The selected financial data should be read in conjunction with EarthWeb's fi-
nancial statements and notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
prospectus. The statement of operations data for the years ended December 31,
1996, 1997 and 1998 and the balance sheet data as of December 31, 1997 and 1998
are derived from the audited financial statements of EarthWeb and are included
elsewhere in this prospectus. The statements of operations data for the three
months ended March 31, 1998 and 1999 and the balance sheet data as of March 31,
1999 are derived from the unaudited consolidated financial statements of
EarthWeb and are included elsewhere in this prospectus. The balance sheet data
as of December 31, 1995 and 1996 and the statement of operations data for the
year ended December 31, 1995 are derived from the audited financial statements
of EarthWeb not included herein. The historical results presented here are not
necessarily indicative of future results.
--------------------------------------------------------------------
Three Months ended
Year ended December 31, March 31,
---------------------------------------------- --------------------
Dollars in thousands, except 1995 1996 1997 1998 1998 1999
per share data ---------- ---------- ---------- ---------- --------- ---------
Statement of Operations
Data:
Revenues.................... $ -- $ 472 $ 1,135 $ 3,349 $ 308 $ 3,732
Cost of revenues............ -- 314 1,358 2,131 395 1,479
---------- ---------- ---------- ---------- --------- ---------
Gross profit (deficit)...... -- 158 (223) 1,218 (87) 2,253
---------- ---------- ---------- ---------- --------- ---------
Operating expenses
Product development....... 36 68 1,003 1,476 246 736
Sales and marketing....... -- 252 1,018 4,546 333 5,188
General and administra-
tive..................... 626 1,802 2,567 3,357 605 1,597
Depreciation.............. 42 101 387 712 163 247
Amortization.............. -- -- 506 404 70 1,531
---------- ---------- ---------- ---------- --------- ---------
Total operating ex-
penses................. 704 2,223 5,481 10,495 1,417 9,299
---------- ---------- ---------- ---------- --------- ---------
Loss from operations........ (704) (2,065) (5,704) (9,277) (1,504) (7,046)
Interest and other income,
net........................ (1) 61 267 307 47 234
---------- ---------- ---------- ---------- --------- ---------
Loss from continuing opera-
tions...................... (705) (2,004) (5,437) (8,970) (1,457) (6,812)
Loss from discontinued oper-
ations..................... 65 (42) (2,384) -- -- --
---------- ---------- ---------- ---------- --------- ---------
Net loss.................... $ (640) $ (2,046) $ (7,821) $ (8,970) $ (1,457) $(6,812)
========== ========== ========== ========== ========= =========
Basic and diluted net loss
per share from continuing
operations................. $ (0.24) $ (0.69) $ (1.86) $ (2.37) $ (0.50) $ (0.82)
Basic and diluted net loss
per share from discontinued
operations................. 0.02 (0.01) (0.81) -- -- --
---------- ---------- ---------- ---------- --------- ---------
Basic and diluted net loss
per share (1).............. $ (0.22) $ (0.70) $ (2.67) $ (2.37) $ (0.50) $ (0.82)
========== ========== ========== ========== ========= =========
Weighted average shares out-
standing used in computing
basic and diluted net loss
per share.................. 2,925,000 2,925,000 2,925,000 3,782,575 2,925,000 8,289,587
========== ========== ========== ========== ========= =========
---------------------------------------------------------
As of
As of December 31, March 31,
---------------------------------------------- ---------
1995 1996 1997 1998 1999
Dollars in thousands ---------- ---------- ---------- ---------- ---------
Balance Sheet Data:
Cash and cash equivalents... $ 886 $3,779 $4,775 $25,292 $ 15,789
Working capital............. 865 3,315 4,317 23,705 4,759
Total assets................ 1,393 5,652 8,514 30,477 70,412
Long-term obligations....... 25 94 85 66 6,314
Stockholders' equity........ 1,251 4,259 6,445 26,852 49,553
(1) On a pro forma basis the net loss per share for 1998 was $1.53. The pro
forma per share amount is computed by using the sum of the weighted average
number of shares of common stock and the 2,439,833 shares of common stock is-
sued in November 1998 upon conversion of preferred stock as if it had been con-
verted on January 1, 1998.
16
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview
EarthWeb is the leading provider of business-to-business online services for
the global IT industry. EarthWeb's network of sites is a central hub for vari-
ous constituents of the IT industry. EarthWeb's integrated online services ad-
dress the needs of these constituents for content, career management and re-
cruiting, commerce and community.
From its inception in 1994 until mid-1997, EarthWeb primarily developed and
maintained Web sites and online commerce infrastructures for its customers.
During this period, substantially all of EarthWeb's revenues were derived from
development contracts, maintenance fees and software license fees. During 1996,
EarthWeb began developing online services for IT professionals. EarthWeb's op-
erations not related to providing online services to IT professionals were dis-
continued in 1997 and have been recorded as discontinued operations for all pe-
riods. In early 1999, EarthWeb continued to broaden its online services to ad-
dress the needs of other constituents of the IT industry.
Through December 31, 1998, EarthWeb purchased five Web sites to expand and ex-
tend its online service offerings. In August 1997, EarthWeb acquired jars.com,
the Web site of the Java Applet Rating Service, for $1.1 million, consisting of
a $500,000 cash payment at closing and four quarterly payments of $150,000.
Jars.com is a premier online service providing ratings and reviews of Java and
other source code. In February 1998, EarthWeb acquired the companion Web sites
htmlgoodies.com and javagoodies.com, which provide tutorials and other techni-
cal resources for Web developers. In April 1998, EarthWeb acquired
intranetjournal.com, a leading online service for Intranet managers. In May
1998, EarthWeb acquired javascripts.com, an online service that complements
EarthWeb's other offerings by providing a large repository of JavaScript source
code. In July 1998, EarthWeb acquired datamation.com, which provides online ar-
ticles, resources and product analysis for IT enterprise managers. The aggre-
gate cost of these Web site acquisitions totaled approximately $949,000. At De-
cember 31, 1998, EarthWeb had intangible assets of approximately $1.1 million,
primarily related to the acquisitions of jars.com and datamation.com. Intangi-
ble assets resulting from these acquisitions will be amortized on a straight-
line basis over a period of three years.
Subsequent to December 31, 1998, EarthWeb has completed a number of additional
acquisitions. In February 1999, EarthWeb completed the acquisition of D&L On-
line, which owns dice.com, a leading online job posting service for IT profes-
sionals, for approximately $35 million in shares of common stock and cash (of
which approximately $3 million is payable through February 2000) with addi-
tional future "earnout" payments of up to $12 million to be paid upon the
achievement of specified revenue targets. Gocertify.com, which provides users
with information on technical certification programs, was also acquired in Feb-
ruary 1999. In March 1999, EarthWeb acquired substantially all of the assets of
The Perl Journal, a leading technical publication for developers using the Perl
programming language, and the related Web site TPJ.com. The aggregate purchase
price for gocertify.com and The Perl Journal was $980,000, of which $750,000 is
payable through March 2000 in the form of common stock or cash, with additional
consideration to be paid based upon future performance. In March 1999, EarthWeb
acquired all of the capital stock of MicroHouse International, Inc. for approx-
imately $9 million in shares of common stock, convertible notes and cash, sub-
ject to adjustment. In addition, EarthWeb assumed $1.7 million of debt as part
of the acquisition. These acquisitions have been accounted for using the pur-
chase method of accounting, and accordingly, the purchase price of each was al-
located to assets acquired and liabilities assumed based on their respective
fair values. Intangible assets resulting from these acquisitions will be amor-
tized on a straight-line basis over a period of three to five years. See Note
10 to EarthWeb's financial statements.
EarthWeb currently derives substantially all of its revenue from advertisements
and sponsorships on its online services. EarthWeb first recognized revenues
from advertising in June 1996 and advertising revenues constituted 95%, 86% and
100% of EarthWeb's total revenues for the years ended December 31, 1998, 1997
and 1996, respectively. Prior to 1998, EarthWeb utilized third party firms to
sell and service advertisements on EarthWeb's sites. At the end of the third
quarter of 1997, EarthWeb hired its first sales employee and in the first quar-
ter of 1998, EarthWeb began relying predominantly on its in-house sales force.
EarthWeb's in-house sales force has increased the average cost per thousand
(CPM) to advertise by marketing the advantages of using EarthWeb's online serv-
ices to reach the IT industry. EarthWeb also derives revenues from online com-
merce, brand licensing and subscription fees.
Advertising revenue is recognized in the period in which the advertisement is
displayed, provided that no significant EarthWeb obligations remain and the
collection of the receivable is probable. EarthWeb obligations typically in-
clude guarantees of a minimum number of "impressions" (times that an advertise-
ment is viewed by users of EarthWeb's online
17
services over a specified period of time). Typically, if the minimum number of
impressions is not achieved, EarthWeb will extend the advertising campaign un-
til the related guarantee is met, which would result in delayed revenue recog-
nition. EarthWeb records revenues and expenses for barter transactions (receipt
of advertisements or other goods or services in exchange for advertisements on
its online services) at the lesser of the estimated fair value of the adver-
tisements, goods or services received or the fair value of the advertisements
given. In future periods, management intends to maximize cash advertising reve-
nues, although EarthWeb will continue to enter into barter advertising transac-
tions as appropriate.
In order to expand its online services, EarthWeb anticipates incurring addi-
tional expenses to increase its product development and sales and marketing ef-
forts, pursue additional strategic acquisitions and support the growth of the
organization. The sales and marketing expenses will primarily include expenses
related to hiring additional employees and increasing advertising and brand
promotion activities. As a result of these expenditures and other factors,
EarthWeb expects to continue to incur losses in the foreseeable future.
EarthWeb expects to experience significant fluctuations in its future quarterly
results due to a variety of factors, many of which are outside of EarthWeb's
control. These factors include the level of usage on the Internet, demand for
Internet advertising, the addition or loss of advertisers, the level of user
traffic on EarthWeb's online services, economic conditions specific to the
Internet industry and online media and economic conditions generally. Manage-
ment believes that its revenues are also subject to seasonal fluctuations be-
cause advertisers generally place fewer advertisements during the first and
third calendar quarters of each year. EarthWeb believes that, as a percentage
of revenues, expenses (primarily sales commissions) may fluctuate between peri-
ods based on the growth of revenues; however, EarthWeb expects expenses to con-
tinue to grow in absolute dollars for the foreseeable future.
Recent Developments
Revenues for the second quarter ended June 30, 1999 were $7.2 million compared
to $666,000 for the second quarter ended June 30, 1998, a 981% increase. Adver-
tising revenues including paid listings, banners and sponsorships represent 86%
of revenues for the quarter ended June 30, 1999. Barter transactions accounted
for approximately 11% and 25% of revenues in the quarters ended June 30, 1999
and June 30, 1998 respectively. For both periods, barter advertising revenues
were related to the exchange of advertisements, trade show booths, and other
promotional activities with other companies.
Net loss for the second quarter ended June 30, 1999 was $9.2 million, or basic
and diluted net loss of $1.02 per share, as compared to $1.5 million for the
second quarter ended June 30, 1998, or a basic and diluted net loss of $0.50
per share. Earnings before interest, taxes and amortization of goodwill and in-
tangible assets, and one time charges related to acquisitions for the second
quarter ended June 30, 1999 were a negative $5.7 million, or $0.64 per share,
compared to a negative $1.4 million, or $0.26 per share on a pro forma basis,
for the second quarter ended June 30, 1998. Although EarthWeb believes that
earnings before interest, taxes, amortization of goodwill and intangible assets
related to acquisitions, and one-time charges is a standard measure commonly
reported and widely used by analysts, investors and other interested parties in
the internet industry, the earnings before interest, taxes, amortization of
goodwill and intangible assets related to acquisitions, and one-time charges
presented for EarthWeb may not be comparable to similarly titled measures re-
ported by other companies. The earnings before interest, taxes, amortization of
goodwill and intangible assets related to acquisitions, and one-time charges
pro forma net loss per share assumes the conversion of all shares of convert-
ible preferred stock as of January 1, 1998. Results for the second quarter in-
clude a one-time charge of $672,000, including a $500,000 non-cash charge re-
lated to the acquisition of MicroHouse.
EarthWeb's customer base increased to over 3,400 advertisers in the second
quarter ended June 30, 1999. This includes classified advertisers on dice.com
which increased to more than 3,150 in the second quarter ended June 30, 1999 up
155% from the end of June 30, 1998.
Aggregate page views of EarthWeb's online services increased to 148.5 million
in the second quarter ended June 30, 1999 from 92.0 million in the first quar-
ter ended March 31, 1999. The number of unique visits recorded on EarthWeb's
sites increased to 33.6 million in the second quarter ended June 30, 1999 from
23.0 million in the first quarter ended March 31, 1999, a 46% increase.
Subscribers to EarthWeb's e-mail journal were approximately 490,000 at the end
of the second quarter ended June 30, 1999 compared to approximately 450,000 in
the first quarter ended March 31, 1999.
18
Results of Operations
Quarter ended March 31, 1999 compared to quarter ended March 31, 1998
Revenues. Revenues for the three months ended March 31, 1999 increased 1,112%
to $3.7 million from $308,000 for the three months ended March 31, 1998. The
increase in revenues was primarily due to an increase in advertising revenues
of $3.1 million. Growth in advertising revenues was attributable to the acqui-
sition of D&L Online and an increase in volume of advertising sold. The net im-
pact on advertising revenues from the acquisition of D&L Online was an increase
of approximately $1.9 million. Advertising revenues including paid listings,
banners and sponsorships represented 92% of revenues for the quarter ended
March 31, 1999. For the quarter ended March 31, 1999, no advertiser, accounted
for more than 10% of revenues. Two customers accounted for approximately 33% of
revenues for the quarter ended March 31, 1998. Barter transactions accounted
for approximately 13% and 23% of revenues for the quarters ended March 31, 1999
and 1998, respectively. For both periods, barter advertising revenues primarily
related to the exchange of advertisements, tradeshow booths, and other promo-
tional activities with other companies.
Results for the quarter include the operating results of D&L Online, from Feb-
ruary 2, 1999, and the operating results of MicroHouse, from March 19, 1999,
which are the respective dates each company was acquired by EarthWeb. All
transactions were accounted for as purchases.
Cost of Revenues. EarthWeb's cost of revenues consists primarily of employee
salaries and related expenses (including payroll taxes and benefits), consult-
ing fees, freelance writing costs, Internet access and hosting fees, computer
systems related expenses and content licensing fees required to support and de-
liver EarthWeb's online services. Cost of revenues for the three months ended
March 31, 1999 increased 274% to $1.5 million from $395,000 for the three
months ended March 31, 1998. The increase in cost of revenues was primarily at-
tributable to increased employee salaries and related expenses, consulting
fees, and freelance writing costs due to the expansion of EarthWeb's online
service offerings.
Product Development Expenses. EarthWeb's product development expenses consist
primarily of employee salaries and related expenses (including payroll taxes
and benefits), consulting fees and computer systems related expenses required
to support the development of new service offerings. Product development ex-
penses for the three months ended March 31, 1999 increased 199% to $736,000
from $246,000 for the three months ended March 31, 1998. The increase in prod-
uct development expenses was primarily attributable to the expansion of
EarthWeb's online service offerings.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily of
advertising (including expenses recorded for barter transactions), employee
salaries, commissions and related expenses (including payroll taxes and bene-
fits) of EarthWeb's sales force and marketing personnel, promotional materials
and trade show exhibition expenses. Sales and marketing expenses for the three
months ended March 31, 1999 increased 1,458% to $5.2 million from $333,000 for
the three months ended March 31, 1998. The increase was primarily attributable
to an increase in advertising expenses of approximately $2.9 million of which
$886,000 relates to expenses of D&L Online. Additionally, salaries, commissions
and related costs increased approximately $1.1 million due to the expansion of
sales force of which $250,000 relates to D&L Online. Management expects sales
and marketing expenses to increase due to the continuing growth of its sales
force and its planned increase in advertising and promotional activities.
General and Administrative Expenses. General and administrative expenses con-
sist primarily of employee salaries and related expenses (including payroll
taxes and benefits) for executive, administrative, and accounting personnel,
facility costs, recruiting fees, insurance costs and professional fees. General
and administrative expenses for the three months ended March 31, 1999 increased
164% to $1.6 million from $605,000 for the three months ended March 31, 1998.
The increase in general and administrative expenses was primarily attributable
to increased employee salaries and related expenses (including payroll taxes &
benefits) and professional fees. Management expects general and administrative
expenses to increase in future periods due to the growth of EarthWeb's busi-
ness.
Depreciation and Amortization. Depreciation and amortization consists primarily
of depreciation of property and equipment and amortization of intangible assets
related to acquisitions. Depreciation and amortization for the three months
ended March 31, 1999 increased 663% to $1.8 million from $233,000 for the three
months ended March 31, 1998. The increase was primarily a result of the amorti-
zation of intangible assets from the acquisition of D&L Online of $1.3 million
and additional depreciation on property and equipment.
Interest and Other Income, Net. Interest and other income, net consists primar-
ily of interest earned on cash and cash equivalents. Interest and other income,
net for the three months ended March 31, 1999 increased 397% to $234,000 from
$47,000 for the three months ended March 31, 1998. The increase was primarily
the result of higher average cash balances during 1999, primarily from the pro-
ceeds of EarthWeb's initial public offering in November 1998.
19
Income Taxes. No provision for federal and state income taxes has been recorded
as EarthWeb has incurred net operating losses through March 31, 1999. Given
EarthWeb's limited operating history, losses incurred to date and the diffi-
culty in accurately forecasting EarthWeb's future results, management does not
believe that the realization of the related deferred income tax assets meets
the criteria required by generally accepted accounting principles and, accord-
ingly, a full valuation allowance has been recorded.
Year ended December 31, 1998 compared to year ended December 31, 1997
Revenues. Revenues for the year ended December 31, 1998 increased 195% to $3.3
million from $1.1 million for the year ended December 31, 1997. The increase in
revenues was due to an increase in advertising revenues of $2.2 million. Ap-
proximately 62% of the growth in advertising revenues was attributable to an
increase in the volume of advertising sold. A secondary reason for the increase
in advertising revenue was the ability of EarthWeb's in-house sales force to
sell advertising at a higher price. Management does not expect significant
price increases in the future and expects to derive growth in revenues primar-
ily through increased volume of advertising sold.
Barter transactions accounted for approximately 25% and 16% of revenues for the
years ended December 31, 1998 and 1997, respectively. For both periods barter
advertising revenues primarily related to the exchange of advertisements with
other companies.
Cost of Revenues. EarthWeb's cost of revenues consists primarily of employee
salaries and related expenses (including payroll taxes and benefits), consult-
ing fees, freelance writing costs, Internet access and hosting fees, computer
related expenses and content licensing fees required to support and deliver
EarthWeb's online services. Cost of revenues for the year ended December 31,
1998 increased 57% to $2.1 million or 63.6% of net revenues from $1.4 million
or 120% of net revenues for the year ended December 31, 1997. The increase in
cost of revenues was primarily attributable to increased employee salaries and
related expenses, consulting fees, and freelance writing costs due to the ex-
pansion of EarthWeb's online service offerings.
Product Development Expenses. EarthWeb's product development expenses consist
primarily of employee salaries and related expenses (including payroll taxes
and benefits), consulting fees and computer leasing costs required to support
the development of new service offerings. Product development expenses for the
year ended December 31, 1998 increased 47% to $1.5 million from $1.0 million
for the year ended December 31, 1997. The increase in product development ex-
penses was primarily attributable to the expansion of EarthWeb's online service
offerings, which included the production of the ITKnowledge.com subscription
service, which was launched in October 1998.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily of
advertising (including expenses recorded for barter transactions), employee
salaries, commissions and related expenses (including payroll taxes and bene-
fits) of EarthWeb's sales force and marketing personnel, promotional materials
and trade show exhibition expenses. Sales and marketing expenses for the year
ended December 31, 1998 increased 347% to $4.5 million from $1.0 million for
the year ended December 31, 1997. The increase was primarily attributable to an
increase in advertising expenses of $2.0 million and salaries, commissions and
related costs of $1.6 million for the in-house advertising sales force, which
did not exist during 1997. Barter transactions accounted for approximately 19%
and 18% of sales and marketing expenses for 1998 and 1997, respectively. Man-
agement expects sales and marketing expenses to increase due to the growth of
its sales force and its planned increase in advertising and promotional activi-
ties.
General and Administrative Expenses. General and administrative expenses con-
sist primarily of employee salaries and related expenses (including payroll
taxes and benefits) for executive, administrative, and accounting personnel,
facility costs, recruiting fees, insurance costs and professional fees. General
and administrative expenses for the year ended December 31, 1998 increased 31%
to $3.4 million from $2.6 million for the year ended December 31, 1997. The in-
crease in general and administrative expenses was primarily attributable to in-
creased consulting fees, professional fees and employee salaries and related
expenses (including payroll taxes & benefits). Management expects general and
administrative expenses to increase in future periods due to the growth of the
business.
Depreciation and Amortization. Depreciation and amortization consists primarily
of depreciation of property and equipment and amortization of intangible assets
related to acquisitions. Depreciation and amortization for the year ended De-
cember 31, 1998 increased 25% to $1.1 million from $893,000 for the year ended
December 31, 1997. The increase was primarily a result of additional deprecia-
tion on property and equipment and amortization of intangible assets from ac-
quisitions. Management expects depreciation and amortization to increase due to
the amortization of goodwill from several acquisitions in 1999.
20
Interest and Other Income, Net. Interest and other income, net consists pri-
marily of interest earned on cash and cash equivalents. Interest and other in-
come, net for the year ended December 31, 1998 increased 15% to $307,000 from
$267,000 for the year ended December 31, 1997. The increase was primarily the
result of higher average cash balances during 1998, primarily from the pro-
ceeds of EarthWeb's initial public offering.
Income Taxes. No provision for federal and state income taxes has been re-
corded as EarthWeb has incurred net operating losses through December 31,
1998. As of December 31, 1998, EarthWeb had approximately $16.3 million of net
operating loss carryforwards for federal income tax purposes, that begin to
expire in 2011, available to offset future taxable income. Given EarthWeb's
limited operating history, losses incurred to date and the difficulty in accu-
rately forecasting EarthWeb's future results, management does not believe that
the realization of the related deferred income tax assets meets the criteria
required by generally accepted accounting principles and, accordingly, a full
valuation allowance has been recorded.
Year ended December 31, 1997 compared to year ended December 31, 1996
Revenues. Revenues for 1997 increased 140% to $1.1 million from $472,000 for
1996. The increase resulted from growth in the volume of advertising impres-
sions sold and a full year of advertising sales activity in 1997 compared to
only seven months of advertising sales activity in 1996. During 1997, the av-
erage selling price for advertising did not change substantially compared to
1996 levels. Barter transactions accounted for approximately 16% and 55% of
revenues for the years ended 1997 and 1996, respectively. During 1997, barter
advertising revenues primarily related to the exchange of advertisements with
other companies. In 1996, as a result of the contribution by Sun Microsystems
of server equipment with a value of $257,000 in exchange for advertising,
EarthWeb recorded a one-time barter transaction.
Cost of Revenues. The cost of revenues for 1997 increased 332% to $1.4 million
from $314,000 for 1996. This increase was primarily the result of costs re-
lated to the growth of EarthWeb's online business, which included hiring addi-
tional content and productions personnel resulting in increased employee sala-
ries and related expenses (including payroll taxes and benefits) of $821,000.
Product Development Expenses. Product development expenses for 1997 increased
1,367% to $1.0 million from $68,000 in 1996. The increase in product develop-
ment expenses was primarily the result of increased salaries and related ex-
penses (including payroll taxes and benefits) of $580,000, and consultant fees
of $252,000 to support the development of EarthWeb's online services.
Sales and Marketing Expenses. Sales and marketing expenses for 1997 increased
304% to $1.0 million from $252,000 in 1996. The increase in sales and market-
ing expenses was primarily the result of an increase in marketing activities,
including advertising, trade show exhibitions, and promotional activities,
which increased $493,000, and employee salaries and related costs (including
payroll taxes and benefits), which increased $163,000. Expenses from barter
transactions were 18% and 0% of sales and marketing expenses for 1997 and
1996, respectively.
General and Administrative Expenses. General and administrative expenses for
1997 increased 42% to $2.6 million from $1.8 million in 1996. The increase in
general and administrative expenses was predominantly the result of increased
salaries and related expenses (including payroll taxes and benefits) of
$550,000, with the balance of the increase primarily due to increases in rent
expense for EarthWeb's additional office space and recruiting costs.
Depreciation and Amortization. Depreciation and amortization for 1997 in-
creased 785% to $893,000 from $101,000 for 1996. This increase was primarily
the result of additional depreciation on property and equipment and amortiza-
tion of intangible assets from the jars.com acquisition. In addition, depreci-
ation and amortization expense for 1997 included a write-off of intangible as-
sets of $337,000 related to the jars.com acquisition.
Interest and Other Income, Net. Interest and other income, net for 1997 in-
creased 334% to $267,000 from $61,000 for 1996. The increase was the result of
higher average cash balances during 1997.
21
Quarterly Results of Operations
The following table sets forth unaudited quarterly statement of operations data
for each of the four quarters during the years ended December 31, 1997 and 1998
as well as the quarter ended March 31, 1999. 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 in-
cluded in the amounts stated below to present fairly the unaudited quarterly
results. The quarterly data should be read in conjunction with the audited fi-
nancial statements of EarthWeb and the notes thereto appearing elsewhere in
this prospectus. The operating results for any quarter are not necessarily in-
dicative of the operating results for any future period.
--------------------------------------------------------------------------------------------
Quarter ended
--------------------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1997 1997 1997 1997 1998 1998 1998 1998 1999
--------- -------- --------- -------- --------- -------- --------- -------- --------
Dollars in thousands
Revenues:
Advertising............ $ 261 $ 239 $ 177 $ 294 $ 284 $ 640 $ 885 $ 1,357 $ 3,433
Other.................. 69 23 17 55 24 26 59 74 299
--------- -------- --------- -------- --------- -------- --------- -------- --------
Total revenues....... 330 262 194 349 308 666 944 1,431 3,732
Cost of revenues........ 258 343 346 411 395 398 601 737 1,479
--------- -------- --------- -------- --------- -------- --------- -------- --------
Gross Profit (deficit).. 72 (81) (152) (62) (87) 268 343 694 2,253
--------- -------- --------- -------- --------- -------- --------- -------- --------
Operating expenses:
Product development.... 237 239 291 236 246 310 434 485 736
Sales and marketing.... 159 265 328 266 333 477 1,082 2,655 5,188
General and
administrative........ 610 686 706 565 605 727 914 1,111 1,597
Depreciation and
amortization.......... 63 77 199 554 233 244 311 328 1,778
--------- -------- --------- -------- --------- -------- --------- -------- --------
Total operating
expenses.............. 1,069 1,267 1,524 1,621 1,417 1,758 2,741 4,579 9,299
--------- -------- --------- -------- --------- -------- --------- -------- --------
Loss from operations.... (997) (1,348) (1,676) (1,683) (1,504) (1,490) (2,398) (3,885) (7,046)
Interest and other
income, net............ 41 26 125 75 47 31 42 187 234
--------- -------- --------- -------- --------- -------- --------- -------- --------
Loss from continuing
operations............. (956) (1,322) (1,551) (1,608) (1,457) (1,459) (2,356) (3,698) (6,812)
Loss from discontinued
operations............. (172) (377) (631) (1,204) -- -- -- -- --
--------- -------- --------- -------- --------- -------- --------- -------- --------
Net loss................ $(1,128) $(1,699) $(2,182) $(2,812) $(1,457) $(1,459) $(2,356) $(3,698) $(6,812)
========= ======== ========= ======== ========= ======== ========= ======== ========
Basic and diluted net
loss per share from
continuing operations.. $ (0.33) $ (0.45) $ (0.53) $ (0.55) $ (0.50) $ (0.50) $ (0.70) $ (0.62) $ (0.82)
Basic and diluted net
loss per share from
discontinued
operations............. (0.06) (0.13) (0.22) (0.41) -- -- -- -- --
--------- -------- --------- -------- --------- -------- --------- -------- --------
Basic and diluted net
loss per share......... $ (0.39) $ (0.58) $ (0.75) $ (0.96) $ (0.50) $ (0.50) $ (0.70) $ (0.62) $ (0.82)
========= ======== ========= ======== ========= ======== ========= ======== ========
Pro forma basic and
diluted net loss per
share(1)............... $ (0.27) $ (0.27) $ (0.41) $ (0.53)
========= ======== ========= ========
(1) The pro forma per share amounts are computed by using the sum of weighted
average number of shares of common stock and the shares issued in November 1998
upon conversion of 2,439,833 shares of preferred stock as if it had been con-
verted on January 1, 1998.
