SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 COMMISSION FILE NO.: 0-25053
THEGLOBE.COM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 14-1782422
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
110 East Broward Blvd., Suite 1400
Fort Lauderdale, FL 33301
(Address of principal executive offices) (Zip Code)
(954) 769-5900 (Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.001 per share
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B (Sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB [X].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes No [X]
Registrant's revenues for the fiscal year ended December 31, 2003 were $
6,580,452.
The number of shares outstanding of the Registrant's Common Stock, $.001 par
value (the "Common Stock") as of March 24, 2004 was 131,990,349.
Aggregate market value of the voting Common Stock held by non-affiliates of the
registrant as of the close of business on March 24, 2004: $68,114,123.
*Includes voting stock held by third parties, which may be deemed to be
beneficially owned by affiliates, but for which such affiliates have disclaimed
beneficial ownership.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report, to the extent not set forth
herein, is incorporated by reference from the registrant's definitive proxy
statement relating to the annual meeting of stockholders to be held in 2004
which definitive proxy statement shall be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year to which this Report
relates.
THEGLOBE.COM, INC.
2003 ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
PART I
Item 1. Business ..................................................... 2
Item 2. Properties ................................................... 8
Item 3. Legal Proceedings ............................................ 8
Item 4. Submission of Matters to a Vote of Security Holders .......... 9
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Small
Business Issuer Purchases of Equity Securities ............... 10
Item 6. Management's Discussion and Analysis or Plan of Operation .... 12
Item 7. Consolidated Financial Statements and Supplementary Data ..... 32
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ......................................... 33
Item 8A. Controls and Procedures. ..................................... 33
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act ............ 34
Item 10. Executive Compensation ....................................... 34
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters ................... 34
Item 12. Certain Relationships and Related Transactions ............... 34
Item 13. Exhibits and Reports on Form 8-K ............................. 34
Item 14. Principal Accountant Fees and Services ....................... 37
SIGNATURES ................................................................ 39
FORWARD LOOKING STATEMENTS
This Form 10-KSB, including without limitation Management's Discussion and
Analysis or Plan of Operation, contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements can be
identified by the use of predictive, future-tense or forward-looking
terminology, such as "believes," "anticipates," "expects," "estimates," "plans,"
"may," "intends," "will," or similar terms. Investors are cautioned that any
forward-looking statements are not guarantees of future performance and involve
significant risks and uncertainties, and that actual results may differ
materially from those projected in the forward-looking statements as a result of
various factors described under "Risk Factors" and elsewhere in this report. The
following discussion should be read together with the consolidated financial
statements and notes to those statements included elsewhere in this report, as
well as the "Risk Factors" set forth in Part II, Item 6 below.
PART I
ITEM 1. BUSINESS
OVERVIEW AND BUSINESS STRATEGY
theglobe.com, inc. (the "Company" or "theglobe") was incorporated on May 1, 1995
(inception) and commenced operations on that date. Originally, theglobe.com was
an online community with registered members and users in the United States and
abroad. That product gave users the freedom to personalize their online
experience by publishing their own content and by interacting with others having
similar interests. However, due to the deterioration of the online advertising
market, the Company was forced to restructure and ceased the operations of its
online community on August 15, 2001. The Company then sold most of its remaining
online and offline properties, but continued to operate its Computer Games print
magazine and the associated website Computer Games Online (www.cgonline.com), as
well as the games distribution business of Chips & Bits, Inc.
(www.chipsbit.com). The Company continues to operate those businesses today.
On June 1, 2002, Chairman Michael S. Egan and Director Edward A. Cespedes became
Chief Executive Officer and President of the Company, respectively.
On November 14, 2002, the Company acquired certain Voice over Internet Protocol
("VoIP") assets from Brian Fowler (now Chief Technology Officer of the Company)
and is now aggressively pursuing opportunities related to this acquisition under
the brand name, voiceglo. In exchange for the assets, the Company issued
warrants to acquire 1,750,000 shares of its Common Stock and an additional
425,000 warrants as part of an earn-out structure upon the attainment of certain
performance targets. The earn-out performance targets were not achieved and the
425,000 earn-out warrants expired on December 31, 2003.
On May 28, 2003, the Company acquired Direct Partner Telecom, Inc. ("DPT"), a
company engaged in VoIP telephony services in exchange for 1,375,000 shares of
the Company's Common Stock and the issuance of warrants to acquire 500,000
shares of the Company's Common Stock. The transaction included an earn-out
arrangement whereby the former shareholders of DPT may earn additional warrants
to acquire up to 2,750,000 shares of the Company's Common Stock at an exercise
price of $0.72 per share upon the attainment of certain performance targets by
DPT over approximately a three year period following the date of acquisition.
DPT was a specialized international facilities-based communications carrier
providing VoIP communications services to emerging countries. DPT was formed in
2002 to leverage its management's international relationships and network
operations experience in the deployment of international voice and multimedia
networks. DPT is a licensed facilities-based carrier headquartered in Ft.
Lauderdale, Florida with switching facilities in New York, New York and Miami,
Florida. The DPT network provides "next generation" packet-based telephony and
value added data services to carriers and businesses in the United States and
Internationally.
The Company acquired all of the physical assets and intellectual property of DPT
and originally planned to continue to operate the company as a subsidiary and
engage in the provision of VoIP services to other telephony businesses on a
wholesale transactional basis. In the first quarter of 2004 the Company decided
to suspend further wholesale telephony business in DPT and to dedicate the DPT
physical and intellectual assets to its developing retail VoIP business, which
is conducted under the name "voiceglo". As a result, the Company wrote down the
goodwill associated with the purchase of DPT and intends to employ these
physical assets in the build out of the VoIP network.
In March 2004, theglobe.com, inc. completed a private offering of 333,816 units
(the "Units") for a purchase price of $85 per Unit (the "Private Offering").
Each Unit consisted of 100 shares of the Company's Common Stock, $0.001 par
value (the "Common Stock"), and warrants to acquire 50 shares of the Common
Stock (the "Warrants"). The Warrants are exercisable for a period of five years
commencing 60 days after the initial closing at an initial exercise price of
$0.001 per share. The aggregate number of shares of Common Stock issued in the
Private Offering was 33,381,647 shares for an aggregate consideration of
$28,374,400, or approximately $0.57 per share assuming the exercise of the
16,690,824 Warrants. The Private Offering was directed solely to investors who
are sophisticated and accredited within the meaning of applicable securities
laws, most of whom were not affiliates with the Company. The purpose of the
Private Offering was to raise funds for use primarily in the Company's
developing voiceglo business, including the deployment of networks, website
development, marketing, and capital infrastructure expenditures and working
capital. Proceeds may also be used in connection with theglobe's other existing
or future business operations. (See "Management's Discussion and Analysis or
Plan of Operation - Liquidity and Capital Resources").
As of December 31, 2003, the Company's revenue sources were principally from the
sale of print advertising in its Computer Games magazine; the sale of video
games and related products through Chips & Bits, Inc., its games distribution
business; and the sale of its Computer Games magazine through newsstands and
subscriptions. Management's intent, going forward, is to devote substantial
monetary, management and human resources to the Company's "voiceglo" VoIP
business.
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OUR PRODUCTS AND SERVICES
As of December 31, 2003, we managed two primary lines of business. One line
consists of our historical network of three wholly-owned businesses, each of
which specializes in the games business by delivering games information and
selling games in the United States and abroad. These businesses are: our print
publication Computer Games Magazine; our Computer Games Online website
(www.cgonline.com), which is the online counterpart to Computer Games Magazine;
and our Chips & Bits, Inc. (www.chipsbits.com) games distribution company.
Management of the Company continues to actively explore a number of strategic
alternatives for its remaining online and offline game properties, including
continuing its existing operations and using its cash on hand, selling some or
all of these properties and/or entering into new or different lines of business.
The second line of business, VoIP telephony services, includes voiceglo
Holdings, Inc., a wholly-owned subsidiary of theglobe.com that offers VoIP-based
phone service to anyone with an Internet connection anywhere in the world. The
term "VoIP" refers to a category of hardware and software that enables people to
use the Internet as the transmission medium for telephone calls.
"VOICEGLO" AND OUR VOICE OVER INTERNET PROTOCOL ("VoIP") BUSINESS.
Overview. The use of the Internet to provide voice communications services is
becoming more prevalent as new providers enter the market and the technology
becomes more accepted. According to Insight Research, VoIP-based services will
grow from $13.0 billion in 2002 to nearly $197.0 billion in 2007. VoIP
technology translates voice into data packets, transmits the packets over data
networks and reconverts them into voice at their destination. Unlike traditional
telephone networks, VoIP does not require dedicated circuits to complete
telephone calls. Instead, VoIP networks can be shared by multiple users for
voice, data and video simultaneously. These types of data networks are more
efficient than dedicated circuit networks because they are not restricted by
"one-call, one-line" limitations of traditional telephone networks. Accordingly,
improved efficiency creates cost savings that can be passed on to the consumer
in the form of lower rates.
Development of our VoIP Business. We entered the VoIP business by acquiring
certain software assets from Brian Fowler on November 14, 2002. Today those
assets serve as the foundation of the products we offer and market under the
brand name, "voiceglo."
On May 28, 2003, the Company acquired DPT, a company engaged in VoIP wholesale
telephony services. At the time we acquired DPT, it was a specialized
international facilities-based communications carrier providing wholesale VoIP
communications services to emerging countries. In the first quarter of 2004, we
decided to suspend DPT's wholesale business and dedicate the DPT physical and
intellectual assets to our retail VoIP business, "voiceglo".
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During the third quarter of 2003, the Company launched its first suite of
consumer and business level VoIP services. These services allow consumers and
enterprises to communicate using VoIP technology for dramatically reduced
pricing compared to traditional telephony networks. The services also offer all
traditional telephony features such as voicemail, caller ID, call forwarding,
and call waiting for no additional cost to the consumer, as well as incremental
services that are not currently supported by the public switched telephone
network ("PSTN") like the ability to use numbers remotely and voice to email
services.
The Company now offers VoIP services, on a retail basis, to individual consumers
and small businesses and currently offers two primary types of services:
o Browser-Based - a full functioning telephone that resides on the
computer desktop and also includes a web-based solution. The only
system requirements are a browser and an Internet connection. The
Company is seeking a patent to protect its position.
o SIP Based Soft Phone - a traditional phone line replacement service.
Requires a voiceglo adapter, a regular phone and an Internet
connection. The service works on broadband, dial-up and wi-fi
Internet connections and can be used with a USB phone directly over
a user's computer if desired.
The browser-based product is marketed under the name "GloPhone":
o Users acquire the GloPhone by downloading a simple "plug-in" to their
browsers. The download is a simple process and once it's completed, the
user's browser is enabled for voice communications;
o Users choose their GloPhone service from a variety of packages offered as
part of the download process and are enabled with a working United States
telephone number;
o GloPhone users speak free to other GloPhone users;
o The GloPhone is used by either utilizing the computer's microphone and
speakers or using an external device, such as a USB phone; and
o GloPhone users can use their service when traveling through the "GloPhone
express" web-based application.
The home and business replacement products are marketed as different "packages"
under the voiceglo brand:
o The home and business replacement products are meant to "replace" existing
traditional phone service with voiceglo's service;
o User's can purchase a voiceglo adapter that allows use of traditional
telephone handsets with the voiceglo service;
o All voiceglo packages include full feature sets such as caller ID, call
waiting, etc.; and
o voiceglo users speak free to other voiceglo users.
Sales and Marketing. The Company is currently developing its product sales and
distribution strategy. The Company may market its services over a wide range of
distribution channels that may include: television infomercials, print media
advertising and Internet advertising and structured customer referral programs.
The Company is currently selling some of its services through both direct and
indirect sales channels (value-added resellers).
Development of our Network and Carrier Relationships; Equipment Suppliers. In
order to offer our services we have invested substantial time, capital and other
resources on the development of the voiceglo network. The voiceglo network is
comprised of switching hardware and software, servers, billing and inventory
systems, and telecommunication carrier services. We own and operate VoIP switch
equipment in Miami and New York, and interconnect these switches utilizing a
leased transport network through numerous carrier agreements with third party
providers. Through these carrier relationships we are able to carry the traffic
of our customers over the Internet and interact with the PSTN. In general, we
enter into from one to five year agreements with these carriers pursuant to
which, in exchange for allocating and dedicating availability on their networks,
we undertake to provide minimum usage of these networks. The greater the minimum
usage, the lower our per minute charge for such usage, assuming full utilization
of such minutes. Given the recent introduction of our voiceglo service
offerings, our minimum commitments under these carrier agreements presently
greatly exceed our actual usage. These Carrier relationships also provide
voiceglo with a leased network for telephone numbers, or "footprint", in more
than 100 area codes in approximately 34 states. The network also provides for
both domestic and international call termination. Although other sources of
supply are available, to assure a reliable source of supply for our voiceglo
offering, we have entered into contracts with two principal suppliers for
telephony handsets and adapters related to our VoIP services. Handsets or
adapters allow our customers to more easily use their computers as telephones.
Pursuant to our agreement with the handset supplier we have committed to
purchase, subject to satisfaction of certain performance criteria relating to
the handsets, a substantial number of handsets by the end of 2004. See
"Management's Discussion and Analysis or Plan of Operation - Liquidity and
Capital Resources".
4
Research and Development
Internet telephony is a technical service offering. As a technology, basic VoIP
service, although complex, is well-understood and has been adapted by many
companies that are selling basic services to consumers and businesses worldwide.
voiceglo, however, believes that in order to be competitive and differentiate
itself among its peers, it must continuously upgrade its service offering. To
that end, the Company is engaged in a program of continuous development of its
products. Since the initial launch of its VoIP service, the Company has
introduced a number of new features which have increased the functionality of
the products. Several major upgrades to the Company's offerings are anticipated
in 2004.
OUR COMPUTER GAMES BUSINESS
COMPUTER GAMES MAGAZINE. Computer Games Magazine is a consumer print
magazine for gamers.
- As a leading consumer print publication for games, Computer Games
magazine boasts: a reputation for being a reliable, trusted, and
engaging games magazine; more editorial, tips and hints than most
other similar magazines; a knowledgeable editorial staff providing
increased editorial integrity and content; and, broad-based
editorial coverage, appealing to a wide audience of gamers.
- One of the most popular features of Computer Games is a CD ROM
containing game demos, which comes bundled monthly with the magazine
in all newsstand editions and a portion of copies mailed to
subscribers.
COMPUTER GAMES ONLINE. Computer Games Online (www.cdmag.com) is the
online counterpart to Computer Games magazine. Computer Games Online is a source
of free computer games news and information for the sophisticated gamer,
featuring news, reviews and previews, along with a powerful Web-wide search
engine.
- Features of Computer Games Online include: game industry news;
truthful, concise reviews; first looks, tips and hints; multiple
content links; thousands of archived files; and, easy access to game
buying.
CHIPS & BITS. Chips & Bits (www.chipsbits.com) is a games distribution
business that attracts customers in the United States and abroad. Chips & Bits
covers all the major game platforms available, including Macintosh, Window-based
PCs, Sony PlayStation, Sony PlayStation2, Microsoft's Xbox, Nintendo 64,
Nintendo's GameCube, Nintendo's Game Boy, and Sega Dreamcast, among others.
Advertising. We continue to attract major advertisers to our Computer Games
print magazine, which is a widely respected consumer print magazine for gamers.
In 2003, no single advertiser accounted for more than 10% of total revenues. For
the twelve months ended December 31, 2003, over 40 clients advertised in our
Computer Games magazine. Following a series of cost reduction measures and
restructuring, we currently have an internal advertising sales staff of two (2)
professionals, both of whom are dedicated to selling advertising space in our
Computer Games print magazine. Although these professionals focus on developing
long-term strategic relationships with clients as they sell advertisements in
our Computer Games print magazine, most of our actual advertising contracts are
for periods of one to three months. All compensation to our sales personnel is
commission based.
In 2003 we hired an entertainment editor based in Los Angeles to develop an
entertainment publication that will be delivered within Computer Games magazine
starting in Spring, 2004. The new magazine, NowPlaying, will cover movies, DVD,
television, music, games, comics and anime, and is designed to fulfill the wider
pop culture interests of our current readers and to attract a more diverse group
of advertisers; autos, television, telecommunications and film to name a few.
Additional sales staff needs are anticipated to be minimal.
COMPETITION
Telephony Business
The telecommunications industry has experienced a great deal of instability
during the past several years. During the 1990s, forecasts of very high levels
of future demand brought a significant number of new entrants and new capital
investments into the industry. New global carriers were joined by many of the
largest traditional carriers and built large global or regional networks to
compete with the global wholesalers. However, in the last three years many of
the new global carriers and many industry participants have either gone through
bankruptcy or no longer exist. The networks were built primarily to meet the
expected explosion in bandwidth demand from data, with specific emphasis upon
Internet applications. Those forecasts have not materialized, telecommunications
capacity now far exceeds actual demand, and the resulting marketplace is
characterized by fierce price competition as traditional and next generation
carriers compete to secure market share. Resulting lower prices have eroded
margins and have kept many carriers from attaining positive cash flow from
operations.
During the past several years, a number of companies have introduced services
that make Internet telephony or voice services over the Internet available to
businesses and consumers. All major telecommunications companies, including
entities like AT&T, Sprint and MCI, as well as iBasis, Net2Phone and
deltathree.com, compete or can compete directly with us.
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Our competitors can be divided into domestic competitors and international
competitors. The international market is highly localized. In markets where
telecommunications have been fully deregulated, the competition continues to
increase. In newly deregulated markets even new entrants to the VoIP space can
rapidly capture significant market share. Competitors in these markets include
both government-owned and incumbent phone companies, as well as emerging
competitive carriers. The principle competitive factors in this marketplace
include: price, quality of service, distribution, customer service, reliability,
network capacity, and brand recognition. The long distance market in the US,
against whom the Company competes, is highly competitive. There are numerous
competitors in the pure play VoIP space and we expect to face continuing
competition from these existing, as well as new, competitors. The principle
competitive factors in the marketplace include those identified above, as well
as enhanced communications services. Our competitors include such VoIP services
companies such as Net2Phone, Skype, Vonage, Go2Call and DeltaThree.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
brand recognition and more established relationships in the industry than we
have. As a result, certain of these competitors may be able to adopt more
aggressive pricing policies which may hinder our ability to market our voice
services. We believe that our key competitive advantages are a function of our
continuing research and development, including our two method patents pending:
o Linking a telephone number to an IP address, allowing anyone,
anywhere in the world to dial a traditional telephone number to
originate a call to the distinct IP address of a voiceglo customer;
and
o Browser to telephone interface, which turns any browser into a voice
enabled communications device and includes many features commonly
available from traditional telephone service providers.
There can be no assurance that we will be successful in our efforts to patent
this technology.
Computer Games Business
Competition among games print magazines is high. We compete for advertising and
circulation revenues principally with publishers of other technology and games
magazines with similar editorial content as our magazine. The technology
magazine industry has traditionally been dominated by a small number of large
publishers. We believe that we compete with other technology and games
publications based on the nature and quality of our magazines' editorial content
and the attractive demographics of our readers. In recent years, demand for
online and PC based games has decreased as non PC based game consoles, including
those from Sony (PlayStation II), Microsoft (X-Box) and Nintendo (Game Boy and
GameCube), have made major product advancements.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard substantial elements of our Websites and underlying technology as
proprietary. In addition, we have developed in our VoIP business certain
technologies which we believe are proprietary and are seeking to develop
additional propriety technology. We attempt to protect these assets by relying
on intellectual property laws. We also generally enter into confidentiality
agreements with our employees and consultants and in connection with our license
agreements with third parties. We also seek to control access to and
distribution of our technology, documentation and other proprietary information.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use our proprietary information without authorization or to
develop similar technology independently. We pursue the registration of our
trademarks in the United States and internationally and we are currently
pursuing patent protection for certain of our VoIP technology, including certain
technology related to our linkage of a telephone number to an IP address and our
browser to telephone interface.
Effective trademark, service mark, copyright, patent and trade secret protection
may not be available in every country in which our services are made available
through the Internet. Policing unauthorized use of our proprietary information
is difficult. Existing or future trademarks or service marks applied for or
registered by other parties and which are similar to ours may prevent us from
expanding the use of our trademarks and service marks into other areas.
Enforcing our patent rights could result in costly litigation. Our patent
applications could be rejected or any patents granted could be invalidated in
litigation. Should this happen, we would lose a significant competitive
advantage. Additionally, our competitors or others could be awarded patents on
technologies and business processes that could require us to significantly alter
our technology, change our business processes or pay substantial license and
royalty fees. (See "Risk Factors-We rely on intellectual property and
proprietary rights.")
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
In General
We are subject to laws and regulations that are applicable to various Internet
activities. There are an increasing number of federal, state, local and foreign
laws and regulations pertaining to the Internet and telecommunications,
including internet telephony (VoIP). In addition, a number of federal, state,
local and foreign legislative and regulatory proposals are under consideration.
Laws or regulations may be adopted with respect to the Internet relating to,
among other things, fees and taxation of VoIP telephony services, liability for
information retrieved from or transmitted over the Internet, online content
regulation, user privacy and quality of products and services. Changes in tax
laws relating to electronic commerce could materially affect our business,
prospects and financial condition. Moreover, the applicability to the Internet
of existing laws governing issues such as intellectual property ownership and
infringement, copyright, trademark, trade secret, obscenity, libel, employment
and personal privacy is uncertain and developing. Any new legislation or
regulation, or the application or interpretation of existing laws or
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regulations, may decrease the growth in the use of the Internet or VoIP
telephony services, may impose additional burdens on electronic commerce or may
alter how we do business.
New laws and regulations may increase our costs of compliance and doing
business, decrease the growth in Internet use, decrease the demand for our
services or otherwise have a material adverse effect on our business.
Internet Telephony (VoIP) Regulation
The use of the Internet and private IP networks to provide voice communications
services over the Internet is a relatively recent market development. Although
the provision of such services is currently permitted by United States federal
law and largely unregulated within the United States, several foreign
governments have adopted laws and/or regulations that could restrict or prohibit
the provision of voice communications services over the Internet or private IP
networks.
In the United States, the Federal Communications Commission ("FCC") has so far
declined to conclude that IP telephony services constitute telecommunications
services (rather than information services). The FCC held a forum on VoIP issues
on December 1, 2003, which included regulatory classification issues. On March
10, 2004, the FCC released guidelines and questions upon which it is seeking
public comment to determine what regulation, if any, will govern companies that
provided VoIP services. Specifically, the FCC has expressed an intention to
further examine the question of whether certain forms of phone-to-phone VOIP
services are information services or telecommunications services. The two are
treated differently in several respects, with certain information services being
regulated to a lesser degree. The FCC has noted that certain forms of
phone-to-phone VOIP services bear many of the same characteristics as more
traditional voice telecommunications services and lack the characteristics that
would render them information services. The FCC has indicated that the
mechanisms for contributing to the Universal Service Fund, issues as to
applicability of access charges and other matters will be considered in that
context. The FCC had previously opened a proceeding in response to a petition by
AT&T which seeks a declaration to preclude local exchange carriers from imposing
access charges on certain AT&T phone-to-phone IP services asserted to be
provided over the Internet. The FCC has recently ruled that so called "pure"
VoIP services which flow entirely over the Internet and never interconnect with
the public switched telephone network, such as a computer to computer call, are
not telecommunications services subject to regulation. The ruling specifically
does not address whether traditional phone regulations might apply to VoIP
services (like those offered by voiceglo) to end users that interconnect with
the traditional telephone system.
If the FCC or any state determines to regulate VoIP, they may impose surcharges,
taxes, licensing or additional regulations upon providers of Internet telephony.
These surcharges could include access charges payable to local exchange carriers
to carry and terminate traffic, contributions to the universal service fund or
other charges. Regulations requiring compliance with the Communications
Assistance for Law Enforcement Act, or provision of enhanced 911 services could
also place a significant financial burden on us. The imposition of any such
additional fees, charges, taxes, licenses and regulations on VoIP services could
materially increase our costs and may reduce or eliminate the competitive
pricing advantage we seek to enjoy. We cannot predict what regulations, if any
the FCC will impose.
Although Internet telephony and VoIP services are presently largely unregulated
by the state governments, such state governments and their regulatory
authorities may assert jurisdiction over the provision of intrastate IP
communications services where they believe that their telecommunications
regulations are broad enough to cover regulation of IP services. Various state
regulatory authorities have initiated proceedings to examine the regulatory
status of Internet telephony services, and in several cases rulings have been
obtained to the effect that the use of the Internet to provide certain
intrastate services does not exempt an entity from paying intrastate access
charges in the jurisdictions in question. As state governments, courts, and
regulatory authorities continue to examine the regulatory status of Internet
telephony services, they could render decisions or adopt regulations affecting
providers of Internet telephony services or requiring such providers to pay
intrastate access charges or to make contributions to universal service funding.
Should the FCC determine to regulate IP services, states may decide to follow
the FCC's lead and impose additional obligations as well.
The regulatory treatment of IP communications outside the United States varies
significantly from country to country. Some countries currently impose little or
no regulation on Internet telephony services, as in the United States. Other
countries, including those in which the governments prohibit or limit
competition for traditional voice telephony services, generally do not permit
Internet telephony services or strictly limit the terms under which those
services may be provided. Still other countries regulate Internet telephony
services like traditional voice telephony services, requiring Internet telephony
companies to make various telecommunications service contributions and pay other
taxes.
More aggressive regulation of Internet telephony providers and VoIP services may
adversely affect our VoIP business operations, and ultimately our financial
condition, operating results and future prospects.
Certain Other Regulation Affecting the Internet
In the United States, Congress has recently adopted legislation that regulates
certain aspects of the Internet, including online content, user privacy and
taxation. In addition, Congress and other federal entities are considering other
legislative and regulatory proposals that would further regulate the Internet.
Congress has, for example, considered legislation on a wide range of issues
including Internet spamming, database privacy, gambling, pornography and child
protection, Internet fraud, privacy and digital signatures. Various states have
adopted and are considering Internet-related legislation. Increased U.S.
7
regulation of the Internet may slow its growth, particularly if other
governments follow suit, which may negatively impact the cost of doing business
over the Internet and materially adversely affect our business, financial
condition, results of operations and future prospects. Legislation has also been
proposed that would clarify the regulatory status of VoIP service. The Company
has no way of knowing whether legislation will pass or what form it might take.
Domain names have been the subject of significant trademark litigation in the
United States and internationally. The current system for registering,
allocating and managing domain names has been the subject of litigation and may
be altered in the future. The regulation of domain names in the United States
and in foreign countries may change. Regulatory bodies are anticipated to
establish additional top-level domains and may appoint additional domain name
registrars or modify the requirements for holding domain names, any or all of
which may dilute the strength of our names. We may not acquire or maintain our
domain names in all of the countries in which our websites may be accessed, or
for any or all of the top-level domain names that may be introduced.
Internationally, the European Union has also enacted several directives relating
to the Internet. The European Union has, for example, adopted a directive that
imposes restrictions on the collection and use of personal data. Under the
directive, citizens of the European Union are guaranteed rights to access their
data, rights to know where the data originated, rights to have inaccurate data
rectified, rights to recourse in the event of unlawful processing and rights to
withhold permission to use their data for direct marketing. The directive could,
among other things, affect U.S. companies that collect or transmit information
over the Internet from individuals in European Union member states, and will
impose restrictions that are more stringent than current Internet privacy
standards in the U.S. In particular, companies with offices located in European
Union countries will not be allowed to send personal information to countries
that do not maintain adequate standards of privacy.
EMPLOYEES
As of December 31, 2003, we had approximately 42 active full-time employees. Our
future success depends, in part, on our ability to continue to attract, retain
and motivate highly qualified technical and management personnel. Competition
for these persons is intense. From time to time, we also employ independent
contractors to support our network operations, research and development,
marketing, sales and support and administrative organizations. Our employees are
not represented by any collective bargaining unit and we have never experienced
a work stoppage. We believe that our relations with our employees are good.
