AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 2003
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO ___________________
COMMISSION FILE NO. 0-25053
THEGLOBE.COM, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
STATE OF DELAWARE 14-1782422
------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
110 EAST BROWARD BOULEVARD, SUITE 1400
FORT LAUDERDALE, FL. 33301
----------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(954) 769-5900
--------------------------------------------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
Check 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
The number of shares outstanding of the Registrant's Common Stock, $.001 par
value (the "Common Stock"), as of May 13, 2003 was 30,382,293.
THEGLOBE.COM, INC.
FORM 10-QSB
INDEX
PART I FINANCIAL INFORMATION
Page
----
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2003 (unaudited)
and December 31, 2002 1
Unaudited Condensed Consolidated Statements of Operations for the
three months ended March 31, 2003 and 2002 2
Unaudited Condensed Consolidated Statements of Cash Flows for the
Three months ended March 31, 2003 and 2002 3
Notes to Unaudited Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis or Plan of Operation 10
Item 3. Controls and Procedures 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings II-1
Item 2. Changes in Securities and Use of Proceeds II-1
Item 3. Defaults Upon Senior Securities II-1
Item 4. Submission of Matters to a Vote of Security Holders II-1
Item 5. Other Information II-1
Item 6. Exhibits and Reports on Form 8-K II-1
A. Exhibits II-1
B. Reports on Form 8-K II-2
Signatures II-3
Certifications II-4
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THEGLOBE.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2003 2002
----------------- -------------------
(UNAUDITED) (NOTE 1(c))
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 792,188 $ 725,422
Accounts receivable, net.. . . . . . . . . . . . . . . . . . . 916,370 1,247,390
Inventory, net . . . . . . . . . . . . . . . . . . . . . . . . 363,703 363,982
Prepaid and other current assets . . . . . . . . . . . . . . . 278,071 331,114
----------------- -------------------
Total current assets . . . . . . . . . . . . . . . . . . . . 2,350,332 2,667,908
Intangible Assets. . . . . . . . . . . . . . . . . . . . . . . $ 164,960 $ 164,960
Property and equipment, net. . . . . . . . . . . . . . . . . . 171,956 174,117
Advance on loan commitment . . . . . . . . . . . . . . . . . . 40,000 40,000
----------------- -------------------
Total assets .. . . . . . . . . . . . . . . . . . . . . . . $ 2,727,248 $ 3,046,985
================= ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $ 530,863 $ 1,395,929
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 1,158,566 447,189
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . 167,599 169,519
Current portion of long-term debt. . . . . . . . . . . . . . . 91,202 123,583
----------------- -------------------
Total current liabilities. . . . . . . . . . . . . . . . . . 1,948,230 2,136,220
Long-Term Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87,852 $ 87,852
----------------- -------------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . $ 2,036,082 $ 2,224,072
----------------- -------------------
Stockholders' equity:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,082 $ 31,082
Preferred stock, at liquidation value. . . . . . . . . . . . . 500,000 0
Additional paid-in capital . . . . . . . . . . . . . . . . . . 218,860,565 218,310,565
Common stock, 699,281 common shares, held in treasury, at cost (371,458) (371,458)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . (218,329,023) (217,147,276)
----------------- -------------------
Total stockholders' equity . . . . . . . . . . . . . . . . . 691,166 822,913
----------------- -------------------
Total liabilities and stockholders' equity . . . . . . . . . $ 2,727,248 $ 3,046,985
================= ===================
See accompanying notes to unaudited condensed consolidated financial statements.
1
THEGLOBE.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31, MARCH 31,
------------ ------------
2003 2002
------------ ------------
(UNAUDITED)
Revenues:
Advertising. . . . . . . . . . . . . . . . . $ 546,869 $ 667,843
Electronic commerce and other. . . . . . . . 1,111,481 1,862,180
------------ ------------
Total revenues . . . . . . . . . . . . 1,658,350 2,530,023
Cost of revenues. . . . . . . . . . . . . . . . . . . 847,238 1,602,121
------------ ------------
Gross profit . . . . . . . . . . . . . . 811,112 927,902
Operating expenses:
Sales and marketing. . . . . . . . . . . . . 567,338 1,020,378
Product development. . . . . . . . . . . . . 152,682 186,199
General and administrative . . . . . . . . . 611,692 625,180
Depreciation . . . . . . . . . . . . . . . . 22,825 -
------------ ------------
Total operating expenses. . . . . . . . . . . . . . . 1,354,537 1,831,757
------------ ------------
Loss from operations. . . . . . . . . . . . . . . . . (543,425) (903,855)
(138,322) 400,447
Interest and other income(expense), net . . . . . . ------------ ------------
Loss before provision for income taxes. . . . . . . . (681,747) (503,408)
Provision for income taxes. . . . . . . . . . . . . . 0 2,700
------------ ------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . $ (681,747) $ (506,108)
============ ============
Basic and diluted net loss per share: . . . . . . . . $ (0.04) $ (0.02)
============ ============
Weighted average basic and diluted shares outstanding 32,382,293 31,081,574
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
2
THEGLOBE.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE-MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------
2003 2002
------------ -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . $ (681,747) $ (506,108)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization . . . . . . . . . . . . 22,825 21,256
Gain on sale of Happy Puppy assets. . . . . . . . . . 0 (134,500)
Non-cash favorable settlements of liabilities . . . . 0 (261,927)
Contributed officer compensation. . . . . . . . . . . 50,000 -
Changes in operating assets and liabilities, net of
dispositions:
Inventory, net. . . . . . . . . . . . . . . . . . . . 279 5,268
Accounts receivable, net. . . . . . . . . . . . . . . 331,020 301,327
Prepaid and other current assets. . . . . . . . . . . 53,043 283,839
Accounts payable. . . . . . . . . . . . . . . . . . . (865,066) (75,144)
Accrued expenses. . . . . . . . . . . . . . . . . . . 711,377 (10,461)
Deferred revenue. . . . . . . . . . . . . . . . . . . (1,920) 1,765
------------ -----------
Net cash used in operating activities . . . . . . . . . . $ (380,189) $ (374,685)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities . . . . . $ 0 $ 270
Proceeds from sale of property and equipment. . . . . 0 500
Purchases of property and equipment . . . . . . . . . (20,664) 0
Payment of security deposits / escrow . . . . . . . . 0 (67,500)
Proceeds from sale of properties. . . . . . . . . . . 0 134,500
------------ -----------
Net cash provided by (used in) investing activities . . . $ (20,664) $ 67,770
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of debt. . . . . . . . . . . . . . . . . . . $ (32,381) $ (853)
Proceeds from issuance of preferred shares. . . . . . 500,000 0
------------ -----------
Net cash provided by (used in) financing activities . . . $ 467,619 (853)
------------ -----------
Net change in cash and cash equivalents . . . . . . 66,766 (307,768)
Effect of exchange rate changes on cash and cash
equivalents . . . . . . . . . . . . . . . . . . . 0 (270)
Cash and cash equivalents at beginning of period. . . . . 725,422 2,563,828
------------ -----------
Cash and cash equivalents at end of period. . . . . . . . $ 792,188 $2,255,790
============ ===========
See accompanying notes to unaudited condensed consolidated financial statements.
3
THEGLOBE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of theglobe.com
theglobe.com, inc. (the "Company" or "theglobe") was incorporated on May 1,
1995 (inception) and commenced operations on that date. theglobe.com was an
online property with registered members and users in the United States and
abroad which allowed its users to personalize their online experience by
publishing their own content and interacting with others having similar
interests. However, due to the decline in the advertising market, the Company
was forced to take cost-reduction and restructuring initiatives, which included
closing its community www.theglobe.com effective August 15, 2001. The Company
then began to aggressively seek buyers for some or all of its remaining online
and offline properties, which consisted primarily of games-related 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 (see Note 4).
Effective June 1, 2002, Chairman Michael S. Egan and Director Edward A.
Cespedes became Chief Executive Officer and President of the Company,
respectively. As of March 31, 2003, 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). As of March 31, 2003, the Company's revenue sources
are 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.
The Company continues to actively explore a number of strategic
alternatives for its business, 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 the Internet Protocol (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
structure upon the attainment of certain performance targets. In conjunction
with the acquisition, E&C Capital Partners, a privately held investment vehicle
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 a new series of preferred securities. That investment closed on
March 28, 2003.
Concurrently with the closing of the preferred stock investment, certain
affiliates of Michael S. Egan and Edward A. Cespedes entered into a non-binding
letter of intent to loan up to $1 million to the Company pursuant to a
convertible secured loan facility. The loan facility would be convertible into
shares of the Company's common stock at the rate of $.09 per share, which if
fully funded and converted, would result in the issuance of approximately 11.1
million shares. In addition, assuming the loan is fully funded, it is
anticipated that the investor group would be issued a warrant to acquire
approximately 2.2 million shares of theglobe.com Common Stock at an exercise
price of $.15 per share. The convertible debt financing is subject to a number
of closing conditions, including execution of definitive documentation,
satisfactory resolution of certain Company liabilities and other tax and
business considerations. The financing is also subject to completion of a loan
facility and related documentation satisfactory to the parties. If consummated,
and assuming the conversion of the debt and/or exercise of the warrant, the
convertible debt financing would result in substantial dilution of the number of
securities of theglobe.com issued and outstanding. There can be no assurance, if
and when, the financing will be consummated.
