE REGISTRATION. The Company shall have the
right to terminate or withdraw any registration initiated by it under this
Section 2.2 prior to the effectiveness of such registration, whether or not
any Holder has elected to include securities in such registration, in which
event the Company shall give written notice to all Holders of record of
Registrable Securities. The Registration Expenses of such withdrawn
registration shall be borne by the Company in accordance with Section 2.4
hereof.
(c) LIMIT ON NUMBER. The Company shall not have any further
obligations under this Section 2.2 if the Company has already effected five
(5) registrations for any Holders pursuant to this Section 2.2.
2.3 DEMAND REGISTRATION. Subject to Section 2.3(c), at any time and
from time to time after the closing of an Initial Offering, the Holders of
(x) twenty-five percent (25%) of all of the Registrable Securities or (y)
fifty percent (50%) of the Registrable Securities issued or issuable in
respect of the Series B Stock and the Series C Stock shall have the right
to require the Company to file a registration statement under the
Securities Act covering all or part of their respective Registrable
Securities, by delivering a written request therefor to the Company
specifying the number of Registrable Securities to be included in such
registration by such Holders and the intended method of distribution
thereof. All requests pursuant to this Section 2.3 are referred to herein
as "Demand Registration Requests," and the registrations requested are
referred to herein as "Demand Registrations." As promptly as practicable,
but no later than ten (10) days after receipt of a Demand Registration
Request, the Company will:
(a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and
(b) as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within fifteen (15) days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section 2.3:
(i) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public of less than $5,000,000; or
(ii) if the Company shall furnish to the Holders a
certificate signed by the Chairman of the Board of Directors of the Company
stating that in the good faith judgment of the Board of Directors of the
Company, it would be seriously detrimental to the Company and its
stockholders for such Registration to be effected at such time, in which
event the Company shall have the right to defer the filing of the
registration statement for a period of not more than one hundred twenty
(120) days after receipt of the request of the Holder or Holders under this
Section 2.3; provided that such right to delay a request shall be exercised
by the Company no more than once in any one-year period, or
(iii) if the Company has already effected four (4) Demand Registrations for the Holders pursuant to this Section 2.3;
(iv) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance; or
(v) if the registration statement with respect to a Demand Registration would be declared effective within a period of 180 days after the effective date of the registration statement pertaining to the Initial Offering or within a period of ninety days (90) after the effective date of the registration statement pertaining to subsequent public offerings (other than registration statements relating to employee benefit plans or Rule 145 transactions).
(c) If the selling Holders intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall
so advise the Company as a part of their request made pursuant to this
Section 2.3 and the Company shall include such information in the written
notice referred to in Section 2.3(a). In such event, the right of any
Holder to include its Registrable Securities in such registration shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting
(unless otherwise mutually agreed by a majority in interest of the selling
Holders and such Holder) to the extent provided herein. All Holders
proposing to distribute their securities through such underwriting shall
enter into an underwriting agreement in customary form with the underwriter
or underwriters selected for such underwriting by a majority in interest of
the selling Holders (which underwriter or underwriters shall be reasonably
acceptable to the Company). If any Holder is or will be unable to deliver
any document reasonably required by the underwriters to register such
Registrable Securities, then the Company shall have no obligation to
include such Registrable Securities in such registration. Notwithstanding
any other provision of this Section 2.3, if the underwriter advises the
Company that marketing factors require a limitation of the number of
securities to be underwritten then the Company shall so advise all Holders
of Registrable Securities which would otherwise be underwritten pursuant
hereto, and the number of shares that may be included in the underwriting
shall be allocated to the Holders of such Registrable Securities on a pro
rata basis based on the number of Registrable Securities proposed to be
registered by all such selling Holders. Any Registrable Securities excluded
or withdrawn from such underwriting shall be withdrawn from the
registration.
2.4 EXPENSES OF REGISTRATION. Except as specifically provided herein, all Registration Expenses incurred in connection with any registration under Section 2.2 or Section 2.3 shall be borne by the Company. All Selling Expenses incurred in connection with any registrations hereunder shall be borne by the holders of the securities so registered pro rata on the basis of the number of shares so registered. The Company shall not, however, be required to pay for expenses of any registration proceeding begun pursuant to Section 2.3, the request of which has been subsequently withdrawn by the requesting Holders unless (i) the withdrawal is based upon material adverse information concerning the Company of which such Holders were not aware at the time of such request, or (ii) the Holders of a majority of Registrable Securities agree to forfeit their right to one requested registration pursuant to Section 2.3, in which event such right shall be forfeited by all Holders. If the Holders are required to pay the Registration Expenses, such expenses shall be borne by the holders of securities (including Registrable Securities) requesting such registration in proportion to the number of shares for which registration was requested. If the Company is required to pay the Registration Expenses of a withdrawn offering pursuant to clause (i) above, then the Holders shall not forfeit their rights pursuant to Section 2.3 to a registration.
2.5 OBLIGATIONS OF THE COMPANY. Whenever required to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use all reasonable efforts to cause such registration statement to become effective and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to one hundred eighty (180) days or, if earlier, until the Holder or Holders have completed the distribution related thereto.
(b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement.
(c) Furnish (without charge) to the selling Holders such number of copies of the registration statement, each amendment and supplement thereto (in each case including all exhibits) and the prospectus included in such registration statement, including each preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them.
(d) Use all reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form of the managing underwriter(s) of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement.
(f) Promptly notify each Holder selling Registrable Securities, and every other holder of securities, if any, covered by such registration statement and each managing underwriter, if any: (i) when the registration statement, any pre-effective amendment, the prospectus or any prospectus supplement related thereto or post-effective amendment to the registration statement has been filed and, with respect to the registration statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or state securities authority for amendments or supplements to the registration statement or the prospectus related thereto or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the registration statement or the initiation of any proceedings for the purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Registrable Securities for sale under the securities or blue sky laws of any jurisdiction or the initiation of any proceeding for such purpose; and (v) of the existence of any fact of which the Company becomes aware which results in the registration statement, the prospectus related thereto or any document incorporated therein by reference containing an untrue statement of a material fact or omitting to state a material fact required to be stated therein or necessary to make any statement therein not misleading.
(g) Furnish, at the request of a majority of the Holders participating in the registration, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective: (i) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to the managing underwriter in an underwritten public offering addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities, and (ii) a "cold comfort" letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering addressed to the underwriters, if any, and if permitted by applicable accounting standards, to the Holders requesting registration of Registrable Securities.
(h) Comply with all applicable rules and regulations of the Commission, and make generally available to its security holders, as soon as reasonably practicable after the effective date of the registration statement (and in any event within 16 months thereafter), an earnings statement (which need not be audited) covering the period of at least twelve consecutive months beginning with the first day of the Company's first calendar quarter after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder.
(i) (i) Cause all such Registrable Securities covered by such registration statement to be listed on the principal securities exchange on which similar securities issued by the Company are then listed (if any), if the listing of such Registrable Securities is then permitted under the rules of such exchange, or (ii) if no similar securities are then so listed, cause all such Registrable Securities to be listed on a national securities exchange or, secure designation of all such Registrable Securities as a National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") "national market system security" within the meaning of Rule 11Aa2-1 of the Commission or, secure NASDAQ authorization for such shares and, without limiting the generality of the foregoing, take all actions that may be reasonably required by the Company as the issuer of such Registrable Securities in order to facilitate the managing underwriter's arranging for the registration of at least two market makers as such with respect to such shares with the National Association of Securities Dealers, Inc.
(j) Provide and cause to be maintained a transfer agent and registrar for all such Registrable Securities covered by such registration statement not later than the effective date of such registration statement.
(k) Use its best efforts to obtain the withdrawal of any order suspending the effectiveness of the registration statement.
(l) Provide a CUSIP number for all Registrable Securities, not later than the effective date of the registration statement.
(m) Make reasonably available to its employees and personnel and otherwise provided reasonable assistance to the underwriters (taking into account the needs of the Company's businesses and the requirements of the marketing process) in the marketing of Registrable Securities in any underwritten offering.
(n) Promptly prior to the filing of any document which is to be incorporated by reference into the registration statement or the prospectus (after the initial filing of such registration statement) provide copies of such document to counsel to the selling Holders of Registrable Securities and to the managing underwriter, if any, and make the Company's representatives reasonably available for discussion of such document and make such changes in such document concerning the selling Holders prior to the filing thereof as counsel for such selling Holders or underwriters may reasonably request.
(o) Cooperate with the selling Holders of Registrable Securities and the managing underwriter, if any, to facilitate the timely preparation and delivery of certificates not bearing any restrictive legends representing the Registrable Securities to be sold, and cause such Registrable Securities to be issued in such denominations and registered in such names in accordance with the underwriting agreement prior to any sale of Registrable Securities to the underwriters or, if not an underwritten offering, in accordance with the instructions of the selling Holders of Registrable Securities at least three business days prior to any sale of Registrable Securities.
(p) Take all such other commercially reasonable actions as are necessary or advisable in order to expedite or facilitate the disposition of such Registrable Securities.
The Company may require as a condition precedent to the Company's obligations under this Section 2.5 that each seller of Registrable Securities as to which any registration is being effected furnish the Company such information regarding such seller and the distribution of such securities as the Company may from time to time reasonably request provided that such information shall be used only in connection with such registration.
Each Holder of Registrable Securities acknowledges that in connection with any underwritten offering, the underwriters may require an over-allotment option covering up to 15% of the shares of capital stock sold in the underwriter offering. The Company may at its option (a) provide the shares subject to the over-allotment option (provided that all of the Registrable Securities to be included in the underwriter offering are sold in the initial underwritten offering) or (b) determine that up to 15% of each Holder's Registrable Securities to be sold in the underwritten offering shall not be included in the initial underwriter offering but shall be reserved to satisfy the over-allotment option and the Holders of Registrable Securities hereby agree to take all actions reasonably necessary to comply with the Company's determination.
Each Holder of Registrable Securities agrees that upon receipt of any
notice from the Company of the happening of any event of the kind described
in Section 2.5(f)(v), such Holder will discontinue such Holder's
disposition of Registrable Securities pursuant to the registration
statement covering such Registrable Securities until such Holder's receipt
of the copies of the supplemented or amended prospectus contemplated by
Section 2.5(f)(v) and, if so directed by the Company, will deliver to the
Company (at the Company's expense) all copies, other than permanent file
copies, then in such Holder's possession of the prospectus covering such
Registrable Securities that was in effect at the time of receipt of such
notice. In the event the Company shall give any such notice, the applicable
period mentioned in Section 2.5(a) shall be extended by the number of days
during such period from and including the date of the giving of such notice
to and including the date when each seller of any Registrable Securities
covered by such registration statement shall have received the copies of
the supplemented or amended prospectus contemplated by Section 2.5(f).
If any such registration statement or comparable statement under "blue
sky" laws refers to any Holder by name or otherwise as the Holder of any
securities of the Company, then such Holder shall have the right to require
(i) the insertion therein of language, in form and substance satisfactory
to such Holder and the Company, to the effect that the holding by such
Holder of such securities is not to be construed as a recommendation by
such Holder of the investment quality of the Company's securities covered
thereby and that such holding does not imply that such Holder will assist
in meeting any future financial requirements of the Company, or (ii) in the
event that such reference to such Holder by name or otherwise is not in the
judgment of the Company, as advised by counsel, required by the Securities
Act or any similar federal statute or any state "blue sky" or securities
law then in force, the deletion of the reference to such Holder.
2.6 TERMINATION OF REGISTRATION RIGHTS. All registration rights granted under this Section 2 shall terminate and be of no further force and effect three (3) years after the date of the Initial Offering. In addition, a Holder's registration rights shall expire if (i) the Company has completed its Initial Offering and is subject to the provisions of the Exchange Act, and (ii) all Registrable Securities held by and issued to such Holder may be sold under Rule 144 during any ninety (90) day period.
2.7 DELAY OF REGISTRATION; FURNISHING INFORMATION.
(a) No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 2.
(b) It shall be a condition precedent to the obligations of the Company to take any action pursuant to Section 2.2 or 2.3 that the selling Holders shall furnish to the Company such information regarding themselves, the Registrable Securities held by them and the intended method of disposition of such securities as shall be required to effect the registration of their Registrable Securities.