ITEM 2. PROPERTIES
Our corporate headquarters is located in Fort Lauderdale, Florida, where we
lease approximately 15,000 square feet of office space from a company which is
controlled by our Chairman. We maintain approximately 9,500 square feet of
office space in two separate locations in Vermont in connection with the
operations of our Computer Games magazine and Chips & Bits, Inc. We own one
property and the other is a lease which expires in September 2005. Additionally,
we have obtained collocation space in secure telecommunications data centers
located in Florida, Georgia and New York which is used to house certain Internet
routing and computer equipment.
ITEM 3. LEGAL PROCEEDINGS
On and after August 3, 2001 and as of the date of this filing, six putative
shareholder class action lawsuits were filed against the Company, certain of its
current and former officers and directors, and several investment banks that
were the underwriters of the Company's November 23, 1998 initial public offering
and its May 19, 1999 secondary offering. The lawsuits were filed in the United
States District Court for the Southern District of New York. The complaints
against the Company have been consolidated into a single action and a
Consolidated Amended Complaint, which is now the operative complaint, was filed
on April 19, 2002.
The lawsuit purports to be a class action filed on behalf of purchasers of the
stock of the Company during the period from November 12, 1998 through December
6, 2000. Plaintiffs allege that the underwriter defendants agreed to allocate
stock in the Company's initial public offering to certain investors in exchange
for excessive and undisclosed commissions and agreements by those investors to
make additional purchases of stock in the aftermarket at pre-determined prices.
Plaintiffs allege that the Prospectus for the Company's initial public offering
was false and misleading and in violation of the securities laws because it did
not disclose these arrangements. The action seeks damages in an unspecified
amount.
The action is being coordinated with approximately 300 other nearly identical
actions filed against other companies. On July 15, 2002, the Company moved to
dismiss all claims against it and the Individual Defendants. On October 9, 2002,
the Court dismissed the Individual Defendants from the case without prejudice
based on stipulations of dismissal filed by the plaintiffs and the Individual
Defendants. On February 19, 2003, the Court denied the motion to dismiss the
complaint against the Company. The Company has approved a Memorandum of
Understanding ("MOU") and related agreements which set forth the terms of a
settlement between the Company, the plaintiff class and the vast majority of the
other approximately 300 issuer defendants. Among other provisions, the
settlement contemplated by the MOU provides for a release of the Company and the
individual defendants for the conduct alleged in the action to be wrongful. The
Company would agree to undertake certain responsibilities, including agreeing to
assign away, not assert, or release certain potential claims the Company may
have against its underwriters. It is anticipated that any potential financial
obligation of the Company to plaintiffs pursuant to the terms of the MOU and
related agreements will be covered by existing insurance. Therefore, the Company
does not expect that the settlement will involve any payment by the Company. The
MOU and related agreements are subject to a number of contingencies, including
the negotiation of a settlement agreement and its approval by the Court. We
cannot opine as to whether or when a settlement will occur or be finalized and,
8
consequently, are unable at this time to determine whether the outcome of the
litigation will have a material impact on our results of operations or financial
condition in any future period.
On July 3, 2003, an action was commenced against one of the Company's
subsidiaries, Direct Partner Telecom, Inc. ("DPT"). Global Communications
Consulting Corp. v. Michelle Nelson, Jason White, VLAN, Inc., Geoffrey Amend,
James Magruder, Direct Partner Telecom, Inc., et al. was filed in the Superior
Court of New Jersey, Monmouth County, and removed to the United States District
Court for the District of New Jersey on September 16, 2003. Plaintiff is the
former employer of Michelle Nelson, a consultant of DPT. Plaintiff alleges that
while Nelson was its employee, she provided plaintiff's confidential and
proprietary trade secret information, to among others, DPT and certain
employees, and diverted corporate opportunities from plaintiff to DPT and the
other named defendants. Plaintiff asserts claims against Nelson including breach
of fiduciary duty, breach of the duty of loyalty and tortious interference with
contract. Plaintiff also asserts claims against Nelson and DPT, among others,
for contractual interference, tortious interference with prospective economic
advantage and misappropriation of proprietary information and trade secrets.
Plaintiff seeks injunctive relief and damages in an unspecified amount,
including punitive damages.
The Answer to the Complaint, with counterclaims, was served on October 20, 2003,
denying plaintiff's allegations of improper and unlawful conduct in their
entirety. The parties have recently reached an amicable resolution of this
matter, including a mutual release of all claims. We anticipate that the release
agreement will be finalized and a Stipulation of Dismissal will be filed with
the Court by the end of April 2004.
The Company is currently a party to certain other legal proceedings, claims,
disputes and litigation arising in the ordinary course of business, including
those noted above. The Company currently believes that the ultimate outcome of
these other proceedings, individually and in the aggregate, will not have a
material adverse affect on the Company's financial position, results of
operations or cash flows. However, because of the nature and inherent
uncertainties of litigation, should the outcome of these actions be unfavorable,
the Company's business, financial condition, results of operations and cash
flows could be materially and adversely affected.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our stockholders for a vote during the three months
ended December 31, 2003.
9
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
The shares of our Common Stock were delisted from the NASDAQ national market in
April 2001 and now trade in the over-the-counter market on what is commonly
referred to as the electronic bulletin board, under the symbol "TGLO.OB" The
following table sets forth the range of high and low bid prices of our common
stock for the periods indicated as reported by the over-the-counter market (the
electronic bulletin board). The quotations below reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions:
2003 2002
------------ ------------
High Low High Low
----- ----- ----- -----
Fourth Quarter $2.12 $1.30 $0.17 $0.05
Third Quarter $1.97 $1.12 $0.10 $0.015
Second Quarter $2.56 $0.13 $0.07 $0.03
First Quarter $0.20 $0.06 $0.07 $0.025
The market price of our Common Stock is highly volatile and fluctuates in
response to a wide variety of factors. (See "Risk Factors-Our stock price is
volatile.")
HOLDERS OF COMMON STOCK
We had approximately 667 holders of record of Common Stock as of March 24, 2004.
This does not reflect persons or entities that hold Common Stock in nominee or
"street" name through various brokerage firms.
DIVIDENDS
We have not paid any cash dividends on our Common Stock since our inception and
do not intend to pay dividends in the foreseeable future. Our board of directors
will determine if we pay any future dividends.
10
SECURITIES OFFERED UNDER EQUITY COMPENSATION PLANS
--------------------------------------------------------------------------------------------------------------
Number of securities to be
issued upon exercise of Weighted-average exercise Number of securities remaining
outstanding options, warrants price of outstanding available for future issuance
Plan category and rights options, warrants and rights under equity compensation plans
--------------------------------------------------------------------------------------------------------------
Equity
Compensation plans
approved by
security holders 4,421,810 $ 1.55 400,177
--------------------------------------------------------------------------------------------------------------
Equity
Compensation plans
not approved by
security holders 5,521,000 $ 0.05 959,000
--------------------------------------------------------------------------------------------------------------
Total
9,942,810 $ 0.72 1,359,177
--------------------------------------------------------------------------------------------------------------
Equity compensation plans not approved by security holders consist of the
following:
o 230,000 shares of Common Stock of theglobe.com, inc., par value
$0.001 per share , issued to Charles Peck pursuant to the
Non-Qualified Stock Option Agreement dated June 1, 2002 at an
exercise price of $0.035 per share. These stock options vested
immediately and have a life of ten years from date of grant.
o 1,750,000 shares of Common Stock of theglobe.com, inc., issued to
Edward A. Cespedes pursuant to the Non-Qualified Stock Option
Agreement dated August 12, 2002 at an exercise price of $0.02 per
share. These stock options vested immediately and have a life of ten
years from date of grant.
o 2,500,000 shares of Common Stock of theglobe.com, inc., issued to
Michael S. Egan pursuant to the Non-Qualified Stock Option Agreement
dated August 12, 2002 at an exercise price of $0.02 per share. These
stock options vested immediately and have a life of ten years from
date of grant.
o 500,000 shares of Common Stock of theglobe.com, inc., issued to
Robin M. Lebowitz pursuant to the Non-Qualified Stock Option
Agreement dated August 12, 2002 at an exercise price of $0.02 per
share. These stock options vested immediately and have a life of ten
years from date of grant.
o 500,000 shares of Common Stock of theglobe.com, inc., issued to
Kellie Smythe pursuant to the Non-Qualified Stock Option Agreement
dated July 17, 2003 at an exercise price of $0.20 per share. 125,000
of these stock options vested immediately with the balance of
375,000 vesting quarterly on a pro-rata basis over three years.
These stock options have a life of ten years from date of grant. Ms.
Smythe terminated her employment with theglobe.com effective
February 10, 2004 and has 90 days from that date to exercise any of
her vested options.
o The Company's 2003 Amended and Restated Non-Qualified Stock Option
Plan (the "2003 Plan"). The purpose of the 2003 Plan is to
strengthen theglobe.com, inc. by providing an incentive to certain
employees and consultants (or in certain circumstances, individuals
who are the principals of certain consultants) of the Company or any
subsidiary of the Company, with a view toward encouraging them to
devote their abilities and industry to the success of the Company's
business enterprise. The 2003 Plan is administered by a Committee
appointed by the Board to administer the Plan, which has the power
to determine those eligible individuals to whom options shall be
granted under the 2003 Plan and the number of such options to be
granted and to prescribe the terms and conditions (which need not be
identical) of each such option, including the exercise price per
share subject to each option and vesting schedule of options granted
thereunder, and make any amendment or modification to any agreement
consistent with the terms of the 2003 Plan. The maximum number of
shares that may be made the subject of options granted under the
2003 Plan is 1,000,000 and no option may have a term in excess of 10
years. Options to acquire an aggregate of 41,000 shares of Common
Stock have been issued to various independent sales agents at a
weighted average exercise price of $1.54. These stock options vested
immediately and have a life of ten years from date of grant.
11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW AND PLAN OF OPERATION
OVERVIEW
During 2000 and 2001, the Company restructured its business operations and sold
off or closed most of its businesses. As of December 31, 2003, we managed two
primary lines of business. One line consists of our historical network of three
wholly owned businesses, each of which specializes in the games business by
delivering games information and selling games in the United States and abroad.
These businesses are: our print publication Computer Games Magazine; our
Computer Games Online website (www.cgonline.com), which is the online
counterpart to Computer Games Magazine; and our Chips & Bits, Inc.
(www.chipsbits.com) games distribution company. Management of the Company
continues to actively explore a number of strategic alternatives for its
remaining online and offline game properties, including continuing its existing
operations and using its cash on hand, selling some or all of these properties
and/or entering into new or different lines of business.
The second line of business, voice over Internet protocol ("VoIP") telephony
services, includes voiceglo Holdings, Inc., a wholly-owned subsidiary of
theglobe.com that offers VoIP web-based, home and business phone service to
anyone anywhere in the world. The term "VoIP" refers to a category of hardware
and software that enables people to use the Internet as the transmission medium
for telephone calls.
At the current time, our revenues are derived principally from the sale of print
advertisements under short-term contracts in our games information magazine
Computer Games, through the sale of video games and related products through our
games distribution business Chips & Bits, Inc.; through the sale of our games
information magazine through newsstands and subscriptions; and through limited
sale of online advertisements. Given their recent launch, our voiceglo VoIP
products and services have yet to produce any significant revenue.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
NET REVENUE. Our revenue sources were principally from the sale of print
advertisements under short-term contracts in our games information magazine
Computer Games; the sale of video games and related products through our games
distribution business Chips & Bits, Inc.; the sale of our games information
magazine through newsstands and subscriptions; and the sale of VoIP telephony
services (primarily from our wholesale VoIP services and not our recently
launched voiceglo retail VoIP services).
Net revenue totaled $6.6 million for the year ended December 31, 2003 as
compared to $9.7 million for the year ended December 31, 2002. The $3.1 million
decline in total net revenue was primarily attributable to decreases in magazine
sales, electronic commerce revenue and advertising, partially offset by net
revenue generated by our VoIP telephony services division.
Advertising revenue from the sale of print advertisements in our games magazine
was $2.6 million, or 39%, of total net revenue for the year ended December 31,
2003, versus $3.1 million, or 32%, of total net revenue for the prior year.
Barter advertising revenue represented approximately 2% and 1% of total net
revenue for the years ended December 31, 2003 and 2002, respectively.
Net revenue attributable to the sale of our games information magazine was $2.0
million, or 31%, of total net revenue for the 2003 year as compared to $3.5
million, or 36%, of total net revenue in 2002. The decline in net revenue from
the sale of our games magazine as compared to the previous year was primarily
the result of a decrease in the circulation base of our games magazine. As rates
for print advertising charged to advertisers are driven largely by the
circulation of the publication, the decline in the circulation base of our games
magazine has also contributed to the decrease in our advertising revenue.
Electronic commerce and other net revenue is principally comprised of sales of
video games and related products through Chips & Bits, Inc. Sales of our online
store accounted for $1.5 million, or 22%, of total net revenue for the year
ended December 31, 2003 as compared to $3.1 million, or 32%, of total net
revenue for 2002. The $1.6 million decrease was primarily the result of advances
in and releases of console and online games, which traditionally have less sales
loyalty to our online store, coupled with the continued decline in the number of
major PC game releases, on which our online store relies for the majority of
sales. In addition, an increasing number of major retailers have increased the
selection of video games offered by both their traditional "bricks and mortar"
locations and their online commerce sites resulting in increased competition.
Net revenue from telephony services totaled $0.5 million for the year ended
December 31, 2003. As part of the Company's strategy to enter the VoIP business,
the Company acquired DPT on May 28, 2003, an international licensed
telecommunications carrier engaged in the purchase and resale of
telecommunications services over the Internet. Telephony services net revenue
generated by DPT during 2003 represented approximately 89% of total telephony
services net revenue and was derived principally from the charges to customers
for international call completion based on the volume of minutes utilized. As a
result of management's decision during the first quarter of 2004 to suspend
DPT's wholesale business and dedicate the DPT physical and intellectual assets
to its retail VoIP business, net revenue derived from the wholesale business of
DPT is not expected to represent a significant component of telephony services
net revenue in the near term. Net revenue attributable to the launch of the
Company's voiceglo products represented the remaining 11% of total 2003
telephony services net revenue. Although the Company launched its basic suite of
VoIP offerings on a "national" basis during the fourth quarter of 2003, the
12
Company has continued to focus significant resources on further development of
its voiceglo product line, most recently evidenced by the 2004 first quarter
launch of its "GloPhone" product line. In addition, the Company has continued to
formulate its marketing strategy and distribution network for its voiceglo
products.
COST OF PRODUCTS AND PUBLICATIONS SOLD. Cost of products and publications sold
related to our games division consists primarily of printing costs of our games
magazine, Internet connection charges, personnel costs, maintenance costs of
website equipment and the costs of merchandise sold and shipping fees in
connection with our online store. Cost of products and publications sold by our
games division totaled approximately $3.1 million and $5.6 million for the years
ended December 31, 2003 and 2002, respectively. The gross margin of the
Company's games division approximated 48% in 2003 as compared to 42% in 2002.
The overall improvement in the gross margin of the games division as compared to
the prior year resulted from the increase in advertising revenue as a percentage
of total net revenue, coupled with an improvement in the gross profit margin of
Chips & Bits. The remaining $0.2 million of cost of products sold for 2003
consisted primarily of customer equipment costs related to the sale of the
Company's voiceglo service launched during mid-August 2003.
DATA COMMUNICATIONS, TELECOM AND NETWORK OPERATIONS. This expense category
relates to the Company's entry into the VoIP business in 2003 and includes
termination and circuit costs related to the Company's wholesale telephony
services business marketed by DPT and the Company's retail telephony services
business marketed under the voiceglo brand name. Personnel and consulting costs
incurred in support of the Company's Internet telecommunications network are
also included in this expense category. Data communications, telecom and network
operations expenses are expected to increase in the future as the Company
further expands its data communications network and expands its
telecommunications carrier relationships in order to support its voiceglo
product line.
SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries
and related expenses of sales and marketing personnel, commissions, advertising
and marketing costs, public relations expenses, promotional activities and
barter expenses. Sales and marketing expenses were $3.3 million for the year
ended December 31, 2003 as compared to $3.5 million for the year ended December
31, 2002. A decline of $1.6 million in sales and marketing expenses incurred by
the Company's games division was partially offset by $1.4 million of sales and
marketing expenses of the VoIP telephony services division. Sales and marketing
expenses of the games division represented approximately 31% and 36% of total
net revenue attributable to the games division's operations for the years ended
December 31, 2003 and 2002, respectively. The 38% reduction in net revenue
generated by the Company's games division as compared to 2002 and the
corresponding decreases in agency subscription expense, were the principal
factors contributing to the decrease in sales and marketing expenses of the
games division. Costs incurred in staffing internally, the identification and
continuing development of a potential independent sales network and advertising
the voiceglo product line were the principal components of sales and marketing
expenses of the VoIP telephony services operations during the year ended
December 31, 2003.
PRODUCT DEVELOPMENT. Product development expenses include salaries and related
personnel costs, expenses incurred in connection with website development,
testing and upgrades; editorial and content costs; and costs incurred in the
development of our voiceglo branded products. Product development expenses
increased to $0.9 million for the year ended December 31, 2003, as compared to
$0.7 million for the year ended December 31, 2002. The increase was principally
attributable to personnel costs and consulting expenses relating to the
development of our VoIP telephony products and services, which totaled
approximately $0.3 million during 2003.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist
primarily of salaries and related personnel costs for general corporate
functions including finance, human resources and facilities, outside legal and
professional fees, directors and officers insurance, bad debt expenses and
general corporate overhead costs. General and administrative expenses were $5.3
million for the year ended December 31, 2003, as compared to $2.8 million for
the year ended December 31, 2002. Increases in headcount and the resulting
personnel expenses, as well as other general and administrative expenses
directly attributable to the Company's new line of business, VoIP telephony
services, were major factors contributing to the $2.5 million increase in total
general and administrative expenses. Other expense categories which increased as
compared to 2002 largely as a result of the Company's entrance into the VoIP
business, included legal fees, other professional fees and facilities costs.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization expense of approximately $0.1
million recorded during 2003 represented the amortization of the non-compete
agreement recorded in connection with the acquisition of DPT prior to its
write-off at year-end and amortization of capitalized patent costs related to
our voiceglo products.
IMPAIRMENT CHARGE. During the first quarter of 2004, the Company decided to
suspend DPT's wholesale business and decided to dedicate the DPT physical and
intellectual assets to its retail VoIP business, which is conducted under the
name of "voiceglo". As a result, management reviewed the long-lived assets
associated with the wholesale VoIP business for impairment. Goodwill of
approximately $0.6 million and the unamortized balance of the non-compete
intangible asset of approximately $0.3 million recorded in connection with the
May 2003 acquisition of DPT were written off and recorded as an impairment loss.
No impairment charges were recorded during 2002.
INTEREST INCOME (EXPENSE), NET. Non-cash interest expense of $1.5 million was
recorded in the second quarter of 2003 related to the beneficial conversion
feature of the $1,750,000 in Convertible Notes issued on May 22, 2003. The
expense resulted as the Convertible Notes were convertible into our Common Stock
at a price below the fair market value of our Common Stock (for accounting
purposes), based on the closing price of our Common Stock as reflected on the
OTCBB on the issuance date of the notes. In addition, the warrant to acquire
3,888,889 shares of our Common Stock issued to one of the note holders was
exercisable at a price below the fair market value of our Common Stock (for
accounting purposes), based on the closing price of our Common Stock as
reflected on the OTCBB on the date of issuance. The value assigned to the
warrant was recorded as a discount to the face value of the Convertible Notes to
be amortized to interest expense over the term of the Convertible Notes.
Discount amortization of approximately $0.2 million was included in interest
expense, net, during the year ended December 31, 2003.
OTHER EXPENSE, NET. Other expense, net, of $0.4 million was reported for the
year ended December 31, 2003. Other expense in 2003 includes reserves against
the amounts loaned by the Company to a development stage Internet related
business venture totaling $0.5 million.
INCOME TAXES. No tax benefit was recorded for the year ended December 31, 2003
as we recorded a 100% valuation allowance against our otherwise recognizable
deferred tax assets due to the uncertainty surrounding the timing or ultimate
realization of the benefits of our net operating loss carryforwards in future
periods. The income tax provision recorded for the year ended December 31, 2002
was based solely on state and local taxes on business and investment capital.
Our effective tax rate differs from the statutory Federal income tax rate,
primarily as a result of the uncertainty regarding our ability to utilize our
net operating loss carryforwards. As of December 31, 2003, the Company had net
operating loss carryforwards available for U.S. and foreign tax purposes of
approximately $144 million. These carryforwards expire through 2023. The Tax
Reform Act of 1986 imposes substantial restrictions on the utilization of net
operating losses and tax credits in the event of an "ownership change" of a
corporation. Due to the change in our ownership interests in August 1997 and May
1999 and the Company's recently completed private offering in March 2004
(together with the exercise and conversion of various securities in connection
with such private offering), as defined in the Internal Revenue Code of 1986, as
amended, the Company may have substantially limited or eliminated the
availability of its net operating loss carryforwards. There can be no assurance
that the Company will be able to avail itself of any net operating loss
carryforwards..
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW ITEMS. As of December 31, 2003, we had approximately $1.1 million in
cash and cash equivalents as compared to $0.7 million as of December 31, 2002.
Net cash used in operating activities was $6.9 million and $2.0 million for the
years ended December 31, 2003 and 2002, respectively. The year-over-year
increase in net cash used in operating activities resulted primarily from an
increase in our net operating losses, partially offset by the impact of non-cash
charges and gains recorded in 2003 and 2002. The most significant of these
non-cash charges during 2003 included the non-cash interest expense recorded as
a result of the beneficial conversion feature of the $1.75 million in
Convertible Notes and associated warrants, as well as the non-cash impairment
charge related to the write-off of goodwill and a non-compete intangible
recorded as a result of the acquisition of DPT.
Net cash of $3.2 million was used in investing activities during the year ended
December 31, 2003. As further described below, the Company incurred $2.4 million
in capital expenditures during 2003, primarily within the VoIP telephony
services division. These expenditures included costs in the development of the
data communications network used to support the voiceglo product line, as well
as the Company's historical wholesale VoIP business. Additionally, in February
2003, the Company committed to fund operating expenses of a development stage
Internet venture at the Company's discretion in the form of a loan. As of
December 31, 2003, approximately $0.5 million had been advanced to the venture.
During 2003, the Company invested approximately $10.3 million in marketable
securities, the funds of which were principally from the proceeds received in
connection with the issuance of the Company's Series G Preferred Stock.
Approximately $10.1 million of investments were sold throughout the second half
of 2003 as working capital was required to fund operations. Partially offsetting
these uses of funds in 2003 was the $0.1 million in net cash acquired upon the
May 2003 acquisition of DPT. The purchase price of DPT consisted of the issuance
of 1,375,000 shares of the Company's Common Stock and the issuance of warrants
to acquire 500,000 shares of the Company's Common Stock. Warrants to acquire an
additional 2,750,000 shares of our Common Stock could be issued if certain
performance or other criteria are satisfied. Net cash provided by investing
activities in 2002 was $0.1 million principally resulting from the sale of the
assets of the Happy Puppy website.
Net cash provided by financing activities in 2003 totaled $10.5 million. As
discussed below and in the notes to the consolidated financial statements, the
Company issued $0.5 million in Series F Convertible Preferred Stock in March
2003; $1.75 million of Convertible Notes in May 2003, and approximately $8.6
million, net of offering costs, of Series G Preferred Stock and associated
warrants in July 2003. Immediately after the May 2003 closing of the DPT
acquisition, the Company paid $0.5 million in cash to the former shareholders of
DPT in repayment of certain loans which they had extended to DPT prior to its
acquisition by theglobe.com.
In order to offer our VoIP services we have invested substantial capital and
made substantial commitments related to the development of the voiceglo network
and telephony handsets and related adapters. The voiceglo network is comprised
of switching hardware and software, servers, billing and inventory systems, and
telecommunication carrier services. We own and operate VoIP switch equipment in
Miami and New York, and interconnect these switches utilizing leased transport
network through numerous carrier agreements with third party providers. Through
these carrier relationships we are able to carry the traffic of our customers
over the Internet and interact with the PSTN. We generally enter into from one
to five year agreements with these carriers pursuant to which, in exchange for
allocating and dedicating availability on their networks, we undertake to
provide minimum usage of these networks. In general, the larger our commitment
the lower our per minute cost of usage of the network. Given the recent
introduction of our voiceglo service offerings, our minimum commitments under
these carrier agreements presently greatly exceed our actual usage.
14
Based upon our existing contractual commitments, we anticipate that our capital
needs for our network over the next twelve months will be substantially as
follows:
o Planned network hardware expenditures for switching and server
equipment are projected to be approximately $1.5 - $2.0 million;
o Planned network software expenditures are projected to be
approximately $300,000; and
o Planned carrier transport and interconnection services are projected
to be approximately $3.5 million.
We have entered into a contract with a supplier for telephony handsets related
to our VoIP services. Subject to the supplier's compliance with the terms of the
contract, we have committed to purchase additional equipment from this supplier
during 2004 totaling approximately $3.4 million. In addition, we anticipate
acquiring other non-network VoIP equipment of approximately $1.0 to $2.0
million. See Note 9, "Commitments and Contingencies" for further discussion of
the Company's contractual obligations and commitments.
As a result of the proceeds raised from our March 2004 private offering, as
further described below, management does not presently anticipate that the
Company will need to raise additional funds within at least the next twelve
months in order to implement its business plans for its existing businesses.
However, there can be no assurance that the capital needs of the Company will
not change, that we will not enter into additional lines of business or that
forecasted expenses will not substantially exceed our expectations. In addition,
our financial position would be adversely affected if we became liable for any
substantial penalties relating to our registration obligations under the private
offering. In any of such events, we may be required to raise additional capital.
We currently have no access to credit facilities with traditional third party
lenders and there can be no assurance that we would be able to raise any such
capital. In addition, any financing that could be obtained (or any shares of
common stock issued in payment of any registration penalties relating to the
March 2004 private offering) would likely significantly dilute existing
shareholders.
CAPITAL TRANSACTIONS. In March 2004, theglobe.com, inc. completed a private
offering of 333,816 units (the "Units") for a purchase price of $85 per Unit
(the "Private Offering"). Each Unit consisted of 100 shares of the Company's
Common Stock, $0.001 par value (the "Common Stock"), and warrants to acquire 50
shares of the Company's Common Stock (the "Warrants"). The Warrants are
exercisable for a period of five years commencing 60 days after the initial
closing at an initial exercise price of $0.001 per share. The aggregate number
of shares of Common Stock issued in the Private Offering was 33,381,647 shares
for an aggregate consideration of $28,374,400, or approximately $0.57 per share
assuming the exercise of the 16,690,824 Warrants. The securities offered in the
Private Offering were not registered under the Securities Act of 1933 and may
not be offered or resold in the United States absent registration or an
applicable exemption from such registration requirements. Pursuant to the terms
of the Private Offering, the Company is contractually obligated to file a
registration statement relating to the resale of the Securities on or about
April 22, 2004 and to cause such registration statement to become effective on
or about July 6, 2004 (or 30 days earlier if such registration statement is not
reviewed by the Securities and Exchange Commission). In the event the Company is
late in any of its registration obligations, it will be liable for payment of a
late fee of 5% of the amount raised in the Private Offering per month, not to
exceed 25% in the aggregate. Any such late fee may be payable in either cash or
additional shares of Common Stock (valued for such purpose at $0.57 per share),
or any combination of the two, at the option of the Company. Any shares so
issued would be included in the foregoing registration statement. Any such
issuance of shares of our common stock may be substantially dilutive of existing
shareholders (other than the investors in the Private Offering to whom such
shares would be issued). The purpose of the Private Offering was to raise funds
for use primarily in the Company's developing voiceglo business, including the
deployment of networks, website development, marketing, and capital
infrastructure expenditures and working capital. Proceeds may also be used in
connection with the Company's other existing or future business operations.