On February 25, 2003 the Company entered into a Loan and Purchase Option
Agreement with a development stage internet related business venture pursuant to
which it agreed to loan the venture up to $160,000 (or greater at the discretion
of theglobe.com) to fund its 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 and the issuance of an aggregate of 2,000,000
unregistered restricted shares of theglobe.com's common stock. As of March 31,
2003, $175,000 has been advanced to this venture.
The Company's December 31, 2002 consolidated financial statements have been
prepared assuming the Company will continue as a going concern. We have received
a report from our independent accountants containing an explanatory paragraph
stating that we have suffered recurring losses from operations since inception
that raise substantial doubt about our ability to continue as a going concern.
Management and the Board of Directors are currently exploring a number of
strategic alternatives regarding its remaining assets and the use of its cash
on-hand, and are also continuing to identify and implement internal actions to
improve the Company's liquidity and operations. These alternatives may include
selling assets, which in any such case could result in significant changes in
the Company's business, or entering into new or different lines of business. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
4
(b) Principles of Consolidation
The condensed 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.
(c) Unaudited Interim Condensed Consolidated Financial Information
The unaudited interim condensed consolidated financial statements of the
Company for the three months ended March 31, 2003 and 2002 included herein have
been prepared in accordance with the instructions for Form 10-QSB under the
Securities Exchange Act of 1934, as amended, and Article 10 of Regulation S-X
under the Securities Act of 1933, as amended. Certain information and note
disclosures normally included in consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations relating to interim condensed
consolidated financial statements.
In the opinion of management, the accompanying unaudited interim condensed
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
of the Company at March 31, 2003 and the results of its operations for three
months ended March 31, 2003 and 2002 and its cash flows for the three months
ended March 31, 2003 and 2002.
The results of operations for such periods are not necessarily indicative
of results expected for the full year or for any future period. These financial
statements should be read in conjunction with the audited financial statements
as of December 31, 2002, and for the three years then ended and related notes
included in the Company's 10-K filed with the Securities and Exchange
Commission.
(d) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. These estimates and assumptions relate to estimates of collectibility of
accounts receivable, the valuation of inventory, accruals and other factors.
Actual results could differ from those estimates.
(e) Cash and Cash Equivalents
The Company considers all highly liquid securities with original maturities
of three months or less to be cash equivalents. The Company had no cash
equivalents at March 31, 2003 and 2002.
(f) Comprehensive Loss
The Company's comprehensive loss was approximately $ 0 and $0.4 million for
the three months ended March 31, 2003 and 2002, respectively. The March 31, 2002
other comprehensive loss was related to the Company's foreign currency
translation adjustment resulting from the wind down of operations in the United
Kingdom. 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. In 2003, there were no foreign currency translation adjustments.
(g) Inventory
Inventories, consisting of products available for sale, are recorded using
the average cost method and valued at the lower of cost or market value. The
Company's provision for obsolescent inventory as of March 31, 2003 and December
31, 2002 was $102,797 and $100,000, respectively.
(h) 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 video games and related products through our
games distribution business Chips & Bits, Inc.; and through the sale of our
games information magazine through newsstands and subscriptions.
Advertising revenues for the games information magazine are recognized at
the on-sale date of the magazine. Sales from the online store are recognized as
revenue when the product is shipped to the customer. Freight out costs are
included in net sales and have not been significant to date. The Company
5
provides an allowance for merchandise sold through its online store. The
allowance provided to date has not been significant.
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 pro ratably over the subscription term. Revenues from the
Company's share of the proceeds from its e-commerce partners' sales are
recognized upon notification from its partners of sales attributable to the
Company's sites. To date revenues from e-commerce revenue shares have been
immaterial.
(i) Concentration of Credit Risk
Financial instruments, which subject the Company to concentrations of
credit risk, consist primarily of cash and cash equivalents, short-term
investments, trade accounts receivable and restricted investments. The Company
invests its cash and cash equivalents and short-term investments among a diverse
group of issuers and instruments. The Company performs periodic evaluations of
these investments and the relative credit standings of the institutions with
which it invests.
The Company's customers are primarily concentrated in the United States.
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.
(j) Net loss per share
Diluted net loss per share has not been presented separately, as the
outstanding stock options, warrants and contingent stock purchase warrants are
anti-dilutive for each of the periods presented.
Diluted net loss per share for the three months ended March 31, 2003 and
2002 does not include the effects of (1) options to purchase 5,969,940 and
2,073,874 shares of common stock, respectively, and (2) warrants to purchase
10,885,201 and 4,011,534 shares of common stock, respectively.
Net loss attributable to common stockholders was calculated as follows:
2003 2002
------------ ----------
Net loss $ (681,747) $(506,108)
Preferred conversion feature of preferred stock (500,000) -
Preferred stock dividend earned - -
------------------------
Net loss attributable to common stock holders $(1,181,747) $(506,108)
========================
(k) Segment Reporting
The Company applies the provisions of Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"), which establishes annual and interim reporting
standards for operating segments of a company. SFAS 131 requires disclosures of
selected segment-related financial information about products, major customers
and geographic areas. The Company is organized in a single operating segment for
purposes of making operating decisions and assessing performance. The chief
operating decision maker evaluates performance, makes operating decisions and
allocates resources based on financial data consistent with the presentation in
the accompanying condensed consolidated financial statements.
The Company's revenues have been earned primarily from customers in the
United States. In addition, all significant operations and assets are based in
the United States.
(l) Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4,
44, and 64, Amendment of SFAS No. 13, and Technical Corrections." SFAS No. 4
required all gains and losses from the extinguishment of debt to be reported as
extraordinary items and SFAS No. 64 related to the same matter. SFAS No. 145
requires gains and losses from certain debt extinguishment not to be reported as
extraordinary items when the use of debt extinguishment is part of the risk
management strategy. SFAS No. 44 was issued to establish transitional
6
requirements for motor carriers. Those transitions are completed, therefore SFAS
No. 145 rescinds SFAS No. 44. SFAS No. 145 also amends SFAS No. 13 requiring
sale-leaseback accounting for certain lease modifications. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002. The provisions relating
to sale-leaseback are effective for transactions after May 15, 2002. The
adoption of SFAS No. 145 is not expected to have a material impact on the
Company's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The principal difference
between SFAS No. 146 and EITF 94-3 relates to the timing of liability
recognition. Under SFAS No. 146, a liability for a cost associated with an exit
or disposal activity is recognized when the liability is incurred. Under EITF
94-3, a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. The provisions of SFAS No. 146 are effective for
exit or disposal activities that are initiated after December 31, 2002. The
adoption of SFAS No. 146 is not expected to have a material impact on the
Company's financial position or results of operations.
In November 2002 the FASB issued FASB Interpretation No., or FIN 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantee of Indebtedness of Others. FIN 45 requires that upon issuance
of a guarantee, the guarantor must recognize a liability for the fair value of
the obligation it assumes under that guarantee. FIN 45's provisions for initial
recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The guarantor's previous
accounting for guarantees that were issued before the date of FIN 45's initial
application may not be revised or restated to reflect the effect of the
recognition and measurement provisions of the Interpretation. The disclosure
requirements are effective for financial statements both interim and annual
periods that end after December 15, 2002. The adoption of FIN 45 is not expected
to have a material impact on the Company's financial position or results of
operations.
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 Company has not yet made a decision to change the method of accounting
for stock-based employee compensation.
In January 2003, the FASB issued Interpretation 46, "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 adoption of
this statement is not expected to have a significant impact on the Company's
financial position or results of operations.
(2) STOCK OPTION REPRICING
On May 31, 2000, the Company offered to substantially all of its employees,
excluding executive officers and the Board of Directors, the right to amend
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, were amended 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 require variable accounting in accordance with FIN No. 44. For the three
months ended March 31, 2003, there was no compensation charge relating to the
re-pricing due to the decrease in value of the common stock price. 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
No stock options were issued for the quarter ended March 31, 2003. Total
stock options outstanding is shown below:
Total Stock Options at 12/31/02 5,971,440
Add: Options Issued -
Less: Options Exercised -
Less: Options Expired / Cancelled (1,500)
----------
Total Stock Options at 3/31/03 5,969,940
==========
The Company estimates the fair value of each stock option at the grant date
by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 2002: no dividend yield; an
expected life of ten years; 160% expected volatility and 4.78% risk free
interest rate. Under the accounting provisions of SFAS 123, the Company's net
7
loss and loss per share would have been adjusted in connection with options
issued to employees had there been any material grants or vesting during the
quarters ended March 31, 2003 and 2002.