2.8 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under Sections 2.2 or 2.3:
(a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners, officers, directors and legal counsel of each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation") by the Company: (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law in connection with the offering covered by such registration statement; and the Company will reimburse each such Holder, partner, officer or director, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 2.8(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld or delayed, nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Holder, partner, officer, director, underwriter or controlling person of such Holder.
(b) To the extent permitted by law, each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration qualifications or compliance is being effected, indemnify and hold harmless the Company, each of its directors, its officers, and legal counsel and each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter and any other Holder selling securities under such registration statement or any of such other Holder's partners, directors or officers or any person who controls such Holder, against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, underwriter or other such Holder, or partner, director, officer or controlling person of such other Holder may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder under an instrument duly executed by such Holder and stated to be specifically for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or other Holder, or partner, officer, director or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability or action if it is judicially determined that there was such a Violation; provided, however, that the indemnity agreement contained in this Section 2.8(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld or delayed; provided further, that in no event shall any indemnity under this Section 2.8 exceed the proceeds from the offering received by such Holder.
(c) Promptly after receipt by an indemnified party under this
Section 2.8 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section
2.8, deliver to the indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to participate in
and, to the extent the indemnifying party so desires, jointly with any
other indemnifying party similarly noticed, to assume the defense thereof
with counsel mutually satisfactory to the parties; provided, however, that
an indemnified party shall have the right to retain its own counsel, with
the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential
differing interests or conflicting defenses between such indemnified party
and any other party represented by such counsel in such proceeding. The
failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action, if materially
prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this
Section 2.8, but the omission to deliver written notice to the indemnifying
party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 2.8.
(d) If the indemnification provided for in this Section 2.8 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any losses, claims, damages or liabilities referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall to the extent permitted by applicable law contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the Violation(s) that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by a court of law by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided that, in no event shall any contribution by a Holder hereunder exceed the proceeds from the offering received by such Holder.
(e) The obligations of the Company and Holders under this Section 2.8 shall survive completion of any offering of Registrable Securities in a registration statement. No indemnifying party, in the defense of any such claim or litigation, shall, except with the consent of each indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. In the event any offering of Registrable Securities is underwritten, and the underwriting agreement provides for indemnification and/or contribution by the Company and the Holders offering securities thereunder, the indemnification and/or contribution obligations of the Company and the Holders hereunder shall in no event exceed the obligations of the parties set forth in such underwriting agreement.
2.9 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Section 2 may be assigned by a Holder to a transferee or assignee of Registrable Securities which (i) is a Holder's family member or trust for the benefit of an individual Holder, or (ii) acquires at least ten thousand (10,000) shares of Registrable Securities prior to conversion to Common Stock or one hundred thousand (100,000) shares of Registrable Securities issued upon conversion of the Shares (as adjusted for stock splits, combinations and the like that occur after the original issuance of such shares); provided, however, (A) the transferor shall, within ten (10) days after such transfer, furnish to the Company written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned, and (B) such transferee shall agree to be subject to all restrictions set forth in this Agreement; provided, further, that such transfer shall have been made in compliance with the Stockholders' Agreement and the Bylaws, as applicable.
2.10 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Section 2 may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the Holders of at least a majority in interest of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 2.10 shall be binding upon each Holder and the Company. By acceptance of any benefits under this Section 2, Holders hereby agree to be bound by the provisions hereunder.
2.11 "MARKET STAND-OFF" AGREEMENT. If requested by the Company as the representative of the underwriters of Common Stock (or other securities) of the Company, each Holder shall not sell or otherwise transfer or dispose of any Shares of Common Stock (or other securities) of the Company held by each such Holder (other than those included in the registration) for a period specified by the representative of the underwriters not to exceed a period of seven (7) days prior to and one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Securities Act pertaining to the Company's Initial Offering or a period of seven (7) days prior to and ninety (90) days following the effective date of any other registration statement of the Company filed under the Securities Act (other than registration statements relating to employee benefit plans and transactions under Rule 145 of the Securities Act), provided that all executive officers and directors of the Company enter into similar agreements. The Company will also agree to a lock-up of the same duration if requested by the underwriters of the Common Stock.
The obligations described in this Section 2.11 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-4 or similar forms that may be promulgated in the future. The Company may impose stop-transfer instructions with respect to the shares of Common Stock (or other securities) subject to the foregoing restriction until the end of said one hundred eighty (180) day period.
2.12 RULE 144 REPORTING. With a view to making available to the Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its best efforts to:
(a) Make and keep public information available, as those terms are understood and defined in SEC Rule 144 or any similar or analogous rule promulgated under the Securities Act, at all times after the effective date of the first registration filed by the Company for an offering of its securities to the general public;
(b) File with the SEC, in a timely manner, all reports and other documents required of the Company under the Exchange Act;
(c) So long as a Holder owns any Registrable Securities, furnish to such Holder forthwith upon request: a written statement by the Company as to its compliance with the reporting requirements of Rule 144 of the Securities Act and of the Exchange Act (at any time after it has become subject to such reporting requirements); a copy of the most recent annual or quarterly report of the Company; and such other reports and documents as a Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing it to sell any such securities without registration.
3. INFORMATION RIGHTS.
3.1 QUARTERLY REPORTS. So long as an Investor owns at least ten thousand (10,000) shares of the Shares or one hundred thousand (100,000) shares of the Common Stock issued upon conversion of the Shares (as adjusted for stock splits, combinations and the like that occur after the original issuance of such shares), as soon as practicable after the end of each fiscal quarter of the Company, and in any event within ninety (90) days thereafter, the Company will furnish to such Investor an unaudited balance sheet of the Company, as at the end of such fiscal quarter, and an unaudited consolidated statement of income and an unaudited consolidated statement of cash flows of the Company, for such quarter, all prepared in accordance with generally accepted accounting principles consistently applied. This obligation shall expire and terminate as to each Investor on the effective date of the first registration statement for the public offering of the Company's Common Stock.
3.2 CONFIDENTIALITY.
(a) Each Investor agrees not to disclose to any third party or use Confidential Information (as hereinafter defined) of the Company for its own use or for any purpose except to evaluate and enforce its equity investment in the Company. Each Investor shall undertake to treat such Confidential Information in a manner consistent with the treatment of its own information of similar proprietary nature and agrees that it shall protect the confidentiality of Confidential Information. Each transferee of any Investor who receives Confidential Information shall agree to be bound by such provisions.
(b) "Confidential Information" means any reports provided
pursuant to Section 3.1 and any other information disclosed by the Company
either directly or indirectly in a writing stamped "Confidential" or
"Proprietary" or, if disclosed orally, which is promptly confirmed in
writing to be Confidential Information. Confidential Information does not
include information, technical data or know-how which (i) is in the
Investor's possession at the time of disclosure as shown by Investor's
files and records immediately prior to the time of disclosure; (ii) is
generally known not as a result of any action or inaction of the Investor;
(iii) is disclosed to an Investor on a non-confidential basis by a third
party having a legal right to disclose such information; or (iv) is
approved for release by written authorization of Company. The provisions of
this Section shall not apply (x) to the extent that an Investor is required
to disclose Confidential Information pursuant to any law, statute, rule or
regulation or any order or legal process of any court; or (y) to the
disclosure of Confidential Information to an Investor's counsel,
accountants or other professional advisors.
4. GENERAL.
4.1 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of New York without giving effect to conflicts of laws principles.
4.2 SURVIVAL. The representations, warranties, covenants, and agreements made herein shall survive any investigation made by any Holder and the closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument.
4.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of Registrable Securities from time to time; provided, however, that prior to the receipt by the Company of adequate written notice of the transfer of any Registrable Securities specifying the full name and address of the transferee, the Company may deem and treat the person listed as the holder of such shares in its records as the absolute owner and holder of such shares for all purposes, including the payment of dividends or any redemption price.
4.4 SEVERABILITY. In case any provision of the Agreement shall be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
4.5 AMENDMENT AND WAIVER.
(a) Except as otherwise expressly provided, this Agreement may be amended or modified only upon the written consent of the Company and the holders of ninety percent (90%) of the Registrable Securities.
(b) Except as otherwise expressly provided, the obligations of the Company and the rights of the Holders under this Agreement may be waived only with the written consent of ninety percent (90%) of the Registrable Securities.
(c) Notwithstanding the foregoing, this Agreement may be amended with only the written consent of the Company to include additional purchasers of Shares as "Investors," "Holders" and parties hereto.
4.6 DELAYS OR OMISSIONS. It is agreed that no delay or omission to exercise any right, power, or remedy accruing to any Holder, upon any breach, default or noncompliance of the Company under this Agreement shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent, or approval of any kind or character on any Holder's part of any breach, default or noncompliance under the Agreement or any waiver on such Holder's part of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, by law, or otherwise afforded to Holders, shall be cumulative and not alternative.
4.7 NOTICES. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) two (2) days after deposit with a recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the party to be notified at the address as set forth on Exhibit A hereto or at such other address as such party may designate by ten (10) days advance written notice to the other parties hereto.
4.8 ATTORNEYS' FEES. In the event that any dispute among the parties to this Agreement should result in litigation, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals.
4.9 HEADINGS. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement.
4.10 ENTIRE AGREEMENT. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subject matter hereof and supersedes all previous negotiations, agreements and arrangements made between the parties with respect to such subject matter. Without limiting the foregoing, the Prior Investor Rights Agreement is hereby expressly superseded.
4.11 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Investor Rights Agreement as of the date set forth in the first paragraph hereof.
COMPANY: INVESTOR:
WEBGENESIS, INC.
By: /s/ Todd V. Krizelman By:
-------------------------------- -----------------------------
Todd V. Krizelman
Chief Executive Officer
By: /s/ Stephan J. Paternot
-------------------------------
Stephan J. Paternot
President
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EXHIBIT A
SCHEDULE OF INVESTORS
EXHIBIT 4.2
AMENDMENT NO. 1 TO
SECOND AMENDED AND RESTATED
INVESTOR RIGHTS AGREEMENT
theglobe.com, inc.
July , 1998
AMENDMENT NO. 1 TO SECOND AMENDED AND RESTATED
INVESTOR RIGHTS AGREEMENT
This AMENDMENT NO. 1 TO SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT (the "Amendment") is entered into as of the ____ day of July, 1998, by and among theglobe.com, inc., a Delaware corporation (the "Company"), and the Investors, as defined in the Second Amended and Restated Investor Rights Agreement (the "Agreement"). Capitalized items used herein and not otherwise defined shall have the meanings ascribed thereto in the Agreement.
WHEREAS, the Investors hold registration and information rights pursuant to the Agreement;
WHEREAS, pursuant to Section 2.10 of the Agreement, the holders of a majority in interest of the Registrable Securities desire to amend the provisions of Section 2 of the Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows:
The first paragraph of Section 2.2 of the Agreement is hereby deleted in its entirety and is replaced with the following:
2.2 PIGGYBACK REGISTRATIONS. Except in connection with an Initial Offering, the Company shall notify all Holders in writing at least fifteen (15) days prior to the filing of any registration statement under the Securities Act for purposes of a public offering of securities (other than non-convertible debt securities) of the Company (excluding registration statements relating to employee benefit plans or with respect to corporate reorganizations or shares sold in connection with an acquisition, including other transactions under Rule 145 of the Securities Act) and will afford each such Holder an opportunity to include in such registration statement all or part of such Registrable Securities held by such Holder. Each Holder desiring to include in any such registration statement all or any part of the Registrable Securities held by it shall, within fifteen (15) days after the above-described notice from the Company, so notify the Company in writing. Such notice shall state the maximum number of Registrable Securities intended to be included in such registration and the intended method of disposition of the Registrable Securities by such Holder. If a Holder decides not to request inclusion of all of its Registrable Securities in any registration statement thereafter filed by the Company, such Holder shall nevertheless continue to have the right to include any Registrable Securities in any subsequent such registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein. Notwithstanding the foregoing, nothing in this Section 2.2 shall be deemed to convey upon any Holder the right to include in any registration statement filed in connection with an Initial Offering all or part of such Holder's Registrable Securities.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 to Second Amended and Restated Investor Rights Agreement as of the date set forth above.
theglobe.com, inc. Investor:
Dancing Bear Investments, Inc.
By: By:
-------------------------------- ----------------------------------
Todd V. Krizelman Name:
Co-Chief Executive Officer and Title:
Co-President
Robert Halperin
By:
--------------------------------
Stephan J. Paternot
Co-Chief Executive Officer,
Co-President and Secretary --------------------------------
David Horowitz
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EXHIBIT 10.1
THIS EMPLOYMENT AGREEMENT, dated as of August 13, 1997 (this "Agreement"), by and between WebGenesis, Inc., a Delaware corporation (the "Company") and Todd Krizelman (the "Executive").