In connection with the Private Offering, Mr. Egan, our Chairman, Chief Executive
Officer and principal stockholder, together with certain of his affiliates,
including E&C Capital Partners, converted a $2,000,000 of Convertible Bridge
Note, $1,750,000 of Secured Convertible Notes and all of the Company's
outstanding shares of Series F Preferred Stock, and exercised all of the
warrants issued in connection with the foregoing Secured Convertible Notes and
Series F Preferred Stock, together with certain warrants issued to Dancing Bear
Investments, an affiliate of Mr. Egan. As a result of such conversions and
exercises, the Company issued an aggregate of 48,775,909 additional shares of
Common Stock. After giving effect to the 33,381,647 shares of Common Stock
issued in the Private Offering (excluding the Warrants) and the foregoing
conversions and exercises, the Company as of March 24, 2004, had issued and
outstanding 131,990,349 shares of Common Stock and 27,004,384 warrants to
acquire shares of Common Stock.
On February 2, 2004, Michael S. Egan and his wife, S. Jacqueline Egan, entered
into a Note Purchase Agreement with the Company pursuant to which they acquired
a convertible promissory note due on demand (the "Bridge Note") in the aggregate
principal amount of $2,000,000. The Bridge Note was convertible into shares of
the Company's Common Stock. The Bridge Note provided for interest at the rate of
ten percent per annum and was secured by a pledge of substantially all of the
assets of the Company. Such security interest was shared with the holders of the
Company's $1,750,000 Convertible Notes issued on May 22, 2003 to E&C Capital
Partners and certain affiliates of Michael S. Egan. In addition, the Egans were
issued a warrant to acquire 204,082 shares of theglobe.com Common Stock at an
exercise price of $1.22 per share. The Warrant is exercisable at any time on or
before February 2, 2009. The exercise price of the Warrant, together with the
number of shares for which such Warrant is exercisable, is subject to adjustment
upon the occurrence of certain events.
On July 2, 2003, theglobe.com, inc. completed a private offering of Series G
Preferred Stock for an aggregate purchase price of approximately $8.7 million.
In accordance with the terms of such Preferred stock, the Series G Preferred
shares converted into common stock at $0.50 per share (or an aggregate of
approximately 17.4 million shares) upon the filing of an amendment to the
Company's certificate of incorporation to increase its authorized shares of
Common Stock from 100,000,000 shares to 200,000,000 shares. Such an amendment
was filed on July 29, 2003. Investors also received warrants to acquire
approximately 3.5 million shares of common stock. The warrants are exercisable
for a period of five years at an exercise price of $1.39 per common share. The
exercise price of the warrants, together with the number of warrants issuable
upon exercise, are subject to adjustment upon the occurrence of certain events.
The purpose of the Series G Preferred Stock offering was to raise funds for use
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primarily in the Company's VoIP telephony services business, including the
deployment of networks, website development, marketing, and limited capital
infrastructure expenditures and working capital. Pursuant to the terms of the
Series G Offering the Company is contractually obligated, subject to certain
limitations, to register the securities upon demand anytime commencing one year
after the sale of the securities.
On May 22, 2003, E&C Capital Partners together with certain affiliates of
Michael S. Egan, entered into a Note Purchase Agreement with the Company
pursuant to which they acquired $1,750,000 of Convertible Notes. The Convertible
Notes were convertible into a maximum of approximately 19,444,000 shares of the
Company's common stock at a blended rate of $0.09 per share. The Convertible
Notes provided for interest at the rate of ten percent per annum payable
semi-annually, a one year maturity and were secured by a pledge of substantially
all of the assets of the Company. Effective October 3, 2003, the holders of the
Convertible Notes waived the option of receiving accrued interest payable in
shares of the Company's Common Stock. Additionally, each of the holders of the
Convertible Notes agreed to defer receipt of interest until June 1, 2004. In
addition, E&C Capital Partners was issued a Warrant to acquire 3,888,889 shares
of the Company's Common Stock at an exercise price of $0.15 per share. The
Warrant was exercisable at any time on or before May 22, 2013.
On March 28, 2003, E&C Capital Partners signed a Preferred Stock Purchase
Agreement and other related documentation pertaining to a $500,000 investment
via the purchase of shares of a new Series F Preferred Stock of theglobe.com and
closed on the investment. Pursuant to the Preferred Stock Purchase Agreement,
E&C Capital Partners received 333,333 shares of Series F Preferred Stock
convertible into shares of the Company's Common Stock at a price of $0.03 per
share. The Series F Preferred Stock had a liquidation preference of $1.50 per
share, provided for payment of a dividend at the rate of 8% per annum and
entitled the holder to vote on an "as-converted" basis with the holders of
Common Stock. In addition, as part of the $500,000 investment, E&C Capital
Partners received warrants to purchase approximately 3,333,333 shares of
theglobe.com Common Stock at an exercise price of $0.125 per share. The warrants
were exercisable at any time on or before March 28, 2013 and both the warrants'
exercise price and number were subject to adjustment.
As a result of the preferential conversion features of the Series G Preferred
Stock and the Series F Preferred Stock, a total of $8,120,000 in non-cash
dividends to preferred shareholders were recognized during the year ended
December 31, 2003.
The shares of our Common Stock were delisted from the NASDAQ national market in
April 2001 and are now traded in the over-the-counter market on what is commonly
referred to as the electronic bulletin board. The trading volume of our shares
has dramatically declined since the delisting. In addition, we are now subject
to a Rule promulgated by the Securities and Exchange Commission that, if we fail
to meet criteria set forth in such Rule, various practice requirements are
imposed on broker-dealers who sell securities governed by the Rule to persons
other than established customers and accredited investors. For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transactions prior to sale. Consequently, the Rule may have a materially adverse
effect on the ability of broker-dealers to sell the securities, which may
materially affect the ability of shareholders to sell the securities in the
secondary market. Consequently, it has also made it more difficult for us to
raise additional capital. We will also incur additional costs under state blue
sky laws if we sell equity due to our delisting.
EFFECTS OF INFLATION
Due to relatively low levels of inflation in 2003 and 2002, inflation has not
had a significant effect on our results of operations since inception.
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Our estimates, judgments and assumptions are continually evaluated based
on available information and experience. Because of the use of estimates
inherent in the financial reporting process, actual results could differ from
those estimates.
Certain of our accounting policies require higher degrees of judgment than
others in their application. These include revenue recognition, valuation of
customer receivables, impairment of intangible assets and income tax recognition
of deferred tax items. Our policies and related procedures for revenue
recognition, valuation of customer receivables, capitalization of computer
software costs and goodwill and other intangible assets are summarized below.
REVENUE RECOGNITION
The Company's revenues were derived principally from the sale of print
advertisements under short-term contracts in our games information magazine
Computer Games; through the sale of our games information magazine through
newsstands and subscriptions; from the sale of video games and related products
through our online store Chips & Bits; and from the sale of VoIP telephony
services. There is no certainty that events beyond anyone's control such as
economic downturns or significant decreases in print advertisement will not
occur and accordingly, cause significant decreases in revenue.
The Company's games division participates in barter transactions. Barter
revenues and expenses are recorded at the fair market value of services provided
or received, whichever is more readily determinable in the circumstances.
Revenue from barter transactions is recognized as income when advertisements or
other products are delivered by the Company. Barter expense is recognized when
the Company's advertisements are run on other companies' websites or in their
magazines, which typically occurs within one to six months from the period in
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which the related barter revenue is recognized. Barter advertising revenues
represented approximately 2% and 1% of consolidated net revenue for the years
ended December 31, 2003 and 2002, respectively.
Advertising. Advertising revenues for the games information magazine are
recognized at the on-sale date of the magazine.
Magazine Sales. Newsstand sales of the games information magazine are recognized
at the on-sale date of the magazine, net of provisions for estimated returns.
Subscriptions are recorded as deferred revenue when initially received and
recognized as income ratably over the subscription term.
Electronic Commerce and Other. Sales from the online store are recognized as
revenue when the product is shipped to the customer. Amounts billed to customers
for shipping and handling charges are included in net revenue. The Company
provides an allowance for returns of merchandise sold through its online store.
The allowance provided to date has not been significant.
Telephony Services. VoIP telephony services revenue represents fees charged to
customers for voice services and is recognized based on minutes of customer
usage or as services are provided. The Company records payments received in
advance for prepaid services as deferred revenue until the related services are
provided. Sales of peripheral VoIP telephony equipment are recognized as revenue
when the product is shipped to the customer. Amounts billed to customers for
shipping and handling charges are included in net revenue.
VALUATION OF CUSTOMER RECEIVABLES
Provisions for allowance for doubtful accounts are made based on historical loss
experience adjusted for specific credit risks. Measurement of such losses
requires consideration of the company's historical loss experience, judgments
about customer credit risk, and the need to adjust for current economic
conditions.
CAPITALIZATION OF COMPUTER SOFTWARE COSTS
The Company capitalizes the cost of internal-use software which has a useful
life in excess of one year in accordance with Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Subsequent additions, modifications, or upgrades to internal-use
software are capitalized only to the extent that they allow the software to
perform a task it previously did not perform. Software maintenance and training
costs are expensed in the period in which they are incurred. Capitalized
computer software costs are amortized using the straight-line method over three
years.
INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
certain acquired intangible assets in a business combination be recognized as
assets separate from goodwill. SFAS No. 142 requires that goodwill and other
intangibles with indefinite lives should no longer be amortized, but rather
tested for impairment annually or on an interim basis if events or circumstances
indicate that the fair value of the asset has decreased below its carrying
value.
Our policy calls for the assessment of the potential impairment of goodwill and
other identifiable intangibles whenever events or changes in circumstances
indicate that the carrying value may not be recoverable or at least on an annual
basis. Some factors we consider important which could trigger an impairment
review include the following:
o Significant under-performance relative to historical, expected or
projected future operating results;
o Significant changes in the manner of our use of the acquired assets
or the strategy for our overall business; and
o Significant negative industry or economic trends.
When we determine that the carrying value of goodwill or other identified
intangibles may not be recoverable, we measure any impairment based on a
projected discounted cash flow method using a discount rate determined by our
management to be commensurate with the risk inherent in our current business
model.
As a result of management's decision during the first quarter of 2004, to
suspend the wholesale business of Direct Partner Telecom, Inc. ("DPT") and to
dedicate the DPT physical and intellectual assets to its retail VoIP business,
we reviewed the long-lived assets associated with the Company's wholesale VoIP
business for impairment. As a result, the goodwill and non-compete intangible
asset recorded in connection with the May 2003 acquisition of Direct Partner
Telecom, Inc. were written off and recorded as an impairment loss in the
Company's statement of operations for the year ended December 31, 2003.
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IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the FASB issued Interpretation No. 46R, "Consolidation of
Variable Interest Entities," an Interpretation of ARB 51. This statement
requires under certain circumstances consolidation of variable interest entities
(primarily joint ventures and other participating activities). The Company has
not yet evaluated the impact of this pronouncement on the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
affects the issuer's accounting for three types of freestanding financial
instruments. One type is mandatorily redeemable shares, which the issuing
company is obligated to buy back in exchange for cash or other assets. A second
type, which includes put options and forward purchase contracts, involves
instruments that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets. The third type of instrument consists of
obligations that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index, or
varies inversely with the value of the issuers' shares. SFAS No. 150 does not
apply to features embedded in a financial instrument that is not a derivative in
its entirety. SFAS No. 150 also requires disclosures about alternative ways of
settling the instruments and the capital structure of entities, whose shares are
mandatorily redeemable. Most of the guidance in SFAS No. 150 is effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective from the start of the first interim period beginning
after June 15, 2003. The adoption of this standard did not have a material
impact on the Company's results of operations or financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments Hedging Activities." This statement amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS
No. 149 became effective during the third quarter of 2003 and did not have a
material impact on the Company's results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123 as
it relates to the transition by an entity to the fair value method of accounting
for stock-based employee compensation. The provisions of SFAS No. 148 are
effective for financial statements for fiscal years ending after December 15,
2002. The adoption of this statement did not have a significant impact on the
Company's financial position or results of its operations.
In November 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" and an interpretation of SFAS No. 5, 57, and 107 and
rescission of SFAS Interpretation No. 34. This statement addresses the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees. This interpretation also
clarifies the requirements related to the recognition of a liability by a
guarantor at the inception of a guarantee for the obligations the guarantor has
undertaken in issuing that guarantee. The adoption of this statement did not
have a significant impact on the Company's financial position or results of
operations.
In November 2002, the EITF addressed the accounting for revenue arrangements
with multiple deliverables in Issue 00-21, "Accounting for Revenue Arrangements
with Multiple Deliverables," ("EITF 00-21"). EITF 00-21 provides guidance on how
the arrangement consideration should be measured, whether the arrangement should
be divided into separate units of accounting, and how the arrangement
consideration should be allocated among the separate units of accounting. EITF
00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The adoption of EITF 00-21 did not have a
significant impact on the Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities. SFAS 146
became effective in the first quarter of 2003 and did not have a significant
impact on the results of operations or financial position of the Company.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." The statement addresses accounting for and reporting obligations
relating to the retirement of long lived assets by requiring that the fair value
of a liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
adoption of SFAS No. 143 did not have a material effect on the consolidated
financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2003, we did not have any material off-balance sheet
arrangements that have or are reasonably likely to have a material effect on our
current or future financial condition, revenues or expenses, results of
operations, liquidity, or capital resources.
18
RISK FACTORS
In addition to the other information in this report, the following factors
should be carefully considered in evaluating our business and prospects.
FUTURE ACQUISITIONS, JOINT VENTURES OR STRATEGIC TRANSACTIONS ENTAIL NUMEROUS
RISKS AND UNCERTAINTIES. WE INTEND TO ENTER NEW LINES OF BUSINESS.
We have entered into a new business line, Voice over Internet Protocol ("VoIP")
telephony services. In November 2002, we acquired certain VoIP assets from an
entrepreneur in exchange for 1,750,000 warrants to purchase our common stock. On
May 28, 2003, we acquired Direct Partner Telecom, Inc. ("DPT"), an international
licensed telecommunications carrier engaged in the purchase and resale of
telecommunication services over the Internet. The purchase price consisted of
1,375,000 shares of theglobe.com common stock and 500,000 warrants to purchase
theglobe.com common stock, together with the ability to earn an additional
2,750,000 warrants. We may also enter into new or different lines of business,
as determined by management and our Board of Directors. The acquisitions of VoIP
assets and of DPT, as well as any future acquisitions or joint ventures could
result, and in some instances have resulted (particularly as it pertains to
DPT), in numerous risks and uncertainties, including:
o potentially dilutive issuances of equity securities, which may be issued
at the time of the transaction or in the future if certain performance or
other criteria are met or not met, as the case may be. These securities
may be freely tradable in the public market or subject to registration
rights which could require us to publicly register a large amount of
Common Stock, which could have a material adverse effect on our stock
price;
o large and immediate write-offs;
o significant write-offs if we determine that the business acquisition does
not fit or perform up to expectations;
o the incurrence of debt and contingent liabilities or amortization expenses
related to goodwill and other intangible assets;
o difficulties in the assimilation of operations, personnel, technologies,
products and information systems of the acquired companies;
o the risks of entering a new or different line of business;
o regulatory and tax risks relating to the new or acquired business;
o the risks of entering geographic and business markets in which we have no
or limited prior experience; and
o the risk that the acquired business will not perform as expected.
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT TO CONTINUE TO INCUR LOSSES.
Since our inception, we have incurred net losses in each quarter, except the
fourth quarter of 2002 where we had net income of approximately $17,000. We
expect that we will continue to incur net losses for the foreseeable future. We
had net losses of approximately $11 million and $2.6 million for the years ended
December 31, 2003 and 2002, respectively. The principal causes of our losses are
likely to continue to be:
o costs resulting from the operation of our businesses;
o costs relating to entering new business lines;
o failure to generate sufficient revenue; and
o general and administrative expenses.
Although we have restructured our businesses, we still expect to continue to
incur losses as we develop our VoIP telephony services business and while we
explore a number of strategic alternatives for our online and offline games
properties, including continuing to operate the properties, acquisition or
development of complementary products, selling some or all of the properties or
other changes to our business.
WE DEPEND ON THE CONTINUED GROWTH IN THE USE AND COMMERCIAL VIABILITY OF THE
INTERNET.
Our VoIP telephony services business and games properties are substantially
dependent upon the continued growth in the general use of the Internet. The VoIP
business is also dependent on the growth in the use of the Internet for
telephones, personal computers and other devices. Internet and electronic
commerce growth may be inhibited for a number of reasons, including:
o inadequate network infrastructure;
o security and authentication concerns;
19
o ease of access;
o inconsistent quality of service;
o availability of cost-effective, high-speed service; and
o bandwidth availability.
As web usage grows, the Internet infrastructure may not be able to support the
demands placed on it by this growth or its performance and reliability may
decline. Websites have experienced interruptions in their service as a result of
outages and other delays occurring throughout the Internet network
infrastructure. If these outages or delays frequently occur in the future, web
usage, as well as usage of our services, could grow more slowly or decline.
Also, the Internet's commercial viability may be significantly hampered due to:
o delays in the development or adoption of new operating and technical
standards and performance improvements required to handle increased levels
of activity;
o increased government regulation;
o potential governmental taxation of such services; and
o insufficient availability of telecommunications services which could
result in slower response times and adversely affect usage of the
Internet.
THE VOIP MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND WE WILL NEED TO
DEPEND ON NEW PRODUCT INTRODUCTIONS AND INNOVATIONS IN ORDER TO ESTABLISH,
MAINTAIN AND GROW OUR BUSINESS.
VoIP is an emerging market that is characterized by rapid changes in customer
requirements, frequent introductions of new and enhanced products, and
continuing and rapid technological advances. To enter and compete successfully
in this emerging market, we must continually design, develop, manufacture, and
sell new and enhanced VoIP products and services that provide increasingly
higher levels of performance and reliability at lower costs. These new and
enhanced products must take advantage of technological advancements and changes,
and respond to new customer requirements. Our success in designing, developing,
manufacturing, and selling such products and services will depend on a variety
of factors, including:
o the identification of market demand for new products;
o access to sufficient capital to complete our development efforts;
o product and feature selection;
o timely implementation of product design and development;
o product performance;
o cost-effectiveness of products under development;
o effective manufacturing processes; and
o success of promotional efforts.
Additionally, we may also be required to collaborate with third parties to
develop our products and may not be able to do so on a timely and cost-effective
basis, if at all. If we are unable, due to resource constraints or technological
or other reasons, to develop and introduce new or enhanced products in a timely
manner or if such new or enhanced products do not achieve sufficient market
acceptance, our operating results will suffer and our business will not grow.
THE INTERNET TELEPHONY BUSINESS IS HIGHLY COMPETITIVE AND ALSO COMPETES WITH
TRADITIONAL TELEPHONY PROVIDERS.
The long distance telephony market and the Internet telephony market are highly
competitive. There are several large and numerous small competitors, and we
expect to face continuing competition based on price and service offerings from
existing competitors and new market entrants in the future. The principal
competitive factors in our market include price, quality of service, breadth of
geographic presence, customer service, reliability, network size and capacity,
and the availability of enhanced communications services. Our competitors will
include major and emerging telecommunications carriers in the U.S. and abroad.
Financial difficulties in the past several years of many telecommunications
providers are rapidly altering the number, identity and competitiveness of the
marketplace. Many of the competitors for our current and planned voiceglo
20
service offerings and of our subsidiary, Direct Partner Telecom, have
substantially greater financial, technical and marketing resources, larger
customer bases, longer operating histories, greater name recognition and more
established relationships in the industry than we have. As a result, certain of
these competitors may be able to adopt more aggressive pricing policies which
could hinder our ability to market our voice services.
During the past several years, a number of companies have introduced services
that make Internet telephony or voice services over the Internet available to
businesses and consumers. All major telecommunications companies, including
entities like AT&T, Sprint and MCI, as well as ITXC, iBasis, Net2Phone and
deltathree.com either presently or potentially route traffic to destinations
worldwide and compete or can compete directly with us. Other Internet telephony
service providers focus on a retail customer base and compete with us. These
companies may offer the kinds of voice services we currently offer or intend to
offer in the future. In addition, companies currently in related markets have
begun to provide voice over the Internet services or adapt their products to
enable voice over the Internet services. These related companies may potentially
migrate into the Internet telephony market as direct competitors. A number of
cable operators have also begun to offer VoIP telephony services via cable
modems which provide access to the Internet. These companies, which tend to be
large entities with substantial resources, generally have large budgets
available for research and development, and therefore may further enhance the
quality and acceptance of the transmission of voice over the Internet.
WE MAY FACE INCREASED GOVERNMENT REGULATION, TAXATION AND LEGAL UNCERTAINTIES IN
OUR INDUSTRY, WHICH COULD HARM OUR BUSINESS.
There are an increasing number of federal, state, local and foreign laws and
regulations pertaining to the Internet and telecommunications. In addition, a
number of federal, state, local and foreign legislative and regulatory proposals
are under consideration. Laws or regulations may be adopted with respect to the
Internet relating to, among other things, fees and taxation of VoIP telephony
services, liability for information retrieved from or transmitted over the
Internet, online content regulation, user privacy and quality of products and
services. Changes in tax laws relating to electronic commerce could materially
affect our business, prospects and financial condition. Moreover, the
applicability to the Internet of existing laws governing issues such as
intellectual property ownership and infringement, copyright, trademark, trade
secret, obscenity, libel, employment and personal privacy is uncertain and
developing. Any new legislation or regulation, or the application or
interpretation of existing laws or regulations, may decrease the growth in the
use of the Internet or VoIP telephony services, may impose additional burdens on
electronic commerce or may alter how we do business. This could decrease the
demand for our existing or proposed services, increase our cost of doing
business, increase the costs of products sold through the Internet or otherwise
have a material adverse effect on our business, plans, prospects, results of
operations and financial condition.
Our ability and plans to provide telecommunication services at attractive rates
arise in large part from the fact VoIP services are not currently subject to the
same regulation as traditional telephony. Because their services are not
currently regulated to the same extent as traditional telephony, VoIP providers
can currently avoid paying charges that traditional telephone companies must
pay. Many traditional telephone operators are lobbying the Federal
Communications Commission (FCC) and the states to regulate VoIP on the same or
similar basis as traditional telephone services. The FCC and several states are
examining this issue. The FCC held a forum on VoIP issues on December 1, 2003,
which included regulatory classification issues. On March 10, 2004, the FCC
released guidelines and questions upon which it is seeking public comment to
determine what regulation, if any, will govern companies that provided VoIP
services. Specifically, the FCC has expressed an intention to further examine
the question of whether certain forms of phone-to-phone VOIP services are
information services or telecommunications services. The two are treated
differently in several respects, with certain information services being
regulated to a lesser degree. The FCC has noted that certain forms of
phone-to-phone VOIP services bear many of the same characteristics as more
traditional voice telecommunications services and lack the characteristics that
would render them information services. The FCC has indicated that the
mechanisms for contributing to the Universal Service Fund, issues as to
applicability of access charges and other matters will be considered in that
context. The FCC had previously opened a proceeding in response to a petition by
AT&T which seeks a declaration to preclude local exchange carriers from imposing
access charges on certain AT&T phone-to-phone IP services asserted to be
provided over the Internet. The FCC has recently ruled that so called "pure"
VoIP services which flow entirely over the Internet and never interconnect with
the public switched telephone network, such as a computer to computer call, are
not telecommunications services subject to regulation. The ruling specifically
does not address whether traditional phone regulations might apply to VoIP
services (like those offered by voiceglo) to end users that interconnect with
the traditional telephone system.
If the FCC or any state determines to regulate VoIP, they may impose surcharges,
taxes or additional regulations upon providers of Internet telephony. These
surcharges could include access charges payable to local exchange carriers to
carry and terminate traffic, contributions to the universal service fund or
other charges. Regulations requiring compliance with the Communications
Assistance for Law Enforcement Act, or provision of enhanced 911 services could
also place a significant financial burden on us. The imposition of any such
additional fees, charges, taxes, licenses and regulations on VoIP services could
materially increase our costs and may reduce or eliminate the competitive
pricing advantage we seek to enjoy.
A number of state regulators have recently taken the position that VoIP
providers are telecommunications providers and must register as such within
their states. VoIP operators have resisted such registration on the position
that VoIP is not, and should not be, subject to such regulations because VoIP is
an information service, not a telecommunication service. In a recent federal
court decision, the Minnesota Public Utilities Commission was enjoined in their
attempt to enforce traditional phone regulations against Vonage, a VoIP
provider. However, other states are not bound by that decision and may reject
the VoIP operator's position and may seek to subject us to regulation and
require us to pay associated charges and taxes. If states are successful in such
regulatory efforts, our business, financial condition and results of operations
could be materially and adversely affected.
21
Our ability to offer services outside the U.S. is also subject to the local
regulatory environment, which may be complicated and often uncertain. Regulatory
treatment of Internet telephony outside the United States varies from country to
country.
PRICING PRESSURES AND INCREASING USE OF VoIP TECHNOLOGY MAY LESSEN OUR
COMPETITIVE PRICING ADVANTAGE.
One of the main competitive advantages of our current and planned VoIP service
offerings is the ability to provide discounted local and long distance telephony
services by taking advantage of cost savings achieved by carrying voice traffic
employing VoIP technology, as compared to carrying calls over traditional
networks. In recent years, the price of telephone service has fallen. The price
of telephone service may continue to fall for various reasons, including the
adoption of VoIP technology by other communications carriers. Many carriers have
adopted pricing plans such that the rates that they charge are not always
substantially higher than the rates that VoIP providers charge for similar
service. In addition, other providers of long distance services are offering
unlimited or nearly unlimited use of some of their services for increasingly
lower monthly rates.
WE RELY ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.
We regard substantial elements of our websites and underlying technology, as
well as certain assets relating to our VoIP business and other opportunities we
are investigating, as proprietary and attempt to protect them by relying on
intellectual property laws and restrictions on disclosure. We also generally
enter into confidentiality agreements with our employees and consultants. In
connection with our license agreements with third parties, we generally seek to
control access to and distribution of our technology and other proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use our proprietary information without
authorization or to develop similar technology independently. Thus, we cannot
assure you that the steps taken by us will prevent misappropriation or
infringement of our proprietary information, which could have an adverse effect
on our business. In addition, our competitors may independently develop similar
technology, duplicate our products, or design around our intellectual property
rights.
We pursue the registration of our trademarks in the United States and
internationally. We are also seeking patent protection for certain VoIP assets
which we acquired or which we have developed. However, effective intellectual
property protection may not be available in every country in which our services
are distributed or made available through the Internet. Policing unauthorized
use of our proprietary information is difficult. Legal standards relating to the
validity, enforceability and scope of protection of proprietary rights in
Internet-related businesses are also uncertain and still evolving. We cannot
assure you about the future viability or value of any of our proprietary rights.
Litigation may be necessary in the future to enforce our intellectual property
rights or to determine the validity and scope of the proprietary rights of
others. However, we may not have sufficient funds or personnel to adequately
litigate or otherwise protect our rights. Furthermore, we cannot assure you that
our business activities will not infringe upon the proprietary rights of others,
or that other parties will not assert infringement claims against us, including
claims related to providing hyperlinks to websites operated by third parties or
providing advertising on a keyword basis that links a specific search term
entered by a user to the appearance of a particular advertisement. Moreover,
from time to time, third parties may assert claims of alleged infringement by us
of their intellectual property rights. Any litigation claims or counterclaims
could impair our business because they could:
o be time-consuming;
o result in significant costs;
o subject us to significant liability for damages;
o result in invalidation of our proprietary rights;
o divert management's attention;
o cause product release delays; or
o require us to redesign our products or require us to enter into royalty or
licensing agreements that may not be available on terms acceptable to us,
or at all.
We license from third parties various technologies incorporated into our sites.
We cannot assure you that these third-party technology licenses will continue to
be available to us on commercially reasonable terms. Additionally, we cannot
assure you that the third parties from which we license our technology will be
able to defend our proprietary rights successfully against claims of
infringement. As a result, our inability to obtain any of these technology
licenses could result in delays or reductions in the introduction of new
services or could adversely affect the performance of our existing services
until equivalent technology can be identified, licensed and integrated.