(3) COMMITMENTS AND CONTINGENCIES
Litigation
On and after August 3, 2001 and as of the date of this filing, the Company
is aware that 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 initial
public offering. The lawsuits were filed in the United States District Court for
the Southern District of New York. The lawsuits purport to be class actions
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. On December 5, 2001, an amended complaint was filed in one of the
actions, alleging the same conduct described above in connection with both the
Company's November 23, 1998 initial public offering and its May 19, 1999
secondary offering. The actions seek damages in an unspecified amount. On
February 19, 2003, a motion to dismiss all claims against the Company was denied
by the Court. The Company and its current and former officers and directors
intend to vigorously defend the actions. The complaints have been consolidated
into a single action, entitled Kofsky v. theglobe.com, inc. et al., Case No. 01
Civ. 7247. Due to the inherent uncertainties of litigation, we cannot accurately
predict the ultimate outcome of the litigation. Any unfavorable outcome of this
litigation could have a material adverse impact on our business, financial
condition and results of operations.
(4) DISPOSITIONS AND OTHER INCOME AND EXPENSE
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 loan (the "Loan') the venture up to $160,000 to fund its
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 and
the issuance of an aggregate of 2,000,000 unregistered restricted shares of
theglobe.com's common stock (the "Option") (See Note 5 - Other Events). As of
March 31, 2003, $175,000 has been advanced to this venture. In connection with
this, the Company has set up a reserve of $135,000 which was recorded in other
expense in the first quarter of 2003.
On February 27, 2002 the Company sold to Internet Game Distribution, LLC
all of the assets used in connection with the Happy Puppy website. The total
consideration received was $135,000. 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. The Company recognized a gain on the sale of $134,500, in the
first quarter of 2002.
(5) OTHER EVENTS
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 loan (the "Loan') the venture up to $160,000 (or greater at
the discretion of theglobe.com) to fund its 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 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 and
matures on December 12, 2003. At it's option, theglobe.com may loan additional
amounts on substantially identical terms. The Option is exercisable at anytime
on or before the later of March 31, 2003 and 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 Loan. As of March 31, 2003,
$175,000 has been advanced to this venture. Due to the uncertainty of
collectibility of this loan, as it is to a development stage business, we have
set up a reserve for all of the loan except the $40,000 attributable to the
acquisition should we exercise our option.
On November 14, 2002, E & C Capital Partners, a privately held investment
holding company owned by Michael S. Egan, our Chairman and CEO and a major
shareholder, and Edward A. Cespedes, our President and a Director, entered into
a non-binding letter of intent with theglobe.com to provide $500,000 of new
financing via the purchase of shares of a new Series F Preferred Stock of
theglobe.com. On March 28, 2003, the parties signed a Preferred Stock Purchase
Agreement and other related documentation pertaining to the investment and
closed on the investment (the "Preferred Stock 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 conversion price is subject to
adjustment upon the occurrence of certain events, including downward adjustment
on a weighted-average basis in the event the Company should issue securities at
a purchase price below $0.03 per share. If fully converted, and without regard
8
to the anti-dilutive adjustment mechanisms applicable to the Series F Preferred
Stock, an aggregate of approximately 16.7 million shares of Common Stock could
be issued. The Series F Preferred Stock has a liquidation preference of $1.50
per share, 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 3.3 million shares of theglobe.com Common
Stock at an exercise price of $0.125 per share. The warrant is 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
Company intends to use the proceeds from the investment for its general working
capital requirements.
At the issuance of the preferred shares, an allocation of proceeds received
was made between the preferred stock and the 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
preferred stock was determined by measuring the fair value of the common shares
on an as converted basis. 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
to the 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, has been recorded as a dividend to the preferred
stockholders in March 2003, as the preferred shares are immediately convertible
into common shares.
As a result of the issuance of the Series F Preferred Stock and the
warrants at the applicable conversion and exercise prices, certain anti-dilution
provisions applicable to previously outstanding warrants to acquire
approximately 4.1 million shares of theglobe.com 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 anytime 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, the exercise price was lowered from approximately $1.39 to $.96 per
share on these warrants and the number of shares issueable upon exercise was
proportionally increased from approximately 4.1 million shares to 5.375 million
shares. The total number of warrants now outstanding, including those issued in
the Preferred Stock Investment, is approximately 10.525 million.
Concurrently with the closing of the preferred stock investment, Michael S.
Egan and Edward A. Cespedes entered into a non-binding letter of intent to loan
up to $1 million to the Company pursuant to a convertible secured loan facility.
The loan facility would be convertible into shares of the Company's common stock
at the rate of $.09 per share, which if fully funded and converted, would result
in the issuance of approximately 11.1 million shares. In addition, assuming the
loan is fully funded, it is anticipated that the investors would be issued a
warrant to acquire approximately 2.2 million shares of theglobe.com Common Stock
at an exercise price of $.15 per share. The convertible debt financing is
subject to a number of closing conditions, including execution of definitive
documentation, satisfactory resolution of certain Company liabilities and other
tax and business considerations. The financing is also subject to completion of
a loan facility and related documentation satisfactory to the parties. If
consummated, and assuming the conversion of the debt and/or exercise of the
warrant, the convertible debt financing would result in substantial dilution of
the number of securities of theglobe.com issued and outstanding. There can be no
assurance, if and when, the financing will be consummated. In addition, the
anti-dilution provisions in certain warrants referred to above would once again
be triggered and the exercise price and the number of shares issueable would
once again be adjusted.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD LOOKING STATEMENTS
The following 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.
OVERVIEW AND PLAN OF OPERATION
As of March 31, 2003, we were a network of three wholly owned properties,
each of which specializes in the games business by delivering games information
and selling games in the United States and abroad. These properties 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. In
addition, as described below, the Company intends to enter into the VoIP
business. Management of 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
(which may include acquisition of other companies).
As of March 31, 2003, our 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 video games and related products
through our games distribution business Chips & Bits, Inc.; and through the sale
of our games information magazine through newsstands and subscriptions.
On November 14, 2002, we acquired certain VoIP assets. Our plans regarding
these VoIP assets are described below. We issued 1.75 million warrants to
acquire shares of our Common Stock in conjunction with the closing of this
acquisition. The Company also issued 425,000 warrants to acquire shares of
Common Stock as part of an earn-out structure. These warrants are held in escrow
by the Company and will only be released upon attainment of certain performance
targets. In conjunction with the acquisition, E&C Capital Partners, a privately
held investment vehicle owned by our Chairman and Chief Executive Officer,
Michael S. Egan and our President, Edward A. Cespedes, entered into a letter of
intent with theglobe.com to provide new financing in the amount of $500,000
through the purchase of a new series of preferred securities.
On March 28, 2003, the parties signed a Preferred Stock Purchase Agreement
and other related documentation pertaining to the investment and closed on the
investment (the "Preferred Stock 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 conversion price is subject to adjustment upon the
occurrence of certain events, including downward adjustment on a
weighted-average basis in the event the Company should issue securities at a
purchase price below $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 16.7 million shares of Common Stock could
be issued. The Series F Preferred Stock has a liquidation preference of $1.50
per share, 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 3.3 million shares of theglobe.com Common
Stock at an exercise price of $0.125 per share. The warrant is 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
Company intends to use the proceeds from the investment for its general working
capital requirements.
Concurrently with the closing of the preferred stock investment, Michael S.
Egan and Edward A. Cespedes entered into a non-binding letter of intent to loan
up to $1 million to the Company pursuant to a convertible secured loan facility.
The loan facility would be convertible into shares of the Company's common stock
at the rate of $.09 per share, which if fully funded and converted, would result
in the issuance of approximately 11.1 million shares. In addition, assuming the
loan is fully funded, it is anticipated that the investors would be issued a
warrant to acquire approximately 2.2 million shares of theglobe.com Common Stock
at an exercise price of $.15 per share. The convertible debt financing is
subject to a number of closing conditions, including execution of definitive
documentation, satisfactory resolution of certain Company liabilities and other
tax and business considerations. The financing is also subject to completion of
a loan facility and related documentation satisfactory to the parties. If
consummated, and assuming the conversion of the debt and/or exercise of the
warrant, the convertible debt financing would result in substantial dilution of
the number of securities of theglobe.com issued and outstanding. There can be no
assurance, if and when, the financing will be consummated.
On February 25, 2003, the Company entered into a Loan and Purchase Option
Agreement with a development stage internet related business venture pursuant to
which it agreed to loan the venture up to $160,000 (or a greater amount, at the
discretion of theglobe.com) to fund its operating expenses and obtained the
10
option to acquire all of the outstanding capital stock of the venture in
exchange for, when and if exercised, $40,000 and the issuance of an aggregate of
2,000,000 unregistered restricted shares of theglobe.com's common stock (See
Note 5 of notes to the unaudited consolidated financial statements - Other
Events). As of March 31, 2003, $175,000 has been advanced to this venture.
Due to the uncertainty of collectibility of this loan, as it is to a
development stage business, we have set up a reserve for all of the loan
except the $40,000 attributable to the acquisition should we exercise our
option.
Our Proposed VoIP Business
Overview. In the summer of 2003, theglobe.com intends to enter the
telephone business with a phone system based upon "Voice over the Internet
Protocol" or "VoIP." The Company's longer term objective is to become a leading
provider of feature-rich, voice communications products and services delivered
over the Internet. At present, the Company is preparing the launch of three
products: voiceglo live, voiceglo usa "your global home phone" and voiceglo biz.