As a result of EarthWeb's limited operating history, EarthWeb does not have
historical financial data for a significant number of periods on which to base
planned operating expenses. EarthWeb's expense levels are based in part upon
its expectations concerning future revenue and, to a certain extent, are fixed.
Quarterly revenues and operating results depend substantially upon the adver-
tising revenues received within the quarter, which are difficult to forecast
accurately. Accordingly, the cancellation or deferral of a small number of ad-
vertising contracts could have a material adverse effect on EarthWeb's busi-
ness, results of operations and financial condition. EarthWeb may be unable to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall, and any significant shortfall in revenue in relation to EarthWeb's
expectations would have an immediate adverse effect on EarthWeb's business, re-
sults of operations and financial condition.
Due to the foregoing factors, quarterly revenues and results of operations are
difficult to forecast, and EarthWeb does not believe that period-to-period com-
parisons of its operating results will necessarily be meaningful and should not
be relied upon as indicators of future performance. In one or more future quar-
ters EarthWeb's results of operations may fall below the expectations of secu-
rities analysts and investors. In such event, the trading price of the common
stock would likely be materially adversely affected.
22
EarthWeb has a limited operating history and its prospects are subject to the
risks, expenses and uncertainties frequently encountered by companies in the
new and rapidly evolving markets for Internet products and services. These
risks include the failure to develop and extend EarthWeb's online service
brands, the rejection of EarthWeb's services by Internet consumers, vendors
and/or advertisers, the inability of EarthWeb to maintain and increase the lev-
els of traffic on its online services, as well as other risks and uncertain-
ties.
EarthWeb recorded a one-time operating charge of approximately $672,000 in the
second quarter of 1999, in connection with the April 1999 grant of stock op-
tions to MicroHouse employees' and the May 1999 public offering, in which
EarthWeb has agreed to pay certain underwriting discounts incurred in connec-
tion with the sale of shares by certain employee selling stockholders.
Liquidity and Capital Resources
EarthWeb historically has satisfied its cash requirements primarily through of-
ferings of convertible preferred stock and common stock and lease financings.
Net cash used in operating activities was $3.3 million for the three months
ended March 31, 1999 and $1.5 million for the three months ended March 31,
1998. Cash used in operating activities for 1999 resulted primarily from a net
loss of $6.8 million offset by amortization and depreciation and increases in
accounts payable and accrued expenses. Cash used in operating activities in
1998 was primarily attributable to a net loss of $1.5 million. Net cash used in
operating activities was $6.5 million for the year ended December 31, 1998 and
$6.7 million for the year ended December 31, 1997. Cash used in operating ac-
tivities for 1998 resulted primarily from a net loss of $9.0 million offset by
an increase in accounts payable and accrued expenses of $2.3 million and depre-
ciation and amortization of $1.1 million. Cash used in operating activities in
1997 was primarily attributable to a net loss of $7.8 million, partially offset
by depreciation and amortization of $893,000.
Net cash used in investing activities for the three months ended March 31, 1999
of $6.3 million was primarily attributable to acquisitions of $5.9 million. Net
cash used in investing activities of $214,000 from 1998 was primarily attribut-
able to cash used for acquisitions and the purchase of fixed assets. Net cash
used in investing activities for the year ended December 31, 1998 of $2.2 mil-
lion was primarily attributable to purchases of fixed assets of $1.1 million
and acquisitions of $1.3 million. Net cash used in investing activities of $2.3
million for 1997 was primarily attributable to cash used for the purchase of
fixed assets of $954,000, acquisitions of $812,000 and a restricted cash de-
posit of $512,000 collateralizing letters of credit.
Net cash from financing activities was $145,000 for the three months ended
March 31, 1999. On May 7, 1999, EarthWeb completed a secondary public offering
of 1,300,000 shares of Common Stock at an offering price of $37.00 per share,
of which 750,000 shares were sold by EarthWeb and 550,000 shares were sold by
selling stockholders. Net proceeds to EarthWeb, net of issuance costs, were ap-
proximately $24.8 million. EarthWeb expects to use the net proceeds for general
corporate purposes, including expansion of sales and marketing capabilities,
possible strategic acquisitions or investments, international expansion, tech-
nical upgrades of internal systems and working capital requirements. Net cash
from financing activities was $29.3 million for the year ended December 31,
1998 and $10 million for the year ended December 31, 1997. In November 1998,
EarthWeb completed its initial public offering of common stock in which
2,100,000 shares were issued at a price of $14.00 per share. Proceeds from the
offering net of offering costs were approximately $25.8 million. In June 1998,
EarthWeb issued 436,446 shares of common stock to EarthWeb LLC through a pri-
vate placement, in consideration of net proceeds of $3.7 million. In June 1997,
EarthWeb issued shares of Series B Convertible Preferred Stock through a pri-
vate placement in consideration of net proceeds of $10 million.
EarthWeb will continue to evaluate possible acquisitions of, or investments in,
business products and technologies that are complementary to those of EarthWeb,
which may require the use of cash. Management believes that existing cash bal-
ances, together with anticipated proceeds from this offering, will be suffi-
cient to meet anticipated cash requirements for at least the next twelve
months; however, EarthWeb may sell additional equity or debt securities or ob-
tain credit facilities. The sale of additional securities could result in dilu-
tion to EarthWeb's stockholders.
23
Year 2000
The Year 2000 issue involves the potential for system and processing failures
of date-related data resulting from computer-controlled systems using two di-
gits rather than four to define the applicable year. For example, computer pro-
grams that contain time-sensitive software may recognize a date using two di-
gits of "00" as the year 1900 rather than the year 2000. This could result in
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send in-
voices or engage in similar ordinary business activities.
EarthWeb believes that its internal software and hardware systems will function
properly with respect to dates in the year 2000 and thereafter and has com-
pleted its internal IT and non-IT assessment. Nonetheless, there can be no as-
surance in this regard until such systems are operational in the year 2000.
EarthWeb is currently creating contingency plans in the event of Year 2000
failures. EarthWeb has contacted all of its significant suppliers to determine
the extent to which EarthWeb's systems are vulnerable to those third parties'
failure to make their own systems Year 2000 compliant. EarthWeb was informed by
such suppliers that their systems are Year 2000 compliant. Additionally, any
Year 2000 problems experienced by EarthWeb's advertising customers could affect
the placement of advertisements on EarthWeb's online services. In the event any
of EarthWeb's suppliers or vendors prove not to be Year 2000 compliant,
EarthWeb believes that it could find a replacement vendor or supplier which is
Year 2000 compliant without significant delay or expense. However, if substan-
tially all of EarthWeb's suppliers and vendors prove not to be Year 2000 com-
pliant and if EarthWeb experiences difficulties in finding replacement vendors,
then, as a result, EarthWeb's business could be materially adversely affected.
The failure to correct material Year 2000 problems by EarthWeb's suppliers and
vendors could result in an interruption in, or a failure of, certain normal
business activities or operations of EarthWeb. Such failure could materially
and adversely affect EarthWeb's results of operations, liquidity and financial
condition. Due to the general uncertainty inherent in the Year 2000 problem,
resulting from the uncertainty of the Year 2000 readiness of third-party sup-
pliers and vendors, EarthWeb is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on EarthWeb's
results of operations, liquidity or financial condition.
To date, EarthWeb has spent an immaterial amount on Year 2000 compliance issues
and expects to incur no significant costs in the future for Year 2000 problems.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Soft-
ware Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effec-
tive for financial statements for years beginning after December 15, 1998. SOP
98-1 provides guidance on accounting for computer software developed or ob-
tained for internal use including the requirement to capitalize specified costs
and amortization of such costs. EarthWeb does not expect the adoption of this
standard to have a material effect on EarthWeb's capitalization policy.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5, which is effective for
financial statements for years beginning after December 15, 1998, provides
guidance on the financial reporting of start-up costs and organization costs.
It requires costs of start-up activities and organization costs to be expensed
as incurred. As EarthWeb has expensed these costs historically, the adoption of
this standard is not expected to have a significant impact on EarthWeb's re-
sults of operations, financial position or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities" ("SFAS No. 133"), which establishes accounting and report-
ing standards of derivative instruments, including certain derivative instru-
ments embedded in other contracts (collectively referred to as derivatives) and
for hedging activities. SFAS No. 133 is effective for EarthWeb's fiscal year
2001. As EarthWeb does not currently engage or plan to engage in derivative or
hedging activities, there will be no impact on EarthWeb's results of opera-
tions, financial position or cash flows upon the adoption of this standard.
24
Business
This section contains forward-looking statements which involve risks and uncer-
tainties. EarthWeb's actual results could differ materially from those antici-
pated in these forward-looking statements as a result of various factors, in-
cluding those set forth under "Risk Factors" and elsewhere in this prospectus.
We are the leading provider of business-to-business online services for the
global IT industry. EarthWeb offers various online services focused on a series
of vertical markets such as networking and telecommunications, software devel-
opment and internet technologies. Our network of vertical sites serves various
constituents of the IT industry, including:
. Programmers and
engineers . Recruiters . Hardware manufacturers
. IT managers . Corporate IT purchasers . Value-added resellers
. Technical
consultants . Software publishers . IT services firms
International Data Corporation forecasts that the worldwide market for products
and services will grow from approximately $800 billion in 1998 to over $1.0
trillion in 2001.
As a global intermediary for the IT industry, we are positioned as the trusted
third party that offers an integrated environment where various constituents
can share information, manage their careers, recruit personnel, transact busi-
ness and interact with one another. We believe that we offer the most in-depth
content and comprehensive range of business-to-business online services for the
IT industry.
We have broadened our online content and services since our initial public of-
fering in November 1998 to address the needs of the various constituents within
the IT industry. We have added content in such areas as security, networking,
hardware and Linux to address a wider range of IT industry segments. We have
also expanded our online business-to-business services, in part through the ac-
quisition of dice.com. In addition, our acquisition of MicroHouse added an im-
portant line of subscription-based products. We intend to continue expanding
the content we offer our users, the segments of the IT industry we address and
the business-to-business services we provide.
Our business has grown substantially as measured by revenues, advertising cus-
tomers and the size of our sales force. Our revenues increased from $1.1 mil-
lion in 1997 to $15.3 million in 1998 on a pro forma basis to include our ac-
quisition of dice.com and MicroHouse. We have increased our advertising cus-
tomer base for our content areas to over 250 customers as of June 30, 1999 from
175 as of December 31, 1998, and have broadened this advertiser base to include
both technology and non-technology companies. Additionally, dice.com had over
3,150 advertisers as of June 30, 1999 on its job board, more than tripling the
number of advertisers since the beginning of 1998. Our subscription revenue
stream has also grown rapidly. We have increased our subscriber base to over
13,300 paying customers as of June 30, 1999. To support our growth, we have in-
creased our sales organization to approximately 50 people.
Industry Overview
IT Industry
The role of information technology in companies and other organizations has ex-
panded and has become even more critical to the successful implementation of
business strategy. While IT traditionally has focused on internal systems, in-
cluding accounting and human resources, IT is expanding its role by changing
the way in which organizations interact with their suppliers, market and de-
liver their products and services and support their customers. Companies in a
broad range of businesses, including financial services, publishing, and com-
puter hardware and software, have re-engineered their operations over the past
several years to reach a greater variety of customers through the expanded use
of technology. This expanded role of technology has continued to fuel the
growth in the worldwide market for IT products and services, which IDC fore-
casts will grow from approximately $800 billion in 1998 to over $1.0 trillion
in 2001.
25
The IT industry is composed of a number of constituents, including:
Constituents Role
------------------------- ----------------------------------------------------
Programmers and engineers Design, create and maintain technical infrastructure
within an organization
IT managers Manage projects, engineers, programmers and
consultants and oversee the execution of their
organization's IT strategy
Technical consultants Work on an IT project on a contract basis
Recruiters Identify and place qualified technical professionals
in full and part-time positions
Corporate IT purchasers Buy hardware, software and technical services for
their organizations
Software publishers Create and license software programs
Hardware manufacturers Manufacture computer, hardware components and
peripherals
Value-added resellers Resell products of hardware manufacturers and
software publishers, and provide value-added
technical services
IT services firms Design, code, implement and maintain IT enterprise
applications and systems on a contract basis
Due to the rapid change in and the expansion of the IT industry, each of these
constituents have the following needs for:
. Content. Members of the IT industry need independent, in-depth and up-to-
date content, such as reference and training material, source code, IT
product information and other technical data. For example, IT purchasers
need access to neutral, third-party reviews and surveys of hardware and
software to inform their purchasing decisions. Engineers and programmers
need access to source code, technical articles and skills training.
. Career Management and Recruiting. Companies and other organizations depend
on a qualified pool of IT professionals. Programmers, engineers and IT con-
sultants use various career services for training, skill certifications and
identifying employment and contract opportunities. Companies and other or-
ganizations and their IT managers use these services to post job listings
and hire IT personnel. IDC estimated that the total amount spent on IT re-
cruiting was $18 billion in 1998, a 20% increase over 1997. IDC forecasts
that the IT education and training market alone will grow from an estimated
$16.5 million in 1998 to $25.3 billion in 2002.
. Commerce. The IT industry needs a marketplace to buy and sell IT products
and services. For example, hardware manufacturers and software publishers
need efficient ways to reach IT purchasers, and IT purchasers need special-
ized stores that provide the products they require for their organization's
technical infrastructure. According to Simba Information, expenditures on
computer reference books totalled approximately $1 billion in 1998 and,
based on industry sources, EarthWeb believes expenditures on IT industry
reports and analysis totalled an estimated $1 billion in 1998.
. Community. Members of the IT industry need a neutral third-party environ-
ment to share information. For example, IT programmers, engineers and man-
agers need a forum to discuss technical issues, and resolve technical prob-
lems. In addition, the various constituents of the IT industry need updated
calendars of IT industry conferences and events.
The IT industry devotes considerable time, effort and financial resources re-
searching new technologies, seeking answers to technical questions, managing
career development, identifying and recruiting qualified personnel, buying and
selling products and services, and developing and implementing IT solutions.
They have had to rely on fragmented and disparate sources to meet these needs,
none of which have provided a comprehensive solution for content, career man-
agement and recruiting, commerce and community.
26
Vertical markets of the IT Industry
The IT industry is organized into particular vertical markets as a result of
the growing complexity of the IT industry and the increasing need for special-
ization.
Vertical Markets Description Major Sub-segments
------------------ ------------------------------------ ------------------------------------
Software Develop- Creation of software applications C/C++, Java, Visual Basic and other
ment using various programming languages, programming languages, object-
tools and environments oriented technology and visual
development environments
Internet Technolo- Use of technologies based on Internet, intranet, extranet, Web
gies and Web De- Internet protocols for communication sites, Internet commerce, Internet
velopment and commerce both within and between security and Internet Protocols
organizations
Enterprise Manage- Deployment of sophisticated, large- Systems management software,
ment scale software applications and financial management systems,
systems to manage and support enterprise resource planning, Year
functions within businesses and 2000, middleware, server operating
other organizations systems such Linux and NT, data
warehousing and supply chain
management
Networking and Design, installation and management Network and directory services, data
Telecommunications of infrastructure for data and voice and voice communications
communications technologies, wireless and mobile
communications and Internet service
provider network infrastructure
Hardware Design, manufacture, purchase and Personal, midrange and mainframe
maintenance of computers, hardware systems; computer chip, PC display,
components and peripherals multimedia and disk storage
technologies
Services, Support Services that support the Systems integration, outsourced
and development, implementation and custom development, systems design
Consulting maintenance of enterprise computing and maintenance, outsourced network
systems management and technical support
The Internet
The Internet enables millions of people worldwide to access current news and
information, find and post job opportunities, conduct business electronically
and create community among individuals with similar professional or personal
interests. The number of Internet users worldwide is projected to grow from an
estimated 142 million at the end of 1998 to 399 million by the year 2002, ac-
cording to IDC. With this growth in the number of users, the Internet is emerg-
ing as a mass communication and commerce medium, which offers advertisers and
vendors distinct advantages over conventional media. The Internet permits ad-
vertisers to target specific demographic groups, measure the effectiveness of
their advertising campaigns and revise them in response to real-time feedback.
Jupiter forecasts consumer-oriented Internet advertising will increase from an
estimated $1.9 billion to $7.7 billion in the same period. The Internet pro-
vides online merchants with the ability to reach a global audience and to oper-
ate with minimal infrastructure, reduced overhead and greater economies of
scale, while providing customers with broad selection, increased pricing infor-
mation and unparalleled convenience. IDC forecasts that total commerce on the
Internet will grow from an estimated $50.4 billion in 1998 to $733.6 billion in
2002, with the business-to-business component growing from an estimated $27.4
billion to $526.2 billion in the same period.
The EarthWeb Solution
Through its network of online services, EarthWeb provides a business-to-busi-
ness hub to meet the needs of the IT industry for content, career management
and recruiting, commerce and community. As a global intermediary for the IT in-
dustry, EarthWeb is positioned as the trusted third party that offers an inte-
grated environment where the various constituents can share information, manage
their careers, recruit personnel, transact business and interact with one an-
other.
27
Content. EarthWeb's online services each focus on a particular segment of the
IT industry. EarthWeb provides technical resources including full-text refer-
ence books, training materials and tutorials, technical articles and source
code libraries to IT professionals to enable them to solve challenging techni-
cal problems. EarthWeb also provides product surveys to enable IT professionals
to make informed purchase decisions. EarthWeb's content is searchable using a
uniform search engine, as well as by browsing a series of categories.
Career Management and Recruiting. EarthWeb connects IT professionals, such as
programmers, engineers and consultants with part and full-time employment
through a variety of online job resources. EarthWeb provides thousands of on-
line listings of available positions and enables companies and other organiza-
tions to efficiently recruit from a central database of potential candidates.
Our compensation surveys assist with career management and recruitment of per-
sonnel. EarthWeb also provides guides to skills certification programs as well
as links to related training material.
Commerce. EarthWeb provides an online marketplace where vendors can promote and
advertise their goods and services, and purchasers can identify, evaluate and
buy the products and services that meet their needs. These online stores in-
clude a training store, a software store and a technical bookstore. Many of the
products in the online stores are difficult to find through traditional chan-
nels. Our vendors include major software developers, such as Microsoft, Lotus
and Symantec, as well as small and mid-sized specialized software vendors. We
have an electronic software delivery mechanism that enables users to download a
variety of software immediately after purchase. We also provide a classified
advertising service for the purchase and sale of specialized hardware.
Community. EarthWeb provides a forum in which users can contribute material and
communicate with each other. Users are encouraged to submit source code, object
code, development tools and other materials that are then archived in our di-
rectories. Our online services also include a number of bulletin boards for
technical discussions that allow users to solve problems together. These bulle-
tin boards are managed by experienced IT professionals to maintain the quality
of content. These discussions are then archived, creating an online knowledge
repository for future reference. We also provide the IT industry with a cen-
tralized calendar of upcoming conferences and events, which enables its members
to identify events relevant to them.
Business Strategy
We seek to maintain and strengthen our position as the leading provider of
business-to-business online services for the global IT industry. We intend to
achieve this objective by implementing the following key strategies:
Broaden and Enhance Business-to-Business Services for the IT Industry. EarthWeb
will continue to expand the range of content and breadth of services it offers
the IT industry. We continue to add, through internal development and acquisi-
tions, content relevant to the various segments of the IT industry. For exam-
ple, the datamation.com and MicroHouse acquisitions supplemented our content in
the enterprise management, networking and hardware segments. We also will con-
tinue to add services needed by various constituents of the IT industry. For
example, the acquisition of dice.com significantly added to our career manage-
ment and recruiting services available to IT professionals and employers.
EarthWeb also intends to continue adding commerce services to its current com-
merce offerings to create the leading online marketplace for IT products and
services.
Strengthen Worldwide Brand Recognition. EarthWeb will continue to promote the
EarthWeb brand as the leading provider of business-to-business online services
for the IT industry. In addition, EarthWeb plans to promote its primary and
secondary brands through online and offline advertising, strategic alliances
and other promotional activities. EarthWeb seeks to reinforce for users, adver-
tisers, and vendors that the EarthWeb brands represent technical competence,
comprehensiveness, timeliness and a trusted third-party source. EarthWeb be-
lieves that the extension of its online model to encompass additional content
and services will attract additional users and further enhance awareness of its
brands.
Cultivate Multiple Revenue Streams. EarthWeb believes its business-to-business
online services model has positioned it to continue growing its multiple reve-
nue streams of advertising, subscription fees and commerce. EarthWeb intends to
continue to increase its advertising revenues by growing its sales force, ex-
panding its base of both technology and non-technology advertisers, and in-
creasing employment-related advertising. EarthWeb will also continue to expand
its premium subscription services. We launched our first subscription service,
ITknowledge.com, in October 1998 and in March 1999 acquired MicroHouse which
has several established premium subscription services. EarthWeb intends to con-
tinue increasing its commerce revenue from its various online stores through
product promotions and superior online customer service.
28
Grow Through Targeted Acquisitions. EarthWeb will continue to pursue acquisi-
tions to fulfill a number of objectives. The most important objective is to
strengthen EarthWeb's existing online services, extend its offerings into addi-
tional IT industry segments and expand the number of business-to-business serv-
ices it offers the various constituents of the IT industry. Another objective
is to obtain valuable brands, expertise and access to new advertisers and us-
ers. An additional objective is to increase overall page views; EarthWeb has
found that the addition of new sites generally increases traffic on its exist-
ing sites as well as on the acquired sites.
Expand Internationally. Many IT professionals reside outside the United States
and approximately one-third of EarthWeb's traffic originates internationally.
Due to its focus on the IT industry, EarthWeb is able to leverage its content
and online services to a wide range of international markets with minimal
translation requirements. EarthWeb has successfully localized and translated
portions of its content for French, Spanish, German and Japanese speakers, and
has additional localization efforts underway.
Online Services
EarthWeb offers a broad range of online services to meet the IT industry's
needs for content, career management and recruiting, commerce and community.
EarthWeb utilizes both Web sites and email to provide its online services.
Content
The content on EarthWeb's sites includes technical resources, reference materi-
als, decision support tools, training materials and tutorials, technical news,
articles and information.
Technical Resources. EarthWeb's online services provide IT professionals with
access to over 150,000 resources and examples for use in their work, including
reusable source code and software interface components. EarthWeb also provides
online decision support tools, including a regular technology survey of more
than 1,000 IT professionals and online assessment tools enabling IT managers to
evaluate their technology infrastructure. EarthWeb further provides extensive
technical resource directories that are categorized using its proprietary cate-
gorization system and contain links to over 17,000 technical resources.
Most of these technical resources are submitted by users and include links to
Web sites that contain technical articles, training materials and source code.
Most of the interface components are provided through licenses with various
aggregators of content. EarthWeb has expended considerable time and effort in
developing its proprietary categorization system, which enables users to
quickly identify and locate relevant technical resources, and has received in-
dustry recognition for this system.
Reference Materials. EarthWeb believes its reference library is the largest on-
line library of technical books for the IT industry. Over 600 technical refer-
ence, how-to and training books are provided in full text. Drawing on a base of
more than 3,500 technical books, comprising over 2 million pages of content,
EarthWeb will continue to add to its online reference products. These books are
provided by leading publishers, including Macmillan Computer Publishing, the
Coriolis Group, IDG Books, CRC Press, 29th Street Press, Wordware Publishing,
ASP Publishing, Sybex Inc., Digital Press, John Wiley & Sons, Inc. and Artech
House, Inc. among others. EarthWeb also provides in-depth product analysis,
benchmarks and other product reference information that facilitate product
evaluation. Reference materials can be browsed by their table of contents or
searched using a search engine. Most of the online books can also be purchased
in physical form through EarthWeb's online technical bookstore.
EarthWeb provides access to many of these materials through its premium sub-
scription services, including ITknowledge.com. Through its acquisition of
MicroHouse, EarthWeb added over 400,000 documents to its content base, includ-
ing technical diagrams, multi-vendor technical information and other reference
material, which are also offered on a subscription basis.
Technical News, Articles and Information. EarthWeb provides a range of original
articles, aggregated news and case studies on various technical subjects.
EarthWeb's online Journal features highlights from EarthWeb's online services
as well as industry news, research, analysis and feature articles. As of June
30, 1999, the email version of the Journal had approximately 490,000 subscrib-
ers. EarthWeb also provides news of interest to the IT industry, which is ag-
gregated daily from various media sources, including CMP Media and Ziff-Davis.
29
Career Management and Recruiting
EarthWeb provides IT professionals with skill assessment tools, certification
program guides, training materials, and job postings. At the same time,
EarthWeb offers companies and other organizations and their IT managers a forum
where they can recruit and hire personnel.
Certification and Assessment. EarthWeb provides resources to IT professionals
who seek to identify specific capabilities which will broaden their skill sets.
IT professionals can use the resources of the recently acquired gocertify.com,
the leading guide to certification programs, as well as other EarthWeb online
reference materials, to assess their skills and determine which certification
programs will help them advance their careers and enhance their knowledge. In
addition, EarthWeb's MicroHouse content is included in certification programs
offered by leading training centers.
Training Materials and Tutorials. EarthWeb features over 400 original, proprie-
tary, in-depth technical tutorials for IT industry constituents. The tutorials
include workshops on specific technical issues, online textbooks, source code,
tests and quizzes. The vast majority of these tutorials are owned exclusively
by EarthWeb, and the balance comes from a variety of third-party publishers.
EarthWeb believes it offers one of the largest collections of training materi-
als and tutorials for IT professionals on the Web, and adds new training mate-
rials on a weekly basis.
Job Postings. EarthWeb provides a variety of online job boards, enabling em-
ployers to post and users to search a large database of full-time and contract
positions. EarthWeb's recent acquisition of dice.com significantly strengthened
its current offerings for career management and recruiting.
Commerce
EarthWeb provides an online marketplace where vendors can promote and advertise
their goods and services, and purchasers can identify, evaluate and buy the
products and services that meet their needs.
Online Shopping. EarthWeb's online storefronts provide the IT industry access
to software, books and other technical products from thousands of vendors, in-
cluding Microsoft, Lotus, Symantec and other leading IT vendors. EarthWeb has
enhanced its online shopping offerings through alliances with, among others,
fatbrain.com and beyond.com. EarthWeb provides a browsable online catalog, se-
cure transactions and physical or secure electronic delivery of software prod-
ucts and fulfillment through its alliances with fartbrain.com and beyond.com.
EarthWeb Auctions. EarthWeb Auctions is a business-to-business marketplace for
IT professionals where new and used equipment from leading manufacturers is of-
fered at competitive prices in a "highest bid wins" environment. EarthWeb Auc-
tions features hundreds of listings for enterprise level products including
servers, workstations, switches, token rings, hubs, peripherals, and storage
equipment.
Community
EarthWeb provides interactive forums for IT professionals, including technical
bulletin boards and question and answer services.
Technical Bulletin Boards. EarthWeb's online services include more than 30
technical bulletin boards containing more than 25,000 postings, which are fo-
cused and managed by experienced IT professionals. These online bulletin boards
enable users to help each other solve technical problems. These bulletin boards
are then archived, creating an online knowledge repository for future refer-
ence. EarthWeb has also archived the electronic full text of Usenet computer
discussions. EarthWeb provides a single search interface for both EarthWeb and
Usenet discussions, allowing users to easily locate the information they need.
Technical Question and Answer Services. EarthWeb encourages users to submit
questions or problems that are selected to be answered by EarthWeb's network of
experienced IT professionals. Detailed answers are published online in a
searchable format.
Other Services. EarthWeb also provides a comprehensive calendar of upcoming IT
conferences and other industry events, and hosts online conference proceedings.
30
Marketing and Sales
Marketing
EarthWeb employs a combination of online and offline advertising campaigns to
promote use of its online services by users, advertisers and vendors. EarthWeb
utilizes a variety of media to market its online services, including Web sites,
print, direct mail and radio. EarthWeb is promoted by over 90,000 links from
other Web sites and links on major distribution portals and search engines.
EarthWeb further markets its online services through its Journal, which as of
June 30, 1999 was emailed to approximately 490,000 subscribers. EarthWeb has an
ongoing public relations program and participates in tradeshows, conferences,
speaking engagements and promotional contests.
EarthWeb pursues strategic relationships with key marketing partners to enhance
brand awareness. Developer.com's Gamelan directory has been exclusively desig-
nated by Sun Microsystems as "The Official Directory for Java" since 1996.