WHEREAS, pursuant to a Stock Purchase Agreement (the "Stock Purchase Agreement"), Dancing Bear Investments, Inc., a Florida corporation ("Investor"), is purchasing from the Company 51% of the fully diluted capital stock of the Company and warrants to purchase 10% of the fully diluted capital stock of the Company;
WHEREAS, the Executive possesses an intimate knowledge of the business and affairs of the Company, and its policies, procedures, methods and personnel; and
WHEREAS, the Company has determined that it is in its best interest to secure the continued services and employment of the Executive on behalf of the Company in accordance with the terms of this Agreement and the Executive is willing to render such services on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties, covenants and agreements herein set forth, the parties hereto agree as follows:
Subject to the terms and provisions of this Agreement, the Company hereby agrees to employ the Executive, and the Executive hereby agrees to be employed by the Company, for the period commencing on the date hereof and ending on the fifth anniversary of the date hereof (the "Employment Term"); or such earlier date as provided in Section 7 hereof. The location of such employment shall be at the principal place of business of the Company, which shall be determined from time to time by the board of directors of the Company (the "Board").
While the Executive is employed by the Company pursuant to this Agreement, the Executive shall serve as the Chief Executive Officer of the Company, and in such other positions as may be agreed upon between the Executive and the Board. The Executive shall perform the duties, undertake the responsibilities and exercise the authority customarily performed, undertaken and executed by persons employed in a similar executive capacity, including, but not limited to, managing the day-to-day operations of the Company, securing and supervising the employees, agents and consultants of the Company and terminating any employees, agents and consultants of the Company, establishing compensation levels for such employees, agents and consultants of the Company in accordance with pre-established parameters established by the Board, allocating stock options in conjunction with the terms set forth in the Company's Bylaws and the 1995 Stock Option Plan, and overseeing the compliance with the Company's financial arrangements in accordance with the parameters established in the Company's annual budget (the "Budget") approved by the Board. In addition, the Executive shall perform such other duties, services and responsibilities incident to such position as determined from time to time by the Board and commensurate with the Executive's position. Except in the case of Executive's death or Disability (as defined herein), the demotion of the Executive, a change in the Executive's title, or appointment of other officers (other than Stephan Paternot or his properly appointed successor) to perform a significant portion of the Executive's duties as described in this Section, without the Executive's prior written consent, shall be deemed a termination of the Executive's employment without Cause (as defined below).
The Executive shall devote his full business time, attention and skill to the performance of his duties, services and responsibilities as an executive officer of the Company. The Executive will not, without the prior written approval of the Board, engage in any other corporate, civic or charitable activity which would interfere with the performance of his duties as an executive officer of the Company, is in violation of policies established in good faith from time to time by the Board of Directors with the approval of not less than 66-2/3% of the directors, is in violation of applicable law, or would create a conflict of interest with respect to the Executive's obligations as an executive officer of the Company.
During the period that the Executive is employed by the Company pursuant to this Agreement, other than pursuant to the terms hereof or in accordance with stock option grants approved by the Board in its sole discretion, the Executive shall not receive any form of compensation (including, but not limited to, consulting fees and sales commissions) from the Company or any Subsidiary (as defined below) of the Company in his capacity as a director, officer, manager or executive of the Company or any of its Subsidiaries. As used herein, "Subsidiary" when used with respect to any person means any corporation or organization, whether incorporated or unincorporated, of which such person owns or controls at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the board of directors or others performing similar functions with respect to such corporation or other organization, or any organization of which such person is a general partner.
In consideration of the performance by the Executive of his obligations hereunder (including any services as an officer, director, executive, member of any committee of the Company or any Subsidiary, or otherwise), the Company shall compensate the Executive as follows:
(a) A base salary (the "Base Salary") at an initial annual rate of $125,000.00 per year effective as of the date hereof, payable in accordance with the normal payroll practices of the Company then in effect. Over the course of the Employment Term, the Executive will be eligible to receive annual increases in the Base Salary as determined by the Board; provided that in no event will any annual increase be less than 15% of the Executive's then-current Base Salary.
(b) An annual cash bonus ("Annual Bonus"), to be determined in part at the discretion of the Board and in part based on the achievement of certain target performance objectives set forth in the Budget and approved by the Board.
(c) A signing bonus of $500,000, payable on execution of this Agreement.
(d) The Executive shall be solely responsible for taxes imposed on the Executive by reason of any compensation and benefits provided under this Agreement (except those taxes normally borne by the Company) and all such compensation and benefits shall be subject to applicable withholding taxes.
If the Executive is unable, as reasonably determined by the Board, to substantially perform his duties as an executive officer hereunder by reason of a physical or mental infirmity for a total of 90 calendar days in any twelve-month period during the Employment Term ("Disability"), the Company shall be entitled to terminate the Executive's employment hereunder in accordance with Section 7.
In addition to the payments described in Section 3 of this Agreement, during the period that the Executive is employed by the Company pursuant to this Agreement, the Executive shall be entitled to participate in all health, welfare and other plans and to receive all benefits that are provided by the Company to its most senior executives from time to time, to the extent the Executive meets the eligibility requirements for any such plan or benefit; provided, that Executive shall be entitled to receive at a minimum the benefits currently provided by the Company to its highest level executives.
Executive shall be entitled to participate in the stock option plans of the Company in which the senior executives of the Company are entitled to participate.
Subject to compliance with Section 2, for each full calendar year during the period that the Executive is employed by the Company pursuant to this Agreement, the Executive shall be entitled to 20 paid vacation days.
(a) The Executive's employment with the Company pursuant to this Agreement shall terminate upon the earliest to occur of any of the events specified in subparagraphs (i) through (iv) below:
(i) the fifth anniversary of the date hereof;
(ii) the date of the Executive's death;
(iii) the Termination Date (as defined below) specified in the Notice of Termination (as defined below) which the Company shall have delivered to the Executive due to the Executive's Disability;
(iv) the Termination Date specified in the Notice of Termination which the Company shall have delivered to the Executive to terminate the Executive's employment for Cause. The term "Cause" as used herein shall mean that the Executive: (A) has been convicted of an act which is defined as a felony under federal or state law; (B) committed one or more acts of willful misappropriation from the Company; (C) willfully failed to perform his duties as an executive of the Company and such failure to perform adversely affects the Company or performed such duties and obligations in a grossly negligent manner; (D) is the subject of any order, judgment, or decree of any court or regulatory authority of competent jurisdiction which is final and non-appealable, permanently or temporarily enjoining him from, or otherwise limiting his engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities law; or (E) is found by a court of competent jurisdiction in a civil action or by the Securities Exchange Commission (the "SEC") to have violated any federal or state securities law, and the judgment in such civil action or finding by the SEC has not been subsequently reversed, suspended, or vacated during the Employment Term;
(b) Any purported termination of the Executive by the Company
(other than by reason of Executive's death) shall be communicated by
written Notice of Termination to the Executive. As used herein, the term
"Notice of Termination" shall mean a notice which indicates the specific
termination provision in this Agreement relied upon and sets forth in
reasonable detail the facts and circumstances claimed to provide a basis
for termination of the Executive's employment under the provision so
indicated. In the event the Executive leaves the employ of the Company in
breach of this Agreement or is removed for Cause, the Executive shall, at
the Company's option, continue to be available to the Company for a period
of one month following departure, for up to ten hours per week, at
reasonable and customary hourly rates to assist in the necessary
transition. As used herein, the term "Termination Date" shall mean the
earlier of (i) the fifth anniversary of this Agreement in the case of a
termination pursuant to Section 7(a)(i), (ii) the date of the Executive's
death in the case of a termination pursuant to Section 7(a)(ii), (iii) the
date specified in the Notice of Termination for termination of the
Executive's employment in the case of a termination pursuant to Section
7(a)(iii) or 7(a)(iv), and (iv) the date of termination of Executive's
employment in the case of a termination under Section 7(c). The Executive
shall be entitled to a hearing related to any such termination described in
Section 7(a)(iii) or 7(a)(iv) above before the Board or a committee thereof
established for such purpose and to be accompanied by his counsel at such
hearing. Such hearing will be held within 30 days of notice to the Board by
the Executive provided he requests such hearing within 30 days of the
Notice of Termination.
(c) In the event that more than 50% of the then issued and outstanding equity securities or more than 50% of the voting rights of the Company is acquired by someone other than Michael Egan and his Controlled Entities and Family Transferees (each as defined in the Stockholders Agreement, dated as of the date hereof, among the Company, Michael Egan, Investor and certain stockholders of the Company) (other than in connection with a public offering) or in the event this Agreement is assigned by the Company in connection with a sale of the Company's assets (a "Change of Control"), the Executive may terminate his employment by delivering to the Company a notice within 60 days after a Change of Control; provided that in the event the Executive provides such notice, the Executive's employment hereunder shall terminate on the earlier of the first anniversary of the Change of Control and the date of termination pursuant to any other provision of this Section 7.
(d) This Agreement shall automatically terminate upon the dissolution, winding-up or liquidation of the Company.
(a) If the Executive's employment with the Company is terminated
(a) by the Company for Cause, (b) by the Executive upon a Change of Control
or (c) upon the dissolution of the Company, the Company will pay the
Executive (i) any accrued and unpaid Base Salary as of the Termination Date
and (ii) an amount to reimburse the Executive for any and all monies
advanced or expenses incurred in connection with the Executive's employment
for reasonable and necessary expenses incurred by the Executive on behalf
of the Company prior to the Termination Date. The Executive's entitlement
to other benefits shall be delivered in accordance with the Company's
benefit plans then in effect.
(b) If the Executive's employment with the Company is terminated by reason of the Executive's death or Disability, the Company's sole obligation under this Agreement shall be to pay or provide the Executive or his estate: (i) the payments required by Section 8(a) hereof and (ii) a pro rata portion of the Annual Bonus for the year of termination based on the Company's performance for the full calendar year in which termination occurs and on the number of days elapsed in such year through the date of termination.
(c) If the Company terminates Executive's employment without Cause, all stock options held by the Executive that have not vested shall automatically vest and the Company shall (i) pay or provide the Executive the payments required by Section 8(b) hereof, (ii) continue to pay the Executive the Base Salary for one year following such termination or the remainder of the Employment Term, whichever is less, and (iii) provide to the Executive and his beneficiaries for one year following such termination or the remainder of the Employment Term, whichever is less, employee benefits substantially similar in the aggregate to those provided to the other most senior executives of the Company; provided, however, that the Company's obligation with respect to the foregoing benefits shall be reduced to the extent the Executive or his beneficiaries obtains any such benefits pursuant to a subsequent employer's benefit plans.
(a) Unauthorized Disclosure. The Executive agrees and understands that in the Executive's position with the Company, the Executive has been and will be exposed to and receive information relating to the confidential affairs of Investor, the Company, their Subsidiaries and/or Affiliates (as defined below), including but not limited to technical information, intellectual property, business and marketing plans, strategies, customer information, other information concerning the products, promotions, development, financing, expansion plans, business policies and practices of Investor, the Company, their Subsidiaries and/or Affiliates and other forms of information considered by Investor or the Company to be confidential or in the nature of trade secrets (collectively, the "Confidential Information"). Confidential Information shall not include information which is (a) now, or hereafter becomes, through no act or failure to act on the part of Executive (except those performed in the ordinary course of the Company's business), generally known or available to the public, (b) rightfully received by the Executive from a third party without confidentiality restrictions, and (c) is independently developed by the Executive without reference to the Confidential Information. The Executive agrees that during the Employment Term and thereafter, the Executive will keep the Confidential Information confidential and not disclose such information, either directly or indirectly, except in the ordinary course of performance of the Company's business, to any third person or entity without the prior written consent of the Chairman of the Board or the Board, unless required to do so by law or court order. This confidentiality covenant has no temporal, geographical or territorial restriction. Upon termination of this Agreement, the Executive will promptly surrender to the Company all property, keys, notes, memoranda, writings, lists, files, reports, customer lists, correspondence, tapes, disks, cards, surveys, maps, logs, machines, technical data or any other tangible product or document which has been produced by, received by or otherwise submitted to the Executive after the date on which he was first employed by the Company and is still in the Executive's possession or control. As used herein, "Affiliate" means, with respect to any person, any person directly or indirectly controlling, controlled by, or under common control with such person.