The products are intended to allow consumers and enterprises to communicate
using voice over the Internet for significantly reduced pricing compared to
traditional telephony networks. We are developing and intend to also offer
traditional telephony services with our VoIP services, such as voicemail, caller
id, call forwarding, and call waiting, as well as incremental services that are
not currently supported by the public switched telephone network (such as the
ability to use numbers remotely and voice to email services). Each of the
foregoing three products is described in greater detail below. Each product is
subject to continuing development by the Company and management continues to
evaluate its business plans for these proposed services. The company will need
to raise substantial additional capital to fully exploit its business plans for
these services. There are a number of significant risks to entry into, and the
conduct of business in, this market, including governmental regulation,
potential taxation of services and many of the risks detailed below under "Risk
Factors."
voiceglo live. voiceglo live is planned as an "on-network"-only
communications product. When implemented, voiceglo live subscribers will be able
to make (to other voiceglo live subscribers) and receive (from other voiceglo
live subscribers and anybody else calling from the Internet) calls to and from
anywhere in the world, and make calls to the public switched telephone network
("PSTN") for a low per minute rate. voiceglo live subscribers will be issued
telephone numbers that, along with other directory information they give us
permission to include, are indexed in all major search engines. Callers to
voiceglo live subscribers will be able to "search" for subscribers by name or
telephone number at any search engine or at the Company's planned voiceglo.com
website directory. Upon completing a search, the caller will receive
notification as to whether or not the subscriber is "Live." If so, the caller
can complete the call right from the search engine or directory. If the
subscriber is not "live," the caller can still complete the call and will
receive the voiceglo subscriber's voicemail greeting. All calls to and between
voiceglo live subscribers are anticipated to be free because they are delivered
over the Internet.
The voiceglo live service is anticipated to be easy to use and mobile. As
currently planned, the service can be used with a USB handset (a simple phone
that plugs into a PC's USB port and which will included as part of the sign-up),
with a PC's microphone and speakers, with any wi-fi enabled device equipped with
a speaker and microphone, or with existing traditional phones with use of an
adapter under development by the Company. We intend for subscribers to be able
to log into their service from any Internet connection in the world and receive
calls made to their voiceglo numbers.
voiceglo usa. voiceglo usa is planned as a full-featured, full-service
alternative to the public switched telephone network (PSTN) available to
enterprises and homes with broadband Internet access. Our plans call for
subscribers to be able to use voiceglo usa just like they would their
traditional telephone service. Calls made and received by subscribers will be
carried over their broadband connections and interconnect with the PSTN using
voiceglo's call signaling technology. The Company has applied for patent
protection for this technology. We cannot predict whether a patent will be
issued for this technology. Upon joining voiceglo usa, subscribers will be
issued traditional phone numbers. In the alternative, they may "port" or
transfer their existing phone numbers to the voiceglo usa service. Subscribers
will be listed (unless they choose to be unlisted) in the traditional PSTN "411"
directory and in voiceglo's proprietary directory. The Company's remote local
number service is anticipated to allow subscribers to choose phone numbers from
any area codes serviced by voiceglo usa, allowing customers to keep numbers "for
life," even if they move. It will also allow them a local presence in areas
where they do not reside. We anticipate that voiceglo usa's service will be
significantly discounted from traditional telephone service.
Like voiceglo live, voiceglo usa is being developed to be easy to use and
portable. As planned, the service can be used with the same USB handset and
other hardware device as described for our proposed voiceglo live service. We
intend for subscribers to be able to log into their service from any high-speed
Internet connection in the world and receive calls made to their voiceglo
numbers at no extra cost. Users are also anticipated to be able to call back to
their local area codes from anywhere in the world. All calls between voiceglo
usa subscribers are anticipated to be free.
voiceglo biz. voiceglo biz is planned as a bundled offering for businesses
that will include voiceglo live and voiceglo usa components. We anticipate that
voiceglo biz will be priced very attractively compared to what businesses must
pay for traditional telephony services. voiceglo biz is anticipated to offer
businesses unlimited local calling and highly attractive long distance rates.
voiceglo biz is also anticipated to offer businesses the ability to use their
corporate phone numbers remotely for no extra cost.
11
Our plans call for voiceglo biz to be used with USB handsets or other
hardware devices like those for our other planned services. We intend for
subscribers to be able to log into their service from any high-speed Internet
connection in the world and receive calls made to their voiceglo numbers. They
will also be able to call back to their local area codes for free from anywhere
in the world. All calls between voiceglo usa subscribers are anticipated to be
free. We anticipate that voiceglo biz lines may be used by multiple users within
a business environment.
RESULTS OF OPERATIONS
Revenues. Our revenue is currently derived principally from the sale of
print advertisements under short-term contracts in our games information
magazine Computer Games; through newsstand sales and subscriptions of our games
information magazine; and through the sale of video games and related products
through our games distribution business Chips & Bits, Inc.
Total revenues decreased to $1.7 million for the three months ended March
31, 2003, as compared to $2.5 million for the three months ended March 31, 2002.
Advertising revenues from the sale of print advertisements in our games magazine
for the three months ended March 31, 2003 were $0.5 million, which represented
33% of total revenues. Advertising revenues for the three months ended March 31,
2002 were $0.7 million, which represented 26 % of total revenues. The decrease
in advertising revenues was primarily attributable to negative industry trends.
Barter advertising revenues represented 2% and 1% of total revenues for the
three months ended March 31, 2003 and 2002, respectively. Sales of the Company's
games information magazine through newsstands and subscriptions accounted for
42%, or $0.7 million, and 38%, or $1.0 million, of total revenues for the
three-month periods ended March 31, 2003 and 2002, respectively. The decrease is
also due to negative industry trends.
Sales of merchandise through our online store accounted for 25% of total
revenues for the three months ended March 31, 2003, or $0.4 million, as compared
to 36% for the three months ended March 31, 2002, or $0.9 million. The decrease
was partially attributable to advances in console and online games, which
traditionally have less sales loyalty to our online store, and to a dramatic
reduction in the number of major PC games releases, on which our online store
relies for the majority of sales and profits.
Cost of Revenues. Cost of revenues consists primarily of Internet
connection charges, staff and related costs of operations personnel,
depreciation and maintenance costs of website equipment, printing costs of our
games magazine and the costs of merchandise sold and shipping fees in connection
with our online store. Gross margins were 49% and 36.7% for the three months
ended March 31, 2003 and 2002, respectively. The quarter-over-quarter increase
in gross margins was primarily attributable to a higher concentration of revenue
derived from subscriptions and newsstand sales of the magazine, which has high
gross margins. Cost of revenues decreased substantially from the corresponding
quarter in 2002 ($0.85 million and $1.6 million, respectively) primarily as a
result of our cost restructuring initiatives. Principally due to the decline in
marketing expenses, total operating expenses decreased substantially from the
corresponding quarter in 2002.
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 $0.6 million
and $1.0 million for the three months ended March 31, 2003 and 2002,
respectively. The year-to-year decrease in sales and marketing expense was
attributable to reduced personnel costs and decreased advertising costs. As of
March 31, 2003, we 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, and to a lesser extent on our Computer Games
Online website, which is the online counterpart to Computer Games magazine.
Product Development. Product development expenses include salaries and
related personnel costs, expenses incurred in connection with the development
of, testing of and upgrades to our websites, and editorial and content costs.
Product development expenses decreased to $0.15 million for the three months
ended March 31, 2003, as compared to $0.2 million for the three months ended
March 31, 2002. The quarter-over-quarter decrease was related to our
restructuring and cost containment initiatives.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related personnel costs for general corporate
functions including finance, human resources, legal and facilities, outside
legal and professional fees, directors and officers insurance, bad debt expenses
and general corporate overhead costs. General and administrative expenses were
relatively stable at approximately $0.6 million for the three months ended March
31, 2003, as well as $0.6 million for the three months ended March 31, 2002.
Amortization of Goodwill and Intangible Assets. Amortization expense was $
0 for the three months ended March 31, 2003 and March 31, 2002. In August 2002,
we acquired certain VoIP assets which are intangible. When they are placed in
service, they will be amortized over their useful life and evaluated annually
for impairment.
Interest and other income, net. Interest and other income, net consists
primarily of interest income from our cash and cash equivalents, offset by
interest expense related to our obligations and the reserve of $135,000 against
the advances to the development stage internet related business venture (See
Overview and Other Events). Interest and other income, net was $ (.1) million
and $0.4 million for the three months ended March 31, 2003 and 2002,
respectively. The quarter-over-quarter decrease was primary attributable to the
decline in interest income related to the decrease in cash and the establishment
of the reserve for the advances to the internet venture. Additionally, the $0.4
million for the three months ended March 31, 2002 included the sale of the Happy
Puppy property ($0.1 million) and the favorable settlement of certain existing
liabilities ($0.3 million).