The regulation of domain names in the United States and in foreign countries may
change. Regulatory bodies could establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding domain
names, any or all of which may dilute the strength of our names. We may not
acquire or maintain our domain names in all of the countries in which our
websites may be accessed, or for any or all of the top-level domain names that
22
may be introduced. The relationship between regulations governing domain names
and laws protecting proprietary rights is unclear. Therefore, we may not be able
to prevent third parties from acquiring domain names that infringe or otherwise
decrease the value of our trademarks and other proprietary rights.
IF WE DO NOT DEVELOP AND MAINTAIN SUCCESSFUL PARTNERSHIPS FOR VOIP PRODUCTS, WE
MAY NOT BE ABLE TO SUCCESSFULLY MARKET ANY OF OUR VOIP PRODUCTS CURRENTLY UNDER
DEVELOPMENT.
We have entered into the VoIP market and our success is partly dependent on our
ability to forge marketing, engineering and carrier partnerships. VoIP
communication systems are extremely complex and no single company possesses all
the technology components needed to build a complete end to end solution. We
will likely need to enter into partnerships to augment our development programs
and to assist us in marketing complete solutions to our targeted customers. We
may not be able to develop such partnerships in the course of our operations and
product development. Even if we do establish the necessary partnerships, we may
not be able to adequately capitalize on these partnerships to aid in the success
of our business.
THE FAILURE OF VOIP NETWORKS TO MEET THE RELIABILITY AND QUALITY STANDARDS
REQUIRED FOR VOICE COMMUNICATIONS COULD RENDER OUR PRODUCTS OBSOLETE.
Circuit-switched telephony networks feature very high reliability, with a
guaranteed quality of service. In addition, such networks have imperceptible
delay and consistently satisfactory audio quality. Emerging VoIP networks or
emerging last mile technologies such as cable, digital subscriber lines, and
wireless local loop, will not be a viable alternative to traditional circuit
switched telephony unless such networks and technologies can provide reliability
and quality consistent with these standards.
WE ARE UNABLE TO PREDICT THE VOLUME OF USAGE AND OUR CAPACITY NEEDS FOR OUR VOIP
BUSINESS; DISADVANTAGEOUS CONTRACTS WOULD REDUCE OUR OPERATING MARGINS.
We have entered into a number of, and may have to enter into additional,
long-term agreements (generally from one to five years) for leased
communications transmission capacity with various carriers. Many of these
agreements have minimum use requirements pursuant to which we are able to
negotiate lower overall per minute usage rates assuming the utilization of all
of such minutes. To the extent that we have overestimated (or in the future
overestimate) our call volume, we are obligated to pay for more transmission
capacity than we actually use, resulting in costs without corresponding revenue.
Given the recent introduction of our voiceglo VoIP service offerings, our
minimum commitments under existing carrier agreements presently greatly exceed
our actual usage. Conversely, in the future, if we underestimate our capacity
needs, we may be required to obtain additional transmission capacity through
more expensive means or such capacity may not be available. As a result, our
margins could be reduced and our business, financial condition and results of
operations could be materially and adversely affected.
WE MAY BE UNSUCCESSFUL IN ESTABLISHING AND MAINTAINING BRAND AWARENESS; BRAND
IDENTITY IS CRITICAL TO OUR COMPANY.
Our success in the Internet telephony market will depend on our ability to
create and maintain brand awareness for our product offerings. This may require
a significant amount of capital to allow us to market our products and establish
brand recognition and customer loyalty. Many of our competitors in the Internet
telephony services market are larger than us and have substantially greater
financial resources. Additionally, many of the companies offering VoIP services
have already established their brand identity within the marketplace. We can
offer no assurances that we will be successful in establishing awareness of our
brand allowing us to compete in the VoIP market.
We believe that maintaining awareness of the brand names of all of our games
properties ("Chips & Bits", "Strategy Plus" and "CGonline.com") is critical to
attracting potential buyers for these properties and to expanding our member
base, the traffic on our websites and our advertising and electronic commerce
relationships. The closure of the community website at "www.theglobe.com", the
Company's flagship website, adversely affected the public's perception of the
Company and its then existing businesses. If Internet users, advertisers and
customers do not perceive our games properties to be of high quality, the value
of the games properties brand names could be materially diluted.
If we fail to promote and maintain our various brands or our games properties'
brand values are diluted, our businesses, operating results, financial
condition, and our ability to attract buyers for the games properties could be
materially adversely affected. The importance of brand recognition will continue
to increase because low barriers of entry to the industries in which we operate
may result in an increased number of direct competitors. To promote our brands,
we may be required to continue to increase our financial commitment to creating
and maintaining brand awareness. We may not generate a corresponding increase in
revenue to justify these costs.
THE MARKET SITUATION CONTINUES TO BE A CHALLENGE FOR CHIPS & BITS DUE TO
ADVANCES IN CONSOLE AND ONLINE GAMES, WHICH HAVE LOWER MARGINS AND TRADITIONALLY
LESS SALES LOYALTY TO CHIPS & BITS.
Chips & Bits depends on major releases in the Personal Computer (PC) market for
the majority of sales and profits. The game industry's focus on X-Box,
Playstation and GameCube has dramatically reduced the number of major PC
releases, which resulted in significant declines in revenues and gross margins
for Chips & Bits, Inc. Gross margins for Chips & Bits, Inc. were 24% and 23% for
the years ended December 31, 2003 and 2002, respectively. Because of the large
installed base of personal computers, these revenue and gross margin percentages
may fluctuate with changes in the PC game market. However, the Company is unable
to predict when, if ever, there will be a turnaround in the PC game market.
Competition among games-focused websites is also growing rapidly, as new
companies continue to enter the market and existing companies continue to layer
games applications onto their websites. We expect that the market will continue
to evolve rapidly, and the rate of product innovations and new product
introductions will remain high. We face competitive pressures from many
companies, both in the United States and abroad. With the abundance of companies
operating in the games market, consumers and advertisers have a wide selection
of services to choose from. Our games information websites compete for users and
advertisers with:
o Games information sites such as Snowball's IGN, ZDnet's Gamespot, and
CNET's GameCenter; and
o Online games centers, where users can play games such as Uproar, Pogo and
Terra Lycos' Gamesville.
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In addition, many companies involved in the games market may be acquired by,
receive investments from, or enter into commercial relationships with larger,
well-established and well-financed companies. As a result of this highly
fragmented and competitive market, consolidations and strategic ventures may
continue in the future.
WE HAVE HISTORICALLY RELIED SUBSTANTIALLY ON ONLINE AND PRINT ADVERTISING
REVENUES. THE ONLINE AND PRINT ADVERTISING MARKETS HAVE SIGNIFICANTLY DECLINED.
IN ADDITION, WE HAVE DRAMATICALLY REDUCED OUR ADVERTISING SALES FORCE.
We historically derived a substantial portion of our revenues from the sale of
advertisements on our websites and in our magazine Computer Games Magazine. Our
business model and revenues were highly dependent on the amount of traffic on
our websites, our ability to properly monetize website traffic and on the print
circulation of our Computer Games magazine. Due to our restructuring in August
2001 (the "August 3, 2001 restructuring"), we now have only two (2) sales people
in our games division and will have tremendous difficulty maintaining
advertising revenues and monetizing traffic to our games properties. In
addition, the editorial content on certain of the game properties is only being
updated periodically, if at all, which may lead to a further decrease in the
number of viewers and which could adversely affect our efforts to sell these
properties. The level of traffic on our sites determines the amount of online
advertising inventory we can sell and the price for which we can sell our games
business. Our ability to generate online advertising revenues depends, in part,
on our ability to create new advertising programs without diluting the perceived
value of our existing programs. Due to the reduction in headcount, we are unable
to create new advertising programs going forward. Print and online advertising
have dramatically decreased since the middle of 2000, and may continue to
decline, which could continue to have a material effect on the Company. Many
advertisers have been experiencing financial difficulties which could materially
impact our revenues and our ability to collect our receivables. For these
reasons, we cannot assure you that our current advertisers will continue to
purchase advertisements from our games properties.
The development of the Internet advertising market has slowed dramatically
during the last three years and if it continues to slow down, our business
performance would continue to be materially adversely affected.
WE MAY BE MATERIALLY ADVERSELY AFFECTED IF ELECTRONIC COMMERCE DOES NOT BECOME A
VIABLE SOURCE OF SIGNIFICANT REVENUES OR PROFITS FOR THE COMPANY. IN ADDITION,
OUR ELECTRONIC COMMERCE BUSINESS MAY RESULT IN SIGNIFICANT LIABILITY CLAIMS
AGAINST US.
In February 2000, we acquired Chips & Bits, Inc., a direct marketer of video
games and related products over the Internet. However, we have limited
experience in the sale of products online as compared to many of our competitors
and the development of relationships with manufacturers and suppliers of these
products. In addition, the closing of our community site and our small business
web-hosting site may adversely affect our electronic commerce due to the loss of
traffic referred by those sites to the Chips & Bits website. We also face many
uncertainties, which may affect our ability to generate electronic commerce
revenues and profits, including:
o our ability to obtain new customers at a reasonable cost, retain existing
customers and encourage repeat purchases;
o the likelihood that both online and retail purchasing trends may rapidly
change;
o the level of product returns;
o merchandise shipping costs and delivery times;
o our ability to manage inventory levels;
o our ability to secure and maintain relationships with vendors;
o the possibility that our vendors may sell their products through other
sites; and
o intense competition for electronic commerce revenues, resulting in
downward pressure on gross margins.
In April 2000, we elected to shut down our e-commerce operations in Seattle,
Washington in order to focus our e-commerce operations on video games and
related products. Accordingly, we cannot assure you that electronic commerce
transactions will provide a significant or sustainable source of revenues or
profits. Additionally, due to the ability of consumers to easily compare prices
of similar products or services on competing websites and consumers' potential
preference for competing website's user interface, gross margins for electronic
commerce transactions which are narrower than for advertising businesses may
further narrow in the future and, accordingly, our revenues and profits from
electronic commerce arrangements may be materially and adversely affected. If
use of the Internet for electronic commerce does not continue to grow, our
business and financial condition would be materially and adversely affected.
Additionally, consumers may sue us if any of the products that we sell are
defective, fail to perform properly or injure the user. Some of our agreements
with manufacturers contain provisions intended to limit our exposure to
liability claims. However, these limitations may not prevent all potential
claims. Liability claims could require us to spend significant time and money in
litigation or to pay significant damages. As a result, any claims, whether or
not successful, could seriously damage our reputation and our business.
24
REVENUE IN PRIOR PERIODS IS NOT INDICATIVE OF FUTURE REVENUE.
Although we achieved significant total revenue growth during 1999 and 2000, our
revenue substantially decreased in 2001, 2002, and again in 2003, due to the
softness in the advertising market, which is expected to continue; our
cost-reduction and restructuring initiatives, which have resulted in a dramatic
reduction in our advertising sales force; increased competition among
games-focused websites; the closing of our community website and our web-hosting
property; and the sale of many of our games properties.
In addition, we have chosen to enter into a new line of business, the VoIP
telephony services market. The Internet telephony services industry is highly
competitive and our senior management has no experience operating in this
industry. We cannot accurately predict whether our VoIP business model will be
successful or when VoIP revenues will be significant in relation to our
consolidated operating results.
OUR QUARTERLY OPERATING RESULTS FLUCTUATE AND VARY BY SEASON.
Due to our significant change in operations, including the entry into a new line
of business, our historical quarterly operating results are not reflective of
future results. As a consequence, the trading price of our Common Stock would
almost certainly be materially and adversely affected. The factors that will
cause our quarterly operating results to fluctuate in the future include:
o acquisitions of new businesses or sales of our assets;
o declines in the number of sales or technical employees;
o the level of traffic on our websites;
o the overall demand for Internet telephony services, Internet advertising
and electronic commerce;
o the addition or loss of VoIP customers, advertisers on our games
properties and electronic commerce partners on our websites;
o overall usage and acceptance of the Internet;
o seasonal trends in advertising and electronic commerce sales and member
usage;
o other costs relating to the maintenance of our operations;
o the restructuring of our business;
o failure to generate significant revenues and profit margins from new
products and services;
o financial performance of other Internet companies who advertise on our
site; and
o competition from others providing services similar to those of ours.
OUR LIMITED OPERATING HISTORY MAKES FINANCIAL FORECASTING DIFFICULT.
We have a limited operating history for you to use in evaluating our prospects
and us. Our prospects should be considered in light of the risks encountered by
companies operating in new and rapidly evolving markets like ours. We may not
successfully address these risks. For example, we may not be able to:
o maintain levels of user traffic on our e-commerce websites;
o maintain or increase the percentage of our off-line advertising inventory
sold;
o maintain or increase both CPM levels and sponsorship revenues for our
games magazine;
o adapt to meet changes in our markets and competitive developments;
o develop or acquire content for our services; and
o identify, attract, retain and motivate qualified personnel.
Moreover, we acquired DPT on May 28, 2003, as a result of our decision to enter
the VoIP services business. DPT began its operations in October 2002, and its
limited operating history, as well as our inexperience in the Internet telephony
business will make financial forecasting even more difficult.
25
OUR MANAGEMENT TEAM IS INEXPERIENCED IN THE MANAGEMENT OF A PUBLIC COMPANY AND
IS SMALL FOR AN OPERATING COMPANY.
Our senior management team is few in number, and other than our Chairman,
President and Chief Financial Officer, have not had any previous experience
managing a public company. Only our Chairman has had experience managing a large
operating company. Accordingly, we cannot assure you that:
o our key employees will be able to work together effectively as a team;
o we will be able to retain the remaining members of our management team;
o we will be able to hire, train and manage our employee base;
o our systems, procedures or controls will be adequate to support our
operations; and
o our management will be able to achieve the rapid execution necessary to
fully exploit the market opportunity for our products and services.
WE DEPEND ON HIGHLY QUALIFIED TECHNICAL AND MANAGERIAL PERSONNEL.
Our future success also depends on our continuing ability to attract, retain and
motivate highly qualified technical expertise and managerial personnel necessary
to operate our businesses. We may need to give retention bonuses and stock
incentives to certain employees to keep them, which can be costly to the
Company. We may be unable to attract, assimilate or retain highly qualified
technical and managerial personnel in the future. Wages for managerial and
technical employees are increasing and are expected to continue to increase in
the future. We have from time to time in the past experienced, and could
continue to experience in the future if we need to hire any additional
personnel, difficulty in hiring and retaining highly skilled employees with
appropriate qualifications. In addition, we may have difficulty attracting
qualified employees due to the Company's restructuring, financial position and
scaling down of operations. Also, we may have difficulty attracting qualified
employees to work in the geographically remote location in Vermont of Chips &
Bits, Inc. and Strategy Plus, Inc. If we were unable to attract and retain the
technical and managerial personnel necessary to support and grow our businesses,
our businesses would likely be materially and adversely affected.
OUR OFFICERS, INCLUDING OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER AND PRESIDENT
HAVE OTHER INTERESTS AND TIME COMMITMENTS; WE HAVE CONFLICTS OF INTEREST WITH
SOME OF OUR DIRECTORS; WE HAVE FURTHER REDUCED OUR BOARD OF DIRECTORS. ALL OF
OUR DIRECTORS ARE EMPLOYEES OR STOCKHOLDERS OF THE COMPANY OR AFFILIATES OF OUR
LARGEST STOCKHOLDER.
Because our Chairman and Chief Executive Officer, Mr. Michael Egan, is an
officer or director of other companies, we have to compete for his time. Mr.
Egan became our Chief Executive Officer effective June 1, 2002. Mr. Egan is also
the controlling investor of Dancing Bear Investments, Inc., an entity controlled
by Mr. Egan, which is our largest stockholder. Mr. Egan has not committed to
devote any specific percentage of his business time with us. Accordingly, we
compete with Dancing Bear Investments, Inc. and Mr. Egan's other related
entities for his time.
Our President and Director, Mr. Edward A. Cespedes, is also an officer or
director of other companies. Accordingly, we must compete for his time. Mr.
Cespedes is an officer or director of various privately held entities and is
also affiliated with Dancing Bear Investments.
Our Vice President of Finance and Director, Ms. Robin Lebowitz is also
affiliated with Dancing Bear Investments. She is also an officer or director of
other companies or entities controlled by Mr. Egan and Mr. Cespedes.
Due to the relationships with his related entities, Mr. Egan will have an
inherent conflict of interest in making any decision related to transactions
between the related entities and us. We intend to review related party
transactions in the future on a case-by-case basis.
WE RELY ON THIRD PARTY OUTSOURCED HOSTING FACILITIES OVER WHICH WE HAVE LIMITED
CONTROL.
Our principal servers are located in Florida and New York at third party
outsourced hosting facilities. Our operations depend on the ability to protect
our systems against damage from unexpected events, including fire, power loss,
water damage, telecommunications failures and vandalism. Any disruption in our
Internet access due to the transition or otherwise could have a material adverse
effect on us. In addition, computer viruses, electronic break-ins or other
similar disruptive problems could also materially adversely affect our
businesses. Our reputation, theglobe.com brand and the brands of our VoIP
services business and game properties could be materially and adversely affected
by any problems experienced by our sites. We may not have insurance to
adequately compensate us for any losses that may occur due to any failures or
interruptions in our systems. We do not presently have any secondary off-site
systems or a formal disaster recovery plan.
26
HACKERS MAY ATTEMPT TO PENETRATE OUR SECURITY SYSTEM; ONLINE SECURITY BREACHES
COULD HARM OUR BUSINESS.
Consumer and supplier confidence in our businesses depends on maintaining
relevant security features. Substantial or ongoing security breaches on our
systems or other Internet-based systems could significantly harm our business.
We incur substantial expenses protecting against and remedying security
breaches. Security breaches also could damage our reputation and expose us to a
risk of loss or litigation. Experienced programmers or "hackers" have
successfully penetrated our systems and we expect that these attempts will
continue to occur from time to time. Because a hacker who is able to penetrate
our network security could misappropriate proprietary information or cause
interruptions in our products and services, we may have to expend significant
capital and resources to protect against or to alleviate problems caused by
these hackers. Additionally, we may not have a timely remedy against a hacker
who is able to penetrate our network security. Such security breaches could
materially adversely affect our company. In addition, the transmission of
computer viruses resulting from hackers or otherwise could expose us to
significant liability. Our insurance may not be adequate to reimburse us for
losses caused by security breaches. We also face risks associated with security
breaches affecting third parties with whom we have relationships.
ONLINE CREDIT CARD FRAUD CAN HARM OUR BUSINESS
The sale of our products and services over the Internet exposes us to credit
card fraud risks. Many of our products and services, including our voiceglo VoIP
services, can be ordered or established (in the case of new voiceglo accounts)
over the Internet using a major credit card for payment. The Company is exposed
to the risk that some of these credit card accounts are stolen or otherwise
fraudulently obtained. In general, the Company is not able to recover fraudulent
credit card charges from such accounts. In addition to the loss of revenue from
such fraudulent credit card use, the Company also remains liable to third
parties whose products or services are engaged by the Company (such as
termination fees due telecommunications providers) in connection with the
services being provided by the Company. We attempt to manage these fraud risks
through our internal controls and our monitoring and blocking systems. If those
efforts are not successful, fraud could cause our revenue to decline
significantly and our business, financial condition and results of operations to
be materially and adversely affected.
WE MAY BE EXPOSED TO LIABILITY FOR INFORMATION RETRIEVED FROM OR TRANSMITTED
OVER THE INTERNET OR FOR PRODUCTS SOLD OVER THE INTERNET.
Users may access content on our websites or the websites of our distribution
partners or other third parties through website links or other means, and they
may download content and subsequently transmit this content to others over the
Internet. This could result in claims against us based on a variety of theories,
including defamation, obscenity, negligence, copyright infringement, trademark
infringement or the wrongful actions of third parties. Other theories may be
brought based on the nature, publication and distribution of our content or
based on errors or false or misleading information provided on our websites.
Claims have been brought against online services in the past and we have
received inquiries from third parties regarding these matters. The claims could
be material in the future. We could also be exposed to liability for third party
content posted by users in our chat rooms or on our bulletin boards.
We also enter into agreements with commerce partners and sponsors under whom we
are entitled to receive a share of any revenue from the purchase of goods and
services through direct links from our sites. We sell products directly to
consumers which may expose us to additional legal risks, regulations by local,
state, federal and foreign authorities and potential liabilities to consumers of
these products and services, even if we do not ourselves provide these products
or services. We cannot assure you that any indemnification that may be provided
to us in some of these agreements with these parties will be adequate. Even if
these claims do not result in our liability, we could incur significant costs in
investigating and defending against these claims. The imposition of potential
liability for information carried on or disseminated through our systems could
require us to implement measures to reduce our exposure to liability. Those
measures may require the expenditure of substantial resources and limit the
attractiveness of our services. Additionally, our insurance policies may not
cover all potential liabilities to which we are exposed.
COMPETITION FOR USERS AND ADVERTISERS, AS WELL AS COMPETITION IN THE ELECTRONIC
COMMERCE MARKET, IS INTENSE AND IS EXPECTED TO INCREASE SIGNIFICANTLY.
Competition among games print magazines is high and increasing as online and
PC-based games continue to gain mainstream popularity, and new, cutting-edge
games and console systems continue to come to the consumer market. The magazine
publishing industry is highly competitive. We compete for advertising and
circulation revenues principally with publishers of other technology and games
magazines with similar editorial content as our magazine. The technology
magazine industry has traditionally been dominated by a small number of large
publishers. We believe that we compete with other technology and games
publications based on the nature and quality of our magazines' editorial content
and the attractive demographics of our readers. Due to our limited resources, we
may not be able to compete effectively in any of the preceding categories in the
future. In addition to other technology and games magazines, our magazine also
competes for advertising revenues with general-interest magazines and other
forms of media, including broadcast and cable television, radio, newspaper,
direct marketing and electronic media. In competing with general-interest
magazines and other forms of media, we rely on our ability to reach a targeted
segment of the population in a cost-effective manner.
The market for users and Internet advertising among websites is rapidly
evolving. Competition for users and advertisers, as well as competition in the
electronic commerce market, is intense and is expected to increase
significantly. Barriers to entry are relatively insubstantial and we believe we
will face competitive pressures from many additional companies both in the
United States and abroad. Accordingly, pricing pressure on advertising rates
will continue to increase in the future, which could have a material adverse
effect on us to the extent that any remaining businesses rely on advertising.
All types of websites compete for users. Competitor websites include other games
information networks and various other types of websites. We believe that the
principal competitive factors in attracting users to a site are:
o functionality of the website;
o brand recognition;
o affinity and loyalty;
o broad demographic focus;
27
o open access for visitors;
o critical mass of users;
o attractiveness of content and services to users; and
o pricing and customer service for electronic commerce sales.
We compete for users, advertisers and electronic commerce marketers with the
following types of companies:
o publishers and distributors of television, radio and print, such as CBS,
NBC and Time Warner;
o electronic commerce websites, such as Amazon.com; and
o other websites serving game enthusiasts, including Ziff Davis' Gamespot
and CNET's Gamecenter.
Many of our existing and potential competitors and traditional media companies,
have the following advantages:
o longer operating histories in the Internet market, - greater name
recognition;
o larger customer bases;
o significantly greater financial, technical and marketing resources; and,
o not seeking to sell their businesses.
In addition, there has been significant consolidation in the industry. This
consolidation may continue in the future. We could face increased competition in
the future from traditional media companies, including cable, newspaper,
magazine, television and radio companies. A number of these large traditional
media companies have been active in Internet related activities including the
games space. Those competitors may be able to undertake more extensive marketing
campaigns for their brands and services, adopt more aggressive advertising
pricing policies and make more attractive offers to potential employees,
distribution partners, electronic commerce companies, advertisers, third-party
content providers and acquisition targets. Furthermore, our existing and
potential competitors may develop sites that are equal or superior in quality
to, or that achieve greater market acceptance than, our sites. We cannot assure
you that advertisers may not perceive our competitors' sites as more desirable
than ours.
Additionally, the electronic commerce market is rapidly evolving, and we expect
competition among electronic commerce merchants to continue to increase
significantly. Because the Internet allows consumers to easily compare prices of
similar products or services on competing websites and there are low barriers to
entry for potential competitors, gross margins for electronic commerce
transactions may continue to be narrow in the future. Many of the products that
we sell on our websites may be sold by the maker of the product directly, or by
other websites. Competition among Internet retailers, our electronic commerce
partners and product makers may have a material adverse effect on our ability to
generate revenues through electronic commerce transactions or from these
electronic commerce partners.
WE ARE INVOLVED IN SECURITIES CLASS ACTION LITIGATION.
We are a party to the securities class action litigation described in Note 9 to
the Consolidated Financial Statements - "Commitments and Contingencies". The
defense of the litigation may increase our expenses and will occupy management's
attention and resources, and an adverse outcome in this litigation could
materially adversely affect us.
VARIOUS STOCKHOLDERS, INDIVIDUALLY OR IN THE AGGREGATE, CONTROL US.
Michael S. Egan, our Chairman and Chief Executive Officer, beneficially owns or
controls, directly or indirectly, approximately 59 million shares of our Common
Stock as of March 24, 2004, which in the aggregate represents approximately 43%
of the outstanding shares of our Common Stock (treating as outstanding for this
purpose the shares of Common Stock issuable upon exercise of the options owned
by Mr. Egan or his affiliates). Accordingly, Mr. Egan would likely be able to
exercise significant influence over, if not control, any stockholder vote.
OUR STOCK PRICE IS VOLATILE.
The trading price of our Common Stock has been volatile and may continue to be
volatile in response to various factors, including:
o entrance into new lines of business, including acquisitions of businesses;
o quarterly variations in our operating results;
o competitive announcements;
28
o sales of any of our remaining games properties;
o the operating and stock price performance of other companies that
investors may deem comparable to us; and
o news relating to trends in our markets.
The stock market has experienced significant price and volume fluctuations, and
the market prices of technology companies, particularly Internet-related
companies, have been highly volatile. Our stock is also more volatile due to the
limited trading volume.
THE SALE OF SHARES ELIGIBLE FOR FUTURE SALE IN THE OPEN MARKET COULD KEEP OUR
STOCK PRICE FROM IMPROVING.
Sales of significant amounts of Common Stock in the public market in the future,
the perception that sales will occur or the registration of such shares could
materially and adversely affect the ability of the market price of the Common
Stock to increase even if our business prospects were to improve. Also, we may
issue additional shares of our common stock or other equity instruments which
may be convertible into common stock at some future date, which could further
adversely affect our stock price.
As of December 31, 2003, there were outstanding options to purchase
approximately 9,943,000 shares of Common Stock, which become eligible for sale
in the public market from time to time depending on vesting and the expiration
of lock-up agreements. The issuance of these securities is registered under the
Securities Act and consequently, subject to certain volume restrictions as to
options owned by executive officers, will be freely tradable. In addition, as of
December 31, 2003, there were outstanding warrants to purchase up to
approximately 20,052,000 shares of our Common Stock upon exercise, together with
an additional 2,750,000 shares issuable upon exercise of warrants subject to
earn-out arrangements. Additionally, as of December 31, 2003, the outstanding
shares of our Series F Preferred Stock and the $1,750,000 Convertible Notes are
convertible into approximately 16,667,000 shares and 19,444,000 shares of our
Common Stock, respectively. Substantially all of our stockholders holding
restricted securities, including shares issuable upon the exercise of warrants
to purchase our Common Stock, are entitled to registration rights under various
conditions.
In March 2004, theglobe.com, inc. completed a private offering of 333,816 units
(the "Units") for a purchase price of $85 per Unit (the "Private Offering").
Each Unit consisted of 100 shares of the Company's common stock and warrants to
acquire 50 shares of the common stock (the "Warrants"). The Warrants are
exercisable for a period of five years commencing 60 days after the initial
closing at an initial exercise price of $.001 per share. The aggregate number of
shares of common stock issued in the Private Offering was 33,381,647 shares,
together with Warrants to acquire an aggregate of 16,690,824 shares. We are
contractually obligated to register the shares of common stock issued in the
Private Offering as well as the shares of common stock underlying the Warrants.