Developer.com was also designated by Apple as the exclusive online location for
the proceedings of the 1998 Apple Worldwide Developers Conference. EarthWeb
also licenses its brands to strategic third parties such as Macmillan Computer
Publishing, which established the EarthWeb Press to publish books and software
for IT professionals. In 1998, a sampler of MicroHouse's library of content was
included in an estimated over 500,000 volumes distributed by Macmillan Computer
Publishing. EarthWeb promotes its dice.com career board through strategic rela-
tionships with a range of online services, including Classifieds2000, Yahoo!
Classified and Excite.
Advertising Sales
EarthWeb enables advertisers to efficiently and effectively reach targeted seg-
ments of the IT industry. EarthWeb's advertiser base includes non-technology as
well as technology based advertisers. Based on independent research commis-
sioned by EarthWeb, 80% of EarthWeb's users are the primary or co-primary deci-
sion-makers for purchases of Internet and Web applications in their enter-
prises. EarthWeb has been able since the beginning of 1997 to sell advertising
space at rates that are higher than the average rates charged by online serv-
ices aimed at more general audiences. Based upon publicly available banner ad-
vertisement rate cards, EarthWeb's rates are approximately 2.5 to 4.0 times
higher than the rates of Lycos, Excite, Yahoo! and Infoseek, which EarthWeb be-
lieves to be a representative group of online services aimed at more general
audiences. Independent research has also shown that 91% of users have some col-
lege education, 34% have at least some graduate level education and 82% are be-
tween 18 and 39 years old.
EarthWeb has built a nationwide sales force with sales representatives in vari-
ous cities, including New York, San Francisco, Boston, Des Moines, Dallas and
Atlanta. As of June 30, 1999, EarthWeb had an advertising sales force consist-
ing of 33 representatives.
During the year ended December 31, 1998, 168 individual advertisers, an in-
crease of over 600% from the prior year, placed advertisements on EarthWeb's
online services. IBM accounted for approximately 11% and Microsoft accounted
for approximately 10% of EarthWeb's revenues for the year ended December 31,
1998. The following is a partial list of EarthWeb's advertisers:
.3Com .Microsoft
.Allaire .Net Bank
.Apple Computer .Nokia Telecommunications
.Bell Atlantic .Nortel Networks
.Compaq and Tandem .Novell
.Eastman Kodak .Oracle
.IBM .Seagate
.Intel .Silicon Graphics
.Lotus .Sun Microsystems
.MCI Worldcom
Furthermore, at the end of the second quarter ended June 30, 1999, dice.com had
over 3,150 job listing advertisers, including major recruiting and consulting
firms such as Manpower Technical Services, Volt Services Group, and Modis Pro-
fessional Services.
Subscription Sales
EarthWeb generates revenue from subscription fees paid to access its premium
content services, including ITknowledge.com, and the MicroHouse product line.
EarthWeb sells subscriptions online as well as through a subscription sales
force. This sales force markets multi-user enterprise licenses to EarthWeb's
wide range of subscription services.
31
Competition
EarthWeb believes it competes on the basis of brand recognition, exclusivity
of content and services, quality and quantity of content, product and resource
selection, convenience and reliability. EarthWeb believes that it is differen-
tiated and well positioned against its competitors because it provides a full
range of business-to-business online services leveraging content, career man-
agement and recruiting resources, commerce and community to facilitate infor-
mation transfer and transactions in the IT sector.
The market for Internet-based online services is relatively new, intensely
competitive and rapidly changing. Since the advent of commercial services on
the Internet, the number of online services competing for users' attention and
spending has proliferated, and EarthWeb expects that competition will continue
to intensify. EarthWeb competes with other companies who have particular sec-
tions of their Web sites directed at segments or sub-segments of the profes-
sional community, including Ziff-Davis (DevHead), CNET (builder.com and
activex.com), CMP Media (CMPnet), Internet.com (webdeveloper.com), Wired Digi-
tal (Webmonkey) and IDG (Javaworld). However, EarthWeb believes that it offers
the most comprehensive content and online business-to-business services for
the IT industry. EarthWeb also competes for circulation and advertising im-
pressions with general interest portal and destination sites as well as tradi-
tional media. With respect to career services, EarthWeb competes with online
job boards. With respect to sales of products, EarthWeb competes with tradi-
tional retailers of these products, including book, software and online retail
stores.
Many of EarthWeb's current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than EarthWeb. These competi-
tors may be able to respond more quickly to new or emerging technologies and
changes in customer requirements and to devote greater resources to the devel-
opment, promotion and sale of their products and services than EarthWeb. There
can be no assurance that EarthWeb will be able to compete successfully against
its current or future competitors.
Infrastructure, Operations and Technology
EarthWeb makes its Web sites available using multiple Sun Microsystems, Digi-
tal Equipment and Wintel-based servers that run on Sun Solaris Digital UNIX
and Microsoft NT operating systems. For disk storage, EarthWeb partially re-
lies on a high performance and fully redundant central storage system from EMC
and NetAppliance. The full implementation of this central storage system will
significantly enhance the scalability of EarthWeb's online services. EarthWeb
licenses software from the following vendors: Apache, Netscape and Microsoft
(Web servers); Engage (advertising management system); Netscape (subscriptions
system); CyberSource (secure credit card capture and billing); Verity (search
and retrieval); Net. Genesis (Web traffic analysis); SalesLogix (sales force
automation); and Solomon (financials).
EarthWeb maintains four data centers. EarthWeb is expanding its network of
fully redundant connectivity to all its data centers. EarthWeb's primary pro-
duction and development systems are copied to backup tapes each night and reg-
ularly stored at an off site facility. EarthWeb maintains a quality assurance
program consisting of both internal and external controls to constantly moni-
tor its servers, processes and network connectivity. EarthWeb has implemented
these various redundancies, backup systems and monitoring systems in order to
minimize the risk associated with damage from fires, power loss, telecommuni-
cations failure, break-ins, computer viruses and other events beyond
EarthWeb's control.
Intellectual Property
EarthWeb seeks to protect its intellectual property through a combination of
license agreements, service mark, copyright, trade secret laws and other meth-
ods of restricting disclosure and transferring title. EarthWeb obtains the ma-
jority of its content under license agreements with publishers, through work
for hire arrangements with third parties and from internal staff development.
EarthWeb has no patents or patents pending for its current online services and
does not anticipate that patents will become a significant part of EarthWeb's
intellectual property in the foreseeable future. Where appropriate, EarthWeb
also enters into confidentiality agreements with its employees, consultants,
vendors and customers, license agreements with third parties and generally
seeks to control access to and distribution of its technology, documentation
and other proprietary information. EarthWeb pursues the registration of its
service marks in the United States and internationally, and has obtained
United States service mark registration for its EarthWeb service mark and the
Fang Logo Design, has been assigned the Plugin Datamation and Datamation serv-
ice marks and has applied for registration of certain of its other service
marks, such as developer.com.
32
U.S. and Foreign Government Regulation
Congress has recently passed legislation that regulates certain aspects of the
Internet, including online content, copyright infringement, user privacy, taxa-
tion, access charges, liability for third-party activities and jurisdiction. In
addition, federal, state, local and foreign governmental organizations have en-
acted and also are considering, and may consider in the future, other legisla-
tive and regulatory proposals that would regulate the Internet. Areas of poten-
tial regulation include, but are not limited to, libel, electronic contracting,
pricing, quality of products and services and intellectual property ownership.
The European Union also has enacted several directives relating to the
Internet. In order to safeguard against the spread of certain illegal and so-
cially harmful materials on the Internet, the European Commission has drafted
the "Action Plan on Promoting the Safe Use of the Internet." Other European
Commission directives address the regulation of privacy, e-commerce, security,
commercial piracy, consumer protection and taxation of transactions completed
over the Internet.
It is not known how courts and administrative agencies will interpret and apply
both existing and new laws. Therefore, we are uncertain as to how new laws or
the application of existing and new laws will affect our business. In addition,
our business may be indirectly affected by our vendors and customers who may be
subject to such legislation. Increased regulation of the Internet may decrease
the growth in the use of the Internet, which could decrease the demand for our
services, increase our cost of doing business or otherwise have a material ad-
verse effect on our business, results of operations and financial condition.
Employees
As of June 30, 1999 EarthWeb had 209 full-time employees, including 70 in sales
and marketing. EarthWeb's future success depends in large part on its ability
to attract and retain highly qualified employees. Competition for such person-
nel is intense and there can be no assurance that EarthWeb will be able to re-
tain its senior management or other key personnel in the future. EarthWeb's em-
ployees are not represented by any union, and EarthWeb considers its relations
with its employees to be good.
Facilities
EarthWeb's headquarters are currently located in a leased facility in New York
City consisting of a total of approximately 33,500 square feet of office space,
the majority of which is under a ten year lease. Dice.com has an office located
in Des Moines, Iowa, consisting of approximately 13,530 square feet under
leases expiring beginning on October 31, 2001. MicroHouse, located in Boulder,
Colorado, has an office consisting of approximately 10,000 square feet under a
lease expiring February 28, 2001.
Legal Proceedings
EarthWeb is party to claims and litigation that arise in the normal course of
business. Management believes that the ultimate outcome of those claims and
litigation will not have a material impact on its financial position or results
of operations.
33
Management
Directors and Executive Officers
The following sets forth certain information with respect to the directors and
executive officers of EarthWeb as of June 30, 1999.
Name Age Position
------------------------------------------------------------------------------------------------------------
Jack D. Hidary(1) 31 President, Chief Executive Officer and Director
Murray Hidary 27 Executive Vice President, Business Development, Secretary, Treasurer and Director
William Gollan 51 Senior Vice President
Lloyd Linn 41 Vice President and President of EW Career Solutions, Inc., a subsidiary of EarthWeb
Irene Math 37 Senior Vice President, Finance
John Kleine 45 Vice President, Systems and Operations
Scott Anderson 45 Vice President, Worldwide Marketing
Mark Schlack 46 Vice President, Content
Cary Davis(1)(2) 32 Director
Henry Kressel(1)(2) 65 Director
Peter Derow 59 Director
(1) Member of the Compensation committee of the Board of Directors
(2) Member of the Audit Committee of the Board of Directors
Messrs. Jack D. Hidary and Murray Hidary are brothers.
Jack D. Hidary has served as the President, Chief Executive Officer and a di-
rector of EarthWeb since April 1996 and has co-managed its predecessors since
January 1995. Mr. Hidary is a co-founder of EarthWeb. From November 1991 to
July 1994, Mr. Hidary served as a Stanley Fellow in Clinical Neuroscience at
the National Institutes of Health, where he helped establish a digital brain
imaging laboratory making use of Internet, neural network and other advanced
technologies. Prior to this fellowship, Mr. Hidary helped build ColumbiaNet,
the online service of Columbia University, where he also studied Philosophy and
Neuroscience.
Murray Hidary has been the Executive Vice President, Business Development, Sec-
retary, Treasurer and a director of EarthWeb since April 1996 and has co-man-
aged its predecessors since January 1995. Mr. Hidary is a co-founder of
EarthWeb. Mr. Hidary studied Music and Composition at New York University.
William Gollan has been the Senior Vice President of EarthWeb since November
1997. Prior to joining EarthWeb, Mr. Gollan was a Senior Vice President of
LitleNet beginning in February 1996 focusing on electronic software distribu-
tion. From March 1994 to April 1996, Mr. Gollan was a Vice President, Sales and
Marketing for Kurzweil Applied Intelligence. From December 1987 to March 1994,
Mr. Gollan was a Managing Director of Weathervane Management Consultants. In
1990, Mr. Gollan co-founded Computer Buying World Magazine, an IDG monthly
trade magazine focused on the computer distribution channel. Mr. Gollan at-
tended Northeastern University.
Lloyd Linn has been the Vice President of EarthWeb and President of EW Career
Solutions, Inc., a subsidiary of EarthWeb that operates the dice.com business,
since February 1999. Mr. Linn was the co-founder of dice.com and co-managed
dice.com since its inception in 1990. Mr. Linn has worked as a contract pro-
grammer and consultant at various technical consulting companies including Cap
Gemini Group. Mr. Linn studied Computer Sciences at Des Moines Area Community
College.
Irene Math is the Senior Vice President, Finance of EarthWeb, and was the Vice
President, Finance from November 1996 to March 1999. From June 1995 to May
1996, Ms. Math served as Corporate Controller for MCI/News Corp.'s Internet
Ventures. From July 1992 to May 1995, she was a Vice President in Banking and
Corporate Finance at Chemical Bank. From September 1984 to June 1992, Ms. Math
held various positions at Arthur Andersen & Co. Ms. Math graduated from Lehigh
University with a B.S. in Accounting and is a Certified Public Accountant.
John Kleine has been the Vice President, Systems and Operations of EarthWeb
since January 1998. Prior to joining EarthWeb, Mr. Kleine served as Vice Presi-
dent, Director of Business Systems from 1983 to 1997 at True North Communica-
tions where he was responsible for all desktop systems, voice and data
networking, data center operations and graphics
34
design computing. Prior to 1983, Mr. Kleine held various financial positions at
Warner Communications, Inc. and Viacom International, Inc. Mr. Kleine received
his B.A. in Accounting and Mathematics from Queens College.
Scott Anderson has been the Vice President, Marketing of EarthWeb since August
1998. From 1994 to July 1998, Mr. Anderson served as a Partner and Worldwide
Management Supervisor at Ogilvy & Mather where he ran the global IBM Software
Group account. In 1994, Mr. Anderson worked at the west coast advertising agen-
cy, Suissa Miller, where he launched Crayola's software family. Prior to that,
he worked at Drew Advertising where, among other accomplishments, he built the
Peter Norton software brand franchise. He won the American Marketing Associa-
tion's Effie award for marketing effectiveness for both the Crayola and IBM
software launches. Mr. Anderson received a B.S. from Rutgers University.
Mark Schlack has been the Vice President, Content for EarthWeb since November
1998. From December 1995 to May 1998, Mr. Schlack served as Editor and later as
Editor-in-Chief of BYTE Magazine, published by McGraw Hill. From June 1990 to
November 1995, he held various positions at Cahners Publishing including Editor
of Datamation and Editor-in-Chief of Systems Integration Business. Mr. Schlack
graduated from the University of Michigan with a B.A. in Creative Writing.
Cary Davis has been a director of EarthWeb since February 1998. Mr. Davis has
served with E.M. Warburg, Pincus & Co., LLC, since October 1994 and has been a
Managing Director since January 1999. From August 1992 to September 1994, Mr.
Davis was employed by Dell Computer Corporation, where his last position was
Manager of Worldwide Desktop Marketing. Mr. Davis also serves as a director of
BEA Systems, Inc. Mr. Davis holds a B.A. from Yale University and an M.B.A.
from Harvard University.
Henry Kressel has been a director of EarthWeb since October 1996. Dr. Kressel
has served with E.M. Warburg, Pincus & Co., LLC, an investment firm, since 1983
and has been a Managing Director since 1985. Prior to 1983, Dr. Kressel was
Staff Vice President for research and development in solid state technology at
the RCA Corporation. Dr. Kressel also serves as a director of Level One Commu-
nications, Inc., a semi-conductor company, IA Corporation, a software develop-
ment company, Nova Corporation, a credit card processing company and Covad Com-
munications, an XDSL service provider. Dr. Kressel received a B.A from Yeshiva
University, a Masters in Applied Physics from Harvard University, a Ph.D. in
Engineering from the University of Pennsylvania and a M.B.A. from the Wharton
School of Business at the University of Pennsylvania.
Peter Derow has been a director of EarthWeb since May 1999. Mr. Derow served as
President and CEO of Institutional Investor, Inc. from 1988 until his retire-
ment in 1997. Earlier, Mr. Derow served as Chairman and President of Newsweek,
Director of The Washington Post Company, President of CBS Publishing Group, and
Senior Vice President and Director of CBS, Inc. Mr. Derow holds a Bachelor of
Arts degree from Harvard College and an MBA from Harvard University's Graduate
School of Business Administration.
Board of Directors
EarthWeb has five directors serving on its Board of Directors. Under the terms
of the certificate of incorporation and By-Laws, Peter Derow's term as director
shall expire at the 2002 annual meeting of the stockholders, Murray Hidary's
and Cary Davis' terms as directors shall expire at the 2000 annual meeting of
the stockholders, and Jack D. Hidary's and Henry Kressel's terms as directors
shall expire at the 2001 annual meeting of the stockholders.
The Board of Directors has established an Audit committee, the members of which
are Henry Kressel and Cary Davis, who are nonemployee directors and a Compensa-
tion committee, the members of which are Henry Kressel and Cary Davis, who are
nonemployee directors, and Jack D. Hidary.
The Audit committee is responsible for recommending to the Board of Directors
the engagement of the independent auditors of EarthWeb and reviewing with the
independent auditors the scope and results of the audits, the internal account-
ing controls of EarthWeb, audit practices and the professional services fur-
nished by the independent auditors.
The Compensation committee is responsible for reviewing and approving all com-
pensation arrangements for officers of EarthWeb, and is also responsible for
administering or making recommendations with respect to EarthWeb's stock plans.
A subcommittee of the Compensation committee consisting of Dr. Kressel and Mr.
Davis administers the 1998 Stock Incentive Plan with respect to EarthWeb's of-
ficers subject to Section 162(m) of the Internal Revenue Code of 1986, as
amended.
The Delaware General Corporation Law provides that a company may indemnify its
directors and officers as to certain liabilities. EarthWeb's certificate of in-
corporation and by-laws provide for the indemnification of its directors and
officers.
35
The effect of such provisions is to indemnify, to the fullest extent permitted
by law, the directors and officers of EarthWeb against all costs, expenses and
liabilities incurred by them in connection with any action, suit or proceeding
in which they are involved by reason of their affiliation with EarthWeb.
EarthWeb maintains directors and officers liability insurance.
EarthWeb does not currently pay any directors' fees.
Employment and Consulting Agreements
Jack D. Hidary and Murray Hidary entered into employment agreements with GNP
effective January 1, 1995. Each of these employment agreements provided for an
initial two-year term, which will extend automatically for additional one-year
terms unless terminated by 60 days prior notice from the respective
counterparty. Through an Intercompany Services Agreement dated as of October
25, 1996 among Jack D. Hidary, Murray Hidary, Nova Spivack, EarthWeb, GNP and
EarthWeb LLC, which amends certain provisions of each of the employment agree-
ments, each of Jack and Murray Hidary agreed to serve as an officer and em-
ployee of EarthWeb as if EarthWeb were "the Company" under his employment
agreement. In connection therewith, EarthWeb agreed to assume all of the obli-
gations of GNP under the employment agreements, including payments of salary
and other compensation. Mr. Jack D. Hidary receives an annual base salary of
$180,000 per annum, subject to cost of living increases, and Mr. Murray Hidary
receives an annual base salary of $165,000 per annum, subject to cost of living
increases. Jack and Murray Hidary are also entitled to receive bonuses as may,
from time-to-time, be awarded by the Board of Directors.
In the event either Mr. Jack D. Hidary or Mr. Murray Hidary is terminated with-
out "cause" (as such term is defined in his employment agreement), each may
continue to receive their respective base salary for a period of up to two
years following such termination. The continued payment of his base salary is
contingent upon his not disclosing EarthWeb's confidential information or com-
peting with the business of EarthWeb.
EarthWeb has entered into employment agreements with William Gollan, Senior
Vice President, Lloyd Linn, Vice President and President of EW Career Solu-
tions, Inc., Irene Math, Senior Vice President, Finance, John Kleine, Vice
President, Systems and Operations, Scott Anderson, Vice President, Worldwide
Marketing and Mark Schlack, Vice President of Content. These employment con-
tracts provide for base salaries ranging from $125,000 to $175,000 and commis-
sions and bonuses based on both individual and overall EarthWeb performance
measures.
The material terms of these employment agreements are:
(1) any dispute or controversy arising under or in connection with the em-
ployment agreement (other than injunctive relief) shall be settled ex-
clusively by arbitration;
(2) if an executive is terminated without cause, she/he will receive sever-
ance pay between 3 and 12 months; and
(3) during the agreement and between to 3 months to 3 years after, the ex-
ecutive is prohibited from competing with EarthWeb.
Benefit Plans
Stock Option Plan
EarthWeb's 1996 amended and restated stock plan was adopted by the board of di-
rectors of EarthWeb in October 1996 and was subsequently ratified by the stock-
holders of EarthWeb. The stock plan provides for the grant of incentive stock
options and non-qualified stock options. The stock plan also provides for the
issuance of stock appreciation rights and restricted stock. Directors, employ-
ees and consultants of EarthWeb are eligible to receive grants under the stock
plan. The stock plan authorizes 525,000 shares of common stock for issuance,
subject to adjustment as set forth in the stock plan. As of May 31, 1999, op-
tions relating to 385,049 shares of common stock were outstanding.
1998 Stock Incentive Plan
EarthWeb's 1998 stock incentive plan was adopted by the board of directors in
November 1998 and has been approved by EarthWeb's stockholders. 2,075,000
shares of common stock have been reserved for issuance under the 1998 stock in-
centive plan, plus an annual increase to be added on the first day of
EarthWeb's fiscal year beginning in 2000 equal to two percent (2%) of the num-
ber of shares outstanding as of such date or a lesser number of shares deter-
mined by the board of directors. Up to 159,000 shares have been reserved for
issuance as incentive stock options, plus an annual increase to be
36
added on the first day of EarthWeb's fiscal year beginning in 2000 equal to the
least of (1) 400,000 shares, (2) four tenths of one percent (.4%) of the number
of shares outstanding as of such date or (3) a lesser number of shares deter-
mined by the board of directors. As of May 31, 1999 options relating to 344,917
shares of common stock were outstanding and approximately 1,730,083 remained
available for future grants.
The purpose of the 1998 stock incentive plan is to attract and retain the best
available personnel, to provide additional incentive to employees, directors
and consultants of EarthWeb and to promote the success of EarthWeb's business.
The 1998 stock incentive plan provides for the granting to employees of options
to purchase common stock that qualify under Section 422 of the Internal Revenue
Code of 1986, as amended, as "incentive stock options" and for the granting of
nonstatutory stock options, stock appreciation rights, dividend equivalent
rights, restricted stock, performance units, performance shares, and other eq-
uity-based rights (including incentive stock options) to employees, directors
and consultants of EarthWeb.
The 1998 stock incentive plan is administered by the board of directors, which
shall determine the provisions, terms and conditions of each 1998 award, in-
cluding, but not limited to, the 1998 award vesting schedule, repurchase provi-
sions, rights of first refusal, forfeiture provisions, form of payment upon ex-
ercise of the 1998 award, payment contingencies and satisfaction of any perfor-
mance criteria. The Compensation committee may make recommendations to the
board of directors with respect to awards under the 1998 stock incentive plan.
A subcommittee of the Compensation committee will administer the 1998 stock in-
centive plan for EarthWeb's officers subject to Section 162(m) of the Internal
Revenue Code of 1986, as amended.
Incentive stock options are not transferable by the optionee other than by will
or the laws of descent and distribution, and each incentive stock option is ex-
ercisable during the lifetime of the optionee only by such optionee. Other 1998
awards shall be transferable to the extent provided in the agreement evidencing
the 1998 award.
The exercise price of incentive stock options must be at least equal to the
fair market value of the common stock on the date of grant, and the term of the
option must not exceed ten years. With respect to an employee who owns stock
possessing more than 10% of the voting power of all classes of EarthWeb's out-
standing capital stock, the exercise price of any incentive stock option must
equal at least 110% of the fair market value of the common stock on the grant
date and the term of the option must not exceed five years. The term of other
awards will be determined by the administrator of the award. The exercise price
or purchase price of nonstatutory stock options will be determined by the ad-
ministrator of the award, but will not be less than 100% of the fair market
value of the stock unless determined by the administrator of the award, and the
exercise price or purchase price, if any, of other awards will also be deter-
mined by the compensation committee. The consideration to be paid for the
shares of common stock upon exercise or purchase of an award will be determined
by the administrator of the award and may include cash, check, promissory note,
shares of common stock, or the assignment of part of the proceeds from the sale
of shares acquired upon exercise or purchase of the award.
Where the award agreement permits the exercise or purchase of an award for a
certain period of time following the recipient's termination of service with
EarthWeb, disability, or death, such award will terminate to the extent not ex-
ercised or purchased on the last day of the specified period or the last day of
the original term of such award, whichever occurs first.
Unless terminated sooner, the 1998 stock incentive plan will terminate automat-
ically in 2008. The board has the authority to amend, suspend or terminate the
1998 stock incentive plan subject to stockholder approval of certain amendments
and provided no such action may affect awards previously granted under the 1998
stock incentive plan unless agreed to by the affected grantees.
1998 Employee Stock Purchase Plan
EarthWeb's 1998 employee stock purchase plan was approved by the board of di-
rectors in November 1998 and has been approved by EarthWeb's stockholders. The
stock purchase plan is intended to qualify as an "employee stock purchase plan"
under Section 423 of the Code in order to provide employees of EarthWeb with an
opportunity to purchase common stock through payroll deductions. An aggregate
of 159,000 shares of common stock has been reserved for issuance under the
stock purchase plan and is available for purchase thereunder, plus an annual
increase to be added on the first day of EarthWeb's fiscal year beginning in
2000 equal to the least of (1) 400,000 shares, (2) two percent (2%) of the out-
standing shares on such date or (3) a lesser number of shares determined by the
compensation committee, subject to adjustment in the event of a stock split,
stock dividend or other similar change in the common stock or the capital
structure of EarthWeb. Except for any employees (a) who, after giving effect to
the grant under the stock purchase plan, would own shares and
37
options equal to 5% or more of the total voting power of EarthWeb's outstanding
common stock, (b) whose rights under all of EarthWeb's stock purchase plans ac-
crue at a rate exceeding $25,000 per year, (c) whose customary employment is 20
or fewer hours per week or 5 or fewer months per year or (d) who are subject to
laws of a foreign jurisdiction that prohibit or make impracticable such employ-
ee's participation in the stock purchase plan, all employees of EarthWeb are
eligible to participate in the stock purchase plan.
Offer periods under the stock purchase plan are generally overlapping periods
of 24 months. The initial offer period commenced on the closing date of the
initial public offering. Additional offer periods will commence each February 1
and August 1. Purchase periods under the stock purchase plan are generally six
month periods. The initial purchase period commenced on the closing date of the
initial public offering. Additional purchase periods will commence each August
1 and February 1. Exercise dates under the stock purchase plan are the last day
of each purchase period. An offer period may be shortened in the event of a
merger of EarthWeb with or into another corporation, the sale of all or sub-
stantially all of the assets of EarthWeb, or certain other transactions.
On the first day of each offer period, a participating employee is granted a
purchase right that is a form of option to be automatically exercised on the
forthcoming exercise dates within the offer period. During the offer period de-
ductions are made from the pay of participants (in accordance with their autho-
rizations) and credited to their accounts under the stock purchase plan. When
the purchase right is exercised, the participant's withheld salary is used to
purchase shares of common stock of EarthWeb. The price per share at which
shares are to be purchased under the stock purchase plan during any purchase
period is the lesser of the fair market value of the common stock (as defined
in the stock purchase plan) on (a) the date of the grant of the option (the
commencement of the offer period) or (b) the exercise date (the last day of a
purchase period). The participant's purchase right is exercised in this manner
on both exercise dates arising in the offer period unless, on the first day of
any purchase period, the fair market value of the common stock is lower than
the fair market value of the common stock on the first day of the offer period.
If so, the participant's participation in the original offer period is termi-
nated, and the participant is automatically enrolled in the new offer period
effective the same date.
Payroll deductions may range from 1% to 15% (in whole percentage increments) of
a participant's regular base pay and, in certain cases, commissions, exclusive
of overtime, bonuses or shift-premiums, but not more than $21,250 per year.
Participants may not make additional payments to their accounts. The maximum
number of shares of common stock that any employee may purchase under the stock
purchase plan during a purchase period is determined by dividing 15% of the em-
ployee's regular base pay by the applicable purchase price. Certain additional
limitations on the amount of common stock that may be purchased during any cal-
endar year are imposed by the Internal Revenue Code.
The stock purchase plan is administered by the compensation committee, which
has the authority to terminate or amend the stock purchase plan (subject to
specified restrictions) and otherwise to administer the stock purchase plan and
to resolve all questions relating to the administration of the stock purchase
plan.