12
Income Taxes. Income taxes were $0 for the three months ended March 31,
2003, compared with approximately $2,700 for the three months ended March 31,
2002. Income taxes were 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. Due to the uncertainty
surrounding the timing or realization of the benefits of our net operating loss
carryforwards in future tax returns, we have placed a 100% valuation allowance
against our otherwise recognizable deferred tax assets. At December 31, 2002,
the Company had net operating loss carry forwards available for U.S. and foreign
tax purposes of approximately $134 million. These carryforwards expire through
2021. The Tax Reform Act of 1986 imposes substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change" of a corporation. Due to the change in our ownership
interests in the third quarter of 1997 and May 1999, as defined in the Internal
Revenue Code of 1986, as amended (the "Code"), future utilization of our net
operating loss carryforwards prior to the change of ownership will be subject to
certain limitations or annual restrictions. Additionally, any future ownership
change could further limit the ability to use these carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, our sole source of liquidity consisted of $0.8
million of cash and cash equivalents. Subsequent to December 31, 2002, we
committed to loan $160,000 (or more, at our discretion) to a development stage
Internet related company in connection with our securing an option to acquire
such third party. $175,000 has been loaned to such company through March 31,
2003. We may loan additional amounts to such company as well. Our liquidity was
temporarily enhanced by the recent investment of $500,000 by an affiliate of the
Company as more fully described below and elsewhere in this report. The Company
has used these funds for its general working capital requirements and, beginning
in April of 2003, has begun to invest considerable resources in the development
of its VoIP business. In order to significantly develop and implement our
business strategy for these assets, the Company will need to raise substantial
additional capital.
We currently do not have access to any other sources of funding, including
debt and equity financing facilities. The Company has limited operating capital.
Our cash needs remain critical. Management does not believe that our current
capital will sustain operations through the end of the fiscal year. If we are
unable to raise additional capital and grow revenue, we may have to defer or
scale back our expansion plans, or sell existing assets, in order to sustain
operations. Any financing that could be obtained will likely dilute existing
shareholders significantly. Although there is a non-binding letter of intent to
loan up to $1 million to the Company, as discussed below and elsewhere in this
report, and even if such loan should close, the Company believes it will still
need to raise significant additional capital.
Our capital requirements depend on numerous factors, including market
acceptance of our services, the capital required to maintain our websites, the
resources we devote to marketing and selling our services, our entry into and
development of new business lines, and our brand promotions and other factors.
We have received a report from our independent accountants, relating to our
December 31, 2002 audited financial statements containing an explanatory
paragraph stating that our recurring losses from operations since inception and
requirement for additional financing raise substantial doubt about our ability
to continue as a going concern. Management and the Board of Directors are
currently exploring a number of strategic alternatives and are also continuing
to identify and implement internal actions to improve the Company's liquidity or
financial performance. These alternatives may include selling assets, which in
any such case could result in significant changes in our business plan, or
entering into new or different lines of business, including plans for our VoIP
business, or cessation of certain business operations or plans to expand our
business.
On March 28, 2003, E & C Capital Partners, a privately held investment
holding company owned by Michael S. Egan, our Chairman and CEO and a major
shareholder, and Edward A. Cespedes, our President and a Director, 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 conversion price is subject to adjustment
upon the occurrence of certain events, including downward adjustment on a
weighted-average basis in the event the Company should issue securities at a
purchase price below $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 16.7 million shares of Common Stock could
be issued. The Series F Preferred Stock has a liquidation preference of $1.50
per share, 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 3.3 million shares of theglobe.com Common
Stock at an exercise price of $0.125 per share. The warrant is 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
Company has been using the proceeds from the investment for its general working
capital requirements. As a result of the foregoing investment, the beneficial
ownership (which, in accordance with applicable rules of the Securities and
Exchange Commission, assumes the conversion of the Series F Preferred Stock and
the exercise of the foregoing warrant) of Michael S. Egan increased from
approximately 35.1 % to approximately 58.5 %. Accordingly, Mr. Egan would likely
be able to exercise significant influence over, if not control, any matter
submitted to a stockholder vote of the Company.
Concurrently with the closing of the preferred stock investment, certain
affiliates of Michael S. Egan and Edward A. Cespedes entered into a non-binding
letter of intent to loan up to $1 million to the Company pursuant to a
convertible secured loan facility. The loan facility would be convertible into
shares of the Company's common stock at the rate of $.09 per share, which if
fully funded and converted, would result in the issuance of approximately 11.1
13
million shares. In addition, assuming the loan is fully funded, it is
anticipated that the investor group would be issued a warrant to acquire
approximately 2.2 million shares of theglobe.com Common Stock at an exercise
price of $.15 per share. The convertible debt financing is subject to a number
of closing conditions, including execution of definitive documentation,
satisfactory resolution of certain Company liabilities and other tax and
business considerations. The financing is also subject to completion of a loan
facility and related documentation satisfactory to the parties. If consummated,
and assuming the conversion of the debt and/or exercise of the warrant, the
convertible debt financing would result in substantial dilution of the number of
securities of theglobe.com issued and outstanding. There can be no assurance,
if and when, the convertible debt financing will be consummated.
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, although the Company has had some
success in offering its securities as consideration for the acquisition of
various business opportunities or assets. 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 of America 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 revenues 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, restructuring reserves
and income tax recognition of deferred tax items. Our policy and related
procedures for revenue recognition and valuation of customer receivables 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; and from the sale of video games and related
products through our online store Chips & Bits. 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 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' web sites or in their
magazines, which typically occurs within one to six months from the period in
which the related barter revenue is recognized. Barter advertising revenues
represented 2% of total revenues for the three months ended March 31, 2003 and
1% of total revenues for the three months ending March 31, 2002.
Advertising. Advertising revenues for the games information magazine are
recognized at the on-sale date of the magazine.
Electronic Commerce and Other. Sales from the online store are recognized
as revenue when the product is shipped to the customer. Freight out costs are
included in net sales and have not been significant to date. The Company
provides an allowance for merchandise sold through its online store. The
allowance provided to date has not been significant.
14
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 pro ratably over the subscription term. Revenues from the
Company's share of the proceeds from its e-commerce partners' sales are
recognized upon notification from its partners of sales attributable to the
Company's sites.
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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4,
44, and 64, Amendment of SFAS No. 13, and Technical Corrections." SFAS No. 4
required all gains and losses from the extinguishment of debt to be reported as
extraordinary items and SFAS No. 64 related to the same matter. SFAS No. 145
requires gains and losses from certain debt extinguishment not to be reported as
extraordinary items when the use of debt extinguishment is part of the risk
management strategy. SFAS No. 44 was issued to establish transitional
requirements for motor carriers. Those transitions are completed, therefore SFAS
No. 145 rescinds SFAS No. 44. SFAS No. 145 also amends SFAS No. 13 requiring
sale-leaseback accounting for certain lease modifications. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002. The provisions relating
to sale-leaseback are effective for transactions after May 15, 2002. The
adoption of SFAS No. 145 is not expected to have a material impact on the
Company's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The principal difference
between SFAS No. 146 and EITF 94-3 relates to the timing of liability
recognition. Under SFAS No. 146, a liability for a cost associated with an exit
or disposal activity is recognized when the liability is incurred. Under EITF
94-3, a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. The provisions of SFAS No. 146 are effective for
exit or disposal activities that are initiated after December 31, 2002. The
adoption of SFAS No. 146 is not expected to have a material impact on the
Company's financial position or results of operations.
In November 2002 the FASB issued FASB Interpretation No., or FIN 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantee of Indebtedness of Others. FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee. FIN 45's provisions for
initial recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The guarantor's previous
accounting for guarantees that were issued before the date of FIN 45's initial
application may not be revised or restated to reflect the effect of the
recognition and measurement provisions of the Interpretation. The disclosure
requirements are effective for financial statements both interim and annual
periods that end after December 15, 2002. The adoption of FIN 45 is not
expected to have a material impact on the Company's financial position or
results of operations.
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 Company has not yet made a decision to change the method of accounting
for stock-based employee compensation.
In January 2003, the FASB issued Interpretation 46, "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 adoption of
this statement is not expected to have a significant impact on the Company's
financial position or results of operations.
15
RISK FACTORS
In addition to the other information in this report, the following factors
should be carefully considered in evaluating our business and prospects.
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 web site at "www.theglobe.com" and
its small business web-hosting property at "www.webjump.com" in August 2001. In
addition, the Company is seeking buyers for its games properties in order to
reduce its cash burn and preserve working capital. 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 may try to sell its remaining game properties or shift
its business strategy in the future. 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 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
affect our electronic commerce due to the inability of those web sites after
their closure to refer traffic to the Chips & Bits web site. 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.
WE MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN.
We may not be able to operate the remaining business in the event that we cannot
sell the business or enter into another arrangement. We may determine to use our
remaining capital in a different line of business and have committed a
substantial portion of our remaining capital to funding of the operations of a
company upon which we have secured an option to acquire the company. At this
point there are minimal prospects for a meaningful return on investment. As of
December 31, 2002, our sole source of liquidity consisted of $0.7 million of
cash and cash equivalents. We currently do not have access to any other sources
of funding, including debt and equity financing facilities. The Company has
limited operating capital and no current access to credit facilities. If we are
unable to keep operating costs down, grow revenue, and maintain terms with our
creditors, we may have to try and raise additional funds through asset sales,
bank borrowings, or equity or debt financing. Obtaining financing from any
unaffiliated third party is very unlikely and any financing that could be
obtained would probably dilute existing shareholders significantly. We received
a report from our independent accountants, relating to our December 31, 2002
audited financial statements, containing an explanatory paragraph stating that
our recurring losses from operations since inception and requirement for
additional financing raise substantial doubt about our ability to continue as a
going concern.