In connection with the March 2004 Private Offering, Mr. Egan, our Chairman,
Chief Executive Officer and principal stockholder, together with certain of his
affiliates and other parties, converted a $2,000,000 Convertible Bridge Note ,
an aggregate of $1,750,000 of Secured Convertible Notes and all of the Company's
outstanding shares of Series F Preferred Stock, and exercised all of the
warrants issued in connection with the foregoing Secured Convertible Notes and
Series F Preferred Stock, together with certain warrants issued to Dancing Bear
Investments (an affiliate of Mr. Egan). As a result of such conversions and
exercises, the Company issued an aggregate of approximately 48.75 million shares
of Common Stock. After taking into account the conversions, exercises and new
investment, as of March 24, 2004, there were outstanding warrants to purchase up
to approximately 24,254,000 shares of our Common Stock upon exercise, together
with an additional 2,750,000 shares issuable upon exercise of warrants subject
to earn-out arrangements.
WE ARE CONTRACTUALLY OBLIGATED TO REGISTER CERTAIN OUTSTANDING SECURITIES AND
MAY FACE SUBSTANTIAL PENALTIES IF WE FAIL TO DO SO.
In connection with the March 2004 Private Offering, we issued an aggregate of
33,381,647 shares of Common Stock, together with Warrants to acquire and
additional 16,690,824 shares (the "Securities"). Pursuant to the terms of the
Private Offering, the Company is contractually obligated to file a registration
statement relating to the resale of the Securities on or about April 22, 2004
and to cause such registration statement to become effective on or about July 6,
2004 (or 30 days earlier if such registration statement is not reviewed by the
Securities and Exchange Commission). In the event the Company is late in any of
its registration obligations, it will be liable for payment of a late fee of 5%
of the amount raised in the Private Offering per month, not to exceed 25% in the
aggregate. Any such late fee may be payable in either cash or additional shares
of Common Stock (valued for such purpose at $0.57 per share), or any combination
of the two, at the option of the Company. Any shares so issued would be included
in the foregoing registration statement. Any such issuance of shares of our
common stock may be substantially dilutive of existing shareholders (other than
the investors in the Private Offering to whom such shares would be issued).
DELISTING OF OUR COMMON STOCK MAKES IT MORE DIFFICULT FOR INVESTORS TO SELL
SHARES. THIS MAY POTENTIALLY LEAD TO FUTURE MARKET DECLINES.
The shares of our Common Stock were delisted from the NASDAQ national market in
April 2001 and are now traded in the over-the-counter market on what is commonly
referred to as the electronic bulletin board or "OTCBB". As a result, an
investor may find it more difficult to dispose of or obtain accurate quotations
as to the market value of the securities. The trading volume of our shares has
dramatically declined since the delisting. In addition, we are now subject to a
Rule promulgated by the Securities and Exchange Commission that, if we fail to
29
meet criteria set forth in such Rule, various practice requirements are imposed
on broker-dealers who sell securities governed by the Rule to persons other than
established customers and accredited investors. For these types of transactions,
the broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transactions
prior to sale. Consequently, the Rule may have a materially adverse effect on
the ability of broker-dealers to sell the securities, which may materially
affect the ability of shareholders to sell the securities in the secondary
market.
The delisting has made trading our shares more difficult for investors,
potentially leading to further declines in share price and making it less likely
our stock price will increase. It has also made it more difficult for us to
raise additional capital. We may also incur additional costs under state
blue-sky laws if we sell equity due to our delisting.
ANTI-TAKEOVER PROVISIONS AFFECTING US COULD PREVENT OR DELAY A CHANGE OF
CONTROL.
Provisions of our charter, by-laws and stockholder rights plan and provisions of
applicable Delaware law may:
o have the effect of delaying, deferring or preventing a change in control
of our company;
o discourage bids of our Common Stock at a premium over the market price; or
o adversely affect the market price of, and the voting and other rights of
the holders of, our Common Stock.
Certain Delaware laws could have the effect of delaying, deterring or preventing
a change in control of our company. One of these laws prohibits us from engaging
in a business combination with any interested stockholder for a period of three
years from the date the person became an interested stockholder, unless various
conditions are met. In addition, provisions of our charter and by-laws, and the
significant amount of Common Stock held by our current and former executive
officers, directors and affiliates, could together have the effect of
discouraging potential takeover attempts or making it more difficult for
stockholders to change management. In addition, the employment contracts of our
Chairman, CEO and Vice President of Finance provide for substantial lump sum
payments ranging from 2 (for the Vice President) to 10 times (for each of the
Chairman and CEO) of their respective average combined salaries and bonuses
(together with the continuation of various benefits for extended periods) in the
event of their termination without cause or a termination of the executive for
"good reason", which is conclusively presumed in the event of a
"change-in-control" (as such terms are defined in such agreements).
WE MAY HAVE TO TAKE ACTIONS TO AVOID REGISTRATION UNDER THE INVESTMENT COMPANY
ACT.
Under the Investment Company Act of 1940 (the "1940 Act"), a company meeting the
definition of an "investment company" is subject to various stringent legal
requirements on its operations. A company can become subject to the 1940 Act if,
among other reasons, it owns investment securities with a value exceeding 40
percent of the value of its total assets (excluding government securities and
cash items) on an unconsolidated basis, unless a particular exemption of safe
harbor applies. Although we are not currently subject to the 1940 Act, at some
point in the future due to the ongoing sale of our assets, the percentage of the
Company's assets which consist of investment securities may exceed 40 percent of
the value of its total assets on an unconsolidated basis. Rule 3a-2 of the 1940
Act provides a temporary exemption from registration under the 1940 Act, for up
to one year, for companies that have a bona fide intent to engage, as soon as
reasonably possible, in business other than investing, reinvesting, owning,
holding or trading in securities ("transient investment companies"). If, due to
future sales of our assets or changes in the value of our existing assets, we
become subject to the 1940 Act, we intend to take all actions that would allow
reliance on the one-year exemption for "transient investment companies",
including a resolution by the Board of Directors that the Company has bona fide
intent to engage, as soon as reasonably possible, in business other than
investing, reinvesting, owning, holding or trading in securities. After the
one-year period, we would be required to comply with the 1940 Act unless our
operations and assets result in us no longer meeting the definition of
Investment Company.
WE CHANGED OUR INDEPENDENT AUDITORS.
On August 8, 2002, we dismissed our independent accountants, KPMG LLP ("KPMG"),
and engaged Rachlin Cohen & Holtz LLP ("Rachlin Cohen") as our new independent
accountants.
WE HAVE CLOSED OUR COMMUNITY SITE, OUR SMALL BUSINESS WEB-HOSTING PROPERTY AND
HAVE SOLD CERTAIN OF OUR GAMES PROPERTIES AND MAY SELL THE REMAINDER OF OUR
GAMES PROPERTIES. WE MAY NOT BE ABLE TO SELL THESE PROPERTIES FOR ANY
SIGNIFICANT VALUE.
Due to the significant and prolonged decline in the Internet advertising sector,
the Company elected to close its community website at "www.theglobe.com" and its
small business web-hosting property at "www.webjump.com" in August 2001. The
Company has already sold substantially all the assets of (i) Kaleidoscope
Networks Limited, the English subsidiary of Attitude Network Ltd. that operated
GamesDomain.com and GamesDomain.co.uk, (ii) KidsDomain.com and KidsDomain.co.uk,
and (iii) HappyPuppy.com and HappyPuppy.co.uk. In addition, the Company sold the
URL of webjump.com. The Company is seeking buyers for its remaining games
properties, Chips & Bits, Inc., an electronic commerce retailer that focuses
primarily on game enthusiasts' and Strategy Plus, Inc., a media property that
publishes a monthly games magazine and a game enthusiast website. The Company
may be unable to sell its remaining games properties quickly, if at all, which
would result in continued depletion of its cash position since the games
business currently operates at a cash loss. The games properties may also lose
some of their value while we try to sell them as we do not have full corporate
30
staff to support these businesses. In addition, the "theglobe.com" brand
continues to lose significant value since the website "www.theglobe.com" was
taken offline August 15, 2001. The closing of our community site and our small
business web-hosting site has also adversely affected our electronic commerce
due to the inability of those websites after their closure to refer traffic to
the Chips & Bits website. We cannot assure you that we will be able to sell all
or any of the remaining games business quickly, if at all, or at any significant
price, or that there will be any return to our equity holders. In addition, the
Company currently has a significant net operating loss carry forward that may
help to offset Federal income taxes in the future, should the Company achieve
profitability. The rules governing use of the net operating loss carry forward
asset are complex and depend on a variety of factors, including maintaining some
continuity of existing business lines. There is no guarantee that we will be
able to maintain use of the net operating loss carry forward if we choose to
sell our games properties or enter different business lines in the future.
31
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THEGLOBE.COM, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets F-2
Statements of Operations F-3
Statements of Stockholders' Equity and Comprehensive Income(Loss) F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-7
32
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
theglobe.com, inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of theglobe.com,
inc. and Subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income (loss), and cash flows for each of the years ended December 31, 2003 and
2002. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
theglobe.com, inc. and Subsidiaries as of December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of the
years ended December 31, 2003 and 2002, in conformity with accounting principles
generally accepted in the United States.
RACHLIN COHEN & HOLTZ LLP
Fort Lauderdale, Florida February 20, 2004, except for Note 14, as to which the
date is March 24, 2004
F-1
THEGLOBE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
Pro forma 2003 2002
------------- ------------- -------------
ASSETS (Unaudited)
------ (Note 14)
Current Assets:
Cash and cash equivalents $ 30,236,000 $ 1,061,702 $ 725,422
Marketable securities ============ 267,970 --
Accounts receivable, less allowance for doubtful
accounts of approximately $113,000 and $130,000 958,487 1,247,390
Inventory, less reserves of approximately $109,000
and $100,000 770,314 363,982
Prepaid expenses 550,930 331,114
Deposits on inventory purchases 820,675 --
Other current assets 26,357 --
------------- -------------
Total current assets 4,456,435 2,667,908
Intangible assets 199,020 164,960
Property and equipment, net 2,416,383 174,117
Other assets 100,240 40,000
------------- -------------
Total assets $ 7,172,078 $ 3,046,985
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 1,935,142 $ 1,395,929
Accrued expenses and other current liabilities 840,376 447,189
Deferred revenue 176,591 169,519
Notes payable and current portion of long-term debt 877 123,583
------------- -------------
Total current liabilities 2,952,986 2,136,220
Long-term debt $ 285,000 1,913,610 87,852
Other long-term liabilities ============ 124,943 --
------------- -------------
Total liabilities 4,991,539 2,224,072
------------- -------------
Stockholders' Equity:
Preferred stock, $0.001 par value; 3,000,000
shares authorized; 333,333 shares issued and
outstanding at December 31, 2003,at liquidation value $ -- 500,000 --
Common stock, $0.001 par value; 200,000,000 shares ============
authorized; 50,245,574 and 31,081,574 shares issued
at December 31, 2003 and 2002, respectively
132,403,130 pro forma (unaudited) $ 132,403 50,246 31,082
============
Additional paid-in capital $ 269,523,000 238,301,862 218,310,565
Treasury stock, 699,281 common shares, at cost ============ (371,458) (371,458)
Accumulated other comprehensive income 1,562 --
Accumulated deficit (236,301,673) (217,147,276)
------------- -------------
Total stockholders' equity $ 32,984,000 2,180,539 822,913
============= ------------- -------------
Total liabilities and stockholders' equity $ 7,172,078 $ 3,046,985
============= =============
See notes to consolidated financial statements.
F-2
THEGLOBE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
------------ ------------
Net Revenue:
Advertising $ 2,555,002 $ 3,131,371
Magazine sales 2,014,458 3,461,387
Electronic commerce and other 1,462,911 3,074,327
Telephony services 548,081 --
------------ ------------
6,580,452 9,667,085
Operating Expenses:
Cost of products and publications sold 3,252,498 5,563,010
Data communications, telecom and network operations 1,448,840 --
Sales and marketing 3,297,897 3,523,226
Product development 902,415 652,997
General and administrative 5,253,755 2,780,060
Depreciation 257,560 88,580
Amortization of intangible assets 72,182 --
Impairment charge 908,384 --
------------ ------------
15,393,531 12,607,873
------------ ------------
Loss from Operations (8,813,079) (2,940,788)
------------ ------------
Other Income (Expense):
Interest income (expense), net (1,777,689) 349,895
Other expense, net (443,629) (11,768)
------------ ------------
(2,221,318) 338,127
------------ ------------
Loss Before Provision for Income Taxes (11,034,397) (2,602,661)
Provision for Income Taxes -- 12,000
------------ ------------
Net Loss $(11,034,397) $ (2,614,661)
============ ============
Basic and Diluted Net Loss Per Common Share $ (0.49) $ (0.09)
============ ============
Weighted Average Common Shares Outstanding 38,710,917 30,382,293
============ ============
See notes to consolidated financial statements.
F-3
THEGLOBE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
Accumulated
Common Stock Additional Other
Preferred -------------------------- Paid-in Treasury Comprehensive
Stock Shares Amount Capital Stock Income (Loss)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2001 $ -- 31,081,574 $ 31,082 $218,255,565 $ (371,458) $ (120,866)
Year Ended December 31, 2002:
Net loss -- -- -- -- -- --
Disposal of Attitude Network-
translation loss -- -- -- -- -- 121,516
Net unrealized (loss) on
securities -- -- -- -- -- (650)
Comprehensive loss -- -- -- -- -- --
Issuances of stock options:
Severance arrangement -- -- -- 13,000 -- --
Acquisition -- -- -- 42,000 -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002 -- 31,081,574 31,082 218,310,565 (371,458) --
Year Ended December 31, 2003:
Net loss
Net unrealized gain on
securities -- -- -- -- -- 1,562
Comprehensive loss -- -- -- -- -- --
Issuances of preferred stock:
Series F Preferred Stock 500,000 -- -- 500,000 -- --
Series G Automatically Converting
Preferred Stock 7,315,000 -- -- 8,945,690 -- --
Issuances of common stock:
Conversion of Series G Automatically
Converting Preferred Stock (7,315,000) 17,360,000 17,360 7,297,640 -- --
Acquisition of Direct Partner
Telecom, Inc. -- 1,375,000 1,375 636,625 -- --
Exercise of stock options -- 429,000 429 118,166 -- --
Beneficial conversion feature of
Convertible Notes -- -- -- 1,750,000 -- --
Employee stock-based compensation -- -- -- 417,567 -- --
Issuances of stock options
to non-employees -- -- -- 225,609 -- --
Contributed capital in lieu of
salary by officer -- -- -- 100,000 -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2003 $ 500,000 50,245,574 $ 50,246 $238,301,862 $ (371,458) $ 1,562
============ ============ ============ ============ ============ ============
Accumulated
Deficit Total
------------- -------------
Balance at December 31, 2001 $(214,532,615) $ 3,261,708
Year Ended December 31, 2002:
Net loss (2,614,661) (2,614,661)
Disposal of Attitude Network-
translation loss -- 121,516
Net unrealized (loss) on
securities -- (650)
-------------
Comprehensive loss -- (2,493,795)
-------------
Issuances of stock options:
Severance arrangement -- 13,000
Acquisition -- 42,000
------------- -------------
Balance, December 31, 2002 (217,147,276) 822,913
Year Ended December 31, 2003:
Net loss (11,034,397) (11,034,397)
Net unrealized gain on
securities -- 1,562
-------------
Comprehensive loss -- (11,032,835)
-------------
Issuances of preferred stock:
Series F Preferred Stock (500,000) 500,000
Series G Automatically Converting
Preferred Stock (7,620,000) 8,640,690
Issuances of common stock:
Conversion of Series G Automatically
Converting Preferred Stock -- --
Acquisition of Direct Partner Telecom, Inc. -- 638,000
Exercise of stock options -- 118,595
Beneficial conversion feature of
Convertible Notes -- 1,750,000
Employee stock-based compensation -- 417,567
Issuances of stock options
to non-employees -- 225,609
Contributed capital in lieu of
salary by officer -- 100,000
------------- -------------
Balance, December 31, 2003 $(236,301,673) $ 2,180,539
============= =============
See notes to consolidated financial statements.
F-4
THEGLOBE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
------------ ------------
Cash Flows from Operating Activities:
Net loss $(11,034,397) $ (2,614,661)
Adjustments to reconcile net loss to net cash
and cash equivalents used in operating activities:
Depreciation and amortization 329,742 88,580
Provisions for excess and obsolete inventory 110,126 --
Provisions for uncollectible accounts receivable 114,888 --
Non-cash interest expense 1,739,635 --
Reserve against amounts loaned to Internet venture 495,000 --
Employee stock compensation 417,567 --
Compensation related to non-employee stock options 225,609 --
Options granted in connection with severance arrangement -- 13,000
Non-cash impairment charge 908,384 --
Non-cash compensation 100,000 --
Loss on disposal or write-off of equipment 61,072 855
Foreign exchange loss on Canadian denominated debt 19,623 --
Non-cash gain on settlements of liabilities (64,207) --
Disposal of Attitude Network- translation loss -- 121,516
Gain on sale of Happy Puppy -- (134,500)
Gain on sale of marketable securities -- (650)
Changes in operating assets and liabilities, net of acquisition and
dispositions:
Accounts receivable, net 328,453 290,502
Inventory, net (516,458) 168,583
Prepaid and other current assets (1,058,806) 706,856
Accounts payable 508,862 55,301
Accrued expenses and other current liabilities 253,215 (592,047)
Deferred revenue 7,072 (59,957)
Other long-term liabilities 122,487 --
------------ ------------
Net cash and cash equivalents used in operating activities (6,932,133) (1,956,622)
------------ ------------
Cash Flows from Investing Activities:
Purchases of marketable securities (10,345,828) --
Proceeds from sales and maturities of marketable securities 10,079,420 57,650
Cash acquired in acquisition of business 60,948 --
Proceeds from sale of properties -- 135,000
Purchases of property and equipment (2,424,791) (32,250)
Amounts loaned to Internet venture (495,000) (40,000)
Patent costs incurred (62,492) --
Payment of security deposits, net (7,600) --
Proceeds from sale of property and equipment -- 11,000
------------ ------------
Net cash and cash equivalents provided by (used in)
investing activities (3,195,343) 131,400
------------ ------------
Cash Flows from Financing Activities:
Borrowings on notes payable and long-term debt 1,750,000 --
Payments on notes payable and long-term debt (545,529) (13,184)
Proceeds from issuances of preferred stock, net 9,140,690 --
Proceeds from exercise of common stock options 118,595 --
------------ ------------
Net cash and cash equivalents provided by (used in)
financing activities 10,463,756 (13,184)
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents 336,280 (1,838,406)
Cash and Cash Equivalents, Beginning 725,422 2,563,828
------------ ------------
Cash and Cash Equivalents, Ending $ 1,061,702 $ 725,422
============ ============
(Continued)
See notes to consolidated financial statements.
F-5
THEGLOBE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Year Ended December 31,
2003 2002
------------ ------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 39,819 $ 25,018
============ ============
Income taxes $ -- $ --
============ ============
Supplemental Disclosure of Non-Cash Transactions:
Common stock and warrants issued in connection with acquisition
of Direct Partner Telecom, Inc. $ 638,000 $ --
============ ============
Conversion of Series G Automatically Converting Preferred
Stock into Common Stock $ 7,315,000 $ --
============ ============
Additional paid-in capital attributable to beneficial conversion features of
Series F Preferred Stock and $1,750,000 Convertible Notes $ 2,250,000 $ --
============ ============
Preferred dividends recorded as a result of beneficial conversion
features of preferred stock issued $ 8,120,000 $ --
============ ============
Debt assumed in purchase of intangible asset $ -- $ 122,960
============ ============
Intangible asset purchased in exchange for warrants $ -- $ 42,000
============ ============
See notes to consolidated financial statements.
F-6
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
theglobe.com, inc. (the "Company" or "theglobe") was incorporated on May 1, 1995
(inception) and commenced operations on that date. Originally, theglobe.com was
an online community with registered members and users in the United States and
abroad. That product gave users the freedom to personalize their online
experience by publishing their own content and by interacting with others having
similar interests. However, due to the deterioration of the online advertising
market, the Company was forced to restructure and ceased the operations of its
online community on August 15, 2001. The Company then sold most of its remaining
online and offline properties. In October 2001, the Company sold all of the
assets used in connection with the Games Domain and Console Domain websites to
British Telecommunications plc, and all of the assets used in connection with
the Kids Domain website to Kaboose Inc. In February 2002, the Company sold all
of the assets used in connection with the Happy Puppy website to Internet Game
Distribution, LLC.
On June 1, 2002, Chairman Michael S. Egan and Director Edward A. Cespedes became
Chief Executive Officer and President of the Company, respectively. The Company
continues to operate its Computer Games print magazine and the associated
website Computer Games Online (www.cgonline.com), as well as the games
distribution business of Chips & Bits, Inc. (www.chipsbits.com). The Company
continues to actively explore a number of strategic alternatives for its
remaining online and offline game properties, including continuing its
operations and using its cash on hand, selling some or all of these properties
and/or entering into new or different lines of business.
On November 14, 2002, the Company acquired certain Voice over Internet Protocol
("VoIP") assets and is now aggressively pursuing opportunities related to this
acquisition under the brand name, voiceglo. In exchange for the assets, the
Company issued warrants to acquire 1,750,000 shares of its Common Stock and an
additional 425,000 warrants as part of an earn-out structure upon the attainment
of certain performance targets. The earn-out performance targets were not
achieved and the 425,000 earn-out warrants expired on December 31, 2003.
On May 28, 2003, the Company acquired Direct Partner Telecom, Inc. ("DPT"), a
company engaged in VoIP telephony services in exchange for 1,375,000 shares of
the Company's Common Stock and the issuance of warrants to acquire 500,000
shares of the Company's Common Stock. The transaction included an earn-out
arrangement whereby the former shareholders of DPT may earn additional warrants
to acquire up to 2,750,000 shares of the Company's Common Stock at an exercise
price of $0.72 per share upon the attainment of certain performance targets by
DPT over approximately a three year period following the date of acquisition.
DPT was a specialized international facilities-based communications carrier
providing VoIP communications services to emerging countries. DPT was formed in
2002 to leverage its management's international relationships and network
operations experience in the deployment of international voice and multimedia
networks. DPT is a licensed facilities-based carrier headquartered in Ft.
Lauderdale, Florida with switching facilities in New York, New York and Miami,
Florida. The DPT network provides "next generation" packet-based telephony and
value added data services to carriers and businesses in the United States and
Internationally.
The Company acquired all of the physical assets and intellectual property of DPT
and originally planned to continue to operate the company as a subsidiary and
engage in the provision of VoIP services to other telephony businesses on a
wholesale transactional basis. In the first quarter of 2004, the Company decided
to suspend DPT's wholesale business and dedicate the DPT physical and
intellectual assets to its retail VoIP business, which is conducted under the
name "voiceglo". As a result, the Company wrote off the goodwill associated with
the purchase of DPT and intends to employ these physical assets in the build out
of the VoIP network.
As of December 31, 2003, the Company's revenue sources were principally from the
sale of print advertising in its Computer Games magazine; the sale of video
games and related products through Chips & Bits, Inc., its games distribution
business; and the sale of its Computer Games magazine through newsstands and
subscriptions. Management's intent, going forward, is to devote substantial
monetary, management and human resources to the Company's "voiceglo" VoIP
business.
Profitability and Liquidity Considerations
At December 31, 2003, the Company reflected stockholders' equity of $2,180,539.
However, as of December 31, 2003, the Company had an accumulated deficit of
$236,301,673 and had incurred net losses for each of the years ended December
31, 2003 and 2002 of $11,034,397 and $2,614,661, respectively. Since November
2002, the Company has been expending significant resources in connection with
the launch of its VoIP telephony business. In response to the previously
described circumstances, management has the following plans:
F-7
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Liquidity
As further discussed in Note 14, "Subsequent Events," during the first quarter
of 2004, the Company completed a private offering of common stock for total
proceeds of approximately $28,374,400. The purpose of the private offering was
to raise funds for use primarily in the Company's developing voiceglo business,
including the deployment of networks, website development, marketing, and
capital infrastructure expenditures and working capital. Proceeds may also be
used in connection with theglobe's other existing or future business operations.
Profitability
In order to achieve and maintain profitability the Company believes it needs to
build and sustain a customer base of a certain size. Once it has reached this
size, revenue will be sufficient to cover fixed costs associated with the
construction and maintenance of the telephony services network and
administrative overhead. To reach this size, the Company must execute a
marketing plan which attracts a substantial number of potential customers to the
Company's website. From this number, management believes an estimated percentage
will download the Company's free software. Of that group, management believes a
percentage will upgrade to a monthly pay-as-you go plan.
The growth needed to maintain profitability will be a function of the Company's
ability to manage customer churn and to continue to upgrade the network.
Customer churn rate should become predictable as the customer population grows.
Incremental network expansion and upgrade should cost less, on a per customer
basis, then the initial network build out.
Summary
Management believes that the actions presently being taken by the Company
provide the opportunity for the Company to improve profitability. However, there
can be no assurances that management's plans will be achieved.
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries from their respective dates of acquisition. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(b) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. These estimates and assumptions relate to estimates of collectibility of
accounts receivable, the valuation of inventory, accruals, the valuations of
fair values of options and warrants and other factors. Actual results could
differ from those estimates.
(c) CASH AND CASH EQUIVALENTS
Cash equivalents consist of money market funds and highly liquid short-term
investments with qualified financial institutions. The Company considers all
highly liquid securities with original maturities of three months or less to be
cash equivalents.
(d) MARKETABLE SECURITIES
The Company accounts for its investment in debt and equity securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." All such
investments are classified as available-for-sale as of December 31, 2003.
Available-for-sale securities are stated at market value, which approximates
fair value, and unrealized holding gains and losses are excluded from earnings,
net of applicable income taxes, and included as a component of stockholders'
equity until realized.
F-8
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
The following is a summary of available-for-sale securities as of December 31,
2003:
Gross
Cost Unrealized Gain Fair Value
-------- --------------- ----------
Preferred Securities $225,000 $ -- $225,000
U.S. Treasury Bills 41,408 1,562 42,970
-------- -------- --------
Total $266,408 $ 1,562 $267,970
======== ======== ========
During the year ended December 31, 2003, the Company had no significant realized
gains on sales of available-for-sale securities. The gross unrealized gain of
$1,562 as of December 31, 2003, has been included in stockholders' equity as
"Accumulated Other Comprehensive Income" in the accompanying consolidated
balance sheet. The Company had no available-for-sale securities as of December
31, 2002.
(e) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of certain of the Company's financial instruments, including
cash, cash equivalents, short-term investments, accounts receivable, accounts
payable, accrued expenses and deferred revenue, approximate their fair value at
December 31, 2003 and 2002 due to their short maturities.
(f) INVENTORY
Inventories, consisting primarily of products available for sale, are recorded
on a first in, first out basis and valued at the lower of cost or market value.
The Company's reserves for excess and obsolete inventory as of December 31, 2003
and December 31, 2002 were approximately $109,000 and $100,000, respectively.
(g) LONG-LIVED ASSETS
Long-lived assets, including property and equipment, goodwill and other
intangible assets are reviewed for impairment annually or whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable, the Company estimates the
undiscounted future cash flows to result from the use of the asset and its
ultimate disposition. If the sum of the undiscounted cash flows is less than the
carrying value, the Company recognizes an impairment loss, measured as the
amount by which the carrying value exceeds the fair value of the asset. Fair
value would generally be determined by market value.
During the first quarter of 2004, the Company's management decided to suspend
DPT's wholesale business and to dedicate the DPT physical and intellectual
assets to its retail VoIP business. As a result, the Company reviewed the
long-lived assets associated with the wholesale VoIP business for impairment.