401(k) Plan
EarthWeb maintains a 401(k) retirement savings plan. All employees of EarthWeb
meeting certain minimum eligibility requirements are eligible to participate in
the 401(k) plan. The 401(k) plan provides that the employee may contribute up
to 15% of his or her pre-tax gross compensation (but not greater than a statu-
torily prescribed annual limit). The 401(k) plan permits, but does not require,
additional contributions to the 401(k) plan by EarthWeb. All amounts contrib-
uted by the employee participants in conformity with plan requirements and
earnings on such contributions are fully vested at all times. For the year
ended December 31, 1998, EarthWeb did not contribute to the 401(k) plan.
EarthWeb's wholly-owned subsidiaries, EW Career Solutions and MicroHouse, also
maintain 401(k) retirement plans.
38
Summary of Executive Compensation
The table below sets forth information concerning the annual and long-term com-
pensation for services rendered in all capacities to EarthWeb during the years
ended December 31, 1997 and 1998 for: (1) the chief executive officer of
EarthWeb and (2) the four other highest paid executive officers of EarthWeb in
1998.
Summary Compensation Table
-----------------------------------------------------
Long-Term
Compensation
------------
Awards
Securities
Name and Other annual Underlying
Principal Position Year Salary Bonus compensation Options
------------------ ---- -------- ---------- ------------ ------------
Jack D. Hidary............ 1998 $160,000 $41,000(2) -- --
Chief Executive Officer
and President 1997 160,000 10,000(1) -- --
Murray Hidary............. 1998 130,000 36,000(2) -- --
Executive Vice President,
Business 1997 130,000 10,000(1) -- --
Development, Secretary
and Treasurer
Irene Math................ 1998 132,000 38,000(2) -- 46,150
Senior Vice President,
Finance 1997 118,000 10,000(1) 29,249
William Gollan............ 1998 151,000 37,000(2) $53,000(3) 74,750
Senior Vice President
John Kleine............... 1998 128,292 19,600(2) -- 19,500
Vice President, Systems
and Operations
(1) Represents bonuses earned in 1997, one-half of which were paid in 1998.
(2) Represents bonuses earned in 1998, a portion of which were paid in 1999.
(3) Represents corporate apartment rental paid in 1998.
Option Grants in Fiscal Year Ended December 31, 1998
The following table sets forth information regarding stock options granted pur-
suant to the stock plan during the fiscal year ended December 31, 1998 to each
of the named executive officers. EarthWeb has never granted stock appreciation
rights.
-------------------------------------------------------------------------
Option Grants in Last Fiscal Year
Individual Grants
---------------------------------------------------
Percent of
Total Options Potential Realizable
Granted to Value at Assumed
Employees (net Annual Rates
Number of of forfeitures) of Stock Price
Securities in Fiscal Year Exercise or Appreciation for
Underlying Ended Base Price Option Term(4)
Options December 31, Per Share Expiration ---------------------
Name Granted(1) 1998(2) ($/Share)(3) Date 5% 10%
--------- ---------- --------------- ------------ ---------- ---------- ----------
Jack D. Hidary.......... -- -- -- -- -- --
Murray Hidary........... -- -- -- -- -- --
William Gollan.......... 74,750 21.44% $3.08 1/29/05 $1,172,180 $1,623,709
Irene Math.............. 46,150 13.24% $3.08 1/29/05 $ 723,694 $1,002,464
John Kleine............. 19,500 5.59% $3.08 1/29/05 $ 305,786 $ 423,576
(1) The options were granted under the stock plan. See "ManagementBenefit
plansStock Option Plan."
(2) Based on an aggregate of 348,650 options granted (net of forfeitures) to
employees in the year ended December 31, 1998, including options granted to
named executive officers.
(3) The exercise price per share of each option was equal to the fair market
value of the common stock on the date of the grant as determined by the board
of directors. EarthWeb determined the fair market value of the common stock on
the date of the grant based upon the most recent price paid by a third party
for EarthWeb's then outstanding convertible preferred
39
stock with an appropriate discount as a result of the convertible preferred
stock having a liquidation preference, the right to board representation and a
cumulative preferred dividend.
(4) Potential realizable values are computed by (a) multiplying the number of
shares of common stock subject to a given option by the initial public offering
price of $14.00 per share, which represents the price per share offered in
EarthWeb's initial public offering on November 11, 1998 (b) assuming that the
aggregate stock value derived from that calculation compounds at the annual 5%
or 10% rate shown in the table for the remaining six-year term of the option
and (c) subtracting from that result the aggregate option exercise price. The
5% and 10% assumed annual rates of stock price appreciation are mandated by the
rules of the Securities and Exchange Commission and do not represent EarthWeb's
estimate or projection of future common stock prices. Actual gains, if any, re-
sulting from stock option exercises and common stock holdings are dependent on
the future performance of the common stock, overall stock market conditions and
the option holder's continued employment with EarthWeb through the vesting pe-
riod. There can be no assurance that the amounts reflected in this table will
be achieved.
Options Exercised During 1998 and Options Values at December 31, 1998
The following table sets forth information concerning options exercised by any
named executive officer during the fiscal year ended December 31, 1998 and un-
exercised options held by the named executive officers as of December 31, 1998.
The values of unexercised in-the-money options represent the positive spread
between the respective exercise prices of outstanding stock options and the
last reported sale price of the common stock on December 31, 1998 of $38.88.
------------------------------------------------------------------------
Aggregate Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
------------------------------------------------------------------------
Value of Unexercised
Number of Securities In-the-
Underlying Unexercised Money
Options at Options at
Shares Fiscal Year End Fiscal Year End
Acquired Value ------------------------- -------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
--------- ----------- -------- ----------- ------------- ----------- -------------
Jack D. Hidary.......... -- -- -- -- -- --
Murray Hidary........... -- -- -- -- -- --
William Gollan.......... -- -- 28,530 93,995 $1,021,319 $3,364,840
Irene Math.............. 2,200 $13,865 15,324 57,876 $ 544,948 $2,089,015
John Kleine............. -- -- 2,925 16,575 $ 104,709 $ 593,353
Compensation Committee Interlocks and Insider Participation
On August 1, 1998, Messrs. Jack D. Hidary, Cary Davis and Henry Kressel were
appointed as members of the Compensation Committee. A subcommittee of the Com-
pensation Committee consisting of Dr. Kressel and Mr. Davis will administer the
1998 Stock Incentive Plan with respect to EarthWeb's officers subject to Sec-
tion 162(m) of the Internal Revenue Code of 1986, as amended. Mr. Hidary has
served as President and Chief Executive Officer of EarthWeb since April 1996.
Mr. Hidary will abstain from Compensation Committee decisions regarding his own
compensation. Mr. Davis has served with E.M. Warburg, Pincus & Co., LLC since
October 1994 and has been a Managing Director since January 1999. Dr. Kressel
has served with E.M. Warburg, Pincus & Co., LLC since 1983 and has been a Man-
aging Director since 1985. In October 1996, EarthWeb issued 2,925,000 shares of
common stock to EarthWeb LLC and assumed substantially all of the liabilities
of EarthWeb LLC in exchange for substantially all of the assets of EarthWeb
LLC. At the time of such transaction, EarthWeb LLC was the sole owner of common
stock then outstanding and, consequently, the members of EarthWeb LLC (which
included GNP, of which Messrs. Jack D. Hidary, Murray Hidary and Peter Derow
were the members at such time) retained their proportionate interests in
EarthWeb through the ownership by EarthWeb LLC of such common stock. In June
1998, EarthWeb issued 433,965 shares of common stock to EarthWeb LLC for an ag-
gregate purchase price of $3.7 million. Immediately prior to the initial public
offering, EarthWeb LLC distributed substantially all shares of EarthWeb common
stock that it held to its members. In October 1996, EarthWeb issued 653,111
shares of Series A Convertible Preferred stock to Warburg in a private place-
ment for an aggregate purchase price of approximately $6.7 million, of which
$4.9 million was received by EarthWeb and the remainder was used to repay cer-
tain investors and cover the transaction costs. In June 1997, EarthWeb issued
598,086 shares of Series B Convertible Preferred stock to Warburg for an aggre-
gate purchase price of $10.0 million. All of the Series A Convertible Preferred
stock and Series B Convertible Preferred stock were converted into 2,439,833
shares of common stock upon completion of EarthWeb's initial public offering in
November 1998.
40
Principal and Selling Stockholders
The following table sets forth information regarding the beneficial ownership
of common stock as of May 31, 1999 for (1) each person (or group within the
meaning of Section 13(d)(3) of the Securities Exchange Act of 1934) known by
EarthWeb to own beneficially 5% or more of the common stock, (2) EarthWeb's di-
rectors and named executive officers, (3) all directors and executive officers
of EarthWeb as a group. The following table also sets forth information regard-
ing the number of common stock being registered by the selling stockholders.
--------------------------
Beneficial Ownership(2)
--------------------------
Name and Address of Beneficial Owners(1)(2) Number Percent
------------------------------------------- ------------- ------------
Warburg, Pincus Ventures, L.P.(3)....................................... 1,817,093 19.39%
Jack D. Hidary(4)....................................................... 844,698 9.02%
Murray Hidary(4)........................................................ 844,698 9.02%
Nova Spivack............................................................ 513,809 5.48%
Peter Derow(5).......................................................... 1,381 *
Cary Davis(6)........................................................... 1,817,093 19.39%
Henry Kressel(6)........................................................ 1,817,093 19.39%
Irene Math(7)........................................................... 27,757 *
William Gollan(8)....................................................... 42,482 *
John Kleine(9).......................................................... 6,739 *
All directors and executive officers as a group (8
persons)(4)(5)(6)(7)(8)................................................ 3,536,616 37.75%
-----------
Common
stock being
Name and Address of Selling Stockholders registered
---------------------------------------- -----------
Lloyd Linn(10)..................................................... 263,755
Diane Rickert(10).................................................. 263,755
Steve Anderson(11)................................................. 9,337
Doug Anderson(11).................................................. 9,337
Robert Anderson(12)................................................ 966
Ascent Partners, Inc. ............................................. 2,542
All selling stockholders as a group(10)(11)(12).................... 549,692
* Less than 1%
(1) Unless otherwise noted, the address of each of the persons listed is 3 Park
Avenue, New York, New York 10016.
(2) As used in this table, "beneficial ownership" means the sole or shared
power to vote or direct the voting or to dispose or direct the disposition of
any security. For purposes of this table, a person is deemed to be the benefi-
cial owner of securities that can be acquired within 60 days from May 31, 1999
through the exercise of any option, warrant or right. Shares of common stock
subject to options, warrants or rights that are currently exercisable or exer-
cisable within 60 days are deemed outstanding for computing the ownership per-
centage of the person holding these options, warrants or rights, but are not
deemed outstanding for computing the ownership percentage of any other person.
The amounts and percentages are based upon 9,369,687 shares of common stock
outstanding as of May 31, 1999.
(3) The sole general partner of Warburg, Pincus Ventures, L.P. ("Warburg") is
Warburg, Pincus & Co., a New York general partnership ("WP"). E.M. Warburg,
Pincus & Co., LLC, a New York limited liability company ("EMWP"), manages
Warburg. The members of EMWP are substantially the same as the partners of WP.
Lionel I. Pincus is the managing partner of WP and the managing member of EMWP
and may be deemed to control both WP and EMWP. WP has a 15% interest in the
profits of Warburg as the general partner and also owns approximately 1.5% of
the limited partnership interests in Warburg. Henry Kressel and Cary Davis, di-
rectors of EarthWeb, are also Managing Directors of EMWP, and thus may be
deemed to have an indirect, pecuniary interest (within the meaning of Rule 16a-
1 under the Exchange Act) in an indeterminate portion of the shares benefi-
cially owned by Warburg and WP. The address for Warburg is 466 Lexington Ave-
nue, New York, New York 10017.
(4) Jack D. Hidary and Murray Hidary equally own GNP. GNP is the managing mem-
ber of EarthWeb LLC and, as a result, is a controlling member of EarthWeb LLC
and thus may be deemed to beneficially own the 35 shares of common stock owned
by EarthWeb LLC. Jack D. Hidary and Murray Hidary each disclaim beneficial own-
ership of these shares except to the extent of their pecuniary interest there-
in.
41
(5) Includes 1,381 shares subject to stock options that are exercisable within
60 days of May 31, 1999.
(6) All of the shares indicated as owned by Dr. Kressel and Mr. Davis are owned
directly by Warburg and are included because of Dr. Kressel's and Mr. Davis'
affiliation with Warburg. Dr. Kressel and Mr. Davis disclaim beneficial owner-
ship of these shares within the meaning of Rule 13d-3 under the Exchange Act.
(7) Includes 24,557 shares subject to stock options that are exercisable within
60 days of May 31, 1999.
(8) Includes 21,258 shares subject to stock options that are exercisable within
60 days of May 31, 1999.
(9) Includes 1,036 shares subject to stock options that are exercisable within
60 days of May 31, 1999.
(10)Includes 28,889 shares in escrow.
Selling Stockholders
527,510 shares which are being offered and sold under this prospectus were
originally issued by EarthWeb, in connection with EarthWeb's acquisition of D&L
Online, Inc., on February 2, 1999. 22,182 shares which are being offered and
sold under this prospectus were originally issued by EarthWeb, in connection
with EarthWeb's acquisition of MicroHouse International Inc. in March 1999.
The selling stockholders and holders listed in any supplement to this prospec-
tus, and any transferors, pledgees, donees or successors to these persons, may
from time to time offer and sell, pursuant to this prospectus, any and all of
these shares. Any supplement to this prospectus may contain certain information
about the selling stockholders and the aggregate principal amount of the shares
beneficially owned by each selling stockholder that they are offering. Such in-
formation will be obtained from the selling stockholders.
Except for Lloyd Linn, none of the selling stockholders currently has any posi-
tion, office or other material relationship with the Company or its affiliates.
See "Management--Directors and Executive Officers" for a description of Mr.
Linn's position with EarthWeb. Because the selling stockholders may offer all
or some portion of their shares, no estimate can currently be given as to the
number of shares that will be held by any selling stockholder upon termination
of such sales. In addition, selling stockholders may have disposed of, or may
dispose of, all or a portion of their shares in transactions exempt from the
requirements of the Securities Act.
42
Plan of Distribution
In February, EarthWeb issued the 527,510 shares of common stock offered by this
prospectus to Lloyd Linn and Diane Rickert in connection with EarthWeb's acqui-
sition of dice.com. In March, EarthWeb issued the 22,182 shares of common stock
to Steve Anderson, Doug Anderson, Robert Anderson and Ascent Partners, Inc. in
connection with EarthWeb's acquisition of MicroHouse International. We agreed
to register these shares under the Securities Act for resale to the public. Un-
der the registration rights agreements between EarthWeb and the selling stock-
holders, we must use commercially reasonable efforts to cause the registration
statement, or a replacement, to be continuously effective under the Securities
Act until the earlier of (1) two years from the effective date of this regis-
tration statement of which this prospectus forms a part or (2) such time as the
selling stockholders have sold all shares offered by this prospectus, or a re-
placement prospectus.
The sale of all or a portion of these shares of common stock by the selling
stockholders may be effected from time to time at prevailing market prices at
the time of such sales, at prices related to such prevailing prices, at fixed
prices that may be changed or at negotiated prices. The selling stockholders
may effect such transactions by selling directly to purchasers in negotiated
transactions, to dealers acting as principals or through one or more brokers,
or any combination of these methods of sale. In addition, shares may be trans-
ferred in connection with the settlement of call options, short sales or simi-
lar transactions that may be effected by the selling stockholders. Dealers or
brokers may receive compensation in the form of discounts, concessions or com-
missions from the selling stockholders. The selling stockholders and any bro-
kers or dealers that participate in the distribution may under certain circum-
stances be "underwriters" within the meaning of the Securities Act, and any
commissions received by such brokers or dealers and any profits realized on the
resale of shares by them may be underwriting discounts and commissions under
the Securities Act. EarthWeb and the selling stockholders may agree to indem-
nify such brokers or dealers against certain liabilities, including liabilities
under the Securities Act.
To the extent required under the Securities Act or the rules of the Securities
and Exchange Commission, a supplemental prospectus will be filed disclosing:
. the name of any such brokers or dealers,
. the number of shares involved,
. the price at which such shares are to be sold,
. the commissions paid or discounts or concessions allowed to such brokers or
dealers, where applicable,
. that such brokers or dealers did not conduct any investigation to verify the
information set out in this prospectus and
. other facts material to the transaction.
We can give no assurance that any of the selling stockholders will sell any or
all of these shares of common stock.
EarthWeb has agreed, among other things, to bear all expenses other than under-
writing discounts and selling commissions but including reasonable fees and
disbursements of one firm or counsel designated to act as counsel for the sell-
ing stockholders, in connection with the registration and sale of these shares.
EarthWeb will not receive any of the proceeds from the offering of these
shares.
43
Certain Transactions
In October 1996, EarthWeb issued 2,925,000 shares of common stock to EarthWeb
LLC and assumed substantially all of the liabilities of EarthWeb LLC in ex-
change for substantially all of the assets of EarthWeb LLC. At the time of this
transaction, EarthWeb LLC was the sole owner of common stock then outstanding
and, consequently, the members of EarthWeb LLC (which included GNP, of which
Messrs. Jack D. Hidary, Murray Hidary and Nova Spivack were the members at that
time) retained their proportionate interests in EarthWeb through the ownership
by EarthWeb LLC of this common stock.
In October 1996, EarthWeb issued 653,111 shares of Series A Convertible Pre-
ferred Stock to Warburg in a private placement for an aggregate purchase price
of approximately $6.7 million, of which $4.9 million was received by EarthWeb
and the remainder was used to repay various investors and cover the transaction
costs. In June 1997, EarthWeb issued 598,086 shares of Series B Convertible
Preferred Stock to Warburg for an aggregate purchase price of $10.0 million.
All of the Series A Convertible Preferred Stock and Series B Convertible Pre-
ferred Stock were converted into 2,439,833 shares of common stock upon the con-
summation of the initial public offering in November 1998.
In June 1998, EarthWeb issued 433,965 shares of common stock to EarthWeb LLC
for an aggregate purchase price of $3.7 million.
The controlling member of EarthWeb LLC is GNP, the members of which are Jack D.
Hidary and Murray Hidary, directors of EarthWeb. Warburg, EarthWeb LLC, GNP and
the GNP members are entitled to demand and piggyback registration rights with
respect to their respective shares of common stock, which, with respect to
EarthWeb LLC, include the former members. See "Description of Capital Stock--
Registration Rights."
Under the Shareholders Agreement, Warburg granted GNP an option to purchase up
to 10% of the shares that Warburg received upon conversion of its preferred
stock, subject to Warburg realizing a return of at least five times on its in-
vestment. The rights become conditionally exercisable after the expiration of
any restrictions on resale of these shares.
44
Description of Capital Stock
General
EarthWeb's authorized capital stock consists of 21,750,000 shares of common
stock, $.01 par value, and 2,000,000 shares of preferred stock, $.01 par value,
which have not been designated. As of May 31, 1999, there were 9,369,687 shares
of common stock outstanding.
The following summary of the terms and provisions of EarthWeb's capital stock
does not purport to be complete and is qualified in its entirety by reference
to the amended and restated certificate of incorporation and bylaws.
Common Stock
The holders of common stock are entitled to one vote for each share on all mat-
ters voted upon by stockholders, including the election of directors. Subject
to the rights of any then outstanding shares of preferred stock, the holders of
the common stock are entitled to such dividends as may be declared in the dis-
cretion of the Board of Directors out of funds legally available therefor. See
"Dividend Policy." Holders of common stock are entitled to share ratably in the
net assets of EarthWeb upon liquidation after payment or provision for all lia-
bilities and any preferential liquidation rights of any preferred stock then
outstanding. The holders of common stock have no preemptive rights to purchase
shares of stock of EarthWeb. Shares of common stock are not subject to any re-
demption provisions and are not convertible into any other securities of
EarthWeb. All outstanding shares of common stock are fully paid and non assess-
able.
Preferred Stock
The Board of Directors of EarthWeb has the authority, without further action by
EarthWeb's stockholders, to issue shares of preferred stock from time to time
in one or more series and to fix the number of shares, designations, voting
powers, preferences, optional and other special rights, and the restrictions or
qualifications thereof. The rights, preferences, privileges, and restrictions
or qualifications, of different series of preferred stock may differ with re-
spect to dividend rates, amounts payable on liquidation, voting rights, conver-
sion rights, redemption provisions, sinking fund provisions, and other matters.
The issuance of such preferred stock could:
.decrease the amount of earnings and assets available for distribution to hold-
ers of common stock;
.adversely affect the rights and powers, including voting rights, of holders of
common stock; and
.have the effect of delaying, deferring, or preventing a change in control of
EarthWeb.
EarthWeb has no present plans to issue any shares of preferred stock.
Registration Rights
From and after May 16, 1999, Warburg and the holders of a majority of the com-
mon stock held by the GNP members, GNP and the members holding a majority in-
terest in EarthWeb LLC are entitled to demand registration rights with respect
to an aggregate of 5,798,798 shares of common stock, or the registrable securi-
ties. Pursuant to these rights, such stockholders may require that EarthWeb
file up to an aggregate of six registration statements under the Securities
Act, subject to certain minimum size and other conditions. In addition, if
EarthWeb proposes to register any of its securities under the Securities Act,
whether for its own account or for any of its stockholders, holders of the reg-
istrable securities are entitled, subject to certain restrictions and limita-
tions, to include their registrable securities in such registration. EarthWeb
is required to bear substantially all registration and selling expenses (except
for underwriting discounts, selling expenses and the fees and expenses of more
than one counsel representing holders of registrable securities) in connection
with the above-described registrations. The foregoing registration rights are
transferable in certain circumstances and may be amended or waived only with
the written consent of EarthWeb and a specified number of holders of registra-
ble securities.
In connection with the acquisition of D&L Online, on February 2, 1999, EarthWeb
agreed to file a shelf registration statement with respect to the shares of
common stock issued to the stockholders of D&L Online as consideration for the
acquisition within 75 days after the acquisition date. Sales by these stock-
holders under the shelf registration statement are subject to limitations as
described in the registration rights agreement between EarthWeb and the stock-
holders of D&L Online. In addition, if EarthWeb proposes to register any of its
securities under the Securities Act, whether for its own account or for any of
its stockholders, the former stockholders of D&L Online also have limited
rights to include their shares of common stock in this registration. EarthWeb
is required to bear substantially all registration and selling expenses (except
for underwriting discounts, selling expenses and the fees and expenses of more
than one counsel for the former
45
stockholders) in connection with the above-described registrations. These reg-
istration rights are transferable in limited circumstances. The registration
rights agreement terminates on March 31, 2001.
In connection with the acquisition of MicroHouse International, in March 1999,
EarthWeb agreed to file a shelf registration statement with respect to the
shares of common stock issued to the stockholders of MicroHouse International
as consideration for the acquisition within 60 days after the acquisition date.
Sales by these stockholders under the shelf registration statement are subject
to limitations as described in the registration rights agreement between
EarthWeb and the stockholders of MicroHouse International. EarthWeb is required
to bear substantially all registration and selling expenses (except for under-
writing discounts, selling expenses and the fees and expenses of more than one
counsel for the former stockholders) in connection with the above-described
registration. These registration rights are transferable in limited circum-
stances. The registration rights agreement terminates on March 18, 2001.
Limitation on Directors' Liabilities
EarthWeb's certificate of incorporation limits, to the maximum extent permitted
by the Delaware General Corporation Law, or the DGCL, the personal liability of
directors and officers for monetary damages for breach of their fiduciary du-
ties as directors and officers, except in various circumstances involving vari-
ous wrongful acts, including a breach of the director's duty of loyalty or acts
of omission which involve intentional misconduct or a knowing violation of law.
Section 145 of the DGCL permits EarthWeb to indemnify officers, directors or
employees against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement in connection with legal proceedings "if [as to any
officer, director or employee] he acted in good faith and in a manner he rea-
sonably believed to be in, or not opposed to the best interests of the corpora-
tion, and, with respect to any criminal act or proceeding, had no reasonable
cause to believe his conduct was unlawful," provided that with respect to ac-
tions by, or in the right of the corporation against, these individuals, indem-
nification is not permitted as to any matter as to which this person "shall
have been adjudged to be liable for negligence or misconduct in the performance
of his duty to the corporation, unless, and only to the extent that, the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability, but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses as the court shall deem proper." Individuals who are successful in the
defense of this action are entitled to indemnification against expenses reason-
ably incurred in connection therewith.
EarthWeb's by-laws require EarthWeb to indemnify directors and officers against
liabilities that they may incur under the circumstances set forth in the pre-
ceding paragraph.
EarthWeb plans to maintain standard policies of insurance under which coverage
is provided (1) to its directors and officers against loss arising from claims
made by reason of breach of duty or other wrongful act and (2) to EarthWeb with
respect to payments which may be made by EarthWeb to these officers and direc-
tors pursuant to the above indemnification provision or otherwise as a matter
of law.
Anti-Takeover Provisions
Various provisions of the DGCL and EarthWeb's certificate of incorporation and
By-Laws may delay, discourage or prevent a change in control of EarthWeb unless
this takeover or change in control is approved by EarthWeb's Board of Direc-
tors. These provisions also may render the removal of directors and management
more difficult. These provisions may discourage bids for common stock at a pre-
mium over the market price and may adversely affect the market price and voting
and other rights of the holders of common stock. See "Risk Factors--Our charter
documents could make it more difficult for a third party to acquire us."
Certificate of Incorporation and By-Laws
The certificate of incorporation provides that the Board of Directors will be
divided into three classes of directors, as nearly equal in number as is rea-
sonably possible, serving staggered terms. The existing directors' current
terms will expire as follows: Peter Derow's term shall expire at the 2002 an-
nual meeting of the stockholders; Murray Hidary's and Cary Davis' terms shall
expire at the 2000 annual meeting of the stockholders; and Jack D. Hidary's and
Henry Kressel's terms shall expire at the 2001 annual meeting of the stockhold-
ers. At each succeeding annual meeting of stockholders, directors elected to
succeed those directors whose terms are expiring at this meeting shall be
elected for a term of office to expire at the third succeeding annual meeting
of stockholders following such election. EarthWeb believes that a classified
Board of Directors will help to assure the continuity and stability of the
Board of Directors and EarthWeb's business strategies and policies as deter-
mined by the Board of Directors, since a majority of the directors at any given
time will have had prior
46
experience as directors of EarthWeb. EarthWeb believes that this, in turn, will
permit the Board of Directors to more effectively represent the interest of
stockholders. With a classified Board of Directors, at least two annual meet-
ings of stockholders, instead of one, will generally be required to effect a
change in the majority of the Board of Directors. As a result, a provision of
EarthWeb's certificate of incorporation relating to a classified Board of Di-
rectors may discourage proxy contests for the election of directors or pur-
chases of a substantial block of the common stock because this provision could
operate to prevent obtaining control of EarthWeb in a relatively short period
of time. The Board classification provision also could have the effect of dis-
couraging a third party from making a tender offer or otherwise attempting to
obtain control of EarthWeb. No director may be removed by the stockholders from
office, except for cause with the affirmative vote of not less than two-thirds
of the total voting power of all outstanding securities of EarthWeb.
The by-laws provide that special meetings of the stockholders of EarthWeb may
be called only by the Chairman of the Board of Directors, the President or the
Board of Directors of EarthWeb. The by-laws require advance written notice,
which generally must be received by the Secretary of EarthWeb not less than 30
days nor more than 60 days prior to a meeting of stockholders (subject to spec-
ified exceptions) of a proposal or director nomination that a stockholder de-
sires to present at this meeting.
The certificate of incorporation allows EarthWeb to issue up to 2,000,000
shares of preferred stock, which could adversely affect the interests of hold-
ers of common stock, could decrease the amount of earnings or assets available
for distribution to the holders of common stock or could adversely affect the
rights and powers, including voting rights, of the holders of common stock. See
"Preferred Stock" above. In specified circumstances, an issuance of preferred
stock could have the effect of decreasing the market price of the common stock,
as well as having the anti-takeover effect discussed above.
All amendments to the provisions of EarthWeb's certificate of incorporation re-
lating to the classified Board must be approved by the holders of 66 2/3% of
the outstanding capital stock entitled to vote and all amendments to EarthWeb's
by-laws must be approved by either the holders of 66 2/3% of the outstanding
capital stock entitled to vote or by a majority of the Board of Directors.
These provisions are intended to enhance the likelihood of continuity and sta-
bility in the composition of the Board of Directors and in the policies formu-
lated by the Board of Directors and to discourage various types of transactions
that may involve an actual or threatened change of control of EarthWeb. These
provisions are designed to reduce the vulnerability of EarthWeb to an unsolic-
ited acquisition proposal and to discourage various tactics that may be used in
proxy fights. However, these provisions could have the effect of discouraging
others from making tender offers for the shares of common stock, and, as a con-
sequence, they also may inhibit fluctuations in the market price of the shares
of common stock that could result from actual or rumored takeover attempts.