WE MAY DECIDE TO RETAIN OUR CURRENT OPERATING BUSINESSES AND WE INTEND TO ALSO
ENTER NEW LINES OF BUSINESS WHICH MAY OR MAY NOT BE RELATED TO THE INTERNET.
Our Board of Directors is reviewing various options for use of our remaining
assets. While we continue to seek buyers for some or all of our remaining
operating businesses, our Board of Directors may decide to retain them.
Regardless of whether we sell our operating businesses, our Board of Directors
may consider entering into additional new or different lines of business,
including non-Internet related lines of business. Our business plan currently
contemplates that we will enter into the VoIP telephony market in the future.
theglobe.com 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 enter different business lines in the future.
OUR ACQUISITIONS, JOINT VENTURES OR STRATEGIC TRANSACTIONS ENTAIL NUMEROUS RISKS
AND UNCERTAINTIES. WE INTEND TO ENTER NEW LINES OF BUSINESS.
On February 24, 2000, we acquired Chips & Bits, Inc., an electronic commerce
retailer that focuses primarily on game enthusiasts' and Strategy Plus, Inc.,
media property that publishes a monthly games magazine and a game enthusiast web
site. Due to the significant and prolonged decline in the Internet advertising
sector, we closed our community web site at "www.theglobe.com" and our small
business web-hosting property at "www.webjump.com" in August 2001. On October
17, 2001, we sold the Games Domain/Console Domain websites. On October 30, 2001,
we sold the Kids Domain web site. On February 27, 2002, we sold the Happy Puppy
website. We also are seeking buyers for the remaining game properties. In
conjunction with our efforts to sell our remaining games properties, we are
considering and evaluating potential business combinations or sales of these
remaining assets. If consummated, any such transaction could result in a change
of control of our company or could otherwise be material to our business or to
your investment in our Common Stock. In addition, as part of the sale of our
games business, we could obtain stock of another company or be the surviving
company in a merger. These transactions may or may not be consummated. If such a
16
transaction is not consummated, it is unclear how long we will continue to be
able to operate. We have begun to explore entering new business lines, including
VoIP telephony services. We may also enter into new or different lines of
business, as determined by management and our Board of Directors. Our future
acquisitions or joint ventures could result in numerous risks and uncertainties,
including:
- potentially dilutive issuances of equity securities, which may be
issued at the time of the transaction or in the future if certain
tests 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;
- large and immediate write-offs;
- significant write-offs if we determine that the business acquisition
does not fit or perform up to expectations;
- the incurrence of debt and contingent liabilities or amortization
expenses related to goodwill and other intangible assets;
- difficulties in the assimilation of operations, personnel,
technologies, products and information systems of the acquired
companies;
- the risks of entering a new or different line of business;
- the risks of entering geographic and business markets in which we have
no or limited prior experience; and
- the risk that the acquired business will not perform as expected.
WE EXPECT TO CONTINUE TO INCUR LOSSES.
We have incurred net losses in each quarter, except the fourth quarter of 2002
where we had net income of $11,000, since our inception and we expect that we
will continue to incur net losses for the foreseeable future. We had net losses
of approximately $2.6 million, $40.7 million, $103.9 million for the years ended
December 31, 2002, 2001 and 2000, respectively. The principal causes of our
losses are likely to continue to be:
- costs resulting from the operation of our services;
- failure to generate sufficient revenue; and
- general and administrative expenses.
Although we have restructured our business, we still expect to continue to incur
losses while we explore the sale of our remaining assets or other changes to our
business.
THE MARKET SITUATION CONTINUES TO BE A CHALLENGE FOR CHIPS & BITS DUE TO RECENT
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 27% and 25% for
the quarters ended March 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:
- Games information sites such as Snowball's IGN, ZDnet's Gamespot, and
CNET's GameCenter; and
- Online games centers, where users can play games such as Uproar, Pogo
and Terra Lycos' Gamesville.
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 ADVERTISING REVENUES. THE
ONLINE ADVERTISING MARKET HAS SIGNIFICANTLY DECLINED. IN ADDITION, WE HAVE
DRAMATICALLY REDUCED OUR SALES FORCE DOWN TO ONLY TWO (2) SALES PEOPLE
NATIONWIDE.
We historically derived a substantial portion of our revenues from the sale of
advertisements on our web sites and in our magazine Computer Games Magazine. Our
business model and revenues were highly dependent on the amount of traffic on
our sites and our ability to properly monetize this traffic. Due to our
restructuring in August 2001 (the "August 3, 2001 restructuring"), we now have
only two (2) sales people and will have tremendous difficulty maintaining
17
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 effect 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. Online advertising has
dramatically decreased since the middle of 2000, and may continue to decline,
which could continue to have a material effect on the Company. Many online
advertisers have been experiencing financial difficulties which could materially
impact our revenues and our ability to collect our receivables.
The development of the Internet advertising market has slowed dramatically
during the last two years and if it continues to slow down, our business
performance would continue to be materially adversely affected. Moreover,
measurements of site visitors may not be accurate or trusted by our advertising
customers. There are no uniformly accepted standards for the measurement of
visitors to a web site, and there exists no one accurate measurement for any
given Internet visitor metric. Indeed, different website traffic measurement
firms will tend to arrive at different numbers for the same metric. For any of
the foregoing reasons, we cannot assure you that advertisers will continue to
purchase advertisements on our sites.
WE NOW RELY SUBSTANTIALLY ON PRINT ADVERTISING REVENUES. THE PRINT ADVERTISING
MARKET HAS SIGNIFICANTLY DECLINED. IN ADDITION, WE HAVE DRAMATICALLY REDUCED OUR
SALES FORCE DOWN TO ONLY TWO (2) SALES PEOPLE NATIONWIDE.
We now derive a substantial portion of our revenues from the sale of
advertisements in our Computer Games print magazine. Our business model and
revenues are highly dependent on the print circulation of our Computer Games
magazine. Due to the August 3, 2001 restructuring, we now have only two (2)
sales people and have tremendous difficulty maintaining print advertising
revenues within our Computer Games magazine. Print advertising has dramatically
decreased since the middle of 2000 and may continue to decline, which could
continue to have a material effect on the Company. Many print 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 on our sites.
OUR QUARTERLY OPERATING RESULTS FLUCTUATE AND VARY BY SEASON.
Due to our significant change in operations, 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:
- sales of our assets;
- the drastic decline in the number of sales employees;
- the level of traffic on our web sites;
- the overall demand for Internet advertising and electronic commerce;
- the addition or loss of advertisers and electronic commerce partners
on our web sites;
- overall usage and acceptance of the Internet;
- seasonal trends in advertising and electronic commerce sales and
member usage;
- other costs relating to the maintenance of our operations;
- the restructuring of our business;
- failure to generate significant revenues and profit margins from new
products and services;
- financial performance of other internet companies who advertise on our
site; and
- competition from others providing services similar to those of ours.
THE VOICE OVER INTERNET PROTOCOL ("VOIP") MARKET WHICH WE SEEK TO ENTER IS
SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND WE WILL NEED TO DEPEND ON NEW PRODUCT
INTRODUCTION AND INNOVATIONS IN ORDER TO START, 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:
- the identification of market demand for new products;
- access to sufficient capital to complete our development efforts;
18
- product and feature selection;
- timely implementation of product design and development;
- product performance;
- cost-effectiveness of products under development;
- effective manufacturing processes; and
- 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, if such new or enhanced products do not achieve sufficient market
acceptance, our operating results will suffer and our business will not grow.
WE ARE INVOLVED IN SECURITIES CLASS ACTION LITIGATION.
We are a party to the securities class action litigation described in Note 12 to
the Consolidated Financial Statements - Litigation. 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, MAY CONTROL US.
Including all warrants, preferred stock, vested options, and all options vesting
within 60 days of May 15, 2003, Michael S. Egan, our Chairman and Chief
Executive Officer, beneficially owns or controls, directly or indirectly,
approximately 33,968,840 shares of our Common Stock, which in the aggregate
represents approximately 58.5 % of the outstanding shares of our Common Stock
(treating as outstanding for this purpose the shares of Common Stock issueable
upon exercise or conversion of the preferred stock, warrants and 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:
- sales of any of our games properties;
- quarterly variations in our operating results;
- competitive announcements;
- entrance into new lines of business;
- the operating and stock price performance of other companies that
investors may deem comparable to us; and
- 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. A substantial
majority of our common stock is freely tradable. Also, we may issue additional
shares of our common stock, which could further adversely affect our stock
price.
There are outstanding options to purchase 5,969,940 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. In addition, as of May 15,
2003, there are outstanding warrants to purchase up to 10,525,817 shares of our
Common Stock upon exercise, including 425,000 warrants subject to an earnout
arrangement and 3,333,333 warrants relating to the Series F Preferred Stock
issued to E & C Capital Partners. Substantially all of our stockholders holding
restricted securities, including shares issueable upon the exercise of warrants
to purchase our Common Stock, are entitled to registration rights under various
conditions.
19
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. Mr. Egan is also Chairman of ANC Rental Corporation, a
spin-off of the car rental business of AutoNation, Inc.