For a period of 6 months following the end of the Executive's employment with the Company, the Company will redirect all personal email received at todd@webgenesis.com or todd@theglobe.com to an email address specified by the Executive.
(b) Non-competition. By and in consideration of Investor's and the Company's entering into the Stock Purchase Agreement and the transactions contemplated thereby, the Company's entering into this Agreement, and the Executive's exposure to the Confidential Information, until the earlier of (i) the fifth anniversary of the date hereof, or (ii) if the Executive's employment is terminated in accordance with Section 7(c) or (d), the date of such termination, or (iii) if the Executive's employment is terminated without Cause, the earlier of the first anniversary of such termination and the fifth anniversary of the date hereof (the "Non-Competition Date"), the Executive will not, directly or indirectly, own, manage, operate, join, control, be employed by, or participate in the ownership, management, operation or control of, or hold the position of shareholder, director, officer, consultant, independent contractor, executive, partner, investor or advisor (whether or not formally appointed), (x) in the case of clause (b)(i) or (b)(ii), in any Class A Restricted Enterprise (as defined below), or (y) in the case of clause (b)(iii), in any Class B Restricted Enterprise (as defined below); provided that in no event shall ownership of less than 1% of the outstanding equity securities of any issuer whose securities are registered under the 1934 Act, standing alone, be prohibited by this Section 9(b). For purposes of this paragraph, (A) the term "Class A Restricted Enterprise" shall mean any person, corporation, partnership or other entity engaged in the computer or internet industries, and (B) the term "Class B Restricted Enterprise" shall mean any person, corporation, partnership or other entity engaged in the virtual community business. Following termination of this Agreement and until the Non-Competition Date, upon request, the Executive shall notify the Company of the Executive's then-current employment status.
(c) Non-solicitation. Until the Non-Competition Date, the Executive shall not interfere with or harm, or intentionally attempt to interfere with or harm, the relationship of the Company, its Subsidiaries and/or Affiliates with, or endeavor to entice away from the Company, its Subsidiaries and/or Affiliates, any person who is an employee, customer or supplier of the Company, its Subsidiaries and/or Affiliates.
(d) Remedies. The Executive agrees that any breach of the terms of this Section 9 would result in irreparable injury and damage to Investor and the Company for which Investor and the Company would have no adequate remedy at law; the Executive therefore also agrees that, in the event of said breach or any threat of breach, Investor and the Company shall be entitled to an immediate injunction and restraining order to prevent such breach and/or threatened breach and/or continued breach by the Executive and/or any and all persons and/or entities acting for and/or with the Executive, without having to prove damages, and to all costs and expenses, including reasonable attorneys' fees and costs (provided, that such fees and expenses shall be awardable only in the event of an adjudication that there was a breach or a legitimate threat of breach), in addition to any other remedies to which Investor or the Company may be entitled at law or in equity. The terms of this paragraph shall not prevent Investor or the Company from pursuing any other available remedies for any breach or threatened breach hereof, including but not limited to the recovery of damages from the Executive. The Executive, Investor and the Company further agree that the provisions of the covenant not to compete are reasonable. The Executive hereby acknowledges that due to the global aspects of the Company's business and competitors it would not be appropriate to include any geographic limitation on this Section 9. Should a court or arbitrator determine, however, that any provision of the covenant not to compete is unreasonable, either in period of time, geographical area, or otherwise, the parties hereto agree that the covenant should be interpreted and enforced to the maximum extent which such court or arbitrator deems reasonable.
The provisions of this Section 9 shall survive any termination of this Agreement and the Employment Term, and the existence of any claim or cause of action by the Executive against either Investor or the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by either Investor or the Company of the covenants and agreements of this Section 9.
The Executive agrees that all Intellectual Property (as hereinafter defined) which is or was at any time made or conceived by the Executive or the Company, acting alone or in conjunction with others after the date on which he was first employed by the Company, is and shall be the property of the Company since its inception and which was used by the Company since its inception, free of any reserved or other rights of any kind on the Executive's part and the Executive hereby assigns to the Company all of his right, title and interest in and to any such Intellectual Property. During the Employment Term and thereafter, the Executive shall promptly make full disclosure of any such Intellectual Property to the Company and do all reasonable acts and things (including, among others, the execution and delivery under oath of patent and copyright applications and instruments of assignment) deemed by the Company to be necessary or desirable at any time in order to effect the full assignment to the Company of the Executive's right and title, if any, to such Intellectual Property and to protect the Company's interests in such Intellectual Property. For purposes of this Agreement, "Intellectual Property" means any discovery, development, program, concept, idea, process or improvement, whether or not patentable, patent, patent application, copyright, copyright registration, license, trademark or trade name, service mark or service name, trade secret or other intellectual property rights, in each case, made during the term of employment (including employment prior to execution of this Agreement) relating in any respect to the present or planned future activities, business, products or services of the Company, its Subsidiaries and/or Affiliates.
The Company reserves the right to obtain and maintain key man life insurance policies with respect to the Executive naming the Company as the primary beneficiary thereunder ("Key Man Life Insurance Policies") at the expense of the Company. The Executive shall use his best efforts to cooperate with the Company and any insurance company approached by the Company with respect to the obtaining and the maintenance of Key Man Life Insurance Policies.
When commercially reasonable, the Company shall obtain and maintain directors' and officers' liability insurance sufficient to cover the Executive's performance in accordance with this Agreement.
The failure to enforce at any time the provisions of this Agreement or to require at any time performance by the other parties of any of the provisions hereof shall in no way be construed to be a waiver of such provisions or to affect either the validity of this Agreement or any part hereof, or the right of any party to enforce each and every provision in accordance with its terms.
No modification, amendment or waiver of any provision of this Agreement shall be effective against any party hereto unless such modification, amendment or waiver is approved in writing by all of the parties hereto.
Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.
This Agreement embodies the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and supersedes and preempts any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. Notwithstanding the foregoing, the Proprietary Information and Invention Agreement between the Company and the Executive (the "Information Agreement") shall continue in accordance with its terms, provided that to the extent of any conflict between the terms of Information Agreement and this Agreement, the terms of this Agreement shall control.
This Agreement shall bind and inure to the benefit of, and be
enforceable by, the parties hereto and their respective successors
(including, without limitation, by way of merger), assigns, heirs and
personal representatives. Notwithstanding the provisions of the immediately
preceding sentence, the Executive shall not delegate any duty under this
Agreement without the prior written consent of the Company. This Agreement
is not intended to be for the benefit of any person not a party hereto
except that the Investor shall be deemed a third party beneficiary of
Section 9 hereof and shall be entitled to enforce the provisions of Section
9 as if a party hereto and the parties hereto may not amend Section 9 in
any manner adverse to the Investor without the Investor's prior written
consent.
Any notice provided for in this Agreement shall be in writing and shall be either personally delivered, sent by facsimile transmission or sent by first class mail or sent by reputable commercial overnight delivery service (charges prepaid) to the address set forth below, or at such address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. Notices will be deemed to have been given hereunder when delivered personally, on the date of facsimile transmission with confirmed answer back, two business days after deposit with a reputable overnight commercial delivery service or on the date of actual receipt if given by any other method of delivery.
To the Company: WebGenesis, Inc.
31 West 21st Street
New York, NY 10010
Attn: Board of Directors
Telephone: (212) 367-8555
Facsimile: (212) 267-8604
With a copy to: Dancing Bear Investments, Inc.
The 110 Tower
Box 70, 110 S.E. 6th Street
Ft. Lauderdale, FL 33301
Attention: Michael Egan
- with a separate copy to the
attention of Rosalie Arthur
Telephone: (954) 527-6550
Facsimile: (954) 527-6182
With a copy to: Tripp, Scott, Conklin & Smith
The 110 Tower, 28th Floor
110 S.E. 6th Street
Ft. Lauderdale, FL 33301
Attention: Dennis Smith
Telephone: (954) 760-4920
Facsimile: (954) 761-8475
To the Executive: 1627 2nd Avenue, Apt. 4B
New York, NY 10028
Telephone: (212) 452-1285
With a copy to: Cooley Godward LLP
5 Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306
Attn: Alan Mendelson
Telephone: (415) 843-5000
Facsimile: (415) 857-0663
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The descriptive headings of the several sections and paragraphs of this Agreement are inserted for reference only and shall not limit or otherwise affect the meaning hereof.
This Agreement shall be governed by and construed in accordance with the laws of the State of Florida without giving effect to the principles of conflicts of laws.
This Agreement may be executed in two counterparts, all of which together shall be considered one and the same agreement, and shall become effective when one or more of the counterparts have been signed by each party and delivered to the other parties, it being understood that all parties need not sign the same counterpart.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by authority of its Board of Directors, and the Executive has hereunto set his hand, the day and year first above written.
WEBGENESIS, INC.
By: /s/ Stephan Paternot ---------------------------- Name: Stephan Paternot Title: President /s/ Todd Krizelman ------------------------------- Todd Krizelman |
EXHIBIT 10.2
THIS EMPLOYMENT AGREEMENT, dated as of August 13, 1997 (this "Agreement"), by and between WebGenesis, Inc., a Delaware corporation (the "Company") and Stephan Paternot (the "Executive").
WHEREAS, pursuant to a Stock Purchase Agreement (the "Stock Purchase Agreement"), Dancing Bear Investments, Inc., a Florida corporation ("Investor"), is purchasing from the Company 51% of the fully diluted capital stock of the Company and warrants to purchase 10% of the fully diluted capital stock of the Company;
WHEREAS, the Executive possesses an intimate knowledge of the business and affairs of the Company, and its policies, procedures, methods and personnel; and
WHEREAS, the Company has determined that it is in its best interest to secure the continued services and employment of the Executive on behalf of the Company in accordance with the terms of this Agreement and the Executive is willing to render such services on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties, covenants and agreements herein set forth, the parties hereto agree as follows:
Subject to the terms and provisions of this Agreement, the Company hereby agrees to employ the Executive, and the Executive hereby agrees to be employed by the Company, for the period commencing on the date hereof and ending on the fifth anniversary of the date hereof (the "Employment Term"); or such earlier date as provided in Section 7 hereof. The location of such employment shall be at the principal place of business of the Company, which shall be determined from time to time by the board of directors of the Company (the "Board").
While the Executive is employed by the Company pursuant to this Agreement, the Executive shall serve as the President of the Company, and in such other positions as may be agreed upon between the Executive and the Board. The Executive shall perform the duties, undertake the responsibilities and exercise the authority customarily performed, undertaken and executed by persons employed in a similar executive capacity, including, but not limited to, managing the day-to-day operations of the Company, securing and supervising the employees, agents and consultants of the Company and terminating any employees, agents and consultants of the Company, establishing compensation levels for such employees, agents and consultants of the Company in accordance with pre-established parameters established by the Board, allocating stock options in conjunction with the terms set forth in the Company's Bylaws and the 1995 Stock Option Plan, and overseeing the compliance with the Company's financial arrangements in accordance with the parameters established in the Company's annual budget (the "Budget") approved by the Board. In addition, the Executive shall perform such other duties, services and responsibilities incident to such position as determined from time to time by the Board and commensurate with the Executive's position. Except in the case of Executive's death or Disability (as defined herein), the demotion of the Executive, a change in the Executive's title, or appointment of other officers (other than Todd Krizelman or his properly appointed successor) to perform a significant portion of the Executive's duties as described in this Section, without the Executive's prior written consent, shall be deemed a termination of the Executive's employment without Cause (as defined below).
The Executive shall devote his full business time, attention and skill to the performance of his duties, services and responsibilities as an executive officer of the Company. The Executive will not, without the prior written approval of the Board, engage in any other corporate, civic or charitable activity which would interfere with the performance of his duties as an executive officer of the Company, is in violation of policies established in good faith from time to time by the Board of Directors with the approval of not less than 66-2/3% of the directors, is in violation of applicable law, or would create a conflict of interest with respect to the Executive's obligations as an executive officer of the Company.
During the period that the Executive is employed by the Company pursuant to this Agreement, other than pursuant to the terms hereof or in accordance with stock option grants approved by the Board in its sole discretion, the Executive shall not receive any form of compensation (including, but not limited to, consulting fees and sales commissions) from the Company or any Subsidiary (as defined below) of the Company in his capacity as a director, officer, manager or executive of the Company or any of its Subsidiaries. As used herein, "Subsidiary" when used with respect to any person means any corporation or organization, whether incorporated or unincorporated, of which such person owns or controls at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the board of directors or others performing similar functions with respect to such corporation or other organization, or any organization of which such person is a general partner.