These provisions also may have the effect of preventing changes in the manage-
ment of EarthWeb.
Delaware Law
EarthWeb is subject to the provisions of Section 203 of the DGCL. Subject to
certain exceptions, Section 203 prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a certain period of time. That period is three years after the date of the
transaction in which the person became an interested stockholder, unless the
interested stockholder attained that status with the approval of the board of
directors or unless the business combination is approved in a prescribed man-
ner. A "business combination" includes certain mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder.
Subject to certain exceptions, an "interested stockholder" is a person who, to-
gether with his or her affiliates and associates, owns, or owned within three
years prior, 15% or more of the corporation's voting stock.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock is American Stock Trans-
fer and Trust Company.
47
Legal Matters
The validity of the common stock offered hereby will be passed upon for
EarthWeb by Morrison & Foerster LLP, New York, New York.
Experts
The balance sheets of EarthWeb Inc. as of December 31, 1998 and 1997 and the
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1998, the balance sheets of
D&L Online, Inc. as of December 31, 1998 and 1997 and the statements of earn-
ings, stockholders' equity and cash flows for the two years ended, and the bal-
ance sheet of MicroHouse as of December 31, 1998 and the statement of opera-
tions and comprehensive loss, stockholders' deficit and cash flows for the year
ended have been included in this Registration Statement in reliance on the re-
ports of PricewaterhouseCoopers LLP, independent accountants, given on the au-
thority of that firm as experts in accounting and auditing.
Where You Can Find More Information
EarthWeb has filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 for the common stock being offered by this prospectus.
This prospectus does not contain all of the information set forth in the regis-
tration statement and the exhibits and schedules thereto. For further informa-
tion with respect to EarthWeb and the shares of common stock offered hereby,
reference is made to the registration statement, including the exhibits and
schedules thereto. Statements contained in this prospectus as to the contents
of any contract or other document referred to in this prospectus are not neces-
sarily complete and, where this contract is an exhibit to the registration
statement, each statement is qualified in all respects by the provisions of
this exhibit. Copies of the registration statement, including the exhibits and
schedules thereto, may be examined without charge at the Public Reference Sec-
tion of the Securities and Exchange Commission, 450 Fifth Street, N.W. Room
1024, Washington, D.C. 20549, and the Securities and Exchange Commission's Re-
gional Offices located at 500 West Madison Street, Suite 1400, Chicago, IL
60661, and 7 World Trade Center, 13th Floor, New York, NY 10048 or on the
Internet at http://www.sec.gov. Copies of all or a portion of the registration
statement can be obtained from the Public Reference Section of the Securities
and Exchange Commission upon payment of prescribed fees. Please call the SEC at
800-SEC-0330 for further information about the public reference room.
EarthWeb is subject to the information and reporting requirements of the Secu-
rities Exchange Act of 1934, as amended, under which it files periodic reports,
proxy statements and other information with the Securities and Exchange Commis-
sion. These reports, proxy and information statements and other information may
also be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.
48
EarthWeb Inc.
Index to Financial Statements
----
Page
----
EarthWeb Inc.
Report of Independent Accountants........................................ F-2
Balance Sheets at December 31, 1998 and 1997............................. F-3
Statements of Operations for the years ended December 31, 1998, 1997 and
1996.................................................................... F-4
Statements of Cash Flows for the years ended December 31, 1998, 1997 and
1996.................................................................... F-5
Statements of Stockholders' Equity for the years ended December 31, 1996,
1997 and 1998........................................................... F-6
Notes to Financial Statements............................................ F-7
Unaudited Condensed Consolidated Balance Sheets at March 31, 1999 and De-
cember 31, 1998......................................................... F-16
Unaudited Condensed Consolidated Statement of Operations for the quarters
ended March 31, 1999
and 1998................................................................ F-17
Unaudited Condensed Consolidated Statement of Cash flows for the quarters
ended March 31, 1999
and 1998................................................................ F-18
Notes to Unaudited Condensed Consolidated Financial Statements........... F-19
D&L Online, Inc.
Report of Independent Accountants........................................ F-21
Balance Sheets at December 31, 1998 and 1997............................. F-22
Statements of Earnings for the years ended December 31, 1998 and 1997.... F-23
Statements of Cash Flows for the years ended December 31, 1998 and 1997.. F-24
Statements of Stockholders' Equity for the years ended December 31, 1997
and 1998................................................................ F-25
Notes to Financial Statements............................................ F-26
MicroHouse
Report of Independent Accountants........................................ F-29
Balance Sheet as of December 31, 1998.................................... F-30
Statement of Operations and Comprehensive Loss for the year ended Decem-
ber 31, 1998............................................................ F-31
Statement of Stockholders' Deficit for the year ended December 31, 1998.. F-32
Statement of Cash Flows for the year ended December 31, 1998............. F-33
Notes to Financial Statements............................................ F-34
Unaudited Pro Forma Condensed Consolidated Financial Information
Overview................................................................. F-39
Unaudited Pro Forma Condensed Consolidated Balance Sheet at December 31,
1998.................................................................... F-40
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the year ended
December 31, 1998....................................................... F-41
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information
for the year ended
December 31, 1998....................................................... F-42
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the three months ended
March 31, 1999.......................................................... F-44
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information
for the three months ended March 31, 1999............................... F-45
F-1
Report of Independent Accountants
To the Board of Directors and Stockholders of
EarthWeb Inc.:
In our opinion, the accompanying balance sheets and the related statements of
operations, stockholders' equity, and cash flows present fairly, in all mate-
rial respects, the financial position of EarthWeb Inc. at December 31, 1998 and
1997 and the results of its operations and cash flows for the three years in
the period ended December 31, 1998 in conformity with generally accepted ac-
counting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these fi-
nancial statements based on our audits. We conducted our audits in accordance
with generally accepted auditing standards, which require that we plan and per-
form the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presenta-
tion. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
January 21, 1999
F-2
EarthWeb Inc.
Balance Sheets
-------------------------
As of December 31,
1998 1997
------------ -----------
ASSETS:
Current assets:
Cash and cash equivalents.......................... $ 25,292,229 $ 4,775,153
Restricted cash.................................... 287,000 512,000
Accounts receivable, net........................... 1,143,681 375,961
Prepaid expenses and other current assets.......... 541,686 235,242
Discontinued operations (accounts receivable)...... -- 403,052
------------ -----------
Total current assets............................... 27,264,596 6,301,408
Fixed assets, net.................................. 2,068,752 1,650,828
Intangible assets, net............................. 1,069,220 505,938
Other assets....................................... 74,816 55,674
------------ -----------
Total assets....................................... $ 30,477,384 $ 8,513,848
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable................................... $ 1,805,076 $ 574,006
Accrued expenses................................... 1,519,807 414,239
Other current liabilities.......................... 157,714 552,179
Discontinued operations (accrued expenses)......... 76,696 443,527
------------ -----------
Total current liabilities.......................... 3,559,293 1,983,951
Other liabilities.................................. 65,686 85,311
------------ -----------
Total liabilities.................................. 3,624,979 2,069,262
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01; 2,000,000 autho-
rized; none issued................................ -- --
Series A Convertible Preferred Stock, par value
$.01; none and 1,000,000 authorized, none and
653,111 issued and outstanding.................... -- 6,531
Series B Convertible Preferred Stock, par value
$.01; none and 600,000 authorized, none and
598,086 issued and outstanding.................... -- 5,981
Common stock, par value $.01; 21,750,000 autho-
rized, 7,903,761 and 2,925,000 issued and out-
standing.......................................... 79,038 29,250
Additional paid in capital......................... 44,582,477 14,715,614
Unearned compensation.............................. (326,562) --
Treasury stock at cost, 4,713 shares............... (199,970) --
Accumulated deficit................................ (17,282,578) (8,312,790)
------------ -----------
Total stockholders' equity......................... 26,852,405 6,444,586
------------ -----------
Total liabilities and stockholders' equity......... $ 30,477,384 $ 8,513,848
============ ===========
The accompanying notes are an integral part of these financial statements.
F-3
EarthWeb Inc.
Statements of Operations
-------------------------------------
Year Ended December 31,
1998 1997 1996
----------- ----------- -----------
Revenues................................ $ 3,349,165 $ 1,135,141 $ 472,109
Cost of revenues........................ 2,131,593 1,358,293 314,332
----------- ----------- -----------
Gross profit (deficit).................. 1,217,572 (223,152) 157,777
----------- ----------- -----------
Operating expenses:
Product development..................... 1,475,665 1,003,422 68,410
Sales and marketing..................... 4,546,839 1,018,313 252,287
General and administrative.............. 3,356,567 2,566,670 1,801,744
Depreciation and amortization........... 1,115,698 892,600 100,859
----------- ----------- -----------
Total operating expenses................ 10,494,769 5,481,005 2,223,300
----------- ----------- -----------
Loss from operations.................... (9,277,197) (5,704,157) (2,065,523)
Interest and other income, net.......... 307,409 267,139 61,497
----------- ----------- -----------
Loss from continuing operations......... (8,969,788) (5,437,018) (2,004,026)
Discontinued operations:
Loss from discontinued operations....... -- (2,142,934) (42,255)
Loss on disposal of discontinued opera-
tions.................................. -- (240,585) --
----------- ----------- -----------
Net loss................................ $(8,969,788) $(7,820,537) $(2,046,281)
=========== =========== ===========
Basic and diluted net loss per share
from continuing operations............. $ (2.37) $ (1.86) $ (0.69)
Basic and diluted net loss per share
from discontinued operations........... -- (0.81) (0.01)
----------- ----------- -----------
Basic and diluted net loss per share.... $ (2.37) $ (2.67) $ (0.70)
=========== =========== ===========
Weighted average shares of common stock
outstanding used in computing
basic and diluted net loss per share... 3,782,575 2,925,000 2,925,000
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
EarthWeb Inc.
Statements of Cash Flows
-------------------------------------
Year Ended December 31,
1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities:
Net loss............................... $(8,969,788) $(7,820,537) $(2,046,281)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization.......... 1,115,698 892,600 100,859
Charge related to issuance of stock op-
tions................................. 82,878 5,948 --
Barter transaction..................... -- -- (257,398)
Reduction of members' receivable....... -- -- 114,389
Provision for doubtful accounts........ 42,650 10,505 --
Reserve for discontinued operations.... -- 443,527 --
Changes in operating assets and liabil-
ities:
Accounts receivable.................... (810,370) (285,287) (101,179)
Prepaid expenses and other current as-
sets.................................. (306,444) (159,321) (72,571)
Other assets........................... (19,142) (32,080) 76,725
Accounts payable and accrued expenses.. 2,294,223 364,877 531,815
Other current liabilities.............. (10,767) 89,389 --
Discontinued operations................ 36,221 (235,526) 206,409
----------- ----------- -----------
Net cash used in operating activities.. (6,544,841) (6,725,905) (1,447,232)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of fixed assets............... (1,147,512) (954,432) (598,543)
Acquisitions........................... (1,310,300) (811,876) --
Restricted cash........................ 225,000 (512,000) --
----------- ----------- -----------
Net cash used in investing activities.. (2,232,812) (2,278,308) (598,543)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from bridge financing......... -- 500,000 500,000
Proceeds from issuance of preferred
stock, net............................ -- 9,499,998 4,381,096
Proceeds from issuance of common stock,
net................................... 29,494,699 -- --
Purchase of treasury stock............. (199,970) -- --
Contribution from members.............. -- -- 58,100
----------- ----------- -----------
Net cash provided by financing activi-
ties.................................. 29,294,729 9,999,998 4,939,196
----------- ----------- -----------
Net increase in cash for the period.... 20,517,076 995,785 2,893,421
Cash and cash equivalents, beginning of
period................................ 4,775,153 3,779,368 885,947
----------- ----------- -----------
Cash and cash equivalents, end of peri-
od.................................... $25,292,229 $ 4,775,153 $ 3,779,368
=========== =========== ===========
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
During 1996, the Company received $257,398 of equipment, in lieu of cash, in a
transaction in which the Company recorded advertising revenue of the same
amount.
During 1996, certain executives of the Company paid expenses on behalf of the
Company, in the amount of $114,389, in exchange for the reduction of their mem-
bers' receivable amounts.
The accompanying notes are an integral part of these financial statements.
F-5
EarthWeb Inc.
Statements of Stockholders' Equity
Convertible
Preferred Stock
Series A and B Common Stock Additional Unearned Receivable
Members ------------------- ---------------- Paid in Compen- from Accumulated
Contributions Shares Amount Shares Amount Capital sation Member Deficit
------------- ---------- ------- --------- ------ ----------- --------- ---------- ------------
Balance at
December 31,
1995............ $2,064,000 -- $ -- -- $ -- $ -- $ -- $(172,489) $ (639,638)
Payment of
member
receivable...... 58,100
Reduction of
member
receivable...... 114,389
Net loss for the
period January
1, 1996 to
October 25,
1996............ (1,554,028)
Effect of
reorganization
(Note 1)........ (2,064,000) 2,925,000 29,250 (158,916) 2,193,666
Issuance of
Series A
convertible
preferred
stock........... 604,288 6,043 4,375,053
Conversion of
promissory note
for Series A
convertible
preferred
stock........... 48,823 488 499,512
Net loss for the
period October
26, 1996 to
December 31,
1996............ (492,253)
------------- ---------- ------- --------- ------ ----------- --------- ---------- ------------
Balance at
December 31,
1996............ -- 653,111 6,531 2,925,000 29,250 4,715,649 -- -- (492,253)
Issuance of
Series B
convertible
preferred
stock........... 568,182 5,682 9,494,316
Conversion of
promissory note
for Series B
convertible
preferred
stock........... 29,904 299 499,701
Issuance of non-
qualified stock
options......... 5,948
Net loss........ (7,820,537)
------------- ---------- ------- --------- ------ ----------- --------- ---------- ------------
Balance at
December 31,
1997............ -- 1,251,197 12,512 2,925,000 29,250 14,715,614 -- -- (8,312,790)
Issuance of
common stock.... 2,536,446 25,364 29,465,517
Exercise of
stock options... 2,482 26 3,792
Issuance of non-
qualified stock
options........ 41,430
Issuance of
stock options
below deemed
fair value for
accounting
purposes....... 368,010 (368,010)
Amortization of
deferred
compensation.... 41,448
Conversion of
preferred
stock........... (1,251,197) (12,512) 2,439,833 24,398 (11,886)
Purchase of
treasury stock..
Net loss........ (8,969,788)
------------- ---------- ------- --------- ------ ----------- --------- ---------- ------------
Balance at
December 31,
1998............ $ -- -- $ -- 7,903,761 79,038 $44,582,477 $(326,562) $ -- $(17,282,578)
============= ========== ======= ========= ====== =========== ========= ========== ============
-----------------
Treasury Stock
-----------------
Shares Amount Total
------ ---------- ------------
Balance at
December 31,
1995............ -- $ -- $ 1,251,873
Payment of
member
receivable...... 58,100
Reduction of
member
receivable...... 114,389
Net loss for the
period January
1, 1996 to
October 25,
1996............ (1,554,028)
Effect of
reorganization
(Note 1)........ --
Issuance of
Series A
convertible
preferred
stock........... 4,381,096
Conversion of
promissory note
for Series A
convertible
preferred
stock........... 500,000
Net loss for the
period October
26, 1996 to
December 31,
1996............ (492,253)
------ ---------- ------------
Balance at
December 31,
1996............ -- -- 4,259,177
Issuance of
Series B
convertible
preferred
stock........... 9,499,998
Conversion of
promissory note
for Series B
convertible
preferred
stock........... 500,000
Issuance of non-
qualified stock
options......... 5,948
Net loss........ (7,820,537)
------ ---------- ------------
Balance at
December 31,
1997............ -- -- 6,444,586
Issuance of
common stock.... 29,490,881
Exercise of
stock options... 3,818
Issuance of non-
qualified stock
options........ 41,430
Issuance of
stock options
below deemed
fair value for
accounting
purposes.......
Amortization of
deferred
compensation.... 41,448
Conversion of
preferred
stock........... --
Purchase of
treasury stock.. 4,713 (199,970) (199,970)
Net loss........ (8,969,788)
------ ---------- ------------
Balance at
December 31,
1998............ $4,713 $(199,970) $26,852,405
====== ========== ============
The accompanying notes are an integral part of these financial statements.
F-6
EarthWeb Inc.
Notes to Financial Statements
1. The Company
Organization
EarthWeb Inc. (the "Company") was incorporated in the State of New York on
April 25, 1996 and subsequently re-incorporated in the State of Delaware on
June 17, 1997.
On October 25, 1996, all of the assets and liabilities of EarthWeb LLC were
transferred, in a tax-free conversion, to EarthWeb Inc., in exchange for the
issuance of 2,925,000 shares of common stock of the Company. This transaction
was accounted for as a reorganization of entities under common control, in a
manner similar to a pooling of interest.
Business
The Company is a leading provider of Internet-based online services to the in-
formation technology ("IT") industry worldwide. Its integrated business-to-
business online services address the needs of IT professionals for content,
community and commerce.
The Company has sustained net losses and negative cash flows from operations
since its inception. The Company's ability to meet its obligations in the or-
dinary course of business is dependent upon its ability to establish profit-
able operations or raise additional financing through public or private equity
financings, collaborative or other arrangements with corporate sources, or
other sources of financings to fund operations. During 1998, the Company re-
ceived financing of approximately $29,500,000, primarily through an initial
public offering of common stock in November 1998.
2. Significant Accounting Policies and Procedures
Revenue Recognition
The Company generates several types of revenue including the following:
Advertising
Advertising revenues are derived from the sale of advertising space on the
Company's various online services. Advertising revenues are recognized over
the period in which the advertisements are displayed, provided that no signif-
icant Company obligations remain and collection of the receivable is reasona-
bly assured. Company obligations typically include guarantees of a minimum
number of "impressions" (times that an advertisement is viewed by users of the
Company's online services over a specified period of time). To the extent that
minimum guaranteed impressions are not met, the Company defers recognition of
the corresponding revenues until the guaranteed impressions are achieved. For
the years ended December 31, 1998, 1997 and 1996, advertising revenues repre-
sented approximately 95%, 86% and 100% of gross revenues from continuing oper-
ations, respectively.
Revenues from barter transactions are recorded at the lower of the estimated
fair value of the advertisements, goods or services received or the estimated
fair value of the advertisements given. Revenue from barter transactions (rep-
resenting advertisements given) is recognized as income when advertisements
are delivered on the Company's Web sites. Barter expense (representing adver-
tisements received) is recognized when the Company's advertisements are run on
other companies' Web sites, which is typically in the same period when the re-
lated barter revenue is recognized. For the years ended December 31, 1998,
1997 and 1996, barter transactions represented 25%, 16% and 55% of total reve-
nues from continuing operations, respectively.
Online Product Sales
The Company has various agreements with product manufacturers where publica-
tions and software are sold on the Company's Web sites. The Company records
the gross revenue earned and the related royalty due to the vendor as cost of
revenues when the products are sent electronically to the customers and
collectibility is reasonably assured.
Subscription Revenue
The Company offers monthly and yearly subscriptions for ITknowledge.com. Sub-
scription revenue is recognized ratably over the life of the subscription.
Amounts received for services which have not yet been provided are reflected
as deferred revenue in the accompanying balance sheets.
F-7
EarthWeb, Inc.
Notes to Financial Statements--(Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original ma-
turities of three months or less to be cash equivalents. Cash that
collateralizes certain letters of credit is recorded as restricted cash on the
balance sheet (see Note 6).
Concentration of Credit Risk
Substantially all of the Company's excess cash has been invested in highly liq-
uid investments. The Company performs ongoing credit evaluations of its custom-
ers' financial condition and generally does not require collateral on accounts
receivable. The Company maintains allowances for credit losses and such losses
have been within management's expectations. The Company's services are provided
to customers in several industries worldwide.
Accounts receivable are stated net of allowances for doubtful accounts of ap-
proximately $53,000 and $11,000 as of December 31, 1998 and 1997, respectively.
Two customers accounted for 31% and 52% of the accounts receivable balance at
December 31, 1998 and 1997, respectively. Two customers accounted for 21% of
revenues for the year ended December 31, 1998 and one customer accounted for
12% of revenues from continuing operations for the year ended December 31,
1997.
Financial Instruments
The recorded amounts of financial instruments approximate their fair values.
Fixed Assets
Depreciation of equipment, furniture and fixtures and computer software is pro-
vided for by the straight-line method over estimated useful lives ranging from
three to five years. Amortization of leasehold improvements is provided for
over the lesser of the term of the related lease or the estimated useful life
of the improvement. The cost of additions and betterments is capitalized, and
repairs and maintenance costs are charged to operations in the periods in-
curred.
Intangible Assets
Intangible assets, resulting from acquisitions of Web sites and other assets,
are being amortized using the straight-line method over three years.
Income Taxes
The Company recognizes deferred taxes by the asset and liability method of ac-
counting for income taxes. Under the asset and liability method, deferred in-
come taxes are recognized for differences between the financial-statement and
tax bases of assets and liabilities at enacted statutory tax rates in effect
for the years in which the differences are expected to reverse. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. In addition, valuation allowances are estab-
lished when necessary to reduce deferred tax assets to the amounts expected to
be realized. The primary sources of temporary differences are depreciation and
amortization of intangible assets.
Risks and Uncertainties
The Company has a limited operating history and its prospects are subject to
the risks, expenses and uncertainties frequently encountered by companies in
the new and rapidly evolving markets for Internet products and services. These
risks include the failure to develop and extend the Company's online service
brands, the rejection of the Company's services by Web consumers, vendors
and/or advertisers, the inability of the Company to maintain and increase the
levels of traffic on its online services, as well as other risks and uncertain-
ties. In the event that the Company does not successfully implement its busi-
ness plan, certain assets may not be recoverable.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities, disclosure of con-
tingent assets and liabilities at the date of the financial statements and re-
ported amounts of revenues and expenses during the reporting period. Actual re-
sults could differ from these estimates. The Company's significant estimates
include the useful lives of fixed assets and intangibles and the accounts re-
ceivable allowance for doubtful accounts.
F-8
EarthWeb, Inc.
Notes to Financial Statements--(Continued)
Long-Lived Assets
The carrying amount of assets is reviewed on a regular basis for the existence
of facts or circumstances, both internally and externally, that suggest impair-
ment. To date no such impairment has been indicated except as disclosed in Note
3. The Company determines if the carrying amount of a long-lived asset is im-
paired based on anticipated undiscounted cash flows before interest. In the
event of impairment, a loss is recognized based on the amount by which the car-
rying amount exceeds fair value of the asset. Fair value is determined primar-
ily using the anticipated cash flows before interest, discounted at a rate com-
mensurate with the risk involved.
Net Loss Per Share
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128").
SFAS No. 128 replaced primary and fully diluted earnings per share with basic
and diluted earnings per share. Unlike primary earnings per share, basic earn-
ings per share excludes any dilutive effect of options, warrants and convert-
ible securities. Diluted earnings per share is very similar to fully diluted
earnings per share. Basic earnings per share is computed using the weighted-av-
erage number of common shares outstanding during the period. Diluted earnings
per share is computed using the weighted-average number of common and common
stock equivalent shares outstanding during the period. Common equivalent shares
have been excluded from the computation as their effect is antidilutive for all
years. Net loss per share amounts for all periods have been restated to conform
to SFAS No. 128 requirements. There were 200,090 and 498,692 options outstand-
ing as of December 31, 1997 and 1998 that could potentially dilute earnings per
share in the future. Such options were not included in the computation of di-
luted loss per share because to do so would have been antidilutive for all pe-
riods presented.
The pro forma net loss per share is computed by dividing the net loss by the
sum of the weighted average number of shares of common stock including the
shares issued as a result of the assumed conversion of all outstanding shares
of Convertible Preferred Stock.
----------
1998
----------
Pro forma basic and diluted net loss per share............... $ (1.53)
Shares used in computing pro forma basic and diluted net loss
per share................................................... 5,880,467
Stock Split
The company authorized and implemented a 0.65-for-one reverse stock split in
connection with the initial public offering of the Company's common stock on
November 10, 1998. All references to the number of shares of common stock have
been retroactively restated in the financial statements to reflect the effect
of this transaction.
Comprehensive Income
The Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income" in 1998. SFAS No. 130 establishes standards for reporting comprehensive
income and its components in financial statements. Comprehensive income, as de-
fined, includes all changes in equity (net assets) during a period from non-
owner sources. To date, the Company has not had any transactions that are re-
quired to be reported in comprehensive income.
Segments
The Company adopted the provisions of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" in 1998. This statement establishes
standards for the way companies report information about operating segments in
annual financial statements. It also establishes standards for related disclo-
sures about products and services, geographic areas and major customers. The
Company has determined that it does not have any separately reportable business
segments as of December 31, 1998.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Soft-
ware Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effec-
tive for financial statements for years beginning after December 15, 1998. SOP
98-1 provides guidance over accounting for computer software developed or ob-
tained for internal use including the requirement to capitalize specified costs
and amortization of such costs. The Company does not expect the adoption of
this standard to have a material effect on the Company's capitalization policy.
F-9
EarthWeb, Inc.
Notes to Financial Statements--(Continued)
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on the finan-
cial reporting of start-up costs and organization costs. It requires costs of
start-up activities and organization costs to be expensed as incurred. As the
Company has expensed these costs historically, the adoption of this standard is
not expected to have a significant impact on the Company's results of opera-
tions, financial position or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities" ("SFAS 133"), which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. As the Company does not currently engage
or plan to engage in derivative or hedging activities there will be no impact
to the Company's results of operations, financial position or cash flows upon
the adoption of this standard.
3. Acquisitions
In August 1997, the Company acquired certain assets related to the Java Applet
Rating Service ("JARS") Web site. The total cost of the acquisition was
$1,261,876 including legal and other professional costs. As of December 31,
1997, there was a payable of $450,000 related to this acquisition that was paid
by August 1998. The Company has also entered into a four year consulting agree-
ment with the seller of JARS where the Company is obligated to pay a consulting
fee of $180,000 per year.
The cost of the JARS acquisition was allocated to certain assets based upon
their estimated fair values as follows:
At December 31, 1997 the Company recorded a charge of approximately $337,000
related to an impairment of the intangible assets acquired in the JARS acquisi-
tion to reflect the fair value of the remaining asset.
During 1998, the Company acquired several Web sites. In February 1998, the Com-
pany acquired the companion Web sites htmlgoodies.com and javagoodies.com. In
April 1998, the Company acquired intranetjournal.com. In May 1998, the Company
acquired javascripts.com. In July 1998, the Company acquired substantially all
of the assets and properties of the Web site datamation.com. In conjunction
with the acquisition of datamation.com, the Company also licensed, on a non-ex-
clusive, fully paid basis from the seller, the right to use certain customer
lists for the purposes of marketing the Company's products and services. The
aggregate cost of these web site acquisitions totaled approximately $949,000,
approximately $89,000 of which is payable over the next year.
Amortization expense of intangible assets resulting from acquisitions totaled
$404,000 and $506,000 in the years ended December 31, 1998 and 1997, respec-
tively.
4. Discontinued Operations
In November 1997, the Company formalized its plan to discontinue its profes-
sional services and software products divisions. Accordingly, operating results
have been reclassified and reported in discontinued operations.
F-10
EarthWeb, Inc.
Notes to Financial Statements--(Continued)
Operating results of the discontinued operations are as follows:
-------------------------------------------------------
Professional Software
Total Services Products Total Total
1998 1997 1997 1997 1996
----- ------------ ----------- ----------- ----------
Revenues.............. -- $2,303,813 $ 476,170 $ 2,779,983 $1,192,378
Expenses.............. -- 1,361,046 3,802,456 5,163,502 1,234,633
----- ------------ ----------- ----------- ----------
Net income (loss)..... -- $ 942,767 $(3,326,286) $(2,383,519) $ (42,255)
===== ============ =========== =========== ==========
Assets and liabilities of the discontinued operations are as follows at Decem-
ber 31:
-------------------------
December 31, December 31,
1998 1997
------------ ------------
Computer equipment and software................... $2,348,249 $1,753,627
Furniture and fixtures............................ 499,425 321,818
Leasehold improvements............................ 635,627 291,311
------------ ------------
3,483,301 2,366,756
Less, accumulated depreciation and amortization... 1,414,549 715,928
------------ ------------
$2,068,752 $1,650,828
============ ============
Depreciation and amortization for the years ended December 31, 1998, 1997 and
1996 totaled approximately $699,000, $529,000 and $101,000, respectively.