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 Chief Financial Officer, Treasurer, Secretary and Director, Ms. Robin Segaul
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 their relationships with his related entities, Mr. Egan will have an
inherent conflict of interest in making any decision related to transactions
between their related entities and us. We intend to review related party
transactions in the future on a case-by-case basis.
At our shareholder meeting in June 2002, we received shareholder approval to
amend the charter of the Company to allow between 1 and 9 directors to serve on
the Board of Directors due to the change in the operations of the business.
Three (3) nominees were elected as directors at the Company's 2002 Annual
Stockholders Meeting: Michael Egan, Edward Cespedes, and Robin Segaul Lebowitz.
Effective June 1, 2002, Michael Egan became the Company's Chief Executive
Officer, Edward Cespedes became the Company's President, and Robin Segaul
Lebowitz became the Company's Treasurer and Secretary. Additionally, Ms.
Lebowitz became the Company's Chief Financial Officer effective July 1, 2002.
All of them are employees or stockholders of the Company or affiliates of
Dancing Bear Investments, our largest stockholder.
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 are seeking to enter into new market areas and our success is partly
dependent on our ability to forge new marketing and engineering 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 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, such
as the Internet, 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.
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. 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 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 will also incur additional costs under state
blue-sky laws if we sell equity due to our delisting.
20
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 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.
WE RELY ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.
We regard substantial elements of our web sites and underlying technology, as
well as certain assets relating to our VoIP plans and other business
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 recently acquired. 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 web sites 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 or our members, of their intellectual property rights. Any litigation claims
or counterclaims could impair our business because they could:
- be time-consuming;
- result in costly litigation;
- subject us to significant liability for damages;
- result in invalidation of our proprietary rights;
- divert management's attention;
- cause product release delays; or
- 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 web
sites may be accessed, or for any or all of the top-level domain names that 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.
WE MAY FACE INCREASED GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES IN OUR
INDUSTRY.
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
21
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.
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.
OUR FINANCIAL PERFORMANCE AND SUBSEQUENT REDUCTIONS OF OUR WORKFORCE MAY AFFECT
THE MORALE AND PERFORMANCE OF OUR REMAINING PERSONNEL AND OUR ABILITY TO ENTER
INTO NEW BUSINESS RELATIONSHIPS OR SELL OUR ASSETS.
We have incurred significant net losses since our inception. In an effort to
reduce our cash expenses, we began to implement certain restructuring
initiatives and cost reductions. In October 2000, we reduced our workforce by 26
employees. In April 2001, we further reduced our workforce by 59 employees. On
August 3, 2001, we further reduced our workforce by 60 employees. We have had
further workforce reductions in 2002 and also left positions unfilled when
certain employees have left the Company. As of December 31, 2002, we had
approximately 21 full-time employees. In addition, recent trading levels of our
common stock have basically eliminated the value of the stock options granted to
employees pursuant to our stock option plan. As a result of these factors, our
remaining personnel may seek employment with larger, more stable companies or
companies they perceive to have better prospects. Our failure to retain
qualified employees to fulfill our needs could halt our ability to operate our
games business and have a material adverse affect on our business.
In addition, the publicity we receive in connection with our financial
performance and measures to remedy it may negatively affect our reputation and
our business partners and other market participants' perception of the Company.
If we are unable to maintain our existing relationships, and develop new,
business relationships, our revenues and collections could suffer materially. In
addition, the announcement that we have closed our community web sites and are
looking for buyers for our games properties could have a material adverse effect
on our ability to retain the employees necessary to operate the games business
and generate revenues and subsequently collect them, and to retain the games
business value prior to a sale.
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 web sites 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 web sites compete for users. Competitor web sites include other
games information networks and various other types of web sites. We believe that
the principal competitive factors in attracting users to a site are:
- functionality of the web site;
- brand recognition;
- affinity and loyalty;
- broad demographic focus;
22
- open access for visitors;
- critical mass of users;
- attractiveness of content and services to users; and
- pricing and customer service for electronic commerce sales.
We compete for users, advertisers and electronic commerce marketers with the
following types of companies:
- publishers and distributors of television, radio and print, such as
CBS, NBC and AOL Time Warner;
- electronic commerce web sites, such as Amazon.com; and
- other web sites 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:
- longer operating histories in the Internet market, - greater name
recognition;
- larger customer bases;
- significantly greater financial, technical and marketing resources;
and,
- 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.
Web browsers offered by Netscape and Microsoft also increasingly incorporate
prominent search buttons that direct traffic to services that compete with ours.
These features could make it more difficult for Internet users to find and use
our products and services. In the future, Netscape, Microsoft and other browser
suppliers may also more tightly integrate products and services similar to ours
into their browsers or their browsers' pre-set home page. Additionally, entities
that sponsor or maintain high-traffic web sites or that provide an initial point
of entry for Internet viewers, such as the Regional Bell Operating Companies,
cable companies or Internet service providers, such as Microsoft and America
Online, offer and can be expected to consider further development, acquisition
or licensing of Internet search and navigation functions that compete with us.
These competitors could also take actions that make it more difficult for
viewers to find and use our products and services.
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 web sites 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 web site may be sold by the maker of the product directly, or by
other web sites. 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.
OUR LIMITED OPERATING HISTORY MAKES FINANCIAL FORECASTING DIFFICULT.
We have never operated solely as a games business. Accordingly, 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:
- maintain levels of user traffic on our e-commerce web sites;
- maintain or increase the percentage of our off-line advertising
inventory sold;
- maintain or increase both CPM levels and sponsorship revenues for our
games magazine;
- adapt to meet changes in our markets and competitive developments;
- develop or acquire content for our services; and
- identify, attract, retain and motivate qualified personnel.
Moreover, we are exploring other alternatives, including our proposed VoIP
business, which may make financial forecasting even more difficult.
23
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:
- have the effect of delaying, deferring or preventing a change in
control of our company;
- discourage bids of our Common Stock at a premium over the market
price; or
- adversely affect the market price of, and the voting and other rights
of the holders of, our Common Stock.
We must follow Delaware laws that 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.
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 MAY BE UNSUCCESSFUL IN ESTABLISHING AND MAINTAINING BRAND AWARENESS; BRAND
IDENTITY IS CRITICAL TO US AND OUR ABILITY TO SELL OUR REMAINING ASSETS.
We believe that establishing and maintaining awareness of the brand name of our
wholly owned subsidiaries, including the brand names of all our games properties
("Chips & Bits", "Strategy Plus" and "CGonline.com") is critical to attracting
buyers for these properties and to expanding our member base, the traffic on our
web sites and our advertising and electronic commerce relationships. The closure
of the community web site at "www.theglobe.com", the Company's flagship web
site, adversely affected the public's perception of the Company. If we fail to
promote and maintain our brand or our brand value is diluted, our continuing
games business, operating results, financial condition, and our ability to
attract buyers for these properties could be materially adversely affected. The
importance of brand recognition will increase because low barriers to entry may
result in an increased number of web sites. To promote our brand, we may be
required to continue to increase our financial commitment to creating and
maintaining brand awareness. We may not generate a corresponding increase in
revenues to justify these costs. Additionally, if Internet users, advertisers
and customers do not perceive our games properties to be of high quality, the
value of our brand could be materially diluted.
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 web sites or the web sites of our distribution
partners or other third parties through web site 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 web sites.
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
24
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.
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 remaining business. We may need to give retention bonuses 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. Furthermore,
we will not be able to effectively offer stock options due to the delisting of
the common stock, low trading volume and cash position of the Company. 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., the Company's two subsidiaries that contain most of the employees
after August 2001. If we were unable to attract and retain the technical and
managerial personnel necessary to support and grow our business, our business
would likely be materially and adversely affected.
OUR MANAGEMENT TEAM IS INEXPERIENCED IN THE MANAGEMENT OF A PUBLIC COMPANY AND
IS SMALL FOR AN OPERATING COMPANY.
Our Chief Executive Officer through May 31, 2002, Chuck Peck, had not had
previous experience managing a public company. The remaining members of our
senior management, other than our Chairman and President, 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:
- our key employees will be able to work together effectively as a team;
- we will be able to retain the remaining members of our management
team;
- we will be able to hire, train and manage our employee base;
- our systems, procedures or controls will be adequate to support our
operations; and
- our management will be able to achieve the rapid execution necessary
to fully exploit the market opportunity for our products and services.
WE RELY ON A THIRD PARTY OUTSOURCED HOSTING FACILITY OVER WHICH WE HAVE LIMITED
CONTROL.
Our principal servers are located in New Jersey at a third party outsourced
hosting facility. 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 web sites. Our reputation,
theglobe.com brand and the brands of our subsidiaries and game properties could
be materially and adversely affected by any problems to 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.
HACKERS MAY ATTEMPT TO PENETRATE OUR SECURITY SYSTEM; ONLINE SECURITY BREACHES
COULD HARM OUR BUSINESS.
Consumer and supplier confidence in our web sites 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.
25
WE DEPEND ON THE CONTINUED GROWTH IN THE USE AND COMMERCIAL VIABILITY OF THE
INTERNET.