In consideration of the performance by the Executive of his obligations hereunder (including any services as an officer, director, executive, member of any committee of the Company or any Subsidiary, or otherwise), the Company shall compensate the Executive as follows:
(a) A base salary (the "Base Salary") at an initial annual rate of $125,000.00 per year effective as of the date hereof, payable in accordance with the normal payroll practices of the Company then in effect. Over the course of the Employment Term, the Executive will be eligible to receive annual increases in the Base Salary as determined by the Board; provided that in no event will any annual increase be less than 15% of the Executive's then-current Base Salary.
(b) An annual cash bonus ("Annual Bonus"), to be determined in part at the discretion of the Board and in part based on the achievement of certain target performance objectives set forth in the Budget and approved by the Board.
(c) A signing bonus of $500,000, payable on execution of this Agreement.
(d) The Executive shall be solely responsible for taxes imposed on the Executive by reason of any compensation and benefits provided under this Agreement (except those taxes normally borne by the Company) and all such compensation and benefits shall be subject to applicable withholding taxes.
If the Executive is unable, as reasonably determined by the Board, to substantially perform his duties as an executive officer hereunder by reason of a physical or mental infirmity for a total of 90 calendar days in any twelve-month period during the Employment Term ("Disability"), the Company shall be entitled to terminate the Executive's employment hereunder in accordance with Section 7.
In addition to the payments described in Section 3 of this Agreement, during the period that the Executive is employed by the Company pursuant to this Agreement, the Executive shall be entitled to participate in all health, welfare and other plans and to receive all benefits that are provided by the Company to its most senior executives from time to time, to the extent the Executive meets the eligibility requirements for any such plan or benefit; provided, that Executive shall be entitled to receive at a minimum the benefits currently provided by the Company to its highest level executives.
Executive shall be entitled to participate in the stock option plans of the Company in which the senior executives of the Company are entitled to participate.
Subject to compliance with Section 2, for each full calendar year during the period that the Executive is employed by the Company pursuant to this Agreement, the Executive shall be entitled to 20 paid vacation days.
(a) The Executive's employment with the Company pursuant to this Agreement shall terminate upon the earliest to occur of any of the events specified in subparagraphs (i) through (iv) below:
(i) the fifth anniversary of the date hereof;
(ii) the date of the Executive's death;
(iii) the Termination Date (as defined below) specified in the Notice of Termination (as defined below) which the Company shall have delivered to the Executive due to the Executive's Disability;
(iv) the Termination Date specified in the Notice of Termination which the Company shall have delivered to the Executive to terminate the Executive's employment for Cause. The term "Cause" as used herein shall mean that the Executive: (A) has been convicted of an act which is defined as a felony under federal or state law; (B) committed one or more acts of willful misappropriation from the Company; (C) willfully failed to perform his duties as an executive of the Company and such failure to perform adversely affects the Company or performed such duties and obligations in a grossly negligent manner; (D) is the subject of any order, judgment, or decree of any court or regulatory authority of competent jurisdiction which is final and non-appealable, permanently or temporarily enjoining him from, or otherwise limiting his engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities law; or (E) is found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission (the "SEC") to have violated any federal or state securities law, and the judgment in such civil action or finding by the SEC has not been subsequently reversed, suspended, or vacated during the Employment Term;
(b) Any purported termination of the Executive by the Company
(other than by reason of Executive's death) shall be communicated by
written Notice of Termination to the Executive. As used herein, the term
"Notice of Termination" shall mean a notice which indicates the specific
termination provision in this Agreement relied upon and sets forth in
reasonable detail the facts and circumstances claimed to provide a basis
for termination of the Executive's employment under the provision so
indicated. In the event the Executive leaves the employ of the Company in
breach of this Agreement or is removed for Cause, the Executive shall, at
the Company's option, continue to be available to the Company for a period
of one month following departure, for up to ten hours per week, at
reasonable and customary hourly rates to assist in the necessary
transition. As used herein, the term "Termination Date" shall mean the
earlier of (i) the fifth anniversary of this Agreement in the case of a
termination pursuant to Section 7(a)(i), (ii) the date of the Executive's
death in the case of a termination pursuant to Section 7(a)(ii), (iii) the
date specified in the Notice of Termination for termination of the
Executive's employment in the case of a termination pursuant to Section
7(a)(iii) or 7(a)(iv), and (iv) the date of termination of Executive's
employment in the case of a termination under Section 7(c). The Executive
shall be entitled to a hearing related to any such termination described in
Section 7(a)(iii) or 7(a)(iv) above before the Board or a committee thereof
established for such purpose and to be accompanied by his counsel at such
hearing. Such hearing will be held within 30 days of notice to the Board by
the Executive provided he requests such hearing within 30 days of the
Notice of Termination.
(c) In the event that more than 50% of the then issued and outstanding equity securities or more than 50% of the voting rights of the Company is acquired by someone other than Michael Egan and his Controlled Entities and Family Transferees (each as defined in the Stockholders Agreement, dated as of the date hereof, among the Company, Michael Egan, Investor and certain stockholders of the Company) (other than in connection with a public offering) or in the event this Agreement is assigned by the Company in connection with a sale of the Company's assets (a "Change of Control"), the Executive may terminate his employment by delivering to the Company a notice within 60 days after a Change of Control; provided that in the event the Executive provides such notice, the Executive's employment hereunder shall terminate on the earlier of the first anniversary of the Change of Control and the date of termination pursuant to any other provision of this Section 7.
(d) This Agreement shall automatically terminate upon the dissolution, winding-up or liquidation of the Company.
(a) If the Executive's employment with the Company is terminated
(a) by the Company for Cause, (b) by the Executive upon a Change of Control
or (c) upon the dissolution of the Company, the Company will pay the
Executive (i) any accrued and unpaid Base Salary as of the Termination Date
and (ii) an amount to reimburse the Executive for any and all monies
advanced or expenses incurred in connection with the Executive's employment
for reasonable and necessary expenses incurred by the Executive on behalf
of the Company prior to the Termination Date. The Executive's entitlement
to other benefits shall be delivered in accordance with the Company's
benefit plans then in effect.
(b) If the Executive's employment with the Company is terminated by reason of the Executive's death or Disability, the Company's sole obligation under this Agreement shall be to pay or provide the Executive or his estate: (i) the payments required by Section 8(a) hereof and (ii) a pro rata portion of the Annual Bonus for the year of termination based on the Company's performance for the full calendar year in which termination occurs and on the number of days elapsed in such year through the date of termination.
(c) If the Company terminates Executive's employment without Cause, all stock options held by the Executive that have not vested shall automatically vest and the Company shall (i) pay or provide the Executive the payments required by Section 8(b) hereof, (ii) continue to pay the Executive the Base Salary for one year following such termination or the remainder of the Employment Term, whichever is less, and (iii) provide to the Executive and his beneficiaries for one year following such termination or the remainder of the Employment Term, whichever is less, employee benefits substantially similar in the aggregate to those provided to the other most senior executives of the Company; provided, however, that the Company's obligation with respect to the foregoing benefits shall be reduced to the extent the Executive or his beneficiaries obtains any such benefits pursuant to a subsequent employer's benefit plans.
(a) Unauthorized Disclosure. The Executive agrees and understands that in the Executive's position with the Company, the Executive has been and will be exposed to and receive information relating to the confidential affairs of Investor, the Company, their Subsidiaries and/or Affiliates (as defined below), including but not limited to technical information, intellectual property, business and marketing plans, strategies, customer information, other information concerning the products, promotions, development, financing, expansion plans, business policies and practices of Investor, the Company, their Subsidiaries and/or Affiliates and other forms of information considered by Investor or the Company to be confidential or in the nature of trade secrets (collectively, the "Confidential Information"). Confidential Information shall not include information which is (a) now, or hereafter becomes, through no act or failure to act on the part of Executive (except those performed in the ordinary course of the Company's business), generally known or available to the public, (b) rightfully received by the Executive from a third party without confidentiality restrictions, and (c) is independently developed by the Executive without reference to the Confidential Information. The Executive agrees that during the Employment Term and thereafter, the Executive will keep the Confidential Information confidential and not disclose such information, either directly or indirectly, except in the ordinary course of performance of the Company's business, to any third person or entity without the prior written consent of the Chairman of the Board or the Board, unless required to do so by law or court order. This confidentiality covenant has no temporal, geographical or territorial restriction. Upon termination of this Agreement, the Executive will promptly surrender to the Company all property, keys, notes, memoranda, writings, lists, files, reports, customer lists, correspondence, tapes, disks, cards, surveys, maps, logs, machines, technical data or any other tangible product or document which has been produced by, received by or otherwise submitted to the Executive after the date on which he was first employed by the Company and is still in the Executive's possession or control. As used herein, "Affiliate" means, with respect to any person, any person directly or indirectly controlling, controlled by, or under common control with such person.
For a period of 6 months following the end of the Executive's employment with the Company, the Company will redirect all personal email received at stephan@webgenesis.com or stephan@theglobe.com to an email address specified by the Executive.
(b) Non-competition. By and in consideration of Investor's and the Company's entering into the Stock Purchase Agreement and the transactions contemplated thereby, the Company's entering into this Agreement, and the Executive's exposure to the Confidential Information, until the earlier of (i) the fifth anniversary of the date hereof, or (ii) if the Executive's employment is terminated in accordance with Section 7(c) or (d), the date of such termination, or (iii) if the Executive's employment is terminated without Cause, the earlier of the first anniversary of such termination and the fifth anniversary of the date hereof (the "Non-Competition Date"), the Executive will not, directly or indirectly, own, manage, operate, join, control, be employed by, or participate in the ownership, management, operation or control of, or hold the position of shareholder, director, officer, consultant, independent contractor, executive, partner, investor or advisor (whether or not formally appointed), (x) in the case of clause (b)(i) or (b)(ii), in any Class A Restricted Enterprise (as defined below), or (y) in the case of clause (b)(iii), in any Class B Restricted Enterprise (as defined below); provided that in no event shall ownership of less than 1% of the outstanding equity securities of any issuer whose securities are registered under the 1934 Act, standing alone, be prohibited by this Section 9(b). For purposes of this paragraph, (A) the term "Class A Restricted Enterprise" shall mean any person, corporation, partnership or other entity engaged in the computer or internet industries, and (B) the term "Class B Restricted Enterprise" shall mean any person, corporation, partnership or other entity engaged in the virtual community business. Following termination of this Agreement and until the Non-Competition Date, upon request, the Executive shall notify the Company of the Executive's then-current employment status.
(c) Non-solicitation. Until the Non-Competition Date, the Executive shall not interfere with or harm, or intentionally attempt to interfere with or harm, the relationship of the Company, its Subsidiaries and/or Affiliates with, or endeavor to entice away from the Company, its Subsidiaries and/or Affiliates, any person who is an employee, customer or supplier of the Company, its Subsidiaries and/or Affiliates.
(d) Remedies. The Executive agrees that any breach of the terms of this Section 9 would result in irreparable injury and damage to Investor and the Company for which Investor and the Company would have no adequate remedy at law; the Executive therefore also agrees that, in the event of said breach or any threat of breach, Investor and the Company shall be entitled to an immediate injunction and restraining order to prevent such breach and/or threatened breach and/or continued breach by the Executive and/or any and all persons and/or entities acting for and/or with the Executive, without having to prove damages, and to all costs and expenses, including reasonable attorneys' fees and costs (provided, that such fees and expenses shall be awardable only in the event of an adjudication that there was a breach or a legitimate threat of breach), in addition to any other remedies to which Investor or the Company may be entitled at law or in equity. The terms of this paragraph shall not prevent Investor or the Company from pursuing any other available remedies for any breach or threatened breach hereof, including but not limited to the recovery of damages from the Executive. The Executive, Investor and the Company further agree that the provisions of the covenant not to compete are reasonable. The Executive hereby acknowledges that due to the global aspects of the Company's business and competitors it would not be appropriate to include any geographic limitation on this Section 9. Should a court or arbitrator determine, however, that any provision of the covenant not to compete is unreasonable, either in period of time, geographical area, or otherwise, the parties hereto agree that the covenant should be interpreted and enforced to the maximum extent which such court or arbitrator deems reasonable.