6. Commitments and Contingencies
Leases
The Company leases office space in New York, under non-cancelable operating
leases expiring at various dates through January 2008. Future minimum lease
payments under non-cancelable operating leases as of December 31, 1998 are as
follows:
Rent expense was approximately $323,000, $278,000 and $183,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
Letter of Credit
As of December 31, 1998, the Company has a $287,000 standby letter of credit to
collateralize its principal facility lease agreement. Restricted cash
collateralizes such standby letter of credit.
F-11
EarthWeb, Inc.
Notes to Financial Statements--(Continued)
Litigation
The Company is subject to legal proceedings and claims which arise in the ordi-
nary course of its business. The Company does not believe that an adverse out-
come of any proceeding would have a material effect on the Company's financial
position or results of operations.
7. Stockholders' Equity
Common Stock
In June 1998, the Company issued 436,446 shares of Common Stock to EarthWeb LLC
through a private placement, in consideration of net proceeds of $3,719,000. In
November 1998, the Company completed its initial public offering of 2,100,000
shares of common stock at a price of $14.00 a share. The total net proceeds to
the Company from the IPO were approximately $25,770,000.
Preferred Stock
On October 25, 1996, the Company issued 653,111 shares of Series A Convertible
Preferred Stock ("Series A") through a private placement, in consideration of
net proceeds to the Company of $4,881,096, inclusive of the conversion of a
$500,000 promissory note.
In June 1997, the Company issued 598,086 shares of Series B Convertible Pre-
ferred Stock ("Series B") through a private placement, in consideration of net
proceeds of $9,999,998, inclusive of the conversion of a $500,000 promissory
note.
As of the closing date of the initial public offering, all shares of Convert-
ible Preferred Stock were converted into 2,439,833 shares of common stock.
Stock Option Plan
During October 1996, the Company adopted the 1996 Amended and Restated Stock
Option Plan (the "1996 Plan") under which incentive stock options or non-
qualified stock options to purchase common stock may be granted to eligible
employees.
In November 1998, the Board of Directors adopted the Company's 1998 Plan (the
"1998 Plan"). The Company has reserved 375,000 shares of Common Stock for issu-
ance under the 1998 Plan, plus an annual increase to be added on the first day
of the Company's fiscal year beginning in 2000 equal to two percent (2%) of the
number of shares outstanding as of such date or a lesser number of shares de-
termined by the Compensation Committee. A summary of the status of the
Company's Plans, as amended, as of December 31, 1997 and 1998, and changes dur-
ing the years ended December 31, 1997 and 1998 are presented below:
---------------------
Weighted
Average
Option Exercise
Shares Price
--------- ---------
Options outstanding--January 1, 1997
Opening balance..................................... --
Granted............................................. 217,568 $ 2.40
Cancelled........................................... (17,478) 1.54
---------
Options outstanding--December 31, 1997.............. 200,090 2.49
Granted............................................. 363,925 5.14
Exercised........................................... (2,732) 1.54
Cancelled........................................... (58,120) 2.51
Expired............................................. (4,201) 1.64
---------
Options outstanding--December 31, 1998.............. 498,962 4.43
=========
Options exercisable at December 31, 1998............ 108,813
Options exercisable at December 31, 1997............ --
Weighted average fair value of options granted
during 1998........................................ $ 0.97
Weighted average fair value of options granted
during 1997........................................ $ 0.75
F-12
EarthWeb, Inc.
Notes to Financial Statements--(Continued)
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options generally vest over a period of four years, however, 15% of all
unvested options automatically vested at the date of the initial public offer-
ing. At December 31, 1998, the Company had reserved 900,000 shares of common
stock for the exercise of options.
The option plan also provides for the issuance of stock appreciation rights and
restricted stock awards under which shares of common stock may be issued to el-
igible employees. No such awards have been made.
Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock-Issued to Employees" and related interpretations in accounting for its
stock option issuances. The Company has adopted the disclosure-only provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation." Had compensation
cost for the Company's stock option issuances been determined based on the fair
value at the grant date for awards in 1998 and 1997 consistent with the provi-
sions of SFAS No. 123, the Company's net loss would have been adjusted to the
pro forma amounts indicated below.
---------------------------
December 31, December 31,
1998 1997
------------ ------------
Net loss--as reported.......................... $(8,969,788) $(7,820,537)
Net loss--pro forma............................ $(9,022,961) $(7,860,720)
Basic net loss per share--as reported.......... $ (2.37) $ (2.67)
Basic net loss per share--pro forma............ $ (2.39) $ (2.69)
The fair value of each option grant is estimated on the date of the grant using
the "Black-Scholes option-pricing model" with the following weighted average
assumptions used for grants for the years ended December 31, 1998 and 1997;
zero dividend yield; no volatility (all options were issued prior to the effec-
tiveness of the IPO); a weighted average risk-free interest rate of 5.34% and
6.90%, respectively; and expected lives of 4 and 5 years, respectively.
During the year ended December 31, 1998, the Company issued stock options with
strike prices below the then fair market value and, as a result, recorded de-
ferred compensation of approximately $368,000. Deferred compensation is amor-
tized over the four-year vesting period of the options. As of December 31,
1998, compensation cost of approximately $41,000 has been recognized.
1998 Employee Stock Purchase Plan
The Company's 1998 Employee Stock Purchase Plan (the "Stock Purchase Plan") was
approved by the Board of Directors in November 1998. The Stock Purchase Plan is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Code in order to provide employees of the Company with an opportunity to
purchase Common Stock through payroll deductions. An aggregate of 159,000
shares of the Company's Common Stock has been reserved for issuance under the
Stock Purchase Plan and is available for purchase thereunder, plus an annual
increase to be added on the first day of
F-13
EarthWeb, Inc.
Notes to Financial Statements--(Continued)
the Company's fiscal year beginning in 2000 equal to the lesser of (i) 400,000
shares, (ii) two percent (2%) of the outstanding shares on such date or (iii) a
lesser number of shares determined by the Compensation Committee. At December
31, 1998, employee contributions to the Plan were approximately $66,000, which
will purchase shares of common stock on July 31, 1999.
8. Income Taxes
The components of the net deferred tax asset as of December 31, 1998 and 1997
consists of the following:
-------------------------
1998 1997
----------- -----------
Operating loss carryforward.................... $ 7,328,880 $ 3,325,050
Depreciation of fixed assets and amortization
of intangibles................................ 13,856 254,250
----------- -----------
Net deferred tax asset......................... 7,342,736 3,579,300
Less, Valuation allowance...................... (7,342,736) (3,579,300)
----------- -----------
Deferred tax asset............................. $ -- $ --
=========== ===========
The difference between the Company's U.S. federal statutory rate of 35%, as
well as its state and local rate, net of a federal benefit of 7%, when compared
to its effective rate of 0% is principally comprised of its valuation allow-
ance.
As of December 31, 1998, the Company has a net operating loss carryforward for
Federal income tax purposes of approximately $16,300,000. The carryforwards
will begin to expire in 2011 if not used. The net deferred tax asset has been
fully reserved due to the uncertainty of the Company's ability to realize this
asset in the future.
9. Employee Savings Plan
The Company has a savings plan (the "Savings Plan") that qualifies as a de-
ferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a portion of their
pretax earnings, up to the Internal Revenue Service annual contribution limit.
For the years ended December 31, 1998 and 1997, the Company did not contribute
to the Savings Plan.
10. Subsequent Events (unaudited)
In February 1999, the Company completed the acquisition of D&L Online, Inc.
which operates dice.com, a leading online job posting service for information
technology professionals. The total purchase price was approximately $35.0 mil-
lion. The consideration paid by EarthWeb to acquire D&L Online consisted of (a)
$7.0 million in cash, $4.0 million of which was paid at closing, with the bal-
ance payable over the next year in two installments, (b) 577,778 shares of
EarthWeb common stock, valued at $26.0 million, based upon the average stock
price of approximately $45.00 from January 26, 1999 through February 9, 1999
and (c) additional future "earnout" payments, based on the performance of the
surviving entity in the merger and related businesses, in the form of EarthWeb
common stock and/or cash with an aggregate value of up to $12.0 million, of
which such amounts are payable over a period of 3 years based on achievement of
certain revenue targets. Under the terms of the agreement and a related escrow
agreement, an aggregate of 57,778 shares of such EarthWeb common stock will be
held in escrow for 18 months for the purpose of indemnifying the Company
against certain liabilities of dice.com and its stockholders. The amount of
consideration paid by EarthWeb was reached through arm's length negotiations
and was funded through the issuance of EarthWeb common stock and from the pro-
ceeds of EarthWeb's initial public offering. The fair value of the options of
approximately $733,000 was determined using the Black-Scholes options pricing
model. The following assumptions were used in the options pricing model: stock
price of $45.00, exercise price of $32.05, term of 3 years, risk free rate of
interest of 5%, 50% volatility and a dividend yield of 0%.
In February 1999, the Company acquired gocertify.com, which provides users with
information on technical certification programs. In March 1999, the Company ac-
quired substantially all the assets of The Perl Journal, a leading technical
publication for developers using the Perl programming language, and the related
Web site TPJ.com. The aggregate purchase price of both acquisitions was
$980,000, of which $750,000 is payable through March 2000 in the form of common
stock or cash. The consideration paid also consists of additional future pay-
ments, based on performance, in the form of cash or stock, with an aggregate
value of up to $500,000.
F-14
EarthWeb, Inc.
Notes to Financial Statements--(Continued)
In March 1999, EarthWeb Inc. acquired MicroHouse International, Inc. for con-
sideration of approximately $9 million. In addition, EarthWeb assumed approxi-
mately $1.7 million in MicroHouse debt as part of the acquisition. The consid-
eration paid by EarthWeb to acquire all of the capital stock of MicroHouse con-
sisted of (a) $1.6 million in cash, $1.0 million of which was paid at closing,
with $500,000 and $95,000 of the balance payable on July 19, 1999 and April 1,
2000, respectively, (b) 50,856 shares of EarthWeb common stock delivered at
closing, valued at $2.2 million, based upon a stock price of $43.14 of which
48,314 shares were delivered to the sellers and the balance were delivered to
Ascent Partners, Inc. as a fee in connection with the acquisition and (c) prom-
issory note in the aggregate amount of approximately $5.0 million convertible
into 126,475 shares of common stock on March 20, 2000 (collectively, the "Prom-
issory Notes"). The beneficial conversion feature related to the convertible
note payable of approximately $482,000, represents the difference between the
average share price from March 17, 1999 to March 23, 1999 of $43.14 and their
negotiated conversion price of $39.33. This beneficial conversion feature will
be amortized over the one-year life of the note payable as a non-cash interest
expense. The note is not convertible prior to March 20, 2000. The amount of
consideration paid by EarthWeb was funded through the issuance of EarthWeb com-
mon stock and the Promissory Notes, and from the proceeds of EarthWeb's initial
offering.
These acquisitions will be accounted for using the purchase method of account-
ing. The results of operations for each will be included with those of the Com-
pany for periods subsequent to the date of each acquisition.
F-15
EarthWeb Inc.
Condensed Consolidated Balance Sheets
unaudited, in thousands
-----------------------
March 31, December 31,
1999 1998
--------- ------------
ASSETS:
Current assets:
Cash and cash equivalents........................... $ 15,789 $ 25,292
Restricted cash..................................... 287 287
Accounts receivable, net............................ 2,814 1,144
Prepaid expenses and other current assets........... 414 542
--------- ------------
Total current assets.............................. 19,304 27,265
Fixed assets, net................................... 2,977 2,069
Intangible assets, net.............................. 48,012 1,069
Other assets........................................ 119 74
--------- ------------
Total assets...................................... $ 70,412 $ 30,477
========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable.................................... $ 2,119 $ 1,805
Accrued expenses.................................... 6,161 1,520
Other current liabilities........................... 5,542 234
Short-term portion of notes payable................. 723 --
--------- ------------
Total current liabilities......................... 14,545 3,559
--------- ------------
Convertible note payable, net of discount............. 4,492 --
Other liabilities..................................... 1,822 66
--------- ------------
Total liabilities................................. 20,859 3,625
--------- ------------
Commitments and contingencies......................... -- --
Stockholders' equity
Common stock, par value $.01; 21,750,000 authorized,
8,580,407 and 7,903,761 issued and outstanding..... 86 79
Additional paid in capital.......................... 74,068 44,582
Unearned compensation............................... (306) (326)
Treasury stock, at cost 4,713 shares................ (200) (200)
Accumulated deficit................................. (24,095) (17,283)
--------- ------------
Total stockholders' equity.......................... 49,553 26,852
--------- ------------
Total liabilities and stockholders equity........... $ 70,412 $ 30,477
========= ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-16
EarthWeb Inc.
Condensed Consolidated Statements of Operations
unaudited, in thousands except per share data
----------------
Quarter ended
March 31,
1999 1998
------- -------
Revenues..................................................... $ 3,732 $ 308
Cost of revenues............................................. 1,479 395
------- -------
Gross profit (loss).......................................... 2,253 (87)
------- -------
Operating expenses:
Product development........................................ 736 246
Sales and marketing........................................ 5,188 333
General and administrative................................. 1,597 605
Depreciation............................................... 247 163
Amortization............................................... 1,531 70
------- -------
Total operating expenses................................. 9,299 1,417
------- -------
Loss from operations......................................... (7,046) (1,504)
Interest and other income, net............................... 234 47
------- -------
Net loss..................................................... $(6,812) $(1,457)
======= =======
Basic and diluted net loss per share......................... $ (0.82) $ (0.50)
======= =======
Weighted average shares of common stock used in computing ba-
sic and diluted
net loss per share.......................................... 8,290 2,925
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-17
EarthWeb Inc.
Condensed Consolidated Statements of Cash Flows
unaudited, in thousands
--------------------
Three Months ended
March 31,
1999 1998
--------- ---------
Cash flows from operating activities:
Net loss.............................................. $ (6,812) $ (1,457)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.......................................... 247 163
Amortization.......................................... 1,531 70
Provision for doubtful accounts....................... 63 4
Charge related to issuance of stock options........... 20 --
Changes in operating assets and liabilities:
Accounts receivable................................... (316) (61)
Prepaid expenses and other current assets............. 263 5
Other assets.......................................... (23) 4
Accounts payable and accrued expenses................. 1,253 (283)
Other current liabilities............................. 441 42
--------- ---------
Net cash used in operating activities: (3,333) (1,513)
--------- ---------
Cash flows from investing activities:
Purchase of fixed assets.............................. (408) (70)
Payments for acquisitions............................. (5,907) (217)
Restricted cash....................................... -- 73
--------- ---------
Net cash used in investing activities................... (6,315) (214)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock, net........... 145 --
--------- ---------
Net cash provided by financing activities............... 145 --
--------- ---------
Net change in cash and cash equivalents for the period.. (9,503) (1,727)
Cash and cash equivalents, beginning of period.......... 25,292 4,775
--------- ---------
Cash and cash equivalents, end of period................ $ 15,789 $ 3,048
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-18
EarthWeb Inc.
Notes To Condensed Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Arti-
cle 10 of Regulation S-X. Accordingly, they do not include all of the informa-
tion and footnotes required by generally accepted accounting principles for an-
nual financial statements. In the opinion of management, all adjustments (con-
sisting only of normal recurring accruals) considered necessary for a fair pre-
sentation have been included. The results for the interim periods presented are
not necessarily indicative of the results that may be expected for any future
period. The following information should be read in conjunction with the finan-
cial statements and notes thereto included in EarthWeb's annual report for the
year ended December 31, 1998.
2. 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 amounts reported in the condensed consolidated financial state-
ments and accompanying notes. Actual results could differ from these estimates.
3. Acquisitions
In February 1999, EarthWeb Inc. (EarthWeb or the Company) completed the acqui-
sition of D&L Online, Inc. (D&L Online) which operates dice.com, a leading on-
line job posting service for information technology professionals. The total
purchase price was approximately $35.0 million. The consideration paid by
EarthWeb to acquire D&L Online consisted of (a) $7.0 million in cash, $4.0 mil-
lion of which was paid at closing, with the balance payable over the next year
in two installments, (b) 577,778 shares of EarthWeb common stock, valued at
$26.0 million, based upon the average stock price of approximately $45.00 from
January 26, 1999 through February 9, 1999 and (c) additional future "earnout"
payments, based on the performance of the surviving entity in the merger and
related businesses, in the form of EarthWeb common stock and/or cash with an
aggregate value of up to $12.0 million, of which such amounts are payable over
a period of 3 years based on achievement of certain revenue targets. Under the
terms of the agreement and a related escrow agreement, an aggregate of 57,778
shares of such EarthWeb common stock will be held in escrow for 18 months for
the purpose of indemnifying the Company against certain liabilities of dice.com
and its stockholders. The amount of consideration paid by EarthWeb was funded
through the issuance of EarthWeb common stock and from the proceeds of
EarthWeb's initial public offering. Under the terms of the agreement, all out-
standing options to purchase D&L Online common stock were converted into non-
qualified options to purchase an aggregate of 36,667 shares of EarthWeb common
stock. The fair value of the options of approximately $733,000 was determined
using the Black-Scholes options pricing model. The following assumptions were
used in the options pricing model: stock price of $45.00, exercise price of
$32.05, term of three years, risk free rate of interest of 5%, 50% volatility
and a dividend yield of 0%.
D&L Online was a customer of EarthWeb prior to the acquisition, and as a result
post acquisition, all revenues from sales to D&L Online have been eliminated in
consolidation. For the period from February 2, 1999 (the date of the acquisi-
tion) to March 31, 1999, D&L Online's revenues and net loss included in the
company's consolidated results of operations for the quarter ended March 31,
1999 totaled $2.0 million and $1.3 million, respectively.
F-19
EarthWeb, Inc.
Notes to Financial Statements--(Continued)
The following unaudited pro forma summary presents consolidated results of op-
erations for the Company as if the acquisition of D&L Online had been consum-
mated on January 1, 1998. The unaudited pro forma information does not neces-
sarily reflect the results that would have been achieved, nor is it necessarily
indicative of future consolidated results of the Company.
------------------------
Three months ended
------------------------
March 31, March 31,
1999 1998
----------- -----------
In thousands except per
share data
Revenues.......................................... $ 4,669 $ 1,739
Net loss.......................................... $(7,589) $(2,857)
Basic and diluted loss per share.................. $ (0.89) $ (0.82)
Weighted average of common stock outstanding...... 8,493 3,503
Pro forma adjustments include: (i) amortization of goodwill and other intangi-
ble assets over a weighted average of 4.5 years, (ii) tax effected adjustment
related to D&L Online's corporation distribution which was recorded as compen-
sation expense that will not be incurred in the future, and (iii) adjustment of
the weighted average shares of common stock outstanding used in the calculation
of earnings per share.
In February 1999, the Company acquired gocertify.com, which provides users with
information on technical certification programs. In March 1999, the Company ac-
quired substantially all the assets of The Perl Journal, a leading technical
publication for developers using the Perl programming language, and the related
Web site TPJ.com. The aggregate purchase price of both acquisitions was
$980,000, of which $750,000 is payable through March 2000 in the form of common
stock or cash. The consideration paid also consists of additional future pay-
ments, based on performance, in the form of cash or common stock, with an ag-
gregate value of up to $500,000.
In March 1999, the Company acquired all the capital stock of MicroHouse for ap-
proximately $9 million, subject to purchase price adjustments. In addition,
EarthWeb assumed $1.7 million in debt as part of the acquisition. The consider-
ation paid by EarthWeb to acquire all the capital stock of MicroHouse consisted
of (a) $1.6 million in cash, $1.0 million of which was paid at closing, with
$500,000 and $95,000 of the balance payable on July 19, 1999 and April 1, 2000,
respectively, (b) 50,856 shares of EarthWeb common stock delivered at closing,
valued at $2.2 million, based upon a stock price of $43.14 of which 48,314
shares were delivered to the sellers and the balance were delivered to Ascent
Partners, Inc. as a fee in connection with the acquisition and (c) promissory
notes in an aggregate amount of $4,973,719 convertible into 126,475 shares of
common stock on March 20, 2000 (collectively, the "Promissory Notes"). The ben-
eficial conversion feature related to the note payable of approximately
$482,000 will be amortized over the one year life of the note payable. Such
purchase price was funded through the issuance of EarthWeb common stock and the
Promissory Notes, and from the proceeds of EarthWeb's initial public offering.
Pro forma results of operations to reflect the acquisition of MicroHouse as if
it occurred on January 1, 1998 has been presented in the Company's Form 8-K/A
filed during May 1999.
These acquisitions have been accounted for using the purchase method of ac-
counting. The results of operations for each have been included with those of
the Company for periods subsequent to the date of each acquisition.
4. Subsequent Event
On May 7, 1999, the Company completed a secondary public offering of 1,300,000
shares of Common Stock at an offering price of $37.00 per share, of which
750,000 shares were sold by the Company and 550,000 shares were sold by selling
stockholders. Net proceeds to the Company, net of issuance costs, were approxi-
mately $24.8 million. The Company expects to use the net proceeds for general
corporate purposes, including expansion of sales and marketing capabilities,
possible strategic acquisitions or investments, international expansions, tech-
nical upgrades of internal systems and working capital requirements.
F-20
Report of Independent Accountants
To the Board of Directors of
D&L Online, Inc.:
In our opinion, the accompanying balance sheets present fairly, in all material
respects, the financial position of D&L Online, Inc. as of December 31, 1998
and 1997, and the related statements of earnings, stockholders' equity and cash
flows for each of the years then ended, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these fi-
nancial statements based on our audits. We conducted our audits of these state-
ments in accordance with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and signifi-
cant estimates made by management, and evaluating the overall financial state-
ment presentation. We believe that our audits provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Omaha, Nebraska
January 22, 1999
F-21
D&L Online, Inc.
Balance Sheets
---------------------
As of December 31,
1998 1997
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 319,870 $ 268,213
Accounts receivable, net of allowance for bad debts of
$48,664 in 1998....................................... 592,968 348,593
---------- ----------
Total current assets................................. 912,838 616,806
Fixed assets, net...................................... 504,534 435,967
Other assets........................................... 45,751 25,598
---------- ----------
Total assets......................................... $1,463,123 $1,078,371
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses and accounts payable.................. $ 427,077 $ 518,292
Deferred revenue....................................... 329,029 82,527
Notes payable.......................................... 470,000 276,940
---------- ----------
Total current liabilities............................ 1,226,106 877,759
Commitments and contingencies
Stockholders' equity:
Common stock, par value $1 per share; 3,000,000 shares
authorized, 1,000 shares issued and outstanding....... 1,000 1,000
Additional paid-in capital............................. 7,433 7,433
Retained earnings...................................... 228,584 192,179
---------- ----------
Total stockholders' equity........................... 237,017 200,612
---------- ----------
Total liabilities and stockholders' equity........... $1,463,123 $1,078,371
========== ==========
The accompanying notes are an integral part of these financial statements.
F-22
D&L Online, Inc.
Statements of Earnings
-----------------------
Year ended December 31,
1998 1997
----------- -----------
Revenues.............................................. $ 7,736,921 $ 3,673,107
Cost of revenues...................................... 1,072,537 781,490
----------- -----------
Gross profit...................................... 6,664,384 2,891,617
Operating expenses:
Sales and marketing................................. 2,287,447 926,197
General and administrative.......................... 4,140,265 1,762,129
Depreciation and amortization....................... 208,297 156,162
----------- -----------
Total operating expenses.......................... 6,636,009 2,844,488
----------- -----------
Operating income...................................... 28,375 47,129
Interest and other income (expense), net.............. 8,030 (17,929)
----------- -----------
Net earnings.......................................... $ 36,405 $ 29,200
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-23
D&L Online, Inc.
Statements of Cash Flows
------------------
Year ended
December 31,
1998 1997
-------- --------
Cash flows from operating activities:
Net income................................................ $ 36,405 $ 29,200
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization............................ 208,297 156,162
Gain on sale of fixed assets............................. (6,251) --
Non cash compensation expense............................ 300,000 110,000
Allowance for doubtful accounts.......................... 48,664 --
Changes in operating assets and liabilities:
Accounts receivable..................................... (293,039) (215,988)
Other assets............................................ (20,153) (17,811)
Accounts payable and accrued expenses................... (91,215) 328,422
Deferred revenue........................................ 246,502 75,128
-------- --------
Net cash provided by operating activities.............. 429,210 465,113
-------- --------
Cash flows from investing activities:
Purchase of fixed assets.................................. (306,797) (274,482)
Proceeds from sale of fixed assets........................ 36,184 --
-------- --------
Net cash used in investing activities.................. (270,613) (274,482)
-------- --------
Cash flows from financing activities:
Stockholder distributions................................. -- (40,000)
Payments on notes payable................................. (106,940) (97,438)
-------- --------
Net cash used in financing activities.................. (106,940) (137,438)
-------- --------
Net increase in cash for the period.................... 51,657 53,193
Cash and cash equivalents, beginning of period............. 268,213 215,020
-------- --------
Cash and cash equivalents, end of period................... $319,870 $268,213
======== ========
Supplemental disclosure of cash flow information:
Interest paid.............................................. $ 14,173 $ 23,599
The accompanying notes are an integral part of these financial statements.
F-24
D&L Online, Inc.
Statements of Stockholders' Equity
------------------------------------------
Additional
Paid- Retained
Common Stock in Capital Earnings Total
------------ ---------- -------- --------
Balance at December 31, 1996....... $1,000 $7,433 $202,979 $211,412
Net earnings....................... -- -- 29,200 29,200
Stockholder distributions.......... -- -- (40,000) (40,000)
------------ ---------- -------- --------
Balance at December 31, 1997....... 1,000 7,433 192,179 200,612
Net earnings....................... -- -- 36,405 36,405
------------ ---------- -------- --------
Balance at December 31, 1998....... $1,000 $7,433 $228,584 $237,017
============ ========== ======== ========
The accompanying notes are an integral part of these financial statements.
F-25
D&L Online, Inc.
Notes to Financial Statements
1. The Company
D&L Online, Inc. (the "Company") was incorporated in the State of Iowa on No-
vember 26, 1991. The Company maintains a job search Web site for computer pro-
fessionals. This Web site is offered to professional recruiters, who, for a
monthly fee, are given access to post job listings for programmers, software
engineers, system administrators, Web developers, hardware engineers, and oth-
ers involved in high technology industries.
2. Significant Accounting Policies and Procedures
Revenue Recognition
Advertising revenues from Web site postings are recognized over the period the
ads are displayed.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original ma-
turities of three months or less to be cash equivalents.
Financial Instruments
The recorded amounts of financial instruments approximate their fair value.
Fixed Assets
Depreciation of computer equipment, furniture and fixtures and computer soft-
ware is provided for by the straight-line method over the estimated useful life
ranging from three to five years. Amortization of leasehold improvements is
provided for over the lesser of the term of the related lease or the estimated
useful life of the improvement. The cost of additions and betterments is capi-
talized and repairs and maintenance costs are charged to operations in the pe-
riods incurred.
Income Taxes
The Company has elected Subchapter S corporation status and as such, substan-
tially all income tax liabilities are the responsibility of the stockholders.
Risks and Uncertainties
The Company and its prospects are subject to the risks, expenses and uncertain-
ties frequently encountered by companies in the new and rapidly evolving mar-
kets for Internet products and services. These risks include the failure to
develop and extend the Company's online service brands, the rejection of the
Company's services by Web consumers, vendors and/or advertisers, the inability
of the Company to maintain and increase the levels of traffic on its online
services, as well as other risks and uncertainties. In the event that the Com-
pany does not successfully implement its business plan, certain assets may not
be recoverable.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities, disclosure of con-
tingent assets and liabilities at the date of the financial statements and re-
ported amounts of revenue and expenses during the reporting period. Actual re-
sults could differ from these estimates.
Long-Lived Assets
The carrying value of assets is reviewed on a regular basis for the existence
of facts or circumstances, both internally and externally, that suggest impair-
ment. To date, no such impairment has been indicated. Should there be an im-
pairment in the future, the Company will determine the impairment based on a
comparison of recorded amounts to the expected future cash flows from the im-
paired assets. The cash flow estimates will contain management's best esti-
mates, using appropriate and customary assumptions and projections at the time.
F-26
D & L Online, Inc.