Goodwill of $577,134 and the unamortized balance of the non-compete intangible
asset of $331,250 recorded in connection with the May 2003 acquisition of DPT
were written off and recorded as an impairment loss in the accompanying
statement of operations for the year ended December 31, 2003. Refer to Note 2,
"Acquisitions and Disposition" for a discussion of the purchase of DPT.
Intangible assets included in the accompanying consolidated balance sheet as of
December 31, 2003, are being amortized on a straight-line basis over their
estimated useful lives or three years.
F-9
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Property and equipment is stated at cost, net of accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the related assets, as follows:
Estimated
Useful Lives
-------------
Network equipment 3 years
Computer equipment and software 3 years
Office equipment 3 years
Furniture and fixtures 3-7 years
Leasehold improvements 5 years
The Company capitalizes the cost of internal-use software which has a useful
life in excess of one year in accordance with Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Subsequent additions, modifications, or upgrades to internal-use
software are capitalized only to the extent that they allow the software to
perform a task it previously did not perform. Software maintenance and training
costs are expensed in the period in which they are incurred. Capitalized
computer software costs are amortized using the straight-line method over three
years.
(h) CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit risk
consist primarily of cash and cash equivalents, marketable securities and trade
accounts receivable. The Company maintains its cash and cash equivalents with
various financial institutions and invests its funds among a diverse group of
issuers and instruments. The Company performs ongoing credit evaluations of its
customers' financial condition and establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of customers, historical
trends and other information. Concentration of credit risk is limited due to the
Company's large number of customers.
(i) REVENUE RECOGNITION
ADVERTISING
Advertising revenue from the sale of print advertisements under short-term
contracts in the games information magazine, Computer Games, are recognized at
the on-sale date of the magazine.
The Company participates in barter transactions whereby the Company trades
marketing data in exchange for advertisements in the publications of other
companies. Barter revenue and expenses are recorded at the fair market value of
services provided or received, whichever is more readily determinable in the
circumstances. Revenue from barter transactions is recognized as income when
advertisements or other products are delivered by the Company. Barter expense is
recognized when the Company's advertisements are run in other companies'
magazines, which typically occurs within one to six months from the period in
which barter revenue is recognized. Barter revenue represented approximately 2%
and 1% of consolidated net revenue for the years ended December 31, 2003 and
2002, respectively.
MAGAZINE SALES
Newsstand sales of the games information magazine are recognized at the on-sale
date of the magazine, net of provisions for estimated returns. Subscriptions are
recorded as deferred revenue when initially received and recognized as income
ratably over the subscription term.
ELECTRONIC COMMERCE AND OTHER
Sales of video games and related products from the Company's online store are
recognized as revenue when the product is shipped to the customer. Amounts
billed to customers for shipping and handling charges are included in net
revenue. The Company provides an allowance for returns of merchandise sold
through its online store. The allowance for returns provided to date has not
been significant.
TELEPHONY SERVICES
VoIP telephony services revenue represents fees charged to customers for voice
services and is recognized based on minutes of customer usage or as services are
provided. The Company records payments received in advance for prepaid services
as deferred revenue until the related services are provided. Sales of peripheral
F-10
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
VoIP telephony equipment are recognized as revenue when the product is shipped
to the customer Amounts billed to customers for shipping and handling charges
are included in net revenue.
(j) ADVERTISING COSTS
Advertising costs are expensed as incurred and are included in sales and
marketing expense. Advertising costs were approximately $411,000 and $182,000
for the years ended December 31, 2003 and 2002, respectively. Barter advertising
costs were approximately 2% of total net revenue for each of the years ended
December 31, 2003 and 2002.
(k) PRODUCT DEVELOPMENT
Product development expenses include salaries and related personnel costs;
expenses incurred in connection with website development, testing and upgrades;
editorial and content costs; and costs incurred in the development of our VoIP
products offered under the voiceglo brand. Product development costs and
enhancements to existing products are charged to operations as incurred.
(l) STOCK-BASED COMPENSATION
The Company follows SFAS No. 123, "Accounting for Stock-Based Compensation",
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS 123
allows entities to continue to apply the provisions of Accounting Principles
Board Opinion No. 25 ("APB 25") and provide pro forma net earnings (loss)
disclosures for employee stock option grants as if the fair-value-based method
defined in SFAS 123 had been applied. Under this method, compensation expense is
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of SFAS No. 123,"
which provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based compensation. SFAS No. 148
also requires more prominent and more frequent disclosures in both interim and
annual financial statements about the method of accounting for stock-based
compensation and the effect of the method used on reported results. The Company
adopted the disclosure provisions of SFAS No. 148 as of December 31, 2002 and
continues to apply the measurement provisions of APB No. 25.
Had the Company determined compensation expense based on the fair value at the
grant date for its stock options issued to employees under SFAS No. 123, the
Company's net loss would have been adjusted to the pro forma amounts indicated
below:
2003 2002
------------- -------------
Net loss - as reported $ (11,034,397) $ (2,614,661)
============= =============
Net loss - pro forma $ (12,438,000) $ (2,714,000)
============= =============
Basic net loss per share -
as reported $ (0.49) $ (0.09)
============= =============
Basic net loss per share -
pro forma $ (0.53) $ (0.09)
============= =============
F-11
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
The per share weighted-average fair value of stock options granted during 2003
on a total of 3,907,450 options whose exercise price equaled the market price of
the stock on the grant date was $0.82. In addition, 500,000 stock options were
granted in 2003 with an exercise price below the market price of the stock on
the grant date and a per share weighted-average fair value of $1.49. The per
share weighted-average fair value of stock options granted during 2002 was $0.02
on the date of grant. Fair values of stock options were calculated using the
option-pricing method with the following weighted-average assumptions:
2003 2002
--------- --------
Risk-free interest rate 3.00% 4.78%
Expected life 5 years 10 years
Volatility 160% 135%-160%
Expected dividend rate 0 0
The Company follows FASB Interpretation No 44, "Accounting for Certain
Transactions Involving Stock Compensation" ("FIN No. 44") which provides
guidance for applying APB Opinion No 25. With certain exceptions, FIN No. 44
applies prospectively to new awards, exchanges of awards in a business
combination, modifications to outstanding awards and changes in grantee status
on or after July 1, 2000.
(m) INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the consolidated
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases for operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the
consolidated results of operations in the period that the tax change occurs.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
(n) NET LOSS PER COMMON SHARE
The Company reports net loss per common share in accordance with SFAS No. 128,
"Computation of Earnings Per Share". In accordance with SFAS 128 and the SEC
Staff Accounting Bulletin No. 98, basic earnings-per-share is computed using the
weighted average number of common shares outstanding during the period. Common
equivalent shares consist of the incremental common shares issuable upon the
conversion of the convertible preferred stock and convertible notes (using the
if-converted method) and the shares issuable upon the exercise of stock options
and warrants (using the treasury stock method). Common equivalent shares are
excluded from the calculation if their effect is anti-dilutive.
During the year ended December 31, 2003, the Company issued equity securities
with common stock conversion features which were immediately convertible into
common stock. As further discussed in Note 7, "Stockholders' Equity", the
Company accounted for the issuance of these securities in accordance with EITF
98-5, "Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios," which resulted in the recognition
of non-cash preferred dividends totaling $8,120,000 at the respective dates of
the securities' issuance. Net loss applicable to common stockholders was
calculated as follows for the years ended December 31, 2003 and 2002:
2003 2002
--------------- ----------------
Net loss $ (11,034,397) $ (2,614,661)
Beneficial conversion features of
preferred stock and warrants (8,120,000) --
--------------- ----------------
Net loss applicable to common
stockholders $ (19,154,397) $ (2,614,661)
================ =================
F-12
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Due to the Company's net losses, the effect of potentially dilutive securities
or common stock equivalents that could be issued was excluded from the diluted
net loss per common share calculation due to the anti-dilutive effect. Such
potentially dilutive securities and common stock equivalents consisted of the
following for the years ended December 31:
2003 2002
---------- ----------
Options to purchase common stock 9,943,000 5,971,000
Common shares issuable upon conversion
of Series F Preferred Stock 16,667,000 --
Common shares issuable upon conversion
of Convertible Notes 19,444,000 --
Common shares issuable upon exercise
of Warrants 22,802,000 6,187,000
---------- ----------
Total 68,856,000 12,158,000
========== ==========
Refer to Note 14, "Subsequent Events," for a discussion of the conversion of the
Series F Preferred Stock and the Convertible Notes and the exercise of warrants
during the first quarter of 2004.
(o) COMPREHENSIVE INCOME (LOSS)
The Company reports comprehensive income (loss) in accordance with the SFAS No.
130, "Reporting Comprehensive Income". Comprehensive income (loss) generally
represents all changes in stockholders' equity during the year except those
resulting from investments by, or distributions to, stockholders. As of December
31, 2003, the Company's accumulated other comprehensive income included in the
accompanying consolidated balance sheet totaled $1,562. The Company had no
accumulated other comprehensive income or loss as of December 31, 2002.
(p) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued Interpretation 46R, "Consolidation of Variable
Interest Entities," an Interpretation of ARB 51. This statement requires under
certain circumstances consolidation of variable interest entities (primarily
joint ventures and other participating activities). The Company has not yet
evaluated the impact of this pronouncement on the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
affects the issuer's accounting for three types of freestanding financial
instruments. One type is mandatorily redeemable shares, which the issuing
company is obligated to buy back in exchange for cash or other assets. A second
type, which includes put options and forward purchase contracts, involves
instruments that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets. The third type of instrument consists of
obligations that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index, or
varies inversely with the value of the issuers' shares. SFAS No. 150 does not
apply to features embedded in a financial instrument that is not a derivative in
its entirety. SFAS No. 150 also requires disclosures about alternative ways of
settling the instruments and the capital structure of entities, whose shares are
mandatorily redeemable. Most of the guidance in SFAS No. 150 is effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective from the start of the first interim period beginning
after June 15, 2003. The adoption of this standard did not have a material
impact on the Company's results of operations or financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments Hedging Activities." This statement amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS
No. 149 became effective during the third quarter of 2003 and did not have a
material impact on the Company's results of operations or financial position.
F-13
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
In November 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" and an interpretation of SFAS No. 5, 57, and 107 and
rescission of SFAS Interpretation No. 34. This statement addresses the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees. This interpretation also
clarifies the requirements related to the recognition of a liability by a
guarantor at the inception of a guarantee for the obligations the guarantor has
undertaken in issuing that guarantee. The adoption of this statement did not
have a significant impact on the Company's financial position or results of
operations.
In November 2002, the EITF addressed the accounting for revenue arrangements
with multiple deliverables in Issue 00-21, "Accounting for Revenue Arrangements
with Multiple Deliverables," ("EITF 00-21"). EITF 00-21 provides guidance on how
the arrangement consideration should be measured, whether the arrangement should
be divided into separate units of accounting, and how the arrangement
consideration should be allocated among the separate units of accounting. EITF
00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The adoption of EITF 00-21 did not have a
significant impact on the Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities. SFAS 146
became effective in the first quarter of 2003 and did not have a significant
impact on the results of operations or financial position of the Company.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." The statement addresses accounting for and reporting obligations
relating to the retirement of long lived assets by requiring that the fair value
of a liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
adoption of SFAS No. 143 did not have a material effect on the consolidated
financial statements.
(q) RECLASSIFICATIONS
Certain amounts in 2002 were reclassified to conform to the 2003 presentation.
NOTE 2. ACQUISITIONS AND DISPOSITION
Acquisition of Direct Partner Telecom, Inc.
On May 28, 2003, the Company completed the acquisition of Direct Partner
Telecom, Inc. ("DPT"), a company engaged in VoIP telephony services, in exchange
for 1,375,000 shares of the Company's common stock and the issuance of warrants
to acquire 500,000 shares of the Company's common stock. The warrants are
exercisable any time before May 23, 2013 at an exercise price of $0.72 per
share. In addition, the former shareholders of DPT may earn additional warrants
to acquire up to 2,750,000 shares of the Company's Common Stock at an exercise
price of $0.72 per share if DPT achieves certain revenue and earnings targets
over approximately the next three years. These warrants will also accelerate and
be deemed earned in the event of a "change in control" of the Company, as
defined in the acquisition documents. In addition, as part of the transaction,
the Company agreed to repay loans totaling $600,000 to certain of the former
shareholders of DPT, including $500,000 immediately after the closing of the
acquisition. The Company issued promissory notes for $100,000, with a two-year
maturity and interest at prime, for the balance.
The total purchase price of DPT was allocated as follows:
Cash $ 61,000
Accounts receivable 155,000
Fixed assets 196,000
Non-compete agreement 375,000
Goodwill 577,000
Assumed debt to former
shareholders (600,000)
Other assumed liabilities (126,000)
---------
$ 638,000
=========
F-14
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2. ACQUISITIONS AND DISPOSITION
(Continued)
As part of the DPT acquisition transaction, the former Chief Executive Officer
of DPT agreed to an employment agreement with a one-year term which
automatically renews for an additional year. The employment agreement also
contains non-compete provisions during the term of the agreement and for a
period of three years following termination of the agreement, as specified. The
$375,000 value assigned to the non-compete agreement was to be amortized on a
straight-line basis over 5 years. Amortization expense of the non-compete
agreement totaled $43,750 in 2003.
As discussed in Note 1, as a result of decisions made during the first quarter
of 2004, the Company performed a review of its long-lived assets for impairment,
which resulted in the write-off of the goodwill and the unamortized balance of
the non-compete agreement arising from the acquisition of DPT which totaled
$908,384.
The following unaudited pro forma condensed consolidated results of operations
for the years ended December 31, 2003 and 2002 assumes the acquisition occurred
as of October 1, 2002, the date which DPT began operations. The unaudited pro
forma information is not necessarily indicative of the results of operations of
the combined company had these events occurred at the beginning of the periods
presented, nor is it necessarily indicative of future results.
Year ended December 31, 2003 2002
------------ ------------
Revenue $ 7,372,000 $ 10,192,000
Net Loss (11,116,000) (2,860,000)
Basic and diluted net loss per common share $ (0.50) $ (0.09)
Loan and Purchase Option Agreement
On February 25, 2003, theglobe.com entered into a Loan and Purchase Option
Agreement with a development stage Internet related business venture pursuant to
which it agreed to fund, in the form of a loan, at the discretion of the
Company, the venture's operating expenses and obtained the option to acquire all
of the outstanding capital stock of the venture in exchange for, when and if
exercised, $40,000 in cash and the issuance of an aggregate of 2,000,000
unregistered restricted shares of theglobe.com's Common Stock (the "Option").
The Loan is secured by a lien on the assets of the venture. Effective January
23, 2004, the Loan and Purchase Option Agreement was amended and an amended
promissory note was signed extending the maturity date of the Loan to March 31,
2004. The Option is exercisable at anytime on or before ten days after
theglobe.com's receipt of notice relating to the award of a certain contract
currently being pursued by the venture. In the event of the exercise of the
Option, (i) the existing CEO and CFO of the venture have agreed to enter into
employment agreements whereby each would agree to remain in the employ of the
venture for a period of two years following the closing of the Option in
exchange for base compensation plus participation in a bonus pool based upon the
pre-tax income of the venture and (ii) the 2,000,000 shares of theglobe.com
Common Stock issued upon such exercise will be entitled to certain "piggy-back"
registration rights. If the Option is not exercised, then theglobe.com has
agreed, subject to certain exceptions, to forgive repayment of $60,000 of the
amount loaned. As of December 31, 2003, $535,000 has been advanced to this
venture. Due to the uncertainty of collectibility of the Loan, as it is to a
development stage business, the Company has set up a reserve for all of the Loan
except the $40,000 attributable to the acquisition should the Company exercise
the Option. The amount of the reserve, $495,000 was included in other expense in
the accompanying statement of operations for the twelve months ended December
31, 2003.
Acquisition of VoIP Assets
On November 14, 2002, the Company acquired certain VoIP assets from an
entrepreneur. In exchange for the assets, the Company issued warrants to acquire
1,750,000 shares of its common stock and an additional 425,000 warrants as part
of an earn-out arrangement upon the attainment of certain performance targets by
December 31, 2003. None of the performance targets had been attained as of
December 31, 2003, resulting in the forfeiture of the 425,000 warrants. In
conjunction with the acquisition, E&C Capital Partners, a privately held
investment holding company owned by our Chairman and Chief Executive Officer,
Michael S. Egan, and our President, Edward A. Cespedes, entered into a
non-binding letter of intent with theglobe.com to provide new financing in the
amount of $500,000 through the purchase of Series F Preferred Stock. Refer to
Note 7, "Stockholders' Equity," for further details.
F-15
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2. ACQUISITIONS AND DISPOSITION
(Continued)
Disposition of Website
On February 27, 2002, the Company sold all of the assets used in connection with
the Happy Puppy website for $135,000, resulting in the recognition of a gain on
the sale of $134,500. The Company received $67,500 immediately, and $67,500 to
be held in escrow until the Company transferred all assets used in connection
with the Happy Puppy website. On May 6, 2002, $67,500 was released to the
Company.
NOTE 3. INTANGIBLE ASSETS
The components of intangible assets were as follows:
December 31, 2003 December 31, 2002
---------------------------- ----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------------ ------------ ------------ ------------
Amortized Intangible Assets:
Digital Telephony $ 227,452 $ 28,432 $ 164,960 $ --
============ ============ ============ ============
Digital telephony assets include certain VoIP assets which were recorded at the
value assigned to the warrants to acquire 1,750,000 shares of the Company's
Common Stock issued in connection with the acquisition of the assets on November
14, 2002 and patent application costs incurred to-date.
Intangible asset amortization expense totaled $72,182 for the year ended
December 31, 2003, including $43,750 of amortization related to the non-compete
agreement recorded in connection with the acquisition of DPT. As discussed in
Note 1(g), the Company wrote-off the $331,250 unamortized balance of the
non-compete agreement as of December 31, 2003. There was no amortization expense
for intangible assets during the year ended December 31, 2002. Annual intangible
asset amortization expense is projected to be $75,818 each year in 2004 and
2005; and $47,384 in 2006.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2003 and 2002,
respectively:
2003 2002
---------- ----------
Network equipment and software $1,712,537 $ --
Computer equipment 679,597 523,829
Capitalized software costs 690,602 89,452
Land and building 181,110 181,110
Furniture and fixtures 149,714 141,493
Leasehold improvements 9,402 --
---------- ----------
3,422,962 935,884
Less: Accumulated depreciation and
amortization 1,006,579 761,767
---------- ----------
$2,416,383 $ 174,117
========== ==========
F-16
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 5. DEBT
Debt consists of the following:
December 31,
-------------------------
2003 2002
---------- ----------
10% Convertible Notes; interest and principal due May 2004 $1,750,000 $ --
Promissory notes issued in connection with the acquisition
of DPT; interest and principal due May 2005;
interest at prime rate (4% at December 31, 2003) 100,000 --
Mortgage note payable; interest payable monthly at 9%;
principal due May 2004 82,612 91,202
Related party obligations payable in Canadian dollars; due in
monthly installments of principal and interest approximating
$3,300 through September 2006; interest at prime plus 2-3% 102,916 120,233
---------- ----------
2,035,528 211,435
Less: unamortized debt discount 121,041 --
Less: short-term portion 877 123,583
---------- ----------
Long-term portion $1,913,610 $ 87,852
========== ==========
On May 22, 2003, E&C Capital Partners together with certain affiliates of
Michael S. Egan, entered into a Note Purchase Agreement with the Company
pursuant to which they acquired convertible promissory notes (the "Convertible
Notes") in the aggregate principal amount of $1,750,000. The Convertible Notes
are convertible at anytime into a maximum of approximately 19,444,000 shares of
the Company's Common Stock at a blended rate of $0.09 per share. The Convertible
Notes have a one year maturity date, which may be extended at the option of the
holders of the Convertible Notes for periods aggregating two years, and are
secured by a pledge of substantially all of the assets of the Company. The
Convertible Notes bear interest at the rate of ten percent per annum, payable
semi-annually. Effective October 3, 2003, the holders of the Convertible Notes
waived the right to receive accrued interest payable in shares of the Company's
Common Stock. Additionally, each of the holders of the Convertible Notes has
agreed to defer receipt of interest until June 1, 2004. Additional interest at
ten percent per annum accrues on any interest amounts deferred. The outstanding
balance of the Convertible Notes as of December 31, 2003, has been reflected as
long-term debt in the accompanying consolidated balance sheet as a result of the
conversion of the Convertible Notes into the Company's Common Stock in March
2004.
In addition, E&C Capital Partners was issued a warrant (the "Warrant") to
acquire 3,888,889 shares of the Company's Common Stock at an exercise price of
$0.15 per share. The Warrant is exercisable at any time on or before May 22,
2013. An allocation of the proceeds received from the issuance of the
Convertible Notes was made between the debt instruments and the Warrant by
determining the pro-rata share of the proceeds for each by comparing the fair
value of each security issued to the total fair value. The fair value of the
Warrant was determined using the Black Scholes model. The fair value of the
Convertible Notes was determined by measuring the fair value of the common
shares on an "as-converted" basis. As a result, $290,500 was allocated to the
Warrant and recorded as a discount on the debt issued and additional paid in
capital. The value of the beneficial conversion feature of the Convertible Notes
was calculated by comparing the fair value of the underlying common shares of
the Convertible Notes on the date of issuance based on the closing price of our
Common Stock as reflected on the OTCBB to the "effective" conversion price. This
resulted in a preferential conversion discount, limited to the previously
discounted value of the Convertible Notes, of $1,459,500, which was recorded as
interest expense in the accompanying consolidated statement of operations as the
Convertible Notes were immediately convertible into common shares.
Reference should be made to Note 14, "Subsequent Events," for a discussion of
the conversion of the Convertible Notes and the exercise of the associated
Warrant during the first quarter of 2004.
Effective May 31, 2003, the maturity date of the mortgage note payable was
extended to May 31, 2004. The extension also required the payment of $8,590 of
the principal outstanding.
F-17
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 5. DEBT
(Continued)
Repayment of debt is due as follows:
Year ending December 31:
2004 $ 1,871,918
2005 139,306
2006 24,304
-------------
$ 2,035,528
=============
NOTE 6. INCOME TAXES
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2003,
and 2002 are presented below.
2003 2002
------------ ------------
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 57,642,000 $ 53,820,000
Allowance for doubtful accounts 244,000 53,000
Issuance of warrants 982,000 725,000
Depreciation and amortization (230,000) 124,000
Other 123,000 58,000
------------ ------------
Total gross deferred tax assets 58,761,000 54,780,000
Less: valuation allowance (58,761,000) (54,780,000)
------------ ------------
Total net deferred tax assets $ -- $ --
============ ============
Because of the Company's lack of earnings history, the net deferred tax assets
have been fully offset by a 100% valuation allowance. The valuation allowance
for net deferred tax assets was $58.8 million and $54.8 million as of December
31, 2003 and 2002, respectively. The net change in the total valuation allowance
was $4.0 million and $(.1) million for the years ended December 31, 2003 and
2002, respectively.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets,
which consist of tax benefits primarily from net operating loss carryforwards,
is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Of the total valuation
allowance of $58.8 million, subsequently recognized tax benefits, if any, in the
amount of $6.4 million will be applied directly to contributed capital.
At December 31, 2003, the Company had net operating loss carryforwards available
for U.S. and foreign tax purposes of approximately $144 million. These
carryforwards expire through 2023.
Under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"),
the utilization of net operating loss carryforwards may be limited under the
change in stock ownership rules of the Code. As a result of ownership changes,
which occurred in August 1997 and May 1999 and the Company's private offering
completed in March 2004 (together with the exercise and conversion of various
securities in connection with the private offering), the Company may have
substantially limited or eliminated the availability of its net operating loss
carryforwards. There can be no assurance that the Company will be able to
utilize any of its net operating loss carryforwards.
F-18
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7. STOCKHOLDERS' EQUITY
On July 2, 2003, the Company completed a private offering of 17,360 shares of
Series G Automatically Converting Preferred Stock ("Series G Preferred Stock")
and warrants to acquire 3,472 shares of Series G Preferred Stock at a purchase
price of $500 per share for a total of $8,680,000 in gross proceeds. Each share
of Series G Preferred Stock was automatically converted into 1,000 shares of
theglobe's Common Stock on July 29, 2003, the effective date of the amendment to
the Company's certificate of incorporation increasing its authorized shares of
Common Stock from 100,000,000 shares to 200,000,000 shares (the "Capital
Amendment"). Similarly, upon the effective date of the Capital Amendment, each
warrant to acquire a share of the Series G Preferred Stock was automatically
converted into a warrant to acquire 1,000 shares of Common Stock. The warrants
are exercisable for a period of 5 years at an initial exercise price of $1.39
per share. A total of 17,360,000 shares of Common Stock were issued pursuant to
the Series G Preferred Stock private offering, while, subject to certain
adjustment mechanisms, a total of 3,472,000 shares of Common Stock will be
issuable upon exercise of the associated warrants.
At the time of the issuance of the Series G Preferred Stock, an allocation of
proceeds received was made between the preferred shares and the associated
warrants. The allocation was made by determining the pro-rata share of the
proceeds for each by comparing the fair value of each security issued to the
total fair value. The fair value of the warrants was determined using the Black
Scholes model. The fair value of the Series G Preferred Stock was determined by
measuring the fair value of the common shares on an "as-converted" basis. As a
result, $1,365,000 was allocated to the warrants sold. In addition, the value of
the preferential conversion was calculated by comparing the fair value of the
underlying common shares based on the closing price of the Company's Common
Stock as reflected on the OTCBB on the date of issuance to the "effective"
conversion price. This resulted in a preferential conversion discount related to
the preferred shares and the associated warrants, limited to the proceeds from
the sale, of $7,315,000 and $305,000, respectively, which have been recorded as
dividends to the preferred stockholders in July 2003, as the preferred shares
and associated warrants were immediately convertible into common shares and
warrants to acquire common shares.
As more fully discussed in Note 5, "Debt", on May 22, 2003, Convertible Notes
totaling $1,750,000 were issued to E&C Capital Partners together with certain
affiliates of Michael S. Egan. The Convertible Notes are convertible at anytime
into a maximum of approximately 19,444,000 shares of the Company's common stock
at a blended rate of $0.09 per share. In addition, E&C Capital Partners was
issued a warrant to acquire 3,888,889 shares of the Company's common stock at an
exercise price of $0.15 per share. The warrant is exercisable at any time on or
before May 22, 2013.
On March 28, 2003, E&C Capital Partners entered into a Preferred Stock Purchase
Agreement with the Company (the "Preferred Stock Investment"), whereby E&C
Capital Partners received 333,333 shares of Series F Preferred Stock convertible
into shares of the Company's Common Stock at a price of $0.03 per share. If
fully converted, and without regard to the anti-dilutive adjustment mechanisms
applicable to the Series F Preferred Stock, an aggregate of approximately
16,667,000 shares of Common Stock could be issued. The Series F Preferred Stock
has a liquidation preference of $1.50 per share (and thereafter participates
with the holders of Common Stock on an "as-converted" basis), will pay a
dividend at the rate of 8% per annum and entitles the holder to vote on an
"as-converted" basis with the holders of Common Stock. In addition, as part of
the $500,000 investment, E&C Capital Partners received warrants to purchase
approximately 3,333,000 shares of the Company's Common Stock at an exercise
price of $0.125 per share. The warrants are exercisable at any time on or before
March 28, 2013. E&C Capital Partners is entitled to certain demand registration
rights in connection with its investment.
The proceeds attributable to the issuance of the Series F Preferred Stock and
the related warrants were allocated to each security in the same manner as
described in the discussion of the Series G Preferred Stock. As a result,
$83,000 was allocated to the warrants sold. In addition, the value of the
preferential conversion was calculated by comparing the fair value of the
underlying common shares on the date of issuance based on the closing price of
the Company's Common Stock as reflected on the OTCBB to the "effective"
conversion price. This resulted in a preferential conversion discount, limited
to the proceeds from the sale, of $417,000. The sum of the two discounts,
$500,000, was recorded as a dividend to the preferred stockholders in March
2003, as the preferred shares were immediately convertible into common shares.