The provisions of this Section 9 shall survive any termination of this Agreement and the Employment Term, and the existence of any claim or cause of action by the Executive against either Investor or the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by either Investor or the Company of the covenants and agreements of this Section 9.
The Executive agrees that all Intellectual Property (as hereinafter defined) which is or was at any time made or conceived by the Executive or the Company, acting alone or in conjunction with others after the date on which he was first employed by the Company, is and shall be the property of the Company since its inception and which was used by the Company since its inception, free of any reserved or other rights of any kind on the Executive's part and the Executive hereby assigns to the Company all of his right, title and interest in and to any such Intellectual Property. During the Employment Term and thereafter, the Executive shall promptly make full disclosure of any such Intellectual Property to the Company and do all reasonable acts and things (including, among others, the execution and delivery under oath of patent and copyright applications and instruments of assignment) deemed by the Company to be necessary or desirable at any time in order to effect the full assignment to the Company of the Executive's right and title, if any, to such Intellectual Property and to protect the Company's interests in such Intellectual Property. For purposes of this Agreement, "Intellectual Property" means any discovery, development, program, concept, idea, process or improvement, whether or not patentable, patent, patent application, copyright, copyright registration, license, trademark or trade name, service mark or service name, trade secret or other intellectual property rights, in each case, made during the term of employment (including employment prior to execution of this Agreement) relating in any respect to the present or planned future activities, business, products or services of the Company, its Subsidiaries and/or Affiliates.
The Company reserves the right to obtain and maintain key man life insurance policies with respect to the Executive naming the Company as the primary beneficiary thereunder ("Key Man Life Insurance Policies") at the expense of the Company. The Executive shall use his best efforts to cooperate with the Company and any insurance company approached by the Company with respect to the obtaining and the maintenance of Key Man Life Insurance Policies.
When commercially reasonable, the Company shall obtain and maintain directors' and officers' liability insurance sufficient to cover the Executive's performance in accordance with this Agreement.
The failure to enforce at any time the provisions of this Agreement or to require at any time performance by the other parties of any of the provisions hereof shall in no way be construed to be a waiver of such provisions or to affect either the validity of this Agreement or any part hereof, or the right of any party to enforce each and every provision in accordance with its terms.
No modification, amendment or waiver of any provision of this Agreement shall be effective against any party hereto unless such modification, amendment or waiver is approved in writing by all of the parties hereto.
Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.
This Agreement embodies the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and supersedes and preempts any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. Notwithstanding the foregoing, the Proprietary Information and Invention Agreement between the Company and the Executive (the "Information Agreement") shall continue in accordance with its terms, provided that to the extent of any conflict between the terms of Information Agreement and this Agreement, the terms of this Agreement shall control.
This Agreement shall bind and inure to the benefit of, and be
enforceable by, the parties hereto and their respective successors
(including, without limitation, by way of merger), assigns, heirs and
personal representatives. Notwithstanding the provisions of the immediately
preceding sentence, the Executive shall not delegate any duty under this
Agreement without the prior written consent of the Company. This Agreement
is not intended to be for the benefit of any person not a party hereto
except that the Investor shall be deemed a third party beneficiary of
Section 9 hereof and shall be entitled to enforce the provisions of Section
9 as if a party hereto and the parties hereto may not amend Section 9 in
any manner adverse to the Investor without the Investor's prior written
consent.
Any notice provided for in this Agreement shall be in writing and shall be either personally delivered, sent by facsimile transmission or sent by first class mail or sent by reputable commercial overnight delivery service (charges prepaid) to the address set forth below, or at such address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. Notices will be deemed to have been given hereunder when delivered personally, on the date of facsimile transmission with confirmed answer back, two business days after deposit with a reputable overnight commercial delivery service or on the date of actual receipt if given by any other method of delivery.
To the Company: WebGenesis, Inc.
31 West 21st Street
New York, NY 10010
Attn: Board of Directors
Telephone: (212) 367-8555
Facsimile: (212) 267-8604
With a copy to: Dancing Bear Investments, Inc.
The 110 Tower
Box 70, 110 S.E. 6th Street
Ft. Lauderdale, FL 33301
Attention: Michael Egan
- with a separate copy to the
attention of Rosalie Arthur
Telephone: (954) 527-6550
Facsimile: (954) 527-6182
With a copy to: Tripp, Scott, Conklin & Smith
The 110 Tower, 28th Floor
110 S.E. 6th Street
Ft. Lauderdale, FL 33301
Attention: Dennis Smith
Telephone: (954) 760-4920
Facsimile: (954) 761-8475
To the Executive: 207 Sullivan Street, Apt.8
New York, NY 10012
Telephone: (212) 228-1473
With a copy to: Cooley Godward LLP
5 Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306
Attn: Alan Mendelson
Telephone: (415) 843-5000
Facsimile: (415) 857-0663
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The descriptive headings of the several sections and paragraphs of this Agreement are inserted for reference only and shall not limit or otherwise affect the meaning hereof.
This Agreement shall be governed by and construed in accordance with the laws of the State of Florida without giving effect to the principles of conflicts of laws.
This Agreement may be executed in two counterparts, all of which together shall be considered one and the same agreement, and shall become effective when one or more of the counterparts have been signed by each party and delivered to the other parties, it being understood that all parties need not sign the same counterpart.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by authority of its Board of Directors, and the Executive has hereunto set his hand, the day and year first above written.
WEBGENESIS, INC.
By: /s/ Todd Krizelman
-------------------------------
Name: Todd Krizelman
Title: Chief Executive Officer
/s/ Stephan Paternot
-------------------------------
Stephan Paternot
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EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, dated as of July 13, 1998 (this "Agreement"), by and between theglobe.com, inc., a Delaware corporation (the "Company") and Frank Joyce (the "Employee").
WHEREAS, the Employee represents that he possesses skills, experience and knowledge that are of value to the Company; and
WHEREAS, the Company desires to enlist the services and employment of the Employee on behalf of the Company and the Employee is willing to render such services on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto agree as follows:
1. Employment Term. Subject to the terms and provisions of this Agreement, the Company hereby agrees to employ the Employee and Employee hereby agrees to be employed by the Company for the period commencing on the date of this Agreement and ending on the third anniversary of the date of this Agreement, unless terminated sooner as hereinafter provided (the "Employment Term").
2. Duties. During the Employment Term the Employee shall serve as Chief Financial Officer of the Company or such other position(s) as may be agreed upon by Company and Employee and shall perform such duties, services and responsibilities incident to such position(s) as determined from time to time by the Board of Directors of the Company (the "Board"). The Employee also agrees to perform such other duties, services and responsibilities as may from time to time be requested by the Board commensurate with the Employee's position(s). In performing such duties hereunder, the Employee will report directly to the Chief Executive Officer and/or the President of the Company.
The Employee shall devote his full business time, attention and skill to the performance of such duties, services and responsibilities, and will use his best efforts to promote the interests of the Company. The Employee will not, without the prior written approval of the President or Chief Executive Officer of the Company, engage in any other corporate, civic or charitable activity which would interfere with the performance of his duties as an employee of the Company, is in violation of written Company policies, is in violation of applicable law, or would create a conflict of interest with respect to the Employee's obligations as an employee of the Company.
3. Compensation. In consideration of the performance by the Employee of the Employee's obligations during the Employment Term (including any services as an officer, director, employee, member of any committee of the Company or any subsidiary, or otherwise), the Company shall compensate the Employee as follows:
(a) A base salary (the "Base Salary") at an annual rate of not less than $200,000 per year, payable in accordance with the normal payroll practices of the Company then in effect. Over the course of the Employment Term, the Employee will be eligible to receive annual increases in the Base Salary as determined by the Chief Executive Officer and the President of the Company within the guidelines established by the Board of Directors.
(b) An annual cash bonus of $50,000 (the "Bonus").
(c) The Employee will be granted, as soon as practicable following the date hereof, options to purchase shares of common stock of the Company, par value $ __ per share (the "Common Stock"), covering the number of shares of Common Stock, and subject to the terms and conditions, described in Schedule 1 attached hereto; provided, however, that such options will be granted under, and subject to the procedures set forth in, the Company's 1998 Stock Option Plan (the "Plan").
The Employee shall be solely responsible for taxes imposed on the Employee by reason of any compensation and benefits provided under this Agreement (except those taxes normally borne by the Company) and all such compensation and benefits shall be subject to applicable withholding taxes.
4. Disability. If the Employee is unable, as reasonably determined by the Chief Executive Officer or President of the Company, to perform his duties, services and responsibilities hereunder by reason of a physical or mental infirmity for a total of 90 calendar days in any twelve-month period during the Employment Term ("Disability"), the Company shall not be obligated to pay the Employee any Base Salary for any period of absence in excess of such 90 calendar days and, in any case, shall be entitled to terminate the Employee's employment hereunder in accordance with Section 7.
5. Benefits and Stock Options. In addition to the payments described in Section 3 of this Agreement, during the period that the Employee is employed by the Company pursuant to this Agreement, the Employee shall be entitled to participate in any employee benefit plans (including any stock option or similar plans) then in effect for similarly situated employees and receive any other fringe benefits that the Company then provides to similarly situated employees to the extent the Employee meets the eligibility requirements for any such plan or benefit; provided, however, that the foregoing shall not be construed as an obligation of the Company to grant additional stock options to the Employee.
6. Vacations. During the Employment Term the Employee shall be entitled to the number of paid vacation days in each calendar year determined by the Company in accordance with the Company's policies in effect from time to time.
7. Termination. The Employee's employment with the Company and the Employment Term shall terminate upon the expiration of the Employment Term or upon the earlier occurrence of any of the following events:
(a) The death of the Employee ("Death").
(b) The mutual agreement between the Company and the Employee on an early termination date.
(c) The termination of employment by the Company for Cause. Termination of employment for "Cause" shall mean termination based on: (i) the Employee's material breach of this Agreement, (ii) conduct by the Employee that is fraudulent or unlawful, (iii) gross negligence of or willful misconduct by the Employee which discredits or damages the Company or (iv) repeated failure to perform his duties and such failure to perform adversely affects the Company.
(d) The termination of employment by the Company for Disability.
(e) The termination of employment by the Company other than for Cause, Disability or Death.
In the event of termination of this Agreement, for whatever reason, the Employee agrees to cooperate with the Company and to be reasonably available to the Company with respect to continuing and/or future matters arising out of the Employee's employment or any other relationship with the Company, whether such matters are business-related, legal or otherwise. The provisions of this paragraph shall survive termination of this Agreement.
8. Termination Payments. If the Employee's employment with the
Company terminates for whatever reason, the Company will pay the Employee
(i) any accrued and unpaid Base Salary as of the Termination Date and (ii)
an amount to reimburse the Employee for any and all monies advanced or
expenses incurred in connection with the Employee's employment for
reasonable and necessary expenses incurred by the Employee on behalf of the
Company on or prior to the date of termination but not paid to the
Employee. If the Employee's employment with the Company terminates pursuant
to Section 7(e) hereof (i) all stock options held by the Employee that have
not vested shall automatically vest, (ii) the Company will continue to pay
the Employee an amount equal to the Employee's Base Salary (at the rate in
effect at the time of termination of employment) during the Non-competition
Term (as defined in Section 9(b) below) and (iii) the Company will pay the
Employee an amount equal to the pro rata portion of the Bonus in respect of
the year in which the termination of employment occurs.
The foregoing payments upon termination shall constitute the exclusive payments due the Employee upon termination under this Agreement, but shall have no effect on any benefits which may be due the Employee under any plan of the Company which provides benefits after termination of employment, other than severance pay or salary continuation which shall be reduced by the amount of any payment received by the Employee pursuant to this Agreement.
9. Employee Covenants.
(a) Unauthorized Disclosure. The Employee agrees and understands that in the Employee's position with the Company, the Employee has been and will be exposed to and receive information relating to the confidential affairs of the Company and its subsidiaries and/or affiliates, including but not limited to technical information, intellectual property, business and marketing plans, strategies, customer information, other information concerning the products, promotions, development, financing, expansion plans, business policies and practices of the Company, its subsidiaries and/or affiliates, and other forms of information considered by the Company to be confidential and in the nature of trade secrets. The Employee agrees that during the Employment Term and thereafter, the Employee will keep such information confidential and not disclose such information, either directly or indirectly, to any third person or entity without the prior written consent of the Company. This confidentiality covenant has no temporal, geographical or territorial restriction. Upon termination of this Agreement, the Employee will promptly supply to the Company all property, keys, notes, memoranda, writings, lists, files, reports, customer lists, correspondence, tapes, disks, cards, surveys, maps, logs, machines, technical data or any other tangible product or document which has been produced by, received by or otherwise submitted to the Employee during or prior to the Employment Term. Any material breach of the terms of this paragraph shall be considered Cause.