Notes to Financial Statements--(Continued)
3. Fixed Assets
Fixed assets consists of the following:
-----------------
Computer equipment and software........................... $549,793 $470,054
Furniture and fixtures.................................... 299,945 159,638
Leasehold improvements.................................... 95,186 95,186
-------- --------
944,924 724,878
Less accumulated depreciation and amortization............ 440,390 288,911
-------- --------
$504,534 $435,967
======== ========
Depreciation and amortization for the years ended December 31, 1998 and 1997
totaled $208,297 and $156,162, respectively.
4. Commitments and Contingencies
The Company leases office space under non-cancelable operating leases expiring
at various dates through 2002. Future minimum lease payments under non-cancel-
able operating leases as of December 31, 1998 are as follows:
Rent expense was $146,018 and $112,560 for the years ended December 31, 1998
and 1997, respectively.
5. Employee Savings Plan
The Company has a savings plan (the "Savings Plan") that qualifies as a de-
ferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a portion of their
pretax earnings, up to the Internal Revenue Service annual contribution limit.
The Company matches 35% of the first 10% contributed by each employee. The
Company's contributions totaled $22,229 and $21,727 for the years ended Decem-
ber 31, 1998 and 1997, respectively.
6. Notes Payable
Notes payable represent amounts due under the following:
-----------------
1998 1997
-------- --------
Term loan payable to bank. Paid off in 1998.............. $ -- $106,940
8% unsecured notes payable to stockholders of the Compa-
ny...................................................... 470,000 170,000
-------- --------
$470,000 $276,940
======== ========
The notes payable to stockholders of the Company have no set maturity dates or
repayment provisions and as such, are reflected as current debt. These notes
represent cumulative non cash compensation payable to the stockholders of the
Company.
F-27
D & L Online, Inc.
Notes to Financial Statements--(Continued)
7. Stock Option Program
The Company has implemented a stock option program effective as of December 31,
1998. Total stock to be offered under this program will not exceed 100 shares.
On December 31, 1998, the Company granted options to purchase 50 shares of com-
mon stock. These options, which have an exercise price of $23,500 per share,
vest 25% per year beginning December 31, 1999 through December 31, 2002. The
unexercised portion of the options expire December 31, 2008. No options have
been exercised through December 31, 1998.
The Company has adopted the disclosure-only provisions of Statement of Finan-
cial Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option
plan. Net earnings for 1998 would have remained as reported had compensation
cost been determined based on the fair value at the grant date for the 1998
award, as the options were granted on December 31, 1998. The fair value of each
option at the date of grant was $11,690. The fair value of the stock options
was estimated using the Black-Scholes option pricing method with the following
assumptions: risk-free interest rate of 7%; zero dividend yield; and expected
option life of 10 years.
8. Related Party Transactions
Included in general and administrative expenses is compensation paid to the
stockholders of the Company. These salaries and bonuses totaled $3,200,000 and
$1,161,538 for the years ended December 31, 1998 and 1997, respectively.
9. Recent Accounting Pronouncements
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on the finan-
cial reporting of start-up costs and organization costs. It requires costs of
start-up activities and organization costs to be expensed as incurred. The
adoption of this standard is not expected to have a significant impact on the
Company's results of operations, financial position or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities" ("SFAS No. 133"), which establishes accounting and report-
ing standards for derivative instruments, including certain derivative instru-
ments embedded in other contracts (collectively referred to as derivatives) and
for hedging activities. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. As the Company does not currently
engage or plan to engage in derivative or hedging activities there will be no
impact to the Company's results of operations, financial position or cash flows
upon the adoption of this standard.
F-28
Report of Independent Accountants
To the Board of Directors
MicroHouse International, Inc.:
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of MicroHouse International, Inc.
(the "Company") at December 31, 1998, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted ac-
counting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these fi-
nancial statements based on our audit. We conducted our audit of these state-
ments in accordance with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and signifi-
cant estimates made by management, and evaluating the overall financial state-
ment presentation. We believe that our audit provides a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Denver, Colorado
April 23, 1999
F-29
MicroHouse International, Inc.
Balance Sheet
as of December 31, 1998
ASSETS:
Current assets:
Cash and cash equivalents........................................ $ 59,569
Accounts receivable, less allowances for doubtful accounts and
returns of $317,105............................................. 933,583
Receivable-affiliates, net....................................... 475,320
Prepaid expenses and other current assets........................ 60,546
-----------
Total current assets........................................... 1,529,018
===========
Fixed assets, net................................................ 213,309
Goodwill, net.................................................... 1,414,441
Other assets..................................................... 21,239
-----------
Total assets................................................... $ 3,178,007
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Accounts payable................................................. $ 432,720
Payables-affiliates.............................................. 125,000
Accrued expenses................................................. 324,574
Deferred revenue................................................. 1,918,100
Notes payable.................................................... 409,038
Line of credit................................................... 221,290
Obligations under capital leases................................. 9,370
-----------
Total current liabilities...................................... 3,440,092
===========
Deferred revenue................................................. 202,891
Notes payable, less current portion.............................. 1,272,205
Obligations under capital leases, less current portion........... 15,349
-----------
Total liabilities.............................................. 4,930,537
===========
Stockholders' deficit:
Common stock, par value $1 per share (10,000 shares authorized,
204 shares issued and outstanding).............................. 204
Additional paid in capital....................................... 620,939
Accumulated other comprehensive loss............................. (9,976)
Accumulated deficit.............................................. (2,363,697)
-----------
Total stockholders' deficit..................................... (1,752,530)
-----------
Total liabilities and stockholders' deficit.................... $ 3,178,007
===========
The accompanying notes are an integral part of these financial statements.
F-30
MicroHouse International, Inc.
Statement of Operations and Comprehensive Loss
for the year ended December 31, 1998
----------
Net revenues............................................................ $4,005,589
Royalties and other revenue............................................. 187,823
----------
Total revenue........................................................ 4,193,412
Cost of revenues........................................................ (1,185,440)
----------
Gross profit............................................................ 3,007,972
----------
Operating expenses:
Selling and marketing.................................................. 1,983,876
Research and development............................................... 106,833
General and administrative............................................. 1,938,534
Depreciation........................................................... 173,304
Amortization........................................................... 282,888
----------
Total operating expenses............................................. 4,485,435
----------
Loss from operations.................................................... (1,477,463)
Interest expense, net................................................... (133,486)
----------
Loss from continuing operations......................................... (1,610,949)
----------
Discontinued operations:
Income from discontinued operations.................................... 567,735
Gain on disposal of discontinued operations............................ 43,782
----------
Total income from discontinued operations............................ 611,517
----------
Net loss................................................................ (999,432)
Other comprehensive loss:
Unrealized loss on securities.......................................... (9,976)
----------
Comprehensive loss................................................. $1,009,408
==========
The accompanying notes are an integral part of these financial statements.
F-31
MicroHouse International, Inc.
Statement of Stockholders' Deficit
for the year ended December 31, 1998
Accumulated
Common Stock Additional Other Total
------------- Paid in Comprehensive Accumulated Stockholders'
Shares Amount Capital Loss Deficit Deficit
------ ------ ---------- ------------- ----------- -------------
Balance at December 31,
1997................... 200 $200 $ 800 $ -- $(1,330,982) $(1,329,982)
Issuance of stock....... 4 4 199,996 -- -- 200,000
Capital contributions... -- -- 420,143 -- -- 420,143
Comprehensive loss:
Net loss................ -- -- -- -- (999,432) (999,432)
Unrealized loss on
securities............. -- -- -- (9,976) -- (9,976)
Dividends............... -- -- -- -- (33,283) (33,283)
------ ------ ---------- ------------- ----------- -------------
Balance at December 31,
1998................... 204 $204 $620,939 $(9,976) $(2,363,697) $(1,752,530)
====== ====== ========== ============= =========== =============
The accompanying notes are an integral part of these financial statements.
F-32
MicroHouse International, Inc.
Statement of Cash Flows
for the year ended December 31, 1998
Cash flows from operating activities:
-----------
Net loss.......................................................... $ (999,432)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation..................................................... 173,304
Amortization..................................................... 282,888
Gain on disposal of discontinued operations...................... (43,782)
Provision for losses on accounts receivable...................... 206,996
Other............................................................ 1,223
Changes in operating assets and liabilities:
Accounts receivable.............................................. (622,417)
Receivable--affiliates, net...................................... 492,474
Inventory........................................................ 27,973
Prepaid expenses................................................. 72,149
Other assets..................................................... (8,016)
Accounts payable................................................. (57,087)
Accrued expenses................................................. 146,030
Payables--affiliates............................................. 125,000
Deferred revenue................................................. 583,680
-----------
Net cash used in operating activities.......................... 380,983
-----------
Cash flows from investing activities:
Purchase of fixed assets.......................................... (55,592)
Software development costs........................................ (246,400)
Acquisitions...................................................... (2,084,604)
-----------
Net cash used in investing activities.......................... (2,386,596)
-----------
Cash flows from financing activities:
Proceeds from issuance of common stock............................ 200,000
Dividends paid.................................................... (33,283)
Capital contributions............................................. 420,143
Payments on line of credit........................................ (211,841)
Proceeds from issuance of debt.................................... 1,906,596
Repayment of debt................................................. (289,705)
-----------
Net cash provided by financing activities...................... 1,991,910
-----------
Net decrease in cash and cash equivalents.......................... (13,703)
Cash and cash equivalents, beginning of year....................... 73,272
-----------
Cash and cash equivalents, end of year............................. $ 59,569
===========
Supplemental Disclosure of Non-cash Investing and Financing
Activities:
Cash paid for interest............................................ $ 126,613
===========
Fixed assets received in settlement of accounts receivable........ $ 27,869
===========
Fixed assets acquired through capital leases...................... $ 29,618
===========
The accompanying notes are an integral part of these financial statements.
F-33
MicroHouse International, Inc.
Notes to Financial Statements
1. The Company
MicroHouse International, Inc. (the "Company") was incorporated under the laws
of the State of Florida in 1991. The Company writes, markets and distributes
technical support information.
2. Significant Accounting Policies and Procedures
Revenue Recognition
Revenue is recognized as technical support information is delivered. When a
product sale includes the right to receive updates, revenue is recognized over
the term of the total deliveries based on the relative value of each delivered
product. Accounts receivable allowances are provided for estimated uncollecti-
ble accounts, sales discounts and returns.
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit and liquid investments with
original maturities of less than 90 days. The carrying amount approximates fair
value due to the short-term maturity of these instruments.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant con-
centrations of credit risk consist principally of cash and cash equivalents and
trade accounts receivable. The majority of cash and cash equivalents was held
by one federally insured financial institution at December 31, 1998. At various
times, the Company maintains cash balances in excess of federally insured lim-
its.
The Company sells its products to customers in several industries worldwide.
Additionally, the Company sells through select resellers and distributors
worldwide. The Company does not require collateral on accounts receivable. The
Company maintains adequate reserves for potential credit losses.
As of December 31, 1998, one customer accounted for 12% of the accounts receiv-
able balance.
Marketable Securities
Marketable securities of $1,042, included in prepaid expenses and other current
assets, consist of investments held in preferred stock in exchange for the for-
giveness of certain trade receivables due the Company. The Company has classi-
fied these investment securities as available-for-sale under Statement of Fi-
nancial Accounting Standards ("SFAS") No. 115, Accounting for Certain Instru-
ments in Debt and Equity Securities. Accordingly, these securities are reported
at fair market value with unrealized gains and losses included in stockholders'
deficit. The Company recognized unrealized losses on investments of $9,976 in
1998.
Fixed Assets
Property and equipment primarily consists of computer hardware, computer soft-
ware and office furniture. Property and equipment is stated at cost and depre-
ciated using the straight-line method over their estimated useful lives. Lease-
hold improvements are amortized over the lesser of the term of the related
lease or the estimated useful life of the improvement. Maintenance and repair
costs are expensed as incurred. Significant renovations and improvements which
improve assets and/or extend the life of assets are capitalized. Gains and
losses on the disposal of equipment are included in income as they occur.
Goodwill
Goodwill recognized in connection with acquisitions accounted for under the
purchase method of accounting is amortized using the straight-line method over
4.5 years. A total of $282,888 of goodwill has been amortized during 1998.
F-34
MicroHouse International, Inc.
Notes to Financial Statements--(Continued)
2. Significant Accounting Policies and Procedures--(Continued)
Income Taxes
The financial statements do not include a provision for income taxes as the
Company is a Subchapter S Corporation. Under Internal Revenue Service regula-
tions, the income tax liability is borne by the stockholders of the Subchapter
S Corporation.
Risks and Uncertainties
The Company has a limited operating history and its prospects are subject to
the risks, expenses and uncertainties frequently encountered by companies in
the new and rapidly evolving markets for technical support information. The
Company's success will therefore depend in part on establishing and maintaining
a leadership position in the field of providing technical support information,
as well as providing related information technology products.
Use of Estimates
The preparation of the Company's financial statements in conformity with gener-
ally accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and disclo-
sure of contingent assets and liabilities at the date of the financial state-
ments and the reported amounts of revenues and expenses during the reporting
period. Actual results may differ from those estimates.
Financial Instruments
The recorded amounts of financial instruments approximate their fair values.
Long-Lived Assets
The carrying value of assets is reviewed on a regular basis for the existence
of facts or circumstances, both internally and externally, that suggest impair-
ment. The Company determines impairment by comparing recorded amounts to the
expected future cash flows from the asset under evaluation. The cash flow esti-
mates contain management's best estimates, using appropriate and customary as-
sumptions and projections.
3. Acquisitions
In March and April 1998, the Company purchased specified assets of White Star
and Ziff-Davis for total consideration of approximately $2,085,000. Both acqui-
sitions were accounted for as purchases and are included in the Company's oper-
ations beginning on the date of acquisition.
The total consideration paid by the Company included cash of $250,000 and prom-
issory notes totaling $1,850,000. A promissory note for $1,500,000 was issued
with an interest rate of 10% and quarterly payments for 15 quarters. Another
promissory note for $350,000 was issued bearing no interest with variable pay-
ments due monthly. A discount of $15,396 was recorded.
The allocations of the purchase prices for the 1998 acquisitions are summarized
as follows:
See Note 4 for discussion of the discontinuation and sale of the ImageCast
Products Division acquired in this acquisition.
The following unaudited pro forma information presents the Company's results of
operations for the year ended December 31, 1998, after giving effect to the ac-
quisition of specified assets of Ziff-Davis, as if the acquisition had been
consummated on January 1, 1998. Such unaudited pro forma information is based
on the historical financial information of the Company and Ziff-Davis and does
not include operational or other changes which might have been incurred by the
Company.
F-35
MicroHouse International, Inc.
Notes to Financial Statements--(Continued)
The unaudited pro forma information for the year ended December 31, 1998 pre-
sented below, exclusive of discontinued operations, is for illustrative infor-
mation purposes only and is not necessarily indicative of results which would
have been achieved or results which may be achieved in the future.
-----------
Net revenue................................................. $ 4,977,122
===========
Net loss from continuing operations......................... $(1,584,594)
===========
4. Discontinued Operations
In November 1998, the Company formalized its plan to discontinue its ImageCast
Products Division and, in the same month, sold this product division to a re-
lated party for $650,000. Accordingly, operating results have been reclassified
and reported in discontinued operations.
Operating results of the discontinued operations are as follows:
In connection with the sale, the Company recorded a gain of approximately
$44,000.
5. Fixed Assets
The major classes of property and equipment and the related depreciation lives
at December 31, 1998 are as follows:
-------------------
Estimated
Useful
Lives
---------
Computer equipment and software...................... $ 554,692 3-5 years
Furniture and fixtures............................... 189,467 5 years
Leasehold improvements............................... 15,475 3 years
Automobile........................................... 59,968 5 years
---------
819,602
Less, accumulated depreciation and amortization...... 606,293
---------
$ 213,309
=========
6. Commitments and Contingencies
Leases
The Company leases office space and equipment. The future payments under all
lease agreements are as follows:
-----------------
Capital Operating
Leases Leases
------- ---------
1999................................................... $12,645 $187,211
2000................................................... 11,835 176,396
2001................................................... 5,530 28,112
------- ---------
Total minimum lease payments........................... 30,010 $391,719
=========
Less: Amounts representing interest.................... 5,291
-------
Present value of net minimum lease payments............ 24,719
Less: Current portion.................................. 9,370
-------
Long-term portion...................................... $15,349
=======
The Company recognized $254,067 of rent expense for the year ended December 31,
1998. The cost of equipment under capital lease included in property and equip-
ment was $29,618 at December 31, 1998.
F-36
MicroHouse International, Inc.
Notes to Financial Statements--(Continued)
7. Debt
The following describes the Company's outstanding debt:
-----------
Line of credit with a bank which provides for borrowings up to
$225,000; due January 15, 1999; interest at prime plus 1.0%
(8.75% at December 31, 1998); monthly interest payments only,
collateralized by all business assets........................... $ 221,290
Fixed rate note; due January 1, 2002; interest at 10%, quarterly
payments of interest only beginning
July 1, 1998; quarterly payments of principal and interest
beginning April 1, 1999 of $146,231, collateralized by all
assets purchased................................................ 1,500,000
Noninterest bearing note; due February 1, 1999; monthly payments
of varying amounts, collateralized by all assets purchased...... 60,065
Variable rate note to stockholder; due February 1, 2018; interest
at prime plus 1.75% (9.5% at
December 31, 1998); monthly principal and interest payments of
varying amounts................................................. 74,089
Fixed rate note to stockholder; due February 1, 2009; interest at
9.71%........................................................... 15,000
Fixed rate note to stockholder; due February 1, 2009; interest at
8.0%; annual interest payments only............................. 15,000
Fixed rate note; due April 3, 2000; interest at 9.65%; monthly
payments of principal and interest of $1,164, collateralized by
automobile...................................................... 17,089
-----------
1,902,533
Less: Current portion............................................ (630,328)
$ 1,272,205
===========
The line of credit was extended for an additional three-month period after De-
cember 31, 1998. All balances relating to the line of credit, the noninterest-
bearing note due February 1999 and the fixed rate note due April 3, 2000, were
fully paid off in April 1999.
8. Employee Savings Plan
The Company has a savings plan (the "Savings Plan") that qualifies as a de-
ferred salary arrangement under Internal Revenue Section 401(k). Under the
Savings Plan, participating employees may defer a portion of their pretax
earnings, up to the Internal Revenue Service annual contribution limit. For
the year ended December 31, 1998, the Company did not contribute to the Sav-
ings Plan.
9. Related Party Transactions
The Company enters into transactions with MicroHouse Development ("MHD") and
MicroHouse Solutions ("MHS"). The major stockholders of the Company have a ma-
jority ownership in MHD and MHS.
The Company provides technical and management advisory services to MHD and
MHS. The Company invoices MHD and MHS for associated costs. MHD and MHS sell
Company products and are paid an up-front agreed royalty amount. Additionally,
the Company sells products on behalf of MHD and MHS and receive an agreed roy-
alty amount. These transactions are summarized below as follows:
Additional related party transactions include receivables totaling $11,098 at
December 31, 1998. The amounts are primarily due from stockholders.
10. Subsequent Event
In March 1999, the Company was sold to EarthWeb Inc.
F-38
Unaudited Pro Forma Condensed Consolidated Financial Information
In February 1999, EarthWeb acquired D&L Online, Inc., which operates dice.com.
The total purchase price was approximately $35.0 million. The consideration
paid by EarthWeb to acquire D&L Online consisted of (a) $7.0 million in cash,
$4.0 million of which was paid at closing, with the balance payable over the
next year in two installments, (b) 577,778 shares of EarthWeb common stock,
valued at $26.0 million, based upon the average stock price of $45.00 from Jan-
uary 26, 1999 through February 9, 1999 and (c) additional future "earnout" pay-
ments, based on the performance of the surviving entity in the merger and re-
lated businesses, in the form of EarthWeb common stock and/or cash with an ag-
gregate value of up to $12.0 million, of which such amounts are payable over a
period of 3 years based on achievement of certain revenue targets. Under the
terms of the agreement and a related escrow agreement, an aggregate of 57,778
shares of such EarthWeb common stock will be held in escrow for 18 months to
insure payment by certain selling shareholders of indemnification claims. The
amount of consideration paid by EarthWeb was reached through arm's length nego-
tiations and was funded through the issuance of EarthWeb common stock and from
the proceeds of EarthWeb's initial public offering. The fair value of the op-
tions of approximately $733,000 was determined using the Black-Scholes options
pricing model. The following assumptions were used in the options pricing mod-
el: stock price of approximately $45.00, exercise price of $32.05, term of 3
years, risk free rate of interest of 5%, 50% volatility and a dividend yield of
0%.
In March 1999, EarthWeb Inc. acquired MicroHouse International, Inc. ("MHI")
for consideration of approximately $9 million. In addition, EarthWeb assumed
approximately $1.7 million in MHI debt as part of the acquisition. The consid-
eration paid by EarthWeb to acquire all of the capital stock of MHI consisted
of (a) $1.6 million in cash, $1.0 million of which was paid at closing, with
$500,000 and $95,000 of the balance payable on July 19, 1999 and April 1, 2000
respectively, (b) 50,856 shares of EarthWeb common stock delivered at closing,
valued at $2.2 million based upon a stock price of $43.14 of which 48,314
shares were delivered to the sellers and the balance were delivered to Ascent
Partners, Inc. as a fee in connection with the acquisition and (c) promissory
note in the aggregate amount of approximately $5.0 million convertible into
126,475 shares of common stock on March 20, 2000 (collectively, the "Promissory
Notes"). The beneficial conversion feature related to the convertible note pay-
able of approximately $482,000, represents the difference between the average
share price from March 17, 1999 to March 23, 1999 of $43.14 and their negoti-
ated conversion price of $39.33. This beneficial conversion feature will be am-
ortized over the one-year life of the note payable as a non-cash interest ex-
pense. The note is not convertible prior to March 20, 2000. The amount of con-
sideration paid by EarthWeb was funded through the issuance of EarthWeb common
stock and the Promissory Notes, and from the proceeds of EarthWeb's initial
public offering.
The Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
year ended December 31, 1998 gives effect to the acquisitions of D&L Online and
MHI as if they had occurred on January 1, 1998 and is based on the historical
results of operations of the Company, D&L Online and MHI for the year ended De-
cember 31, 1998. The Unaudited Pro Forma Condensed Consolidated Balance Sheet
gives effect to the acquisitions of D&L Online and MHI as if the acquisitions
had occurred on December 31, 1998. The Unaudited Pro Forma Condensed Consoli-
dated Statement of Operations and the Unaudited Pro Forma Condensed Consoli-
dated Balance Sheet and the accompanying notes should be read in conjunction
with the historical financial statements of the Company, D&L Online and MHI and
notes thereto.
The Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
three months ended March 31, 1999 gives effect to the acquisitions of D&L On-
line and MHI as if they had occurred on January 1, 1998 and is based on the
historical operations of the Company as reported in Form 10-Q for the period
ended March 31, 1999 and the historical operations of D&L Online and MHI for
the period prior to the dates of acquisition.
The Unaudited Pro Forma Condensed Consolidated Financial Information is in-
tended for informational purposes only and is not necessarily indicative of the
future financial position or future results of operations of the consolidated
company after the acquisitions of D&L Online and MHI or of the financial posi-
tion or results of operations of the consolidated company that would have actu-
ally occurred had the acquisitions of D&L Online and MHI been effected on Janu-
ary 1, 1998.
F-39
EarthWeb Inc.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
------------------------------------------------------------------------
As of December 31, 1998
------------------------------------------------------------------------
Pro Forma Pro Forma
EarthWeb Inc. D&L Online, Inc. MicroHouse Adjustments Total
------------- ---------------- ---------- ------------ -----------
ASSETS
Cash and cash equiva-
lents.................. $25,292,229 $ 319,870 $ 59,569 $ (5,360,080)(1a) $20,311,588
Accounts receivable,
net.................... 1,143,681 592,968 933,583 -- 2,670,232
Other current assets.... 828,686 -- 535,866 (345,807)(1h) 1,018,745
------------- ---------------- ---------- ------------ -----------
Total current assets.. 27,264,596 912,838 1,529,018 (5,705,887) 24,000,565
Fixed assets, net....... 2,068,752 504,534 213,309 -- 2,786,595
Goodwill and intangible
assets, net............ 1,069,220 -- 1,414,441 45,884,553 (1b) 48,368,214
Other assets............ 74,816 45,751 21,239 -- 141,806
------------- ---------------- ---------- ------------ -----------
Total assets.......... $30,477,384 $1,463,123 $3,178,007 $ 40,178,666 $75,297,180
============= ================ ========== ============ ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accounts payable and
accrued expenses....... $ 3,324,883 $ 427,077 $ 757,294 1,100,000 (1g) $ 5,609,254
Other current liabili-
ties................... 234,410 329,029 2,273,760 (1,136,001)(1c) 2,201,198
500,000 (1d)
Notes payable........... -- 470,000 409,038 1,500,000 (1e) 2,379,038
------------- ---------------- ---------- ------------ -----------
Total current
liabilities.......... 3,559,293 1,226,106 3,440,092 1,963,999 10,189,490
Other liabilities....... 65,686 -- 1,490,445 1,595,000 (1e) 3,151,131
Convertible note pay-
able, net.............. 4,491,849 (1i) 4,491,849
Stockholders' equity.... 26,852,405 237,017 (1,752,530) 32,127,818 (1f) 57,464,710
------------- ---------------- ---------- ------------ -----------
Total liabilities and
stockholders'
equity............... $30,477,384 $1,463,123 $3,178,007 $ 40,178,666 $75,297,180
============= ================ ========== ============ ===========
The accompanying notes are an integral part of these financial statements.
F-40
EarthWeb Inc.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
---------------------------------------------------------------------------
For the year ended December 31, 1998
---------------------------------------------------------------------------
EarthWeb D&L Pro Forma Pro Forma
Inc. Online, Inc. MicroHouse Adjustments Total
----------- ------------ ----------- ------------ ------------
Revenues................ $ 3,349,165 $ 7,736,921 $ 4,193,412 $ -- $ 15,279,498
Cost of revenues........ 2,131,593 1,072,537 1,185,440 -- 4,389,570
----------- ------------ ----------- ------------ ------------
Gross profit............ 1,217,572 6,664,384 3,007,972 -- 10,889,928
----------- ------------ ----------- ------------ ------------
Operating expenses:
Product development... 1,475,665 -- 106,833 -- 1,582,498
Sales and marketing... 4,546,839 2,287,447 1,983,876 -- 8,818,162
General and
administrative....... 3,356,567 4,140,265 1,938,534 (2,050,000)(2a,2b) 7,385,366
Depreciation and
amortization......... 1,115,698 208,297 456,192 10,523,573 (2c) 12,303,760
----------- ------------ ----------- ------------ ------------
Total operating
expenses........... 10,494,769 6,636,009 4,485,435 8,473,573 30,089,786
----------- ------------ ----------- ------------ ------------
Operating (loss)
income................. (9,277,197) 28,375 (1,477,463) (8,473,573) (19,199,858)
Interest and other
income, net............ 307,409 8,030 (143,462) (482,000)(2d) (310,023)
Income taxes............ -- -- (1,120,000)(2a) (1,120,000)
----------- ------------ ----------- ------------ ------------
Loss from continuing
operations............. (8,969,788) 36,405 (1,620,925) (10,075,573) (20,629,881)
Discontinued operations:
Income from discontinued
operations............. 567,735 567,735
Gain on disposal of
discontinued
operations............. 43,782 43,782
----------- ---------- ----------- ------------ ------------
Total income from
discontinued
operations............. -- -- 611,517 -- 611,517
----------- ---------- ----------- ------------ ------------
Net loss................ $(8,969,788) $ 36,405 $(1,009,408) $(10,075,573) $(20,018,364)
=========== ============ =========== ============ ============
Basic net loss per
share.................. $ (2.37) $ (4.54)
=========== ============
Weighted average shares
used in computing basic
net loss per share..... 3,782,575 628,634 (2e) 4,411,209
=========== ============ ============
Supplemental pro forma
basic net loss per
share(2f).............. $ (1.53) $ (3.08)
=========== ============
Weighted average shares
used in supplemental
pro forma basic net
loss per share(2f)..... 5,880,467 628,634 (2e) 6,509,101
=========== ============ ============
The accompanying notes are an integral part of these financial statements
F-41
EarthWeb Inc.
Notes to the Unaudited Pro Forma Condensed
Consolidated Financial Information
(1) Pro Forma Adjustments and Assumptions
The pro forma adjustments to the unaudited pro forma condensed consolidated
balance sheet, assuming the acquisition occurred on December 31, 1998, are as
follows:
1(a) Adjustment to record cash payment of $4,360,000 and 1,000,080 in con-
nection with the D&L Online and MHI acquisitions, respectively.