Our market is rapidly evolving. Our remaining business is substantially
dependent upon the continued growth in the use of the Internet, PC and console
games and electronic commerce on the Internet becoming more widespread. Web
usage and electronic commerce growth may be inhibited for a number of reasons,
including:
- inadequate network infrastructure;
- security and authentication concerns with respect to transmission over
the Internet of confidential information, including credit card
numbers, or other personal information;
- ease of access;
- inconsistent quality of service;
- availability of cost-effective, high-speed service; and
- bandwidth availability.
If 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. Web sites 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 web sites, could grow more slowly or decline.
Also, the Internet's commercial viability may be significantly hampered due to:
- delays in the development or adoption of new operating and technical
standards and performance improvements required to handle increased
levels of activity;
- increased government regulation; and
- insufficient availability of telecommunications services which could
result in slower response times and adversely affect usage of the
Internet.
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
inability of those web sites after their closure to refer traffic to the Chips &
Bits web site. We also face many uncertainties, which may affect our ability to
generate electronic commerce revenues and profits, including:
- our ability to obtain new customers at a reasonable cost, retain
existing customers and encourage repeat purchases;
- the likelihood that both online and retail purchasing trends may
rapidly change;
- the level of product returns;
- merchandise shipping costs and delivery times;
- our ability to manage inventory levels;
- our ability to secure and maintain relationships with vendors;
- the possibility that our vendors may sell their products through other
sites; and
- 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 web sites and consumers' potential
preference for competing web site'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.
26
INTERNET ADVERTISING HAS NOT PROVEN AS EFFECTIVE AS TRADITIONAL MEDIA.
The Internet advertising market is relatively new and continues to evolve. We
cannot yet gauge its effectiveness as compared to traditional advertising media.
Many of our current or potential advertising partners have limited or no
experience using the Internet for advertising purposes and they have allocated
only a limited portion of their advertising budgets to Internet advertising. The
adoption of Internet advertising, particularly by those entities that have
historically relied upon traditional media, requires the acceptance of a new way
of conducting business, exchanging information and advertising products and
services. Advertisers that have traditionally relied upon other advertising
media may be reluctant to advertise on the Internet or find it less effective.
No standards have been widely accepted to measure the effectiveness of Internet
advertising or to measure the demographics of our user base. Additionally, no
standards have been widely accepted to measure the number of members, unique
users, page views or impressions related to a particular site. We cannot assure
you that any standards will become available in the future, that standards will
accurately measure our users or the full range of user activity on our sites or
that measurement services will accurately report our user activity based on
their standards. If standards do not develop, advertisers may not advertise on
the Internet. In addition, we depend on third parties to provide these
measurement services. These measurements are often based on sampling techniques
or other imprecise measures and may materially differ from each other and from
our estimates. We cannot assure you that advertisers will accept our or other
parties' measurements. The rejection by advertisers of these measurements could
have a material adverse effect on our business and financial condition.
The sale of Internet advertising is subject to intense competition that has
resulted in a wide variety of pricing models, rate quotes and advertising
services. For example, advertising rates may be based on the number of user
requests for additional information made by clicking on the advertisement, known
as "click throughs," on the number of times an advertisement is displayed to a
user, known as "impressions," or on the number of times a user completes an
action at an advertiser's web site after clicking through, known as "cost per
action." Our contracts with advertisers typically guarantee the advertiser a
minimum number of impressions. To the extent that minimum impression levels are
not achieved for any reason, including the failure to obtain the expected
traffic, our contracts with advertisers may require us to provide additional
impressions after the contract term, which may adversely affect the availability
of our advertising inventory. In addition, certain long-term contracts with
advertisers may be canceled if response rates or sales generated from our site
are less than advertisers' expectations. This could have a material adverse
effect on us. Online advertisers are increasingly demanding "cost per click" and
"cost per action" advertising campaigns, which require many more page views to
achieve equal revenue, which significantly affects our revenues. If online
advertisers continue to demand those "cost per action" deals, it could
negatively impact our business.
Our revenues and the value of the assets we are seeking to sell could be
materially adversely affected if we are unable to adapt to other pricing models
for Internet advertising if they are adopted. It is difficult to predict which,
if any, pricing models for Internet advertising will emerge as the industry
standard. This makes it difficult to project our future advertising rates and
revenues. Online advertising pricing has been declining. Additionally, it is
possible that Internet access providers may, in the future, act to block or
limit various types of advertising or direct solicitations, whether at their own
behest or at the request of users. Moreover, "filter" software programs that
limit or prevent advertising from being delivered to an Internet user's computer
are available. Widespread adoption of this software could adversely affect the
commercial viability of Internet advertising. In addition, concerns regarding
the privacy of user data on the Web may reduce the amount of user data collected
in the future, thus reducing our ability to provide targeted advertisements.
This may, in turn, put downward pressure on cost per thousand impressions
("CPM").
27
ITEM 3. 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 2003, 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. 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
2003 evaluation. 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.
28
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See note 3(a) of the Financial Statements included in this Report - "Litigation"
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Sales of Unregistered Securities
On March 28, 2003, E & C Capital Partners, a privately held investment
holding company owned by Michael S. Egan, our Chairman and CEO and a major
shareholder, and Edward A. Cespedes, our President and a Director, 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 conversion price is subject to adjustment
upon the occurrence of certain events, including downward adjustment on a
weighted-average basis in the event the Company should issue securities at a
purchase price below $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 16.7 million shares of Common Stock could
be issued. The Series F Preferred Stock has a liquidation preference of $1.50
per share, 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 3.3 million shares of theglobe.com Common
Stock at an exercise price of $0.125 per share. The warrant is 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
Company has been using the proceeds from the investment for its general working
capital requirements. This issuance was exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 4(2) of such Act.
(b) Use of Proceeds from Sales of Registered Securities.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
On April 30, 2003 we filed our proxy statement with the SEC relating to our
proposed 2003 Annual Meeting originally scheduled to be held on June 20, 2003.
We have since determined to modify our agenda for the 2003 Annual Meeting and
will be filing revised preliminary proxy material with the SEC in the near
future. Consequently, we will be moving our annual meeting date from June 20,
2003 to on or about July 24, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate relating to Previously Outstanding Series of
Preferred Stock and Relating to the Designation, Preferences and
R Series F Preferred Stock (1).
4.1 Form of Warrant dated March 28, 2003 to acquire shares of Common
Stock (1).
10.1 Preferred Stock Purchase Agreement dated March 28, 2003 between
theglobe.com, inc. and E&C Capital partners, LLLP (1).
10.2 Loan and Purchase Option Agreement dated February 25, 2003 (2).
II-1
10.3 Amended and Restated Promissory Note (2).
10.4 Form of Stock Purchase Agreement (2).
99.1 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.
99.2 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.
---------------
(1) Incorporated by reference to our Form 10-K for the year ended December 31,
2002, filed March 30, 2003.
(2) Incorporated by reference to our Form 8-K filed March 3, 2003. Confidential
portions of this exhibit were omitted and filed separately with the SEC
pursuant to a request for confidential treatment.
(b) Reports on Form 8-K.
Form 8-K related to an event dated February 25, 2003, relating to an
Item 5 disclosure of a Loan and Purchase Option Agreement.
Form 8-K related to an event dated March 28, 2003, relating to an Item
5 disclosure of a Preferred Stock Investment and Letter of Intent
relating to a potential Convertible Note Financing.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-QSB to be signed on its behalf
by the undersigned thereto duly authorized.
theglobe.com, inc.
/s/ Michael S. Egan
-------------------
Michael S. Egan
Chief Executive Officer (Principal Executive Officer)
May 15, 2003
II-3
CERTIFICATE PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
OF CHIEF FINANCIAL OFFICER
I, Robin Segaul Lebowitz, Chief Financial Officer of theglobe.com, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of theglobe.com.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report; and
4. The registrant's other certifying officers and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date; and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or person performing the equivalent
function):
a. all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there are significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
------------------
/s/ Robin Segaul Lebowitz
------------------------------
Name: Robin Segaul Lebowitz
Title: Chief Financial Officer
II-4
CERTIFICATE PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
OF CHIEF EXECUTIVE OFFICER
I, Michael S. Egan, Chief Executive Officer of theglobe.com, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of theglobe.com.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date; and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or person performing the equivalent
function):
a. all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there are significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Michael S. Egan
------------------------------
Name: Michael S. Egan
Title: Chief Executive Officer
II-5
EXHIBIT INDEX
3.1 Certificate relating to Previously Outstanding Series of
Preferred Stock and Relating to the Designation, Preferences and
R Series F Preferred Stock (1).
4.1 Form of Warrant dated March 28, 2003 to acquire shares of Common
Stock (1).
10.1 Preferred Stock Purchase Agreement dated March 28, 2003 between
theglobe.com, inc. and E&C Capital partners, LLLP (1).
10.2 Loan and Purchase Option Agreement dated February 25, 2003 (2).
10.3 Amended and Restated Promissory Note (2).
10.4 Form of Stock Purchase Agreement (2).
99.1 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.
99.2 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.
---------------
(1) Incorporated by reference to our Form 10-K for the year ended December 31,
2002, filed March 30, 2003.
(2) Incorporated by reference to our Form 8-K filed March 3, 2003. Confidential
portions of this exhibit were omitted and filed separately with the SEC
pursuant to a request for confidential treatment.