(b) Non-competition. By and in consideration of the Company's
entering into this Agreement and the payments to be made and benefits to be
provided by the Company hereunder, and further in consideration of the
Employee's exposure to the proprietary information of the Company, the
Employee agrees that the Employee will not, during the Employment Term, and
thereafter during the Non-competition Term (as defined below), directly or
indirectly own, manage, operate, join, control, be employed by, or
participate in the ownership, management, operation or control of, or be
connected in any manner, including but not limited to holding, the
positions of shareholder, director, officer, consultant, independent
contractor, employee, partner, or investor, (x) in the case of a
termination other than under Section 7(e), in any Class A Restricted
Enterprise (as defined below), or (y) in the case of a termination under
Section 7(e), in any Class B Restricted Enterprise (as defined below);
provided that in no event shall ownership of less than 1% of the
outstanding equity securities of any issuer whose securities are registered
under the 1934 Act, standing alone, be prohibited by this Section 9(b). For
purposes of this paragraph, (A) the term "Class A Restricted Enterprise"
shall mean any person, corporation, partnership or other entity engaged in
the computer or internet industries, and (B) the term "Class B Restricted
Enterprise" shall mean any person, corporation, partnership or other entity
engaged in the virtual community business. Following termination of this
Agreement, upon request, the Employee shall notify the Company of the
Employee's then current employment status. For purposes of this Agreement,
the "Non-competition Term" shall mean the period beginning on the date upon
which the Employment Term ends for any reason, and ending on the first
anniversary of such date; provided, however, that the Company, in its sole
discretion, shall have the right, upon no less than fourteen (14) days
written notice to the Employee, to elect to end the Non-competition Term
(and, accordingly, end any further severance obligations under Section 8
hereof), effective as of any date which is not less than six months
following the end of the Employment Term.
(c) Non-solicitation. During the Non-competition Term, the Employee shall not interfere with or harm, or intentionally attempt to interfere with or harm, the relationship with the Company or its subsidiaries, or endeavor to entice away from the Company or its subsidiaries, any person who at any time during the Employment Term was an employee or customer of the Company or any of its subsidiaries or otherwise had a material business relationship with the Company or any of its subsidiaries.
(d) Remedies. The Employee agrees that any breach of the terms of this Section 9 would result in irreparable injury and damage to the Company for which the Company would have no adequate remedy at law; the Employee therefore also agrees that in the event of said breach or any threat of breach, the Company shall be entitled to an immediate injunction and restraining order to prevent such breach and/or threatened breach and/or continued breach by the Employee and/or any and all persons and/or entities acting for and/or with the Employee, without having to prove damages, in addition to any other remedies to which the Company may be entitled at law or in equity. The terms of this paragraph shall not prevent the Company from pursuing any other available remedies for any breach or threatened breach hereof, including but not limited to the recovery of damages from the Employee. The Employee and the Company further agree that the provisions of the covenant not to compete are reasonable. The Employee hereby acknowledges that due to the global aspects of the Company's business and competitors it would not be appropriate to include any geographic limitation on this Section 9. Should a court or arbitrator determine, however, that any provision of the covenant not to compete is unreasonable, either in period of time, geographical area, or otherwise, the parties hereto agree that the covenant should be interpreted and enforced to the maximum extent which such court or arbitrator deems reasonable.
The provisions of this Section 9 shall survive any termination of this Agreement and the Employment Term, and the existence of any claim or cause of action by the Employee against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants and agreements of this Section 9.
10. Proprietary Rights. The Employee represents and warrants that all patents, patent applications, rights to inventions, copyright registrations and other license, trademark and trade name rights heretofore owned by the Employee and relating to the business of the Company or any of its subsidiaries have been duly transferred to such corporation.
11. Non-Waiver of Rights. The failure to enforce at any time the provisions of this Agreement or to require at any time performance by the other party of any of the provisions hereof shall in no way be construed to be a waiver of such provisions or to affect either the validity of this Agreement or any part hereof, or the right of either party to enforce each and every provision in accordance with its terms.
12. Notices. Every notice relating to this Agreement shall be in writing and shall be given by personal delivery or by registered or certified mail, postage prepaid, return receipt requested.
13. Binding Effect/Assignment. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, personal representatives, estates, successors (including, without limitation, by way of merger) and assigns. Notwithstanding the provisions or the immediately preceding sentence, the Employee shall not assign all or any portion of this Agreement without the prior written consent of the Company.
14. Entire Agreement. This Agreement sets forth the entire understanding of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements, written or oral, between them as to such subject matter. This Agreement may not be amended, nor may any provision hereof be modified or waived, except by an instrument in writing duly signed by the party to be charged.
15. Severability. If any provision of this Agreement, or any application thereof to any circumstances, is invalid, in whole or in part, such provision or application shall to that extent be severable and shall not affect other provisions or applications of this Agreement.
16. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York, without reference to the principles of conflict of laws.
17. Modifications and Waivers. No provision of this Agreement may be modified, altered or amended except by an instrument in writing executed by the parties hereto. No waiver by either party hereto of any breach by the other party hereto of any provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions at the time or at any prior or subsequent time.
18. Headings. The headings contained herein are solely for the purposes of reference, are not part of this Agreement and shall not in any way affect the meaning or interpretation of this Agreement.
19. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by authority of its Board of Directors, and the Employee has hereunto set his hand, the day and year first above written.
theglobe.com, inc.
By: /s/ Stephan Paternot -------------------------------- Stephan Paternot, President |
/s/ Frank Joyce ----------------------------------- Frank Joyce |
SCHEDULE 1
STOCK OPTION
The Employee shall be granted a stock option (the "Option") to purchase 175,000 shares of Common Stock, with an exercise price per share equal to the fair market value per share of Common Stock as of the date of grant (which value shall be 15% below the initial public offering price). The Option shall vest with respect to one-third of the shares subject thereto on each of the first 3 anniversaries of the date of grant. The Option shall be subject to the terms and conditions set forth in the Plan, a copy of which has been provided to the Employee.
In the event that the Company's revenues in respect of fiscal year 1998 reach $7 million, the Employee shall also be granted an Option to purchase 25,000 shares of Common Stock, with an exercise price per share equal to the fair market value per share of Common Stock as of the date of grant. The option shall be fully vested upon grant and subject to the terms and conditions set forth in the Plan.
In the event that the Company's revenues in respect of fiscal year 1999 reach $25 million, the Employee shall also be granted an Option to purchase 25,000 shares of Common Stock, with an exercise price per share equal to the fair market value per share of Common Stock as of the date of grant. The option shall be fully vested upon grant and subject to the terms and conditions set forth in the Plan.
EXHIBIT 10.4
FORM OF
INDEMNIFICATION AGREEMENT
This INDEMNIFICATION AGREEMENT, dated July __, 1998, is made by and among theglobe.com, inc., (the "Company"), on the one hand, and ________________ (the "Individual"), on the other hand.
For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
(a) The Company shall indemnify and hold harmless the Individual to the fullest extent permitted by law against any judgments, fines, amounts paid in settlement, and expenses (including attorneys' fees and disbursements) incurred in connection with, or in any way arising out of, any claim, action or proceeding (whether civil or criminal) against, or affecting, the Individual resulting from, relating to or in any way arising out of, (i) the Individual's current position as an officer, director, trustee, partner or any other position with any entity, employee benefit plan or other enterprise that Individual serves at the request of the Company (including, without limitation, those positions set forth on Annex A hereto) or (ii) any such future positions that the Individual serves at the request of the Company. This indemnification shall be in addition to, and not in lieu of, any other indemnification that the Individual shall be entitled to pursuant to the Second Amended and Restated Certificate of Incorporation, By-Laws or other applicable governance document of the Company or otherwise under applicable law.
(b) The Individual shall provide notice to the Company of any action or proceeding that would give rise to a claim for indemnification hereunder (an "Action") and of his or her intention to make a claim for indemnification hereunder; provided, however, that no delay or failure on the part of the Individual in notifying the Company shall relieve the Company from any obligation hereunder unless and solely to the extent the Company is materially and adversely prejudiced thereby. Upon request by the Individual, the Company shall pay all fees and expenses and other costs incurred by the Individual by reason of his or her participation in the Action in advance of the final disposition of the Action.
With respect to any Action, the Company will be entitled (a) to participate therein at its own expense and (b) to assume the defense, jointly with any other indemnifying party, with counsel satisfactory to the Individual; provided, however, that the Company will not be entitled to assume the defense if the Individual shall have concluded that there may be a conflict of interest between the Company and such Individual with respect to such Action. After the Company has so assumed such defense in accordance with this Paragraph 2, the Company will not be liable to the Individual for any fees and expenses of counsel subsequently incurred by the Individual. The Individual shall have the right to employ his or her own counsel in an Action, but the fees and expenses of such counsel shall be at the expense of such Individual.
The Company shall not be liable hereunder for any settlement of any Action effected without its prior written consent (which consent may not be unreasonably withheld). The Company shall not settle any Action without the Individual's prior written consent, unless the proposed settlement only involves the payment of money damages, does not impose an injunction or other equitable relief upon the Individual, does not admit to any wrongdoing by the Individual and results in the unconditional release of the Individual with respect to all claims for which indemnification is sought.
If any clause, paragraph or provision of this Agreement or the application thereof to any person or situation to any extent shall be held illegal, invalid or unenforceable under present or future law, then in that event, it is the intention of the parties hereto that the remainder of this Agreement shall not be affected thereby and that such clause, paragraph or provision be reformed by them so as to be legal, valid and enforceable.
This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York.
This Agreement may be executed in one or more counterparts each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto duly execute this Indemnification Agreement as of the date first above written.
THEGLOBE.COM, INC.
Title:
EXHIBIT 10.7
WEBGENESIS, INC.
1995 STOCK OPTION PLAN
ADOPTED MAY 26, 1995
AMENDED NOVEMBER 27, 1995
AMENDED NOVEMBER 13, 1996
AMENDED AUGUST 11, 1997
1. PURPOSES.
(a) The purpose of the Plan is to provide a means by which selected Employees and Directors of and Consultants to the Company, and its Affiliates, may be given an opportunity to purchase stock of the Company.
(b) The Company, by means of the Plan, seeks to retain the services of persons who are now Employees or Directors of or Consultants to the Company or its Affiliates, to secure and retain the services of new Employees, Directors and Consultants, and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates.
(c) The Company intends that the Options issued under the Plan shall, in the discretion of the Board or any Committee to which responsibility for administration of the Plan has been delegated pursuant to subsection 3(c), be either Incentive Stock Options or Nonstatutory Stock Options. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and in such form as issued pursuant to Section 6, and a separate certificate or certificates will be issued for shares purchased on exercise of each type of Option.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f) respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in accordance with subsection 3(c) of the Plan.
(e) "COMPANY" means WebGenesis, Inc., a Delaware corporation.
(f) "CONSULTANT" means any person, including an advisor, engaged by the Company or an Affiliate to render consulting services and who is compensated for such services, provided that the term "Consultant" shall not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors.
(g) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means the employment or relationship as a Director or Consultant is not interrupted or terminated. The Board, in its sole discretion, may determine whether Continuous Status as an Employee, Director or Consultant shall be considered interrupted in the case of: (i) any leave of absence approved by the Board, including sick leave, military leave, or any other personal leave; or (ii) transfers between locations of the Company or between the Company, Affiliates or their successors.
(h) "DIRECTOR" means a member of the Board.
(i) "EMPLOYEE" means any person, including officers and Directors, employed by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company.
(j) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
(k) "FAIR MARKET VALUE" means the value of the common stock as determined in good faith by the Board.
(l) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.
(m) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option.
(n) "OPTION" means a stock option granted pursuant to the Plan.
(o) "OPTION AGREEMENT" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan.
(p) "OPTIONEE" means an Employee, Director or Consultant who holds an outstanding Option.
(q) "PLAN" means this 1995 Stock Option Plan.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and until the Board delegates administration to a Committee, as provided in subsection 3(c).