As a result of the issuance of the Series F Preferred Stock, the Series G
Automatically Converting Preferred Stock, the Convertible Notes and the
associated warrants at their respective conversion and exercise prices, certain
anti-dilution provisions applicable to previously outstanding warrants to
acquire approximately 4,103,000 shares of the Company's Common Stock were
triggered. Like many types of warrants commonly issued, these outstanding
warrants to acquire shares of the Company's Common Stock include weighted
average anti-dilution provisions which result in a lowering of the exercise
price, and an increase in the number of warrants to acquire shares of the
Company's Common Stock any time shares of common stock are issued (or options or
other securities exercisable or convertible into common stock) for a price per
share less than the then exercise price of the warrants. As a result of the
Preferred Stock Investment and the issuance of the Series G Preferred Stock and
the Convertible Notes, the exercise price was lowered from approximately $1.39
to $0.66 per share on these warrants and the number of shares issuable upon
exercise was proportionally increased from approximately 4,103,000 shares to
6,836,000 shares. As of December 31, 2003, approximately 95% of such warrants
were beneficially owned by Michael S. Egan.
F-19
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7. STOCKHOLDERS' EQUITY
(Continued)
Certain holders of Common Stock are subject to substantial restrictions on the
transfer or sale of shares and also have certain "piggy-back" and demand
registration rights which, with certain exceptions, require the Company to make
all reasonable efforts to include within any of the Company's registration
statements to sell such securities any shares that have been requested to be so
included.
Reference should be made to Note 14, "Subsequent Events," for a discussion of
certain equity transactions during the first quarter of 2004, including the
conversion of the Series F Preferred Stock into Common Stock, the exercise of
the warrants issued in connection with the Series F Preferred Stock, as well as
other previously outstanding warrants.
NOTE 8. STOCK OPTION PLAN
During 1995, the Company established the 1995 Stock Option Plan, which was
amended (the "Amended Plan") by the Board of Directors in December 1996 and
August 1997. Under the Amended Plan, a total of 1,582,000 common shares were
reserved for issuance. Any incentive stock options granted under the Amended
Plan were required to be granted at the fair market value of the Company's
Common Stock at the date the option was issued.
Under the Company's 1998 Stock Option Plan (the "1998 Plan") a total of
3,400,000 common shares were reserved for issuance and provides for the grant of
"incentive stock options" intended to qualify under Section 422 of the Code and
stock options which do not so qualify. The granting of incentive stock options
is subject to limitation as set forth in the 1998 Plan. Directors, officers,
employees and consultants of the Company and its subsidiaries are eligible to
receive grants under the 1998 Plan.
In January 2000, the Board adopted the 2000 Broad Based Employee Stock Option
Plan (the "Broad Based Plan"). Under the Broad Based Plan, 850,000 shares of
Common Stock were reserved for issuance. The intention of the Broad Based Plan
is that at least 50% of the options granted will be to individuals who are not
managers or officers of theglobe. In April 2000, the Company's 2000 Stock Option
Plan (the "2000 Plan") was adopted by the Board of Directors and approved by the
stockholders of the Company. The 2000 Plan authorized the issuance of 500,000
shares of Common Stock, subject to adjustment as provided in the 2000 Plan. The
Broad Based Plan and the 2000 Plan provide for the grant of "incentive stock
options" intended to qualify under Section 422 of the Code and stock options
which do not so qualify. The granting of incentive stock options is subject to
limitation as set forth in the Broad Based Plan and the 2000 Plan. Directors,
officers, employees and consultants of the Company and its subsidiaries are
eligible to receive grants under the Broad Based Plan and the 2000 Plan.
In September 2003, the Board adopted the 2003 Sales Representative Stock Option
Plan (the "2003 Plan") which authorized the issuance of up to 1,000,000
non-qualified stock options to purchase the Company's Common Stock to sales
representatives who are not employed by the Company or its subsidiaries. In
January 2004, the Board amended the 2003 Plan to include certain employees and
consultants of the Company.
In accordance with the provisions of the Company's stock option plans,
nonqualified stock options may be granted to officers, directors, other
employees, consultants and advisors of the Company. The option price for
nonqualified stock options shall be at least 85% of the fair market value of the
Company's Common Stock. In general, options granted under the Company's stock
option plans expire after a ten-year period and in certain circumstances
options, under the 1995 and 1998 plans, are subject to the acceleration of
vesting. Incentive options granted to stockholders who own greater than 10% of
the total combined voting power of all classes of stock of the Company must be
issued at 110% of the fair market value of the stock on the date the options are
granted. A committee selected by the Company's Board of Directors has the
authority to approve optionees and the terms of the stock options granted,
including the option price and the vesting terms.
Options were granted during 2003 for 4,407,450 shares of Common Stock, of which
500,000 options were granted pursuant to an individual nonqualified stock option
agreement and not pursuant to any of the plans described above. During 2002, a
total of 5,347,500 stock options were granted, of which 5,175,000 were granted
pursuant to individual nonqualified stock options agreements and not pursuant to
any of the plans described above.
The Company applies APB Opinion No. 25 in accounting for grants to employees
pursuant to stock option plans and, accordingly, compensation cost of $233,750
was recognized for stock options granted to employees at exercise prices below
fair market value in 2003. No stock options were granted to employees with
exercise prices below fair market value during 2002. In addition, $152,884 of
stock compensation expense was recorded in 2003 as a result of the accelerated
vesting of stock options issued to certain terminated employees. Compensation
cost recognized in connection with stock options granted in lieu of services
rendered by non-employees was $225,609 and $13,000 for the years ended December
31, 2003 and 2002, respectively.
F-20
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. STOCK OPTION PLAN
(Continued)
On May 31, 2000, the Company offered to substantially all of its employees,
excluding executive officers and the Board of Directors, the right to cancel
certain outstanding stock options and receive new options with an exercise price
equal to the then current fair market value of the stock. Options to purchase a
total of approximately 1.1 million shares, approximately 20% of outstanding
options on that date, were canceled and approximately 856,000 new options were
granted at an exercise price of $1.594 per share, which was based on the closing
price of the Company's Common Stock on May 31, 2000. The new options vest at the
same rate that they would have vested under previous option plans. The Company
is accounting for these re-priced stock options using variable accounting in
accordance with FIN No. 44. In addition, as a result of options which were
granted within six months of the cancellations, an additional 244,000 options
also required variable accounting in accordance with FIN No. 44. For the year
ended December 31, 2003, approximately $30,933 of compensation expense was
recorded in connection with the re-priced stock options. There was no
compensation charge relating to the re-priced options during the year ended
December 31, 2002. As of December 31, 2003, 82,480 options remain outstanding
which are being accounted for in accordance with FIN No. 44. The Company cannot
estimate the impact of FIN No. 44 on its future results of operations as the
charge is dependent on the future market price of the Company's Common Stock,
which cannot be predicted with any degree of certainty. Depending upon movements
in the market value of the Company's Common Stock, this accounting treatment may
result in significant non-cash compensation charges in future periods.
Stock option activity during the periods indicated is as follows:
Weighted
Options Total Average
Vested Options Exercise Price
---------- ---------- ----------
Outstanding at December 31, 2001 3,104,349 $ 5.77
Granted 5,347,500 0.02
Exercised -- --
Canceled (2,480,409) 3.31
----------
Outstanding at December 31, 2002 5,870,749 5,971,440 0.63
==========
Granted 4,407,450 0.80
Exercised (429,000) 0.28
Canceled (7,080) 1.07
----------
Outstanding at December 31, 2003 8,475,232 9,942,810 $ 0.72
========== ========== ==========
Options available at December 31, 2002 4,259,547
==========
Options available at December 31, 2003 1,359,177
==========
F-21
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. STOCK OPTION PLAN
(Continued)
Options Outstanding Options Vested
------------------- --------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range Outstanding Life Price Vested Price
------------- ----------- -------- --------- --------- ---------
$ .02 -$ .02 4,875,000 8.6 $ 0.02 4,875,000 $ 0.02
.035- .035 230,000 8.4 0.035 230,000 0.035
.04 - .05 47,500 8.2 0.05 20,945 0.05
.14 - .14 230,000 9.3 0.14 230,000 0.14
.20 - .23 515,000 9.5 0.20 165,218 0.20
.53 - .53 53,200 6.9 0.53 37,635 0.53
.56 - .56 1,650,000 9.4 0.56 1,650,000 0.56
.63 - .80 302,000 9.4 0.66 217,126 0.65
1.14 - 1.29 408,500 9.7 1.25 183,346 1.25
1.32 - 1.49 272,500 9.7 1.40 133,125 1.39
1.50 - 1.52 806,500 9.8 1.50 183,375 1.50
1.59 - 1.59 34,610 6.2 1.59 32,773 1.59
1.62 - 2.50 65,500 8.3 1.99 64,189 1.99
4.50 - 6.69 332,500 4.7 4.69 332,500 4.69
15.75 -15.75 120,000 5.0 15.75 120,000 15.75
----------- ---------
9,942,810 8,475,232
=========== =========
NOTE 9. COMMITMENTS AND CONTINGENCIES
Network Commitments
The Company and its subsidiaries are a party to various network service
agreements which provide for specified services, including the use of secure
data transmission facilities, capacity and other network services. The term of
the agreements typically range from one to five years. Certain of the agreements
contain minimum usage commitments or early cancellation penalties. Commitments
under such network service agreements, including estimated minimum usage
commitments for certain contracts which have not yet fully commenced, are as
follows:
Year ending December 31:
2004 $ 3,549,000
2005 940,000
2006 911,000
2007 520,000
2008 332,000
Thereafter --
-----------
$ 6,252,000
===========
Purchase Obligations
The Company has contractual purchase obligations to certain of its suppliers
providing for the purchase of certain equipment or services. As of December 31,
2003, the Company's unconditional purchase obligations totaled approximately
$3,412,000, which pursuant to the contract are due to be paid during 2004.
F-22
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES
(Continued)
Employment Agreements
On August 1, 2003, the Company entered into employment agreements with its
Chairman and Chief Executive Officer, President and Vice President of Finance
(its former Chief Financial Officer). The three agreements, which are for a
period of one year and automatically extend for one day each day until either
party notifies the other not to further extend the employment period, provide
for annual base salaries totaling $650,000 and annual bonuses based on pre-tax
operating income, as defined, for an annual minimum of $100,000 in total. The
agreements also provide for severance benefits under certain circumstances, as
defined, which in the case of the Chairman and Chief Executive Officer and the
President, include lump-sum payments equal to ten times the sum of the
executive's base salary and the highest annual bonus earned by the executive,
and in the case of the Vice President of Finance, include lump-sum payments
equal to two times the sum of the executive's base salary and the highest annual
bonus earned by the executive. In addition, these severance benefits also
require the Company to maintain insurance benefits for a period of up to ten
years, in the case of the Chairman and Chief Executive Officer and the
President, and up to two years, in the case of the Vice President of Finance,
substantially equivalent to the insurance benefits existing upon termination.
As discussed in Note 2, "Acquisitions and Disposition", as part of the May 2003
acquisition transaction of DPT, its former Chief Executive Officer agreed to an
employment agreement with a one-year term which automatically renews for an
additional year. Pursuant to the agreement, the employee serves as the Vice
President of Network Operations at a base salary of $125,000 per annum. The
agreement also contains non-compete provisions during the term of the agreement
and for a period of three years following termination of the agreement, as
specified.
In conjunction with the November 2002 acquisition of certain digital telephony
intangible assets, the Company entered into an employment agreement with the
Seller whereby he serves as Chief Technical Officer of theglobe.com. Per the
Agreement, he receives a base salary of $125,000 per annum and is subject to
significant non-compete provisions. The term of the employment agreement is
annual with renewal options and contains a severance provision which provides
base salary for the longer of the remaining term of the first year of the
agreement or six months.
Severance Agreement
In the second quarter of 2002, severance benefits of $699,833 were recorded and
paid. In connection with his termination, the former Chief Executive Officer was
paid $625,000 on May 31, 2002, reflecting the terms of his severance package.
Additionally, options to purchase 425,000 shares of the Company's Common Stock
at an exercise price of $0.035 per share (the closing price on May 6, 2002)
valued at $13,000 (calculated using Black-Scholes) were granted on May 6, 2002,
further reflecting the terms of his severance package. These options immediately
vested upon grant and have a life of ten years.
Operating Leases
The Company leases facilities under noncancelable operating leases. These leases
generally contain renewal options and require the Company to pay certain
executory costs such as maintenance and insurance. Rent expense for the years
ended December 31, 2003 and 2002 totaled approximately $326,000 and $73,000,
respectively.
Effective September 1, 2003, the Company entered into a sublease agreement for
office space with a company controlled by our Chairman. The lease term is for
five years with base rent of approximately $284,000 during the first year of the
sublease. Per the agreement, base rent increases by approximately $23,000 per
year thereafter. Rent expense for the year ended December 31, 2003, as noted in
the preceding paragraph included approximately $106,000 of expense related to
this sublease.
The approximate future minimum lease payments under noncancelable operating
leases with initial or remaining terms of one year or more at December 31, 2003,
were as follows:
2004 $ 306,000
2005 315,000
2006 338,000
2007 206,000
2008 1,000
Thereafter --
-------------
$ 1,166,000
=============
F-23
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES
(Continued)
Termination of 401(K) Plan
During November 2002, the Company terminated its 401k plan.
Letter of Credit
As of December 31, 2003, the Company had approximately $20,000 in outstanding
standby letters of credit used to support inventory purchases.
Litigation
On and after August 3, 2001 and as of the date of this filing, six putative
shareholder class action lawsuits were filed against the Company, certain of its
current and former officers and directors, and several investment banks that
were the underwriters of the Company's November 23, 1998 initial public offering
and its May 19, 1999 secondary offering. The lawsuits were filed in the United
States District Court for the Southern District of New York. The complaints
against the Company have been consolidated into a single action and a
Consolidated Amended Complaint, which is now the operative complaint, was filed
on April 19, 2002.
The lawsuit purports to be a class action filed on behalf of purchasers of the
stock of the Company during the period from November 12, 1998 through December
6, 2000. Plaintiffs allege that the underwriter defendants agreed to allocate
stock in the Company's initial public offering to certain investors in exchange
for excessive and undisclosed commissions and agreements by those investors to
make additional purchases of stock in the aftermarket at pre-determined prices.
Plaintiffs allege that the Prospectus for the Company's initial public offering
was false and misleading and in violation of the securities laws because it did
not disclose these arrangements. The action seeks damages in an unspecified
amount.
The action is being coordinated with approximately 300 other nearly identical
actions filed against other companies. On July 15, 2002, the Company moved to
dismiss all claims against it and the Individual Defendants. On October 9, 2002,
the Court dismissed the Individual Defendants from the case without prejudice
based on stipulations of dismissal filed by the plaintiffs and the Individual
Defendants. On February 19, 2003, the Court denied the motion to dismiss the
complaint against the Company. The Company has approved a Memorandum of
Understanding ("MOU") and related agreements which set forth the terms of a
settlement between the Company, the plaintiff class and the vast majority of the
other approximately 300 issuer defendants. Among other provisions, the
settlement contemplated by the MOU provides for a release of the Company and the
individual defendants for the conduct alleged in the action to be wrongful. The
Company would agree to undertake certain responsibilities, including agreeing to
assign away, not assert, or release certain potential claims the Company may
have against its underwriters. It is anticipated that any potential financial
obligation of the Company to plaintiffs pursuant to the terms of the MOU and
related agreements will be covered by existing insurance. Therefore, the Company
does not expect that the settlement will involve any payment by the Company. The
MOU and related agreements are subject to a number of contingencies, including
the negotiation of a settlement agreement and its approval by the Court. We
cannot opine as to whether or when a settlement will occur or be finalized and,
consequently, are unable at this time to determine whether the outcome of the
litigation will have a material impact on our results of operations or financial
condition in any future period.
On July 3, 2003, an action was commenced against one of the Company's
subsidiaries, Direct Partner Telecom, Inc. ("DPT"). Global Communications
Consulting Corp. v. Michelle Nelson, Jason White, VLAN, Inc., Geoffrey Amend,
James Magruder, Direct Partner Telecom, Inc., et al. was filed in the Superior
Court of New Jersey, Monmouth County, and removed to the United States District
Court for the District of New Jersey on September 16, 2003. Plaintiff is the
former employer of Michelle Nelson, a consultant of DPT. Plaintiff alleges that
while Nelson was its employee, she provided plaintiff's confidential and
proprietary trade secret information, to among others, DPT and certain
employees, and diverted corporate opportunities from plaintiff to DPT and the
other named defendants. Plaintiff asserts claims against Nelson including breach
of fiduciary duty, breach of the duty of loyalty and tortious interference with
contract. Plaintiff also asserts claims against Nelson and DPT, among others,
for contractual interference, tortious interference with prospective economic
advantage and misappropriation of proprietary information and trade secrets.
Plaintiff seeks injunctive relief and damages in an unspecified amount,
including punitive damages.
The Answer to the Complaint, with counterclaims, was served on October 20, 2003,
denying plaintiff's allegations of improper and unlawful conduct in their
entirety. The parties have recently reached an amicable resolution of this
matter, including a mutual release of all claims. We anticipate that the release
agreement will be finalized and a Stipulation of Dismissal will be filed with
the Court by the end of April 2004.
F-24
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES
(Continued)
The Company is currently a party to certain other legal proceedings, claims,
disputes and litigation arising in the ordinary course of business, including
those noted above. The Company currently believes that the ultimate outcome of
these other proceedings, individually and in the aggregate, will not have a
material adverse affect on the Company's financial position, results of
operations or cash flows. However, because of the nature and inherent
uncertainties of litigation, should the outcome of these actions be unfavorable,
the Company's business, financial condition, results of operations and cash
flows could be materially and adversely affected.
NOTE 10. RELATED PARTY TRANSACTIONS
Certain directors of the Company also serve as officers and directors of Dancing
Bear Investments, Inc. ("Dancing Bear"). Dancing Bear is a stockholder of the
Company and an entity controlled by our Chairman.
Interest expense on the $1,750,000 Convertible Notes due E&C Capital Partners
together with certain affiliates of our Chairman totaled approximately $108,200,
excluding the amortization of the discount on the Notes, during the year ended
December 31, 2003. The interest remained unpaid at December 31, 2003, and was
included in accrued expenses in the accompanying consolidated balance sheet.
Several entities controlled by our Chairman have provided services to the
Company and two of its subsidiaries, including: the lease of office and
warehouse space; and the outsourcing of customer service and warehouse functions
for the Company's VoIP operation. During 2003, a total of approximately $383,000
of expense was recorded related to these services. Approximately $70,000 related
to these services was included in accounts payable and accrued expenses at
December 31, 2003.
The Company believes that the terms of the foregoing arrangements are on
comparable terms as if they were entered into with unaffiliated third parties.
Stockholders' Agreement
In 1997, the Chairman, the former Co-Chief Executive Officers, two Directors of
the Company and Dancing Bear (an entity controlled by the Chairman) entered into
a Stockholders' Agreement (the "Stockholders' Agreement") pursuant to which the
Chairman and Dancing Bear or certain entities controlled by the Chairman and
certain permitted transferees (the "Chairman Group") agreed to vote for certain
nominees of the former Co-Chief Executive Officers or certain entities
controlled by the former Co-Chief Executive Officers and certain permitted
transferees (the "Former Co-Chief Executive Officer Groups") to the Board of
Directors and the Former Co-Chief Executive Officer Groups agreed to vote for
the Chairman Group's nominees to the Board, who would represent up to five
members of the Board. Additionally, pursuant to the terms of the Stockholders'
Agreement, the former Co-Chief Executive Officer and the two Directors granted
an irrevocable proxy to Dancing Bear with respect to any shares acquired by them
pursuant to the exercise of outstanding Warrants transferred to each of them by
Dancing Bear. Such shares would be voted by Dancing Bear, which is controlled by
the Chairman, and would be subject to a right of first refusal in favor of
Dancing Bear upon certain private transfers. The Stockholders' Agreement also
provided that if the Chairman Group sold shares of Common Stock and Warrants
representing 25% or more of the Company's outstanding Common Stock (including
the Warrants) in any private sale, the Former Co-Chief Executive Officer Groups
and the two Directors of the Company would be required to sell up to the same
percentage of their shares as the Chairman Group's sales. If either the Chairman
Group sold shares of Common Stock or Warrants representing 25% or more of the
Company's outstanding Common Stock (including the Warrants) or the Former
Co-Chief Executive Officer Groups sold shares or Warrants representing 7% or
more of the shares and Warrants of the Company in any private sale, each other
party to the Stockholders' Agreement, including entities controlled by them and
their permitted transferees, had the option to sell up to the same percentage of
their shares. Effective March 28, 2003, the Stockholders' Agreement was
terminated.
NOTE 11. SEGMENTS AND GEOGRAPHIC INFORMATION
The Company applies the provisions of SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information", which establishes annual and interim
reporting standards for operating segments of a company. SFAS No. 131 requires
disclosures of selected segment-related financial information about products,
major customers and geographic areas. Effective with the May 2003 acquisition of
DPT, the Company is now organized in two operating segments for purposes of
making operation decisions and assessing performance: the computer games
division and the VoIP telephony services division. The computer games division
consists of the operations of the Company's Computer Games print magazine and
the associated website Computer Games Online (www.cgonline.com) and the
operations of Chips & Bits, Inc., its games distribution business. The VoIP
telephony services division is principally involved in the sale of
telecommunications services over the Internet to consumers and other
telecommunications service providers.
F-25
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. SEGMENTS AND GEOGRAPHIC INFORMATION
(Continued)
The chief operating decision maker evaluates performance, makes operating
decisions and allocates resources based on financial data of each segment. Where
appropriate, the Company charges specific costs to each segment where they can
be identified. Certain items are maintained at the Company's corporate
headquarters ("Corporate") and are not presently allocated to the segments.
Corporate expenses primarily include personnel costs related to executives and
certain support staff and professional fees. Corporate assets principally
consist of cash, cash equivalents and marketable securities. There are no
intersegment sales. The accounting policies of the segments are the same as
those for the Company as a whole.
The following table presents financial information regarding the Company's
different segments for the two years ended December 31, 2003:
2003 2002
---------- ----------
NET REVENUE:
Computer games and other $ 6,032,371 $ 9,667,085
VoIP telephony services 548,081 --
------------ -----------
$ 6,580,452 $ 9,667,085
============ ===========
INCOME (LOSS) FROM OPERATIONS:
Computer games and other $ 120,907 $ (411,626)
VoIP telephony services (5,116,437) (1,196)
Corporate expenses (3,817,549) (2,527,966)
------------ -----------
Loss from operations (8,813,079) (2,940,788)
Other income (expense), net (2,221,318) 338,127
------------ -----------
Consolidated loss before income tax $(11,034,397) $(2,602,661)
============ ===========
DEPRECIATION AND AMORTIZATION:
Computer games and other $ 62,208 $ 85,327
VoIP telephony services 258,334 --
Corporate 9,200 3,253
------------ -----------
$ 329,742 $ 88,580
============ ===========
IDENTIFIABLE ASSETS:
Computer games and other $ 1,957,714 $ 2,602,834
VoIP telephony services 4,251,082 164,960
Corporate assets 963,282 279,191
------------ -----------
$ 7,172,078 $ 3,046,985
============ ===========
CAPITAL EXPENDITURES:
Computer games and other $ -- $ 32,250
VoIP telephony services 2,366,047 --
Corporate 58,744 --
------------ -----------
$ 2,424,791 $ 32,250
============ ===========
F-26
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. SEGMENTS AND GEOGRAPHIC INFORMATION
(Continued)
The Company's historical net revenues have been earned primarily from customers
in the United States. In 2003, VoIP telephony services net revenue was primarily
attributable to the sale of telephony services outside of the United States.
Telephony services revenue derived from Thailand represented approximately
$458,000 or 7% of consolidated net revenue for the year ended December 31, 2003.
In addition, all significant operations and assets are based in the United
States.
NOTE 12. VALUATION AND QUALIFYING ACCOUNTS - ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance
At Additions Additions Balance
Beginning Due To Charged To At End Of
Year Ended, Of Period Acquisitions Expense Deductions Period
----------------- ---------- ------------- ----------- ----------- ----------
December 31, 2003 $ 128,613 $ -- $ 114,888 $ (130,515) $ 112,986
December 31, 2002 $3,203,295 $ -- $ -- $(3,074,682) $ 128,613
NOTE 13. SUMMARY OF QUARTERLY FINANCIAL INFORMATION - (UNAUDITED)
Quarter Ended
----------------------------------------------------------
December 31, September 30, June 30, March 31,
2003 2003 2003 2003
-------------- --------------- ------------ -----------
Net revenue $ 1,748,840 $ 1,717,462 $ 1,455,800 $1,658,350
Operating expenses 6,495,874 4,045,997 2,649,885 2,201,775
Loss from operations (4,747,034) (2,328,535) (1,194,085) (543,425)
Net loss (5,077,665) (2,517,614) (2,757,371) (681,747)
Net loss applicable to common
stockholders (5,077,665) (10,137,614) (2,757,371) (1,181,747)
Basic and diluted net loss per
share $ (0.10) $ (0.23) $ (0.09) $ (0.04)
Net loss applicable to common stockholders for the 2003 quarterly periods
includes the preferred dividend impact of the beneficial conversion features of
the preferred stock and warrants issued.
Quarter Ended
------------------------------------------------------------
December 31, September 30, June 30, March 31,
2002 2002 2002 2002
-------------- --------------- ------------- ------------
Net revenue $ 2,464,009 $ 2,259,263 $ 2,413,790 $ 2,530,023
Operating expenses 2,327,465 2,786,906 4,059,624 3,433,878
Income (loss) from operations 136,544 (527,643) (1,645,834) (903,855)
Net income (loss) 16,922 (492,046) (1,633,429) (506,108)
Net loss applicable to common
stockholders 16,922 (492,046) (1,633,429) (506,108)
Basic and diluted net loss per
share $ -- $ (0.02) $ (0.05) $ (0.02)
F-27
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 14. SUBSEQUENT EVENTS
On February 2, 2004, our Chairman and Chief Executive Officer and his spouse,
entered into a Note Purchase Agreement with the Company pursuant to which they
acquired a demand convertible promissory note (the "Bridge Note") in the
aggregate principal amount of $2,000,000. The Bridge Note was convertible into
shares of the Company's Common Stock. The Bridge Note provided for interest at
the rate of ten percent per annum and was secured by a pledge of substantially
all of the assets of the Company. Such security interest was shared with the
holders of the Company's $1,750,000 Convertible Notes issued to E&C Capital
Partners and certain affiliates of our Chairman and Chief Executive Officer. In
addition, the Chairman and Chief Executive Officer and his spouse were issued a
warrant to acquire 204,082 shares of the Company's Common Stock at an exercise
price of $1.22 per share. The Warrant is exercisable at any time on or before
February 2, 2009. The exercise price of the Warrant, together with the number of
shares for which such Warrant is exercisable, is subject to adjustment upon the
occurrence of certain events.
In March 2004, theglobe.com completed a private offering of 333,816 units (the
"Units") for a purchase price of $85 per Unit (the "Private Offering"). Each
Unit consisted of 100 shares of the Company's Common Stock, $0.001 par value
(the "Common Stock"), and warrants to acquire 50 shares of the Company's Common
Stock (the "Warrants"). The Warrants are exercisable for a period of five years
commencing 60 days after the initial closing at an initial exercise price of
$0.001 per share. The aggregate number of shares of Common Stock issued in the
Private Offering was 33,381,647 shares for an aggregate consideration of
$28,374,400, or approximately $0.57 per share assuming the exercise of the
16,690,824 Warrants.
The Private Offering was directed solely to investors who are sophisticated and
accredited within the meaning of applicable securities laws, most of whom were
not affiliates with the Company. The purpose of the Private Offering was to
raise funds for use primarily in the Company's developing voiceglo business,
including the deployment of networks, website development, marketing and capital
infrastructure expenditures and working capital. Proceeds may also be used in
connection with theglobe's other existing or future business operations.