1(b) Adjustment to calculate goodwill and intangible assets and to allocate
purchase price over the estimated fair value of net assets and liabil-
ities acquired of D&L Online and MHI, calculated as follows:
-------------------------------------
D&L Online MicroHouse Total
----------- ----------- -----------
Cash portion of purchase price.... $ 4,360,000 $ 1,000,080 $ 5,360,080
Value of stock and option portion
of purchase price(1)............. 26,733,010 -- 26,733,010
Value of stock and option portion
of purchase price(2)............. -- 2,193,928 2,193,928
Convertible promissory note pay-
able............................. -- 4,973,719 4,973,719
Payable portion of purchase
price............................ 3,000,000 595,000 3,595,000
Transaction costs................. 500,000 600,000 1,100,000
----------- ----------- -----------
Purchase price.................... 34,593,010 9,362,727 43,955,737
Less: fair value of net assets and
liabilities to be acquired....... 480,673 (2,409,489) (1,928,816)
----------- ----------- -----------
34,112,337 11,772,216 45,884,553
Customer list and other intangi-
bles............................. (15,800,000) -- (15,800,000)
----------- ----------- -----------
Goodwill.......................... $18,312,337 $11,772,216 $30,084,553
=========== =========== ===========
(1) The value of the common stock issued to D&L Online was determined to
be $45.00 a share.
(2) The value of the common stock issued to MHI was determined to be
$43.14 a share
1(c) Adjustment to deferred revenue to record the balance of the future ob-
ligation of existing subscriptions at its fair value.
1(d) Adjustment to record current and long-term portion of note payable to
MHI stockholders as part of the total consideration paid.
1(e) Adjustment to record current and long-term portion of note payable to
D&L Online stockholders as part of the total consideration paid.
1(f) Adjustment to reflect the issuance of 577,778 of common stock issued
in connection with the D&L Online and to reflect the issuance of
50,856 shares of common stock issued in connection with the MHI acqui-
sition and the additional paid in capital of $482,000 recorded in con-
nection with the beneficial conversion feature of the convertible note
payable.
1(g) Adjustment to record approximately $500,000 and $600,000 of expenses
incurred in connection with the acquisitions of D&L Online and MHI,
respectively.
1(h) Adjustment to remove MHI net related party receivables settled upon
the acquisition.
1(i) Adjustment to record the issuance of the convertible note of
$4,973,719 to MHI stockholders. The note has been recorded net of a
discount of $482,000, which will be amortized as interest expense over
the one-year life of the note. The beneficial conversion feature rep-
resents the difference between the average share price from March 17,
1999 to March 23, 1999 of $43.14 and their negotiated conversion price
of $39.33.
F-42
The pro forma adjustments to the unaudited pro forma condensed consolidated
statement of operations, assuming the acquisition occurred on January 1, 1998,
are as follows:
2(a) Adjustment of $2.8 million due to D&L Online's S corporation distribu-
tion which was recorded as compensation expense that will not be in-
curred in the future, as well as to record the associated tax charge
of $1.1 million which does not assume the utilization of EarthWeb's
net operating loss carryforwards.
2(b) Adjustment to record compensation expense of approximately $750,000
related to options issued to MHI employees to purchase shares of
EarthWeb common stock at an exercise price below the fair market value
of the EarthWeb common stock at the date of grant.
2(c) Adjustment to depreciation and amortization to reflect the amortiza-
tion of goodwill and intangible assets of approximately $7.6 million
and $2.9 million, over an approximate 4.5 year period and 4 year peri-
od, the expected period of benefit, resulting from the acquisitions of
D&L Online and MHI, respectively.
2(d) Adjustment to non-cash interest expense of $482,000 to reflect the ac-
cretion of the discount on the convertible note issued in connection
with the acquisition of MHI.
2(e) Adjustment of weighted average shares of common stock outstanding of
577,778 and 50,856 used in computing basic and diluted net loss per
share to reflect the issuance of 577,778 and 50,856 shares of common
stock as of January 1, 1998 resulting from the acquisitions of D&L On-
line and MHI, respectively.
2(f) The supplemental pro forma net loss per share amount is computed by
using the sum of the weighted average number of shares of common stock
and the 2,439,833 shares of common stock in November 1988 upon conver-
sion of preferred stock as if it had been converted on January 1,
1998.
F-43
EarthWeb Inc.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
---------------------------------------------------------------------------------
January 1,
1999- January 1, 1999- January 1, 1999-
March 31, 1999 February 1, 1999 March 18, 1999
-------------- ---------------- ----------------
EarthWeb D&L Pro Forma Pro Forma
Inc. Online, Inc. MicroHouse Adjustments Total
-------------- ---------------- ---------------- ----------- -----------
Revenues................ $ 3,732,151 $ 937,119 $ 1,143,914 $ -- $ 5,813,184
Cost of revenues........ 1,478,698 109,551 482,396 -- 2,070,645
-------------- ---------------- ---------------- ----------- -----------
Gross profit............ 2,253,453 827,568 661,518 -- 3,742,539
-------------- ---------------- ---------------- ----------- -----------
Operating expenses:
Product development.... 736,586 -- 37,835 -- 774,421
Sales and marketing.... 5,187,744 621,895 399,052 -- 6,208,691
General and
administrative........ 1,597,085 300,959 332,090 -- 2,230,134
Depreciation and
amortization.......... 1,777,945 21,417 111,476 1,328,000 (2a) 3,238,838
-------------- ---------------- ---------------- ----------- -----------
Total operating
expenses............. 9,299,360 944,271 880,453 1,328,000 12,452,084
-------------- ---------------- ---------------- ----------- -----------
Operating loss.......... (7,045,907) (116,703) (218,935) (1,328,000) (8,709,545)
Interest and other
income, net............ 233,657 (28,153) (38,023) 167,481
-------------- ---------------- ---------------- ----------- -----------
Net loss................ $(6,812,250) $ (144,856) $ (256,958) $(1,328,000) $(8,542,064)
============== ================ ================ =========== ===========
Basic and diluted net
loss per share......... $ (0.82) $ (0.99)
============== ===========
Weighted average shares
used in computing basic
net loss per share..... 8,289,587 363,709 (2b) 8,653,296
============== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-44
EarthWeb Inc.
Notes to the Unaudited Pro Forma Condensed
Consolidated Statement of Operations
(1)Pro Forma Adjustments and Assumptions
The pro forma adjustments to the unaudited pro forma condensed consolidated
statement of operations, assuming the acquisitions of D&L Online and MHI oc-
curred on January 1, 1998, are as follows:
2(a) Adjustment to depreciation and amortization to reflect the amortiza-
tion of goodwill and intangible assets of approximately $653,000 mil-
lion and $675,000, over an approximate 4.5 year period and 4 year pe-
riod, the expected period of benefit, resulting from the acquisitions
of D&L Online & MHI, respectively.
2(b) Adjustment of weighted average shares of common stock outstanding used
in computing basic and diluted net loss per share to reflect the issu-
ance of 577,778 and 50,856 shares of common stock as of January 1,
1998 resulting from the acquisitions of D&L Online and MHI, respec-
tively. An additional adjustment of 126,475 shares of common stock is-
sued in connection with the conversion of the convertible note payable
into common stock one year from the date of acquisition.
F-45
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses to be home by the registrant, other
than underwriting discount, in connection with the issuance and distribution of
the Common Stock hereunder.
-------
Item
---- Amount
SEC registration fee $10,946
Nasdaq National Market Listing Fees 9,006
*Accounting fees and expenses 10,000
*Legal fees and expenses 25,000
*Printing costs
*Blue sky fees and expenses
*Miscellaneous
-------
*Total $
=======
* Estimated.
Item 14. Indemnification of Directors and Officers.
Section 145 ("Section 145") of the General Corporation Law of the State of Del-
aware (the "DGCL") provides that directors and officers of Delaware corpora-
tions may, under certain circumstances, be indemnified against expenses (in-
cluding attorneys' fees) and other liabilities actually and reasonably incurred
by them as a result of any suit brought against them in their capacity as a di-
rector or officer, 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, if they had no reasonable
cause to believe their conduct was unlawful. Section 145 also provides that di-
rectors and officers may also be indemnified against expenses (including attor-
neys' fees) incurred by them in connection with a derivative suit 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, except that no indemnification may be
made without court approval if such person was adjudged liable to the corpora-
tion.
EarthWeb has implemented such indemnification provisions in its Amended and Re-
stated Certificate of Incorporation which provides that officers and directors
shall be entitled to be indemnified by EarthWeb to the fullest extent permitted
by law against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement incurred in connection with any action, suit or pro-
ceeding by reason of the fact that he or she is or was an officer or director
of the Company.
The above discussion of EarthWeb's Amended and Restated Certificate of Incorpo-
ration and Sections 102(b)(7) and 145 of the DGCL is not intended to be exhaus-
tive and is qualified in its entirety by such Amended and Restated Certificate
of Incorporation and statutes.
EarthWeb has agreed to indemnify the Underwriters and their controlling per-
sons, and the Underwriters have agreed to indemnify EarthWeb and its control-
ling persons, including directors and executive officers of EarthWeb, against
certain liabilities, including liabilities under the Securities Act. Reference
is made to the Underwriting Agreement filed as part of the Exhibits hereto.
For information regard EarthWeb's undertaking to submit to adjudication the is-
sue of indemnification for violation of the securities laws, see Item 17 here-
of.
Item 15. Recent Sales of Unregistered Securities.
On October 25, 1996, the Registrant issued (i) 2,925,000 shares of its common
stock to EarthWeb LLC in exchange for substantially all the assets and liabili-
ties of EarthWeb LLC and (ii) 653,111 shares of its Series A preferred stock to
Warburg, Pincus Ventures, L.P. ("Warburg") for an aggregate purchase price of
$6.7 million. On June 23, 1997, the Registrant issued 598,086 shares of its Se-
ries B preferred stock to Warburg for an aggregate purchase price of $10.0 mil-
II-1
lion. In June 1998, the Registrant issued 433,965 shares of its Common Stock to
EarthWeb LLC for an aggregate purchase price of $3.7 million.
Exemption from registration for the transactions described above was claimed
pursuant to Section 4(2) of the Securities Act of 1933, as amended, regarding
transactions by the issuer not involving a public offering, in that these
transactions were made, without general solicitation or advertising, to sophis-
ticated 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. Additionally, since February 1997, the Regis-
trant has granted stock options to certain of its employees and consultants
pursuant to its 1996 Amended and Restated Stock Plan. Such grants were made in
reliance on Rule 701 promulgated under the Securities Act. As of November 9,
1998, the Registrant had granted options to purchase 500,592 shares of Common
Stock to employees and consultants pursuant to the 1996 Amended and Restated
Stock Option Plan.
On February 2, 1999, the Registrant completed the acquisition of D&L Online,
Inc. ("D&L") for aggregate consideration of $35 million including 577,778
shares of common stock to the stockholders of D&L. Additional consideration for
the acquisition includes future payments, based on the performance of D&L, in
the form of Registrant's common stock or cash, at Registrant's option, with an
aggregate value of up to $12 million. This transaction was exempt from regis-
tration pursuant to Section 4(2) of the Securities Act of 1933, as amended, re-
garding transactions by an issuer not involving a public offering.
On March 19, 1999, the Registrant completed the acquisition of MicroHouse In-
ternational, Inc. ("MicroHouse") for aggregate consideration including 50,856
shares of common stock and a convertible promissory note in the original prin-
cipal amount of $4,973,719, which is convertible into 126,475 shares of common
stock on March 20, 2000. This transaction was exempt from registration pursuant
to Section 4(2) of the Securities Act of 1993, as amended, regarding transac-
tions by an issuer not involving a public offering.
Item 16. Exhibits and Financial Statement Schedules.
-------------------------------------------------------------------------------
Exhibit
No. Description
*2.1 Agreement and Plan of Merger among EarthWeb Inc., EW Acquisition
Corporation, D&L Online, Inc., Lloyd Linn, and Diane Rickert;
incorporated by reference to Exhibit 2.1 to the Registrant'
Current Report on Form 8-K dated February 2, 1999.
2.2 Securities Purchase Agreement among the Registrant, MicroHouse
International, Inc. and Steve Anderson, Doug Anderson, Robert
Anderson and Ascent Partners; incorporated by reference to
Exhibit 2.1 to the Registrant' Current Report on Form 8-K dated
March 12, 1999.
3.1 Form of Amended and Restated Certificate of Incorporation;
incorporated by reference to Exhibit 3.1 to Registrant's
Registration Statement on Form S-1 (SEC File No. 333-60837).
3.2 Form of Amended and Restated By-laws; incorporated by reference
to Exhibit 3.2 to Registrant's
Registration Statement on Form S-1 (SEC File No. 333-60837).
4.1 Amended and Restated Shareholders Agreement dated as of June 24,
1997 among the Registrant,
EarthWeb LLC, GNP, Warburg, Jack D. Hidary, Murray Hidary and
Peter Derow; incorporated by reference
to Exhibit 4.1 to Registrant's Registration Statement on Form S-
1 (SEC File No. 333-60837).
4.2 Specimen Common Stock Certificate of Registrant; incorporated by
reference to Exhibit 4.2 to Registrant's Registration Statement
on Form S-1 (SEC File No. 333-60837).
4.3 Registration Rights Agreement dated as of October 25, 1996 by
and between the Registrant, Warburg, EarthWeb LLC and GNP;
incorporated by reference to Exhibit 4.3 to Registrant's
Registration Statement on Form S-1 (SEC File No. 333-60837).
4.4 Registration Rights Agreement between EarthWeb Inc., Lloyd Linn
and Diane Rickert; incorporated by reference to Exhibit 4.1 to
the Registrant's Current Report on Form 8-K dated February 2,
1999.
4.5 Registration Rights Agreement dated as of March 19, 1999 between
EarthWeb, Inc., Steve Anderson, Doug Anderson, Robert Anderson
and Ascent Partners; incorporated by reference to Exhibit 4.1 to
the Registrants' Current Report on Form 8-K dated March 12,
1999.
4.6 Zero Coupon Convertible Promissory Note dated as of March 19,
1999, of Registrant in favor of Steven Anderson; incorporated by
reference to Exhibit 4.2 to the Registrant's Current Report on
Form 8-K dated March 12, 1999.
II-2
Exhibit
No. Description
------- -----------
4.7 Zero Coupon Convertible Promissory Note dated as of March 19,
1999, of Registrant in favor of Doug Anderson; incorporated by
reference to Exhibit 4.3 to the Registrant's Current Report on
Form 8-K dated March 12, 1999.
4.8 Zero Coupon Convertible Promissory Note dated as of March 19,
1999, of Registrant in favor of Robert Anderson; incorporated by
reference to Exhibit 4.4 to the Registrant's Current Report on
Form 8-K dated March 12, 1999.
**5 Opinion of Morrison & Foerster LLP
9 Form of Voting Trust Agreement, as amended; incorporated by
reference to Exhibit 9 to Registrant's Registration Statement on
Form S-1 (SEC File No. 333-60837).
10.1 1996 Amended and Restated Stock Plan, as amended; incorporated
by reference to Exhibit 10.1 to Registrant's Registration
Statement on Form S-1 (SEC File No. 333-60837).
10.2 Employment Agreement dated January 1, 1995 between GNP (formerly
EarthWeb Ltd.) and Jack D. Hidary; incorporated by reference to
Exhibit 10.2 to Registrant's Registration Statement on Form S-1
(SEC File No. 333-60837).
10.3 Employment Agreement dated January 1, 1995 between GNP (formerly
EarthWeb Ltd.) and Murray Hidary; incorporated by reference to
Exhibit 10.3 to Registrant's Registration Statement on Form S-1
(SEC File No. 333-60837).
10.4 Employment Agreement dated November 4, 1996 between the
Registrant and Irene Math; incorporated by reference to Exhibit
10.4 to Registrant's Registration Statement on Form S-1 (SEC
File No. 333-60837).
10.5 Employment Agreement dated November 3, 1997 between the
Registrant and William Gollan;
incorporated by reference to Exhibit 10.5 to Registrant's
Registration Statement on Form S-1 (SEC File
No. 333-60837).
10.6 Consulting Agreement dated as of August 1, 1998 between the
Registrant and Peter Derow; incorporated
by reference to Exhibit 10.6 to the Registrant's Registration
Statement on Form S-1 (SEC File No. 333-
60837).
10.7 Intercompany Services Agreement dated October 25, 1996 among the
Registrant, EarthWeb LLC, GNP (formerly EarthWeb Ltd.), Jack D.
Hidary, Murray Hidary and Peter Derow, as amended; incorporated
by reference to Exhibit 10.7 to the Registrant's Registration
Statement on Form S-1 (SEC File No. 333-60837).
10.8 Lease Agreement dated April 28, 1995 between 3 Park Avenue Co.
and MJN Enterprises, Inc., as
amended; incorporated by reference to Exhibit 10.8 to the
Registrant's Registration Statement on Form S-1
(SEC File No. 333-60837).
10.9 Form of 1998 Stock Incentive Plan; incorporated by reference to
Exhibit 10.9 to the Registrant's Registration Statement on Form
S-1 (SEC File No. 333-60837).
10.10 Form of 1998 Employee Stock purchase plan; incorporated by
reference to Exhibit 10.10 to Registrant's Registration
Statement on Form S-1 (SEC File No. 333-60837).
10.11 Employment Agreement between EarthWeb Inc. and Lloyd Linn;
incorporated by reference to Exhibit 10.1
to the Registrant's Current Report on Form 8-K dated February 2,
1999.
10.12 Employment Agreement between Registrant and John Kleine;
incorporated by reference to Exhibit 10.6 to
the Registrant's Current Report on Form 10-K for the year ended
December 31, 1998.
21 Subsidiaries
23.1 Consents of PricewaterhouseCoopers LLP
**23.2 Consent of Morrison & Foerster LLP (set forth in Exhibit 5)
**23.3 Consent of Jupiter Communications
**23.4 Consent of Forrester Research, Inc.
**23.5 Consent of International Data Corporation
**23.6 Consent of Advertising Age's Business Marketing
**23.7 Consent of Simba Information, Inc.
24 Powers of Attorney (set forth in the signature page hereto)
27 Financial Data Schedule
* Confidential treatment has been received with respect to certain portions of
this Exhibit. Omitted portions have been filed separately with the Commis-
sion.
** To be filed by amendment.
II-3
Item 17. Undertakings.
The Registrant hereby undertakes the following:
(1) To file, during any period in which offers or sales are being made, a post-
effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securi-
ties Act;
(ii) To reflect in the prospectus any facts or events arising after the ef-
fective date of the Registration Statement (or the most recent post-effec-
tive amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information in the Registration Statement. Not-
withstanding the foregoing, any increase or decrease in volume of securi-
ties offered (if the total dollar value of securities offered would not ex-
ceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the ag-
gregate, the changes in volume and price represent no more than a 20 per-
cent change in the maximum aggregate offering price set forth in the "Cal-
culation of Registration Fee" table in the effective Registration State-
ment; and
(iii) To include any material information with respect to the plan of dis-
tribution not previously disclosed in the Registration Statement or any ma-
terial change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registra-
tion statement relating to the securities offered therein, and the offering of
such securities at that time to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(4) For purpose of determining any liability under the Securities Act, the in-
formation omitted from the form of prospectus filed as part of this registra-
tion 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 shall be deemed to be part of this registration statement as of
the time it was declared effective.
(5) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the regis-
trant 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 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 appro-
priate jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the un-
dersigned, thereunto duly authorized, in the City of New York, State of New
York, on August 2, 1999.
EarthWeb Inc.
/s/ Jack D. Hidary
By: ____________________________________
Jack D. Hidary
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints and hereby authorizes Jack D. Hidary and Irene Math,
severally, such person's true and lawful attorneys-in-fact, with full power of
substitution or resubstitution, for such person and in such person's name,
place and stead, in any and all capacities, to sign on such person's behalf,
individually and in each capacity stated below, any and all amendments, includ-
ing post-effective amendments to this Registration Statement and to sign any
and all additional registration statements relating to the same offering of se-
curities as this Registration Statement that are filed pursuant to Rule 462(b)
of the Securities Act of 1933, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact, full power and authority to
do and perform each and every act and thing requisite or necessary to be done
in and about the premises, as fully to all intents and purposes as such person
might or could do in person, hereby ratifying and confirming all that said at-
torneys-in-fact, or the substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities on August
2, 1999.
Name and Signature Title
------------------ -----
/s/ Jack D. Hidary President, Chief Executive
______________________________________ Officer and Director
Jack D. Hidary
/s/ Murray Hidary Executive Vice President,
______________________________________ Secretary, Treasurer and
Murray Hidary Director
/s/ Peter Derow Director
______________________________________
Peter Derow
/s/ Henry Kressel Director
______________________________________
Henry Kressel
Director
______________________________________
Cary Davis
/s/ Irene Math Senior Vice President,
______________________________________ Finance (Principal
Irene Math Financial and Accounting
Officer)
II-5
Exhibit Index
Exhibit
No.Description Page No.
------------------ --------
*2.1 Agreement and Plan of Merger among EarthWeb Inc., EW
Acquisition Corporation, D&L Online, Inc., Lloyd Linn, and
Diane Rickert; incorporated by reference to Exhibit 2.1 to
the Registrant' Current Report on Form 8-K dated February
2, 1999.
2.2 Securities Purchase Agreement among the Registrant,
MicroHouse International, Inc. and Steve Anderson, Doug
Anderson, Robert Anderson and Ascent Partners; incorporated
by reference to Exhibit 2.1 to the Registrant' Current
Report on Form 8-K dated March 12, 1999.
3.1 Form of Amended and Restated Certificate of Incorporation;
incorporated by reference to Exhibit 3.1 to Registrant's
Registration Statement on Form S-1 (SEC File No. 333-
60837).
3.2 Form of Amended and Restated By-laws; incorporated by
reference to Exhibit 3.2 to Registrant's Registration
Statement on Form S-1 (SEC File No. 333-60837).
4.1 Amended and Restated Shareholders Agreement dated as of
June 24, 1997 among the Registrant, EarthWeb LLC, GNP,
Warburg, Jack D. Hidary, Murray Hidary and Peter Derow;
incorporated by reference to Exhibit 4.1 to Registrant's
Registration Statement on Form S-1 (SEC File
No. 333-60837).
4.2 Specimen Common Stock Certificate of Registrant;
incorporated by reference to Exhibit 4.2 to Registrant's
Registration Statement on Form S-1 (SEC File No. 333-
60837).
4.3 Registration Rights Agreement dated as of October 25, 1996
by and between the Registrant, Warburg, EarthWeb LLC and
GNP; incorporated by reference to Exhibit 4.3 to
Registrant's Registration Statement on Form S-1 (SEC File
No. 333-60837).
4.4 Registration Rights Agreement between EarthWeb Inc., Lloyd
Linn and Diane Rickert; incorporated by reference to
Exhibit 4.1 to the Registrant's Current Report on Form 8-K
dated February 2, 1999.
4.5 Registration Rights Agreement dated as of March 19, 1999
between EarthWeb, Inc., Steve Anderson, Doug Anderson,
Robert Anderson and Ascent Partners; incorporated by
reference to Exhibit 4.1 to the Registrants' Current Report
on Form 8-K dated March 12, 1999.
4.6 Zero Coupon Convertible Promissory Note dated as of March
19, 1999, of Registrant in favor of Steven Anderson;
incorporated by reference to Exhibit 4.2 to the
Registrant's Current Report on Form 8-K dated March 12,
1999.
4.7 Zero Coupon Convertible Promissory Note dated as of March
19, 1999, of Registrant in favor of Doug Anderson;
incorporated by reference to Exhibit 4.3 to the
Registrant's Current Report on Form 8-K dated March 12,
1999.
4.8 Zero Coupon Convertible Promissory Note dated as of March
19, 1999, of Registrant in favor of Robert Anderson;
incorporated by reference to Exhibit 4.4 to the
Registrant's Current Report on Form 8-K dated March 12,
1999.
**5 Opinion of Morrison & Foerster LLP
9 Form of Voting Trust Agreement, as amended; incorporated by
reference to Exhibit 9 to Registrant's Registration
Statement on Form S-1 (SEC File No. 333-60837).
10.1 1996 Amended and Restated Stock Plan, as amended;
incorporated by reference to Exhibit 10.1
to Registrant's Registration Statement on Form S-1 (SEC
File No. 333-60837).
10.2 Employment Agreement dated January 1, 1995 between GNP
(formerly EarthWeb Ltd.) and Jack D. Hidary; incorporated
by reference to Exhibit 10.2 to Registrant's Registration
Statement on Form S-1 (SEC File No. 333-60837).
10.3 Employment Agreement dated January 1, 1995 between GNP
(formerly EarthWeb Ltd.) and Murray Hidary; incorporated by
reference to Exhibit 10.3 to Registrant's Registration
Statement on Form S-1 (SEC File No. 333-60837).
10.4 Employment Agreement dated November 4, 1996 between the
Registrant and Irene Math; incorporated by reference to
Exhibit 10.4 to Registrant's Registration Statement on Form
S-1
(SEC File No. 333-60837).
10.5 Employment Agreement dated November 3, 1997 between the
Registrant and William Gollan; incorporated by reference to
Exhibit 10.5 to Registrant's Registration Statement on Form
S-1
(SEC File No. 333-60837).
Exhibit
No.Description Page No.
------------------ --------
10.6 Consulting Agreement dated as of August 1, 1998 between the
Registrant and Peter Derow; incorporated by reference to
Exhibit 10.6 to the Registrant's Registration Statement on
Form S-1 (SEC File No. 333-60837).
10.7 Intercompany Services Agreement dated October 25, 1996
among the Registrant, EarthWeb LLC, GNP (formerly EarthWeb
Ltd.), Jack D. Hidary, Murray Hidary and Peter Derow, as
amended; incorporated by reference to Exhibit 10.7 to the
Registrant's Registration Statement on Form S-1 (SEC File
No. 333-60837).
10.8 Lease Agreement dated April 28, 1995 between 3 Park Avenue
Co. and MJN Enterprises, Inc., as amended; incorporated by
reference to Exhibit 10.8 to the Registrant's Registration
Statement on Form S-1 (SEC File No. 333-60837).
10.9 Form of 1998 Stock Incentive Plan; incorporated by
reference to Exhibit 10.9 to the Registrant's Registration
Statement on Form S-1 (SEC File No. 333-60837).
10.10 Form of 1998 Employee Stock purchase plan; incorporated by
reference to Exhibit 10.10 to
the Registrant's Registration Statement on Form S-1 (SEC
File No. 333-60837).
10.11 Employment Agreement between EarthWeb Inc. and Lloyd Linn;
incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K dated February 2,
1999.
10.12 Employment Agreement between Registrant and John Kleine;
incorporated by reference to
Exhibit 10.6 to the Registrant's Current Report on Form 10-
K for the year ended December 31, 1998.
21 Subsidiaries
23.1 Consents of PricewaterhouseCoopers LLP
**23.2 Consent of Morrison & Foerster LLP (set forth in Exhibit 5)
**23.3 Consent of Jupiter Communications
**23.4 Consent of Forrester Research, Inc.
**23.5 Consent of International Data Corporation
**23.6 Consent of Advertising Age's Business Marketing
**23.7 Consent of Simba Information, Inc.
24 Powers of Attorney (set forth in the signature page hereto)
27 Financial Data Schedule
* Confidential treatment has been received with respect to certain portions of
this Exhibit. Omitted portions have been filed separately with the Commis-
sion.
**To be filed by amendment.
Exhibit 21
Subsidiaries
EW Career Solutions, Inc.
MicroHouse International, Inc.
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
report dated January 21, 1999, on our audits of the financial statements of
EarthWeb Inc. as of December 31, 1998 and 1997 and for the three years in the
period ended December 31, 1998. We also consent to the reference to our firm
under the caption "Experts."
/s/ PricewaterhouseCoopers LLP
New York, NY
July 30, 1999
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
report dated January 22, 1999, on our audits of the financial statements of
D&L Online, Inc. as of December 31, 1998 and 1997 and for the two years in the
period ended December 31, 1998. We also consent to the reference to our firm
under the caption "Experts."
/s/ PricewaterhouseCoopers LLP
New York, NY
July 30, 1999
2
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
report dated April 23, 1999, on our audit of the financial statements of
MicroHouse as of and for the year ended December 31, 1998. We also consent to
the reference to our firm under the caption "Experts."
/s/ PricewaterhouseCoopers LLP
New York, NY
July 30, 1999
ARTICLE 5
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10(K) AND
10(Q) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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