(b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan:
(i) To determine from time to time which of the persons eligible under the Plan shall be granted Options; when and how each Option shall be granted; whether an Option will be an Incentive Stock Option or a Nonstatutory Stock Option; the provisions of each Option granted (which need not be identical), including the time or times such Option may be exercised in whole or in part; and the number of shares for which an Option shall be granted to each such person.
(ii) To construe and interpret the Plan and Options granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Option Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective.
(iii) To amend the Plan or an Option as provided in Section 11.
(iv) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company.
(c) The Board may delegate administration of the Plan to a committee composed of not more than two (2) members (the "Committee"). If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan (including the grant of stock options under the Plan), the powers theretofore possessed by the Board (and references in this Plan to the Board shall thereafter be to the Committee).
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 10 relating to adjustments upon changes in stock, the stock that may be sold pursuant to Options shall not exceed in the aggregate one million five hundred eighty two thousand (1,582,000) shares of the Company's common stock. If any Option shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the stock not purchased under such Option shall revert to and again become available for issuance under the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Incentive Stock Options may be granted only to Employees. Nonstatutory Stock Options may be granted only to Employees, Directors or Consultants.
(b) No person shall be eligible for the grant of an Option if, at the time of grant, such person owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of such stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be identical, but each option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions:
(a) TERM. No Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
(b) PRICE. The exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. The exercise price of each Nonstatutory Stock Option shall be not less than eighty five percent (85%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or
(ii) at the discretion of the Board or the Committee, at the time of the
grant of the Option, (A) by delivery to the Company of other common stock
of the Company, (B) according to a deferred payment or other arrangement
(which may include, without limiting the generality of the foregoing, the
use of other common stock of the Company) with the person to whom the
Option is granted or to whom the Option is transferred pursuant to
subsection 6(d), or (C) in any other form of legal consideration that may
be acceptable to the Board.
In the case of any deferred payment arrangement, interest shall be payable at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than the amounts stated to be interest under the deferred payment arrangement.
(d) TRANSFERABILITY. An Option shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the Option is granted only by such person. The person to whom the Option is granted may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionee, shall thereafter be entitled to exercise the Option.
(e) VESTING. The total number of shares of stock subject to an Option may, but need not, be allotted in periodic installments (which may, but need not, be equal). The Option Agreement may provide that from time to time during each of such installment periods, the Option may become exercisable ("vest") with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary but in each case will provide for vesting of at least twenty percent (20%) per year of the total number of shares subject to the Option. The provisions of this subsection 6(e) are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised.
(f) SECURITIES LAW COMPLIANCE. The Company may require any Optionee, or any person to whom an Option is transferred under subsection 6(d), as a condition of exercising any such Option, (1) to give written assurances satisfactory to the Company as to the Optionee's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Option; and (2) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the Option for such person's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise of the option has been registered under a then currently effective registration statement under the Securities Act of 1933, as amended (the "Securities Act") or (ii) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock.
(g) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates (other than upon the Optionee's death or disability), the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it at the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant, or such longer or shorter period specified in the Option Agreement, or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionee does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan.
(h) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous
Status as an Employee, Director or Consultant terminates as a result of the
Optionee's disability, the Optionee may exercise his or her Option (to the
extent that the Optionee was entitled to exercise it at the date of
termination), but only within such period of time ending on the earlier of
(i) the date twelve (12) months following such termination (or such longer
or shorter period specified in the Option Agreement), or (ii) the
expiration of the term of the Option as set forth in the Option Agreement.
If, at the date of termination, the Optionee is not entitled to exercise
his or her entire Option, the shares covered by the unexercisable portion
of the Option shall revert to and again become available for issuance under
the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified herein, the Option shall terminate, and
the shares covered by such Option shall revert to and again become
available for issuance under the plan.
(i) DEATH OF OPTIONEE. In the event of the death of an Optionee during, or within a period specified in the Option after the termination of, the Optionee's Continuous Status as an Employee, Director or Consultant, the Option may be exercised (to the extent the Optionee was entitled to exercise the Option at the date of death) by the Optionee's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionee's death pursuant to subsection 6(d), but only within the period ending on the earlier of (i) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of such Option as set forth in the Option Agreement. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan.
(j) EARLY EXERCISE. The Option may, but need not, include a provision whereby the optionee may elect at any time while an Employee, Director or Consultant to exercise the Option as to any part or all of the shares subject to the Option prior to the full vesting of the Option. Any unvested shares so purchased may be subject to a repurchase right in favor of the Company or to any other restriction the Board determines to be appropriate.
(k) STOCKHOLDERS' AGREEMENT. As a condition to the grant of an option to an Optionee on or after August 13, 1997, such Optionee shall execute a Joinder Agreement to that certain Stockholders' Agreement (the "Stockholders' Agreement"), dated August 13, 1997, by and among the Company and the Stockholders (as defined therein), which shall provide that all shares of Common Stock subject to options granted to such Optionee on or after August 13, 1997, shall be subject to the terms of the Stockholders' Agreement. Such Optionee shall have the right, but not the obligation, to execute a Joinder Agreement to the Stockholders' Agreement with respect to shares of Common Stock subject to options granted prior to August 13, 1997.
7. COVENANTS OF THE COMPANY.
(a) During the terms of the Options, the Company shall keep available at all times the number of shares of stock required to satisfy such Options.
(b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the Options; provided, however, that this undertaking shall not require the Company to register under the Securities Act either the Plan, any Option or any stock issued or issuable pursuant to any such Option. If, after reasonable efforts, the Company is unable to Obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such options unless and until such authority is obtained.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Options shall constitute general funds of the Company
9. MISCELLANEOUS.
(a) The Board shall have the power to accelerate the time at which an Option may first be exercised or the time during which an Option or any part thereof will vest pursuant to subsection 6(e), notwithstanding the provisions in the Option stating the time at which it may first be exercised or the time during which it will vest.
(b) Neither an Optionee nor any person to whom an Option is transferred under subsection 6(d) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Option unless and until such person has satisfied all requirements for exercise of the Option pursuant to its terms.
(c) Nothing in the Plan or any instrument executed or Option granted pursuant thereto shall confer upon any Employee, Director, Consultant or Optionee any right to continue in the employ of the Company or any Affiliate (or to continue acting as a Director or Consultant) or shall affect the right of the Company or any Affiliate to terminate the employment or relationship as a Director or Consultant of any Employee, Director, Consultant or Optionee with or without cause.
(d) To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year under all plans of the Company and its Affiliates exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options.
(e) The Board shall have the authority to effect, at any time and from time to time (i) the repricing of any outstanding Options under the Plan and/or (ii) with the consent of the affected holders of Options, the cancellation of any outstanding Options and the grant in substitution therefor of new Options under the Plan covering the same or different numbers of shares of Common Stock, but having an exercise price per share not less than eighty-five percent (85%) of the Fair Market Value (one hundred percent (100%) of the Fair Market Value in the case of an Incentive Stock Option or, in the case of a ten percent (10%) stockholder (as defined in subsection 5(b)), not less than one hundred and ten percent (110%) of the Fair Market Value) per share of Common Stock on the new grant date.
10. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject to any Option (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), the Plan will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan pursuant to subsection 4(a) and the outstanding Options will be appropriately adjusted in the class(es) and number of shares and price per share of stock subject to such outstanding Options.
(b) In the event of: (1) a dissolution, liquidation or sale of substantially all of the assets of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; or (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then to the extent permitted by applicable law: (i) any surviving corporation shall assume any Options outstanding under the Plan or shall substitute similar Options for those outstanding under the Plan or (ii) such Options shall continue in full force and effect. In the event any surviving corporation refuses to assume or continue such Options, or to substitute similar options for those outstanding under the Plan, then, with respect to Options held by persons then performing services as Employees, Directors or Consultants: (a) the time during which such Options may be exercised shall be accelerated prior to the consummation of the event described above (the "Acceleration Event"), (b) any shares acquired by such Optionees upon exercise of such accelerated Options shall be deemed acquired immediately after the acceleration thereof but immediately prior to the consummation of the Acceleration Event, (c) the shares issued upon exercise of the accelerated Options, if any, shall be subject to the Stockholders' Agreement, and (d) the Options shall terminate if not exercised prior to the Acceleration Event.
11. AMENDMENT OF THE PLAN AND OPTIONS.
(a) The Board at any time, and from time to time, may amend the Plan by the affirmative vote of six (6) of the nine (9) members of the Board, including the consent of either Todd Krizelman or Stephan Paternot (while such person continues to serve on the Board of Directors). However, except as provided in Section 10 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company within twelve (12) months before or after the adoption of the amendment, where such amendment requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code.
(b) The Board may in its sole discretion and by the affirmative vote of six (6) of the nine (9) members of the Board, including the consent of either Todd Krizelman or Stephan Paternot (while such person continues to serve on the Board of Directors) submit any other amendment to the Plan for stockholder approval.
(c) It is expressly contemplated that the Board may amend the Plan in accordance with the terms hereof in any respect the Board deems necessary or advisable to provide Optionees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith.
(d) Rights and obligations under any Option granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the person to whom the Option was granted and (ii) such person consents in writing.
(e) The Board at any time, and from time to time, may amend the terms of any one or more Options; provided, however, that the rights and obligations under any Option shall not be impaired by any such amendment unless (i) the Company requests the consent of the person to whom the Option was granted and (ii) such person consents in writing.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time by the affirmative vote of six (6) of the nine (9) members of the Board, including the consent of either Todd Krizelman or Stephan Paternot (while such person continues to serve on the Board of Directors). Unless sooner terminated, the Plan shall terminate on May 26, 2005 which shall be within ten (10) years from the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Options may be granted under the Plan while the Plan is suspended or after it is terminated.
(b) Rights and obligations under any Option granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the consent of the person to whom the Option was granted.
13. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no Options granted under the Plan shall be exercised unless and until the Plan has been approved by the stockholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board, and, if required, an appropriate permit has been issued by the Commissioner of Corporations of the State of California.
Exhibit 11.1
Computation of loss per share
Years ended December 31, Six months ended June 30,
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(unaudited)
Basic:
Net loss ($65,706) ($750,180) ($3,584,400) ($767,435) ($5,824,270)
Net loss applicable to common
stockholders ($65,706) ($750,180) ($3,584,400) ($767,435) ($5,824,270)
============ ============ ============ ============ ============
Basic weighted average shares
outstanding 2,250,000 2,250,000 2,293,545 2,281,920 2,322,794
============ ============ ============ ============ ============
Basic loss per common share ($0.03) ($0.33) ($1.56) ($0.34) ($2.51)
============ ============ ============ ============ ============
Diluted:
Net loss applicable to common
stockholders ($65,706) ($750,180) (3,584,400) ($767,435) ($5,824,270)
============ ============ ============ ============ ============
Basic weighted average shares
outstanding 2,250,000 2,250,000 2,293,545 2,281,920 2,322,794
Net effect of dilutive securities 0 0 0 0 0
------------ ------------ ------------ ------------ ------------
Diluted weighted average shares
outstanding 2,250,000 2,250,000 2,293,545 2,281,920 2,322,794
============ ============ ============ ============ ============
Diluted loss per common share ($0.03) ($0.33) ($1.56) ($0.34) ($2.51)
============ ============ ============ ============ ============
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EXHIBIT 23.1
ACCOUNTANTS' CONSENT AND REPORT ON SCHEDULE
The Board of Directors and Stockholders
theglobe.com, inc.:
The audits referred to in our report dated April 16, 1998, except for note 8, which is as of July 22, 1998, included the related financial statement schedule as of December 31, 1997, and for the period from May 1, 1995 (inception) to December 31, 1995 and for the years ended December 31, 1996 and 1997, included in the Registration Statement. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.
We consent to the use of our report included herein and to the reference to our firm under the headings "Selected Financial Data" and "Experts" in the Prospectus.
KPMG PEAT MARWICK LLP
New York, New York
July 24, 1998
EXHIBIT 99.1
SCHEDULE II
theglobe.com, inc.
VALUATION AND QUALIFYING ACCOUNTS--
ALLOWANCE FOR DOUBTFUL ACCOUNTS
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED END
OF PERIOD TO EXPENSE DEDUCTIONS OF PERIOD
---------- ---------- ---------- ----------
Period from May 1, 1995 to
December 31, 1995 $0 $--- $--- $0
Year ended December 31, 1996 $0 $--- $--- $0
Year ended December 31, 1997 $0 $12,000 $--- $12,000
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