Halpern Capital, Inc., acted as placement agent for the Private Offering, and
was paid a commission of $1.2 million and issued a warrant to acquire 1,000,000
shares of Common Stock at $0.001 per share.
The securities offered were not registered under the Securities Act of 1933 and
may not be offered or resold in the United States absent registration or an
applicable exemption from such registration requirements. Pursuant to the terms
of the Private Offering, the Company is contractually obligated to file a
registration statement relating to the resale of the Securities on or about
April 22, 2004 and to cause such registration statement to become effective on
or about July 6, 2004 (or 30 days earlier if such registration statement is not
reviewed by the Securities and Exchange Commission). In the event the Company is
late in any of its registration obligations, it will be liable for payment of a
late fee of 5% of the amount raised in the Private Offering per month, not to
exceed 25% in the aggregate. Any such late fee may be payable in either cash or
additional shares of Common Stock (valued for such purpose at $0.57 per share),
or any combination of the two, at the option of the Company. Any shares so
issued would be included in the foregoing registration statement.
In connection with the Private Offering, Michael S. Egan, our Chairman, Chief
Executive Officer and principal stockholder, together with certain of his
affiliates, including E&C Capital Partners, converted the $2,000,000 Convertible
Bridge Note, $1,750,000 of Secured Convertible Notes and all of the Company's
outstanding shares of Series F Preferred Stock, and exercised (on a "cashless"
basis) all of the warrants issued in connection with the foregoing Secured
Convertible Notes and Series F Preferred Stock, together with certain warrants
issued to Dancing Bear Investments, an affiliate of Mr. Egan. As a result of
such conversions and exercises, the Company issued an aggregate of 48,775,909
additional shares of Common Stock. After giving effect to the 33,381,647 shares
of Common Stock issued in the Private Offering (excluding the Warrants) and the
foregoing conversions and exercises, the Company, at March 24, 2004, had issued
and outstanding 131,990,349 shares of Common Stock (including exercises of
options in the first quarter) and 27,004,384 warrants to acquire shares of
Common Stock.
F-28
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 14. SUBSEQUENT EVENTS
(Continued)
Proforma (Unaudited)
Included with the accompanying consolidated balance sheets is a pro forma
presentation of the effects on certain balance sheet accounts at December 31,
2003 if the two previously described financing transactions had taken place on
December 31, 2003. A summary of the pro forma adjustments follows:
Gross proceeds:
Bridge note $ 2,000,000
Private offering 28,374,000
-------------
30,374,000
Commission paid (1,200,000)
-------------
Net proceeds $ 29,174,000
=============
Pro Forma
Historical Adjustments Pro forma
---------- ----------- -------------
Cash and cash equivalents $ 1,062,000 $29,174,000 (a) $ 30,236,000
Long-term debt 1,914,000 (1,750,000) (b) ] 285,000
121,000 (c) ]
Preferred stock 500,000 (500,000) (d) --
Common stock 50,246 82,157 (e) 132,403
Additional paid-in capital $238,302,000 $ 31,221,000 (f) $269,523,000
(a) Net cash proceeds received after December 31, 2003
(b) Conversion of secured convertible notes
(c) Unamortized beneficial conversion feature of secured convertible notes
(d) Conversion of Series F Preferred Stock
(e) Par value (.001) of 33,381,647 shares issued in Private Offering and
48,775,909 shares in connection with conversions and exercises as discussed
above
(f) Balance of additional paid-in capital
Series F Preferred Stock 500,000
Secured convertible notes 1,750,000
Unamortized discount (121,000)
Bridge note 2,000,000
Private offering, net of commission 27,174,000
----------
31,303,000
Allocated to common stock (82,157)
----------
31,221,000
==========
F-29
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 8, 2002, we dismissed our independent public accountants, KPMG LLP
("KPMG"), and engaged Rachlin Cohen & Holtz LLP ("Rachlin Cohen") as our new
independent public accountants. This change was approved by our Board of
Directors.
The audit reports issued by KPMG on our consolidated financial statements as of
and for the years ended December 31, 2001 and December 31, 2000, did not contain
any adverse opinion or a disclaimer of opinion, and were not qualified or
modified, as to uncertainty, audit scope or accounting principles, except as
follows:
KPMG's report on the consolidated financial statements of theglobe.com, inc. and
subsidiaries as of and for the years ended December 31, 2001 and 2000, contained
a separate paragraph stating "the Company has suffered recurring losses from
operations since inception that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to this matter are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty."
During fiscal years ended December 31, 2001 and December 31, 2000, and the
subsequent interim period from January 1, 2002 through our dismissal of KPMG on
August 8, 2002, there were no disagreements with KPMG on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to KPMG's satisfaction,
would have caused KPMG to make reference to the subject matter of the
disagreement in connection with its reports on our consolidated financial
statements for such years; and there were no reportable events as defined in
Item 304(a)(1)(v) of Regulation S-K.
The Company furnished KPMG with a copy of its Report on Form 8-K relating to the
foregoing change in accountants and requested KPMG to furnish it with a letter
addressed to the Securities and Exchange Commission ("Commission") stating
whether it agrees with the statements set forth above. A copy of KPMG's letter
to the Commission dated August 13, 2002 was filed as an exhibit on Form 8-K on
August 13, 2002 and as an exhibit on Form 10-K for the fiscal year ended
December 31, 2002 filed on March 31, 2003.
During the fiscal years ended December 31, 2001 and December 31, 2000 and
through August 8, 2002, we did not consult with Rachlin Cohen with respect to
the application of accounting principles to a specified transaction, or the type
of audit opinion that might be rendered on our consolidated financial
statements, or any other matters or events described in Item 304(a)(2)(i) and
(ii) of Regulation S-K.
ITEM 8A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure (1)
that information required to be disclosed by us in the reports we file or submit
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's ("SEC") rules and forms, and (2)
that this information is accumulated and communicated to management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in evaluating the
cost benefit relationship of possible controls and procedures.
In March 2004, under the supervision and review of our Chief Executive Officer
and Chief Financial Officer, we conducted an evaluation of the effectiveness of
our disclosure controls and procedures as of December 31, 2003. Based on that
evaluation, our Chief Executive Officer and our Chief Financial Officer have
concluded that our disclosure controls and procedures are effective in alerting
them in a timely manner to material information regarding us (including our
consolidated subsidiaries) that is required to be included in our periodic
reports to the SEC.
In addition, there have been no significant changes in our internal controls or
in other factors that could significantly affect those controls since our March
2004 evaluation. There were also no significant changes in our internal control
over financial reporting that occurred during the fourth quarter of 2003 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. We cannot assure you, however, that
our system of disclosure controls and procedures will always achieve its stated
goals under all future conditions, no matter how remote.
33
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The Company has adopted a Code of Ethics applicable to its officers, including
its principal executive officer, principal financial officer, principal
accounting officer or controller and any other persons performing similar
functions. The Code of Ethics will be provided free of charge by the Company to
interested parties upon request. Except as provided above, the information
called for by Part III, Item 9, regarding the Registrant's directors is included
in our Proxy Statement relating to our annual meeting of stockholders, and is
incorporated herein by reference. The information appears in the Proxy Statement
under the caption "Election of Directors." The Proxy Statement will be filed
within 120 days of December 31, 2003, the Company's year-end.
ITEM 10. EXECUTIVE COMPENSATION
Information called for by Part III, Item 10, is included in our Proxy Statement
relating to our annual meeting of stockholders, and is incorporated herein by
reference. The information appears in the Proxy Statement under the caption
"Executive Compensation." The Proxy Statement will be filed within 120 days of
December 31, 2003, the Company's year-end.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information called for by Part III, Item 11, is included in our Proxy Statement
relating to our annual meeting of stockholders, and is incorporated herein by
reference. The information appears in the Proxy Statement under the caption
"Beneficial Ownership of Shares." The Proxy Statement will be filed within 120
days of December 31, 2003, the Company's year-end.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding our relationships and related transactions is available
under "Certain Transactions" in our Proxy Statement relating to our annual
meeting of stockholders, and is incorporated herein by reference. The Proxy
Statement will be filed within 120 days of December 31, 2003, the Company's
year-end.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
NO. ITEM
2.1 Agreement and Plan of Merger dated as of February 1, 1999 by and among
theglobe.com, inc., Nirvana Acquisition Corp., Factorymall.com, inc. d/b/a
Azazz, and certain selling stockholders thereof (14).
2.2 Agreement and Plan of Merger dated as of April 5, 1999 by and among
theglobe.com, inc., Bucky Acquisition Corp., Attitude Network, Ltd. and
certain shareholders thereof (15).
2.3 Agreement and Plan of Merger dated as of January 13, 2000 by and among
theglobe.com, inc., Chips & Bits, Inc., Strategy Plus CB Acquisition
Corp., SP Acquisition Corp., Yale Brozen and Tina Brozen(9).
3.1 Form of Fourth Amended and Restated Certificate of Incorporation of the
Company(3).
3.2 Form of By-Laws of the Company(2).
3.3 Certificate relating to Previously Outstanding Series of Preferred Stock
and Relating to the Designation, Preferences and R Series F Preferred
Stock(21).
4.1 Second Amended and Restated Investor Rights Agreement among the Company
and certain equity holders of the Company, dated as of August 13, 1997(2).
4.2 Amendment No.1 to Second Amended and Restated Investor Rights Agreement
among the Company and certain equity holders of the Company, dated as of
August 31, 1998(2).
4.3 Amendment No.2 to Second Amended and Restated Investor Rights Agreement
among the Company and certain equity holders of the Company, dated April
9, 1999(7).
4.4 Form of Amendment No.3 to the Second Amended and Restated Investor Rights
Agreement among the Company and certain equity holders of the Company(8).
34
4.5 Registration Rights Agreement, dated as of September 1, 1998(6).
4.6 Amendment No.1 to Registration Rights Agreement, dated as of April 9,
1999(7).
4.7 Specimen certificate representing shares of Common Stock of the
Company(4).
4.8 Amended and Restated Warrant to Acquire Shares of Common Stock(2).
4.9 Form of Rights Agreement, by and between the Company and American Stock
Transfer & Trust Company as Rights Agent(3).
4.10 Registration Rights Agreement among the Company and certain equity holders
of the Company, dated February 1, 1999, in connection with the acquisition
of factorymall.com(6).
4.11 Form of Amended and Restated Registration Rights Agreement among the
Company and certain equity holders of the Company in connection with the
acquisition of factorymall.com(7).
4.12 Registration Rights Agreement among the Company and certain shareholders
of the Company, dated April 9, 1999, in connection the acquisition of
Attitude Network, Ltd(7).
4.13 Registration Rights Agreement among the Company and certain shareholders
of the Company, dated November 30, 1999, in connection with the
acquisition of Webjump.com from Infonent.com, Inc.(10).
4.14 Registration Rights Agreement among the Company and certain shareholders
of the Company, dated February 24, 1999, in connection with the
acquisition of Chips & Bits, Inc. and Strategy Plus, Inc.(10).
4.15 Form of Warrant dated November 12, 2002 to acquire shares of Common
Stock.(13).
4.16 Form of Warrant dated March 28, 2003 to acquire shares of Common Stock
(21).
4.17 Form of Warrant dated May 22, 2003 to acquire an aggregate of 3,888,889
shares of theglobe.com Common Stock (17).
4.18 Form of Convertible Promissory Note (17).
4.19 Form of Warrant dated May 28, 2003 to acquire an aggregate of 500,000
shares of theglobe.com Common Stock (17).
4.20 Form of Warrant dated July 2, 2003 to acquire securities of theglobe.com,
inc. (18).
4.21 Certificate Relating to the Designation, Preferences and Rights of Series
G Preferred Stock (18).
4.22 Form of Warrant dated March 5, 2004 to acquire securities of theglobe.com,
inc. (20).
9.1 Stockholders' Agreement by and among Dancing Bear Investments, Inc.,
Michael Egan, Todd V. Krizelman, Stephan J. Paternot, Edward A. Cespedes
and Rosalie V. Arthur, dated as of February 14, 1999(6).
10.1 Form of Indemnification Agreement between the Company and each of its
Directors and Executive Officers(1).
10.2 Lease Agreement dated January 12, 1999 between the Company and Broadpine
Realty Holding Company, Inc.(6).
10.3 2000 Broad Based Stock Option Plan(11).
10.4 1998 Stock Option Plan, as amended(7).
10.5 1995 Stock Option Plan(1).
10.6 Employee Stock Purchase Plan(6).
10.7 Technology Purchase Agreement dated November 12, 2002, among theglobe.com,
inc., and Brian Fowler(13).
10.8 Employment Agreement dated November 12, 2002, among theglobe.com, inc. and
Brian Fowler(13).
10.9 Payment Agreement dated November 12, 2002, among theglobe.com, inc.,
1002390 Ontario Inc., and Robert S. Giblett(13).
10.10 Release Agreement dated November 12, 2002, among theglobe.com, inc. and
certain other parties named therein(13).
35
10.11 Preferred Stock Purchase Agreement dated March 28, 2003 between
theglobe.com, inc. and E&C Capital Partners, LLLP.(21).
10.12 Loan and Purchase Option Agreement dated February 25, 2003 (20).*
10.13 Amended and Restated Promissory Note (20).*
10.14 Form of Stock Purchase Agreement (20).*
10.15 Note Purchase Agreement dated May 22, 2003 between theglobe.com, inc. and
E&C Capital Partners, LLLP and certain other investors named therein (17).
10.16 Agreement and plan of Merger dated May 23, 2003 between theglobe.com,
inc., DPT Acquisition, Inc., Direct Partner Telecom, Inc., and the
shareholders thereof (17).
10.17 Employment Agreement dated May 28, 2003 between theglobe.com and James
Magruder (17).
10.18 Form of Subscription Agreement relating to the purchase of Units of
securities of theglobe.com, inc. (18).
10.19 Employment Agreement dated August 1, 2003 between theglobe.com, inc. and
Michael S. Egan (19).
10.20 Employment Agreement dated August 1, 2003 between theglobe.com, inc. and
Edward A. Cespedes (19).
10.21 Employment Agreement dated August 1, 2003 between theglobe.com, inc. and
Robin Segaul Lebowitz (19).
10.22 Amended & Restated Non-Qualified Stock Option Agreement effective as of
August 12, 2002 between theglobe.com, inc. and Michael S. Egan (19).
10.23 Amended & Restated Non-Qualified Stock Option Agreement effective as of
August 12, 2002 between theglobe.com, inc. and Edward A. Cespedes (19).
10.24 Amended & Restated Non-Qualified Stock Option Agreement effective as of
August 12, 2002 between theglobe.com, inc. and Robin Segaul Lebowitz (19).
10.25 Non-Qualified Stock Option Agreement dated as of July 17, 2003 between
theglobe.com, inc. and Kellie L. Smythe (19).
10.26 2003 Sales Representatives Stock Option Plan (19).
10.27 Securities Purchase and Registration Agreement dated March 2, 2004
relating to the purchase of Units of securities of theglobe.com, inc.
10.28 Amendment to the Service Order Agreement Terms and Conditions dated
July 30, 2003, and October 24, 2003 between XO Communications, Inc. and
Direct Partner Telecom, Inc., including XO Services Terms and Conditions.*
10.29 Agreement dated August 7, 2003 by and between Promotion and Display
Technology, Ltd. and theglobe.com, inc. *
10.30 Broad Capacity Services Agreement dated October 17, 2003 by and between
Direct Partner Telecom, Inc. and Progress Telecom Corporation.*
16. Letter dated August 13, 2002 from KPMG LLP relating to change of
independent certified accountants (12).
23.1 Consent of Rachlin Cohen & Holtz LLP.
31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certificate of the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley act of 2002.
32.1 Certification of the Chief Executive Officer Pursuant To 18 U.S.C. Section
1350 As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002.
32.2 Certification of the Chief Financial Officer Pursuant To 18 U.S.C. Section
1350 As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002.
36
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the three months ended during December
31, 2003.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information called for by Part III, Item 14, is included in our Proxy Statement
relating to our annual meeting of stockholders, and is incorporated herein by
reference. The Proxy Statement will be filed within 120 days of December 31,
2003, the Company's year-end.
37
1. Incorporated by reference from our registration statement on Form S-1
filed July 24, 1998 (Registration No. 333-59751).
2. Incorporated by reference as Exhibit to our Form S-1/A filed August 20,
1998.
3. Incorporated by reference from our Form S-1/A filed September 15, 1998.
4. Incorporated by reference from our Form S-1/A filed October 14, 1998.
5. Incorporated by reference from our Form S-1/A filed November 15, 1998.
6. Incorporated by reference from our Form 10-K for the year ended December
31, 1998 filed March 30, 1999.
7. Incorporated by reference from our Form S-1 filed April 13, 1999.
8. Incorporated by reference from our Form S-1/A filed May 3, 1999.
9. Incorporated by reference from our report on Form 8-K filed on March 8,
2000.
10. Incorporated by reference from our Form 10-K for the year ended December
31, 1999 filed March 30, 2000.
11. Incorporated by reference from our Form 10-Q for the quarter ended March
31, 2000 dated May 15, 2000.
12. Incorporated by reference from our Form 8-K filed August 13, 2002.
13. Incorporated by reference from our Form 8-K filed on November 26, 2002.
14. Incorporated by reference from our Form 8-K filed on February 16, 1999.
15. Incorporated by reference from our Form 8-K filed on April 23, 1999.
16. Incorporated by reference from our Form 8-K filed on March 3, 2003.
17. Incorporated by reference from our Form 8-K filed on June 6, 2003.
18. Incorporated by reference from our Form 8-K filed on July 11, 2003.
19. Incorporated by reference from our Form 10-QSB filed on November 14, 2003.
20. Incorporated by reference from our Form 8-K filed on March 17, 2004.
21. Incorporated by reference from our Form 10-K filed on March 31, 2003.
* Confidential portions of this exhibit have been omitted and filed separately
with the Commission pursuant to a request for confidential treatment.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 2004 theglobe.com, inc.
By /S/ MICHAEL S. EGAN
----------------------------
MICHAEL S. EGAN
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
By /S/ GARRETT PETTINGELL
----------------------------
GARRETT PETTINGELL
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING OFFICER)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated this 30th day of March 2004.
/s/MICHAEL S. EGAN
----------------------------------------
MICHAEL S. EGAN Chairman
/s/EDWARD A. CESPEDES
----------------------------------------
EDWARD A. CESPEDES Director
/s/ROBIN LEBOWITZ
----------------------------------------
ROBIN LEBOWITZ Director
39
EXHIBIT INDEX
NO. ITEM
2.1 Agreement and Plan of Merger dated as of February 1, 1999 by and among
theglobe.com, inc., Nirvana Acquisition Corp., Factorymall.com, inc. d/b/a
Azazz, and certain selling stockholders thereof (14).
2.2 Agreement and Plan of Merger dated as of April 5, 1999 by and among
theglobe.com, inc., Bucky Acquisition Corp., Attitude Network, Ltd. and
certain shareholders thereof (15).
2.3 Agreement and Plan of Merger dated as of January 13, 2000 by and among
theglobe.com, inc., Chips & Bits, Inc., Strategy Plus CB Acquisition
Corp., SP Acquisition Corp., Yale Brozen and Tina Brozen(9).
3.1 Form of Fourth Amended and Restated Certificate of Incorporation of the
Company(3).
3.2 Form of By-Laws of the Company(2).
3.3 Certificate relating to Previously Outstanding Series of Preferred Stock
and Relating to the Designation, Preferences and R Series F Preferred
Stock (21).
4.1 Second Amended and Restated Investor Rights Agreement among the Company
and certain equity holders of the Company, dated as of August 13, 1997(2).
4.2 Amendment No.1 to Second Amended and Restated Investor Rights Agreement
among the Company and certain equity holders of the Company, dated as of
August 31, 1998(2).
4.3 Amendment No.2 to Second Amended and Restated Investor Rights Agreement
among the Company and certain equity holders of the Company, dated April
9, 1999(7).
4.4 Form of Amendment No.3 to the Second Amended and Restated Investor Rights
Agreement among the Company and certain equity holders of the Company(8).
4.5 Registration Rights Agreement, dated as of September 1, 1998(6).
4.6 Amendment No.1 to Registration Rights Agreement, dated as of April 9,
1999(7).
4.7 Specimen certificate representing shares of Common Stock of the
Company(4).
4.8 Amended and Restated Warrant to Acquire Shares of Common Stock(2).
4.9 Form of Rights Agreement, by and between the Company and American Stock
Transfer & Trust Company as Rights Agent(3).
4.10 Registration Rights Agreement among the Company and certain equity holders
of the Company, dated February 1, 1999, in connection with the acquisition
of factorymall.com(6).
4.11 Form of Amended and Restated Registration Rights Agreement among the
Company and certain equity holders of the Company in connection with the
acquisition of factorymall.com(7).
4.12 Registration Rights Agreement among the Company and certain shareholders
of the Company, dated April 9, 1999, in connection the acquisition of
Attitude Network, Ltd(7).
4.13 Registration Rights Agreement among the Company and certain shareholders
of the Company, dated November 30, 1999, in connection with the
acquisition of Webjump.com from Infonent.com, Inc.(10) .
4.14 Registration Rights Agreement among the Company and certain shareholders
of the Company, dated February 24, 1999, in connection with the
acquisition of Chips & Bits, Inc. and Strategy Plus, Inc.(10).
4.15 Form of Warrant dated November 12, 2002 to acquire shares of Common
Stock.(13).
4.16 Form of Warrant dated March 28, 2003 to acquire shares of Common Stock
(21).
4.17 Form of Warrant dated May 22, 2003 to acquire an aggregate of 3,888,889
shares of theglobe.com Common Stock (17).
40
4.18 Form of Convertible Promissory Note (17).
4.19 Form of Warrant dated May 28, 2003 to acquire an aggregate of 500,000
shares of theglobe.com Common Stock (17).
4.20 Form of Warrant dated July 2, 2003 to acquire securities of theglobe.com,
inc. (18).
4.21 Certificate Relating to the Designation, Preferences and Rights of Series
G Preferred Stock (18).
4.22 Form of Warrant dated March 5, 2004 to acquire securities of theglobe.com,
inc. (20).
9.1 Stockholders' Agreement by and among Dancing Bear Investments, Inc.,
Michael Egan, Todd V. Krizelman, Stephan J. Paternot, Edward A. Cespedes
and Rosalie V. Arthur, dated as of February 14, 1999(6).
10.1 Form of Indemnification Agreement between the Company and each of its
Directors and Executive Officers(1).
10.2 Lease Agreement dated January 12, 1999 between the Company and Broadpine
Realty Holding Company, Inc.(6).
10.3 2000 Broad Based Stock Option Plan(11).
10.4 1998 Stock Option Plan, as amended(7).
10.5 1995 Stock Option Plan(1).
10.6 Employee Stock Purchase Plan(6).
10.7 Technology Purchase Agreement dated November 12, 2002, among theglobe.com,
inc., and Brian Fowler(13).
10.8 Employment Agreement dated November 12, 2002, among theglobe.com, inc. and
Brian Fowler(13).
10.9 Payment Agreement dated November 12, 2002, among theglobe.com, inc.,
1002390 Ontario Inc., and Robert S. Giblett(13).
10.10 Release Agreement dated November 12, 2002, among theglobe.com, inc. and
certain other parties named therein(13).
10.11 Preferred Stock Purchase Agreement dated March 28, 2003 between
theglobe.com, inc. and E&C Capital Partners, LLLP. (21).
10.12 Loan and Purchase Option Agreement dated February 25, 2003 (20).*
10.13 Amended and Restated Promissory Note (20).*
10.14 Form of Stock Purchase Agreement (20).*
10.15 Note Purchase Agreement dated May 22, 2003 between theglobe.com, inc. and
E&C Capital Partners, LLLP and certain other investors named therein (17).
10.16 Agreement and plan of Merger dated May 23, 2003 between theglobe.com,
inc., DPT Acquisition, Inc., Direct Partner Telecom, Inc., and the
shareholders thereof (17).
10.17 Employment Agreement dated May 28, 2003 between theglobe.com and James
Magruder (17).
10.18 Form of Subscription Agreement relating to the purchase of Units of
securities of theglobe.com, inc. (18).
10.19 Employment Agreement dated August 1, 2003 between theglobe.com, inc. and
Michael S. Egan (19).
10.20 Employment Agreement dated August 1, 2003 between theglobe.com, inc. and
Edward A. Cespedes (19).
10.21 Employment Agreement dated August 1, 2003 between theglobe.com, inc. and
Robin Segaul Lebowitz (19).
10.22 Amended & Restated Non-Qualified Stock Option Agreement effective as of
August 12, 2002 between theglobe.com, inc. and Michael S. Egan (19).
10.23 Amended & Restated Non-Qualified Stock Option Agreement effective as of
August 12, 2002 between theglobe.com, inc. and Edward A. Cespedes (19).
10.24 Amended & Restated Non-Qualified Stock Option Agreement effective as of
August 12, 2002 between theglobe.com, inc. and Robin Segaul Lebowitz (19).
41
10.25 Non-Qualified Stock Option Agreement dated as of July 17, 2003 between
theglobe.com, inc. and Kellie L. Smythe (19).
10.26 2003 Sales Representatives Stock Option Plan (19).
10.27 Securities Purchase and Registration Agreement dated March 2, 2004
relating to the purchase of Units of securities of theglobe.com, inc.
10.28 Amendment to the Service Order Agreement Terms and Conditions dated
July 30, 2003, and October 24, 2003 between XO Communications, Inc. and
Direct Partner Telecom, Inc., including XO Services Terms and Conditions.*
10.29 Agreement dated August 7, 2003 by and between Promotion and Display
Technology, Ltd. and theglobe.com, inc. *
10.30 Broad Capacity Services Agreement dated October 17, 2003 by and between
Direct Partner Telecom, Inc. and Progress Telecom Corporation.*
16. Letter dated August 13, 2002 from KPMG LLP relating to change of
independent certified accountants(12).
23.1 Consent of Rachlin Cohen & Holtz LLP.
31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certificate of the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley act of 2002.
32.1 Certification of the Chief Executive Officer Pursuant To 18 U.S.C. Section
1350 As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002.
32.2 Certification of the Chief Financial Officer Pursuant To 18 U.S.C. Section
1350 As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002.
42
1 Incorporated by reference from our registration statement on Form S-1
filed July 24, 1998 (Registration No. 333-59751).
2. Incorporated by reference as Exhibit to our Form S-1/A filed August 20,
1998.
3. Incorporated by reference from our Form S-1/A filed September 15, 1998.
4. Incorporated by reference from our Form S-1/A filed October 14, 1998.
5. Incorporated by reference from our Form S-1/A filed November 15, 1998.
6. Incorporated by reference from our Form 10-K for the year ended December
31, 1998 filed March 30, 1999.
7. Incorporated by reference from our Form S-1 filed April 13, 1999.
8. Incorporated by reference from our Form S-1/A filed May 3, 1999.
9. Incorporated by reference from our report on Form 8-K filed on March 8,
2000.
10. Incorporated by reference from our Form 10-K for the year ended December
31, 1999 filed March 30, 2000.
11. Incorporated by reference from our Form 10-Q for the quarter ended March
31, 2000 dated May 15, 2000.
12. Incorporated by reference from our Form 8-K filed August 13, 2002.
13. Incorporated by reference from our Form 8-K filed on November 26, 2002.
14. Incorporated by reference from our Form 8-K filed on February 16, 1999.
15. Incorporated by reference from our Form 8-K filed on April 23, 1999.
16. Incorporated by reference from our Form 8-K filed on March 3, 2003.
17. Incorporated by reference from our Form 8-K filed on June 6, 2003.
18. Incorporated by reference from our Form 8-K filed on July 11, 2003.
19. Incorporated by reference from our Form 10-QSB filed on November 14, 2003.
20. Incorporated by reference from our Form 8-K filed on March 17, 2004.
21. Incorporated by reference from our Form 10-K filed on March 31, 2003.
* Confidential portions of this exhibit have been omitted and filed separately
with the Commission pursuant to a request for confidential treatment.
43